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spk00: Good morning and welcome to the CTO Realty Growth second quarter 2021 operating results conference call. All participants will be in listen-only mode. If 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 questions. 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 John Albright, President and CEO. Please go ahead.
spk02: Thank you, Operator. Good morning, everyone, and thank you for joining us today for the CTO Realty Growth Second Quarter 2021 Operating Results Conference Call. With me is Matt Partridge, our Chief Financial Officer. Before we begin, I'll turn it over to Matt to provide the customary disclosures regarding today's call. Matt?
spk04: Thanks, John. I'd like to remind everyone that many of our comments today are considered forward-looking statements under federal securities law. Companies' actual future results may differ significantly from matters discussed in these forward-looking statements, and we undertake no duty to update these statements. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's Form 10-K, Form 10-Q, and other SEC filings. You can find our SEC reports and our earnings release on our website at ctoreet.com. With that, I'll now turn the call back over to John.
spk02: Thanks, Matt. We had a very active second quarter, making good progress on a number of initiatives we set out to accomplish at the beginning of the year. Some of the highlights of the quarter include acquiring a very high-quality Class A mixed-use property in a Plano sub-market of Dallas, selling eight single-tenant properties, launched our first preferred equity offering. We received extremely strong demand and attractive pricing, and putting under contract the remaining land holdings in the land joint venture, which we anticipate will close by the end of the year. Starting with our most recent acquisition, we acquired the shops at Legacy in Plano, Texas, late in the quarter for $72.5 million. With a three-mile population of more than 100,000 people, a daytime population of more than 100,000, and average household incomes of nearly $140,000. We believe it is an excellent addition to our growing portfolio and has us well positioned within one of the most attractive submarkets of Dallas, Texas. The property, which spans more than 236,000 square feet, is a retail-driven, mixed-use property that sits at the heart of the broader 2,600-acre Master Plan Legacy District. is surrounded by a concentration of Fortune 500 companies, including the regional or North American headquarters for Toyota, FedEx, Yum! Brands, Pepsi, Capital One, Boeing, Liberty Mutual, and Frito-Lay. The tenant makeup is a well-performing mix of amenity-driven retailers and national and local food and beverage operators anchored by the Capital Grill and Seasons 52, which are both Darden Brands. There is also a high-quality complementary office component to the property, which is anchored by WeWork's 59,000 square feet technology and amenity-driven co-working space. Year-to-date, we have invested $111 million across three multi-tenanted properties in sub-markets of our target cities, Dallas, Texas, Salt Lake City, Utah, and Las Vegas, Nevada. We acquired the properties at a weighted average cap rate of 8.5%, which materially exceeds the top end of our initial acquisition cap rate guidance and has resulted in us increasing our acquisition volume and cap rate guidance for the year. As I mentioned earlier, we sold eight single-tenant properties during the second quarter for a combined sale price of $61 million at a weighted average cap rate of 7.1%. Following the end of the quarter, we've since sold two additional single tenant out parcels for $7.6 million at a weighted average cap rate of 4.3%. Year to date, through the end of July, we've sold 12 properties, 11 of them single tenant for a combined sale price of $73 million at a weighted average cap rate of 6.8%. Operationally, we made good progress in addressing a number of our remaining 2021 lease expirations. with the largest exercise renewals being Albertsons at our West Close Shopping Center in Fort Worth, Texas, and Ross at Ashford Lane in Atlanta, Georgia. From a new leasing perspective, we signed six new leases in the quarter and average rent of more than $21 per square foot, with the most notable being Super Rica at Ashford Lane. I'm pleased to say we are continuing to build leasing momentum for the back half of the year as we work through a number of LOIs and actively negotiating more than half a dozen leases at various properties. As for the end of the quarter, our income property portfolio consisted of 20 properties comprising of approximately 2.7 million square feet of rentable square fit located in 10 states and 14 markets. Our portfolio was 91% occupied at the quarter end with the change in occupancy from the last quarter really more of a function of us selling 100% occupied single-tenant assets and a result of our recently announced leasing activity being in the transitional stage and therefore the tenant is not yet occupying the lease space. When taking into account our lease space that is not yet occupied, our portfolio is closer to 93% lease as of quarter end. We continue to put an emphasis on faster growing markets that are forecasted to exhibit excellent supply-demand dynamics in which are located in business-friendly states benefiting from notable population growth. Our largest markets are now Florida, Texas, Georgia, and Arizona to capitalize on these projected long-term trends. As of the quarter end, 90% of our portfolio rents come from MSAs with over a million people, and nearly 90% are located in the Urban Land Institute's top 30 markets. In addition to our income property portfolio activity, we continue to make strides in monetizing our non-income producing legacy land holdings and subsurface interest. In the quarter, we sold 9,300 acres of subsurface interest, bringing our year-to-date total subsurface interest sales to almost 35,000 acres or $2.6 million. We also sold a wholly owned land parcel in Daytona Beach for half a million dollars, We are under contract to sell our downtown Daytona Beach development site for $6.25 million. All of this activity is, of course, in addition to the previously announced agreement to sell the remaining assets in the land joint venture. The contract purchaser of the land JV is currently in due diligence. So at this point, we anticipate providing an update to the process during our third quarter earnings call. With that, now I'll turn to Carl over to Matt.
spk04: Thanks, John. Beginning with our top line, we continued our strong rent collection results in the second quarter, collecting 100% of contractual base rent. Total revenues for the second quarter of 2021 increased 9.8% to $14.3 million. And year-to-date total revenues increased by 12.2% to $29 million. In both instances, the increases were largely driven by real estate operations revenue associated with previously mentioned subsurface and vacant land sales. We did experience moderate growth in management fee revenue during the second quarter, but given the recent capital raising activities at Alpine, we do expect management fee revenue to increase to a quarterly run rate of approximately $900,000 in the third quarter as we start to recognize the full benefit of the increases associated with their capital raising activities. Additionally, income property revenues in the quarter were largely flat because year-over-year revenue gains from recent acquisitions are being offset by the timing between dispositions and subsequent redeployment of disposition proceeds. However, there will be a meaningful acceleration in income property revenues as we realize the revenue benefits from our acquisition of the shops of legacy that occurred late in the second quarter. For the second quarter of 2021, funds from operations were $4.9 million, or 83 cents per share, and adjusted funds from operations were $6.3 million, or $1.07 per share. Our funds from operations were impacted by our loss on extinguishment of debt related to the required write-off of deferred financing fees that occurred when the CMBS loan was assumed by Alpine as part of the previously mentioned asset sales. This one-time item impacted FSO results by approximately 11 cents per share in the quarter. Conversely, our AFFO in the second quarter was positively impacted by approximately $434,000 of repayments of deferrals related to the previously mentioned rent deferral agreements. The second quarter of 2021 represented the height of our existing repayment obligations, and going forward, the scheduled payments are anticipated to be approximately $90,000 in each of the third and fourth quarters. I reiterate to everyone that our year-over-year per share comparisons are also materially impacted by the 1.2 million shares issued as part of the special distribution related to the company's reconversion that occurred in December of 2020. As previously announced, the company paid a second quarter regular cash dividend of $1 per share on June 30th to shareholders of record on June 21st. Our second quarter cash dividend represents a 300% year-over-year increase when compared to the company's second quarter 2020 cash dividend and an annualized yield of approximately 7.4%. Our quarterly dividend represents a cash payout ratio of 94% of Q2 2021 AFFO per share. As we noted in yesterday's press release, the company is revising its practice of declaring a quarterly cash common stock dividend concurrent with its quarterly earnings. We instead anticipate announcing our quarterly cash common stock dividend and our Series A perpetual preferred dividend for the third quarter of 2021 and future quarters in the second month of the respective quarter. Turning to our capital markets activities and the balance sheet, in May we bought back approximately $800,000 of convertible notes, reducing the face value of our convertible notes outstanding to $61.7 million. In June, we exercised the accordion option on our existing 2026 term loan for an additional $15 million of proceeds. We ended this quarter with total cash and restricted cash of $18.6 million and total long-term debt outstanding of $311 million. Net debt to total enterprise value at quarter end was approximately 48%. As John referenced earlier, we did price an upsizer inaugural perpetual preferred Series A offering during the quarter at a six and three-eighths coupon with the closing of the offering occurring on July 6. Today, with the recent asset sales and taking into account the influx of capital from the preferred offering, our net debt to enterprise value is approximately 35%. And finally, we did update our 2021 guidance yesterday, increasing the midpoint of our AFFO per share range and increasing our acquisitions and disposition guidance to account for our year-to-date performance and expected activity in the back half of the year. Of note, we increased our disposition volume midpoint by $37.5 million and and decreased the midpoint of our anticipated disposition cap rate range by 55 basis points. We increased the midpoint of our acquisition volume by $100 million and increased the midpoint of our anticipated going-in cash cap rates by 50 basis points. We also reduced our FFO per share midpoint to $3.75 to account for the previously noted extinguishment of debt and other one-time items. and we increased our FFO per share midpoint to $4.10 to account for better investment spreads on net investment activity in income properties, better growth in external management fees, and the increasing dividend payments from our investment in Pine. Our updated guidance does not include any additional assumptions for outside equity, and it could be heavily influenced by the timing of dispositions and the subsequent redeployment of proceeds into acquisitions, as well as the future performance of our current and prospective tenants. With that, I'll now turn the call back over to Jones.
spk02: Thanks, Matt. In closing, we're very pleased with our activity today, and we are excited about what we're projecting for the balance of 2021 with our revised guidance. What we're anticipating not only represents improved growth prospects for the year, but also positions us to meaningfully grow earnings in 2022 and beyond as we realize the full benefits of our net investment activity and the growth of Alpine and our overall company evolution. I want to thank all of our investors and partners for their continued support. With that, we'll open it up for questions. Operator?
spk00: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Our first question today comes from Rob Stevenson with Jannie.
spk05: Good morning, guys. John, can you talk about, you know, the new guidance is, you know, essentially 100 to 150 million of acquisitions in the back half of the year. Do you have some of that already under contract? What types of assets are you looking at here? And sort of what should we be expecting in terms of You know, are these fully occupied? Is there some lease up? How do you characterize what you're looking at these days?
spk02: Yeah, so the reason we have the guidance is that at two-fold. One, we are seeing a lot of quality assets that are being teed up to come to market this fall, and so we're pretty excited about the target-rich environment, and we've been We actually just bid on a property this week on best and final. I can just say that because we didn't make it. We didn't win it. But there is more capital chasing properties, which isn't good. but it's bringing out some higher quality property. So the way to think of it is we love obviously legacy that we bought with a little bit of lease up opportunity. So that would be our favorite sort of acquisition that there's some vacancy that we can capitalize on. And then the other thing that's really driving the upside on the guidance for acquisitions is really dispositions. The capital markets are very favorable on selling some assets, and so we're looking at our single-tenant office buildings as good candidates, and the pricing's very good, so that's kind of what we're doing.
spk05: Okay. And then the deal to sell the remaining land holdings, that does not include anything with subsurface rights, is that correct?
spk02: Correct. Correct.
spk05: What's the current thinking in the plan for that? Does that go away at some point in the next year, year and a half? Does that stay for a while? Is the monetization further out for that? How should we be thinking about this?
spk02: As you've seen in our announcement, we've been whittling away at it. So we've been going to a lot of the service owners and offering the opportunity to buy products. uh, their subsurface, our, our subsurface, uh, rights underneath their land. And that's been going pretty well, as you can see. But yeah, we, we plan on selling that, you know, as soon as we can and get the right price, but I would give it 12 months.
spk05: Okay. And then Matt, what is the construction in progress on the balance sheet?
spk04: Yeah. So a lot of that, um, build out for tenants, most notably the food hall at Astrid Lane that, um, It's going to commence right here later in the third quarter. But we've got some other projects with other tenants at different centers that are also in process.
spk05: All right. And then one last one for me. John, to what extent is the remaining dispositions that you would wind up doing or even exceeding the top end of the guidance range on dispositions reliant on you guys closing the acquisitions as well and using that as a source of funding? I mean, if you don't, for some reason, the acquisitions get pushed into 2022, do the dispositions get pushed from a lining up from a NOI replacement standpoint and a 1031 perspective?
spk02: Yeah, I would say that that's fair, that if for some reason the acquisition candidates aren't there at the right pricing, then we won't move the offices without feeling very comfortable that there's a good acquisition opportunity to match up with that.
spk05: Okay. Thanks, guys. Appreciate the time.
spk02: Thank you.
spk00: Our next question comes from Michael Gorman with VTIG.
spk01: Yeah, thanks. Good morning. John, if I could just go back to the acquisitions for a minute. You mentioned, obviously, one of your favorite types is kind of what you did at Legacy there where there's some lease-up opportunity. And I'm just wondering, given some of the commentary that we've heard from some of the strip center operators this quarter about the leasing velocity and things like that, are you seeing more hesitancy for owners to sell vacancy or are they asking for more value attributed to the vacancy when they're bringing assets to market just because there is more certainty around that kind of lease up growth potential?
spk02: So good question. So what we're seeing is a lot of the assets that we are hearing coming to market this fall after the summer are really transactions that were attempted pre-COVID and they didn't get the pricing. It's not that the pricing has gone back to pre-COVID, but people feel like they're not going to take the discount that they were getting prepared to take when COVID came around. So they feel like this is another chance at an exit. And so I think that's kind of what you're seeing is people kind of rushing to the doors with assets that they had lined up to sell pre-COVID, then COVID happened, and now they're not going to risk it again. And so with regards to lease up, If the property, if there's some vacancy there, they don't expect to get paid for the vacancy. What we are seeing is some assets, the seller's deciding to wait a little longer so they can do leasing and then come to market with it. But if it has a vacancy, they're not asking for value for that because if they haven't gotten a lease by now, how can you assume a buyer is going to give them value for that?
spk01: Okay, that's helpful. And then Just on the capital structure side, obviously with Pine, there was some success with doing an OP unit transaction during the quarter. I'm just curious as you think about the potential future acquisitions for CTO, especially if the equity value moves higher, are OP units going to be a potential tool in the capital structure here as well?
spk02: Yeah, we don't have an OP unit structure at CTO yet. So, definitely not, and we wouldn't be issuing equity at these type of prices. So, luckily, we still have internal capital through the land sale, through subsurface sale, through remonetizing. single-tenant property, so we don't really need to rely on outside capital. But look, I mean, we want to grow the company, so when the pricing of the equity is better, we'll look at those options.
spk01: Okay, great. And just one last question on the land sale. Obviously, the buyer is in their due diligence, and so that's the next step. But having gone through that and selling these land parcels, I mean, kind of what level of certainty or what's involved in the due diligence here on the land side? Are they looking at zoning potential? Are they looking at improvement rights or kind of what's the process?
spk02: Yeah, right now they're deep into actually planning developments on the properties, engaging civil engineers, architects on how they would look at developing the parcels. So there's no rezoning risk. Everything's been zoned appropriately for the different uses. They're spending a lot of time talking with consultants, talking with brokers, developers. They're just getting a better and better feel for the market and the land and any of the development issues with regards to what's the cost of putting roads and utilities and all that kind of thing. Nothing really is subject to zoning or entitlement.
spk01: Okay, great. Thank you very much. Sure.
spk00: If you have further questions, please press star 1 to join our queue. Our next question comes from Craig Cucera with B Reilly.
spk03: Hey, good morning, guys. I wanted to follow up on the JV land sale. You've got another contract for $67 million. The partner has, I think, a $33-plus million balance. What do you expect to receive on a net basis? Are there any taxes tied to that, and how should we think about that?
spk04: Thanks, Greg. So we expect to receive somewhere around $26 million before taxes. This is held in a taxable REIT subsidiary, so there's some taxable – considerations that we have to work through as a result of it being in the TRS. But I think on a net basis, it's going to be, worst case, $20 million that kind of nets up to the REIT. But I think we have the potential to maybe get more than that, depending on how we maneuver the tax side of things.
spk03: Got it. And I know you mentioned that you had the $6 million Daytona parcel under contract. Is that in guidance? And kind of what are you thinking when that might close?
spk02: That's not in guidance, but it would close by the end of the year.
spk03: Got it. And just thinking about the preferred that you issued and your change in your guidance, I think it looks like you're acquiring 100 million more but selling 25 to 50. Can you talk about how you're thinking about leverage now that you do have preferred in the capital stack?
spk04: Yeah, so I think from a leverage perspective, we've got strong coverage from a debt service coverage perspective, even with the new preferred on a pro forma basis. So we feel pretty good about where that stands. I look at the preferred as leverage to the common, but it is perpetual capital, so it certainly has that equity quality. And so I think we have some room to move leverage back up as we identify opportunities in the market, hopefully in the back half of the year like John talked about. So I think we'll probably run it somewhere between six and seven times net debt fee, even over the long run. But that'll move around, obviously, depending on timing. We're at the low end right now at 35% net debt fee to total enterprise value today.
spk03: Okay, got it. That's it for me. Thank you. Great, Dave.
spk00: This concludes our question and answer session. I'd like to turn the call back over to John Albright for any closing remarks.
spk02: Thank you very much for attending the call and look forward to talking to you in the next couple days. Thank you.
spk00: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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