Thank you for standing by, and welcome to the CTO Realty Growth Fourth Quarter and Year-End 2022 Operating Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s conference call is being recorded. I will now turn the conference to your host, Mr. Matt Partridge, Chief Financial Officer. Please begin.

Good morning, everyone, and thank you for joining us today for the CTO Realty Growth fourth quarter and year-end 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 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, supplemental and most recent investor presentation on our website at ctoreit.com. With that, I’ll now turn the call over to John.

Thanks, Matt, and good morning, everyone. Our activity during the fourth quarter capped off another record year, which resulted in full year core FFO per share growth of 35% and full year AFFO per share growth of 26%. The fourth quarter was especially noteworthy because it was our largest quarter ever in terms of investment volume and included the first follow-on equity offering in the history of the company, while 2022 was very productive across all aspects of our business, and I'll highlight a few of the more notable accomplishments. Excluding the fourth quarter acquisitions, we signed new leases, renewals and extensions on 8% of the total portfolio square feet at an average cash rent of more than $31 per square foot. We grew same-property NOI by 13%. Total investments were a record $375 million, meaningfully derisk our balance sheet by match funding our fourth quarter acquisition activity, and extending all of our debt maturities out to $2.25 or beyond, grew our common cash dividend by 12% year-over-year and we delivered 2022 total shareholder return in the top quartile of the entire REIT industry, including outpacing most of our retail-focused peers. It was a great year, and our team's execution has us well-positioned for long-term success. Notwithstanding, some near-term tenant challenges that we'll discuss as part of our 2023 guidance, we believe we've built our company and the underlying portfolio for long-term growth and value creation as we've invested in properties with very attractive demographics within markets that are projected to have some of the highest population and job growth in the country. During the fourth quarter, we completed three transactions for a quarterly record of nearly $195 million at a weighted average going-in cash cap rate of 8%. All three investments have meaningful upside through a combination of leasing…

Thanks John. Transaction activity John highlighted continues our portfolio multiyear transition into larger grocery, lifestyle, traditional retail, and mixed-use assets. As of the end of 2022, 90% of our portfolio's annualized cash-based rents are now coming from retail and mixed-use properties, up from just over 75% this time last year, with the majority of those rents coming from grocery-anchored lifestyle and power center assets. Furthermore, this transaction activity has increased the total square feet of our portfolio by 37% compared to year-end 2021 and from a tenant makeup perspective, our top tenant list now includes well-known retailers such as Whole Foods, Publix, Darden Restaurants, Best Buy, T.J. Maxx, HomeGoods, AMC, Ross Dress for Less, Hobby Lobby, Burlington, Academy Sports, and REI. Occupancy at year-end 2022 was 90.2% and our leased occupancy was 92.9%. Our operational metrics for the year were very strong with same-property NOI growth of 13%, comparable leasing spreads increasing by 17%, and overall portfolio occupancy growth of 170 basis points. Most notably, comparable new leases signed during the year increased 58% when compared to the previous comparable cash-based rent and comparable renewals, options, and extensions signed during the year resulted in a 5.5% increase when compared to the expiring comparable cash-based rent. Comparable leasing spreads exclude new leases that were signed for space that has been vacant since our acquisition. For the quarter, same-property NOI decreased by 6.9%, driven primarily by the increased bad debt expense related to the hall at Ashford Lane, one-time operational and CAM-related items at Crossroads Towne Center and the Shops at Legacy, and lower year-over-year percentage rent from the Daytona Beach Restaurants, which is largely due to the more active hurricane season. Fourth quarter 2022 core FFO was $0.34 per share, representing a 10.5% decrease compared to the fourth quarter of 2021…

Thank you. [Operator Instructions] Our first question comes from Gaurav Mehta of EF Hutton Group. Your line is now open.

Yes. Thanks. Good morning. I wanted to ask you on your transaction guidance for 2023. Can you maybe provide some color on the expected timing of acquisition and dispositions?

Hey, Gaurav. The guidance assumes that most of the acquisitions will be back-end weighted. We have some small stuff here towards the end of the first quarter, beginning of the second quarter, but most of it's going to be probably late or early fourth

Okay. And maybe on the transaction volume on the disposition side, can you provide some color on the range of $5 million to $75 million? What are you guys looking for to get on the lower end and upper end of that range?

Given the current state of the capital markets, it's causing a little bit of volatility in the transaction side of things. So there's a fairly wide bid-ask spread. And so the range reflects that. So we have some certainty on some small single-tenant disposition that could materialize here in the next few months, but then the wider end of the range is really related to opportunistic dispositions if the market firms up.

Okay. Thank you.

Thank you. One moment, please. Our next question comes from the line of Rob Stevenson of Janney. Your line is open.

Good morning, guys. Do you have the Regal at Beaver Creek back now or you have to wait until Regal’s bankruptcy during the summer or whatever that happens to get it?

Yes. So Rob, so it's kind of interesting on the whole Regal because of a little bit of a surprise to us because they did not reject the lease originally. And then as you know, judge basically told them to go reject a bunch of leases. And so they reject their leases, but they had paid us rent like literally a week or two weeks before they rejected it. So clearly, they are intending to keep the lease. So now it might be surprising to you. It's certainly surprising to me, but we've had more than 10 theater operators come out of the woodwork wanting that theater plus some other interest from other users, actually larger format than the 45,000 square feet we have there. So it's interesting and great to see the activity. But the answer to your question is we are talking to them about a short-term deal because they want to keep the lights on there, while they figure out their bankruptcy and maybe come back to us with something more productive. So we're in negotiations with them. So it's not a clear cut right now.

Okay. And I guess the question then winds up being, from your standpoint, I mean, thinking about the theater business and being in that longer-term versus I assume if it's going to be apartments that that's something that you would sell-off that you wouldn't partner with somebody did a merger developer to develop that for you to own longer term?

That's -- so there's three options here. Obviously, keep it as a theater and obviously, there's tons of theater interest, but probably doesn't do a lot for a residual cap rate on that property for us. The second is a different retail user, which has better credit, and we have those looking at the property a couple of different ones. And then, of course, the apartments. So the apartments, obviously, is definitely an easy one. With regards to whether we sell or JV at – we might be more open to JV net because, obviously, I think that would help quite a bit on the valuation of the property, having that mixed-use component with the residential side. But obviously, we would bring in a really strong operator to do that with.

Okay. And then, Matt, what is in your -- given the acquisition and disposition volumes, what's in your 2023 guidance in terms -- assumptions in terms of debt levels and interest expense at this point given the new swap?

Yeah. We're generally assuming we stay leverage neutral to where we are today with the transaction guidance being assumed to be weighted towards the back-end of the year and it's a pretty wide range, just given the uncertainty of the transaction market and the broader economic environment. That's what's causing the wide range on the share count as well. So there's a lot of timing factors in there, but generally leverage neutral from a debt and equity perspective.

Okay. And then one last one for me, I mean what's the plan at this point for the WeWork space at Legacy?

So we are talking with several different users; one, which we think would be very complementary to the property and be a much better use than WeWork style. So we're in negotiations or discussions with that group. So we've probably got at least 30 days to figure out, which route we're going to go.

Okay. All right. Thanks guys. Appreciate the time.

Thank you.

Thank you. One moment, please. Our next question comes from the line of Floris van Dijkum of Compass Point. Your line is open.

Thanks. Hi, good morning guys.

Good morning, Floris.

Hey. I wanted to -- maybe if you guys could comment a little bit more on your structured finance part of the business. Obviously, it creates some -- it creates a nice yield, but it creates lumpiness I believe you lost one of your loans prepaid, which causes some earnings disruption. But maybe talk about the stuff that you've done, for example, the exchange, I know that you -- will these loans lead into future acquisitions, I guess, is what I'm trying to get at?

In some cases, they will, for sure. But in other cases, we're looking at deals where it's a short-term bridge loan. It's obviously very nice risk-adjusted yield. And I think I saw something where John Gray said this week that they're leaning in big in the lending business, because there's -- you're picking up meaningful more yield with less risk. So we're seeing the same opportunities, but there are other loan opportunities we're looking at where we'd actually like to own the project and gives us that optionality. So you'll probably see us be more active on that side, but I don't think it's -- we're going to grow the structured finance portfolio a lot more than what the balance was before we got paid down. So it's a great business in this kind of environment where developers are trying to hang on and/or do acquisitions, but the financing markets still locked up and frozen. So we'll continue to monitor those.

And could you guys maybe comment on your -- I believe you internalized the property management in Atlanta what kind of impact that has financially and also strategically? And could we expect more of the -- of that internalization of the property management part in other markets.

Yeah. It certainly is, and given our largest market, makes a lot of sense, and we're well on our way in doing that sort of process right now, with regards to identifying personnel and so forth. But I'll basically let Matt comment on what kind of impact that has on the timing

Yes Floris. It's going to be a process throughout the year. So I would expect the full internalization of property management for Atlanta to happen more in the back half of the year. So the benefit, which we think could be between $0.01 to $ 0.015 of earnings, when fully stabilized it will really come through in 2024.

Great. And maybe one last one for me, if I may, if you could talk a little bit about -- well, obviously, the guidance here was – is a little bit lower than expectations. But maybe would it be helpful to talk about sort of where you expect NOI for the current portfolio to be in a couple of years' time once it's fully stabilized? Because one of the issues that investors always have to try to assess with CTO, is that it's a – you bought some assets that need a little bit of work and where you can create some value – there's obviously a little bit more headwinds in 2023 partly because of the tenants issues. But also partly because you're repositioning assets it might be helpful if you guys could share some of your – where you think stabilized NOI could trend to in two to three years' time?

Yeah. I'll give more of the color commentary, let Matt either Dodge or answer the future number. Basically, as we're just talking about Regal theater with them rejecting that lease and maybe doing a short-term lease that is less than what they had, the – probably, the highest and best value total return for the company and our shareholders would be to do an apartment deal, but that would mean bringing – having income come off the property for a couple of years until that's built. And so in the – we're always trying to measure the right balance given public company dynamics and growing FFO, and that sort of thing with regards to what's the total best total return. But – we are seeing a lot – we are seeing more traction in getting tenants open. Superica just opened at Ashford-Lane. It looks like Grana will be open in May. And – and also Hawkers will be done probably in April. So those are tenants that have taken forever to, to kind of get going and get open. But now we're seeing the fruits of that, which will obviously be more productive for our income next year. And we're – we just signed a lease actually yesterday or day before, at West Broad where the tenant will probably not be operational until summer of 2024. So the lead times on these tenants are a little frustrating, but the – obviously, what they bear fruit at the end of the day is going to be pretty terrific. So I'll let Matt talk about the consequences.

Yeah. Financially, I'm not going to give a hard number on NOI, but what I will say is that our expectation for 2024 is that we're going to be above where we were for 2022 from an FFO and AFFO perspective once we work through this near-term disruption. But really, at the end of 2024, going into 2025, we should continue to see pretty strong growth. So same-store NOI growth this year was 13% as we continue to lease up these assets where we have meaningful vacancy, I think it can be in the high single digits, low double digits for the next few years.

Thanks guys.

Thanks, Floris.

Thank you. One moment, please. Our next question comes from the line of Matthew Erdner. Your line is open.

Hey, guys. How is it going? Could you talk a little more about The Exchange at Gwinnett and just the construction process and how that's tracking in terms of supply and getting those things built?

Yes. So the developer who we bought the first phase of The Exchange at Gwinnett from late in 2021 is making good progress. We do expect that loan to convert into the acquisition of Phase 2. So that will probably transact or come on board here over the next few months, and that's one of the smaller assets or set of assets that I was referring to at the beginning of the questions in terms of the smaller stuff that will close in the first half of this year.

Awesome. That's helpful. And then in terms of other construction loans or preferred equity deals that you guys are looking at, where are you guys seeing those most?

We're seeing them on situations where the debt coming due and the tenancy is a little bit more volatile, whether the properties have a legal type situation where lenders won't touch it, but there's a basis where if the tenant blows out, you're still very happy to own the property at that sort of basis. So we're seeing those sort of opportunities in new acquisitions where somebody wants to transact pretty fast on an acquisition and can't wait on kind of finding a lender and going through that process, The more of a bridge loan acquisition sourcing kind of those two type of opportunities right now.

Awesome. Thank you guys.

Thank you.

One moment, please. Our next question comes from the line of Michael Gorman of BTIG. Again, Michael Gorman, your line is open.

Yes. Thanks. Good morning. John, just another question on kind of the current market environment, I know we've talked about a lot so far on the call, but maybe can you just contextualize and apologies if I missed it, but when you think about the potential investment activity for 2023, and I know it's maybe back-end weighted, how much of that is going to be kind of potentially atypical structured deals, unusual transactions, whether it's an assemblage like you did in the fourth quarter, or just how are you thinking about the weighting between maybe a traditional long-term hold asset like some of the centers you recently acquired versus maybe some of the more non-traditional investments?

Yes. It's definitely going to be primarily the long-term hold sort of like the type of acquisitions we made at the end of the year. What we're seeing in the market right now is not a lot of activity. There's a reluctance for sellers to bring properties to market without clear indications of where the pricing is going to be. I think they don't want to have something that's kind of shop worn. These are type -- there's a fairly large shadow inventory of projects that we would like to participate in and try and buy that are not on the market, had been on the market before years pandemic -- before the pandemic and the holders most likely need to sell. So, they're trying to kind of pick their spots. So, right now, it's pretty quiet. We expect, as Matt alluded to, to be more active later in the year, where we hope that there'll be some more activity for sure. I think the talk in the market on other product types is that the debt situation, obviously, with interest rates rising, is this going to cause more and more friction, which will probably show a lot more activity by the summer. And so that's -- I would expect by summer and back half of the year, there will be some decent opportunities. But that's where -- look, that's where we want to focus is on the larger projects in terrific markets that we're going to do well over time.

Okay, great. That's helpful. And then maybe just as you think about not only the acquisition side or the investment side, but also maybe the disposition side. Understanding you're always targeting the highest and best return for shareholders. As you think about it with a portfolio that's still on the smaller side and growing, how do you balance out more stable acquisitions or even disposing of single-tenant assets for a portfolio that's more weighted towards, I think, that kind of value creation component in a market that's kind of choppy like we're expecting in 2023. How do you strike that balance, just given as you talked about before, kind of the demands of a public company environment?

Yes. I mean I think a lot of our investors understand the value creation side of it and taking advantage of the opportunities. I think for instance, The Collection and being able to buy that asset on 58 acres at $172 per square foot, way below where you can build it and the activity we're seeing there is really just kind of tells us that this was a terrific acquisition. Those are the type of deals we want to make more of where whether we're buying some vacancy or we're buying where you might have some turbulence with regards to a tenant in the future, but there's a solution to it. That's kind of where we want to really grab some value and opportunity. So, on the disposition side, really, we're going to hopefully find a larger-type acquisition where that would allow us to accelerate some of the smaller projects that we have on the disposition side, whether it's in Santa Fe and in West Cliff, those sorts of things and then have more of these dominant centers in terrific locations at kind of where the focus is.

Okay, great. Thanks for the time guys.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to John Albright for any closing remarks.

Thank you very much for attending the call and look forward to talking with you post the call.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.