Good day, and welcome to the CTO Realty Growth Third Quarter 2023 Operating Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chief Financial Officer, Matt Partridge. Please go ahead.

Good morning, everyone. Thank you for joining us today for CTO Realty Growth's third quarter 2023 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, quarterly supplemental and most recent investor presentation on our website at ctoreit.com. With that, I'll now hand the call over to John.

Thanks, Matt, and good morning, everyone. I'm pleased to announce we had a strong quarter of operational execution that led us to meaningfully increase our full year FFO and AFFO guidance. The strength in our numbers were driven by better-than-forecasted tenant retention for lease renewals, accelerated new tenant rent commencements, outsized percentage rent from food and beverage and theater operators and improved expense controls, where we have direct cost exposure. All of this strength was partially offset by a credit loss associated with our WeWork location, where they have stopped making payments as of September. And those payments were set to expire in April of 2024. Leasing activity during the quarter was strong. The team signed 21 leases totaling more than 132,000 square feet, including approximately 26,000 square feet of previously acquired vacancy. This is the second-highest volume of square feet leased in one quarter in our company's history. The activity was relatively widespread and included the signing of a replacement lease for the food hall space at Ashford Lane in Atlanta. The new lease is with Politan Row, a well-known successful operator of food halls, who has a multiple location presence in Atlanta. While the rent is lower than the previous food hall lease, we are getting a more established operator with a better credit profile. And we did not have to make any additional capital investments. They are scheduled to open before the end of the year. For the quarter, our comparable rent spreads were essentially flat, down 0.4%, largely due to the lower rent from the food hall space. When removing the impact of this specific lease, we grew comparable rents 11.4%, most notably benefiting from the solid growth in rents at Beaver Creek Crossings outside of Raleigh and The Collection at Forsyth near Atlanta. Year-to-date, we've…

Thanks, John. Starting with an overview of our portfolio, we ended the quarter with 23 properties totaling 4.1 million square feet of leasable space located in nine states and 14 markets. At quarter-end, portfolio occupancy was 90% and portfolio leased occupancy was 93%. As John mentioned, our signed but not open or SNO pipeline continues to grow, representing nearly $4 million of incremental future base rent. Within our SNO pipeline, more than half of future rents are related to space that was vacant at the time of acquisition. So the benefit from these new leases is not only the addition of base rent but also the reimbursement income that comes from tenants paying their pro rata share of common area maintenance, insurance and real estate taxes that the company has previously absorbed as non-reimbursable operating expenses. Earnings for the third quarter of 2023 were better than forecasted with core FFO per share results accelerating for the fourth quarter in a row. Core FFO for the third quarter of 2023 was $0.47 per share, which was unchanged when compared to the third quarter of 2022. And AFFO decreased 2% to $0.48 per share when compared to the same period of 2022. These results are especially notable given the year-over-year impact of higher interest rates and some of the tenant credit issues impacting our 2023 results that we've discussed on prior calls. Breaking down the quarterly results further, total revenues increased by over 23% to $28 million. This increase is largely driven by the full period impact of our Q4 2022 and year-to-date 2023 acquisitions such as West Broad Village, The Collection at Forsyth, Plaza at Rockwall and The Exchange at Gwinnett Phase 2 as well as the positive comparable same-property net operating income increases at Exchange at Gwinnett Phase 1, Westcliff…

Thank you. [Operator Instructions] Our first question comes from Rob Stevenson with Janney Montgomery Scott. Your line is open.

Good morning guys. Matt, how much was the prior rents on the food hall and versus the new? And is that going to be open for any meaningful part of fourth quarter? Or for modeling purposes, should we just assume the contribution basically starts in the first quarter?

Morning, Rob. The rent is about 25% lower on the food hall replacement tenant. The food hall is paying 51% and then the new tenant is paying obviously a little bit less. I would assume for modeling purposes, they don’t rent commence and start paying rent until January 1. We’re hopeful that they’ll get opened in December. But it’s a fluid process, obviously.

Okay. And then similarly, did WeWork make its September payment? Or was August their last payment? And how much should we be thinking about that as a month?

August was their last payment. It’s about $240,000 a month. So we lost $240,000 in – for September. And then obviously, we’re losing that each month in Q4 and Q1 of next year.

Okay. So you’ve got – the food hall wasn’t contributing basically anything in the third quarter. You did get two of the three WeWork payments. Can you sort of – what are the other sort of adjustments that we need to be thinking about? So if I walk through the fourth quarter core FFO guidance, you’re $1.28 year-to-date. The low end of your guidance is $1.58. So at the low end, you’re $0.30, if I’m doing my math correctly, and at the high end, $0.34 for the fourth quarter versus a $0.47. What’s the other adjustments that we need to be thinking about there on a significant basis?

Yes. There’s a decent amount of percentage rent in the third quarter that won’t be in the fourth quarter in part because one of the tenants who pay a significant amount of percentage rent, they have a fiscal year end in August. And so the sort of buildup resets in September. And then obviously, we’re losing WeWork. We’ve had a few other tenants who didn’t renew. And so they’re going to be coming out of cash flow going forward. We sold the Westcliff property. And so obviously, that’s sitting in restricted cash until we close out the reverse 1031 that, that goes into. So there’s a bunch of different items. And then to my prepared comments, I would say we are being a little bit conservative. Because some of the rent start dates, we’ll see if the tenants get there. And then with the state of the world today, we’re not sure if we’re going to lose anybody else, but – so we’re being cautious with the fourth quarter. So, I would say there is upside to our fourth quarter implied guidance.

Okay. That’s helpful. And then, John, what do you plan to do with the land that you bought at Forsyth? And is that entitled?

Yes. So the land has a very flexible commercial zoning, not residential, but commercial. It was part of the original plan when Cousins marketplace was developing us 20-some-odd years ago. And when we bought Collection, it was already under contract with a spa operator, who was going to build like a destination spa sort of thing. And we just kept touch base with Cousins. And when they fell out of contract, we jumped in. There’s a dynamic amount of interest in that parcel – of that size parcel from single users. But it could be multiple users. So we wanted to, in effect, control our adjacent land. And it’s going to be a benefit to our property to make sure that the use is complementary to Collection. So we’re pretty excited about the opportunity there.

And the timeframe for that, is that a few years out? How soon would you be thinking that you’d wind up having some sort of decision as to what’s going to go in there and start moving dirt around?

So ideally, we would ground lease it to one or two users. But as you know, we don’t like to spend a lot of development money and – but we’re already having some dialogue with tenants. And a lot of them want to purchase the land rather than doing a lease structure. So we’re working through that. But for modeling purposes, it takes a long time and so forth. I would say kind of end of fourth quarter next year would be kind of – we’d probably have something figured out there, for sure.

Okay. That’s helpful. And then last one for me. John, how are you and the Board thinking about capital deployment and the sort of trade-off between making a $15 million first mortgage during the quarter and buying back stock at $15, $16? How are you sort of balancing that and thinking about that going forward in terms of capital uses?

Yes. So I mean, obviously, we find the stock very – and the preferred very attractive here. So we certainly discuss that every quarter. But we are hopeful to find some deployment and some opportunities. And where we think that the pricing right now isn’t as favorable as you might expect, given the macroeconomic backdrop, and so we’re waiting to kind of find that good opportunity to reinvest in investments. But we’re being patient. So we’re – so at the same time, we’ll take advantage of depressed stock prices, but waiting for more of an investment opportunity.

Okay. I guess, as a follow-up to that, Matt, are you guys getting any benefit from the preferred in terms of credit pricing? Or is it basically just being treated as debt?

It is being treated as equity from a leverage ratio perspective. But obviously, the fixed coupon payment gets picked up in our fixed charge coverage ratio. So it depends on which covenant we’re talking about within the facility agreement on how it gets treated.

Okay. So there is some sort of trade-off by buying that back versus equity – versus the common equity, I should say?

That’s correct, from a leverage ratio perspective, yes.

Okay. All right, guys, thanks. I appreciate the time. Have a great weekend.

Thanks, Rob.

Thanks, you too.

One moment for our next question. Our next question comes from Matthew Erdner with JonesTrading. Your line is open.

Hey, guys. Good morning. And thanks for taking the question. What kind of opportunities are you seeing the most of right now? Is it land financing or just physical properties themselves? And I guess, what are you looking at the hardest at the moment?

Yes. I mean, we’re not really seeing a lot of good opportunities right now. It’s a kind of a quiet market. People that want to sell assets don’t think that this is a great time to be selling an asset. And so we’re waiting for some of the sellers that need to sell an asset, whether they have debt maturities or they have a fund life issue or something like that. So the market is fairly quiet right now. We’re not looking to buy additional land. The 10 acres next to Collection was unique in expanding the campus and controlling the site. But on the financing side, we’re not really searching out financing opportunities. If they come to us, we’ll certainly consider them. And it would be more – if we do a financing deal, we’ll probably recycle out of some of our existing investments, and so just keep the size neutral. But yes, we expect probably first quarter, there will be better opportunities out there on the investment side, and so we’re being patient.

Got you. Thanks. And then in terms of tenant recycling and ones that didn’t renew, could you talk about the leasing activity and what kind of tenants are looking to go into these properties?

Yes. I mean, we’re having still good leasing activity, especially on our newer acquisitions at West Broad and Collection and Ashford Lane. And it’s really a little bit trying to kind of get the right mix of tenants on some of these properties as we’ve done a lot of the heavy lease-up. And so for instance, soft goods wants to be next to soft goods. And so tenants basically don’t want to commit until the other tenant commits. And so we’re playing that dance a little bit. But the activity has been very good. And then Legacy, we’ve seen an uptick of activity on the WeWork space, which has been great to see. We were working with a fitness tenant for about six months, who wanted to take all the space, and it would have been a fantastic use for the property. And it just was the economics of the deal, given how much it would cost to do the build-out. We thought it just didn’t really make sense. So we terminated those conversations. And now we’ve picked up conversations on regular way tenants. And that activity has been very, very active in the last 45 days. So we’re hopeful there.

That’s helpful. Thank you, guys.

Our next question comes from R.J. Milligan with Raymond James. Your line is open.

Hey, good morning, guys. So in the quarter for the two properties that were sold, a pretty low cap rate, especially given the interest rate environment. I’m just curious when those deals were struck and who were the buyers?

So on – I’ll start with General Dynamics, the office building. That was more of a syndicator. And that’s where we’re seeing a lot of a office buyer interest is from groups that are syndicating out equity and looking for attractive below replacement cost properties with good yield and good credit. On Westcliff, the low cap rate is a little bit misdirected in that there’s a lot of leases we did recently. But those leases don’t come online until next year. So the cap rate does go up next year. But that was a value-add group that was local to that asset.

Got you. Thanks. And then can you talk about the decision to buy back some preferreds in the quarter versus buying back stock and then the thought process about either buying back preferreds or stock going forward?

Yes. I mean, we have set rates or set prices on both, where we find those to be attractive on the preferred, buying at the discount to liquidation preference. We find that very, very attractive and a meaningful pickup for our NAV for our shareholders. So it’s a way to buy your – somewhat your liabilities at a big discount. And then the stock, obviously, where we’re trading at high 9s dividend yield and way below replacement, our NAV, we obviously have a set price there that we will be very active in the buyback program if the stock continues to be at certain prices.

And R.J., just to expand on John’s comments, these are facilitated through 10b5-1 plans. So it’s not like we’re resetting the price all the time. It’s established at a point in time and then it stays in place going forward under the program.

Got you. And then just one more question on sort of the broader environment, and you guys talked about this in your comments about the time to get to rent commencement. And I’m just curious what you’re seeing overall in the sector. Is it taking longer? Are you – and I think what we’ve been hearing from the peers is that the time from signing a lease to getting open is taking longer. And I’m just curious what’s driving that.

Yes. That’s been the case for some time now. So I don’t think that’s a new element. I would say that the construction costs have not come down. We’re working with a prospective tenant right now, obviously, several prospective tenants, but one that I had a meeting with yesterday, where we brought in a contractor to discuss construction costs. And the build-out of some of the space is 2x what it was five years ago. And the costs are not coming down as much as you would think with activity kind of slowing. So you’re still dealing with elevated construction costs, TI costs. And the timing, contractors are still busy. So timing is if you go from a discussion with the tenant right now on signing a lease, you’re probably not going to be open for a year. So it’s frustrating, but it’s something we just have to work through.

Okay. Thanks. That’s it for me.

Thank you. That concludes the question-and-answer session. Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.