Wintergreen Advisers Urges Shareholders to Take a Stand Against a Pattern of Excessive Compensation, Poor Disclosure, Investment Speculation, and a Lack of Supervision at Consolidated-Tomoka

CTO: Total Return – 0.78% (negative)
Russell 2000: RTY Index: 18.60%
Russell 2000 Financial Services Index: 33.27%
MSCI REIT Index: 15.14% (Even their questionably chosen Index has vastly outperformed)

Compensation Committee members John Allen (prior Chairman of the Committee), Thomas Warlow (current Chairman of the Committee) and Laura Franklin continue to overpay management by gifting them shares in the Company – which Wintergreen Advisers, LLC (“Wintergreen”) believes management will likely just continue to sell.

CTO’s Directors approved total compensation of over $5.5m in 2015 and over $1.7m in 2016 for Mr. Albright. In 2016, the CTO Board proposed a compensation plan under which an unbelievable 37% of operating income would be dedicated to paying executives bonuses!

Fortunately, over 55% of votes cast rejected the 2016 compensation plan in an advisory Say on Pay vote. However, instead of taking the shareholders’ legitimate concerns to heart and designing a fair and shareholder-friendly plan, in 2017 the Board wasted shareholder funds by hiring multiple consultants to come up with a compensation scheme that is even worse. This new scheme has, among its many problems:

• 20% of bonus not tied to any metric. Under the proposed 2017 plan, 20% of bonus compensation is not tied to any metric and may be awarded at will. Wintergreen believes this is a giveaway to management.
• REMOVED shareholder outreach criteria. Last year management had an obligation at least to hold quarterly calls, host an investor day, and otherwise abide by some shareholder outreach metrics. This year management is not even required to communicate with investors. Bonuses can be achieved without any kind of shareholder communication.
• Metrics which pay double bonuses for the same transaction. 30% of the bonus may be awarded for closing the sale of real estate for which the executives were ALREADY PAID A BONUS LAST YEAR. In addition, there is no requirement that the deals close at the announced prices, incentivizing management to close deals at any price in order to earn their bonus.

This extremely flawed compensation scheme is, unfortunately for CTO shareholders, a case of “been there, done that”. In 2015, the Board approved compensation that was so excessive, it violated the terms of CTO’s own compensation plans, resulting in the return of tens of thousands of shares. Instead of recognizing this as an issue of excessive pay as soon as it was permitted, the Board immediately reissued a good portion of the returned shares. As a result, CTO’s shareholders will now pay an unnecessarily high tax bill, because of the Board’s error.

Wintergreen believes that management should be paid well for strong performance. However, we do not believe that executive compensation plans should be a giveaway to management. Perhaps if the current Board held more shares in CTO, they would think like owners and actually represent the interests of shareholders. Wintergreen owns more than 27% of the company and has an interest in creating a compensation plan that adequately incentivizes management, but is not a blank check. This starts with tying pay to performance and enforcing a meaningful clawback so that if management misbehaves, they will be held accountable.

Wintergreen had to file a lawsuit against the company and its Directors in order to give shareholders the opportunity to have well-qualified candidates challenge the current Board. After much wasted time and energy, along with significant legal fees, the lawsuit was settled; with CTO agreeing to all of Wintergreen’s terms.

The time and money spent trying to block CTO’s largest shareholder from proposing board nominees, a core right of shareholders, should have been spent on improving returns for shareholders.

Wintergreen’s nominees will act in the interests of all shareholders because our interests are aligned with those of other CTO shareholders. For too long this has been a ‘rubber stamp’ board, and it is time for change. The Wintergreen nominees will create a culture at CTO where the board and management think like owners.

At the 2016 Annual Meeting CTO’s Directors recommended a vote in favor of a proposal that would have allowed for the issuance of over 1.3 million new shares, which would have resulted in dilution of over 23%. To help illustrate what this dilution means for a shareholder of CTO, if the proposal had been implemented and the Company had issued the full amount of the requested shares, a shareholder who owned $1,000 worth of stock would be diluted such that the value of the shares immediately after the additional stock was issued, would be $765.

Wintergreen opposed the Board’s proposed dilution plan, and in contrast will listen to shareholder requests that shares be bought back when the Company is trading at a discount to NAV, with shares being retired, so all shareholders benefit. As the largest shareholder of CTO, Wintergreen’s interests are aligned with those of other shareholders and we would seek to decrease dilution for the benefit of all shareholders.

Hostile Takeover: CTO nominees John Albright, John Allen, William Olivari, Howard Serkin, and Thomas Warlow have allowed management to pursue an ill-conceived takeover deal.

In 2015, Mr. Albright informed Wintergreen that CTO intended to pursue a hostile takeover of Forestar, a Texas real estate company of approximately equivalent size to CTO and sought Wintergreen’s support. Under this plan he could return to his home state and live in Dallas.

The Forestar deal made no sense strategically because the Forestar portfolio was not consistent with CTO’s then current holdings. In addition, CTO management did not have the expertise to successfully operate Forestar. As a result, Wintergreen opposed this ill-conceived plan. If CTO’s Directors were doing their job of representing the interests of shareholders, this plan never would have seen the light of day. This is yet another example of the CTO Directors failing to stand up to management.

Blind Pool: CTO nominees John Albright, John Allen, William Olivari, Howard Serkin, and Thomas Warlow’s lack of supervision resulted in substantial losses when they permitted management to trade in a speculative investment portfolio, ultimately costing shareholders $576,000. Even after these massive losses, we are not aware of the Board imposing any penalties on management. What is to stop management from continuing to engage in similar behavior?

In the first quarter of 2015, the Company purchased approximately $5.1 million in investment securities, in our view without adequate disclosure. By the third quarter of 2015, this number had increased to $8.1 million, and was accompanied by increased trading activity. Notably, less than 9 months later, and only after Wintergreen highlighted its concerns that this activity was beyond the authority of management in letters to CTO, the Company liquidated these investments, at a loss to shareholders of approximately $576,000, plus costs, with no apparent penalty to management.

Over 66% of net operating income from the so-called 1031 Income Property portfolio is below investment grade. The Board is allowing management to speculate with shareholder assets, which puts the future of the Company at risk.

For example, in their rush to complete deals to window dress results ahead of the Annual Meeting, CTO recently announced that it has invested over $3 million of shareholder assets in a speculative grade retail store, Jo-Ann Stores, Inc. These stores are currently Rated CCC+ by S&P, which means that it is “Currently Vulnerable and dependent on favorable business, finance, and economic conditions to meet financial commitments.” We are all aware of the shift in the behavior of many consumers buying the types of goods sold in many retail stores to shop online. These trends do not bode well for retail stores and we question why CTO feels otherwise. Investing in speculative businesses with long-term leases is not what CTO shareholders expect from the Company and it is the Board’s responsibility to rein in management when the company veers off course.

CTO also has a shareholder unfriendly habit of announcing deals at one price, then marking them down, perhaps to expedite the closing, which helps management to meet bonus criteria. A recent example was for ICI, where the Company reduced the price by over $1.5 million due to an increase in “development” costs.

Wintergreen’s nominees will work to restructure CTO’s income property portfolio to ensure that it has a common theme and makes sense. The goal of every single transaction should be to increase the value of the portfolio for shareholders. Any other motivations, such as maximizing the volume of transactions in order to earn a bigger bonus, hurt shareholders and should not be considered.