CTO Realty Growth, Inc.

Q3 2021 Earnings Conference Call

10/28/2021

spk00: Hello and welcome to the CTO Q3 2021 earnings call. My name is Elliot and I'll be coordinating your call today. If you'd like to register a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I'll now hand over to our host, John Albright, President and CEO. John, please go ahead when you're ready.
spk01: Thank you, operator. Good morning, everyone, and thank you for joining us today for the CTO Realty Growth Third 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?
spk05: Thanks, John. I'd like to remind everyone that many of our comments today are considered 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 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 ctoread.com. With that, I will now turn the call back over to John.
spk01: Thanks, Matt. I'm very pleased with our strong third quarter, which we believe has set us up to have a productive fourth quarter that will give us momentum to drive significant earnings growth in 2022. Transactionally, it was a disposition heavy quarter where we sold four single tenant properties for a combined sales price of $75 million and a weighted average cap rate of 5%, generating a combined gain on sale of $22.7 million. The highlight of our third quarter distribution activity was the sale of our single-tenant office building based in Raleigh, North Carolina, leased to Wells Fargo, which generated a gain of more than $17 million. Year-to-date, we've sold 14 properties, 13 of which were single-tenant assets, for a combined sales price of $141 million at a weighted average exit cap rate of 6%. And as we announced in yesterday's earnings release, we are increasing our disposition guidance by another $25 million to account for the additional sales we anticipate will close before the end of the year. While it was a quiet third quarter from an acquisition standpoint, all of our disposition activity is setting us up for a very active fourth quarter, as evidenced by our increase to the bottom and top ends of our acquisition guidance. Our full-year acquisition guidance now has a range with a top end of $250 million, implying as much as $140 million of additional acquisition volume in the fourth quarter. We expect half of that activity to come from the retail property that we are under contract to purchase for $70 million in Raleigh, North Carolina, that we disclosed last week. And we're down the road on a few other interesting opportunities in very strong markets that we're hopeful can get over the finish line before the year ends. Within the existing portfolio, we experienced strong leasing demand in the quarter, most notably at 245 Riverside, Ashford Lane, and our newly acquired shops at Legacy. We signed new leases in the quarter at an average rent of more than $30 per square foot, the most notable being a Sweet Greens lease at Ashford Lane and a new lease with the Haskell Company to take more than 16,000 square feet at our only multi-tenanted office building, 245 Riverside. Of our renewals and extensions during the quarter, we experienced nearly 5% growth in the new per-square-foot lease rate versus the prior rate. And most importantly, we anticipate continued momentum into the fourth quarter as we work to finalize a number of leases at Ashford Lane to accelerate that property's redevelopment, particularly now that we have started to make meaningful progress on the lawn. Also during the quarter, we strategically acquired our joint venture partner 70% interest in the mitigation bank, JV, for a payment of $16.1 million net of available cash. The full market value of the mitigation credit over the 10-year credit release period is approximately $30 million. So our focus is now centered around monetizing the mitigation credit or the mitigation bank in its entirety as efficiently as possible so we can start generating income through the reinvestment of the net proceeds. The buyout of the partnership gives us more flexibility as to how we execute the sale of the individual credit or the sale of the mitigation bank as a whole, while benefiting from a lower carrying cost in the interim. We are hoping to fully monetize mitigation in 2022. Our other joint venture, which is our 1,600-acre land joint venture, remains under contract, and the buyer's due diligence period is set to expire within the next week. Proceeds before taxes are expected to be more than $25 million and closing is still anticipated before year end. Our downtown Daytona Beach development site is also still under contract for just over $6 million and we continue to anticipate that closing to occur before the end of the year as well. And finally, we did sell nearly 1 million in mineral rights during the quarter. We've sold 3.5 million of mineral rights year to date which leaves us with approximately $7 million in mineral rights left to sell on approximately 400,000 acres of land. Assuming these transactions all come to fruition, we will be out of both the joint ventures and we'll have sold all of our remaining land by year end, truly positioning the company to focus on our core strategy of multi-tenanted retail and mixed-use properties. So, overall, I can look at the upcoming and potential value of the remaining non-income producing assets, which includes the proceeds from the Land Joint Venture, downtown Daytona Beach land, the remaining subsurface interest, and the current value of the mitigation bank. We believe there is more than $50 million of non-income producing equity on the balance sheet available for reinvestment. Using our current share count and the low end of our current acquisition cap rate guidance as a reinvestment rate, we have the opportunity to organically grow AFFO per share by more than 15% when compared to the midpoint of our 2021 AFFO guidance. On a leveraged neutral basis, that could result in approximately 75 cents of additional AFFO per share. When you combine that organic growth with the lift we're going to get from our reinvestment and project leasing, we are very excited about our future earning potential and what that can mean for our shareholders. With that, I'll turn it over to Matt.
spk05: Thanks, John. As of the end of the quarter, our income property portfolio consisted of 19 properties comprised of approximately 2.2 million square feet of rentable space located in nine states and 13 markets. Our portfolio is 90% occupied at quarter end and similar to last quarter, the quarter over quarter change in occupancy is more of a function of the company selling 100% occupied single tenant assets and our recently announced leasing activities being in the transitional stage. and therefore the tenant is not yet occupying the lease space than any loss of existing tenants. From a top tenant perspective, Wells Fargo is no longer a top tenant following the sale of their office property in Raleigh, but Fidelity remains our largest tenant exposure at just over 8%. And WeWork, which is our largest tenant at the Shops of Legacy, recently went public via SPAC merger and is now trading at a market cap of more than $8 billion, providing a significant credit upgrade. Geographically speaking, Our largest markets continue to be within Florida, Texas, Georgia, and Arizona, where we expect to benefit from positive long-term demographic trends, and we'll add North Carolina back to that list when we close on the acquisition John referenced earlier. Total revenues for the third quarter increased nearly 14% to $16.6 million, and year-to-date, total revenues have increased by 12.7% to $45.6 million. We continued our strong rent collection results in the third quarter, collecting 100% of contractual base rents, and we continue to benefit from the transaction driven revenue associated with the previously mentioned mineral rights sales. I will also highlight that we experience quality growth in income property revenues from full quarter impact of the shops at Legacy and an acceleration in our management fee income from Alpine Income Property Trust due to the full quarter impact of their Q2 capital raising activities. For the third quarter of 2021, funds from operations increased to $6.1 million, or $1.03 per share, and adjusted funds from operations were $6.4 million, or $1.09 per share. I'll remind everyone that our year-over-year per share comparisons are 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 third-quarter regular cash dividend of $1 per share on September 30th to shareholders of record on September 9th. A third quarter cash dividend represents a 150% year-over-year increase when compared to the company's third quarter 2020 cash dividend and an annualized yield of approximately 7.4%. A quarterly dividend represents a cash payout ratio of 92% of Q3 AFFO per share, and we're currently tracking to pay out approximately 100% of taxable income for 2021. As we turn to our balance sheet, we are well positioned to support the growth John talked about in the fourth quarter and into 2022. We ended the quarter with total cash and restricted cash of $75.6 million and total long-term debt outstanding of $236 million. Net debt to total enterprise value at quarter end was approximately 29%, and our net debt to EBITDA was just over five times. We closed our previously announced perpetual preferred Series A offering at the beginning of the third quarter and paid a prorated Series A preferred dividend of 37.63 cents per share on September 30th to shareholders of record on September 9th. And for the second consecutive quarter, we updated our 2021 guidance, increasing the midpoint of our AFFO per share range by 10 cents. And as John previously referenced, we increased our acquisition and disposition guidance by $25 million at the top end of each range to account for our year-to-date performance and expected activity in the fourth quarter. 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 deployment of capital into acquisitions, as well as future performance of our current prospective tenants. With that, I'll turn the call back over to John.
spk01: Thanks, Matt. As I said before, this is a strong quarter that positions us to execute in the fourth quarter and provides us an opportunity to deliver outside earnings growth in 2022. There's still a lot of progress to be made, but we have a very high-quality growing portfolio based in some of the fastest-growing markets in the country. And I'm proud of the way our team is executing to realize the value creation opportunities we recognized when we acquired these properties over the last 24 months. I look forward to providing a digital update on our investment activity and operational successes throughout the quarter. And 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: Thank you for our Q&A. If you would like to ask a question, please press star followed by one on your telephone keypad. When preparing to ask a question, please ensure your device is unmuted locally. Our first question comes from Michael Gorman from BTIG. Michael, your line is now open.
spk02: Thanks. Good morning, guys. Good morning. John, I wonder if you could just spend a minute talking about the Raleigh acquisition and the pipeline. Understand that there are limits to what you can disclose there, but maybe just spend a minute talking about how these opportunities came onto your radar screen, how they were sourced, and Maybe just to the extent, any kind of characteristics. Is it a mixed-use type of asset or kind of how that positions within the portfolio?
spk01: Sure. So when we sold the Wells Fargo office buildings in Raleigh, you know, it's a little bit of mixed emotions because it's a fantastic asset in a fantastic market. But given the cap rate being so low and the profit that – We would earn and basically be able to reinvest the creatively at a higher cap rate was very attractive to us. And we're lucky to find lucky to find a similar size asset in Raleigh, even though that wasn't the domain objective. It wasn't like we were really searching really hard to replace an asset in Raleigh, but it came about we pre pandemic. Uh, we talked to the developer. about this asset. It was, um, it's an asset in a JV. They, um, uh, the partnership, uh, you know, basically the time to sell. Uh, and we were, you know, have been actively, uh, making acquisition offers on other assets and other, other locations. And, and, uh, that developers, uh, circle back with us. And, you know, we were very pleased that it was still available and we, We really dug in and did some due diligence, but it's just a fantastic market. I don't want to get too many details, but it's more, I would say, more neighborhood power type center than mixed use.
spk02: Okay, great. That's helpful. And then switching gears a bit, the mitigation bank, I know you talked about hoping to monetize in 2022. Just wondering when looking at the timing here, is there an opportunity that the mitigation credits could be teamed up with the land sale, with the 1,600 acres? Or am I thinking about that incorrectly?
spk01: No, you're thinking about it right. So the reason we repurchased or purchased our JV interest ownership, BlackRock came into the JV, a great partner, great partnership. before the property was entitled as a mitigation bank. So because there was some uncertainty on the entitlement and so forth, their cost of capital was rightfully fairly high because there's a little bit of a speculation. And so we repurchased it as we've gotten full entitlements of the bank. We have been selling credits from the bank. We finally got the last federal permit there. And so there's an opportunity for us to buy them out and have a better cost of capital and better flexibility. And then to your point, the buyers of our remaining land portfolio, they realize that for them to exercise on their plan, their operational plans for the land, they need a lot of our credit. So we're in discussion right now. with when we would sell credits to them and at what price. And so we're in very active discussions on that part. And then as far as the other land sales we've done over the years, all the land sales that we've done, the landowners are obligated to buy credits from us as they develop. So long story short, through our whole portfolio of land here in Daytona Beach, there is more credit demand than we'll have credits for. And so what we'll do is we'll monetize some of this on our own and then probably sell the whole bank to somebody else or do another joint venture on a better economic terms for us. So there's a good path to monetization and there's an incredible amount of development activity here that's going to need those credits. And again, there's a lot more credit needs in this space than we'll have.
spk02: Okay, great. That's helpful. And then last one for me. In your presentation, you've got a pretty impressive slide in terms of the total return performance for CTO over a couple of different timeframes. And I'm just interested in kind of how you're thinking about positioning CTO as you get towards the end of this transition within the different peer groups and how you think about and how investors are thinking about comps and the track record being what it is, kind of what gets you that next leg up in valuation that would certainly seem warranted given the track record.
spk01: Yeah, so I appreciate that. So we did put in this 10-year track record because I think we get lost in the shuffle pretty much. Given that we converted to a REIT and we did the special dividend, and if you just basically total it all up, look, it surprised us when we decided to do it since the 10 years I've been here. And I think a lot of that success, given that a lot of the times we didn't have great coverage from folks like yourself, we were kind of that orphan seaport that no one wanted to invest in because we didn't fit in any buckets. And just really actively working our portfolio, moving to cash flow assets, and we're all about generating cash flow. So we're not the types that are going to buy something for a five-year development kind of project. We're all about generating cash flow that we can pass on to our shareholders. So that high dividend and low multiple that we're trading on, we hope that through this last iteration of selling our non-income producing assets and moving those into income producing properties is further going to organically grow our FFO and the street will probably be a little bit late to understanding that because we are that small company. We kind of got lost in the shuffle. But if you consider that we'll sell the land JV and get those proceeds, we sell a $6 million land site in downtown Daytona. We monetize mitigation bank. We sell some subsurface. You take all that money you invested at, call it a seven cap, and you do a little bit of leverage on it, You know, it, it, it, it moves our FFO quite a bit because we're a small company. So that's, that's great. And, and we always want to, you know, mimic, I guess, a little bit of the most successful company in our space and that's federal realty, which, uh, hats off to them for, you know, having such an exciting, you know, 25 FFO multiple or whatever, but you know, where we're positioned, you know, we're going to be positioned in states and in cities. that, uh, you know, we have a lot of tailwinds. I mean, obviously we're in Arizona, Texas, Florida, uh, we'll be back in Raleigh. Um, and so those are, have great macro trends. I have a feeling that, you know, federal being in San Jose and Bethesda, you know, in DC area, those are a little bit more headwinds. So I think, I think the, the macro environments favoring kind of our strategy and, and hopefully people will, you know, wake up to it, but we'll see.
spk02: All right, fantastic. Thanks for the time.
spk01: Thank you.
spk00: Our next question comes from Rob Stevenson from Janie Montgomery Scott. Rob, your line is now open.
spk04: Good morning, guys. John, can you talk a little bit about the sales process for Wells? Understanding it only takes one buyer, How robust is the demand for these types of office assets these days? It seems like at least in the public market valuations that, you know, offices where people have been avoiding like the plague. What's been your experience as you go to been marketing these assets both here and at Pine and as you think about marketing future assets on the office side?
spk01: Yeah, I think, you know, just obviously we're coming out of the office side, but just to give you the experience on Wells. Wells is a little bit of a special situation in that the rent was a third of market and you had this fantastic campus in Raleigh. And so this was really a family office type deal where it didn't really matter what the cap rate was to the buyer. Just it's a generational asset because the basis was so low because the rent was so low. And so obviously it didn't work great in our portfolio as a public company because we didn't really get credit for it. Uh, but it's, it's an asset that if you, if this was your own personal portfolio, you'd never sell it. Uh, but it just, you know, we're here for public shareholders and, uh, it, it was holding back, uh, our earnings power. And so as we reinvest this, it's just going to do a lot more wonders for us than, than holding it. But to answer your question, as far as the appetite out there, There's probably more appetite than you would imagine for office. I mean, obviously, offices, you can't generically throw office. I mean, we have properties in more areas that, again, have the tailwinds, whether it's in Jacksonville or Tampa. That office is going to get more attraction than something in an urban setting in the northeast that has incredible amount of carry costs and operating costs as far as TIs and LCs that they're getting zero rent growth. So in basically summary, our office properties, there are definitely capital sources that are interested in it and we'll be able to move through it when we find good acquisitions to replace those assets.
spk04: Okay. And how are you thinking about you know, dispositions going forward here. You have the cash from the previous dispositions. You have these non-income producing assets that you detailed that you could sell and that some of these you will be selling in the near term. Are you going to wind up, you know, marketing more, you know, single tenant assets in the year end to take advantage of the 1031 markets, some of these other assets in the year end? Are you going to wait until you have the additional acquisition opportunities
spk01: identified how should we be thinking about that as well as your you know uh desire to raise uh common equity here yeah so uh given that you know we have the 1031 these these office assets you know it almost feels like uh uh an airport with planes uh circling the airport waiting to land i mean we have them you know some assets teed up and ready to go but we need to find the acquisitions that that work for us and so we're actively bidding on retail properties, multi-tenanted retail properties in many different states that we're focusing on. And so as we find them, like Raleigh, we'll start moving the office properties through the process. And so we have no need for outside capital. We have plenty of capital, plenty of liquidity, which is great. We're just really trying to find the acquisition opportunities that fit for us. I mean, just on a Just as an observation on the strip center, open air center, power center, the capital has really come back to those sectors in the last six months. That's great for our portfolio. It increases our NAV as those cap rates have gone down pretty dramatically. I don't think it's just a year-end 1031 dynamic because the properties we've been chasing are not really 1031 assets. They're a little larger. I think it's just really a recognition that retail is a lot better place to be than people had feared during COVID and so forth. And as you know, all these retail tenants have gotten a hell of a lot better during COVID. And so there's a lot of strength there. There's a lot of store count increasing expansion there. Of course, on the restaurant side, there's an incredible amount of restaurant demand for new locations. So all of that's feeding into bringing capital back to the space. Unfortunately for us, we'd love it if we had the market we had about eight months ago. But the negative to that is you had a lot of sellers that weren't going to sell their assets in that weak market. So now they are coming out with more and more assets as the price discovery has been a lot better.
spk04: Okay. And then I know you don't want to get into too much detail, but when you look at the Raleigh acquisition, material vacancy, upcoming expirations that may not renew that you guys have to re-tenant, redevelopment opportunities or out parcel opportunities, where's the upside going forward for you guys on this asset?
spk01: Yeah, that's why we like this asset a lot. There is some out parcel development opportunity. And there is some, uh, re-tenanting opportunity down the road, as far as, uh, suboptimal type tenants that, um, you know, if, if they were ever to leave, it would have a chance for us to, to basically, um, better the occupancy. So there's a, there's a combination of opportunity. There is, uh, out parcel, uh, padside development opportunity and re-tenanting opportunity, but not as much a vacancy opportunity.
spk04: okay and then last one for me just uh uh uh housekeeping matt the mitigation bank uh stuff is in a trs is that true is that true that's correct okay and given all the stuff that you're at the end of the day that you have you know at least until you sell the uh the land jv etc are you anywhere near your trs limits for 2021 2021 no we're in good shape from that perspective um
spk05: you know, the land JV and the mitigation bank and the alpine management TRL and TRSs, but they're not anywhere close to the limitation.
spk04: Okay. Thanks, guys. Appreciate it. Thanks, guys.
spk05: Appreciate it. Thank you.
spk00: As a final reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad. Our next question comes from Craig Cucera from B Riley Securities. Craig, your line is now open.
spk03: Yeah, thanks. Good morning, guys. Matt, I wanted to talk about the guidance. Year-to-date, you've bought assets at about an 8.5 cap rate. You're guiding to kind of a low 7 for the year, which would imply that the remaining assets you're buying are kind of priced maybe between a 5.5 and 6. Is that conservatism on your part, or are you looking at maybe higher tenant credit in which you're looking to close the rest of the year, or is that just market-based? You're just seeing cap recompression.
spk05: Yeah, I'll let John talk a little bit about the mix, but in terms of the guidance, it is a little bit of conservatism. It is a little bit of what's going to hit at the end of the year versus what may or may not flow into Q1. And so the mix is going to drive the cap rates, but we are looking to up-tier the quality of the portfolio. I'll let John talk a little bit about what that mix looks like, though.
spk01: Yeah, Craig. It's really a little bit a function of the opportunities we're seeing that we're trying to purchase. There's some vacancy opportunity where we're buying properties with lower vacancy and our higher vacancy, lower occupancy that we have a chance to really add some growth to the portfolio or additional growth. And so, and it'll help our, our basically, you know, from, you know, dividend coverage ratio. I think everyone, you know, even though our dividends super strong, you know, that will help us kind of show, you know, just as far as metrics. And so, and then another property that's really more of a total return opportunity. It has, it definitely has yield to it, current yield to it, but the low current yield, because there's a, It's a redevelopment play down the road, not for us to do, but an opportunity to really add some FAR, maybe double the FAR. And so it has a great total return metric, but a lower current yield metric. So that's a little bit of a combination of the acquisition opportunities in front of us.
spk03: Got it. No, I get it. So basically you might be starting lower, but, you know, be able to create a much higher stabilized yield over time. That makes sense. I feel like at Westcliff, which is the one property that does have a bit more vacancy than the others in the portfolio, you've discussed maybe some developer interest there in the past, maybe a large tenant looking to backfill, fitness, et cetera there. Has there been any movement on that front?
spk01: Yeah, so total frustration from my standpoint for sure, but there – There's definitely, call it three groups, operators looking at that large 38,000 square foot vacancy, and some of them are just, it's either fitting into their pipeline, let's say, I'm just making this up a little bit, let's say a tenant's looking at opening five facilities in the Dallas-Fort Worth area, and it's just really slotting this one in, and we're not but we don't want to hold it for them. We want to execute now. And one group, for instance, is in the middle of a capital raise and didn't want to do it until they get the capital in the door. And so it's a little bit of incredible frustration, but I have a feeling in the first quarter we'll have better success and visibility to leasing that up. But for a small company as us, as you mentioned, As you know, having that leased up is actually pretty impactful, so we're totally focused on it.
spk03: Got it. No, that makes sense. And one more for me. I know that you were pretty excited when you added Superica and the food hall operator at Ashford Lane. I'm curious, has that translated yet to increased leasing activity and interest at Ashford Lane?
spk01: At Ashford Lane? So I'll give you a little bit of background on the food hall as far as where they are just as an opportunity since you bring it up. You know, this whole supply chain thing is just like it's definitely hit the real estate side as well because the food hall is basically accessing a lot of their inventory FF&E from China. And I don't have to tell you what that means. Uh, so they're looking at more end of the year opening. And when we signed this up, we thought it was going to be summer of this year. So a couple months ago. And so, um, but you know, they're making very good progress. They're about 80% built out. Uh, but you know, even on the build outside, uh, you know, they're waiting for materials and so forth. But as far as a lease, as you, as you can see in our earnings, um, We have an incredible amount of leasing activity there. But interesting to me, it really hasn't been driven by the food hall excitement. It's really the location that we have on Ashford Lane is so important for that whole area that tenants, if they are looking for expanding in the burbs outside of Atlanta, this is where this is one of the hot areas. And so as you can think about it, you know, the more core of Atlanta, a lot of those tenants are leaving for the burbs. And so we're just in a good spot. So it doesn't really have to do with the hall as much.
spk03: Okay, great. Thanks.
spk00: We have no further questions. I'll now hand back to John for any closing remarks.
spk01: Thank you very much for attending our earnings call and look forward to talking to you through the rest of the year. Thank you.
spk00: This concludes today's call. You may now disconnect your lines and we thank you for joining.
Disclaimer

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