CTO Realty Growth, Inc.

Good day, and welcome to the CTO Realty Growth Q2 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask a question. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to CEO and President John Albright. Please go ahead.

Good morning. Thank you for calling in for CTO Realty Growth conference call, earnings call. I'll hand the call over to Mark Patton for him to read some disclaimers.

Thanks, John. Good morning, everyone. During our call today, we'll make certain statements that may be considered to be forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to these forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time and are in greater detail in the company's filings to the SEC and in our earnings release issued last night. Let me note that we filed our Q2 investor presentation last night which is now available on our website. Our investor presentation provides additional information you may find useful and that we may reference during this call. And I just wanted to add one more thing that it's been a privilege to work at CTO for the last eight years, to work with John on the team. And I look forward to many good things for this company going forward. Turn it back over to John.

Thank you, Mark. And we all here at CTO and Alpine have appreciated everything Mark's done for the company. And we wish him well in his future endeavors at Essential. And we're sorry to see him go, but hopefully he stays in close contact with us. Operator, I think we're ready for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two.

Please pause momentarily while we assemble our roster. The first question today will come from Craig Crucera with B. Reilly FBR. Please go ahead.

Hey, good morning, guys. Before I forget, Mark, I just wanted to say how much I sincerely appreciated working with you and getting to know you over the past several years and wish you good luck in essential properties as well.

Thanks, Craig. I appreciate that. I've enjoyed it as well.

Well, terrific. Well, I'll start with the first question. I want to start with your top line on the income-producing revenue side. That was lighter than what I was looking for. Can you kind of walk me through some of the adjustments that were maybe made to that related to COVID-19, whether that's any sort of tenant write-offs or issues related to abatements? Anything there would be helpful.

Yeah, I think it would just be – I can get to you some specifics, or we'll try and figure out the exact data. But in terms of deferrals, that's really where you're going to make an adjustment on sort of the rent side or the cash side. For the most part, we've been a cruel the whole way. So I think from a P&L standpoint, I'm trying to think about why it might be a little bit lighter other than the fact that we had significant dispositions in the quarter. I'm not sure what might be defined by lighter for you, but it might just be some of the abatements really, which You know, if you think about the abatements, you know, it's probably less than $400,000.

So, you know, you have that and you have, Craig, obviously we sold the loan portfolio, which is fairly high yielding. And then obviously, as Mark mentioned, you know, sold, you know, a fair amount of ground leases and so forth. But if there's a number of how much we're off, we're happy to kind of do a deeper dive and get back to you.

No, that's fair. I guess in regard to, I think there's about 7% or so in the second quarter that had not yet been worked out. Would that, I guess that would immediately sort of come out of that pool of rent. Is that a fair assessment or is that included in there?

Yeah, that's actually a fair assessment because to the extent that we get past, you know, the period where it would be prudent to have it as revenue, that would be something we would adjust down for. Yeah.

And, Craig, I think you probably had a chance to kind of look at all the pages on our investor presentation, but we went ahead and identified the major part of that is 24-hour fitness in Falls Church. And I will tell you that not only is 24-hour fitness very interested in staying there, so they didn't reject it in bankruptcy, and they've actually reached out to us, but there are other operators, not only of fitness, but other industries involved. very strong credits that are interested in that site. And so, um, you know, so I know when, when people look at, you know, a tenant list and they see kind of 24 hour fitness or probably, you know, scratching their heads like, okay, you know, how long is it going to be down for on rent? But, uh, that property is in a very strong location. Uh, and we haven't even hired a broker and we're getting, you know, in balance from, uh, different, uh, tenant rep groups.

Okay, great. I appreciate the color there. That was one of my questions. Circling to what I looked at as some of the larger news in the press release was the reconversion. Do you guys currently have a sense of what the E&P distribution would be in a reconversion if it occurred today? I think the last time you put out a number was right around when you created Alpine Income. I think it was something in the $33 million range. Do you have a sense of where that is today, or is that still TBD?

Actually, it's a great question. I appreciate it. Given sort of our performance over the last year, our income has generated some additional EMP, so it's probably more in the 35 to 38 kind of category, so maybe if you call it a 36 or so.

Got it. And I think at the time you sort of put out something publicly on that in the fourth quarter of last year. I believe that there was some mix between what would be paid in cash and what would be paid in stock. I guess, A, I think at that point in time it was about 20% cash. Should investors expect something similar to that if a reconversion occurs? And how much control do you have over the cash versus stock component?

Well, it used to be you had to go to the IRS and get a private letter ruling to get the 80-20 permission. And I think the general theory was, you know, enough cash to really cover the tax portion of the dividend. But now the IRS has come out and basically sort of codified that, that you could do the 80-20 commission. if you choose, but it's obviously up to the company in many ways, but also it's the conversions up to the shareholders in terms of approval. But most recently, and I think it's really kind of a COVID-driven thing, the IRS has been allowing a 90-10 split, so 10% in cash. Not sure where the board's going to come out on that, but the 80-20 is certainly the one that is permitted.

Okay, great. And I noted in your investor presentation that you now were talking about $4 per share in operating cash flow. I think last quarter it was $5.25. I just want to confirm, is that just based on the existing portfolio and then the result of just the dispositions? Any color there would be great.

Yes, it's based on, again, the loans being sold down, sold off, and everything. and the properties, $46 million of properties that we have sold, that majority of that's in cash waiting to be redeployed. So that's the bulk of it.

Got it. No, that makes sense. And just circling back to what you carry as a remaining loan investment, I think the Carpenter Hell Hotel ground lease is the primary investment there. Can you remind me what the yield is on that ground lease?

uh it's it starts the way that uh that ground is set up it starts with a uh in the low five percent uh type of uh cap rate kind of five and a quarter then it escalates uh rather every year rather rapidly um and so um you know the the expectation is that uh Most likely the operator buys out that lease at some point, but it could be where we get a nice ground lease position that's escalating at a fairly rapid pace.

Okay. Can we talk about your guidance? I think you're in 2020 looking at anywhere from maybe an additional call at $25 million to upwards of $75 million of acquisitions. Clearly, you have the capital and the debt capacity to do the high end of that. But can you talk about the existing pipeline of what you're looking at? Is there any skew toward office or retail or the types of properties you're considering?

Yeah, so it's obviously a great time to be out looking for acquisitions. I will tell you that the environment's a little strange in that the people that are out looking to sell their assets – you know, have a motivation to sell clearly, but some of the higher quality assets aren't in the market, even though people are sellers because they just figured this is a terrible time to be selling an asset. So, you know, so what you're seeing is for very high quality properties, you're seeing, you know, the cap rates being compressed, obviously with interest rates so low that that makes sense. And then with properties that are you know, higher risk or not as core, the cap rates are wider. So we're looking for more kind of opportunistic acquisitions with higher yielding potential, higher returns. And so more on the flavor of on the office side as, you know, obviously for retail, you know, having the headwinds it does, you know, The majority of our pipeline has been on the office side.

Okay, great. And I know that you're ahead of your 2020 disposition expectations. You sold the Wawa earlier this quarter. Are you still looking to dispose of single-tenant assets, you know, in the rest of the year, maybe a ground lease here or there, or do you think you're done more or less?

Yeah, so on these smaller ground lease type situations, there's more to do. Obviously, since we had a lot done, we're not as aggressively selling them. But given where we've been able to execute on a cap rate basis, we'll sell there all day long. So there probably will be some more sales the latter half of the year.

I want to change gears and go to the land joint venture with Magnetar. In your presentation, you put off that the remaining land value estimate is anywhere from $90 million to $110 million. Just to confirm, is that inclusive of the $31 million that's under contract, or is that outside of that $31 million under contract?

That's inclusive.

Okay. That's what I thought. Okay, I think that's it for me. Thanks, guys. Great. Thanks, Craig.

As a reminder, if you would like to ask a question, please press star and then one. The next question will come from Craig Gilbert with Linden Advisors. Please go ahead.

Thanks for taking my question. I just had a few. One is on the unresolved, so it looks like the majority of that is for 24-hour fitness. Can you speak to the other, you know, call it three or so percents? maybe what's going on there and any prospects for recovery?

Yeah, so most of the balance is really small shop space in our larger centers like Crossroads, Perimeter, Atlanta, or The Strand in Jacksonville. So it's mainly smaller operators. I will say that, you know, realize for obvious reason, people have a lot of concern for retail operators. I will say that we've had a lot of tenant interest in these spaces lately. I would say in the last three, four weeks, the activity has increased dramatically. And so we feel very confident. It's not more or less chasing these unresolved. It's really finding you know, stronger operators who want that new vacancy. So given that we have, you know, really strong centers there, that's really the opportunity is to trade up with a stronger operator.

Got it. Got it. And then just on the geographic diversity, it looks like, you know, obviously you're in some of these states, Florida, Georgia, Texas, where we could see, you know, maybe reshutdowns. How are you thinking about that and just trying to manage that risk?

To be honest with you, we're not spending a lot of time worrying about it in that we have a solid tenant base even if we were to shut down again. Our cash flow never came close to being an issue. And I was, I mean, maybe this is the reason why Florida is in a little bit of trouble on the COVID side. Uh, you know, our restaurants on the beach in Daytona has some of the best days they've ever had in the last couple of weeks. So, um, I don't think, I mean, I'm not trying to guess what happens in the, in the national, um, uh, basis here on the COVID or statewide, but I don't think we're going back to a shutdown just, uh, You know, given kind of where we are, I don't think that's what people are talking about, at least here in Florida they're not talking about it. And I was in Texas last week. And, you know, I would say that it's more on a municipal basis, you know, whether a city or town decides to do something, but not on a statewide basis.

Okay. Okay. And then the last one is just on the timing of the reconversion. I think the press release said as soon as late 2020. Okay. What is, I guess, the outer bound of how late you think it could go and, I guess, the main driver, kind of what you're waiting on for it to come sooner rather than later?

Well, Ed, great question, by the way, and thanks for asking about that. So sequencing-wise, there are a couple things that have to happen. I alluded to the shareholder meeting, but if you kind of back up from there, we've got to file an S-4 to merge the C-Corp into the REITs. So anytime you file a registration statement, you've got to go through the SEC process. And, you know, that is an unknown amount of time, even though we're a fairly experienced filer. So it could be upwards of 90 days. So, you know, if you kind of go down that route and then you soon after that file a proxy for the shareholder meeting, those are kind of your gating items to get you there.

Okay. Makes sense. Appreciate it. Thank you.

Thank you. Thank you.

This will conclude today's question and answer session. I would now like to turn it back over to Mr. John Albright for any closing remarks.

Thank you, everyone. Again, thank you, Mark Patton, for being our CFO under going through a lot of changes and progress for the company, and we look forward to talking with you throughout the quarter. Thank you.

Bye. The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.