CTO Realty Growth, Inc. (CTO) Q1 2026 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the CTO Realty Growth Q1 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jenna McKinney, Director of Finance. Please go ahead.

Good morning, everyone, and thank you for joining us today for the CTO Realty Growth First Quarter 2026 Operating Results Conference Call. Participating on the call this morning are John Albright, President and Chief Executive Officer; Philip Mays, Chief Financial Officer; and other members of the executive team that will be available to answer questions during the call. I would like to remind everyone that many of our comments today are considered forward-looking statements under federal securities laws. 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 discussed 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 will turn the call over to John.

Thanks, Jenna, and good morning, everyone. We are pleased to report a strong quarter to start the year, highlighted by a robust leasing and strong same-store NOI growth as well as the $81.6 million acquisition of a high-quality shopping center in Texas. Our strategic focus on shopping centers located along growth corridors primarily in the Southeast and Southwest markets of the United States, along with the proactive asset management and leasing continues to produce strong results. Starting with retail leasing. During the quarter, we executed leases, renewals and extensions totaling 153,000 square feet, including 146,000 square feet of comparable leases at an average cash rent increase of 14%. Our leasing activity for the quarter was spread across our portfolio, but particularly positive at [indiscernible] Crossing in Orlando, where we signed a lease with Williams Sonoma to fill the former Mattress Firm space. And just after quarter end, we signed a lease with Pottery Barn Kids to fill a space that had been vacant since we acquired the property. Combined, this activity has increased [indiscernible] Crossing to 97% leased and improves the quality of the tenant roster and value of the asset. Further, our only shopping center with leased occupancy below 90% is now Carolina Pavilion at 83%, and we are in active negotiations with tenants for all the remaining vacancy. We look forward to providing announcements of this leasing activity at this shopping center in the future. We are also making strong progress with the 6 outparcel opportunities we discussed on our last call. During the quarter, we signed a lease with Swig for a drive-through customized beverage store at Marketplace at Seminole Towne Center located in Orlando. And just after quarter end, we signed a lease with Cooper's Hawk at Ashley Park located in Atlanta market. In addition, we have executed LOIs or in active lease negotiations for the remaining 4 outparcels. We continue to expect these 6 outparcels to generate low double-digit unlevered yield on approximately $30 million of investment. We anticipate that this $30 million will primarily be deployed and begin contributing to earnings in 2027 with the full benefit expected to be recognized in 2028. We also look forward to providing additional announcements related to this initiative in the coming quarters. Reflecting our leasing progress at quarter end, our portfolio was 95.4% leased and our Signed-Not-Open pipeline totaled $6.2 million of annual cash base rent, representing approximately 5.5% of in-place annual cash base rent. We believe this pipeline of new lease revenue will provide a meaningful earnings tailwind beginning as we move through 2026 and into 2027. Further, leasing activity completed over the prior year for which tenants have commenced paying rent is already beginning to benefit NOI. For the quarter, same-property NOI for shopping centers increased 6.8% compared to the comparable prior year period. Excluding the benefit of certain nonrecurring items, same-property NOI for shopping centers grew at a healthy 4.2%. Moving to investment activity. During the quarter, we announced an acquisition of Palms Crossing, a 399,000 square foot open-air center located in McAllen, Texas for $81.6 million. Palms Crossing is anchored by Best Buy, Hobby Lobby, Burlington Coat Factory, Barnes & Noble and Nike and is currently 98% leased and benefits from strong cross-border shopping. This property has also provides the opportunity to develop 2 additional outparcels beyond the 6 discussed earlier. With this acquisition, Texas is now our third largest state by ABR and combined contribution from Georgia, Florida, North Carolina and Texas increased to 85% of total ABR. On the property recycling front, Madison Yards located in Atlanta is under contract with a nonrefundable deposit, and we expect the sale to close in May. Madison Yards is 99% leased and the anticipated sale would enable us to extract value from a stabilized asset while also reducing our AMC Theatres exposure to only 2 locations, which are both high performing. Further, the anticipated sale, along with Palms Crossing acquisition will complete the recycling proceeds at a positive cap rate spread contributing to future earnings growth. As we move forward, we're evaluating additional property sales, focusing on recycling capital from stabilized properties into assets at positive initial yield spread with the potential for value-add opportunities and higher earnings growth in the future. Now turning to our structured investments. During the quarter, we received full repayment of our [indiscernible] $30 million preferred investment in Watters Creek Village. This repayment was expected and represents the only structured investment scheduled to mature in 2026. More notably, just after the quarter end, we completed a $75 million preferred equity investment in a Class A premier retail property located in the Southwest. This preferred investment yields 12% and has a term of 2 years. This activity increased our structured investment portfolio by $45 million to $158 million subsequent to quarter end with a weighted average yield of 11.6%. In summary, 2026 is off to a great start, and we are in a great position to sustain our growth in the quarters ahead. Our portfolio continues to perform well and is supported by embedded growth drivers, including in-place below-market rents, our Signed-Not-Open pipeline, planned outparcel developments and disciplined capital recycling. Collectively, we believe that these initiatives can support meaningful earnings growth for several years to come and contribute to our increased guidance for core FFO and AFFO per diluted share to new ranges that imply approximately 12% growth at the midpoint. And with that, I will now hand the call over to Phil.

Thanks, John. On this call, I will briefly highlight our earnings, provide an update on our balance sheet and discuss our raised 2026 outlook. Starting with operating results. For the first quarter, core FFO was $16.9 million, a $2.5 million increase compared to $14.4 million reported in the comparable quarter of the prior year. And on a diluted share basis was $0.52 per share versus $0.46 per share. AFFO was $18.2 million for the quarter, an increase of $2.7 million compared to $15.5 million reported in the comparable quarter of the prior year and on a diluted share basis was $0.56 per share versus $0.49 per share. The growth in both core FFO and AFFO was primarily driven by leases executed over the past year that have since commenced paying rent, although it did include approximately $0.01 related to nonrecurring recovery benefits from final 2025 CAM, real estate taxes and insurance billings that tenants recorded in this quarter. With regards to property operations, as John mentioned, same-property NOI for shopping centers increased 6.8% in the first quarter compared to the comparable quarter of the prior year. Excluding the nonrecurring recovery benefits discussed earlier, same-property NOI for our shopping centers still increased a healthy 4.2%. Given the relatively small size of our same-property NOI, $200,000 impacts quarterly growth by approximately 100 basis points. Accordingly, unusual and nonrecurring items like this can occasionally skew our same-property NOI, so we want to highlight the impact of such items when appropriate. Notably, shopping center properties represented 97% of total same-property NOI for the quarter. Total same-property NOI, including our few noncore properties, increased 3.4% for the quarter. This growth was impacted by one tenant as previously announced, vacating 98,000 square feet at our Albuquerque property at the beginning of December 2025, which more than offset the nonrecurring recovery benefits recorded. As a reminder, this vacancy has been fully leased to the state of New Mexico, which is expected to commence paying rent in late 2026. Moving to the balance sheet. At March 31, 2026, we had total debt of $651.8 million with a weighted average interest rate of 4.6%. Further, we ended the quarter with approximately $125 million of liquidity and leverage at 6.4x net debt to pro forma adjusted EBITDA, which is consistent with the end of 2025. During the quarter, we opportunistically utilized our common ATM program to issue approximately 733,900 common shares at an average price of $19.59 per share for total net proceeds of $14.2 million. Notably, these proceeds, combined with the repayment of our $30 million Watters Creek preferred investment and higher NOI enabled us to maintain leverage at a consistent level even with the acquisition of Palms Crossing completed in this quarter. Now turning to guidance. For the full year 2026, we are increasing our core FFO outlook to a new range of $2.06 to $2.11 per diluted share and our AFFO outlook to a new range of $2.19 to $2.24 per diluted share. Key assumptions reflected in our guidance include increased investment volume, including structured investments of $175 million to $250 million, same-property NOI growth for shopping centers of 3.5% to 4.5% and general and administrative expenses of $19.7 million to $20.2 million. And with that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Jay Kornreich with Cantor Fitzgerald & Company.

I guess I just want to start out with the new $75 million Southwest preferred equity investment at the 12% yield. I guess what attracted you to that investment? And how do you anticipate, I guess, the draw schedule occurring -- sorry, how do you anticipate the draw schedule occurring going forward? And in terms of funding sources for it, I guess you can use $30 million from the Watters investment, which was prepaid, but how do you think about funding the incremental $45 million?

Yes. We've already did the investment. So it was like it was one closing. And so as you mentioned, the Watters Creek was recycled into that. And we'll basically have, as we mentioned, an asset sale coming up and so forth, which will bring down leverage. But otherwise, we just use the balance sheet for the balance of it.

Okay. And then just going back to the original 10 vacant anchor spaces that we've talked about. I think there's still 3 remaining to be signed. Can you just give an update on how those conversations are progressing and when you think you could get a lease signed and ultimately rent payment beginning?

Yes. It's going really well as far as terms have been agreed upon moving to leases, but these things with these large national companies go really slow. So I would say, conservatively, I would say, 3 months and hoping to do it before then. But every time you think these things would take 30 days, it drags. So -- but we are -- the good thing is even though the lease may take that long, we're working right away on basically engineering drawings and what needs to be done to outfit the space for the tenants. So that's not going to -- we're not going to wait for the lease to be signed to get that work done. So the lease commencement will kind of stay kind of probably take, call it, 9 months or so to kind of get the tenant in place, but that part won't move even though the lease may drag out.

Our next question comes from the line of Matthew Erdner with Jones Trading.

I'm just curious what's going to lead you kind of towards the high range of the investment guidance versus the bottom end? Because I think if you lean towards the bottom end, it will probably be one more structured investment. And given the timing of Madison Yards, should we expect anything to kind of happen in the second half of the year from an investment perspective?

Phil, I'll let you kind of address that, but I'll start with some of the pipeline. We do have structured investments that we are working on. It's relatively small, but that's something that could happen here in the next 30 days. And as far as acquisition pipeline, we do have our eyes on a couple of things, but they're not going to happen until they're not even out in the market yet. They're being prepared for market. So we hope to be more active probably in the next kind of 4 months. And then we'll -- as mentioned in our prepared remarks, we'll have some recycling going on, which will kind of happen in the next probably 3 months.

Yes, Matt, it's Phil. And you're correct in your assumption. So the small structured investment John referred to would put us right around the low end of the range. And then if we complete some of the larger property acquisitions in the pipeline, it would push us up towards the higher end of the range.

Got it. And then kind of as a follow-up to that, are you guys assuming that outparcel at Forsyth, there's 10 extra acres there in the investment guidance for this year? Or would that be additional?

Yes. So they won't contribute to earnings in this year. It's one of the pads that we've identified. So part of the -- where we've discussed $30 million of capital earning low double-digit yield unlevered. It's in that group. But any earnings from that will not be in this year, Matt.

Our next question comes from the line of Craig Kucera with Lucid Capital Markets.

With the preferred equity investment you made here in the second quarter, I think -- and it sounds like you've got another potential small one. I think that brings CTO's exposure to structured investments to around 11%, maybe closer to 15% when fully funded relative to undepreciated assets. Are you thinking about a cap or target on that as a percentage of the balance sheet similar to PINE?

Yes. Thanks for the question. So I would say that most likely, the cap will be -- it will definitely be below 20% and maybe more in line with the 15%. And so as you've seen at PINE, sometimes it will go a little higher as we anticipate some payoffs happening. But roughly 15% feels like a good place for us.

Okay. Great. And thinking about investment guidance, you've done $156 million year-to-date. I think you started out the year guiding to sort of 8% to 8.5%. The preferred equity down here this quarter is 12%. Has that sort of yield range changed at all because of that?

Yes. So the cap rates, I can kind of go into kind of what we're seeing on cap rates. And then as we see more visibility on what we'll be buying and kind of the structured finance kind of give you a better mix outcome. But in general, the acquisitions that we're seeing are kind of in the 7.5% to 8% range. And then with regards to structured finance, something in the kind of 10% to 13% range. And so you kind of have that little blend.

Okay. Great. That's very helpful. Just a couple more for me. Looking at your space that's expiring this year, it looks like it's significantly above the average in the portfolio, particularly on the anchor space, are mostly on the anchor space. You had, I think, a 24% cash increase in rent spreads last year. Do you -- I think you had [ 14% ] this quarter. Are you thinking something in the double-digit range is possible this year? Or is that going to be a little tougher?

Yes. I mean I think the spreads, you would see them kind of continue in the range they've been, Craig. Are you referring to '26 when you say this year, right?

Yes, in '26.

Yes, yes. So the expiring rents are a little higher, right? I think they're closer to [ '25 ] where we've been signing a lot of leases. But we're not only working on '26, we're also working on '27. I mean they start early. So I think while the spreads could come down a little just because the average rent and the leases expiring in '26 could bring it down a little. But generally, it still should be close to where we've historically been recently. Obviously, any one quarter can bounce around a lot just because it's not a lot of [ GLA ] in one quarter, but for the full year, should be pretty good.

Okay. That's helpful. Just one more for me.

What's driving that? -- there's fewer anchors in there, Craig. So that's what's left is small shop. So a little higher ABR.

And just one more for me. I think last quarter, the implied ABR recognition in the Signed-Not-Open pipeline was about [ 2.9 ] million for 2026. I think now we're looking at [ 1.8 ] million in the updated deck. Can you give us a sense of how you're anticipating the timing of that [ 1.8 ] million in '26 and sort of how we should think about modeling '27 from a Signed-Not-Open pipeline recognition perspective?

Yes. So about [ 1.5 ] million rolled off the pipeline from last time and got -- and commenced. And then with new leases, we kind of filled that back up, signing about [ 1.5 ] million. So the total the Signed-Not-Open pipeline did not move much. What did go in went in relatively closer to the beginning of the quarter. So it was in there for most of the quarter and it's reflected in the quarter's run rate. With what's left in the Signed-Not-Open pipeline, I think it will be a little more Q3, Q4 weighted. And then generally, almost all of it is in place, albeit maybe later in the year, prior to '27. So you should get pretty much the full impact of the Signed-Not-Open pipeline in '27. I think there's one tenant that pushes to early '28, but almost everything should be recognized in '27.

I'm sorry, are you saying recognized as of sort of that early '27 or throughout '27?

Early '27. So it should -- just other than one tenant, I think they're all -- you should get the full benefit of the Signed-Not-Open pipeline for '27. There's one tenant you won't get the full benefit of until '28 because they'll open during '27. But what's left for '26 will be later in the year, and then you'll get the full benefit in '27.

Our next question comes from the line of John Massocca with B. Riley Securities.

Maybe thinking about the Madison disposition. I know we can kind of back into the numbers a little bit on our own given your disclosure. But is it right to think that that's at about a 6% cap rate? I know it kind of depends a little bit on the NOI margin at that specific asset, but does that sound roughly correct?

It's a little higher than that because of the AMC Theatres.

Okay. All right. And then maybe kind of more big picture as you're thinking about your leasing pipeline and some of the vacancy that's left. And I know a lot of that's been addressed because a lot of it is in Carolina Pavilion. But is there any kind of hesitancy you've seen in retailers and frankly, in recent weeks around signing deals just given some of the macro uncertainty out there, some of the uncertainty about how some of the headline stuff maybe impacts the consumer. Just curious how the kind of leasing trajectory has been on a super recent basis.

There's been no hesitancy with pushing forward on leases. We have not seen any pullback whatsoever on any category.

Okay. And then the in-place portfolio, any new tenants or any kind of notable increase to the watch list? I was just curious if there's any kind of pushes and pulls there. Anything coming out of the watch list even too?

No. I mean really, as I've said in prior calls, it's really some of the smaller type tenants and maybe restaurant oriented, but there's been no notable change one way or the other on the watch list.

Okay. And then last one. There's been a decent amount of M&A in the space in kind of recent years, including a notable comp to you all recently. How does that impact kind of your disposition and acquisition outlook? Is there stuff that maybe comes out of those transactions or a competitor maybe not being in the space that increases the likelihood of you closing certain deals? Does it indicate something you can do on the capital recycling side that is interesting? Just kind of curious if the events outside of your control kind of changed the dynamics around how you're operating the business?

Yes. I would just say that there's just a lot more capital out there and that price point of that transaction was fairly aggressive. So it's helpful on our recycling side for sure, but not helpful on our acquisition side. So we pride ourselves on being fast to kind of address an acquisition. We can move fast. And the groups that are out there on the acquisition hunt are much larger kind of institutional and they take a lot longer. So just being a little bit nimble is an advantage for us.

Our next question comes from the line of Gaurav Mehta with Alliance Global Partners.

I wanted to ask you on the acquisition that you made, Palms Crossing this quarter. On the value-add upside, can you maybe talk about where the rents are on that property versus where the market rents are?

Yes. I mean the market rents are below market, but there's not really any sort of play where we're going to get a tenant out and we're going to have a huge mark-to-market on lease-up. I would just say that we do have a little bit of vacancy, and we have an outparcel that we didn't pay any money for that we're working on. So that's where the growth is going to come over and beyond what we bought. But they are below market, but not something that you can kind of get to anytime soon.

Okay. Second question on the guidance, just a clarification. On the Madison Yards, I didn't see that listed in the guidance assumption. Is that included in your guidance, the disposition?

No, we didn't put a disposition volume out there. Currently, that's the only near-term and planned disposition.

So I'm showing no further questions at this time. This concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.