Q2 2022 CTO Realty Growth Inc Earnings Call
To ask a question during the session you will need to press star.
Star one one on your telephone please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Matt Partridge, Our Chief Financial Officer. Please go ahead.
Good morning, everyone and thank you for joining us today for the CTO Realty growth second quarter 2022 operating 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 the 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.
Can find our SEC reports earnings release supplemental and most recent investor presentation on our website at <unk> Dot com with that I'll now turn the call over to John .
Thanks, Matt and good morning, everyone.
We've had a productive few months since our last quarter's earnings call, making progress on a number of operational initiatives are continuing to accretively grow the company through a combination of high quality acquisitions and attractive structured investments that provide strong risk adjusted returns.
During the quarter, we entered into a $30 million preferred equity investment in <unk> Creek as we spoke about during our last earnings call. This is a terrific grocery anchored retail property is being repositioned by the sponsor into a premier lifestyle Center just outside of Dallas in Allen, Texas.
We also opportunistically originated $19 million construction loan on the retail portion of water star in Orlando as part of our structured investments program.
This is Marshall Burlington anchored asset that includes 325 residential units and a number of out parcels is on one of the strongest retail corridors in all of Florida across the street for the Margaritaville resort, Orlando and <unk> to a water park and just around the corner from the entrance to Walt Disney World.
Yeah.
While these types of investments will not be a significant piece of our income generating portfolio. We've allocated a small portion of our balance sheet to these type of opportunistic investments that allow us to generate outsized returns through a prioritize positioned in the capital stack for assets, we'd otherwise like to.
These investments also have acted as a bridge between lower cap rates were seeing earlier in the year for a regular way acquisitions versus the improved yields were starting to see in the acquisition market as prices readjust with the interest rates.
Obsequent to the end of the quarter, we invested $80 million in our largest acquisition to date Madison yards, a publix anchored property with an infill location along the outline in Atlanta, Georgia. This core investment with an opportunity to acquire a newly built grocery anchored property and one of the strongest submarkets in one of the fastest growing cities in America.
Got it.
Normally we would have been priced out of this type of asset.
And we were at the beginning of the year, but we have a strong relationship with the seller who is focused on certainty of close given the challenging that market.
Which is how we ended up acquiring the property at a more favorable yield.
For Us this was a scenario, where we're able to significantly up here our portfolio quality by taking the proceeds from our first quarter lower growth Carpenter Hotel and party city property sale to reinvest at a higher yield into those grocery anchored trophy property that have base rent increases in all but one of them.
<unk>.
On the disposition front, we did not have any property sales during the quarter, but as evidenced by our revised guidance that Matt will talk about in more detail later in our prepared remarks, we do anticipate more actively in the back half of the year as we look to Opportunistically exit some of our legacy office assets.
Operationally, we continue to focus on our property repositioning programs and leasing initiatives, which drove excellent same store NOI growth and have us well positioned to deliver further outside growth through the back half of this year and enter 2023.
In the quarter, we signed over 40000 square feet of new leases and renewals at an average rent of nearly $32 per square foot.
Average lease term of more than 10 years.
Of our renewals and extensions during the quarter, we experienced a three 8% increase in the new per square foot lease rates versus prior rates.
Similar to the past quarters, new leases signed were largely related to existing vacancy.
With units that were acquired as Bacon.
Of note, we had only one backfill scenario during the quarter, which allowed us to double the expiring rent with a tenant that should drive significantly more foot traffic to the property improve our overall tenant mix.
Our excellent Q2 year over year same store NOI growth of nearly 24% was driven by a combination of contractual rent increases strategic reductions in operating expenses, so non repeatable onetime items and new leases coming online in the historically vacant space.
Adjusting for the onetime prior items that resulted in a positive comparisons are year over year same store NOI was still up a healthy 13%.
Not surprisingly Ashford Lane was the biggest year over year outperforming our portfolio as it continues to benefit from our leasing efforts in repositioning strategy.
The lawn is nearly complete and most of the tenants who front the new Green space will open between now and the end of the year.
This property has been a great project for us and our progress today will easily drive outsize.
<unk> growth over the next 18 months.
But with the property only being 80% lease we still have more opportunity to go.
We're working with some exciting concepts that will hopefully get us closer to 90% or higher lease level before the end of the year and we will make this a true destination property for the surrounding community.
Really repositioning of our Santa Fe property continues to come along nicely. Just this past weekend, we launched a new program for our parking garage. They will start generating income on this aspect of the property, which was previously opened for free use.
This is in addition to the hospitality lease that we signed earlier in the year with the rosewood hotels into the on the authority to take the entire top floor of one of the buildings and we're working diligently to fill the remaining 15% of the vacancy to drive further property level cash flow, which should translate into significant property level same store.
Our NOI growth in 2023.
I'll now pass it over to Matt to talk about our performance in the quarter capital markets activities and increased guidance.
Thanks, John .
The quarterly and year to date results outlined today are before the effects of our three for one stock split that began trading at a post split price on July one 2022. However, our revised annual guidance has been adjusted to account for the three for one stock split and includes adjustments for our first and second quarter results.
We ended the quarter with 21 properties comprised of approximately $2 8 million square feet of principle states located in nine states and 15 markets with our acquisition of Madison yards. We now have 22 properties comprising 3 million square feet in Atlanta is now firmly established as the top market in our portfolio.
Digging deeper into our market exposure, 65% of our base rents now come from the U L. A top 15 markets of Atlanta, Dallas, Raleigh, Phoenix, Miami, Salt Lake City, Tampa, and Washington D C.
And nearly another 10% of our base rents coming from the <unk> top 25 markets of Las Vegas, Orlando and Houston.
Our markets population growth strong retailer demand and our property locations gives us confidence, we'll be able to continue our momentum with new leasing as well as positively manage through upcoming lease rollover in the back half of 2022 and enter 2023.
From a top tenant perspective fidelity remains our largest tenant exposure at approximately 6%, but AMC and publics are now are number eight and number 11 tenants respectively. Following our purchase of Madison yards.
At quarter end, our portfolio was 91, 3% occupied and we reported leased occupancy of 93, 5%.
The majority of our quarter over quarter increases related to in place occupancy were driven by the shops at legacy in the Plano Submarket of Dallas, Texas, and the Strand, which is our multi tenant retail property in Jacksonville, Florida total.
Total revenues for the second quarter of 2022 increased 36% to $19 $5 million and year to date total revenues have increased by 26% to $36 7 million.
As part of our revenue gains in the quarter, we did make some incremental progress selling a $5 million subsurface interests, but overall, both our quarterly and year to date total revenue increases were largely driven by income property revenue gains.
As John previously referenced our year over year same property NOI growth was 24% for the second quarter or 13%. Excluding one time items year to date year over year same property NOI increased 20% or 14% when those one time items from the second quarter of 2021 are removed.
As a reminder, our year over year same property NOI statistics only include assets owned for the entirety of the measurement periods and about 2022 and 2021 for.
For the second quarter of 2022 core <unk> grew 60% to $1 41 per share and <unk> grew 38% to $1 48 per share as a reminder, these per share results are before the effects of our three for one stock split.
Similar to our results in the first quarter core <unk> was positively impacted by the elimination of approximately $279000 of quarterly amortization related to the discount on convertible debt. We previously held on our balance sheet.
Its discount was eliminated at the beginning of the year as part of our implementation of certain accounting standards, which are outlined in more detail in our Form 10-Q.
The convertible debt discount amortization has historically been adjusted for in our calculation of <unk> for the elimination of this amortization has no impact on the comparability of our year over year <unk> results.
As previously announced the company paid a second quarter regular cash dividend of $1 12 per share.
Which is a 12% year over year increase over the company's Q2, 2021 cash dividend and a 4% increase over our Q1 2022 quarterly cash dividend and our current stock split adjusted annualized yield of approximately 7%.
Our quarterly dividend represents a cash payout ratio of 76% of Q2 2022 <unk> per share and we continue to work towards efficiently paying out approximately 100% of taxable income in 2022.
We ended the quarter with $34 million of cash and restricted cash and nearly $100 million of undrawn commitments under our revolving credit facility our quarter end net debt to total enterprise value was approximately 41% and our net debt to EBITDA was six six times.
A quiet quarter on the capital markets front, but we did issue just over 88000 shares of common stock through our ATM program for net proceeds of $5 $7 million at an average issuance price of just over $66 per share or $22 per share after adjusting for the three for one stock split.
Also within the quarter, we repurchased one 1 million common stock at an average price of $57 37 per share or $19 12 per share after adjusting for the three for one stock split.
We increased our full year guidance, which takes into account our strong year to date performance revised expectations for transaction activity and current capital markets environment.
And our anticipation of a broader economic slowdown and as I mentioned before the effects of our three for one stock split.
Our new core <unk> per share guidance range of $1 58 to $1 64 per share, which is an increase of <unk> <unk> per share at the low end and <unk> <unk> per share at the high end, our new <unk> per share guidance range of $1 70 to $1 76 per share, which is an increase of <unk> <unk> per share at the low end and <unk> <unk> per share at the high end these per share est.
<unk> for the full year of 2020 to do take into account the effects of our announced stock split.
Our revised guidance also increases the top end and bottom end of our investment and disposition volume estimates and the associated yields to account for our year to date transaction activity and expectations for the balance of the year. In 2022, we now expect to invest between $250 million and $275 million at an initial yield between 7% and seven 2%.
5% and we now anticipate selling between $50 million $80 million of assets at an exit cap rate between six 5% and 675%.
I will turn the call back over to John <unk> for his closing remarks, thanks, Matt while the economic backdrop remains unpredictable and I'm optimistic that we'll continue to find opportunities for further growth with our disciplined investment approach and I'm excited about the tremendous operational progress we've made and how that has translated into strong earnings growth.
Our revised 2022 guidance.
Look forward to providing updates on our portfolio and investment activity throughout the quarter and we appreciate all of our teams hard work and continued support of our shareholders. At this time, we'll open it up for questions operator.
Thank you.
Mind, you to ask a question you will need to press star one one on your telephone please standby with composites Q&A roster.
Our first question comes from Gaurav Mehta with Jeff Hutton you May proceed.
Yeah. Thanks, good morning.
First question on your balance.
Balance sheet you guys did with your acquisition guidance for 2022 I was wondering if you could.
Talk about how you expect to fund.
The increased acquisition guidance and maybe also touch upon the balance that you have on the credit line with variable rate debt should we expect you guys to do any kind of permanent financing for the credit line.
Hey, Dara.
With respect to the acquisition guidance I think.
What you can anticipate as we're going to continue to sell assets to fund that so well.
Obviously announced one this morning before the market opened and.
In terms of the floating rate debt. That's on the revolver. We are looking at doing a new term loan, which will fix with a swap.
To reduce that balance and put some more fixed rate debt on the balance sheet.
Okay great.
Second question on the transaction market you did touch upon seeing some higher cap rates in the transaction market as a result of higher interest rates.
Can you maybe provide some more color on what you guys are seeing in the transaction market in terms of maybe the volume in the pipeline and what Youre hearing from from the sellers.
Yes. This is John so the larger the asset.
Probably the more.
Problematic it is for a seller to sell just because of the secured debt markets.
Or kind of in kind of a lot kind of market right now there's not a lot of there's no securitization is happening there is no really distribution of that so so balance sheets they are not.
A lot of balance sheet capacity for for new lending, so if youre, a seller and youre looking to sell larger type projects that need.
Secured debt.
The folks that normally we'd be a buyer and utilizing the secured debt market or out of the market. So the buyer pool is.
Lot smaller and then the other kind of facet of it is if you're a seller and you really wanted to have something sold by the end of the year and you do have a buyer that wants to use secured debt, you're probably less likely to.
To go with that buyer, even though their price might be higher because of the.
The risk of execution happening. So so right now it is a good time, we are seeing cap rates widen out because of interest rates and they have widened out the expectations have widened out from sellers.
And.
There are more properties coming on the market.
People are going to bring them out earlier than they may have just because.
Why would you risk.
Being the last last person, who is coming out with the project. So we're sifting through the opportunities.
We're very we're optimistic that we'll find something that fits with us and allows us to kind of move.
Move through.
Some of the office properties.
Alright, thanks for taking my questions Sir.
Thank you one moment for questions.
Our next question comes from Rob Stevenson with Janney You May proceed.
Good morning, guys, John given the size of the company what drove the share repurchases in the quarter was it a lack of acquisition opportunities and.
And how are you thinking about that going forward versus acquisitions.
Yes.
Rob as you know through our history, we've been an active buyer of our stock when the stock is being sold offer no. No particular reasons that have to do the fundamentals of the company and whenever we see a real good opportunity to buy stock at a very.
So a significant discount to NAV.
It's a hell of a lot more accretive in our opinion to to buy kind of your own your own security than buying a another property.
It's a sure thing in buying our stock back.
When when Theres, a big dip in there was a big dip in the market.
And so people are selling for not had anything to do with CTO and we took advantage of it.
We're happy to take advantage of it when those sort of opportunities show themselves.
Okay. So I mean, I guess the follow up then would wind up being I think it.
It was 57 and change so that's a split adjusted call. It 19 ish I mean relative to what your acquisition pipeline looks like today, how would your stock price were to pull back to that level. How would you sort of think about the inherent growth of the company and the ability to add.
Via acquisitions versus buying back stock at whatever that implies from a cap rate for CTO et cetera from a balancing act.
Especially leveraged neutral rate, yes, let me look we want to grow the company for sure and so we're looking for those opportunities and we're optimistic we're going to be able to do that.
But having said that if something of an anomaly in the market happened.
Again, we're all about driving shareholder value driving NAV.
There's not an <unk> game. This is all about delivering results to our shareholders and I think our results have proven themselves so for whatever reason.
The Formula works and so we're going to we're not going to deviate just because we want to get to some sort of size and the one thing to keep in mind.
We do have those small amount of converts out there that will convert into common stock so thats going to Delever us in a big way.
You can also think about it is us buying back stock in <unk>.
Forward essence of that that basically convert going to common.
Okay. That's helpful. And then can you it looks like that you guys leased up some vacancy during the quarter.
The stuff that's core.
The big pockets.
Vacancy left and the opportunities for you and where are you in the discussions on those assets that youre likely to keep for the next call. It three years or so with leasing up any of the vacancy in those assets.
Yes, I would say there is still some low hanging fruit at Ashford lane as far as lease up and Thats where were seeing the.
The most activity right now so and we have negotiations going on so we're very confident that we're going to get there this year on more leasing there.
But other than that.
There is vacancy of Westcliff thats, not really core, but we are actually having a good leasing activity there right now.
And yes, there is actually a little bit the other one would be the other component were really based Santa Fe, where we have 12000 square feet on the street level, which our demo ing right now to kind of have it in better presentation, and where we've had dialogue with US a couple of tenants on that space now.
More early innings for that space, but those are the <unk>.
Those are kind of chunks.
Okay.
And then the Orlando structured investment I mean, what's the end game. There for you guys is that given the short term nature of that is that an asset that you.
Would wind up taking an equity interest in.
At some point.
Is that just going to get repaid at the 30 days or so how should we be thinking about that and sort of how youre looking at that type of business going forward.
Yes on that asset.
We expect to.
To get paid off this year.
But.
It's one where we would like to own the project at a certain price so it's a little bit it depends.
If the developer kind of get to the price expectation he was versus kind of where we want to be so it could go 50 50, either way, Okay. And then last one for me you guys. It looks like from the last few quarters at least you guys have been reliably sort of selling three four or $500000.
Worth of.
Our subsurface rights.
Is that.
Likely to continue to be the pace going forward or is there anything more sizable in the horizon, there or is it just.
More of the same as we think about the rest of 2022 and into 'twenty three.
Yes, I would say it's more of the same.
You do get some sort of people kind of have come around that are talking a little bit of a bigger bigger challenge, but I would say.
The probability is low lower on those I wouldn't want to I want you to have that modeled out but I would say it's more of the same. Okay. Thanks, guys. Appreciate it have a good weekend. Thank you.
Sure.
Sure.
Yes.
Thank you one moment for questions.
Our next question comes from Michael Gorman with BTG you May proceed.
Yes, Thanks, good morning, John maybe sticking with the structured investment.
Portfolio there.
About it with the Choppiness in the markets right now you talked about some of the challenges in the debt markets with sellers.
Different projects I'm, just wondering what the pipeline looks like there how you source those deals and maybe how large you're willing to make that as a piece of the business.
Maybe if the regular way acquisitions are a little bit choppy or two.
Yes so.
As mentioned.
Looking to <unk>.
Strategically grow that portion of the business it's almost.
Bespoke if somebody comes to us and needing some sort of liquidity because of the debt market challenges.
Having said that I'm surprised that we really don't have anything in front of US right. Now so there's no kind of pipeline in that business right now, but it kind of happens when you least expect it a little bit so.
So we keep our eyes open for it but nothing nothing on the radar.
Okay, Great and then maybe I think you talked a little bit about Ashford lean and some of the tenants opening up by year end, especially the ones focused on facing the lawn. If you look at some of the other assets like Santa Fe, and Texas, where you have a decent spread between leased and currently open and occupied.
When do you think those spaces start to roll on line is that the back half of this year as well or will some of that leak into 'twenty three.
Mainly located in 'twenty three.
Just.
Everything everything is taking longer from lease negotiations to build out so I'd say its more of a 'twenty three.
Okay, Great and then Matt maybe just two quick ones on guidance.
I'm just curious when you have an investment that you both originate and expect to close out in the same year like the development financing is that is that in your investment guidance.
And then maybe the second piece.
Assuming <unk> was in the disposition guidance, but just wanted to double check.
Yes for the latter question, yes highlight was in the disposition guidance.
With respect to the former question about investment guidance, we were including water star in there in terms of originations and the yields that we're originating at.
But obviously, if we get that capital back and reinvest it that will also roll into there. So it's almost a double dip in the sense that you can't model out the full $2 50 to $2 75 is ongoing there'll be some recycling if we get that capital back from water star.
Okay, Perfect and then maybe just one last quick one with highlight how much notice did did the.
Master lease or give you give you that they were going to exercise their option.
And we've been working on it for about like 45 days.
Okay, great. Thanks, so much guys.
Thanks Kim.
Thank you one moment for questions.
Our next question comes from Matthew Harrigan with Jones trading you May proceed.
Hey, guys. Thanks for the question and congrats on the good quarter.
So I guess what is the difference right now between institutional cap rates and what would be a high net worth family office cap rate are you guys seeing more strength in one of those two than the other.
I would say I wouldn't say that cap rates are different I would just say that.
Yes, I would say more of the family offices have been more active.
Late than than they had been previously I think they've seen that.
Becomes a good opportunity for them to get the quality assets at higher cap rates that they were priced out of before and then I.
Institutions are a little bit.
Slower on on kind of re engaging but I'd say thats definitely happening now.
So I wouldn't say the cap rates are different I would say that that the.
The clearing prices will be roughly assignment assume one group kind of be a little bit more active than the other.
Got you. Thanks, that's helpful and then what assets moving forward do you desire to develop and what would be the timeline for those.
Well, we don't really like developing too much.
We think that that has a whole risk.
Associated with that that really we would rather kind of come in and buy a project. That's been developed that didnt really hit pro forma or something happened and we're able to acquire it below the development costs and a lot of the hard work has been done.
Planning the entitlement the leasing and so there's a lot of capital in time put together for developments are weak, we would rather kind of be the group that kind of comes in and buys those projects when they didn't really work out as planned.
Awesome and then I got one more could you guys provide an update on the mitigation bank and kind of where that is compared to last quarter.
Yes.
Started seeing some more more activity on credit sales. So I would expect you to see us being more active.
From here to the end of the year on on credit sales out of the mitigation bank for sure.
Awesome. Thank you.
Thank you.
Thank you and as a reminder to ask a question you will need to press star one one on your telephone.
Our next question comes from RJ Milligan with Raymond James You May proceed.
Hey, guys. Just one quick question as most of my questions have been answered, but Matt maybe you could give a little bit of color on expected timing and obviously that's important for the gap between leased and occupied and rent paying.
You should expect that to trend over the next couple of quarters.
Yes, Jay.
To John's point, I think when you look at the spread at legacy and Santa Fe those are probably more 2022 2023 rent commencement.
Whereas.
The leased versus occupied spread at Ashford is probably a Q4 lease commitment wave for us so.
It's going to be spread out over the next 12 months or so with it being a little lumpy in Q4 with all the Ashford stuff coming online around Milan.
Got it so still that rent will come online through at least the second quarter of next year.
Yes.
Okay. That's it from me thanks, guys.
Thanks.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to John Albright, President and Chief Executive Officer for any further remarks.
Thank you for attending the call.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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