Q3 2021 CTO Realty Growth Inc Earnings Call
Hello, and welcome to the CTO Q3, 2021 earnings call. My name is <unk> and I'll be coordinating your call today.
Lots of register a question during the presentation you may do so by pressing star followed by one telephone keypad.
I'll hand over to John Albright, President and CEO. John. Please go ahead, when you're ready.
Thank you operator, good morning, everyone and thank you for joining us today for the T. T O royalty growth third quarter 2021 operating results conference call with me is Matt Partridge, our Chief Financial Officer.
Before we begin I'll turn it over to Matt to provide the customary disclosures regarding today's call Matt. Thanks, John 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 have to.
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 and our earnings release on our website at <unk> Dot com with that I will now turn the call back over to John Thanks, Matt I'm very pleased with our strong.
Long third quarter, which we believe have set us up to have a productive fourth quarter that will give us momentum to drive significant earnings growth in 2022.
Transactional a disposition heavy quarter, where we sold four single tenant properties for a combined sales price of $75 million at a weighted average cap rate of 5% generating a combined gain on sale.
Sale of $22 7 million the highlight of our third quarter disposition activity was the sale of our single tenant office building based in Raleigh, North Carolina leads to Wells Fargo, which generated a gain of more than $17 million.
Year to date, we've sold 14 properties 13 of which were single tenant assets for a combined sales price of $141 million at a weighted average cap rate of 6%.
And as we announced in yesterday's earnings release, we are increasing our disposition guidance by another $25 million to account for the additional sales we anticipate will close before the end of the year. While it was a quiet third quarter from an acquisition standpoint, all of our disposition activity and setting us up for a very active fourth quarter as evidenced by our <unk>.
Free to the bottom and top ends of our acquisition guidance. Our full year acquisition guidance now has arranged with a top end up $250 million decline as much as $140 million of additional acquisition volume in the fourth quarter.
We expect half of that activity to come from the retail property with that we are under contract to purchase for $70 million in Raleigh, North Carolina.
Closed last week.
And we're down the road on a few other interesting opportunity and very strong market that we're hopeful can get over the finish line before year end.
Within the existing portfolio, we experienced strong leasing demand in the quarter, most notably at 245, Riverside Ashford Lane and our newly acquired shop their legacy we signed new leases in the quarter at an average rent of more than $30 per square foot. The most notable being a sweet green leaves at Ashford Lane.
New lease with the Haskell company to take more than 16000 square feet at our only multi tenanted office buildings 245 wherever side of our renewals and extensions during the quarter, we experienced nearly 5% growth in the new FERC square foot lease rate versus the prior rate and most importantly, we anticipate continued momentum.
Into the fourth quarter as we work to finalize a number of leases that Ashford lane to accelerate that property's redevelopment, particularly now that we have started to make meaningful progress on the lawn.
Also during the quarter, we strategically acquired our joint venture partner's, 70% interest in the mitigation bank JV for payment of $16 $1 million net of available cash the full market value of the mitigation credit over the 10 year credit release period is approximately $30 million. So our focus is now centered around monetizing.
The mitigation credit or the mitigation bank in its entirety as efficiently as possible. So we can start generating income for the reinvestment of the net proceeds the buyout of the partnership gives us more flexibility as to how we execute the sale of the individual credit or the sale of the mitigation bank as a whole while benefiting from a lower carrying.
In the interim.
We are hoping to fully monetize mitigation in 2022 or.
Our other joint venture, which is our six 800 acre land joint venture remains under contract and the buyer's due diligence period and set to expire within the next week proceeds before taxes are expected to be more than $25 million and closing is still anticipated before year end or downtown Daytona Beach development side is also still under car.
Track for just over $6 million and we continue to anticipate that closing to occur before the end of the year as well and.
And finally, we did sell nearly $1 million and mineral rights during the quarter, we sold $3 5 million of mineral rights year to date, which leaves us with approximately $7 million in mineral rights left to sell on approximately 400000 acres of land.
Assuming these transactions all come to fruition, we will be out of both the joint ventures, and we will have sold all of our remaining land by yearend truly positioning the company to focus on our core strategy of multi tenant at retail and mixed use properties.
So overall, if you look at the upcoming and potential value of the remaining non income producing assets, which includes the proceeds from the land joint venture downtown Daytona Beach land, the remaining subsurface interests and the current value of the mitigation Bank. We believe there is more than $50 million of non income producing equity on the balance sheet Ava.
<unk> for reinvestment using our current share count and the low end of our current acquisition cap rate guidance as the reinvestment rate, we have the opportunity organically grow <unk> per share by more than 15% when compared to the midpoint of our 2021 <unk> guidance on a leverage neutral basis that could result in approximately 75%.
Of additional <unk> per share when you combine that organic growth with the lift we're going to get from our reinvestment and project leasing we are very excited about our future earnings potential and what that can mean for our shareholders with that I'll turn it over to Matt.
Thanks, John.
The end of the quarter. Our income property portfolio consisted of 19 properties comprised of approximately $2 2 million square feet of rentable space located in nine states and 13 market. Our portfolio was 90% occupied at quarter end and similar to last quarter the quarter over quarter change in occupancy theres more of a function of the companies selling 100% occupied.
I'll turn it asset and our recently announced leasing activity as being in the transitional stage and therefore, the tenant is not yet occupying the lease space than any loss of existing kind of from a top tenant perspective Wells Fargo is no longer a top tenant following the sale of their office property in Raleigh, but fidelity remains our largest tenant exposure at just over 8% and we weren't.
<unk>, which is our largest tenant at the shops at legacy recently went public via stock merger and is now trading at a market cap of more than 8 billion, providing a significant credit upgrade geographically speaking our largest markets continue to be within Florida, Texas, Georgia, and Arizona, where we expect to benefit from positive long term demographic trends and will add north Carolina back to that.
Lift when we closed on the acquisition John referenced earlier total revenues for the third quarter increased nearly 14% to $16 6 million and year to date total revenues have increased by 12, 7% to $45 6 million. We continued our strong rent collection results in the third quarter collecting 100% of contractual base rent and we continue to benefit from the transaction driven.
Revenue associated with the previously mentioned mineral rights sale.
I'll also highlight that we experienced quality growth and income property revenues from full quarter impact of the shops at legacy and an acceleration in our management fee income from Alpine income property trust due to the full quarter impact of their Q2 capital raising activities for the third quarter of 2021 funds from operations increased to $6 1 million.
A $1 <unk> per share and adjusted funds from operations were $6 4 million or $1.09 per share.
Remind everyone that our year over year per share comparisons are materially impacted by the one 2 million shares issued as part of the special distribution related to the company's REIT conversion that occurred in December of 2020, as previously announced the company paid a third quarter regular cash dividend of $1 per share on September 30 to shareholders of record on September nine.
Our third quarter cash dividend represents a 150% year over year increase when compared to the company's third quarter 2020 cash dividend and an annualized yield of approximately seven 4% our quarterly dividend represents a cash payout ratio of 92% of Q3 <unk> per share and we are currently tracking to pay out approximately 100% of taxable income for 2021.
As we turn to our balance sheet, we are well positioned to support the growth John talked about in the fourth quarter and into 2022, we ended the quarter with total cash and restricted cash of $75 6 million and total long term debt outstanding of $236 million net debt to total enterprise value at quarter end was approximately 29% and our net debt to EBITDA was just over five times.
Our previously announced perpetual preferred series a offering at the beginning of the third quarter and paid a prorated series a preferred dividend of $37 63 per share on September 30 to shareholders of record on September nine for the second consecutive quarter, we updated our 2021 guidance increasing the midpoint of our <unk> per share range by <unk> 10 cents and <unk>.
John previously referenced we increased our acquisition and disposition guidance by $25 million at the top end of each range to account for our year to date performance than expected activity in the fourth quarter. Our updated guidance does not include any additional assumptions for outside equity and it could be heavily influenced by the timing of dispositions and the deployment of capital into acquisitions as well as future performance of our current risk.
Spectrum tenants with that I'll turn the call back over to John Thanks, Matt as I said before this is a strong quarter that positions us to execute in the fourth quarter and provides us an opportunity to lower outside earnings growth. In 2022. There is still a lot of progress we made but we have a very high quality growing portfolio base and some of the fastest growing market.
And the country and I'm proud of the way our team is executing to realize the value creation opportunities. We recognized when we acquired these properties over the last 24 months I look forward to providing additional updates on our investment activity and operational successes throughout the quarter and I wanted to thank all of our investors and partners for their continued support with that.
I'll open it up for questions operator.
Thank you for our Q&A, if you'd like to ask a question. Please press star followed by one on your telephone keypad.
To ask a question. Please ensure your device is on mute locally.
Our first question comes from Michael Gorman from BT Archie Michael Your line is now open.
Thanks, Good morning, guys.
I'm just wondering if you could just spend.
Wonder if you could just spend a minute talking about the.
The rally acquisition in the pipeline and understand that there are limits to what you can disclose there, but maybe just spend a minute talking about how these opportunities came under your radar screen.
They were sourced and.
Maybe just to the extent any kind of characteristics is it a is it a mixed use type of asset or kind of how that positions within the portfolio.
Yeah sure.
So when we sold the Wells Fargo office buildings in Raleigh.
A little bit of a mixed.
Mix the motions because it was a fantastic asset in a fantastic market, but given the the.
The cap rate being so low and the profit that.
We would earn and basically be able to reinvest accretively at a higher cap rate was very attractive to us and we're lucky if I'm lucky to find a similar size asset in Raleigh, even though that wasn't the the main objective there wasn't like we were really searching you're really hard to replace an asset in Raleigh.
It came out pre pandemic, we talk to the developer.
This asset it was it's an asset in a JV.
The partnership.
So at the time to sell.
And we were have been actively.
<unk> acquisition offers on other assets another other locations in and that developers circle back with US and we were very pleased that it was still available and we we really dug in and did some due diligence, but it's just a fantastic market.
No I don't want to get too many details, but it's more I would say more neighborhood power type.
Center, then mixed use.
Okay, Great that's helpful.
And then switching gears a bit the mitigation bank.
You talked about hoping to monetize in 2022 I'm just wondering when when looking at the timing here is is there an opportunity that the mitigation credits.
It could be teamed up with the with the land sale with the 600 acres or am I thinking about that correctly.
No you're thinking about it right. So the reason we repurchased are purchased our JV interests are ownership Blackrock came into the JV a great partner a great partnership before the property was entitled as a mitigation bank. So.
There is some uncertainty on the entitlement and so forth their cost of capital was rightfully you know fairly high because there's a little bit of speculation.
And so we repurchased it as we've gotten the full entitlement of the of the bank, we had been selling credits.
From the bank.
We finally got the last federal permit there and so there's an opportunity for us to buy them out and have a better cost of capital and better flexibility and then to your point are the buyers of the.
Of our remaining land portfolio, they realize that to for them to to exercise on their plan their operational plans for the land they need a lot of our credit. So we're in a in discussion right now with.
When we would sell credits to them and at what price and so we're in very active discussions on that that part and then and then as far as the other land sales we've done over the years all of the land sales that we've done.
The landowners are obligated to buy credits from us as they develop so long story short through our whole portfolio of land here in Daytona Beach. There is more credit demand then we will have credits for and so what we'll do is we'll monetize some of this on our own and then probably.
Sell the whole bank to somebody else or do another another joint venture on a better.
Economic terms for us so so theres a good path to monetization and and there is incredible amount of development activity here, that's going to need those credits and again, there's a lot more credits needs in this in this space and then we will have.
Okay, Great. That's helpful and then last one for me.
In your presentation, you have got a pretty impressive slide in terms of the total return performance for CTO over a couple of different timeframes.
I'm just interested in kind of how youre thinking about.
Positioning CTO as you get towards the end of this transition within the different peer groups and how you think about how you think about and how investors are thinking about.
Comps and you know.
Track record being what it is kind of what what gets you that next leg up in valuation that would certainly seem warranted given the track record.
Yes, so I appreciate that so we did put in this this 10 year track record because I think we get lost in the shuffle.
Pretty pretty much.
Given that we converted to a REIT and we did the special dividend.
If you just basically total it all up it it's it look of surprise us when we decided to do it.
10 years I've been here.
And I think a lot of that success given that you know a lot of times, we didn't have great coverage from folks like yourself, we were kind of that orphan Sea Corps, but no one wanted to invest in because we didn't fit in any buckets.
Just really actively working our portfolio moving to cash flow.
Assets and we're all about generating cash flow. So we're not the types that are going to buy something.
For a five year development project, we're all about generating cash flow that we can pass on to our shareholder so that high dividend and low multiple that we're trading on we hope that through this last iteration of selling our non income producing assets are moving those into income producing.
<unk> properties is further going to organically grow our <unk> and and the street will probably be a little bit late to understanding that because we're just kind of because we are that small company, we kind of got lost in the shuffle, but if you if you can.
That will sell the land J D and get those proceeds we sell a $6 million land site in downtown Daytona, we monetize mitigation bank, we sell some sub surface you take all that money you invest it I'd call. It a seven cap and you do a little bit of leverage on it.
It it moves our <unk> quite a bit because we're a small company. So that's that's great and we always want to mimic.
Mimic I guess, a little bit of the most successful company in our space and that's federal Realty, which hats off to them for having such a exciting twenty-five <unk> multiple or whatever but you know where we're positioned we're gonna be position in states and cities that we have.
A lot of tailwind so I mean, obviously, we're in Arizona, Texas, Florida.
We'll be back in Raleigh.
So those are have great macro trends.
Have a feeling that federal being in San Jose in Bethesda.
In D. C area those are a little bit more headwind. So I think yes, I think the the macro environment favoring kind of our strategy and hopefully people will wake up to it but we'll see.
All right fantastic. Thank you for the time.
Thank you.
Our next question comes from Rob Stevenson from Janney Montgomery Scott.
Your line is now open.
Good morning, guys.
John can you talk a little bit about the sales process for wells understanding it only takes one buyer.
Just as the demand for these types of office assets. These days is it seems like at least in the public market valuations that offices, where people have been avoiding like the plague what's been your experience as you go to bid marketing these assets both here and at Pine and as you think about marketing future assets on the office side.
That's on the office side, Yeah, I think just obviously, we're coming out of the office side, but just to give you the experience on wells wells is a little bit of a special situation and that day there.
Rent was a third of a market and you had this fantastic campus in Raleigh, and so this was really a family office type deal where it didn't really matter what the cap rate was to the buyer just it's a generational asset because the basis was so low because the rent is so low.
So obviously it didn't work grade in our portfolio as a public company, because we didn't really get credit for it.
But it is an asset that if you. If this was your own personal portfolio, we would never sell it but it just you know we're here for our public shareholders and it was holding back our earnings power and so as we reinvest this it just going to do a lot more wonders for us than than holding it but to answer your question as far as.
The appetite out there theres, probably more appetite than you would imagine for office I mean, obviously.
Office is you cant generically throw office I mean, we have properties in more areas that again have the tail ends whether its in Jacksonville or Tampa.
That office is going to get more attraction than something in an urban setting in the northeast that has incredible amount of carry costs and operating costs as far as T.
Ti and Lcs that theyre getting zero rent growth. So so in basically summary, our office properties. There definitely capital sources that are interested in and we'll be able to move through it when we find good acquisitions to replace those assets.
And how are you thinking about.
Dispositions going forward here you have the cash from the previous dispositions you'd have these non income producing assets could you detail that you could sell and then some of these that you will be selling in the near term are you going to wind up marketing more single tenant assets in the year and to take advantage of the 10 31 market.
These other.
Assets in the year and you're going to wait until you have the additional acquisition opportunities identified how should we be thinking about that as well as Europe.
Desire to raise.
Common equity here with common equity here, yeah. So given that you know we have the 10 31. These these office assets and it almost feels like.
And airport with planes circling the airport waiting to land I mean, we have some assets teed up and ready to go but we need to find the acquisitions that worked for us and so we're actively bidding on a retail properties multi tenant and retail properties in many different states that we're focusing on.
And so as we find them like Raleigh will start moving the office properties through the process and so we have no need for outside capital, we have plenty plenty of capital plenty of liquidity, which is great.
So really trying to find the acquisition opportunities that fit for us I mean, just on a on a.
Just as an observation on the strip center or open Air Center.
A power center or the capital has really come back to that those sectors in the last six months.
So look that's great for our portfolio increases our NAV as those cap rates have come down pretty dramatically.
I don't think it's just a year and $2 31 dynamic because of the properties. We've been chasing or are not really 10 31 assets are a little larger.
It's just really a recognition that retail.
Is a lot better place to be than people had feared during COVID-19 and so forth and as you know all of these are retail tenants have gotten a hell of a lot better.
During COVID-19 and they're so theres a lot of strength there, there's a lot of store count increasing expansion of core.
On the restaurant side, there is incredible amount of restaurant demand for a new location. So all of that's feeding into bringing capital back to the space. Unfortunately for us we'd love it with we have.
The market, we had about eight months ago, but the negative to that as he had a lot of sellers that werent going to sell their assets in that week market. So now they are coming out with more and more assets as the price discovery has been a lot better.
Okay, and then I know you don't want get into too much detail, but when you look at the the rally acquisition.
Material vacancy upcoming explorations that may not renew that you guys have to re tenant redevelopment opportunities or our out parcel opportunities where is the upside going forward for you guys on the SaaS side you guys on this asset yes, that's why we like this asset a lot there is some out parcel development opera.
<unk> and there is some re Kennedy an opportunity down the road as far as suboptimal type tenants that.
If they were ever to leave it would have a chance for us to to basically better or the occupancy. So there's a combination of opportunity. There is a L parcel pad site development opportunity and re tenant an opportunity, but not as much a vacancy opportunity.
Okay, and then last one for me just a.
Housekeeping, Matt the mitigation bank stuff is in a Trs is that true in a Trs is that true that's correct.
And given all the stuff that you're at the end of the day that you have at least until you sell the <unk>.
Land JV et cetera are you anywhere near your Trs limits for 2021 for 2020 one no. We're in good shape from that perspective.
The land JV and the tier and the mitigation bank in the alpine management fee or <unk>, but they're they're not anywhere close to the limitation.
Okay. Thanks, guys I appreciate it okay. Thanks, guys I appreciate it thank you.
As a final reminder, if you'd like to ask a question. Please press star followed by one on your telephone keypad.
Yeah.
Our next question comes from your question Craig Sarah.
Ryan Securities Craig Your line is now open.
Right.
Yes, thanks, good morning, guys.
Good morning, Matt I wanted to talk about the guidance.
Year to date, you bought assets at about an eight five cap rates.
You're guiding to kind of a low seven for the year, which would imply that the remaining assets you are buying or kind of price maybe it's between a five and a happened six.
That conservatism on your part or are you looking at maybe higher tenant credit and what Youre looking to close the rest of the year or is that was that just market base. So you're just seeing cap rate compression.
Yeah, I'll, let John talk a little bit about the mix, but in terms of the guidance. It is a little bit of conservatism. It is a little bit of what's going to hit at the end of the year versus what may or may not flow into into Q1.
And so the mix is going to drive drive the cap rates, but we are looking to up tier the quality of the portfolio I'll, let John talk a little bit about what that mix looks like that yeah Craig.
It's really a little bit a function of the opportunities we're seeing that we're we're trying to purchase.
There is some vacancy opportunity, where we're buying properties with up with lower vacancy and our higher vacancy lower occupancy that we have a chance to.
Really add some growth to the portfolio, our additional growth and so and it will help our are basically.
You know dividend coverage ratio I think everyone you know, even though our dividend super strong.
That will help us kind of show you know just as far as our metrics.
And then another property that's really more of a total return opportunity. It has it definitely has yield to a current yield to it but the low current yield because theres a.
It's a redevelopment play down the road not for us to do but an opportunity to really add some F. A R. Maybe double the F. A R and so it's a it has a great total return metric, but a but a lower current yield metrics. So that's a little bit of a combination of the acquisition opportunities in front of us.
Got it no I get it so basically you might be starting lower but you'll be able to create a much higher stabilized yield over time that that makes sense.
I feel like it Westcliff, which is the one property that does have a bit more vacancy that the others than the others in the portfolio you discussed maybe some developer interest there in the past maybe a large tenant looking to backfill.
Fitness et cetera, there has there been any movement on that front.
Yeah. So in.
Total frustration.
From my standpoint for sure, but there there's definitely call it three.
Groups operators looking at that large 38000 square foot vacancy and some of them are just it's either fitting into their pipeline lets say I'm, just making this up a little bit, let's say tenants looking at opening five facilities in the Dallas Fort worth area and surely slotting. This.
One in and we're not but we don't want to hold it for them, we want to be one.
Execute now and one group for instance is in the middle of a capital raise and didn't want to do it until they get the capital in the door and so so it's a little bit of incredible frustration, but I have a feeling in the in the first quarter.
We'll have better success and visibility to leasing that up but for a small company as us as you as you know having that leased up is actually pretty impactful. So we're totally focused on it.
Got it no that makes sense.
And one more for me I know that you were pretty excited when you added superior food Hall, operator at Ashford Lane.
I'm curious has that translated yet to to increased leasing activity and interest and at Ashford.
You're seeing it accurately.
So I'll give you a little bit of a background on the on the food Hall as far as where they are just as an opportunity since you bring it up you know this the whole supply chain thing is this like it's definitely hit the real estate side as well because the food Hall is basically accessing a lot of.
Of their inventory.
They need from China and.
And I don't have to tell you what that means.
So they're looking at more end of the year opening and when we sign this up we thought it was gonna be summer of this year. So a couple of months ago and so.
But you know they are making very good progress or about 80% built out.
But even on the build outside.
They're waiting for materials, and so forth, but as far as leasing as you as you can see in our earnings.
We have incredible amount of.
Leasing activity, there, but interesting to me it really hasn't been driven by the food Hall excitement.
It's really the location that we have on Ashford Lane is so important for.
That whole area that tenants if they are looking for expanding in the burbs outside of Atlanta. This is where this is one of the hot areas.
So as you can think about it you know the more core of Atlanta, and a lot of those tenants are leaving for the Burbs and so we're just in a good spot. So it doesn't really have to do with the the hall as much.
Okay, great. Thanks.
Right.
We have no further questions I will now hand back to John for any closing remarks.
Thank you very much for attending our earnings call and look forward to talking to you.
Through the rest of the year. Thank you.
This concludes today's call you may now disconnect your lines and we thank you for joining.
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