Hello and welcome to the CTO Q3 2021 Earnings Call. My name is Elliot, and I will be coordinating your call today. [Operator Instructions] I will now hand over to our host John Albright, President and CEO. John, please go ahead when you ready.

Thank you, operator. Good morning, everyone, and thank you for joining us today for the CTO Realty Growth's 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 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 and our earnings release on our website at ctoreit.com. With that, I'll now turn the call back over to John.

Thanks, Matt. I'm very pleased with our strong third quarter, which we believe has set us up to have a productive fourth quarter that will give us momentum to drive significant earnings growth in 2022. Transactionally, it was the best positioned heavy quarter where we sold four single tenant properties for combined sales price of $75 million and a weighted average cap rate of 5%, generating a combined gain on 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 leased to Wells Fargo, which generated a gain of more than $17 million. Year to date, we sold 14 properties 13 of which were single tenant assets for a combined sales price of $141 million at a weighted average exit 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 quiet third quarter from an acquisition standpoint, all of our disposition activity is setting us up for a very active fourth quarter as evidenced by our increase to the bottom and top ends of our acquisition guidance. Our full year acquisitions guidance now has range with a top end of $250 million, implying 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 that we are under contract to purchase for $70 million in Raleigh, North Carolina that we disclosed last week. And we're down the road on a few other interesting opportunities in very strong markets that we're hopeful can get over the finish line before the…

Thanks, John. As of 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 markets. Our portfolio was 90% occupied a quarter end and similar to last quarter, the quarter-over-quarter change in occupancy is more of a function of the company selling 100% occupied single tenant assets and our recently announced leasing activities being in the transitional stage, and therefore the tenant is not yet occupying the leased space and any loss of existing tenants. From a top tenant perspective, Wells Fargo is no longer a top tenant following the sale of the office property in Raleigh, but Fidelity remains our largest tenant exposure at just over 8%. And live-work, which is our largest tenant at the Shops at Legacy recently went public via a SPAC 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 while North Carolina back to that list 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 will 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…

Thanks, Matt. As I said before, this is about the strong quarter that positions us executed in the fourth quarter and provides us an opportunity to deliver outside earnings growth in 2022. There's still a lot of progress to be made, but we have a very high quality growing portfolio based on some of the fastest growing markets in 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 update on our investment activity and operational successes throughout the quarter. And I want to thank all of our investors and partners for their continued support. With that, we'll open it up for questions. Operator?

[Operator Instructions] Our first question comes from Michael Gorman from BTIG. Michael, your line is now open.

John, I wonder if you could just spend - I wonder if you could just spend a minute talking about the Raleigh acquisition and the pipeline, 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, how they were sourced, and maybe just to the extent any kind of characteristics. Is it a mixed use type of asset or kind of how that positions within the portfolio?

Sure. So when we sold the Wells Fargo office buildings in Raleigh, you know, it's a little bit of, you know, mixed emotions because of the fantastic asset in a fantastic market, but given 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 to find a similar sized asset in Raleigh, even though that wasn't the main objective. It wasn't like we were really searching really hard to replace an asset in Raleigh, but it came back pre-pandemic we talked to the developer about this asset. It was - it's an asset in a JV the partnership, you know, basically at the time to sell. And we were have been actively making acquisition offers on other assets in other locations and that developers circle back with us. And we were very pleased that it was still available and we really dug in and did some due diligence. But it's just a fantastic market. It's, you know, I don't want to get too many details. That'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 and I know you talked about hoping to monetize in 2022. Just wondering when looking at the timing here is, is there an opportunity that the mitigation credits? It could be teamed up with the landfill, with the 1,600 acres, or am I thinking about that incorrectly?

No, you're thinking about it, right. So the reason we repurchased or purchased our JV interests ownership. BlackRock came into the JV, a great partner, great partnership before the property was entitled as a mitigation bank. So, because there was some uncertainty on the entitlement and so forth, their cost of capital was rightfully, fairly high because there's a little bit of speculation. And so we repurchased it as we've gotten full entitlements of the bank. We have 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, the buyers of the - of our remaining land portfolio, they realize that to for them to exercise on their plan, their operational plans for the land, they need a lot of our credit. So we're 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 part. And then as far as the other land sales we've done over the years, all 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 than we'll 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 joint venture on a better economic terms for us. So there's a good path to monetization and there's incredible amount of development activity here that's going to need those credits. And again, there's a lot more credit needs in this space than we'll have.

Okay. Great. That's helpful. And then last one for me. In your presentation, you've got a pretty impressive slide in terms of the total return performance for CTO over a couple of the different timeframes. And I'm just interested in kind of how you're 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 the track record being what it is kind of 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's - look, it surprised us when we decided to do it since the 10 years I've been here. And I think a lot of that success, given that a lot of times we didn't have great coverage from folks like yourself. We were kind of that Orphan CCOR, but no one wanted to invest in because we didn't fit into any buckets and 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 kind of project. We're all about generating cash flow that we can pass on to our shareholders. 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 and moving those into non-income producing assets and moving those into income producing properties is further going to organically grow our FFO. 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 consider that we'll sell the land JV and get those proceeds, we sell $6 million land site in downtown Daytona. We monetize mitigation bank. We sell some subsurface. You take all that money. You invest it and call it a seven cap and you do a little bit of leverage on it. You know it moves our FFO quite a bit because we're a small company. So that's great. And we always want to, you know, mimic, I guess, a little bit of the most successful company in our space. And that's that reality which has off to them for, you know, having such an exciting, you know, 25 FFO multiple or whatever. But you know, where we're positioned, you know, we're going to be positioned in states and cities that, you know, we have a lot of tailwinds. I mean, obviously, we're in Arizona, Texas, Florida. We'll be back in Raleigh. And so those are have great macro trends. I have a feeling that, you know, federal being in San Jose and Bethesda, you know, in DC area, those are a little bit more headwind. So I think the macro environment is favoring kind of our strategy and hopefully people will wake up to it. But we'll see.

Our next question comes from Rob Stevenson from Janney Montgomery Scott. Rob, your line is now open.

John, can you talk a little bit about the sales process for wells understanding it only takes one buyer? How robust is the demand for these types of office assets these days is, it seems like, at least in the public market valuation that offices where people have been avoiding like the plague. What's been your experience as you go to been marketing these assets both here and at Pine and as you think about marketing future assets on the office side?

Yes. I think just obviously we're coming out of the office. Sorry, but just to give you the experience on Wells. Wells is a little bit of a special situation in that the rent was a third of 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 was so low. And so obviously it didn't work great in our portfolio as a public company because we didn't really get credit for it. But it's an asset that if you - this was your own personal portfolio, you'd never sell it. But just we're here for public shareholders and it was holding back our earnings power. And so as we reinvest this, it's just going to do a lot more wonders for us than holding it. But to answer your question, as far as the appetite out there, there's probably more appetite than you would imagine for office. I mean, obviously, our offices, you can generically throw office. I mean, we have properties in poorer areas that again have the tailwinds, whether it's in Jacksonville or Tampa, those that offices are going to get more attraction than something in an urban setting in the Northeast that has incredible amount of carry cost and operating costs as far as TIs and LCs that - and then they're getting zero rent growth. So, in that - and basically summary, our office properties, they're are definitely capital sources that are interested in and we'll be able to move through it when we find capital sources that are interested in and, you know, we'll be able to move through it when we find good acquisitions to replace those assets.

Okay. And how are you thinking about, you know, dispositions going forward here you have the cash from the previous dispositions, you've have these non-income producing assets, which you detailed that you could sell and that some of these that you will be selling in the near-term. Are you going to wind up, you know, marketing more, you know, single tenant assets in the year end to take advantage of the 1031 markets some of these other assets in the year end, you're going to wait until you have the additional acquisition opportunities identified? How should we be thinking about that as well as your, you know, desire to raise common equity here?

Yes. So given that you know, we have the 1031 these office assets, you know, almost feels like an airport with planes circling the airport waiting to land. I mean, we have, you know, some assets teed up and ready to go, but we need to find the acquisitions that work for us. And so we're actively bidding on retail properties, multi-tenanted 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 of capital and liquidity, which is great. We're just really trying to find the acquisition opportunities that fit for us. I mean, just on a on a, you know, just as an observation on the strip center, open air center, power center, the capital has really come back to that those sectors in the last six months. And so, you know that look, that's great for our portfolio. It increases our NAV as those cap rates have come down pretty dramatically. I don't think it's just a year end 10/31 dynamic because of the properties we've been chasing are not really 10/31 assets, are a little larger. I think it's just really a recognition that retail is a lot better place to be than people had feared during COVID and so forth. And as you know, all these retail tenants have gotten a hell of a lot better during COVID, and - so there's a lot of strength there. There's a lot of store count increasing expansion. Of course, on the restaurant side, there's an incredible amount of restaurant demand for new locations, so all that's feeding into bringing capital back to the space. Unfortunately for us, we'd love it if we had the market we had about eight months ago, but the negative to that is you had a lot of sellers that weren't going to sell their assets in that weak 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 to get into too much detail, but when you look at the Raleigh acquisition, material vacancy, upcoming expirations that may not renew that you guys have to re-tenant, redevelopment opportunities or outparcel opportunities. Where's the upside going forward for you guys on this asset?

Yes, that's why we like this asset a lot. There is some out parcel development opportunity and there is some re-tenanting 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 basically better the occupancy. So there is a combination of opportunity. There is outparcel outside development opportunity and re-tenanting opportunity, but not as much a vacancy opportunity.

Okay. And then last one for me just housekeeping, Matt, the mitigation bank stuff is in a TRS. Is that true?

That's correct.

Okay. And given all the stuff that you're at the end of the day that you have, you know, at least until you sell the land JV, et cetera, are you anywhere near your TRS limits for 2021?

No, we're in good shape from that perspective. You know, the land JV and the mitigation bank and the Alpine management TRL and TRS, but they're not anywhere close to the limitation.

[Operator Instructions] Our next question comes from Craig Kucera from B. Riley Securities. Craig, your line is now open.

Matt, I wanted to talk about the guidance. You know, year-to-date, you've bought assets at about an 8.5 cap rates. You're guiding to a kind of a low 7 for the year, which would imply that the remaining assets you're buying are kind of priced, maybe between a 5.5 and 6. Is that conservatism on your part? Or are you looking at maybe higher tenant credit in which you're looking to close the rest of the year? Or is that just market based you're just seeing, you know, cap rate compression?

Yes, 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 Q1. And so the mix is going to drive traffic cap rates. But we are looking to up to the quality of the portfolio that John talked a little bit about what that mix looks like.

Yes. Craig, you know, it's really a little bit of a function of the opportunities we're seeing that we're trying to purchase. There are some vacancy opportunity where we're buying properties with lower vacancy and or higher vacancy, lower occupancy that we have a chance to really add some growth to the portfolio or additional growth. And so - and it will help our basically from a dividend coverage ratio, I think everyone, even though our dividend super strong, that will help us kind of show just as far as metrics. And so - and then another property that's really more of a total return opportunity, it has it definitely has a yield to it, current yield to it. But the low current yield, because there's a - it's a redevelopment play down the road, not for us to do, but an opportunity to really add some FAR and maybe double the FAR And so it's a - it has a great total return metric, but a lower current yield metric. So that's a little bit of 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 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've 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?

Yes. So it is terrible frustration from my standpoint, for sure. But there - there's definitely call it three groups operators looking at that large 38,000 square foot vacancy, and some of them are just - it's either fitting into their pipeline. Let's 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 it's really slotting this one in, and we're not - but we don't want to hold it for them. We want to execute now. One group, for instance, was 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, it's a little bit of incredible frustration, but I have a feeling in the first quarter, we'll have better success and visibility to leasing that up, but for a small company as us, as you know, having that leased up is actually pretty impactful. So we're totally focused on it.

No, that makes sense. And one more for me. I know that you were pretty excited when you added Superica in the food hall operator at Ashford Lane. I'm curious, has that translated yet to increased leasing activity and interest in - at Ashford Lane?

So I'll give you a little bit of background on the food hall as far as where they are just as an opportunity since you bring it up. That's 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 their inventory, if any, from China. And I'll 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 going to be summer of this year, so a couple of months ago. And so, but they're making very good progress there about 80% built out. But even on the build-out side, they're waiting for materials and so forth. But as far as leasing, as you can see in our earnings, we have an 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 high areas. And so as you can think about it, you know, the more core of Atlanta, 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 hall as much.

We have no further questions. I'll 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.