CTO Realty Growth Q3 2024 Earnings Call Transcript

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October 25, 2024

There are 7 speakers on the call.

Operator

by. Welcome to CTO Realty Growth's Third Quarter 20 24 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer 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.

Operator

Please go ahead.

Speaker 1

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.

Speaker 2

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 ks, 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 will turn the call over to John.

Speaker 1

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 $191,300,000 in a weighted average yield of 9.5%, including $137,500,000 for a 3 property portfolio of shopping centers located in North Carolina and Florida. On the leasing front, we signed more than 200,000 square feet of new leases, renewals and extensions at an average rent of $21.17 per square foot, bringing our year to date leasing activity to 385,000 square feet at an average rent of $23.74 per square foot. Our comparable lease spreads were 12% in the 3rd quarter and 26% in the 1st 9 months of 2024.

Speaker 1

Notable new leases included approximately 24,000 square feet leased to the Pickler former Earth Fare 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' Price Plaza, Barnes and Noble Electric Collection and Michaels at Astra Lane. With this leasing activity, we ended the 3rd quarter with leased occupancy of 95.8%, 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 $6,500,000 in future rents, just over 7% of our current in place cash based rent. Now turning to investments.

Speaker 1

As mentioned earlier, we acquired 3 open air shopping centers for $137,500,000 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 1st mortgage and a preferred equity investment.

Speaker 1

In September, we originated a $43,800,000 1st mortgage loan with initial term of 2 years and initial interest rate of 11%. This loan is secured by over 100 acres entitled for over 2,000,000 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 $10,000,000 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 structure investments, our year to date investment activity now totals almost $275,000,000 at 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.

Speaker 1

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,

Speaker 2

I will briefly discuss our strength in balance sheet, strong earnings and revised full year 2024 guidance. Starting with the balance sheet, during the quarter, we issued approximately 6,900,000 shares at a weighted average share price of $18.63 per share under our common stock ATM program, generating net proceeds of $125,700,000 These equity proceeds along with $18,000,000 of proceeds from our disposition of Jordan Landing provided over 75% of the capital needed to fund our $191,000,000 of investment activity announced this quarter. Additionally, we closed the $100,000,000 5 year term loan. The funds from this new loan were used to term out $100,000,000 that was outstanding on our revolving credit facility for which the company had already entered into SOFR swaps. Utilizing these existing SOFR swaps, the initial fixed rate of this $100,000,000 5 year term loan was 4.68%.

Speaker 2

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 $200,000,000 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 Q3 of 2023. AFFO was $0.51 per diluted share for the quarter compared to $0.48 reported in the Q3 of 2023.

Speaker 2

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 Shoppes at Legacy and Price Plaza. Moreover, our signed not open pipeline of $6,500,000 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 3rd quarter regular cash dividend of $0.38 per share, resulting in a Q3 AFFO payout ratio of approximately 75%.

Speaker 2

Consistent with past practice towards the end of November, we will announce our quarterly dividend for the Q4. 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.

Speaker 2

With $274,000,000 of investments closed year to date, we are again increasing our investment guidance to a new range of $300,000,000 to $350,000,000 As a reminder, our investment outlook includes both property acquisitions and structured investments. With that, operator, please open the line for questions.

Operator

Our first question will come from the line of Rob Stevenson with Janney Montgomery Scott.

Speaker 3

Hi, good morning guys. John, other than the 14% dividend, what's the attractive thing about the $10,000,000 hospitality investment? And what's the collateral if they wind up not being able to pay over the next 5 years?

Speaker 1

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

Speaker 3

Okay. Can you hear me now?

Speaker 1

Yes, I can.

Speaker 3

Okay. So other than the 14% dividend, what's the attractive thing about the $10,000,000 hospitality investment? And what is the collateral if they can't pay over the next 5 years at some point?

Speaker 1

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

Speaker 3

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?

Speaker 3

How are you thinking about the funding of the equity portion of deals over the next 6 months?

Speaker 1

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 the acquisition, but you won't see us recycling as much as we have in the past years.

Speaker 3

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?

Speaker 1

Yes. 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.

Speaker 1

There is incredible amount of housing, so and the state needs office space, the university needs office space, and there is no one building offices, as you know. So, we are actually getting in a better and better situation. But to answer your question, we're waiting to find out how Fidelity wants to utilize it 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.

Speaker 3

Okay. And then, Phil, you guys have talked about the $6,500,000 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?

Speaker 2

Yes. So just for modeling purposes, if you wanted to kind of ratably ramp it up over the next 9 to 12 months, somewhere in that time period kind of ramping it up ratably will approximate how that will come online.

Speaker 3

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?

Speaker 1

No. I mean the only one that really you can think of are that is strategic and that they don't have a renewal right and we already have 2 tenants that wanted higher rents and better quality tenants. So nothing that's a problem. Everything's more of an opportunity.

Speaker 3

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

Speaker 1

All right. Thanks, Rob. You as well.

Operator

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

Speaker 4

Hey, good morning, guys. Obviously, a

Speaker 5

pretty aggressive acquisition quarter and based on guidance, it looks like you could do another $25,000,000 to $75,000,000 roughly for the rest of the year. Based on the yield assumptions looks like that would all be properties, but are you looking at any other additional structured finance investments?

Speaker 1

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 still it's such high quality that it will go for much lower cap rates and kind of what we're targeting, but it's more strategic than just an investment. And then on the acquisition side, we have something in our line of sight that's smaller, but high quality.

Speaker 5

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

Speaker 1

That is in the rearview mirror. All right. It took us 120 years.

Speaker 5

Changing gears, I want to talk about the $44,000,000 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 alone all of the entire project or is it carved out towards maybe retail and multifamily or something else?

Speaker 1

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, I would say, 3 to 4 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 the developer.

Speaker 1

As you know, we don't we're not a developer, but it's more like a Reston Town Center opportunity. So and then part of the property is on top of the Fairfax it's in Fairfax County on top of a metro station that's closest to Dulles. And as you can imagine, all the data if this was a data center land, it would be worth 300,000,000 dollars 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 it's now you're seeing dirt starting to move.

Speaker 5

Got it. So they have broken ground at this point?

Speaker 1

They've done more basically earthwork, horizontal development as they're waiting for basically the multifamily developers to do the next stage.

Speaker 5

Got it. And looking at the 3 property portfolios 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?

Speaker 1

Yes. 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 this the Carolina Pavilion project is going to be because it's been 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 Conn's and Big Lots were not part of the signed leases that are going to open, but now we've gotten those We're in the process of trying to get those spaces back.

Speaker 1

We basically have multiple tenants that want that those boxes at better, more favorable rents than we bought the project under. So this is looking as a fantastic investment. So knock on wood, we feel like the execution here is going to be fairly easy and fairly fast.

Speaker 5

All right. Thanks. Appreciate it.

Speaker 1

Thank you.

Operator

Our next question comes from the line of John Massocca with B. Riley Securities.

Speaker 4

Good morning, everybody.

Speaker 2

Good morning.

Speaker 6

So maybe

Speaker 4

just kind of curious on the disposition of Jordan Landing, kind of what drove the cap rate there, just given it's fully occupied property in a pretty high growth market, just any more color on that particular asset in that sale?

Speaker 1

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

Speaker 4

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?

Speaker 1

Yes, 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 a tenant and they've gotten a great feedback and pre membership investments. And so, unfortunately, it's not going to open up until latter part of 2025. So that income primarily from that space is going to hit 2026.

Speaker 1

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 tenant for the property, bringing a lot of activity there. So we're excited about it.

Speaker 4

And just because it sounds like you have some big close prospects for the remaining 2 thirds of the space there?

Speaker 1

What we're going to look 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 ground it out here and get a lease up.

Speaker 4

Okay. And then maybe bigger picture, 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 move outs or reposition space etcetera?

Speaker 1

Not really. I mean really the only the softness that we're seeing is some of the restaurants sales are down and we're definitely monitoring that. But 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.

Speaker 4

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

Speaker 1

Well, yes, so far there is no one that's really kind of like we're out sort of situations. I mean, we're in where we have we're in lease negotiations for new ones, especially at legacy. So, but to answer your question, the space that's the easiest to lease and restaurant land is 2nd generation. So if any of these tenants do succumb, we'll have backfills readily available.

Speaker 4

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

Speaker 1

Next year, we're doing a lot of work because we've been so active on leasing side, the acquisition side, investment side. Wait till the end of the year to kind of give you better guidance. There's a lot of moving parts and the good news is it's all good news.

Speaker 4

That's fair. And that's it for me. Thank you very much. Thank you.

Operator

Our next question comes from R. J. Milligan with Raymond James.

Speaker 1

J. Milligan:] 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.

Speaker 1

Obviously, as the company gets bigger, I'm just curious how you're thinking about running the balance sheet over the next 2 years? Look, we love the leverage being down. That's the goal and we the capital markets were fantastic for us in the last couple of months where we're 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.

Speaker 1

But we don't mind taking it up a bit if there is a great opportunity, but then look for an opportunity to bring it back down.

Speaker 6

Okay, that makes sense.

Speaker 1

That's it for me. Thanks guys. Thank you.

Operator

Our next question comes from the line of Gaurav Mehta with Alliance Global Partners.

Speaker 6

Yes, thanks. Good morning. I wanted to ask you on your asset 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?

Speaker 1

Some of these smaller assets that we've talked about, 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 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.

Speaker 1

Look, if the pricing gets better and better, there may be one that's 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.

Speaker 6

Okay. Thank you. That's all I had.

Speaker 1

Great. Thank you.

Operator

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

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