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spk08: Speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Partridge, Chief Financial Officer. Please go ahead.
spk02: Good morning, everyone, and thank you for joining us today for the CTO Realty Growth Second Quarter 2022 Operating Results Conference Call. With me today is our CEO and President, John Albright. Before we begin, 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 the 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, earnings release, supplemental, and most recent investor presentation on our website at ctoreit.com. With that, I'll now turn the call over to John.
spk05: Thanks, Matt, and good morning, everyone. We've had a productive few months since our last order's earnings call, making progress on a number of operational initiatives and continuing to creatively grow the company through a combination of high-quality acquisitions and attractive structured investments that provide strong risk-adjusted returns. During the quarter, we entered into a $30 million preferred equity investment in Waters Creek. As we spoke about during our last earnings call, this is a terrific, grocery-anchored retail property that's being repositioned by the sponsor into a premier lifestyle center just outside of Dallas in Allen, Texas. We also opportunistically originated a $19 million construction loan on the retail portion of Waterstar in Orlando as part of our structured investments program. This is a Marshall Burlington anchored asset that includes 320 on-site residential units and a number of out parcels. It is on one of the strongest retail corridors in all of Florida across the street from the Margaritaville Resort, Orlando, and H2O Waterpark, and just around the corner from the entrance to Walt Disney World. While these types of investments will not be a significant piece of our income generating portfolio, we have allocated a small portion of our balance sheet to these types of opportunistic investments that allow us to generate outsized returns through a prioritized position in the capital stack for assets we'd otherwise like to own. These investments also have acted as a bridge between lower cap rates we were seeing earlier in the year for regular way acquisitions versus the improved yields we're starting to see in the acquisition market as prices readjust with the interest rates. Subsequent to the end of the quarter, we invested $80 million in our largest acquisition to date, Madison Yards, a public anchored property with an infill location along the Beltline in Atlanta, Georgia. This core investment was an opportunity to acquire a newly built, grocery-anchored property in one of the strongest sub-markets in one of the fastest-growing cities in America. Normally, we would have been priced out of this type of asset, and we were at the beginning of the year, but we have a strong relationship with a seller who is focused on certainty of close, given the challenging debt market, which is how we ended up acquiring the property at a more favorable yield. For us, this was a scenario where we were able to significantly up-tier our portfolio quality by taking the proceeds from our first quarter lower growth Carpenter Hotel and Party City property sales and reinvest at a higher yield into this grocery anchored trophy property that have base rent increases in all but one of the leases. On the decision front, we did not have any property sales during the quarter, but as evidenced by our revised guidance, that Matt will talk about in more detail later in our prepared marks, we do anticipate more actively in the back half of the year as we look to opportunistically exit some of our legacy office assets. Operationally, we continue to focus on our property repositioning programs and leasing initiatives, which drove excellent same-store NOI growth and have us well positioned to deliver further outside growth through the back half of this year and into 2023. In the quarter, we signed over 40,000 square feet of new leases and renewals, an average rent of nearly $32 per square foot, and an average lease term of more than 10 years. Of our renewals and extensions during the quarter, we experienced a 3.8% increase in the new per square foot lease rates versus prior rates. Similar to the past quarters, new leases signed were largely related to existing vacancy associated with units that were acquired as vacant. Of note, we had only one backfill scenario during the quarter, which allows us to double the expiring rent with a tenant that should drive significantly more foot traffic to the property and improve our overall tenant mix. Our excellent Q2 year-over-year same-store NOI growth of nearly 24% was driven by a combination of contractual rent increases, strategic reductions in operating expenses, some non-repeatable one-time items and new leases coming online in the historically vacant space. Adjusting for the one-time prior items that resulted in a positive comparison, our year-over-year same-store NOI was still up a healthy 13%. Not surprisingly, Ashford Lane was the biggest year-over-year outperformer in our portfolio as it continues to benefit from our leasing efforts and repositioning strategy. The lawn is nearly complete and most of the tenants who front the new green space will open between now and the end of the year. This property has been a great project for us and our progress today will easily drive outside NOI growth over the next 18 months. But with the property only being 80% lease, we still have more opportunity to go. We're working with some exciting concepts that will hopefully get us closer to 90% or higher lease level before the end of the year. and we'll make this a true destination property for the surrounding community. Similarly, repositioning of our Santa Fe property continues to come along nicely. Just this past weekend, we launched a new program for our parking garage that will start generating income on this aspect of the property, which was previously open for free use. This is in addition to the hospitality lease that we signed earlier in the year with Rosewood Hotels, Inn of the Anasati, to take the entire top floor of one of the buildings, and we're working diligently to fill the remaining 15% of the vacancy to drive further property-level cash flow, which should translate into significant property-level same-store NOI growth in 2023. I'll now pass it over to Matt to talk about our performance in the quarter, capital markets activities, and increased guidance.
spk02: Thanks, John. The quarterly and year-to-date results I'll outline today are before the effects of our three-for-one stock split that began trading at a post-split price on July 1st, 2022. However, our revised annual guidance has been adjusted to account for the three-for-one stock split and includes adjustments for our first and second quarter results. We ended the quarter with 21 properties comprised of approximately 2.8 million square feet of rentable space located in nine states and 15 markets. With our acquisition of Madison Yards, we now have 22 properties comprising 3 million square feet, and Atlanta is now firmly established as the top market in our portfolio. Digging deeper into our market exposure, 65% of our base rents now come from the ULI top 15 markets of Atlanta, Dallas, Raleigh, Phoenix, Miami, Salt Lake City, Tampa, and Washington, D.C. And nearly another 10% of our base rents come from the ULI top 25 markets of Las Vegas, Orlando, and Houston. Our market's population growth, strong retailer demand, and our property locations give us confidence we'll be able to continue our momentum with new leasing, as well as positively manage through upcoming lease rollover in the back half of 2022 and into 2023. From a top tenant perspective, Fidelity remains our largest tenant exposure at approximately 6%, but AMC and Publix are now our number 8 and number 11 tenants, respectively, following our purchase of Madison Yards. At quarter end, our portfolio is 91.3% occupied, and we reported least occupancy of 93.5%. The majority of our quarter-over-quarter increases related to in-place occupancy were driven by the shops at Legacy in the Plano sub-market of Dallas, Texas, and The Strand, which is our multi-tenant retail property in Jacksonville, Florida. Total revenues for the second quarter of 2022 increased 36% to $19.5 million, and In year-to-date, total revenues have increased by 26% to $36.7 million. As part of our revenue gains in the quarter, we did make some incremental progress selling a half a million dollars of subsurface interest. But overall, both our quarterly and year-to-date total revenue increases were largely driven by income property revenue gains. As John previously referenced, our year-over-year same property NOI growth was 24% for the second quarter or 13% excluding one-time items. Year-to-date year-over-year same property NOI increased 20% or 14% when those one-time items from the second quarter of 2021 are removed. As a reminder, our year-over-year same property NOI statistics only include assets owned for the entirety of the measurement periods in both 2022 and 2021. For the second quarter of 2022, core FFO grew 60% to $1.41 per share and AFFO grew 38% to $1.48 per share. As a reminder, these per share results are before the effects of our three-for-one stock split. Similar to our results in the first quarter, core FFO was positively impacted by the elimination of approximately $279,000 of quarterly amortization related to the discount on convertible debt we previously held on our balance sheet. This discount was eliminated at the beginning of the year as part of our implementation of certain accounting standards, which are outlined in more detail in our Form 10-Q. The convertible debt discount amortization has historically been adjusted for in our calculation of AFFO, so the elimination of this amortization has no impact on the comparability of our year-over-year AFFO results. As previously announced, the company paid a second quarter regular cash dividend of $1.12 per share, which is a 12% year-over-year increase over the company's Q2 2021 cash dividend and a 4% increase over our Q1 2022 quarterly cash dividend. and a current stock split adjusted annualized yield of approximately 7%. Our quarterly dividend represents a cash payout ratio of 76% of Q2 2022 AFFO per share, and we continue to work towards efficiently paying out approximately 100% of taxable income in 2022. We ended the quarter with $34 million of cash in restricted cash and nearly $100 million of undrawn commitments under a revolving credit facility. Our quarter in net debt to total enterprise value was approximately 41%, and our net debt to EBITDA was 6.6 times. It was a quiet quarter on the capital markets front, but we did issue just over 88,000 shares of common stock to our ATM program for net proceeds of $5.7 million at an average issuance price of just over $66 per share, or $22 per share after adjusting for the three-for-one stock split. Also within the quarter, we repurchased $1.1 million of common stock at an average price of $57.37 per share, or $19.12 per share after adjusting for the three-for-one stock split. We increased our full-year guidance, which takes into account our strong year-to-date performance, revised expectations for transaction activity, and current capital markets environment, and our anticipation of a broader economic slowdown, and as I mentioned before, the effects of our three-for-one stock split. Our new core FFO per share guidance range is $1.58 to $1.64 per share, which is an increase of $0.06 per share at the low end and $0.04 per share at the high end. Our new AFFO per share guidance range is $1.70 to $1.76 per share, which is an increase of $0.05 per share at the low end and $0.03 per share at the high end. These per share estimates for the full year of 2022 do take into account the effects of our announced stock split. Our revised guidance also increases the top end and bottom end of our investment and disposition volume estimates and the associated yields to account for our year-to-date transaction activity and expectations for the balance of the year. In 2022, we now expect to invest between $250 million and $275 million at an initial yield between 7% and 7.25%, and we now anticipate selling between $50 million and $80 million of assets at an exit cap rate between 6.25% and 6.75%. I'll turn the call back over to John now for his closing remarks.
spk05: Thanks, Matt. While the economic backdrop remains unpredictable, I'm optimistic that we'll continue to find opportunities for further growth with our disciplined investment approach, and I'm excited about the tremendous operational progress we've made and how that is translated into strong earnings growth in our revised 2022 guidance. I look forward to providing updates on our portfolio and investment activity throughout the quarter, and we appreciate all of our team's hard work and continued support of our shareholders. At this time, we'll open it up for questions. Operator?
spk08: Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from Gaurav Mehta with EF Hutton. You may proceed.
spk01: Yeah, thanks. Good morning. First question on your balance sheet. You guys did raise your acquisition guidance for 2022. I was wondering if you could talk about how you expect to fund the increased acquisition guidance and maybe also touch upon the balance that you have on the credit line with variable rate debt. Should we expect Do you guys do any kind of permanent financing for that credit line?
spk02: Yeah, hey, Gaurav. With respect to the acquisition guidance, I think what you can anticipate is we're going to continue to sell assets to fund that. So we obviously announced one this morning before the market opened. And in terms of the floating rate debt that's on the revolver, we are looking at doing a new term loan, which we'll fix with a swap to reduce that balance and put some more fixed rate debt on the balance sheet.
spk01: Okay, great. Second question on the transaction market, you did touch upon seeing some higher cap rates in the transaction market as a result of higher interest rates. Can you maybe provide some more color on what you guys are seeing in the transaction market in terms of maybe the volume and the pipeline and what you're hearing from the sellers?
spk05: Yeah, this is John. So, you know, the larger the asset, probably the more problematic it is for a seller to sell just because of the secure debt markets are kind of in kind of a locked kind of market right now. There's not a lot of a There's no securitizations happening. There's no really distribution of debt. So balance sheets, there's not a lot of balance sheet capacity for new lending. So if you're a seller and you're looking to sell larger type projects that need secure debt, the folks that normally would be a buyer and utilizing secure debt market are out of the market. So the buyer pool is a lot smaller. And then the other kind of facet of it is if you're a seller and you really want to have something sold by the end of the year and you do have a buyer that wants to use secured debt, you're probably less likely to go with that buyer, even though their price might be higher because of the risk of execution happening. So right now is a good time. We are seeing cap rates widen out because of interest rates. And they have widened out. The expectations have widened out from sellers. And, you know, there are more properties coming on the market. You know, people are going to bring them out earlier than they may just because, you know, why would you risk kind of being the last person who's coming out with a project? So we're sifting through the opportunities. And we're very, you know, we're optimistic that we'll find something that that fits with us and allows us to kind of move through, you know, some of the office properties.
spk01: All right. Thanks for taking the questions.
spk05: Sure.
spk08: Thank you. One moment for questions. Our next question goes from Rob Stevenson with Jenny. You may proceed.
spk06: Good morning, guys. John, given the size of the company, what drove the share repurchases in the quarter? Was it a lack of acquisition opportunities? And how are you thinking about that going forward versus acquisitions?
spk05: Yeah, I mean, Rob, as you know, through our history, we've been an active buyer of our stock when the stock is being sold off for no particular reasons that have to do with the fundamentals of the company. And whenever we see a good opportunity to buy stock at a very significant discount to NAV, it's a hell of a lot more creative, in our opinion, to buy your own security than buying another property. It's a sure thing in buying our stock back at a when there's a big dip and there was a big dip in the market. And so, you know, people are selling for not having anything to do with CTO and we took advantage of it. And, you know, we're happy to take advantage of it when those sort of opportunities show themselves.
spk06: Okay. So, I mean, I guess the, the followup then would wind up being, I think that the, it was 57 and change. So that's a split adjusted, call it 19 ish. I mean, you know, relative to what your acquisition pipeline looks like today, how would, you know, if your stock price were to pull back to that level, how would you sort of think about the inherent growth of the company and the ability to add via acquisitions? versus buying back stock at whatever that implies from a cap rate for CTO, et cetera, from a balancing perspective, and especially leverage neutral, right?
spk05: Yeah. I mean, look, we want to grow the company for sure, and so we're looking for those opportunities, and we're optimistic we're going to be able to do that. But, you know, having said that, if something, an anomaly in the market happens, you know, again, we're all about driving shareholder value, driving NAV, This is not an AUM game. This is all about delivering results to our shareholders, and I think our results have proven themselves. So for whatever reason, the formula works, and so we're not going to deviate just because we want to get to some sort of size. And the one thing to keep in mind, we do have those small amount of converts out there that will convert into common stocks, so that's going to de-lever us in a big way. So you can also think about it as us buying back stock in a forward essence of that basically convert going to common.
spk06: Okay, that's helpful. And then it looks like that you guys leased up some vacancy during the quarter. Of the stuff that's core, where are the big pockets of vacancy left and the opportunities for you, and where are you in the discussions on those assets that you're likely to keep for the next, call it three years or so, with leasing up any of the vacancy in those assets?
spk05: Yeah, I would say there's still some low-hanging fruit at Ashford Lane as far as lease up, and that's where we're seeing the most activity right now. And we have negotiations going on, so we're very confident that we're going to get there this year on more leasing there. But, you know, other than that, you know, there's a vacancy at Westcliff that's not really core, but we are actually having good leasing activity there right now. And, you know, there is actually a little bit, I mean, the other one would be, the other component would really be Santa Fe where we have 12,000 square feet on the street level, which we're demoing right now to kind of have it in better presentation and work. We've had a dialogue with a couple tenants on that space now. That's more early innings for that space, but those are kind of the chunks.
spk06: Okay. And then the Orlando structured investment, what's the end game there for you guys, given the short-term nature of that? Is that an asset that you would wind up taking an equity interest in at some point? Um, you know, is that just going to get repaid at the, you know, in 30 days or so? How should we be thinking about that and sort of how you're looking at that type of business going forward?
spk05: Yeah, on that asset, you know, we, we expect to, um, to get, uh, paid off, you know, this year. Uh, but, um, you know, it's one where we would like to own the, the project at a certain price. So it's a little bit, you know, it depends if, um, if the developer kind of gets to the price expectation he wants versus kind of where we want to be. So it could go 50-50 either way.
spk06: Okay. And then last one for me. You guys, it looks like from the last few quarters at least, you guys have been reliably sort of selling $300,000, $400,000, or $500,000 worth of of subsurface rights. Is that, you know, likely to continue to be the pace going forward? Is there anything more sizable in the horizon there? Or is it just, you know, more of the same as we think about, you know, the rest of 2022 and into 23?
spk05: Yeah, I would say it's more of the same. You know, you do get some sort of, you know, people come around that are talking a little bit of a bigger bigger chunk, but I would say, you know, probability is a little lower on those, so I wouldn't want you to have that modeled out, but I would say it's more of the same.
spk06: Okay. Thanks, guys. Appreciate it. Have a good weekend.
spk05: Thank you. You too.
spk08: Thank you. One moment for questions. Our next question comes from Michael Gorman, BTIG. You may proceed.
spk10: Yeah, thanks. Good morning. John, maybe sticking with the structured investment portfolio there, as you think about it with the choppiness in the markets right now, you talked about some of the challenges in the debt markets with sellers and different projects. I'm just wondering what the pipeline looks like there, how you source those deals, and maybe how large you're willing to make that as a piece of the business, maybe if the regular way acquisitions are a little bit choppier too.
spk05: Yeah, so as mentioned, you know, we're not looking to, you know, strategically grow that portion of the business. It's almost bespoke if somebody comes to us and needing some sort of liquidity because of the debt market challenges. You know, having said that, you know, I'm surprised that we really don't have anything in front of us right now. So there's no kind of pipeline in that business right now, but it kind of happens when you least expect it a little bit. So we keep our eyes open for it, but nothing on the radar.
spk10: Okay, great. And maybe I think you talked a little bit about Ashford Lane and some of the tenants opening up by year end, especially the ones facing the lawn. If you look at some of the other assets like Santa Fe and Texas where you have a decent spread between leased and currently open and occupied, When do you think those spaces start to roll online? Is that back half of this year as well, or will some of that leak into 23?
spk05: Mainly leak into 23. You know, just everything's taking longer from lease negotiations to build out. So I would say it's more of a 23. Okay, great.
spk10: And then, Matt, maybe just two quick ones on guidance. I'm just curious, when you have an investment that you both originate and expect to close out in the same year, like the development financing, is that in your investment guidance? And then maybe the second piece, I'm assuming Hialeah was in the disposition guidance, but just wanted to double check.
spk02: Yeah, for the latter question, yes, Hialeah was in the disposition guidance. With respect to the former question about investment guidance, we're including WaterStar in there in terms of originations and the yields that we're originating at. But obviously, if we get that capital back and reinvest it, that'll also roll into there. So it's almost a double dip in the sense that you can't model out the full 250 to 275 as ongoing. There'll be some recycling if we get that capital back from WaterStar. Okay.
spk10: Okay, perfect. And then maybe just one last quick one with Hylia. How much notice did the master list lower give you that they were going to exercise their option?
spk05: We've been working on it for about like 45 days.
spk10: Okay, great. Thanks so much, guys. Thank you.
spk08: Thank you. One moment for questions. Our next question comes from Matthew Erdner with Jones Trading. You may proceed.
spk07: Hey, guys. Thanks for the question, and congrats on the good quarter. So I guess what is the difference right now between institutional cap rates and what would be a high net worth family office cap rate? Are you guys seeing more strength in one of those two than the other?
spk05: I wouldn't say the cap rates are different. I would just say that... Yeah, I would say more of the family offices have been more active of late than they have been previously. I think they've seen that this becomes a good opportunity for them to get quality assets at higher cap rates that they were priced out of before. And then the institutions are a little bit slower on kind of re-engaging. I would say that that's definitely happening now. So I wouldn't say the cap rates are different. I would say that the clearing prices will be roughly the same. You're just seeing one group kind of be a little bit more active than the other.
spk07: Gotcha. Thanks. That's helpful. And then what assets moving from one group to the other? Gotcha. Thanks. That's helpful. And then what assets moving forward do you desire to develop and what would be the timeline for those?
spk05: Well, we don't really like developing too much. We think that that has a whole risk associated with it that really we would rather kind of come in and buy a project that's been developed that didn't really hit pro forma or something happened and we're able to acquire it below the development costs. And a lot of the hard work has been done, the planning, the entitlement, the leasing. And so there's a lot of capital and time put together for developments. And we would rather kind of be the group that kind of comes in and buys those projects when they didn't really work out as planned.
spk07: Awesome. And then I got one more. Could you guys provide an update on the mitigation bank and kind of where that is compared to last quarter?
spk05: Yeah, we've started seeing some more activity on credit sales. So I would expect you to see us being more active from here to the end of the year on credit sales out of the mitigation bank for sure. Awesome. Thank you. Thank you.
spk08: Thank you. And as a reminder, to ask a question, you will need to press star 1-1 on your telephone. Our next question comes from RJ Milligan with Raymond James. You may proceed.
spk04: Hey, guys. Just one quick question, as most of my questions have been answered. But, Matt, maybe you could give a little bit of color on expected timing, and obviously that's important for the gap between leased and occupied and rent paying, and how we should expect that to trend over the next couple quarters.
spk02: Yeah, hey, Robert J. To John's point, I think when you look at the spread at Legacy in Santa Fe, those are probably more 2023 rent commencements, whereas the leased versus occupied spread at Ashford is probably a Q4. lease commitment wave for us. So it's going to be spread out over the next 12 months or so with it being a little lumpy in Q4 with all the Ashford stuff coming online around the lawn.
spk04: Got it. So still that rent will come online through at least the second quarter of next year?
spk09: Yes.
spk04: Okay. That's it for me. Thanks, guys. Thanks.
spk08: Thank you, and I'm not showing any further questions at this time. I would now like to turn the call back over to John Albright, President and Chief Executive Officer, for any further remarks.
spk05: Thank you for attending the call.
spk08: Thank you. This concludes today's conference call. Thank you for participating.
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