Good day, and thank you for standing by. Welcome to the CTO Realty Growth Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your host today, Matt Partridge, Chief Financial Officer. Please go ahead.

Good morning, everyone. Thank you for joining us for the CTO Realty Growth Fourth Quarter and Full Year 2023 Operation 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 those 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. We had a terrific fourth quarter of execution in nearly all aspects of our business, resulting in core FFO and AFFO per share growth of 41%, which was meaningfully ahead of our expectations and consensus estimates. Our strong fourth quarter drove a significant beat above the top end of our previously provided full-year guidance, fueled by fourth-quarter same-property NOI growth of 4.7%, better-than-expected tenant retention, and property-level NOI at some of our more recently acquired properties that are not included in our same-property statistics. Continued strength in leasing, where we generated comparable rent spreads of nearly 18% during the quarter and 7.5% for the year, and beneficial timing related to the flurry of dispositions we had to finish 2023. Overall, I'm pleased with the way our team executed as we worked our way back from some unexpected tenant departures early last year. I'm happy to say we're continuing to see that positive momentum carry forward into the first quarter of 2024, where we've had a very strong couple of months. The supply-demand balance that many people have highlighted as a multiyear tailwind for retail helped drive our strong leasing activity during the quarter. This is evidenced by our signing of nearly 100,000 square feet of new leases, renewals, options, and extensions, at an average rent of $32.66 per square foot. To put that into perspective, this per square foot value for the fourth quarter was at least 23% higher than the average rents achieved in the first, second, or third quarters of 2023. In addition to our ability to push rates, quality of leasing during the fourth quarter was relatively widespread, with the collection at Foresight and West Broad Village seeing the most activity and more than half of the rents coming from leading brands such as REI, Fidelity, UBS, Ford's Garage, and J.Crew. Our 18% comparable growth in new cash base rents versus expiring rents is going to help push same-store NOI in 2024 and even more so in 2025, when we'll get the full benefit of some of the larger leases signed on acquired vacancy, when we eliminate over the natural timing disruption. For the full year, the quality of our locations, strong demographics, and targeted lease-up strategies allowed us to sign nearly 0.5 million square feet of leases, resulting in our signed but not open pipeline totaling more than 6% of the portfolio cash-based rent, and it's growing. We ended the year with a modest increase to occupancy, finishing at 90.3%, and leased occupancy increased to 93.3%, both of which are a testament to our leasing activity given that we've largely been selling 100% occupied assets. During the fourth quarter, we sold 6 properties for $64 million at a weighted average exit cap rate of 7.8%. These dispositions included a community shopping center in Fort Worth, Texas, a small format retail property in Henderson, Nevada, three single-tenant retail outparcels at our Crossroads Town Center in Chandler, Arizona, and one of our two remaining single-tenant office properties. For the full year, we sold nine properties for $87 million at a weighted average exit cap rate of 7.5% and generated total gains of sales of $6.6 million. On the investments front, it was a relatively quiet period. However, throughout 2023, we invested $80 million into four retail properties and one land parcel and originated two first mortgage investments totaling $30 million. In aggregate, we've invested in a blended going-in cash yield of 7.7%, which is notably above our 2023 disposition cap rate that was negatively impacted by the higher exit cap rates on two office property sales. As we close the book on 2023 and shift our focus on 2024, I'm very excited about some of the recent activity in our portfolio and the investment opportunities we're seeing in the market. From a transaction perspective, we are under contract with a nonrefundable deposit to sell our mixed-use property in Santa Fe, New Mexico for $20 million. We anticipate this sale will close before the end of the quarter, and the proceeds from this sale, combined with restricted cash and seller financing proceeds from the most recent office sales, give us dry powder to acquire larger-format retail properties that are more core to our strategy. To put some context around the early 2024 positive momentum, Politan Row and established food hall experience in Atlanta and Culinary Dropout, a well-known Sam Fox restaurant concept, both opened at Ashford Lane this month. In Fogo de Chão just opened last week to a very strong reception at West Broad Village in Richmond. Together, just these three tenants combined for approximately $1.4 million in annual base rent. In addition, just in the past week, we signed a ground lease on the undeveloped 10 acres we purchased less than six months ago that is adjacent to the collection at Foresight. In the same week, we sold our remaining non-income producing subsurface interest for gross proceeds of $5 million, which we intend to tax efficiently redeploy into an investment acquisition. With that, I'll let Matt highlight our portfolio, go into details about 2023 financial results and provide some more specifics regarding our 2024 guidance, and then we'll open it up for questions.

Thanks, John. We ended the year with 20 properties totaling 3.7 million square feet of leasable space in eight states and 12 markets. Our portfolio continues to be concentrated in some of the fastest-growing areas of the Sunbelt, with Atlanta and Dallas now representing 50% of our annualized base rent, and the majority of our other markets are in higher growth population states such as Texas, Florida, Arizona, and North Carolina. Recent disposition activities have allowed us to decrease the stand-alone office exposure in our portfolio to less than 5% at year-end 2023, compared to 10% at year-end 2022. Our top tenant list continues to increase in quality, with Whole Foods, Publix, Dick's Sporting Goods, Darden Restaurants, Best Buy, T.J. Maxx Home Goods, AMC, Fidelity and others solidified as top 10 tenants. Our earnings for the fourth quarter of 2023 surpassed expectations, with core FFO per share demonstrating its fourth consecutive quarter of acceleration, coming in at $0.48 per share, representing a 41.2% increase compared to the fourth quarter of 2022. Fourth quarter 2023 AFFO was $0.52 per share, representing a 40.5% increase over the fourth quarter of 2022. Q4 core FFO and AFFO year-over-year comparisons benefited from better tenant retention, higher rents and better NOI flow-through at many of our recently acquired properties. A 4.7% increase in same-property NOI, most notably driven by strong percentage rents at our Daytona Beach restaurants and the full-year benefits from the repositioning and lease-up of Ashford Lane, lease termination payments related to tenants who previously vacated, increased interest income from the makeup and size of our structured investments portfolio, and growth in management fees and dividend income. The strength in our results was partially offset by higher interest expense and increased income taxes as well as the full-year effects of our December 2022 common equity raise. For the year, core FFO was $1.77 per share and AFFO was $1.91 per share, representing a year-over-year per share growth of 2% and 4%, respectively, when compared to 2022. After accounting for the impact of the 3-for-1 stock split in 2022, AFFO per share in 2023 represents an all-time record year for the company since it converted to a REIT in 2020. As we previously announced, the company paid a fourth-quarter regular cash dividend of $0.38 per share in December, resulting in a Q4 2023 AFFO payout ratio of 73%. Earlier this week, the company declared its first-quarter 2024 regular common stock cash dividend of $0.38 per share, which is payable on March 28 to shareholders of record on March 14. This is the company's 48th consecutive year of declaring a common dividend, and the $0.38 per share represents a very attractive current annualized yield of approximately 9.2%. During the fourth quarter, we maintained our opportunistic approach to capital allocation, repurchasing more than 14,000 shares of our Series A Preferred Stock at an average price of $18.40 per share. This represents a 26% discount to liquidation preference, and we also repurchased over 62,000 shares of our common stock at an average price of $15.72 per share, which has an effective annualized yield on cost of 9.7%. As part of our approach to balance sheet and interest rate management, we entered into a new $50 million forward starting interest rate swap agreement to fix SOFR at an average fixed swap rate of 3.85% for the period between February 2024 and January 2028. This locks in nearly all of our remaining variable interest rate exposure on our balance sheet at a current all-in fixed rate of 5.45%, which is approximately 150 basis points below the current floating interest rate. We ended the year with net debt to total enterprise value of 51%, and our net debt to pro forma EBITDA improved quarter-over-quarter to 7.6 times. With more than $150 million of total liquidity from available cash, restricted cash, and undrawn revolver commitments, as well as the anticipated proceeds from our Santa Fe property sale, we're well positioned to be opportunistic in the transactions market this year. Turning to our 2024 guidance, we expect core FFO to be between $1.56 to $1.64 per diluted share, and AFFO is forecasted to be between $1.70 and $1.78 per diluted share. We're anticipating investment activity between $100 million and $150 million at a weighted average initial investment yield of 7.75% to 8.25%, and our disposition guidance assumes $75 million to $125 million of asset sales at a weighted average exit cap rate between 7.5% and 8.25%. Our assumptions for 2024, which conservatively contemplates cash flow disruption related to the timing of our dispositions and investments, also includes very strong lease-up assumptions for the current portfolio. Before taking into account our transaction activities, we're projecting leased occupancy to be between 95% and 96% by year-end, implying gains of approximately 200 to 300 basis points during the year, which would be a strong tailwind for 2025. Same-property NOI in 2024 is forecasted to increase between 2% to 4%, which is most materially impacted by the lost rent from WeWork in 2024 and our expectation that there will be timing disruption between when some of our known lease expirations occur and when the replacement tenants' rent commences. Both of these drags in 2024 are expected to reverse and provide incremental growth in 2025. As part of our guidance assumptions, we've maintained credit loss reserves between 75 and 100 basis points of property-level revenue, which is consistent with our historical run rate, and we're not currently projecting any additional share issuances or repurchases. And finally, as John mentioned, our signed but not open, our SNO pipeline continues to grow, representing $4.5 million of incremental future-based rent or more than 6% of our current portfolio's cash base rent. Combined with the positive leasing momentum, potential upside to our guidance from the timing of transactions and the long-term benefits of our asset management and technology initiatives, we're setting the stage for a strong 2024 and the potential for a milestone year in 2025. With that, I'll now turn it back over to the operator to open the line for questions.

Our first question comes from the line of Floris Van Dijkum with Compass Point.

Hi. Good morning, guys. Thanks for taking my question. John, obviously, you guys got a lot of things moving, and we're happy. I think investors are probably happy to see you get rid of some of that office exposure, which appears to be unloved in the markets today. Maybe if you could talk a little bit about your other initiatives that you've been doing, including bringing the property management in-house that I believe, in Atlanta, are there steps underway to do the same thing in Dallas, and what kind of uplift could investors expect going forward from these kinds of initiatives?

Yes. Thanks, Floris. I'll let Matt talk about the uplift. But as far as structure, we do have an expanding team in Atlanta and it has been very successful and beneficial to us having people on the ground and a lot of efficiencies there, and especially just people with an owner's eye on our properties there. And given that we've had all these restaurant openings with Politan Food Hall has just opened, Culinary Dropout just opened, it's just been critical to have people there on the ground and very helpful. And with regards to Dallas, we're starting a little bit of that process. We don't have quite as large a presence there as in Atlanta, but you could see that sort of opportunity as well down the road.

Hi, Floris, it's Matt. From an uplift perspective, I think Atlanta probably provides at least $0.01 to $0.02 a share, and that's without a more focused team probably getting some economies of scale in terms of bidding out cohesive contracts for the entire portfolio in the market. So there's probably upside to that $0.01 to $0.02.

Thanks. I would like to follow up on the SNO pipeline, which you mentioned is $4.5 million of ABR, accounting for about 6% of your ABR. What is the timing for that to come online? Additionally, does that figure exclude the backfills for WeWork or the theater in North Carolina? Could you provide more details on the timing and the status of backfilling in those two spaces?

Yes. I'll give a little bit of color on the timing, and I'll let John talk about the backfill on WeWork and Regal. So timing-wise, Politan Row, Culinary Dropout, and Fogo de Chão that John mentioned all opened this past couple of weeks. That's about 30% of the pipeline. The rest of it probably is late Q3 and Q4 weighted. So it will have a disproportionate benefit to 2025 versus 2024.

And as regards to where we are with particular tenants. So on Regal theater, we've been going back and forth with two different tenants, and we're basically there with a tenant. So you should see that kind of in motion very soon. And so that's nice to get that backfill and get going. But remember, the process on all of these, especially on larger tenants, to get open is really running a year. We try to do better and shorten that. Obviously, it's really up to the tenant with getting permit drawings, but the approval process in certain jurisdictions just takes a while, as you probably have heard, across the campus of other companies. With regards to WeWork, this year we've had several tours with tenants. So there's a couple of tenants out there for the full space. There are a couple of tenants there for half the space or one-third of the space. So we're very anxious to get a lead. And so our brokers know that. And so we won't let a deal die over small issues. So we're aggressively pursuing tenants in the market.

And Floris, just to piggyback on that, you are correct. Neither of those spaces are in our SNO pipeline today.

Got it. So maybe just a follow-up on the retenanting because, again, that theoretically should have fairly high re-leasing costs, particularly if you're splitting a box as you might end with or a box, I should say, the space with WeWork space there. Is it safe to assume that's going to cost potentially up to $100 a square foot to re-tenant that space?

Definitely, that could be in the realm. I think we talked about this on a conference call six months ago, maybe nine months ago, when we were negotiating with a fitness tenant that wanted the whole space, and that would have been north of 100. But I would say 100 is very safe on traditional office space. And if you do something more special, it will be higher than that, but that's a safe assumption.

And would that be safe to make that assumption for the Regal space as well?

It's not quite as high as WeWork, but it's a little bit shy of that.

Okay. Thanks. That’s it from me for now.

Sure.

Our next question will come from the line of Rob Stevenson with Janney Montgomery Scott.

Good morning, guys. Is the Regal retenanting a theater or is that a different concept?

So it's a different concept. There has been theater interest, but it's a different concept.

Okay. Is that going to take longer than a year, if you're converting a theater or some other use given the slope floors and all of that sort of stuff?

It should take a year because of permitting, but without permitting, it wouldn't take that long.

Okay. That's helpful. And then, Matt, the $4.5 million that you talked about coming online in 2024. Is that all on stuff that was not open in the fourth quarter? Or does that include stuff that may have opened in December, but didn't pay a full quarter's worth of rent?

Yes. That's going to be a combination of both. But primarily, it's going to be stuff that has not come online yet.

Okay. But that includes whatever adjustment we need to get to a pro forma for any leases that started paying rent in December and things like that. I think that's included in that $4.5 million?

That's right.

Okay. Perfect. And then any material known move-outs in 2024 or early 2025 at this point?

Just Regal is the only known move out, and that will be late March, early April.

Okay. And then how are you guys thinking about the Fidelity asset in New Mexico? I mean, given where that's yielding in 100% occupied versus the market for office assets and being able to replace that NOI at some point?

Yes. So I would like to know your specific concern, Rob, so I can address it properly.

Well, first of all, it's not a great market for office assets, but that's a single-tenant asset, which has been performing somewhat better in the marketplace with high-quality credit tenants. What are you considering if you decide to sell that at some point in 2024? What do you anticipate the cap rate spread being? Will it end up being 150 to 200 basis points different from where you can reinvest the proceeds? So, what do you see as the market for that and how are you planning to replace that net operating income going forward?

I was out in the area last week to look closely at the market. Since our last office asset, I want to share some insights. The property is located in the Mesa del Sol master-planned community, near the Sandia National Labs and Kirkland Air Force Base. With significant government investment in those infrastructures, there is considerable contractor interest in the Albuquerque area, making Mesa del Sol an attractive location. Netflix continues to invest $1 billion and is constructing more movie studios just a short distance from the Fidelity campus. The Fidelity building is a two-story structure with two separable units, and it's the only office building in that complex. There are currently 1,000 lots being developed for homes, along with multifamily projects underway. Additionally, there are plans for a hotel in Mesa del Sol which will include two hotels specifically for Netflix's operations. A solar manufacturer is planning to build a facility directly across from Fidelity, alongside an Australian helium energy company entering Mesa del Sol. Given these developments, the market for the Fidelity building is improving. We are in discussions with Fidelity about possibly extending the lease to enhance its marketability and value for sale. This potential monetization could help us maintain income neutrality if we decided to sell. If we had to sell the building now in a less favorable position, it wouldn't be ideal due to potential income loss when replacing the capital, but the Class A building, developed by Forest City, is in a growing area. With the influx of new government contractors and clean energy companies to Albuquerque, I believe the situation is promising. I apologize if that was a bit lengthy.

No, that was helpful. My last question is about tenants. If you were to sell Fidelity, and AMC became your top tenant, how do those assets look today? Considering the data on food traffic during Friday and Saturday nights, are those theaters performing well again, or are they still struggling? Is their performance dependent on how quickly blockbusters are released? How are you all assessing those theater assets?

Yes. I took a look at our portfolio last week and visited the manager of the AMC at Madison Yards in Atlanta. This theater ranks among the top five in the entire Atlanta region for AMC, performing very well out of 15 to 17 theaters. They've seen some strong film performances recently and are optimistic about that location. It's one of the newest theaters in the AMC system, well-sized, and the AMC we have at Collection is located in a prime spot near the highway, offering good visibility. The market there is thriving. If they were to leave, it would be easy and beneficial for us to find new tenants with better credit and potentially higher rent. Overall, we feel confident about our investments in the theater space right now. That's just a bit of the context.

All right. That's helpful. I appreciate the time, and have a great weekend.

All right. Thank you, Rob.

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

Given the short-term loan that seems to be maturing in the second half of the year, are you anticipating that acquisitions will occur during that time with dispositions happening earlier? Additionally, what factors will propel you towards the higher end of the guidance, aiming for the $150 million mark instead of the $100 million?

Yes. So we basically have some acquisition activity going on right now. We hope to be kind of front-ended, as you mentioned there. And so the timing could be on top of when the seller financing that we did for Sable gets monetized. And so that timing should match up fairly well. And so we have that going on, but I'll let Matt talk about your other question.

Yes, Matt, regarding the timing of transaction activity, we are currently working on some initiatives that would help match fund recent dispositions. However, the rest of our guidance indicates that acquisitions will be more heavily weighted towards the end of the period. There is a timing gap between dispositions and acquisitions reflected in our guidance. To reach the higher end of our range, we will need to identify valuable acquisition opportunities. We are confident about the liquidity of the assets we plan to sell for matching purposes, so it will primarily depend on opportunistic choices.

Yes. Got you. And then can you talk about the opportunities that you're currently seeing, whether it's in markets where you're already at or if you're looking to expand into some new markets?

A little bit of both. So finding opportunities within our markets and new markets.

Got you. And then one last quick one for me. Do you know the cap rate on the acquisitions or the disposition, sorry, if you were to exclude the office transactions?

I don't have it off the top of my head, Matt, but it's certainly inside of the blended cap rate given the more elevated cap rates on the two office dispositions.

Got you. Thank you, guys.

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

Good morning.

Good morning, John.

Can you hear me?

Yes.

So maybe sticking with the theme of guidance and kind of the ranges in the investment activity, what could kind of cause you to be closer to the high end on the cap rate or the investment yield seen? And I guess, as you kind of contemplate that investment volume guidance, are there some more of the structured investments you've been doing recently factored into that? Or is it kind of more typical equity investments in shopping center assets that would make up the bulk of that guidance?

Yes. We're definitely looking at just right down the fairway as far as core sort of acquisitions of where the strategy is as far as buying larger format retail, where there's different levers of increasing value with bringing in new tenancy, changing our tenancy, that sort of thing. And so we feel pretty good that we have our eyes on the higher end of that guidance as far as cap rate without any structured finance investments. We don't have any structured finance investments that we're looking at right now.

Okay. Regarding the employees' portfolio, you mentioned that the increase in cash rent was quite broad-based. Is the 17.9% level sustainable as we consider 2024, or was it possibly an anomaly related to specific leases that were renewed or established?

Good question. I think on the 2024 leases expiring, there's a pretty good opportunity to drive more rate. The average cash rent per square foot for the leases expiring in 2024 is $17.83, so that's meaningfully below our average rent for the portfolio and obviously pretty significantly below our last 12 months of leasing activity average rent. So I think there'll continue to be a pretty substantial lift on a re-leasing effort. Something that's probably a little bit more specific to us in the space is the fact that we have been acquiring vacancy over the past few years. And so there's a lot of runway to drive increased cash flow independent of the comparable lease spreads.

Okay. And then lastly, on the ground lease, can you maybe just provide a little more color on the counterparty there? What's the likelihood that they, in your mind, would enact terminate the agreement during the feasibility period and utilize the purchase option? Just kind of any additional color there would be helpful?

Sure. So the group that basically we signed the ground lease with the option to buy really wanted to buy the parcel, but from a timing perspective, that didn't work for us. So we gave them the option after a year, where they could purchase the site. So that was definitely their preference, was to buy the site. The group is well capitalized. It will be a very good draw and very complementary to the collection. We'll bring good customers with big spending sort of outlook. And so we're very excited about it. If they drop out, it was a tough choice to go with this group. We had two other groups that were buying for it. To be honest with you, the other groups would pay more, but we felt more comfortable with this use and the timing it would go faster than the other groups, but the other groups would pay more. I have no problem, if these guys don't make it or feel like it will be fairly easy to backfill that for sure.

And you might not be able to provide this, but just any kind of color of brackets in the purchase option and what that would kind of imply in terms of a return on your investment?

Yes, the return will be very, very good for the shareholders. So it would be basically almost a double.

Okay. That's very helpful, and that's it for me. Thank you very much.

Thanks, John.

Our next question will come from the line of R.J. Milligan with Raymond James.

Hi. Good morning, guys. Just one question for me for the investment guidance for the year. The cap rates, $775 million to $825 million. I'm just curious; obviously, you've shown an appetite to buy back either common or preferred shares. I'm curious with your stock trading in the 8% cap rate range or north of that. How do you feel about additional buybacks versus making more investments?

Yes, thank you, R.J. A significant portion of this acquisition is motivated by recycling efforts, for example, the Santa Fe project, which is under contract for $20 million. The forward credit building we sold is part of that, and the seller financing will come into play as well. Much of this is influenced by 1031 requirements. Additionally, we have been quite active in repurchasing shares at appealing levels for our shareholders. We will not be using proceeds from asset sales to buy back stock, but we are open to other avenues for repurchase if the stock price dips to attractive levels again. For example, we could divest some of our structured finance investments to fund that. We are certainly willing to repurchase stock when we believe it is undervalued and appealing, but many of the acquisitions will be driven by the 1031 aspect.

That’s was it from me. Thanks, guys.

Thanks.

Our next question will come from the line of Michael Gorman with BTIG.

Yes. Thanks. Good morning. Just a quick question, Matt, on the disposition guidance range. Does that include the payoff of the seller financing on Sable Pavilion? Or is that above and beyond the dispositions guidance?

No, that would be above and beyond the disposition guidance.

Okay. Great. Do the remaining two structured investments also have any accelerated prepayment options associated with them?

If they do, we have a make whole provision.

Okay. Great. Thanks so much.

Thank you.

And that concludes today's question-and-answer session. This concludes today's conference call. Thank you for participating. You may now disconnect.