CTO Realty Growth, Inc. (NYSE:CTO) Q4 2023 Earnings Call Transcript

CTO Realty Growth, Inc. (NYSE:CTO) Q4 2023 Earnings Call Transcript February 23, 2024

CTO Realty Growth, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the CTO Realty Growth Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I’d now like to hand the conference over to your host today, Matt Partridge, Chief Financial Officer. Please go ahead.

Matthew Partridge: Good morning, everyone. Thank you for joining us for the CTO Realty Growth Fourth Quarter and Full Year 2023 Operation 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-K, Form 10-Q and other SEC filings. You can find our SEC reports, earnings release, quarterly supplemental and those recent investor presentation on our website at ctoreit.com. With that, I’ll now turn the call over to John.

John Albright: Thanks, Matt, and good morning, everyone. We had a terrific fourth quarter of execution in nearly all aspects of our business, resulting in core FFO and AFFO per share growth of 41%, which was meaningfully ahead of our expectations and consensus estimates. Our strong fourth quarter drove a significant beat above the top end of our previously provided full year guidance, fueled by fourth quarter same-property NOI growth of 4.7%, better-than-expected tenant retention and property level NOI at some of our more recently acquired properties that are not included in our same-property statistics. Continued strength in leasing, where we generated comparable rent spreads of nearly 18% during the quarter and 7.5% for the year and beneficial timing related to the flurry of dispositions we had to finish 2023.

Overall, I’m pleased with the way our team executed as we worked our way back from some unexpected tenant departures early last year. I’m happy to say we’re continuing to see that positive momentum carry forward into the first quarter of 2024, where we’ve had a very strong couple of months. The supply-demand balance that many people have highlighted as a multiyear tailwind for retail helped drive our strong leasing activity during the quarter. This is evidenced by our signing of nearly 100,000 square feet of new leases renewals, options and extensions, an average rent of $32.66 per square foot. To put that into perspective, this per square foot value for the fourth quarter was at least 23% higher than the average rents achieved in the first, second or third quarters of 2023.

In addition to our ability to push rates, quality of leasing during the fourth quarter was relatively widespread with the collection at Foresight and West Broad Village, seeing the most activity and more than half of the rents coming from leading brands such as REI, Fidelity, UBS, Ford’s Garage and J.Crew. Our 18% comparable growth in new cash base rents versus expiring rents is going to help push same-store NOI in 2024 and even more so in 2025. When we’ll get the full benefit of some of the larger leases signed on acquired vacancy, when we lapped over the natural timing disruption. For the full year, the quality of our locations, strong demographics and targeted lease-up strategies allowed us to sign nearly 0.5 million square feet of leases resulting in our signed, but not open pipeline totaling more than 6% of the portfolio cash-based rent and it’s growing.

We ended the year with a modest increase to occupancy, finishing at 90.3% and leased occupancy increased to 93.3%, both of which are a testament to our leasing activity given that we’ve largely been selling 100% occupied assets. During the fourth quarter, we sold 6 properties or $64 million at a weighted average exit cap rate of 7.8%. These dispositions included a community shopping center in Fort Worth, Texas, a small format retail property in Henderson, Nevada, three single-tenant retail outparcels at our Crossroads Town Center in Chandler, Arizona, and one of our two remaining single-tenant office properties. For the full year, we sold nine properties for $87 million at a weighted average exit cap rate of 7.5% and generated total gains of sales of $6.6 million.

On the investments front, it was a relatively quiet period. However, throughout 2023, we invested $80 million into four retail properties and one land parcel and originated two first mortgage investments totaling $30 million. In aggregate, we’ve invested in a blended going-in cash yield of 7.7%, which is notably above our 2023 disposition cap rate that was negatively impacted by the higher exit cap rates on two office property sales. As we close the book on 2023 and shift our focus on 2024, I’m very excited about some of the recent activity in our portfolio and the investment opportunities we’re seeing in the market. From a transaction perspective, we are under contract with a nonrefundable deposit to sell our mixed-use property in Santa Fe, New Mexico for $20 million.

We anticipate this sale will close before the end of the quarter, and the proceeds from this sale, combined with restricted cash and seller financing proceeds from the most recent office sales give us dry powder to acquire larger format retail properties that are more core to our strategy. To put some context around the early 2024 positive momentum, Politan Row and established food hall experience in Atlanta and culinary dropout a well-known Sam Fox restaurant concept, both opened at Ashford Lane this month. In Fogo de Chão just opened last week to a very strong reception at West Broad Village in Richmond. Together, just these three tenants combined for approximately $1.4 million in annual base rent. In addition, just in the past week, we signed a ground lease on the undeveloped 10 acres we purchased less than six months ago that is adjacent to the collection at Foresight.

In the same week, we sold our remaining non-income producing subsurface interest for gross proceeds of $5 million, which we intend to tax efficiently redeploy into an investment acquisition. With that, I’ll let Matt highlight our portfolio, go into details about 2023 financial results and provide some more specifics regarding our 2024 guidance, and then we’ll open it up for questions. Matt?

Matthew Partridge: Thanks, John. We ended the year with 20 properties totaling 3.7 million square feet of leasable space in eight states and 12 markets. Our portfolio continues to be concentrated in some of the fastest-growing areas of the Sunbelt with Atlanta and Dallas now representing 50% of our annualized base rent, and the majority of our other markets are in higher growth population states such as Texas, Florida, Arizona and North Carolina. Recent disposition activities have allowed us to decrease the stand-alone office exposure in our portfolio to less than 5% at year-end 2023, compared to 10% at year-end 2022. And our top tenant list continues to increase in quality with Whole Foods, Publix, Dick’s Sporting Goods, Darden Restaurants, Best Buy, T.J. Maxx Home Goods, AMC, Fidelity and [indiscernible] all solidified as top 10 tenants.

Our earnings for the fourth quarter of 2023 surpassed expectations with core FFO per share demonstrating its fourth consecutive quarter of acceleration coming in at $0.48 per share, representing a 41.2% increase compared to the fourth quarter of 2022 and fourth quarter 2023 AFFO was $0.52 per share representing a 40.5% increase over the fourth quarter of 2022. Q4 core FFO and AFFO year-over-year comparisons benefited from better tenant retention, higher rents and better NOI flow-through at many of our recently acquired properties. A 4.7% increase in same-property NOI, most notably driven by strong percentage rents at our Daytona Beach restaurants and the full year benefits from the repositioning and lease-up of Ashford Lane, lease termination payments related to tenants, who previously vacated, increased interest income from the makeup and size of our structured investments portfolio, and growth in management fees and dividend income.

The strength in our results was partially offset by higher interest expense and increased income taxes as well as the full year effects of our December 2022 common equity raise. For the year, core FFO was $1.77 per share and AFFO was $1.91 per share, representing a year-over-year per share growth of 2% and 4%, respectively, when compared to 2022. After accounting for the impact of the 3-for-1 stock split in 2022, AFFO per share in 2023 represents an all-time record year for the company since it converted to a REIT in 2020. As we previously announced, the company paid a fourth quarter regular cash dividend of $0.38 per share in December, resulting in a Q4 2023 AFFO payout ratio of 73% and earlier this week, the company declared its first quarter 2024 regular common stock cash dividend of $0.38 per share, which is payable on March 28 to shareholders of record on March 14.

This is the company’s 48th consecutive year of declaring a common dividend and the $0.38 per share represents a very attractive current annualized yield of approximately 9.2%. During the fourth quarter, we maintained our opportunistic approach to capital allocation, repurchasing more than 14,000 shares of our Series A Preferred Stock at an average price of $18.40 per share. This represents a 26% discount to liquidation preference, and we also repurchased over 62,000 shares of our common stock at an average price of $15.72 per share, which has an effective annualized yield on cost of 9.7%. As part of our approach to balance sheet and interest rate management, we entered into a new $50 million forward starting interest rate swap agreement to fix SOFR at an average fixed swap rate of 3.85% for the period between February 2024 and January 2028.

This locks in nearly all of our remaining variable interest rate exposure on our balance sheet at a current all-in fixed rate of 5.45%, which is approximately 150 basis points below the current floating interest rate. We ended the year with net debt to total enterprise value of 51% and our net debt to pro forma EBITDA improved quarter-over-quarter to 7.6 times. With the more than $150 million of total liquidity from available cash, restricted cash and undrawn revolver commitments as well as the anticipated proceeds from our Santa Fe property sale, we’re well positioned to be opportunistic in the transactions market this year. Turning to our 2024 guidance, we expect core FFO to be between $1.56 to $1.64 per diluted share, and AFFO is forecasted to be between $1.70 and $1.78 per diluted share.

We’re anticipating investment activity between $100 million and $150 million at a weighted average initial investment yield of 7.75% to 8.25% and our disposition guidance assumes $75 million to $125 million of asset sales at a weighted average exit cap rate between 7.5% and 8.25%. Our assumptions for 2024, which conservatively contemplates cash flow disruption related to the timing of our dispositions and investments also includes very strong lease-up assumptions for the current portfolio. Before taking into account our transaction activities, we’re projecting leased occupancy to be between 95% and 96% by year-end, implying gains of approximately 200 to 300 basis points during the year, which would be a strong tailwind for 2025. Same-property NOI in 2024 is forecasted to increase between 2% to 4%, which is most materially impacted by the loss rent from WeWork in 2024 and our expectation that there will be timing disruption between when some of our known lease expirations occur and when the replacement tenants rent commence.

Both of these drags in 2024 are expected to reverse and provide incremental growth in 2025. As part of our guidance assumptions, we’ve maintained credit loss reserves between 75 and 100 basis points of property level revenue, which is consistent with our historical run rate, and we’re not currently projecting any additional share issuances or repurchases. And finally, as John mentioned, our signed but not open, our SNO pipeline continues to grow, representing $4.5 million of incremental future-based rent or more than 6% of our current portfolio’s cash base rent. Combined with the positive leasing momentum, potential upside to our guidance from the timing of transactions from the long-term benefits of our asset management and technology initiatives, we’re setting the stage for a strong 2024 and the potential for a milestone year in 2025.

With that, I’ll now turn it back over to the operator to open the line for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Floris Van Dijkum with Compass Point.

Floris van Dijkum: Hi. Good morning, guys. Thanks for taking my question. John, obviously, you guys got a lot of things moving and we’re happy. I think investors are probably happy to see you get rid of some of that office exposure, which appears to be unloved in the markets today. Maybe if you could talk a little bit about your other initiatives that you’ve been doing, including bringing the property management in-house that I believe, in Atlanta, are there steps underway to do the same thing in Dallas and what kind of uplift could investors expect going forward from these kinds of initiatives?

John Albright: Yes. Thanks, Floris. I’ll let Matt talk about the uplift. But as far as structure, we do have an expanding team in Atlanta and has been very successful and beneficial to us, having people on the ground and a lot of efficiencies there, and especially just people with an owner’s eye on our properties there. And given that we’ve had all these restaurant openings with Politan Food Hall has just opened, Culinary Dropout just open. It’s just some really been critical to have people there on the ground and very helpful. And with regards to Dallas, we’re starting a little bit of that process. We don’t have quite as large a presence there as in Atlanta, but you could see that sort of opportunity as well down the road.

Matthew Partridge: Hi, Floris, it’s Matt. From an uplift perspective, I think Atlanta probably provides at least $0.01 to $0.02 a share, and that’s without a more focused team probably getting some economies of scale in terms of bidding out cohesive contracts for the entire portfolio in the market. So there’s probably upside to that $0.01 to $0.02.

Floris van Dijkum: Thanks. And maybe if I could follow through as well. The SNO pipeline, it’s — I think you indicated it’s $4.5 million of ABR, around 6% of your ABR. When is the timing of that coming online? And — does that includes — presumably that does not include the backfills for WeWork or the theater in North Carolina. But if you can give us a little bit more color on the timing and also in those two particular spaces what’s happening on backfilling those?

Matthew Partridge: Yes. I’ll give a little bit of color on the timing, I’ll let John talk about the backfill on WeWork and Regal. So timing-wise, Politan Row, Culinary Dropout and Fogo de Chão that John mentioned all opened this past couple of weeks. That’s about 30% of the pipeline. The rest of it probably is late Q3, 4Q weighted. So it will have a disproportionate benefit to 2025 versus 2024.

John Albright: And as regards on where we are with particular tenants. So on Regal theater we’ve had — we’ve been going back and forth to two different tenants, and we’re basically there with a tenant. So you should see that kind of in motion very soon. And so that’s nice to get that backfill and get going. But remember, the process on all of these, especially on larger tenants to get open is really running a year. We try to do better and shorten that. Obviously, it’s really up to the tenant with getting permit drawings, but it’s the approval process. In certain jurisdictions just take a while, as you probably have heard, across the campus of other companies. With regards to WeWork, we’ve had this year, we’ve had several tours with tenants.

So there’s a couple of tenants out there for the full space. There’s a couple of tenants there for half the space or one-third of the space. So we’re very anxious to get a lead. And so our brokers know that. And so we won’t let a deal die over small issues. So we’re aggressively pursuing tenants in the market.

Matthew Partridge: And Floris, just to piggyback on that, you are correct. Neither of those spaces are in our SNO pipeline today.

Floris van Dijkum: Got it. So maybe just a follow-up on the retenanting because, again, that theoretically should have fairly high re-leasing costs, particularly if you’re splitting a box as you might end with or a box, I should say, the space with WeWork space there. Is it safe to assume that’s going to cost potentially up to $100 a square foot to re-tenant that space?

John Albright: Definitely, that could be in the realm. I think we talked about this on conference call — earnings call six months ago, maybe nine months ago, when we were negotiating with a fitness tenant that wanted the whole space, and that would have been north of 100. But I would say 100 is very safe on traditional office space. And if you do something more special, it will be higher than that, but that’s a safe assumption.

Floris van Dijkum: And would that be safe to make that assumption for the Regal space as well?

John Albright: It’s not quite as high as WeWork, but it’s a little bit shy of that.

Floris van Dijkum: Okay. Thanks. That’s it from me for now.

John Albright: Sure.

Operator: Our next question will come from the line of Rob Stevenson with Janney Montgomery Scott.

Robert Stevenson: Good morning, guys. Is the Regal retenanting a theater or is that a different concept?

John Albright: So there — it’s a different concept. There has been theater interest, but it’s a different concept.

Robert Stevenson: Okay. Is that going to take longer than a year, if you’re converting a theater or some other use given the slope floors and all of that sort of stuff?

John Albright: It should take a year, it would take a year because of permitting — but if you didn’t have permitting, it would not take a year.

Robert Stevenson: Okay. That’s helpful. And then, Matt, the $4.5 million that you talked about coming online in 2024. Is that all on stuff that was not open in the fourth quarter? Or does that include stuff that may have opened in December, but didn’t pay a full quarter’s worth of rent?

Matthew Partridge: Yes. That’s going to be a combination of both. But primarily, it’s going to be stuff that has not come online yet.