CTO Realty Growth, Inc.

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.

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.

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.