CTO Realty Growth, Inc.

Good day and thank you for standing by. Welcome to CTO Realty Growth's third quarter 2024 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your host today, John Albright, President and CEO. Please go ahead.

Good morning, everyone, and thank you for joining us today for the CTO Realty Growth Third Quarter 2024 Operating Results Conference Call. I'm joined today by Phil Mays, our Chief Financial Officer. Before we begin, I'll turn it over to Phil to provide a customary disclosure regarding today's call. Phil?

Thanks, John. I would like to remind everyone that many of our comments today are considered forward-looking statements under federal securities laws. 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 our 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 ctoread.com. With that, I will turn the call over to John.

Thanks, Bill. I'm pleased to report on another strong quarter with significant accomplishments across all areas of our business. In the quarter, we invested $191.3 million in a weighted average yield of 9.5%. including $137.5 million for a three-property portfolio of shopping centers located in North Carolina and Florida. On a leasing front, we signed more than 200,000 square feet of new leases, renewals, and extensions, and an average rent of $21.17 per square foot, bringing our year-to-date leasing activity to 385,000 square feet and an average rent of $23.74 per square foot. Our comparable lease spreads were 12% in the third quarter and 26% in the first nine months of 2024. Notable new leases included approximately 24,000 square feet leased to the Pickler, a pickleball facility replacing the former Earth Fair at the Collection of Foresight, and 20,000 square feet of the former WeWork space to the Legacy Club, a high-end membership-only social club at the Shops at Legacy. Anchor renewals included Ross at Price Plaza, Barnes & Noble at The Collection, and Michaels at Astrid Lane. With this leasing activity, we ended the third quarter with lease occupancy of 95.8% and an increase of 120 basis points from the previous quarter. Before leaving the topic of leasing, I want to note that our signed, not open pipeline continues to grow and now stands at $6.5 million in future rents, just over 7% of our current in-place cash-based rent. Now turning to investments, as mentioned earlier, we acquired three open-air shopping centers for $137.5 million, including Carolina Pavilion, Millennia Crossing, and Lake Brandon Village. These properties are all aligned with our investment strategy as they expand our geographic reach and strengthen our presence in key growth markets. Carolina Pavilion adds the Charlotte, North Carolina market And Brandon Village adds Tampa, Florida market to our portfolio, while Millennium Crossing grows our existing Orlando, Florida presence. Combined, these centers added almost 900,000 square feet to our portfolio, growing our GLA by over 20%. In addition to growing our property portfolio this quarter, we also grew our structured investment portfolio, adding a first mortgage and a preferred equity investment. In September, we originated a $43.8 million first mortgage loan with an initial term of two years and initial interest rate of 11%. This loan is secured by over 100 acres and titled for over 2 million square feet for a mixed-use development located in Herndon, Virginia, near Dulles Airport and adjacent to the Metro Rail Silver Line Station. In August, we also completed a $10 million preferred equity investment as a subsidiary of a publicly listed hospitality entertainment company with a dividend rate of 14%. Inclusive of both property acquisition and structured investments, our year-to-date investment activity now totals almost $275 million and a weighted average yield of 9.1%. With this amount of investment activity, We were pleased that we were able to efficiently raise capital that Phil will discuss in a few moments. On the disposition front, we sold Jordan Landing, located in West Jordan, Utah, resulting in 100% of our portfolio now being in the southeast and southwest. With that, I will now hand the call over to Phil.

Thanks, John. On this call, I will briefly discuss our strength and balance sheet, strong earnings, and revised full year 2024 guidance. Starting with the balance sheet, during the quarter, we issued approximately 6.9 million shares at a weighted average share price of $18.63 per share under our common stock ATM program, generating net proceeds of $125.7 million. These equity proceeds, along with $18 million of proceeds from our disposition of Jordan Landing, provided over 75% of the capital needed to fund our 191 million of investment activity announced this quarter. Additionally, we closed a $100 million five-year term loan. The funds from this new loan were used to term out $100 million that was outstanding on a revolving credit facility for which the company had already entered into SOFR swaps. Utilizing these existing SOFR swaps, the initial fixed rate of this $100 million five-year term loan was 4.68%. Notably, our equity issuance and term loan combined permitted us to incrementally improve both leverage and liquidity. We ended the quarter with net debt to EBITDA of 6.4 times, a full turn lower than last quarter, net debt to total enterprise value of 43%, and over $200 million of liquidity, thereby providing a strengthened balance sheet to support continued growth. Moving to financial results, Core FFO was $0.50 per diluted share for the quarter, compared to $0.47 reported in the third quarter of 2023. AFFO was $0.51 per diluted share for the quarter, compared to $0.48 reported in the third quarter of 2023. This represents approximately 6% growth in both core FFO and AFFO. As John discussed, the company continued to have positive leasing momentum, and the result of this momentum is evident in our same property NOI growth of 6.3% for the quarter. This growth is spread among our same property portfolio, but primarily driven by growth at Ashford Lane, the collection at Foresight, the shops at Legacy, and Price Plaza. Moreover, our signed not open pipeline of $6.5 million will continue to add NOI growth as the new tenants take possession and commence paying rent. Regarding our common dividend, as we announced in August, we distributed a third quarter regular cash dividend of 38 cents per share, resulting in a Q3 AFFO payout ratio of approximately 75%. Consistent with past practice, towards the end of November, we will announce our quarterly dividend for the fourth quarter. Lastly, with regard to guidance, we are pleased that our increase in investment activity at attractive yields, same-property NOI growth, and attractive term loan pricing enables us to raise our guidance while at the same time growing our common equity market capitalization and strengthening our balance sheet. Accordingly, we are raising our full year 2024 outlook to a new core FFO range of $1.83 to $1.87 per diluted share, from $1.81 to $1.86 per diluted share, and raising the low end of our AFFO range to a new range of $1.96 to $2 per diluted share, from $1.95 to $2 per diluted share. The assumptions that underlie our guidance are detailed in our earnings press release. However, I do want to note our increased investment guidance. With $274 million of investments closed year-to-date, we are again increasing our investment guidance to a new range of $300 million to $350 million. As a reminder, our investment outlook includes both property acquisitions and structured investments. With that, operator, please open the line for questions.

As a reminder, if you'd like to ask a question at this time, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question will come from the line of Rob Stevenson with Jenny Montgomery Scott.

Good morning, guys. John, other than the John, other than the 14% dividend, what's the attractive thing about the $10 million hospitality investment? And what's the collateral if they wind up not being able to pay over the next five years?

Rob, can you repeat that? We lost temporary connection.

Okay. Can you hear me now?

Yes, I can.

Okay. So other than the 14% dividend, what's the attractive thing about the $10 million hospitality investment? And what is the collateral if they can't pay over the next five years at some point?

Well, you had me at 14%. But basically, you know, it's a publicly traded company that just raised quite a bit of capital on a rights offering and might have had the previous CFO at CTO as a CFO there.

Okay. And Phil talked about the raised acquisition guidance. How are you thinking about funding that? Is that going to be fund through ATM issuance, or are there more dispositions that you're teeing up and just won't close until early 2025? How are you thinking about the funding of the equity portion of deals over the next six months?

Well, now that we have our leverage down to a level that we haven't seen in quite a while, and as Phil mentioned, the liquidity that we have, we'll probably use the line, but we obviously exceeded our investments here this year. There are a few smaller deals that we hope to close this year. But we feel like we're in a great spot to monitor the capital markets. And obviously, it's dependent on finding an acquisition, but you won't see us recycling as much as we have in the past years.

And how are you thinking about the remaining office asset versus selling today versus holding into the future? How is that sort of math looking like to you in terms of the optimization there?

Yeah, I mean, we're monitoring it. The tenant is utilizing it and they're thinking about their future plans at the same time that that asset is experiencing an incredible market environment in Albuquerque. It's near the missile range. It's near the Netflix movie studios that are nearing completion. There's an incredible amount of housing, and the state needs office space. The university needs office space, and there's no one building offices, as you know. So we're actually getting in a better and better situation. But to answer your question, we're waiting to find out how Fidelity wants to utilize this for the long term. And we're just kind of waiting on them, but everything's been going the right direction. But at some point, yes, we will exit it.

Okay. Okay. And then, Phil, you guys have talked about the six and a half million of signed but not open leasing. When does that start to hit FFO and when are the, is it chunky or is it evenly sort of spread throughout when that comes online in 2025?

Yeah, so just for modeling purposes, if you wanted to kind of radically ramp it up over the next nine to 12 months, somewhere in that time period, kind of ramping it up radically, will approximate how that'll come online.

All right, that's helpful. And then last one for me, any known move-outs of note at this point in 2025 in the portfolio?

No, I mean, the only one that, you know, really you can think of that is strategic in that they don't have a renewal right and we already have two tenants that wanted higher rents and better quality tenants. So nothing that's a problem. Everything's more of an opportunity.

All right. Thank you. Thanks, guys, for the time, and have a great weekend.

All right. Thanks, Rob. You as well.

Our next question will come from the line of Craig Cucera with Lucid Capital Markets.

Hey, good morning, guys. Obviously, a pretty aggressive acquisition quarter, and based on guidance, it looks like you could do another $25 to $75 million roughly for the rest of the year. Based on the yield assumptions, it looks like that would all be properties, but are you looking at any other additional structured finance investments?

We are looking at one. It's smaller, but it's very high quality, and it actually is very close to one of our assets, and so it would be a nice loan to own. We would love to own it. We just don't think we'll have an opportunity to because it's such high quality that it will go for much lower cap rates than kind of what what we're targeting, but it's more strategic than just an investment. And then, you know, on the acquisition side, we have, you know, something in our line of sight that's smaller, but, you know, high quality.

Got it. And with the sale of the mitigation credits this quarter, should we expect to see any more remaining earnings from real estate operations, or is that effectively ceased?

That is in the rearview mirror.

All right. It took us 120 years. Changing gears, I want to talk about the $44 million mortgage investments. Looking at that project up by Dulles, it looks like there's at least at one point some potential hotel space, a lot of office. Is the collateral underlying the loan all of the entire project, or is it carved out towards maybe retail and multifamily or something else?

No, it's all the property. The vast majority of the value there is multifamily. As you can imagine, your top tier multifamily developers are lining up to buy sites from the developer. And they're in contracts, LOIs and contracts for, you know, I would say three to four right now. And on the hotel side, they are looking to maybe develop that themselves. There's 160,000 square feet designed and permitted for retail that we would love to be helpful in that investment with a developer. As you know, we don't, you know, we're not a developer, but it's more like a rest and town center opportunity. So, and then part of the property is on top of the Fairfax, it's in Fairfax County on top of the metro station that's closest to Dulles. And as you can imagine, if this was a data center land, it would be worth $300 million. So it's an awesome development project. They've been working on it for 15 years. Just imagine the entitlements have taken that long, and now you're seeing dirt starting to move. Got it. So they have broken ground at this point? They've done more basically earthwork, horizontal development as they're waiting for basically the multifamily developers to do the next stage. Got it.

And looking at the three-property portfolio you acquired this quarter, it looks like there's a lot of occupancy upside to where the assets have already been leased. Can you talk about maybe any sort of CapEx spend that you're expecting at those properties?

Yeah, so when we bought it, these leases were in place, and so they've already been addressed as far as the CapEx. So we're very excited about what the transformation of the Carolina Pavilion project is going to be because some of these boxes have been vacant for some time and now the tenants are just now getting to the build-out side of it, but we took credit for the landlord side of it when we acquired it. The interesting thing after the acquisition is cons and big lots were not part of the signed leases that are going to open, but now we're in the process of trying to get those spaces back. We basically have multiple tenants that want those boxes at better, more favorable rents than we bought the project under. So this is looking, you know, as a fantastic investment. So, you know, knock on wood, I feel like the execution here is going to be fairly easy and fairly fast. All right. Thanks.

Appreciate it. Thank you.

Our next question comes from the line of John Masoka with B Riley securities.

Good morning, everybody. Morning. Um, maybe, uh, just kind of curious on the disposition of Jordan landing, kind of what drove the cap rate there? Um, just given it's fully occupied property, um, in a pretty high growth market, just in being more color on that particular asset and that sale.

Yeah, I mean, you're right. It's a vibrant market. It's smaller property. And it really is at home is the issue. So we looked at if we held on to it in a bad home, something happened at home, you know, amount of time on demising that home space and so forth. We decided, you know, let's just sell it as small property. So that's what's driving the higher cap rate. Understood.

And then in terms of Correct me if I misheard, but the lease-up of the former WeWork space, was that a partial lease-up, or was that all of the previously vacated space?

Yeah, it's about a third of it, and we're pretty excited about it. It's almost like kind of a Soho Club sort of tenant, and they've gotten great feedback and pre-membership investments. And so unfortunately, it's not going to open up until the latter part of 2025. So that income primarily from that space is going to hit 2026. And we're waiting a little longer to make an announcement in that market to help with the rest of the lease up of the WeWork space. So it's taking longer, but this is going to be exciting. Exciting tenant for the property, bringing a lot of activity there, so we're excited about it.

And just because it sounds like you have some big close prospects for the remaining two-thirds of the space there.

What we're looking at doing is demising it, so it's going to be a lot of smaller tenants. Some of the larger tenants we've been talking to just taking longer, so we'd rather just kind of let's just kind of crown that out here and get a lease up.

And then maybe bigger picture, you know, have you seen any change just given some of the macroeconomic uncertainty around retailer demand for either their existing space or to kind of take over, you know, move outs or reposition space, et cetera?

Not really. I mean, really the only – the softness that we're seeing is some of the restaurants' sales are down. And, you know, we're definitely monitoring that. But, you know, as a commentary on the economy, I would say on the restaurants, that's where you're seeing more of the challenges and the softness.

Any change in demand for backfill for those types of assets?

Well, yeah, so far there's no one that's really kind of like we're out sort of situations. I mean, we're in lease negotiations for new ones, especially in legacy assets. So to answer your question, you know, the space that's the easiest to lease in restaurant land is second generation. So if any of these tenants do succumb, we'll have backfills readily available. Okay.

And then last one for me, I know you didn't provide 2025 guidance, but as we kind of think about same-story NOI growth for next year, any kind of notable puts and takes there that could impact you know, the comparisons versus what you're going to do this year?

You know, next year we're doing a lot of work because we've been so active on leasing side, the acquisition side, investment side. You know, wait until the end of the year to kind of give you better guidance. You know, there's a lot of moving parts and, you know, the good news is it's all good news. That's fair. And that's it for me. Thank you very much. Thank you.

Our next question comes from RJ Milligan with Raymond James.

Hey, good morning, guys. Most of my questions have been asked, but I really want to focus on the leverage. And John, you mentioned and we saw in the release that leverage has come down pretty nice here and is at one of the lowest levels it's been. And I'm just curious, how do you think about running leverage going forward, given historically you've been more willing to run in higher leverage? But obviously, as the company gets bigger, I'm just curious how how you're thinking about running the balance sheet over the next two years?

Look, we love the leverage being down. That's the goal. And the capital markets were fantastic for us in the last couple months where we were able to do that. So we would run leverage up only for the short duration for an acquisition opportunity and then look to rebalance. So where we are is a very comfortable sort of level for our leverage. But we don't mind taking it up a bit if there's a great opportunity, but then look for an opportunity to bring it back down.

Okay, that makes sense. That's it for me. Thanks, guys. Thank you.

As a reminder, if you'd like to ask a question at this time, that is star 1-1. Our next question comes from the line of Gaurav Mehta with Alliance Global Partners.

Yeah, thanks. Good morning. I wanted to ask you on your acid recycling. I think earlier in the call you said that not expect as much recycling going forward as in the past. Just wondering, within your portfolio, are there any assets that may be sold in the future?

You know, some of these smaller assets that we've talked about, you know, the Daytona assets could be opportunities where we're just looking for scale now. And so we'll continue to look at that. Here at Winter Park, we have a a mixed-use property that's small and the market is very strong here. We're just waiting for it to get a little stronger. So just more cleanup on the size versus some sort of other opportunities. Look, if the pricing gets better and better, there may be one that doesn't have a lot of growth in it, and we may look to sell something if strategically it makes sense. But Nothing on the horizon.

Okay, thank you. That's all I have.

Great. Thank you.

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.