Good day, and thank you for standing by. Welcome to the CTO Realty Growth Fourth Quarter and Year-end 2021 Earnings Call. [Operator Instructions] I'd now like to hand the conference over to Matt Partridge, Chief Financial Officer..

Good morning, everyone, and thank you for joining us today for the CTO Realty Growth, Fourth Quarter and Year-end 2021 Operating Results Conference Call. With me is our CEO and President, John Albright. Before we begin, I'd like to remind everyone that many of our comments today are considered forward-looking statements under federal securities law.

The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we undertake no duty to update these statements.

Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's Form 10-K, Form 10-Q, and other SEC filings. You can find our SEC reports, earnings release, and supplemental information on our website at ctoreit.com.

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

Thanks, Matt.

In our first full year as a REIT, we made tremendous progress refining our portfolio and executing on our retail-focused investment strategy, closed out the year with a number of grocery-anchored, traditional retail and mixed-use acquisitions in highly desirable markets, strong leasing activity, opportunistic single-tenant dispositions and the sale of the remaining assets in our Land joint venture.

The final monetization of the land completes our exit from the landowning business, which spanned over 110 years.

As we reflect on our more recent activities in 2021 and the impact of those activities we have on the future, I'm very pleased with the advances we have made to further improve our high-quality portfolio and how we've positioned CTO to drive outsized AFFO growth through a combination of organic and external opportunities.

Drilling down into our fourth quarter activities, we had a record acquisition quarter, acquiring nearly $140 million of property as we redeployed the proceeds generated from our third and fourth quarter dispositions and the new term loan we completed in November. For the year, we acquired nearly $250 million of assets and initial yield of 7.2%.

The 8 acquisitions are located in strong submarkets of some of the most in-demand cities in the United States, including Raleigh, Dallas, Atlanta, Santa Fe, Las Vegas, Salt Lake City, and Orlando.

Some of these acquisitions will drive future growth through repositioning opportunities and some provide strong, stable in-place cash flows to support our attractive 7% dividend yield.

In all instances, we expect leasing demand, property cash flows, a residual value of the real estate to continue to benefit from our market's robust population growth in their business-friendly operating environments.

On the disposition front, we sold 15 properties in 2021, 14 of which were single-tenant assets for a total disposition volume of $162 million.

The weighted average exit cap rate was 6%, generating a combined gain on sale of more than $28 million and representing more than 120 basis points of net investment spread between our weighted average acquisition cap rate and our weighted average disposition cap rate.

Operationally, we ended the quarter with economic occupancy of nearly 89% in leased occupancy of more than 92%, reflecting the significant progress we've made in executing on our repositioning plan at Ashford Lane and the incremental gains across a number of our properties in our portfolio.

During the fourth quarter, we signed new leases at an average rent more than $41 per square foot. Most of the new leases were at Ashford Lane in Atlanta, where we are currently under construction on the lawn, which we expect to be completed in late spring or early summer.

Of our renewals and extensions during the quarter, we experienced more than 15% growth in comparable new per square foot lease rates demonstrating our ability to realize higher rents when the expiring leases have no remaining contractual options.

The impact of our leasing gains on our portfolio same-store NOI is going to be significant for 2022 and 2023, and we're looking forward to reporting these more traditional retail metrics beginning in the first quarter.

Just at Ashford Lane alone were scheduled to have Superica, the hall, Brown Bag Seafood, [indiscernible] juice bar, Jeni's ice cream, [indiscernible] Grana and Sweetgreen, all opened their doors for business in 2022, transforming the property into a dining destination in driving increased foot traffic for the properties of other retail tenants.

As we think about the upcoming year, we'll continue to concentrate our efforts on high-quality, well-located retail and mixed-use acquisition opportunities. The acquisition activity will drive our disposition efforts as we focus on selling our remaining office properties and completing our portfolio shift to retail and mixed use.

With that, I'll now turn the call back over to Matt..

Thanks, John. As John noted, 2021 was an excellent year of progress for CTO as we made significant financial and operational strides and executed on the transformation of our portfolio. We ended the year with 22 properties comprised of approximately 2.7 million square feet of rentable space located in 10 and 16 markets.

Our top market is now Atlanta, where we acquired a newly constructed Sprouts-anchored center just down the road from Simon's Mall of Georgia, and our other top 5 markets include Jacksonville, Dallas, Raleigh, and Phoenix, all of which are experiencing excellent demographic trends and have strong multiyear catalysts for growth.

Our portfolio was 88.5% occupied and 92.6% leased at year-end. And as John highlighted, we had strong leasing spreads in the quarter. Our overall comparable blended spreads were up 12.3% when compared to expiring rents with increases of 15.5% for options and renewals and 6.4% for new leases.

Because we've acquired a number of properties over the past 2 years with meaningful amounts of existing vacancy, we exclude from these calculations, new leases that were signed for space that has been vacant since our acquisition.

With a transformed portfolio that better reflects the go-forward asset strategy, we do plan to report same-store occupancy and net operating income metrics beginning in the first quarter of 2022, and we've expanded our supplemental disclosure that is available on our website to provide additional industry-standard information.

For the fourth quarter, NAREIT FFO was $0.60 per share, core FFO was $1.07 per share, and adjusted FFO was $1.23 per share.

We started to report core FFO to adjust for onetime financing transactions, any future mark-to-market adjustments and certain amortization that is transactional in nature, but not currently permitted within the NAREIT FFO calculation.

Our 2021 core FFO results directly aligned to our previously provided 2021 FFO guidance and as we noted in our earnings release yesterday, our 2022 core FFO guidance accounts for these potential future adjustments.

For the year, 2021 NAREIT FFO was $3.35 per share and core FFO was $3.93 per share, which was an $0.08 per share beat at the top end of our guidance range. Our 2021 AFFO was $4.36 per share and represents a $0.16 per share beat at the top end of our AFFO guidance range.

As previously announced in November, the company paid a fourth quarter regular common stock cash dividend of $1 per share on December 30. And earlier this week, we announced an 8% increase for our first quarter 2022 regular common stock cash dividend, which will be paid on March 31 to shareholders of record on March 10.

Our new first quarter common stock dividend of $1.08 per share represents an annualized yield of approximately 7% and an 86% implied annualized cash payout ratio based on the midpoint of our 2022 AFFO per share guidance. As of year-end 2021, we had total cash and restricted cash of $31 million and total long-term debt outstanding of $283 million.

Net debt to total enterprise value at quarter end was approximately 36%, and our net debt-to-EBITDA was 6.1x.

We were active in a number of different aspects in the capital markets during the fourth quarter, with the most notable transactions, including entering into a new $100 million term loan in November, repurchasing nearly $11 million of our 2025 senior convertible notes, repurchasing more than 40,000 shares of our common stock at an average price of $54.48 per share.

And while modest in dollar value, we did purchase 8,000 shares of Pine stock at an average price of $17.65 per share as we continue to believe there is significant unrealized value embedded in our pine ownership. As part of the earnings release yesterday, we did release anticipated transaction and earnings guidance for 2022.

Our guidance relies on a number of significant assumptions, including, but not limited to, our ability to raise funds for investment at reasonable cost of capital, our ability to acquire and sell assets at acceptable valuations, and an overall stable economy that supports our underlying tenants.

We expect to invest between $200 million to $250 million in properties at a blended investment yield of 6.25% to 6.75%.

Our transaction volume and investment yields take into account the increasingly competitive acquisition environment and also assumes some structured investments in the form of preferred equity or development loans that allow us to gain an interest in assets we would otherwise like to own and where we can potentially obtain a higher yield and a shadow pipeline of opportunities through right of first refusal or right of first offer options within the loan or preferred equity agreements.

Our dispositions guidance assumes $40 million to $70 million of asset sales at a blended exit cap rate between 6.5% and 7.5%. As John noted, we expect to focus our disposition efforts on our remaining noncore single tenant and office properties, which will continue to move our portfolio towards a pure-play multi-tenant retail and mixed-use strategy.

Our full year 2022 core FFO guidance range is $4.30 to $4.55 per share, and our full year 2022 AFFO guidance range is $4.90 to $5.15 per share.

The midpoint of our AFFO guidance implies 15% year-over-year growth, which is driving our recently increased dividend and is also significantly improving the overall coverage of our dividend as we look to maximize free cash flow. Overall, 2022 is shaping up to be another strong year of growth as we capitalize on our momentum from 2021.

We appreciate the support provided by our shareholders and business partners, and we look forward to continued success. I'll now turn the call back over to John for his closing remarks. Thanks, Matt. We're very proud to have delivered 57% total shareholder return in 2021.

Part of our outperformance was from our stock being re-rated in our first year as a REIT, which is still a meaningful future opportunity given that very limited current REIT dedicated shareholder and index ownership.

And we think a large part of our outperformance is from the market recognizing our efforts and success throughout the year as we continued our portfolio repositioning process and executed on our business strategy. For 2022, we provided guidance that has the top end of the range, poised to deliver 18% AFFO per share growth.

Our recently announced dividend increase provides a growing outsized dividend yield with improved AFFO coverage. And all of this is driven by our high-quality portfolio that is based on some of the strongest markets in the United States. And finally, we did announce we are moving our headquarters to Winter Park, Florida.

We continue to maintain our Daytona Beach office, but Winter Park is in a larger MSA that will give us access to a deeper employee pool as we look to grow our talented team. We appreciate all of your support. And with that, we will open it up to questions.

Operator?.

[Operator Instructions] Our first question comes from Rob Stevenson with Janney..

John, now that you've gotten rid of the land JV, what's the current plan for the subsurface rights portfolio? And Matt, what else do you guys have that would be considered bad income for the REIT at this point going forward?.

So on the subsurface mineral rights, we've been selling a lot of individual transactions to service owners. Whether someone owns a small piece of property or a large ranch. So we've been proactively reaching out to service owners, and we have a fair amount of activity on that. They're kind of small dollar sizes, but that's the way we're going about it.

It is just granularly selling it off. And then also on the mitigation bank we'll be selling credits throughout the year and look to try to sell the whole bank, which would bring in some capital for reinvesting in the income properties, and I'll let Matt talk about the accounting part of it..

On the bad income side, the biggest component of income that's flowing through the TRS is the management fee related to Alpine. There's nothing else that's really substantial in there other than that..

Okay. And then what are your leasing expectations for 2022 for the vacancy in the portfolio? I mean most of your assets are 100% occupied, but you do have a few that are lower occupancy, redevelopment, et cetera.

Any near-term leases that you guys feel confident or likely to be signed? And also any move-outs of size in 2022 on any of the currently occupied space?.

Yes. So on the leasing side, the leasing activity is very robust, especially at Ashford Lane, as we discussed. And some of that has to do with tenants that we can move out or have expiring leases. So it may not be the leasing pure vacancy, but it's taking advantage of a lower rental rate tenant that might have to be leading.

And so there's lots of activity on leasing existing occupied space and vacancy. One example I'll give you is we bought, as we mentioned in our press release an empty building adjacent to Ashford Lane. And we're in discussions, LOI lease negotiations with a tenant to take all of that.

So and then on in Santa Fe, we have lots of active discussions going on, on some vacancy there. So we're very optimistic on what we'll be able to do on that building throughout the year. But in general, I would say that's very robust leasing activity and it has to do with taking advantage of tenants with low rents and vacancy..

And Rob, on the move-out side, I would say we've kind of -- we've addressed more than half of the lease expirations in 2022 and the biggest one, we have a backfill tenant for us. So we're in pretty good shape there..

Okay.

What was the cap rate on the Party City disposition to pine?.

I was going to say it was in the high Texas..

Okay. And then last one for me, John, how does the Board balance buying shares of pine within CTO versus repurchasing CTO shares when the stocks are undervalued, given your unique knowledge of both companies.

Obviously, you buy repurchase CTO shares, if you're going to do it on a leverage neutral basis, you're only able to put $0.50 of every dollar to work or even less versus taking cash and buying pine.

How do that match nations work inside the board when you view theoretically both companies as being undervalued? And where do you put your incremental dollar going forward in those situations?.

Well, as you can see, we were active on both fronts. And so it’s basically when there’s dislocation and either opportunity that we have certain levels where we say that we want to invest more in either repurchasing CTO stock or buying Pine Stock. So it’s really a function of the opportunity and having set levels where we have interest in both.

So it’s a little bit of a combination..

Next question comes from Craig Kucera with B. Riley Securities..

I want to first start out with the guidance.

And just to confirm, does the disposition guidance include any monetization of the mitigation credits or rights? Or is that just sort of a mix of expected sales of single tenant, maybe some office properties?.

That is just the single tenant and office properties. The mitigation credits or the mitigation bank or any subsurface would be in addition to the guidance..

Got it. Okay.

And it sounded like you've had some success kind of selling the subsurface on a one-off basis, but have you started marketing the mitigation credits as more of a bulk sale? And I guess, how is that going so far? Or is that still TBD?.

Yes, we have people that are interested and have done -- made offers and done some analysis. It's a little bit of a complicated investment. So a lot of folks aren't as knowledgeable about it. So we've walked them through that.

But we'll basically we have a price in mind and fairly optimistic that as we sell credits and the bank gets smaller, the price will come up to a level that where we're interested in transacting. So anyway, it's been pretty active, and it's a sector that people like. It's just really finding the right capital source for us..

Got it. Changing gears, I appreciate you seeing the increased disclosure on the leasing activity. And I think you noted there's about a -- about a 400 basis point spread between what's leased and what's currently occupied.

Can you give us a sense of when those tenants which have signed leases, but haven't started paying rent, will take economic occupancy? Is that somewhere mid '22? Or just any color there would be helpful..

Yes, I'll start with that.

I would say that, as you can imagine, with everything going on in the macro markets as far as inflation, supply chains, labor and everything, everything is taking a little longer and tenants that have we signed leases with have multiple locations that they're trying to open and so they're slotting in our openings within their larger platforms.

And so I would say kind of a mid-year to, I would say, June, July, August is really where the bulk of them will be coming in, and that could slip. I mean, because it's just hiring architects and contractors and contractors are saying that they're not interested in doing this because they got bigger projects going on.

It's just all a function of what you can imagine. So I would say mid- to midyear and third quarter..

Okay. Fair enough. And just thinking about your investment pipeline, I guess historically, you've done more mezzanine loans and loans, et cetera, and kind of got out of that business.

And I guess, are you -- should we expect to see a meaningful amount of those in 2022 as far as investments in preferred equity? And I guess sort of how are you thinking about that from a risk-adjusted return relative to sort of your investment pipeline outside on the property side?.

Yes. I mean it's a good question, Craig, and that's why I wanted to highlight it. We are seeing opportunity. It's a little bit different this time on the structured investments than before we were doing good risk-adjusted yields on properties that may or may not fit in our portfolio.

But now we're looking at structured finance investments in properties that we'd love to have in our portfolio. For instance, what we're seeing is that, let's say, a developer has a project, they've gotten contractor bids come back, the bids are 30% to 40% higher than budget rather than calling equity that has a price to it.

They're basically bridging the gap with us for a short duration. And so we're seeing a fair amount of that sort of opportunity on assets that we really like. And we're probably going to get yields higher than if we were the equity, but it just won't be a long duration.

We're talking about 1- to 3-year to 5-year sort of duration, but that keeps us really basically on top of assets that we'd like to own. It keeps us with relationships with developers or owners that we'd like to do more business with.

And so we feel like it lead to a transaction that will be kind of long-term equity properties for us in the future or could..

Okay. Great. And just one more for me, kind of in the same vein. 2022 looks like a pretty active year again on the external growth side.

Can you give us a sense of kind of what your current pipeline is that you're working on? And kind of what you see may be closing in the next 3 to 6 months that you can?.

Yes. I mean we do have a property in the pipeline that should close relatively soon, let's say, next 30 days. But we are -- we've been actively bidding literally on assets almost every week. And we're not trying super hard to buy assets.

The cap rates have come down quite a bit but we're hoping that some of the macro issues in the market will provide opportunity for us to buy at better yields. So we're being prudent about the offers that we're putting out. And so the good news is there's a fair amount of assets that are on the market or coming to market.

So we're just picking our spots, and we feel optimistic that we'll fill out the acquisition side, given what we're seeing coming to market..

[Operator Instructions] Our next question comes from Jason Stewart with Jones Trading..

I wanted to follow up on the macro environment and your comments around the acquisition and the competitive environment there. It sounds like rate volatility has not impacted people's acquisition appetite.

Are you seeing new capital coming into the sector? Or is this from existing players?.

It's mainly from existing players that were on the sidelines during the pandemic and have basically said, okay, retail has done fairly well during the pandemic. And so people are coming back into the market and feel like they're underrepresented in their portfolio on retail. So you're seeing a lot of capital.

It's kind of a catch-up capital, I would say. And so we're trying to stay out of the way of those people that are investing because they're a little bit behind on their portfolio allocations. And hopefully, that kind of gets basically taken up pretty soon, and we'll be able to buy a better yield.

But we're actively kind of pursuing all acquisitions, and we're learning lots about the players out there and where they're buying properties, and we're just kind of biding our time..

Got it.

And then in terms of dispositions, is it your expectation that the rest of the single tenant net lease properties go to pine? Or are there required returns too high?.

Yes. I mean there's very -- there's a few that could go to pine, but where we're seeing transactions take place, probably the cap rates will be lower than where pine would have an interest..

Got it. Okay. And then I don't think we've touched on the Wells office. If you could just give us a quick update, that would be great..

You're talking about the wells that Pine owns over in Hillsboro..

Yes, this as it relates to the way you're just thinking about dispositions in terms of CTO and office portfolio. If it relates, that would be awesome..

Yes. So I’ll just talk about CTO, given that we’ve given that update at Pine. But in CTO, we do have, as you know, 3 or 4 office assets that we want to sell, but we’re trying to basically meet those up with acquisitions. And so the market is strong for the property that we have even on the multi-tenant side property that we have in Jacksonville.

And so we’re very confident that we’ll be able to transact on selling those assets. We’re just — it’s really finding the acquisition l’g of it. So we're —as we are pursuing acquisitions, we plan on using part of that capital from selling the further down on the office side..

Our next question comes from Michael Gorman with BTIG..

John, I apologize if I missed it, but could you maybe just talk a little bit about as you continue to shift more towards the income-producing assets kind of portfolio construction strategy as you think about potential value-add assets versus in-place stable cash flows.

What's your comfort level there in terms of the balance between them and occupancy upside versus in-place occupancy?.

Yes. I mean, good question. I mean, look, given that we trade at such a low multiple, and we have such strong cash flow and we're paying a very nice dividend yield. The market -- we like finding vacancy where we can have outsized equity returns and not as concerned about having additional cash flow right off the bat.

And so that allows us to look for assets where for instance Santa Fe was a great example, where 66% occupied and a lot of low-hanging fruit. So we like those a lot where we can buy way below replacement costs in good locations and with the robust leasing activity and tenant activity, we feel like we can do some good work there.

But yes, we -- look, we are bidding on stabilized assets as well, but probably not going to be as competitive, given the capital out there chasing those sort of assets right now. I mean, you're seeing a lot of very low cap rates for very stabilized assets.

So we'd rather find something with a little bit of vacancy that doesn't fit a lot of the other capital providers..

Okay. Great. And then maybe just one on the dividend. Obviously, a nice increase coming into the report here.

And even with that, with the strong AFFO guidance, your payout ratio definitely goes down, but maybe the -- can you just talk about the strategy about how much you think that's getting recognized in the marketplace versus retaining some excess cash flow here to fund the investment pipeline? And was that increase driven by necessity or just how you were thinking about the dividend increase here versus the cash flow?.

Yes. I'll let Matt talk about that as it will help you give you some background there..

Yes, Mike, we're very focused on maximizing cash flow. So when you see us do a dividend increase, it's largely to track to 100% payout of taxable income. We're not -- we're not increasing it just to continue to increase the dividend for the sake of doing it. We're trying to be pretty efficient with retained cash flow.

In terms of the market recognition, I think as we continue to improve the payout ratio, as you noted, we're in the mid-80s now for an AFFO payout ratio, which is much more palatable for people.

I think we'll start to get more recognition for the dividend and the outsized yield that we're providing, but obviously, coming into this year, it was more elevated. So I think that's a good step forward..

Okay. Great.

And so I guess, maybe Matt, just the way that we should think about it, is it right to think that the dividend will probably track AFFO growth from this point forward? Or could we still see a little bit of a reduction in the payout ratio? Or how should we think about dividend growth going forward?.

Yes. I would say with the status quo, you should assume it attracts FFO growth. And then if we raise additional capital and have a bit more of a depreciation shield on the deployment of that additional capital, you’ll see the payout ratio come down as we continue to try to maximize cash flow..

I'm showing no further questions in queue at this time. I'd like to turn the call back to John Albright for closing remarks..

Thank you very much for attending this call, and we look forward to talking with you throughout the quarter. Thank you..

This concludes today's conference call. Thank you for participating. You may now disconnect..