CTO Realty Growth Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 3, 2024

Key Takeaways

  • Positive Sentiment: Strong leasing in Q1 with over 100,000 sq ft of new deals at an average rent of $27.12/sq ft, including replacing Regal Cinemas with a fitness tenant that boosts projected same-store NOI growth.
  • Positive Sentiment: Occupancy rose to 92.6% (leased occupancy 94.3%), and the signed-but-not-open pipeline now represents 3.5% of prospective occupancy, supporting future rent roll-up.
  • Positive Sentiment: Q1 core FFO of $0.48 per share (up 23% y/y) and AFFO of $0.52 (up 21% y/y) beat expectations, leading to a $0.04 raise in full-year guidance and a 73% AFFO payout ratio at an 8.8% yield.
  • Positive Sentiment: Post-quarter issuance of 1.7 million preferred shares raised $33 million, enabling early repayment of floating-rate debt and leaving the revolver at zero balance to fund future acquisitions.
  • Neutral Sentiment: 2024 disposition guidance was lowered to $50–$75 million, reflecting a more selective sales strategy even as capital recycling into core assets remains a priority.
AI Generated. May Contain Errors.
Earnings Conference Call
CTO Realty Growth Q1 2024
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the CTO Q1 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to turn the conference over to your speaker for today, Lisa Baricone. Please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining us today for the CTO Realty Growth First Quarter 2024 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 actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's Form 10 ks, Form 10 Q and other SEC filings.

Speaker 1

You can find our SEC reports, earnings release, supplemental and most recent investor presentation on our website atctoreit.com. And now, I'll turn it over to John for his prepared remarks.

Speaker 2

Thanks, Lisa. Good morning, everyone, and thank you for joining us. I'd like to start off by thanking our former CFO, Matt Partridge for his many contributions to our company. We wish him well with his new opportunity. We've engaged a national search forum to assist us in identifying our new CFO and have started interviewing candidates.

Speaker 2

Today, we'll provide a brief overview of our Q1 results, discuss the continued strength we're seeing in the leasing front and highlight our recent transactions. Starting with our operating business, we had yet another successful quarter of leasing activity in the Q1. We signed over 100,000 square feet of new leases, renewals, options and extensions at an average rent of $27.12 per square foot. That's over 200,000 square feet of leasing activity in the past 6 months. The leasing activity was relatively widespread and included the signing of a replacement of Regal Cinemas at Beaver Creek Crossing at Apex, North Carolina.

Speaker 2

The new 45,000 square foot lease is with a well known successful regional fitness operator. Arena is meaningfully higher than the rent under the existing Regal lease given the reduced rent in place associated with the bankruptcy of Regal. The fitness operator tenant is tentatively scheduled to open for business in mid-twenty 25. Comparable growth in new cash based rents versus expiring rents stood at an impressive 68%, which includes the significant impact of the Regal replacement tenant. We anticipate this activity will help push same store NOI in 2024 and even more so in late 2025 when we get the full benefit of our rent commencement under some of the larger leases signed on acquired vacancy.

Speaker 2

Given our recent leasing activity, our signed but not open pipeline now represents 3.5 percent of prospective occupancy pickup and over 5% of our existing quarter end cash flow base rents. We ended the quarter with a strong increase in occupancy finishing at 92.6%, an increase of 2.3% from year end 2023. Additionally, our lease occupancy increased by 1% from year end 2023 to 94.3%. Turning to our investments for the quarter. We acquired the final property within the Sprouts grocery anchored exchange at Gwinnett in Buford, Georgia for $2,300,000 Additionally, as announced in March, we purchased Marketplace at Seminole Town Center in the Sanford submarket of Orlando, Florida for $68,700,000 The multi tenanted retail power center is over 315,000 square feet located on 41 Acres along I Ford just over 20 miles northeast of downtown Orlando.

Speaker 2

The property is 98% leased and is anchored by Burlington, Marshalls, World Market, Petco, Ross Dress For Less, Old Navy, Ulta, Beauty and 5 Below. With this acquisition, the Orlando Metroplex, which has seen tremendous growth over the past few years, is now in our top five markets representing over 8% of our in place cash based rent and Florida has moved into our top 3 states with over 17% of our annual cash based rent. Additionally, we originated $10,000,000 first mortgage loan on a retail development in West Palm Beach, Florida at a fixed interest rate of 11%, of which $6,700,000 was funded during the Q1. On the disposition front, we are pleased to complete the sale of our mixed use property in Santa Fe, New Mexico for $20,000,000 and exit cap rate of 8.2% and a gain of 4 $600,000 From a capital recycling perspective, we will continue to prioritize selling smaller non core assets for redeployment into attractive investment opportunities. After quarter end, the company issued just over 1,700,000 shares of our 6 point 3 8 percent preferred stock for net proceeds of $33,000,000 With the net proceeds from this issuance and the $15,000,000 early prepayment of the Sable Pavilion seller financing loan, we were able to pay down all of our floating rate debt under our credit facility subsequent to the quarter end.

Speaker 2

This gives us ample liquidity to pursue larger format retail center acquisitions in what we believe is a very favorable environment with limited buyer competition. With that, I'd like to hand the call back over to Lisa.

Speaker 1

Thanks, John. As of the end of the quarter, our income property portfolio consisted of 20 properties comprised of approximately 3,900,000 square feet of rentable space located in 8 states and 11 markets. The geographic makeup of our portfolio includes top performing markets such as Atlanta, Dallas, Richmond, Orlando and Jacksonville. As we've mentioned in the past, these markets have demonstrated outstanding potential for growth and are delivering extensive employment and population expansion, which bodes well for our tenants and the underlying value of our properties. From a tenant makeup perspective, our top retail tenants consist of well known operators such as Best Buy, Ross, Whole Foods, TJ Maxx, Dick's Sporting Goods, Darden Restaurants and Publix.

Speaker 1

As John previously mentioned, at quarter end, occupancy was 93 percent and our leased occupancy was 94%, with 95% of our portfolio's annualized cash based rents coming from retail and mixed use properties, and the majority of those rents coming from grocery anchor, lifestyle and power center assets. The overarching fundamentals for real estate are strong and these properties continue to benefit from outsized tenant demand and limited supply. Jumping into our earnings results for the quarter. Our earnings for the Q1 of 2024 exceeded expectations with core FFO per share coming in at $0.48 per share, representing a 23% increase compared to the Q1 of 2023. Q1 2024 AFFO was $0.52 per share, representing a 21% increase over the Q1 of 2023.

Speaker 1

Q1 2024 core FFO and AFFO as compared to the Q1 of 2023 benefited from a full quarter's impact of our Q2 2023 acquisition, which included Plaza at Rockwall and Outparcels at The Exchange at Gwinnett, as well as the partial quarter impact of Marketplace at Seminole Town Center, offset by asset dispositions in the same period. Core FFO and AFFO also benefited from rent commencements at several properties. Our same property NOI increased by 6% compared to the Q1 of 2023, which increase was largely due to the lease up of several properties, including the collection at Foresight and West Broad Village, as well as increased percentage rents at several properties. We do anticipate our same property NOI growth will normalize during the remainder of 2024 due to certain one time benefits included in our first quarter 2024 results, primarily related to finalizing our 2023 CAM reconciliation billing. As we announced in February, we distributed a 1st quarter regular cash dividend of $0.38 per share, resulting in a Q1, 2024 AFFO payout ratio of 73% and an attractive current annualized yield of approximately 8.8%.

Speaker 1

Turning to our balance sheet. As of the end of the quarter, our total long term debt outstanding was $543,000,000 net debt to total enterprise value was just over 53 percent and our net debt to EBITDA was 7.6 times. While we ended the quarter with total cash and restricted cash of nearly $15,000,000 and had $59,500,000 of floating rate debt on our revolving credit facility, as John mentioned earlier, in April, we were able to pay down our revolver balance and we currently have no floating rate debt outstanding on the revolver. On the capital markets front, during the Q1, we repurchased nearly 41,000 shares of our common stock in the open market for approximately $700,000 at an average price of $16.28 per share. We also issued over 125,000 shares of common stock through our ATM program for total net proceeds of $2,100,000 at an average issuance price of $17.05 per share.

Speaker 1

And finally, as a part of the earnings release yesterday, we increased our full year 2024 core FFO and AFFO earnings guidance to take into account our Q1 results and go forward expectation. Our 2024 core FFO and AFFO guidance both increased by $0.04 per share. We also reduced our disposition guidance to a range of 50,000,000 dollars to 75,000,000 for the balance of the year. And with that, I'll turn the call back to the operator to open the line up for questions and answers.

Operator

Thank you. And our first question today will be coming from Gaval Mehta from Alliance Global Partners. Your line is open.

Speaker 3

Good morning. Thanks. I wanted to ask you on your Orlando acquisition, hoping to get some more color on any value add opportunities in that property and maybe some color on the mark to market rent upside?

Speaker 4

Yes. Thanks very much. So there's not a lot of value add there. It's fairly stabilized. But what we liked about there was some vacancy below market leases that really have a lot of opportunity.

Speaker 4

Roughly, 20,000 to 40000 square feet is below market. And so even though it's very stabilized as far as argument C, there is some future opportunity to drive some NOI growth.

Speaker 3

Okay. Second question on your disposition guidance that was lower and hoping to get some more color on why that was lowered?

Speaker 4

Pressed to sell some assets if we had some an acquisition larger acquisition lined up. We would certainly move through some assets we want to sell, but we want to be patient on the sell side. And so we after doing the preferred raise, kind of like there's one real need to kind of push through some disposition.

Speaker 3

Okay. Thank you.

Speaker 5

Thank you.

Operator

Thank you. One moment for our next question. Our next question will be coming from Rob Stevenson of Janney Montgomery and Scott. Your line is open.

Speaker 6

Good morning, guys. John, I guess just continuing on the theme of dispositions, any incremental update on your thinking on the remaining office asset at this point? Is that something that you guys think will transact this year? Or is it looking like more of a 25% or later? How should we be thinking about that at this point?

Speaker 4

Yes. I mean, I don't really it doesn't feel like it's going to be this year. We're talking with the tenant, but the tenant is in no rush. The facility is fine for their uses, and they have other things that they're working on. So we're not we're kind of need to be in the queue as far as when they can kind of get around to discussions with us.

Speaker 4

So unless we have like, again, a really large hurry with that. Love to take you out there sometime because once you see what's going on in the area, the property positions are only getting better and better with time. So it's kind of like a nice bottle of Bordeaux in the cellar. It's only getting better. I know a lot of people obviously rightfully get nervous about office and that's why we move through a lot really fast.

Speaker 4

But this one, you don't really need to feel like you have exposure.

Speaker 6

Okay. And then I think in your prepared comments, you talked about the leased but not open yet portion of the portfolio. When did the bulk of those leases commence and start paying rent? Is that late in this year with the biggest financial impact in 2025? Or is it really mostly all in 2025 that you'll start actually seeing that pop up in the vacancy in the occupancy numbers and then also in the rental line?

Speaker 4

Yes. It's mostly the back half of this year. So 2025 is really the year that's going to get a lot of love on the revenue coming forward, especially the replacement of the Regal. That one's probably mid-twenty 25, but the rest of the signed but not open is really the back half of this year.

Speaker 6

Okay. And then any on the other side of that coin, any known move outs at this point of note over the next 18 to 24 months?

Speaker 4

No. It's we keep on having the antennas up for any issues, but so far all green light.

Speaker 6

Okay. And then last one for me. After the preferred deal, how are you thinking about incremental use of preferreds going forward? Do you think the cap structure right now is maxed out at this point on preferreds? Is there still room for you to be able to do that if the common isn't at a price that's to your liking?

Speaker 6

How should we be thinking about that and where that sort of fits in your capital stack?

Speaker 4

Yes. I mean, we feel like we did the appropriate amount. And what one thing I'd point out is we did the size necessary for the preferred to be index qualified, And it's gone into the index. And as you probably noticed, the preferred has just ripped in price and volume. So that's going to give us a nice tailwind of cost of capital in the future.

Speaker 4

But if we get productive here on some acquisitions, we probably won't lean into the preferred until kind of balancing out the rest of the capital structure.

Speaker 6

Okay. That's helpful. Thanks and have a great weekend.

Speaker 4

Thank you. You

Operator

too. Thank you. Our next question will be coming from RJ Milligan of Raymond James. Your line is open.

Speaker 7

Hi, good morning. First just to clarify, I'm not sure if I missed it, but for the big same store NOI growth in single tenant, is that percentage rents or is that CAM catch ups or is it both?

Speaker 4

Yes, I'm going to let Lisa answer that, RJ.

Speaker 1

Hey, RJ. Yes, so really what that is on the single tenant side is our properties we have in Daytona Beach that we bought in the back of 2024. We kind of bought those as vacant and rents came on board in Q3 of 2023. So what you're seeing there is about $140,000 of rents in Q1 twenty twenty four when there was none in Q1 of last year. So that's about 15% of the 21% increase there.

Speaker 7

That's helpful. Thank you. And then, John, maybe you could just elaborate a little bit more on the acquisition environment. Obviously, there's been some adjustment in this higher for longer interest rate environment. I'm just curious what you're seeing out there in terms of sellers and seller expectations.

Speaker 4

Yes. So the good news is we're seeing plenty of opportunities. So we're kind of being patient and bidding appropriately for where we think there's value. But there are clearly other buyers out there. But it's really finding given that we're an all cash buyer, we're seeing a lot of the competition on the buyer side needing financing.

Speaker 4

So it's really the sellers who they kind of go through the analysis, do they want to take a risk going with a buyer that needs financing, subject to financing, which that buyer is typically higher than us? Or do they just want to go with an all cash, more certainty buyer at a lower price. And so it's really waiting for those good opportunities for us. So the good news is there's plenty of opportunity out there. So I think sellers are if they're in the market now, it's really part of their plan to sell whether there's financing that's coming due, whether there's redemption queues in the funds that own these properties or just basically partners looking for time to sell sort of thing.

Speaker 4

So it's a good environment and we're just trying to be patient.

Speaker 7

Thanks, John. And just to add to that, I'm curious, what is the interest rate environment where you think that there's going to be more transactions? Is it stability in interest rates? Or is it lower interest rates? Because obviously this morning, we're seeing the tenure come down and just there's been a lot of sellers who said, we think rates are going to come down later, so we're going to stay on the sidelines.

Speaker 7

And I'm just curious, is it are you looking more for stability or just for lower rates in general?

Speaker 4

I think from the sell side, people are not really waiting. If they're in the market now, they need to sell in the next 6 months or so. I think that as far as your general question there, I think with stability and kind of knowing that there's going to be some rate cuts in the future, I think you're going to see more buyers come off the sideline. And so that's not going to be good for us, but we're all trying to kind of get some transactions while they're getting good. So we are surprised to see some transactions happen at cap rates that are just slightly above the 10 year.

Speaker 4

And so it's just like how does that math ever work. But there are some buyers that that kind of fits in their model. I think any kind of stability in the interest rates is really kind of does the

Speaker 5

That's it for me.

Speaker 8

Thank you.

Operator

Thank you. One moment for the next question. And our next question is coming from Matthew Elsner of Jones Trading. Your line is open.

Speaker 5

Hey, good morning guys. Thanks for taking the question. Could you talk a little bit about acquisition timing? Should we expect that to kind of happen more so in the near term or is it back half ended? And then can you also talk about the difference in opportunities that you're seeing between the loans and just overall asset acquisitions?

Speaker 5

Thanks.

Speaker 4

Yes. So the acquisitions are more kind of back half of the year. We were hoping to have something in the first half of the year, but didn't work out. With regards to loans, there are certainly some acquisitions that we weren't the winner and we felt like there'd be buyers that would need some help on the financing side. So we've offered it up, but so far no takers.

Speaker 4

But I think we'll we're hopeful that we'll have a little opportunity there as there are some really some great basis sort of properties, value add, a lot of heavy lift. So the financing market is not going to be very productive for these buyers. And there'll be a pretty big gap in the capital structure, which we hope to fill.

Speaker 5

Yes, that's helpful. Thank you, guys. Thank you.

Operator

Thank you. One moment for the next question. And our next question will be coming from John Muscotta of B. Riley Securities.

Speaker 8

Good morning. Just kind of quickly on the Regal, the old Regal box, you mentioned those leases, the rents are kind of higher versus what Regal was paying. I guess, how do they compare to Regal's rents maybe pre bankruptcy?

Speaker 4

Yes. So pre bankruptcy, it's basically double digit percentage up from their previous rent.

Speaker 8

Okay. Very helpful. And then, the Lake Worth loan investment or loan you put in place, are there any kind of options on that to purchase the property or any kind of other kind of moving pieces to that loan besides just obviously the interest income and the draw downs?

Speaker 4

Yes, there is definitely we do have a right of first refusal if certain cap rates are above a certain level. So we do have the right to acquire if the yields get to a level that interests us.

Speaker 8

Okay. That's very helpful. And then kind of last kind of quick detail question. As we

Speaker 5

think about disposition guidance, I mean, is the seller

Speaker 8

loan repayment included in that or the Sabal or is that kind of excluded just given the actual transaction occurred last year?

Speaker 4

Yes, it does not include that.

Speaker 8

Okay. That's it for me. Thank you very much.

Speaker 7

Great. Thank you.

Operator

Thank you. This concludes our Q and A session. As well, this concludes the meeting for today. Thank you all for joining. You may disconnect.

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