CTO Realty Growth Inc (CTO) 2025 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CTO Realty Growth fourth quarter and year end 2025 earnings call. (Operator Instructions) Please be advised that today's conference is being recorded. I would like now to turn the conference over to Jenna McKinney, Director of Finance. Please go ahead.

Good morning, everyone, and thank you for joining us today for the CTO Realty Growth fourth quarter 2025 operating results conference call. Participating on the call this morning are John Albright, President and Chief Executive Officer; Philip Mays, Chief Financial Officer; and other members of the executive team that will be available to answer questions during the call.

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 discussed 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.

Thanks, Jenna, and good morning, everyone. We are pleased to report a robust fourth quarter, highlighted by record high leased occupancy of 95.9% same-property NOI growth for our shopping centers of 4.3% and the previously announced acquisition of a shopping center in South Florida.

Our strategic focus on shopping centers located in the higher-growth Southeast and Southwest markets of the US, along with the proactive asset management and leasing is producing strong results across all areas of our business. Nowhere is this better illustrated than in our retail leasing results. During the fourth quarter, we signed leases for 189,000 square feet including 167,000 square feet of comparable leases and a cash rent increase of 31%.

For the full year, we signed leases for a record 671,000 square feet including 592,000 square feet of comparable leases at a cash rent increase of 24%. Further, we continue to make meaningful progress backfilling our 10 anchor spaces. As previously announced in the fourth quarter, we signed a lease with a national investment-grade retailer at Market Place at Seminole Town Center for 48,000 square feet. This single lease consolidated the 34,000 square feet formerly occupied by Big Lots, 9,000 square feet of small shop space and 5,000 square feet of new expansion space. Further, this lease brought us to 7 resolved anchor spaces in 2025, totaling 177,000 square feet.

Additionally, we are in active negotiations for the three anchor spaces in the Value City at Carolina Pavilion which we expect to get back in early 2026. Notably, all combined, we expect to achieve a positive cash rent spread of approximately 60%, the high end of the targeted range previously disclosed. So while getting these boxes back did result in temporary downtime, it ultimately accelerated our ability to achieve higher rents and stronger tenant credits along with driving higher customer traffic to the respective center.

More broadly, as of year-end, our signed-not-open pipeline stands at $6.1 million, representing approximately 5.8% of annual cash base rents. We believe this pipeline position us for meaningful earnings growth as reflected in our outlook, with almost half of the signed-not-open pipeline anticipated to be recognized in 2026 and 100% in 2027.

Moving to investment activity. In December, we acquired Pompano Citi Center, an open-air retail center located on 35 acres in Pompano Beach submarket of Fort Lauderdale, Florida, for $65.2 million. The property consists of 509,000 square feet of operating space that is currently 92% occupied, plus 62,000 square feet of unfinished shelf space, primarily on the second level presenting future leasing opportunity. Pompano Citi Center is anchored by Burlington, T.J. Maxx, Nordstrom Rack, Ross Dress For Less and JCPenney.

Further, the property enjoys a prime location at a high-traffic intersection offering great visibility and access. This acquisition provides another attractive opportunity to create long-term value through both strategic mark-to-market rent opportunities and incremental leasing. Including the acquisition of Ashley Park, an open-air lifestyle center acquired early in 2025 and $21 million of structured investments originated during 2025, we closed $166 million of investments during 2025 at a weighted average initial cash yield of 9%. Moving to dispositions. Last quarter, I provided an update about the significant leasing we completed at The Shops at Legacy North located in Dallas, Texas.

During this quarter, we capitalized on those leasing efforts and sold The Shops at Legacy North for $78 million and a cash exit cap of low 5%. While the lease-up of this shopping center took longer than anticipated, we are pleased with the ultimate outcome and the ability to accretively recycle the proceeds into higher-yielding acquisitions. This transaction demonstrates our team's ability to execute value-add strategies at properties, retenanting, increasing occupancy and bringing rents up to market. As we look ahead, I do want to note a near-term anticipated acquisition. We are under contract to acquire a 384,000 square foot shopping center located in Texas for approximately $83 million.

We look forward to announcing the closing of this acquisition in the first quarter of 2026 and providing more details at that time. Additionally, while we have plenty of liquidity under our revolving credit facility to acquire this property, we may elect to fund this acquisition by selling a stabilized property, thus accretively recycling the proceeds to further drive earnings. Finally, while both leasing and capital recycling will add to earnings growth in 2026 and 2027, we never rest here at CTO. We have identified 6 outparcels for development in our various stages of negotiations with tenants ranging from preliminary to detailed lease negotiations. Three of the 6 outparcels are for larger boxes and uses.

We expect to drive significant foot traffic to their respective centers. While each specific opportunity is unique, in general, they average about $5 million of investment capital and low double-digit yield. If completed, we expect the capital to be invested over 2026 and 2027 with leases beginning to contribute to earnings in the second half of 2027. In summary, while we are pleased with our 2025 performance, we are even more excited about the future of CTO. We are beginning to reap the benefits of our strategic business plan, focusing on the right assets in the right markets, along with the proactive leasing and asset management.

I'm immensely proud of the team here at CTO and what they have accomplished along with the performance and results they are driving for our shareholders. And with that, I will now hand the call over to Phil.

Thanks, John. On this call, I will highlight our earnings, provide an update on our balance sheet and discuss our initial 2026 outlook. Starting with operating results. For the fourth quarter, core FFO was $15.8 million, a $1.6 million increase compared to the reported in the comparable quarter of the prior year. On a per share basis, core FFO was $0.49 per diluted share compared to $0.46 per diluted share in the comparable quarter of the prior year.

For the full year, core FFO was $60.5 million, a $12.6 million increase compared to $47.9 million reported in the comparable prior year. On a per share basis, core FFO was $1.87 per diluted share compared to $1.88 per diluted share in the comparable prior year. The change in core FFO per share for the full year reflects the reduction in leverage that took place late in 2024 when we reduced net debt to EBITDA by approximately a full turn. With regards to same-property NOI, total same-property NOI, including our 4 noncore properties, increased 1.1% for the fourth quarter. Same-property NOI for our noncore properties was impacted by Fidelity, vacating almost half of our 212,000 square foot office property located in Albuquerque, New Mexico and lower percentage rent from our beachfront restaurants in Daytona Beach, Florida.

As previously disclosed, we have already released the portion of the building vacated by Fidelity to the state of New Mexico for an initial lease term of 10 years, making the property now 100% leased to two investment-grade tenants. Further, we currently expect the state of New Mexico to begin paying cash rent in the latter half of 2026.

Notably, same property NOI for our shopping centers increased 4.3% in the fourth quarter. This growth was driven by leasing activity across our portfolio and a reduction in maintenance costs related to a property enhancement project completed in the fourth quarter of 2024. For context, shopping center properties represent 93% of total same-property NOI for the fourth quarter.

However, given the relatively small nominal size of our same-property NOI, just $200,000 impacts quarterly growth by approximately 100 basis points and one tenant vacating together with the seasonal impact of percentage rent at a noncore property can obscure the same-property NOI trend at our shopping centers. Accordingly, we have updated our supplemental financial information this quarter to more clearly highlight the metrics related to our shopping center properties.

Moving to the balance sheet. We started the fourth quarter in a strong financial position after completing the previously announced $150 million term loan financing at the end of the third quarter. The proceeds from these new term loans were used to retire a $65 million term loan scheduled to mature in March of 2026 and reduce the balance on our revolving credit facility to provide enhanced liquidity.

Notably, we now only have $17.8 million of debt maturing in 2026. Also, as previously disclosed, early in the fourth quarter, we repurchased $5 million of common stock at a weighted average purchase price of $16.26 per share increasing our repurchases for the full year of 2025 to a total of $9.3 million at a weighted average purchase price of $16.27 per share.

Regarding liquidity, we ended the year with $167 million of liquidity, consisting of $149 million available under our revolving credit facility and $18 million in cash available for use. This provides more than adequate capacity to initially fund the $83 million anticipated acquisition of a shopping center located in Texas that John discussed earlier. From a leverage perspective, we ended the fourth quarter with net debt to EBITDA of 6.4x, an improvement from 6.7x at the end of the third quarter.

The anticipated acquisition in Texas will temporarily elevate our leverage to a level similar to that at the start of the quarter. However, we anticipate deleveraging from the sale of select assets as well as rent commencing from our signed-not-open pipeline. Now turning to our 2026 outlook. Our initial earnings guidance for the full year of 2026 is $1.98 to $2.03 for core FFO per diluted share and $2.11 to $2.16 for AFFO per diluted share. Key assumptions reflected in our initial guidance include: investment volume, including structured investments of $100 million to $200 million at a weighted average initial yield between 8% and 8.5%.

The same-property NOI growth for shopping centers of 3.5% to 4.5% and general and administrative expenses of $19.5 million to $20 million. One last note, the cadence of our same-property NOI growth will improve over the year as tenants included in our signed-not-open pipeline take possession of their space and commence paying rent.

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

(Operator Instructions) Jay Kornreich, Cantor Fitzgerald.

First, I wanted to ask about backfilling the 10 vacant anchor centers. Could you just give us another color as to the timing of how rent from those already signed leases starts to get paid in 2026? And then for the three leases that have yet to be signed, any thoughts as to timing for that? And if that can also, I guess, hit the upper end of that 40% to 60% increase in leasing spreads you forecasted?

Yes, thanks. I'll kind of answer sort of the ones that we're still working on. We have -- we're in a fortunate situation with regards to the vacancies that are left where we have multiple tenants buying for the space, and we're trying to obviously optimize sort of the higher paying credit, what it does for the center, that sort of thing. So we're trying to move around the chess pieces. And that's more talking about Carolina Pavilion and there's two boxes there.

And so I would suspect that that's going to get resolved here in the next 6 months for sure. And then as we talked about before, these things tend to take a year at least to kind of get into operation. But I'll let Phil talk about the others that we've signed up.

Yes, Jay, on the ones that have already been completed, as far as contributing to the fourth quarter, it's really just the two Boot Barns, one at Rockwall and one at [price] that got opened really quick. We did get Slick City moved into Carolina, but it was very, very late in the year, it didn't contribute much this year. And then just going forward, it will ramp up about half in '26 and then they'll all be online in '27.

Okay. I appreciate that. And then just one follow-up. I guess looking at the office property in New Mexico, which now has this new lease worked out between the two tenants, I guess, how do you think about the value and opportunity to dispose of that asset now? And whenever that does happen, should it happen? What would your ideal use of the proceeds be?

Yes. So we're definitely in a fortunate position that now that we have the state of New Mexico, taking half the building and Fidelity another other half, we certainly have a marketable asset right now. So we are in early discussions with groups that have an interest in buying it. But as we get closer to the state of New Mexico's rent commencement, it's kind of really we're going to have higher values to us.

So we're being patient with it, knowing that we have that opportunity and alternatively, to your question, we would look to reinvest those proceeds into an open-air center, a larger open-air center. And if we find a great candidate acquisition opportunity, we may speed up the process of selling that building in New Mexico.

Craig Kucera, Lucid.

I want to talk about Pompano Citi Center. There is a mention of some potential mark-to-market lease-up opportunity there. Can you give us some color on what you think that might be?

Well, it's really -- I mean, look, JCPenney is the largest tenant and they literally pay nothing. And so if that company wherever to really go under or get back space or most likely is something where we buy out their space, that's a huge opportunity at that property.

But really, the real opportunities, Craig, the lease-up, there's a fair amount of vacancy, and we're very active right now in -- with LOIs going out to prospective tenants. It's really turning this around, creating the excitement of the activity, and we're doing that. So we're really very optimistic about Pompano. But there's -- it's more about lease-up than taking an old tenant and bringing in a new tenant at higher rent. But certainly, the largest one by far, JCPenney is that opportunity down the road.

Right. That could be pretty significant if they're paying nothing. Changing gears, it was a very strong leasing quarter. Obviously, a lot going on at Seminole Town Center. But outside of that, were there just kind of a flavor of the market, are you seeing any particular categories that are really creating or are you finding demand in your shopping centers for?

It's really the strong national brands that are still very interested in spaces if you have them. You have the T.J. Maxx' of the world, the Ross and so forth. So I mean, you're actually seeing more development occur in different markets because those tenants are doing very well in this economy as we read the national headlines and so they're looking for store expansion. So if you have a big box in a good market and a good center, you really are in the driver's seat.

Great. I saw you extended and increased the Revana loan and extended founders. Have you gotten any indication from Watters that they'll extend? Or you expect that to be repaid in the second quarter?

Yes. Unfortunately, we expect that to be repaid. We are hoping that it wouldn't, but it looks like it will. So we'll be on the hunt to replace that.

Got it. And I saw that Revana paid down a portion of their balance but you would anticipate them drawing down the remaining $25 million or so available on that loan in 2026?

Yes. They have some basically users for some of the site and they need to do site work and put in the roads and all that kind of stuff, utilities. And so it's really master development work. And so yes, we expect that to be used to improve that site.

Okay. Great. And just one more for me. Phil, this is on the ABR recognition timing on the signed-not-open. Can you give us any more granularity certainly relative to 2026? Is this like we -- should we assume something ratable? And as far as 2027, is that also throughout 2027, I would imagine? Or any additional granularity would be helpful for modeling purposes.

Yes. Ratable is pretty close. It may ramp up a little more towards the latter half of the year in '26. But if you're doing it ratable or a little bit stacked towards the latter part of the year, you're going to be pretty close. And same for '27, from what we can see now.

You would say the same for '27 as well?

Yes, from what we can see now, yes.

John Massocca, B. Riley.

So maybe thinking about the Texas acquisition that's in the pipeline, how does that property, you think, look compared to the portfolio today? And I guess, is there more kind of a value-add opportunity in that acquisition as you see it today? Or is that going to be something that's more stabilized or you're just getting it at a really solid yield and maybe there's some rent mark-to-market in the future that's attractive?

How about if I say all of the above? We're lucky that it's a stabilized asset with upside opportunity. There's actually a land parcel that comes along with it that there's definitely possibilities for and there is a little bit of lease-up and there is some below-market leases, but nothing near term so that you can get a hold out. So it hits all the boxes. So we're pretty excited about it.

Okay. And then maybe thinking about acquisitions in the pipeline or in the guidance beyond that transaction and with the likely repayment of the one structured investment in mind, how much of that is maybe structured investments as you see it today? And how much of that would be additional shopping center purchases?

We're definitely on the hunt for the larger shopping center purchases. And we -- in the last week, I went to go see two larger ones that were definitely interested in. I would say that the market, there's not a lot on the market right now. There is a lot of talk about brokers doing a lot of valuations for sellers. And so we'll see whether that comes to fruition.

But we're definitely looking to find some chunkier shopping centers this year. As we mentioned before, we still have some recycle opportunities in our portfolio where we've leased up properties and they're slower growth now. And if we can move them into, for instance, the Texas acquisition, where there's a ramp of cash flow increases and lease-up opportunity. That's kind of where we like to position ourselves.

And as you think about -- I mean, I know if you bespoke based on whatever asset you decided to sell, but what's kind of the day one spread in yields between kind of dispositions and acquisitions? I mean you gave acquisition cap rates and guidance, but just kind of curious what the disposition side would be.

I mean at least 100 basis points, if not more, most likely more.

To the positives?

Yes.

Okay. And then last one for me. CapEx kind of came up a little bit in 4Q, is that kind of a better run rate level as we look at the portfolio today? Because I know you sold legacy, which is a little bit more of a CapEx-intensive asset. Just kind of curious how we should think about that going forward.

Yes, the fourth quarter was elevated. It did include the large anchor lease at Market Place at Seminole. That's the one John talked about where the anchor took the 34,000 square foot box and then also is absorbing 9,000 a small shop plus 5,000 square feet of expansion. And there was also a restaurant in there and the restaurants always carry a little heavier TI. So I would say the fourth quarter is probably a little higher than the run rate going forward.

Those run rates are, for a portfolio our size, are better to look at an annual basis because it's just one lease like an anchor in any one quarter can skew it up significantly. And I would say just generally, the fourth quarter is a little higher than a good run rate.

Gaurav Mehta, Alliance Global Partners.

I wanted to follow up on the SNO timing of 47% in 2026. It seems like it's different than 76% you had in last quarter. So is it like the new leases that came in? Or was there any changes in the timing?

Yes. When you look at it from quarter-to-quarter, there's a lot of moving parts. So there was a tenant that moved off of it and into this year, right? And then you also -- you had where we sold legacy, so then that dropped off. And I think that's probably the biggest mover in your kind of reconciliation of the 76% that was previously there to 50% now.

There was a lot of lease-up at legacy, as John discussed that we completed, and then with selling that, that drops out of the pipeline. And the amount did not decrease because we signed a lot of new leases, right? So the signed-not-open pipeline is still significantly large even with legacy falling off, but that's the change, the biggest driver of that change for '26.

Okay. Understood. Second question I have is on your market allocation as you look to acquire new properties. I see that Atlanta seems to be much higher at 36% than rest of the market. And I'm just wondering if you could just maybe comment on how you think about allocating in any given market as far as exposure to cash ABR?

Yes. I mean, look, we're not looking to add to Atlanta. So you'll probably see Atlanta move down over time for sure. And so given that our portfolio is 85%, North Carolina, Florida, Texas, Georgia, we certainly have one of the strongest portfolios relative to the growth of markets where tenants want to be. And so you'll just see more of our investments in other markets kind of in that Southeast, Southwest, but less so in Atlanta.

Jason Weaver, JonesTrading.

Just first of all, when it comes to allocation, can you talk about the relative merits between grocery, anchor, lifestyle and power centers and of those, what you're most likely looking to target?

Yes. I mean, look, grocer is terrific, but it's a lower-yielding kind of product and a little bit slower growth sort of product. And so -- and then lifestyle is fantastic. We've had some great success, but they're a little bit more expensive to operate. You need more of that security element and everything because you have restaurants and entertainment and so forth, but they work really well in the right locations.

And then power is just more stable but higher growth opportunities with lease-up and less sort of CapEx exposure, tenants that are going in those don't need really high TI sort of finish outs like the lifestyle centers do, but that's sort of an easy sort of way to think about them.

Yes. And how are you thinking about the relative availability in the market for what you can deploy to today?

Yes. We're not right now on the grocer side. We're not chasing those just because of the yields are so low. However, we do -- we're looking at lifestyle and power, for sure. And a lot of the opportunities we're looking at are kind of have that grocer opportunity in the future where grocers would come into those centers.

We're seeing that in our portfolio now where we may have a large power center, but a grocer is looking at one of the boxes, and we've had that happen before where, unfortunately, we couldn't get one of the tenants out, that would have been a very national grocer that is very beloved in the nation. But unfortunately, we're couldn't get a book store out to accommodate them if you can imagine.

So we won't be chasing grocers just because the yield is way too low. We don't see a compelling return opportunity there. We do see it in areas where in the lifestyle and power where the yields are definitely higher, and there's not as much capital chasing them.

Great. That's helpful. And then maybe it's a little bit early here, but with 20% of your base rent, 2028 lease is coming off, have you started any discussions on what types and sort of opportunity that might present for FFO growth in the [out year]?

Yes. I mean, look, that's the great thing about this company set up right now is we've done so much work on the lease-up and kind of the ramp that -- and a lot of these tenants that -- or these properties that we bought, their leases are below market. And these tenants are doing well. And so most likely, they're going to exercise renewal options. But if not, there's definitely some mark-to-market opportunities.

So we don't really have to do much here to grow our earnings, it's just really letting the portfolio play out. And so the setup is really great. We don't have to do anything special to have some really interesting growth here.

Thank you. And this does conclude today's Q&A session and conference call. I want to thank you for participating, and you may now disconnect.