CTO Realty Growth Inc

NYSE:CTO

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and thank you for standing by. Welcome to CTO Realty Growth's Third Quarter 2024 Earnings Call. [Operator Instructions]. 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.

[John Albright, executive]

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?

[Philip Mays, executive]

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 ctoreit.com.

With that, I will turn the call over to John.

[John Albright, executive]

Thanks, Phil. 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 at a weighted average yield of 9.5%, including $137.5 million 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 third quarter and 26% in the first 9 months of 2024.

Notable new leases included approximately 24,000 square feet leased to the Pickler, a Pickleball facility replacing the former Earth Fare at The Collection of Forsyth 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, The Collection and Michaels at Ashford Lane. With this leasing activity, we ended the third 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 $6.5 million in future rents, just over 7% of our current in-place cash base rent.

Now turning to investments. As mentioned earlier, we acquired 3 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 as Tampa, Florida markets to our portfolio, while Millennia 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 the first mortgage in our preferred equity investment. In September, we originated a $43.8 million first mortgage loan with an initial term of 2 years and initial interest rate of 11%. This loan is secured by over 100 acres entitled for over 2 million square feet for a mixed-use development located in Herndon, Virginia near Dulles Airport and adjacent to the Metrorail Silver Line station. In August, we also completed a $10 million preferred equity investment in 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.

[Philip Mays, executive]

Thanks, John. On this call, I will briefly discuss our strengthened 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 5-year term loan. The funds from this new loan were used to term out $100 million 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 million 5-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 6.4x 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 was spread among our same-property portfolio, but primarily driven by growth at Ashford Lane, The Collection at Forsyth, 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 $0.38 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 and 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. The $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.

[Operator]

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

[Robert Stevenson, analyst]

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 5 years?

[John Albright, executive]

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

[Robert Stevenson, analyst]

Okay. Do you hear me now?

[John Albright, executive]

Yes, I can.

[Robert Stevenson, analyst]

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 5 years at some point?

[John Albright, executive]

Well, you had me at 14%. But basically, 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 as CTO as the CFO there.

[Robert Stevenson, analyst]

Okay. And Phil talked about the raised acquisition guidance. How are you thinking about funding that? Is that going to be funded through ATM issuance? Or are there more dispositions that you're teeing up and just won't close until early '25. How are you thinking about the funding of the equity portion of deals over the next 6 months?

[John Albright, executive]

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 were hoped to close this year, but it would 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.

[Robert Stevenson, analyst]

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?

[John Albright, executive]

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. 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 it for the long term and we're just kind of waiting on them, but everything has been going in the right direction. But at some point, yes, we will exit it.

[Robert Stevenson, analyst]

Okay. And then, Phil, you guys have talked about the $6.5 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?

[Philip Mays, executive]

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.

[Robert Stevenson, analyst]

All right. That's helpful. And then last 1 for me. Any known move-outs of note at this point in 2025 in the portfolio?

[John Albright, executive]

No. I mean the only 1 that really can think of are that is strategic and that they don't have a renewal right, and we already have 2 tenants that wanted at higher rents and better quality tenants. So nothing, that's a problem. Everything is more of an opportunity.

[Operator]

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

[Craig Kucera, analyst]

Obviously, a pretty aggressive acquisition quarter and based on guidance, it looks like you could do another $25 million 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?

[John Albright, executive]

We are looking at one. It's smaller, but it's very high quality. And it actually -- it's very close to 1 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 there's such high quality that it will go for a much lower cap rate than 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.

[Craig Kucera, analyst]

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?

[John Albright, executive]

That is in the rearview mirror.

[Craig Kucera, analyst]

All right.

[John Albright, executive]

I think it will take us 120 years.

[Craig Kucera, analyst]

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 1 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 multifamily or something else?

[John Albright, executive]

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. 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 the metro station as closest to Dulles. And as you can imagine, all the data -- 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. You can imagine the entitlements have taken that long, and now it's -- now you're seeing dirt starting to move?

[Craig Kucera, analyst]

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

[John Albright, executive]

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

[Craig Kucera, analyst]

Got it. And looking at the 3-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?

[John Albright, executive]

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 site 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. 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.

[Operator]

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

[John Massocca, analyst]

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

[John Albright, executive]

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

[John Massocca, analyst]

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?

[John Albright, executive]

Yes, it's about 1/3 of it, and we're pretty excited about it. It's almost like a kind of a SOHO Club sort of tenant, and they've gotten us a 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 announcement in that market to help with the rest of the lease-up of the WeWork space. So it's taken longer, but this is going to be exciting tenant for the property, bringing a lot of activity there. So we're excited about it.

[John Massocca, analyst]

And just because it sounds like you have some big close prospects for the remaining 2/3 of the space there?

[John Albright, executive]

What we're going to -- 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 ground it out here and get it leased up.

[John Massocca, analyst]

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, et cetera?

[John Albright, executive]

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.

[John Massocca, analyst]

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

[John Albright, executive]

Well, yes, so far, there's no one that's really kind of like we're out in sort of situations. I mean, we're in -- were we have -- we're in lease negotiations for new ones, especially in Legacy. So -- but to answer your question, 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.

[John Massocca, analyst]

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?

[John Albright, executive]

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

[Operator]

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

[R.J. Milligan, analyst]

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 is 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 at higher leverage. But obviously, as the company gets bigger, I'm just curious how you're thinking about running the balance sheet over the next 2 years?

[John Albright, executive]

Look, we love the leverage being down. I mean that's the goal. And 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. 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.

[Operator]

[Operator Instructions] Our next question comes from the line of Gaurav Mehta with Alliance Global Partners.

[Gaurav Mehta, analyst]

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?

[John Albright, executive]

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 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 of if strategically it makes sense, but nothing on the horizon. Great. Thank you.

[Operator]

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