8-K: CTO Realty Growth Reports Strong Fourth Quarter and Full Year 2023 Results, Outlines 2024 Guidance

CTO Realty Growth announced positive operating results for Q4 and full year 2023, highlighted by significant leasing growth and strategic asset management, while also providing guidance for 2024.

Summary

• CTO Realty Growth reported a net income per diluted share of $0.03 for the full year 2023 and $0.25 for the fourth quarter.
• Core FFO per diluted share was $1.77 for the year and $0.48 for the quarter, while AFFO per diluted share was $1.91 for the year and $0.52 for the quarter.
• The company invested $80 million in property acquisitions and $30.4 million in structured investments during 2023.
• CTO sold nine income properties for $87.1 million with a 7.5% exit cap rate for the year and six properties for $64.2 million with a 7.8% exit cap rate in Q4.
• Same-property NOI decreased by 2.4% for the full year but increased by 4.7% in the fourth quarter.
• Comparable leasing activity showed a 7.5% rent per square foot growth for the year and a 17.9% growth in the fourth quarter.
• The company repurchased 369,300 common shares and 21,192 preferred shares during the year.
• CTO paid common stock dividends of $1.52 per share for the year, a 1.8% increase over 2022, and $0.38 per share for the fourth quarter.
• Subsequent to year-end, CTO entered into a contract to sell a property in Santa Fe for $20 million and signed a ground lease for a land parcel in Cumming, GA.
• The company also completed the sale of its remaining subsurface interests for $5 million.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with strong Q4 results, strategic asset management, and a focus on future growth. The high dividend yield and potential undervaluation compared to peers are also positive indicators. However, the full-year decrease in Same-Property NOI and some tenant challenges in the first half of the year temper the overall sentiment slightly.

Positives

• The company achieved strong comparable leasing rent growth of nearly 18% and same-store NOI growth of just under 5% in the fourth quarter.
• CTO successfully improved its portfolio, balance sheet, and long-term growth profile throughout 2023.
• The company's strategic initiatives for 2024 are expected to set the stage for meaningful property NOI growth in 2025.
• CTO is seeing more opportunities for investment and plans to be active in the transactions market.
• The company's dividend payout ratio is targeted at 100% of taxable income.
• The company has a well-staggered debt maturity schedule with no near-term debt maturities.
• The company has forward hedges out to 2033 to minimize interest rate volatility.
• The company has a strong focus on retail-based, large format, multi-tenanted assets in higher growth MSAs.
• The company has a strong focus on asset recycling and value-add acquisitions.
• The company has a strong focus on operational upside.
• The company has a strong focus on monetizing legacy assets.
• The company has a strong focus on managing and retaining ownership in Alpine REIT (NYSE:PINE).

Negatives

• Same-Property NOI decreased by 2.4% for the full year 2023 compared to 2022.
• The company experienced some tenant challenges in the first half of the year.
• The company's occupancy rate is 90.3%, while leased occupancy is 93.3%, indicating some vacant space.
• The company's net debt to Pro Forma EBITDA was 7.6 times as of December 31, 2023.

Risks

• The company's ability to remain qualified as a REIT is a risk.
• Exposure to U.S. federal and state income tax law changes, including changes to the REIT requirements, is a risk.
• General adverse economic and real estate conditions pose a risk.
• Macroeconomic and geopolitical factors, including inflationary pressures and interest rate volatility, are risks.
• Credit risk associated with the company investing in structured investments is a risk.
• The impact of pandemics such as COVID-19 on the global economy and the company's financial condition is a risk.
• The inability of major tenants to continue paying their rent or obligations due to bankruptcy is a risk.
• The loss or failure, or decline in the business or assets of PINE is a risk.
• The completion of 1031 exchange transactions is a risk.
• The availability of investment properties that meet the company's investment goals and criteria is a risk.
• Uncertainties associated with obtaining required governmental permits and satisfying other closing conditions for planned acquisitions and sales are risks.

Future Outlook

The company's 2024 guidance includes a projected Core FFO per diluted share between $1.56 and $1.64 and an AFFO per diluted share between $1.70 and $1.78. Same-Property NOI growth is expected to be between 2% and 4%. The company anticipates investing between $100 million and $150 million and disposing of assets between $75 million and $125 million.

Management Comments

• Operational performance in the fourth quarter was strong, with comparable leasing rent growth of nearly 18% and same-store NOI growth of just under 5%, said John P. Albright, President and Chief Executive Officer of CTO Realty Growth.
• Even with some of the tenant challenges we experienced in the first half of the year, we continued to improve our portfolio, balance sheet, and long-term growth profile, and our fourth quarter performance caps off a year where we delivered $1.91 of AFFO per share, said John P. Albright, President and Chief Executive Officer of CTO Realty Growth.
• For 2024, we have a number of strategic initiatives were focused on to set the stage for meaningful property NOI growth in 2025, including the recent openings of Politan Row, Culinary Dropout, and Fogo de Cho, and rent commencing the majority of our signed-but-not-open pipeline that represents more than 6% of in-place annualized cash base rents, said John P. Albright, President and Chief Executive Officer of CTO Realty Growth.
• We are also seeing more opportunities for investment and look forward to being active in the transactions market as we continually search for opportunities to grow our high-quality retail-focused portfolio, said John P. Albright, President and Chief Executive Officer of CTO Realty Growth.

Industry Context

This announcement reflects a trend in the REIT sector towards focusing on high-quality retail assets in growing markets. The emphasis on asset recycling and value-add acquisitions aligns with strategies employed by other successful REITs. The company's focus on operational improvements and leasing activity is crucial for maintaining competitiveness in the current market.

Comparison to Industry Standards

• CTO's 2024E FFO multiple of 11.1x is lower than the peer average of 12.5x, suggesting a potential undervaluation compared to peers like FRT, SITC, SKT, UE, AKR, KIM, WSR, BRX, and KRG.
• CTO's current annualized dividend yield of 9.3% is significantly higher than the peer average of 4.7%, indicating a potentially attractive income opportunity for investors.
• The company's focus on retail-based, large format, multi-tenanted assets is similar to strategies employed by other retail-focused REITs.
• CTO's active asset management approach, emphasizing operational upside, is a common practice among successful REITs.
• The company's strategy of monetizing legacy assets to redeploy capital into core strategy assets is a typical approach for REITs seeking to optimize their portfolios.
• CTO's management of Alpine Income Property Trust (PINE) is a unique aspect that provides a diversified income stream, which is not common among all REITs.
• The company's net debt to Pro Forma EBITDA of 7.6x is within the range of other REITs, but it is important to monitor this metric for potential risks.
• The company's fixed charge coverage ratio of 2.6x is a key indicator of its ability to meet its debt obligations, which is a standard metric used in the industry.

Stakeholder Impact

• Shareholders will benefit from the increased dividend and potential for capital appreciation.
• Employees will benefit from the company's commitment to an inclusive and supportive work environment.
• Customers will benefit from the company's focus on high-quality retail properties.
• Suppliers and creditors will benefit from the company's strong financial position and commitment to meeting its obligations.

Next Steps

• The company will host a conference call on February 23, 2024, to discuss the results.
• The company plans to be active in the transactions market, seeking opportunities to grow its high-quality retail-focused portfolio.
• The company will focus on strategic initiatives to set the stage for meaningful property NOI growth in 2025.
• The company will continue to monitor and manage its debt and leverage metrics.
• The company will continue to execute its leasing strategy to improve occupancy and rental rates.

Key Dates

Keywords

REIT, Real Estate, Retail Properties, Leasing, AFFO, FFO, NOI, Dividends, Property Acquisitions, Asset Dispositions, Structured Investments, Debt Management