CTO Realty Growth Inc (CTO) 2024 Q4 法說會逐字稿

Good day, and welcome to CTO's fourth-quarter and full year 2024 earnings call (Operator Instructions) As a reminder, this call may be recorded.

I would now like to turn the call over to Phil Mays, CFO. Please go ahead.

Thank you. 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 expectations are disclosed from time to time in greater detail in the company's Form 10-K, Form 10-Q and other SEC filings. Today's call will include certain non-GAAP financial measures.

For reconciliation of these non-GAAP measures, you should also refer to our earnings release and SEC filings. You can find our SEC filings, earnings release supplemental and most recent investor presentation on our website at ctoreit.com.

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

Thanks, Phil. 2024 was a year of significant accomplishments towards execution of our strategic business plan. Our robust performance was driven by investment volume and leasing activity that both exceeded expectations and with efficient capital raising, we reported core FFO of $1.88 per share for the year, a record high for CTO and growth of 6% from 2023.

Beginning with investment activity, in 2024, we completed $331 million of investments at a weighted average yield of 9.3%, consisting of $227 million of retail property acquisitions located in our target markets of the Southeast and Southwest and $104 million of structured investments. These amounts include two investments closed in the fourth quarter.

In November, we originated a $40 million first mortgage loan for the development of an 80,000 square foot retail center anchored by Whole Foods market located in Atlanta. The loan has an initial term of 30 months and initial fixed interest rate of 12.15%.

Additionally, this development neighbors our shopping center known as The Collection at Forsyth and we have the right of first refusal to purchase it. In December, we acquired Granada Plaza for $17 million, expanding our presence in the Tampa market. Granada Plaza is a 74,000-square-foot shopping center anchored by a high-performing Publix and is in a densely-populated and growing retail market in the Tampa metro area.

Our investment activity over the full year of 2024 increased our portfolio by 1 million square feet or 26% to 4.7 million square feet. Significantly, we were able to complete our first investment in Charlotte, North Carolina market while further expanding our presence in both Orlando and Tampa.

With our growth in 2024, I want to note that our total enterprise value rose by 33% to approximately $1.3 billion, and we ended the year with significantly reduced leverage and over $200 million of liquidity. Now transitioning to leasing. During the fourth quarter, we signed 68,000 square feet of new leases, renewals and extensions, bringing full year leasing activity to more than 450,000 square feet at an average rent of $24.07 per square foot.

On a comparable lease basis, we signed 352,000 square feet for the full year 2024 at a positive cash lease spread of 23% and an average rent of $23.36 per square foot. We believe that our strong comparable leasing spreads are a further indication of the strong tenant demand for our high-quality properties within our strategic markets.

Significantly, our signed not open leasing pipeline now stands at $5.2 million, representing almost 6% of in-place cash rents. The rent commencement associated with this pipeline will be weighted towards the second half of 2025. Accordingly, we expect to recognize just over 50% of it in 2025. And for 2026, we'll receive the full benefit of it.

Moving to recently announced retailer bankruptcies. Given that all of our impacted leases were for spaces with meaningfully below market rents and embedded value, we have been proactive in working to quickly regain them. Late in the fourth quarter, we successfully worked through the court process and regained 4 spaces that were occupied by our two Big Lots, one Conn's and an American Freight.

Furthermore, we are now working on agreements to get possession of our three Party City spaces and three [JOANN] spaces early in 2025. Notably, we already have LOIs or are negotiating leases with tenants for a majority of these spaces. We believe this is a testament to our favorable markets and locations which drive tenant demand.

Based on current lease negotiations, we currently estimate that potential re-leasing spread for these spaces could be between 40% and 60%. While we are making rapid progress on leases with new tenants, it simply takes time for tenants to obtain permits, complete their build-out and open. Accordingly, we expect rent from new tenants to commence during 2026.

We are also in negotiation with several anchor tenants for our 10 acres of undeveloped land adjacent to our shopping center at The Collection of Forsyth. We are targeting to have this property contribute to earnings by late 2026. The leasing opportunity for this property, combined with the re-leasing opportunities related to the recent retailer bankruptcies and our signed not open pipeline should provide strong tailwinds for 2026 earnings growth.

As we look ahead, our acquisition pipeline is robust, and we currently anticipate closing one or two acquisitions in the near term. We're excited about these opportunities and the ability to continue our portfolio growth with high-quality investments at attractive yields in 2025 and look forward to providing more information to you soon.

And with that, I will now hand the call back over to Phil.

Thanks, John. As John discussed, we had an excellent fourth quarter, concluding a strong 2024. Starting with the balance sheet. During the fourth quarter, we raised net proceeds of $33 million at a weighted average price of $19.77 per share, which brought our total net proceeds raised under our ATM program to $165 million for the full year at a weighted average price of $18.79 per share.

To place this in context, the capital we raised represents over 40% of our common equity market capitalization at the beginning of 2024. This capital helped us to improve net debt to EBITDA by over a full turn, ending the year at 6.3 times.

Further, our 2024 ATM activity, along with closing a $100 million term loan in September of 2024, provided us with capital to significantly grow the company and importantly, ended the year with $222 million of liquidity and the balance sheet to support continued growth.

In 2025, we do have one debt maturity. Our convertible notes with an outstanding face amount of $51 million and a stated interest rate of (inaudible) 8% mature on April 15. We have recently sent notices to the holders of the convertible notes of our election to settle these notes in cash.

Accordingly, with the terms of the notes, the cash settlement price is not fully fixed until maturity and will change primarily based on our common share price. However, for reference purposes, a $20 common share price is equivalent to approximately a $75 million settlement of all the outstanding notes at maturity.

Moving to operating results. Core FFO was $14.2 million for the fourth quarter, a $3.3 million increase compared to the $10.8 million reported in the fourth quarter of 2023. On a per share basis, core FFO was $0.46 in the fourth quarter of 2024 compared to $0.48 in the fourth quarter of 2023.

This change of $0.02 per share is primarily the result of significant reduction in leverage that I discussed earlier. For the full year of 2024, core FFO was $1.88 per share compared to $1.77 per share in 2023, representing 6% growth.

Now on to guidance. For 2025, we are establishing a core FFO range of $1.80 to $1.86 per share and an AFFO range of $1.93 to $1.98 per share. The assumptions that support our guidance are detailed in our earnings press release, but I would like to provide additional context regarding two matters.

First, settling our convertible notes for cash will cost approximately $0.05 per share in 2025 due to the settlement price being at a premium to the face amount and rolling the relatively low coupon rate of the convertible notes to our revolving credit facility rate.

Second, page 8 of our updated investor presentation posted last night includes a summary of the 10 spaces John discussed earlier on the call. Our guidance includes a $0.10 per share impact related to these spaces based on the assumptions that we have regained possession of all of them around the end of the first quarter of 2025.

And with that, operator, please open the line for questions.

(Operator Instructions)

Gaurav Mehta, Alliance Global Partners.

Thank you. Good morning. I wanted to follow-up on your comments around convertible notes and just clarify, so that settlement, you guys are expecting that with cash and there's no expectation of share issuance with that conversion, right?

Yeah. This is Phil. We have given notice that our intention is to settle in cash. And so contractually, that's the only right we have. If we wanted to settle some in shares, generally, the note holders would still be open to that, and we could do an exchange with them. But at this point, we anticipate settling it in cash.

Okay. And so, the cash, the source would be the line of credit?

Yes. They initially go on the line and then it would be termed out later.

Okay. Second question on the guidance. I was hoping if you could provide some more color on your 2025 outlook between acquisitions and structured investments. What kind of mix you're expecting?

Yeah. So right now, presently, we're seeing just core acquisition opportunities. We don't have any structured investment opportunities kind of in front of us right now, but we expect to see some later in the year. But right now, it's primarily core acquisitions.

Okay. And then lastly, on the same property NOI guidance, can you provide some color on how you expect that to trend from quarter to quarter?

Yeah. I mean, first, I would just say, I would always kind of focus on the annual number there because like $150,000 -- it's a small pool, $150,000 in one quarter is like 1% -- but generally, pretty even. It's going to bump up and down a little, but it will be generally pretty even. And then hopefully, in the fourth quarter, it will start to pick up a little more.

Okay thank you that's all I had.

Thank you.

Rob Stevenson, Janney Montgomery Scott.

Good morning, guys. That slide 8 in the deck was very helpful. But a question for you, John. Did I understand you say that half of the re-leasing would impact '25 and that you'd get the full impact of the $4 million to $4.5 million of new rent in '26? Just trying to jive that with the $0.10 a share in the guidance.

It's Phil, and I'll let John add in. But when he was talking about 50% in '25, he was talking about our signed not open pipeline, which is separate from page 8. Page 8 is just these recent retailer bankruptcies and vacancies, and that's separate from that.

On page 8, all of that, we're anticipating to come online in '26. And then separately, the signed not open pipeline, we're anticipating on picking up about half of that in '25 and then the full impact of that in '26 to add to the pickup of these vacancies.

Okay. That's helpful. And then the -- you have one of your structured investments, the Watters Creek maturing in April. What is that looking like in terms of recent conversations with that borrower? Is that a repay?

Is that an extend? How is that likely to be resolved? And if you're getting the money back -- expected to get the money back, then how is that market these days to replace that? Or are you going to wind up bringing the structured investment portfolio down a little bit in size?

Yeah, I think -- I was with the borrower a week ago, and they're doing great on that property, and we're hoping that we stay in there. We expect that we'll have probably a short-term extension. So when I mean short term, maybe a year or something like that, but we'll see. But having said that, given it's a high-quality grocery-anchored center, our pricing there, if we were to get it back, we anticipate that we'd be able to reinvest that at a higher yield.

And I guess if that's staying -- if that's likely to stay in the portfolio and nothing else comes out in the interim, how aggressive should we expect you guys to be in expanding the $107 million portfolio today? Is that likely to end 2025 at $150 million, pushing $200 million? Is this the current sort of upper end?

Yeah. I would say maybe add $40 million to the balance is something to expect. That's something that we've got to imagine we can kind of grow that by upper bounds of $50 million this year is sort of the thought process.

Okay. That's helpful. And then, last one for me. Can you talk about how your AMCs are performing these days? Is that you're starting to get back to some more robust releases with the Captain America movie and stuff like that? How are they performing versus where they were in the past? And how much of a concern are they for you at this point in the cycle?

Yeah. I mean they're definitely a lot less concern because they had a good year last year. And as you mentioned, Captain America has been doing very well and especially in these locations. So these -- the AMCs that we have are top performers in their market.

And so we're actually -- in Charlotte, the last acquisition, the AMC is not something that you would find to be an exciting experience when you drive up to it. And we're actually going to paint and add lighting, everything, even though it doesn't look great, it does terrific.

I was with someone that lives in the Charlotte area, and they mentioned that they go to this theater, even though it's out of the way because it's the most kind of convenient for them to get in and out of. And so long story short, all of them are performing very well. And yes, the box office, just as a macro backdrop has been very good for them.

Okay. Thanks, guys. Appreciate the time. Have a great weekend.

Great. You too.

Matthew Erdner, JonesTrading

Hey, good morning, guys. Thanks for taking the question. John, I believe you mentioned something about those 10 additional acres next to Forsyth that are up in that area. Could you remind me again what the plan was with that?

Yeah. So originally, when we bought it, we had a tenant right off the bat who started paying us sort of a licensing fee. It was really an option sort of fee. They dropped it as they were having trouble with their other operations and other locations, so they wanted to scale back their expansions.

And so we obviously took it back and now we're discussing with several different large tenants that would be very complementary to the collection as far as a great draw and bringing a lot of visitors to the location. So we're in those negotiations right now.

So we hopefully and expect something in, let's just say, in the next three months. And then this is something that would probably come online, whether it's late 2026 or 2027. But yes, it's something that we wanted to highlight because we're starting to get closer to a deal there.

Yeah, that's helpful. And then I'm guessing that would kind of include the first right of refusal similar to others. And then as a follow-up to that, it's probably a little ways away, but do you ever anticipate kind of closing on some of those right to refusals and taking those properties in?

Yeah. So on that one, just to be clear, on the 10 acres, we own that property. So we would -- we could build it and have the lease ourselves and not have a first right of refusal. It's not an outside developer. It could be an outside developer, but right now, we're talking to tenants on a primary basis.

And then with regard to your question on other deals where we've done loans where we have a first right of refusal, yes, I think the Whole Foods would be that across the street there at Collection would be high likely that we would buy that in because it's such a complement to Collection.

Got it. That's helpful. Thank you.

Thank you.

RJ Milligan, Raymond James.

Hey, good morning, guys. I appreciate the detail on slide 8. It's helpful. But I'm curious, Phil, for the guidance, what is baked into additional potential bad debt sort of -- you obviously highlight the known or expected vacancies, but I'm curious what you're baking into guidance for unknown.

Yeah. So we've taken out all the known. Largely, that's on slide 8, and that's just excluded from '25. And then after that, as far as the tenants that are in place, it's pretty much our general 1%, nothing different from historical run rate on that. Does that answer your question?

It does. And then, for the -- I know you guys mentioned four of those 10 boxes, you expect the rent to commence in 2026. Can you just give me an idea of the expected timing of that rent commencement in '26?

Yeah.I mean, we're hoping to have most of them online in the first half of '26, the majority of them. There might be two or three depending on timing that could be the latter half. But assuming we can -- I mean, we are working really hard, [RJ] to get them back as soon as possible and get them re-leased. And if we can get them back sooner, then we would hope to have them all early in the first half or in the first half.

But there could be a few boxes that might take a little longer to get a hold of and then those could be delayed to getting them online in the second half. But we would hope to have a majority of them on up and paying rent in the first half.

And a little bit of it, RJ, is, we do have opportunities to do tenants that could come in faster, but would not be as accretive to the whole center and not as good kind of credit. And so, we're willing to kind of take a longer lease delivery rent commencement for higher-quality tenant that just takes a lot longer because they're investment-grade and that sort of thing.

And that's helpful. That leads into my last question, John, which is who are the tenants that you're talking to that are interested in those spaces? And then just curious how you think about the overall value creation as you get those new tenants into the space.

Yeah. I mean the value creation is definitely low-hanging fruit for sure. I mean, think about Sanford and Orlando that we bought a year ago, we had roughly an eight cap, and you have Big Lots coming back at roughly $12 a square foot, and we're talking to a tenant that is investment grade at basically double that.

So I mean, just the -- not only the income accretion, but in the cap rate compression of having that credit versus when we bought it with Big Lots, so it's -- and that's across the board on these Party Cities. The backfills are enterprising tenants that are growing, that are kind of darlings of Wall Street sort of thing. So we're very excited about the mix that we'll be able to backfill here.

That's helpful. Thank you, guys.

Thanks.

John Massocca, B. Riley Securities.

Good morning. Maybe kind of going back to slide 8, the $9 million to $12 million of CapEx, I mean, how does that kind of impact the CapEx outlook for 2025 versus, say, what's kind of more run rate or what you were doing in -- sorry, 2025 versus what you were doing in 2024?

Yeah. I mean, so that's incremental to what we -- our kind of -- our regular run rate there. So it would be on top of that, John. And the way to think about that CapEx too, is if we're on the lower end of that, we'll be on the lower end of the spreads there, like 40%. And if we're on the higher end, 12%, we'll be on the higher end of the spreads there with a much larger mark-to-market. But that is kind of a onetime incremental to get these boxes up and running again.

Okay. And kind of with that in mind, I mean, what lease durations are you kind of talking about today with potential replacement tenants, just given there is a decent amount of CapEx going into these boxes?

Yeah, roughly 10 to 15 years. So good lease duration and good credit behind them.

Okay. I appreciate that. And then on the kind of -- the re-leasing side of things, I mean, is the timing you're seeing typical of what you would see for vacancies, maybe kind of smaller vacancies you've seen in the portfolio historically?

I know you talked there's a bit of a variance on IG versus maybe some smaller tenants can come in faster. But I mean, is it just indicative of anything in the kind of macro environment or specific to these assets? Or is that timing just kind of typical if you were to see other vacancies going forward?

Yeah. I mean, it's definitely typical of the macro environment with these highly-desired boxes, these national tenants that we're talking to just have their normal pipeline of what they're delivering this year, next year, years out.

So it's just -- if you want the higher-quality tenants, you're just kind of getting into their pipeline and they just have a process. So it just takes more time. Now if you want to go the local route with a smaller operator, certainly, it's a lot faster. But certainly, we're looking at the total value creation of having higher credits in these centers.

Okay. And then, last one for me, maybe broad strokes if you don't have the exact number in front of you, but what would kind of same-store NOI growth expectations have been for 2025 if you weren't dealing with these vacancies?

Yeah, 2% to 3%. So we're putting guidance out at 1%, but would have been more in the 2% to 3% range.

Perfect. That's very helpful. And that's it for me.

Thanks.

Craig Kucera, Lucid Capital Markets.

Yeah. Hey, good morning, guys. You've got a lot of activity planned in '25 without any dispositions. And I know you're comfortable running the company at higher leverage, but is the plan to be leverage neutral or did you maybe frontload some equity in '24 and you're willing to lever up?

Yeah. I mean, look, we're -- we want to have a trajectory on the leverage to go down. Clearly, the converts are kind of a unique situation this year. But given that what we have kind of in front of us, we feel like the acquisitions that we're seeing right now are accretive even at these lower stock price levels.

So just depending on how things go -- remember, when we settle these converts, they are they're basically hedged against our stock. So they will be covering on the stock. So there should be a good backdrop. And then hopefully, given the size of the company and the growth of what we did last year, we're getting closer to REIT index inclusion.

So if you look at the investor base that came in, in December, we're starting to get more of that index buying, as you can see, BlackRock bought a lot in the quarter, had some new REIT dedicated come in. So we're starting to get that traction that we always wanted. So I think the backdrop is really good for this year. And so looking forward to kind of executing on acquisitions that are going to be complementary and accretive and see what we have in front of us.

Okay. Great. Changing gears, at the time of the Carolina Pavilion acquisition, I think it was 93% occupied. I guess, as part of your underwriting process, were you aware you would lose a number of tenants in the fourth quarter or want to kick them out? And was that mark-to-market opportunity part of the attractiveness of the purchase?

Yeah. So I think I might have mentioned that in the last earnings call that when we put under contract Carolina Pavilion and by the time we closed, we had three tenants basically go bankrupt and close their stores, which is highly unusual. And most people would maybe say that would be detrimental and you drop the contract, but actually, it was in our underwriting that it came sooner, of course, on the closings.

But the mark-to-market opportunity, to happen faster was just so extraordinary for us that the excitement level for what that property can do is pretty exciting. So we're -- we have great activity, as we mentioned, on these boxes and in the process of getting these tenants to backfill. So the economics of this property are going to be totally different here in 12, 24 months.

Right. And just one more for me. Given the changes in the current administration and some job losses in [DC], have the folks at Rivana communicated any changes to you regarding their development schedule or any of that sort?

No, they're seeing great activity on the multifamily front on that project. And they are -- it's -- they have an incredible amount of activity and demand for that land. That Northern Virginia area, as you know, Loudoun County, the data center market has just been extraordinary. And a lot of the contractors are out in the market, to your point, but there's still such housing demand that there are no bumps at all along the road.

Okay. That's it for me. Thanks, guys.

Great. Thank you.

Michael Gorman, BTIG.

Yeah, thanks, John, maybe just sticking with some of the discussions around acquisitions and some of your underwriting. I'm curious if -- maybe not yet, but if you think there'll be some additional opportunities in the acquisition market shaken loose by some of these recent retailer bankruptcies where maybe smaller landlords don't want to have to go through a re-tenanting or don't want to have to go through another CapEx cycle. Are you seeing or starting to see any opportunities because of these new vacancies in the marketplace for acquisitions?

No, we're not seeing that. I think we're seeing almost the opposite. I mean, you're seeing a lot of institutional capital starting to creep into this market. And we expect -- it's a little -- it's kind of gotten out there in the market a little bit.

There's going to be probably a large trade that's going to be very complementary to one of our assets that's in the market of -- so you're going to see some sort of dramatic acquisitions as you're seeing large pension sovereign capital migrate into the shopping center space.

I mean, obviously, you saw the Blackstone ROIC acquisition closed, and that was a little -- and I think we're all kind of lucky with the horrible Palisades fire and everything going on in California, whether there would be a situation there, but that closed like clockwork. I mean, so you're starting to see really that sort of wave of capital come in for the long term.

And as I mentioned, the Party Cities and the Big Lots and all kinds, kind of that's just that's really opportunity versus headwinds because those tenants are at such low rents and did really nothing for shopping centers and actually probably was a deterrent for some of the shopping centers. So this is more of an opportunity than a headwind.

Got it. Great. And then, I think, I could probably tell just based on the CapEx expectations, but for any of the LOIs you're discussing, would any of that add a grocer to an existing center or are these all non-grocer tenants?

These are all non-grocer. We had a grocer opportunity, which -- but the grocer was just going to deliver it longer than we wanted to really sit around and wait for. They had a lot of things in their pipeline to kind of get done first. And even though having a grocer in one of our shopping centers has been great, it just -- we felt like we're not buying green bananas.

Perfect thanks so much.

Thank you.

John Massocca, B. Riley Securities.

Hi. Just a quick one for me, given some of the conversations on mark-to-market with rents. What's the outlook for the 2025 lease expirations? I mean, just kind of noting it's above your average cash rent per square foot, but everything is kind of bespoke in a portfolio like this?

There's nothing where there's a roll-down situation. Everything's a positive. It's definitely not kind of the mark-to-market we're seeing in our -- in the page 8 of our presentation. But there -- everything -- the trajectory is definitely up, but there's no kind of drawdown as far as having higher rents rolling.

Okay. Any broad stroke ranges you're kind of looking at for just this year's lease expirations?

I would say kind of the 10% range is kind of a good range to say, plus or minus where those tenants are rolling to -- if they're coming out, the market rents are at least 10% higher.

Okay. Very helpful. That's it for me.

Thank you. There are no further questions at this time. This does conclude the program. Thank you for your participation, and you may now disconnect. Everyone, have a great day.