CTO Realty Growth, Inc.
Q4 2020 Earnings Call Transcript

Published: 19 Feb 2021

[Operator:]

Good day and welcome to the CTO Fourth Quarter and Full Year Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would like to turn the conference over to John Albright. Please go ahead.

[John Albright:]

Thank you, operator. Good morning, everyone, and thank you for joining us today for the CTO Realty Growth fourth quarter and year-end 2020 operating results conference call. With me is Matt Partridge, our CFO. Before we begin, I will turn it over to Matt to provide the customary disclosures regarding today's call. Matt?

[Matt Partridge:]

Thanks John. I would like to remind everyone that many of our many 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 duties to update these statements.

[John Albright:]

Thanks, Matt. As many of you are aware, CTO has a long and storied 110-year history. This past year was yet another milestone in our progression and arguably our most active year, which saw us experienced many challenges with the COVID-19 pandemic, but was also highlighted by the implementation of our diversified real estate investment strategy, a record year of acquisitions and dispositions excellent rent collections, and culminating with the company's conversion to a real estate investment trust. Our transition to a REIT has been a long and winding process. But we believe that benefits of the structure for shareholders now and in the future are numerous. With our REIT election, we've instituted a regular quarterly cash dividend that allows us to effectively pass along the income of the company to our shareholders. Additionally, our REIT status now allows us to be more appropriately compared to other companies owning and managing similar real estate investments. And as you saw with our earnings release and supplemental financial report yesterday, has served as a catalyst for improved financial reporting that we hope will drive a more comparable valuation to our new peers. As we've previously disclosed 2020 was a record year of acquisitions and dispositions and represented the first year that we've put to work our refined diversified investment strategy, emphasizing investments in states and markets that we believe are experiencing positive business trends and above average population and job growth. For the full year of 2020, we acquired four properties for $185.1 million and a weighted average cap rate of 7.8%. The acquisitions included three retail properties within entering sub-markets of Phoenix, Atlanta and Miami, as well as one office property in Tampa. The acquisitions were funded with proceeds from asset dispositions throughout 2020, with a 1031 proceeds from the company sale of assets from Alpine Income Property Trust, when Alpine did its IPO in late 2019. As part of the 2020 dispositions, we sold four assets in the fourth quarter for total disposition volume of nearly $35 million for a weighted average cap rate of 6.1%. Of the $35 million, $28.5 million was related to our retail property in Aspen, Colorado, which was sold back to the tenant under the terms of the tenants existing buyback right.

[Matt Partridge:]

Thanks, John. The company experienced excellent rent collection results during the fourth quarter, collecting an average of 99% of contractual base rent. These rent collection efforts combined with the sale of non-income producing assets and subsequent reinvestment into income producing properties, allowed the company to report total revenues of 16 million during the fourth quarter, more than 33% increase over the fourth quarter of 2019. For the full year of 2020, total revenues increased 25% to 56.4 million. The 99% collection rate for the fourth quarter represents rents that were contractually due in each respective month and includes the effects of rent deferrals agreed to prior to the rent payment date. The acceleration and collections from the third quarter of 2020 was primarily a result of the company resolving outstanding balances due from Harkins Theatres and 24 Hour Fitness, the latter of which had previously filed for bankruptcy and has since reorganized and reemerged. For January, we are excited to announce we have collected 99% of contractual base rents due and payable. In consideration of our reconversion, we will now be reporting funds from operations or FFO and adjusted funds from operations or AFFO, as it is standard in the industry. For the fourth quarter of 2020, funds from operations were 10.1 million or $2.11 per diluted share. This represents a 174% year-over-year increase from the fourth quarter of 2019. Adjusted funds from operations for the fourth quarter of 2020 were 10.6 million or $2.20 per diluted share and this represents a 210% year-over-year increase from the fourth quarter of 2019.

[John Albright:]

Thanks, Matt. 2020 was a transformative year for us as CTO and I'm so proud of our team and all that they accomplish. I want to thank all of our investors and partners for their continued support, especially for their patients during our reconversion. At this time, we'll now open it up for questions, operator?

[Operator:]

We will now begin the question-and-answer session. The first question comes from Rob Stevenson with Janney.

[Rob Stevenson:]

John, what does the acquisition pipeline look like today? And what types of assets are in there? I mean, you guys have a pretty well defined sort of sources of cash, but help us understand, the current thinking on uses of cash, at least in the first half of the year?

[John Albright:]

Sure. Yes. So as you know, Rob, we have the 28 million sitting in the bank. And so we've been on the hunt for acquisitions very actively in the last 60 days, we have found some good candidates. And I would say that all of them are multi-tenanted retail properties in areas that markets that we really like a lot. So we're pretty happy with kind of the candidates that we have, that we're undergoing due diligence right now. But it's all retail and all multi-tenanted in strong markets.

[Rob Stevenson:]

And is that I mean, the way that you guys are thinking about the business today is that, the focus, I mean, would we see, something along the lines of Carpenter or some office stuff? Or is that really as you're thinking about it these days, not really where the best opportunities lie for you?

[John Albright:]

We're actively looking at those type of mixed use opportunities, because the capital for those types of acquisitions has somewhat evaporated. And so there's actually some good opportunity in that sector. And it's really getting the right price of course. So you're having sellers that are coming off their pre-COVID valuations, but slowly getting there. So we've been actively looking at, what we think are opportunistic type of purchases, where the property might have a combination of office and retail, but more on the retail side and they may have some vacancy, kind of like how we picked up Perimeter had a lot of -- they could see opportunity and so we are seeing some good opportunities just a matter of trying to get up the right deal.

[Rob Stevenson:]

Okay. And then, the 2021 guidance, Matt, does that include the 1.8 million land sale gain in the first quarter?

[Matt Partridge:]

It does. And I would say, when you think about the guidance, obviously, there's a lot of transaction activity baked into that. And so there's some drag on redeployment assumed, as well as a fairly conservative approach on the renewals and lease assumptions.

[Rob Stevenson:]

Okay. And so the dispositions numbers include land sales, either outright or subsurface sales during the year as well?

[Matt Partridge:]

Yes. Those are purely existing income assets.

[Rob Stevenson:]

Okay. And is there anything else in the 2021 guidance that would be considered sort of non-core? Are you guys anticipating in that additional subsurface sales or additional land sales out of the JV, et cetera?

[Matt Partridge:]

From a subsurface, sales, I'll let John talk about it. I think on the land JV side, we still got some heavy lifting to do to get to where we're in the money on the land JV, but I'll let John talk about the subsurface expectations.

[John Albright:]

Yes. So Rob, we expect to have more subsurface activity this year. We're having some good dialogue with people that on the surface land and we own the minerals and it's actually through a new mapping service that we came about that can actually find out how who owns the properties in a more efficient way than we had in the past. So having 450,000 acres around bunch of counties in Florida and we're able to find farms and ranches that have 2000, 3000 acres or something like that. So we're -- we think there'll be more activity definitely in the subsurface side this year. And then, again, on the land side and land JV, we're having good progress on traditional land sales, but it's just going to take two years or so until we start seeing economics coming to CTO.

[Rob Stevenson:]

Okay, So is there anything other than the 1.8 that you didn't have gained in the first quarter that's implied in that 3.80 to 4.10 guidance number?

[Matt Partridge:]

There is not.

[Rob Stevenson:]

Okay. And then, I guess the last one for me, Matt, just from sort of figure everything out, what was the recurring FFO per share in the fourth quarter sort of stripping out the land sale and all the other noise? I mean, from the sort of recurring stuff, whether or not you want to call recurring or core? How should we be thinking about sort of the build throughout, as we're looking is that, 3.80 to 4.10, obviously, there's 1.8 million of land sales in there. But what are we basing the fourth quarter sort of run rate from a recurring basis off of?

[Matt Partridge:]

Yes. So existing NOI, today is a little over 35 million on the income portfolio. With mitigation credits and some other extraneous stuff that runs through the P&L, there'll be some noise with that will get adjusted out in AFFO, which is why I would say focus on AFFO number, because of the way some of the non-core assets get treated on certain transactions. But a little over 35 million to existing NOI number, but obviously that's going to move around based on what assets are sold and then when proceeds are redeployed.

[Operator:]

The next question comes from Craig Kucera with B. Riley Securities.

[Craig Kucera:]

I want to start out talking about your expectations for 2021 baked into the guidance as well, the cap rate expectations are quite a bit different than what you either bought last year or sold. And I guess I'm curious, is that just a function of what you're seeing in the market? Are you just being maybe a little bit more conservative on, where you're buying assets and selling assets in 2021?

[John Albright:]

Yes. So I would say it's a little bit of combination on the acquisition side, remember, it's -- we're trying to give you guidance on the initial cap rate that we're buying, but that may imply that property has some vacancy. So the total return obviously is going to be higher than that, but just the initial cash cap rate. We're being kind of conservative there in case we have some properties that have some lease up opportunity. And then on the disposition side, just we are trying to be conservative there, hopefully we do better. But just want to lay that out there.

[Craig Kucera:]

Okay, fair enough. Certainly to the impairment on the land JV you took, was that at any particular parcel in Daytona Beach? Or was that sort of across the market any color there that'd be great.

[John Albright:]

Yes. So we bought, I would call for lack of better term, a spike piece, that a developer that's near our assemblage that we're talking with apartment developers and that was really kind of a blocking tactic, if you will. And so we're going to go ahead and sell that asset. And so there's a small asset, small impairment.

[Matt Partridge:]

Yes. And then, on the actual land, JV, Craig, part of that is just due to timing related to expectations of sales. So we're accruing a preferred return on the land JV and so the farther out sales go, the more that preferred return accrues and the less we get close to our basis that's on the balance sheet. So that was the driver of the impairment on the land JV.

[Craig Kucera:]

Okay, I appreciate that. I want to talk about leverage, you closed the fourth quarter at about 35% net debt, you're sitting on a lot of restricted cash. And it looks like you're match funding acquisitions in 2021, understanding that there's probably going to be a timing difference. But I guess, just going forward, should we consider leverage to be relatively constant or any movement there?

[Matt Partridge:]

Yes. I think from a leverage standpoint, will naturally delever over time as we unlock the equity that's in subsurface rights, the land joint venture, the land that John talks about just a minute ago. So naturally, delever as we unlock that equity and redeployed in income producing assets, but from a total debt outstanding perspective, I think you can expect that to stay relatively constant, it'll move around a little bit based on timing of acquisitions and dispositions. But I don't at this point, we don't have any intention to materially move leverage up.

[Craig Kucera:]

Okay, got it. In your opening comments, John, you kind of went through on some renewals, some other leasing activity? I think, entering '21, you have about 5% of your rent expiring this year. Can you talk about sort of where you are specifically in regards to sort of those discussions? And are there any known move outs in 2021?

[John Albright:]

Yes, there's only really one that's, any kind of size, there's a tenant at 245, Riverside, which is kind of a full floor type of size, tenant, 20,000 square feet or so. But, we're having actually decent tenant activity on the office side, which would be surprising, I think, for all of us, given what's going on with COVID. So, that property has held up over the years into the high 90s because it's just somewhat of a boutique asset that's not downtown on the river. So that would be the only thing that's a kind of a known move out. On Perimeter, there's tenants that we're trying to get out, because we can do better on the lease rate. So, there, hopefully, there will be some moves out in Perimeter because we have, better kind of paying tenants to backfill it.

[Craig Kucera:]

Got it. And in regard to your, the debt side of things, I think you've got a mortgage coming due here in a couple months on the Wells Fargo property in Raleigh. It's kind of what's the expectation there is that just to refinance that and kind of what are we looking at as far as financing options there?

[Matt Partridge:]

Yes. So we're going to look to term out a portion of the revolver currently, which will free up some capacity to refinance that mortgage on to the revolver.

[Craig Kucera:]

Okay. And you mentioned there was about $1 million on deferred rent impact to AFFO in 2020. Kind of what's the expectation for recovering that in 2021?

[Matt Partridge:]

Yes. So 2021 we're looking at about 400,000 for the full year and it's pretty smooth throughout the year. It's not too lumpy and the deferral collections will go out through 2023. So we've got a little bit of a longer timeline on the recollection side of things, but that's the impact for 2021.

[Operator:]

This concludes our Q&A session. I would like to turn the conference back over to John Albright for any closing remarks.

[John Albright:]

Thank you for attending the earnings call and look forward to talking to you this quarter.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.