CTO Realty Growth, Inc. — Q3 2023 Form 10-Q
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2023. CTO is a self-managed equity REIT focused primarily on retail and mixed-use properties. At quarter-end, it owned 23 properties in nine states, comprising 4.1 million square feet, and also held commercial loans and investments, managed Alpine Income Property Trust (PINE), and owned Florida subsurface mineral interests.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $28.5 million | $23.1 million | $79.2 million | $59.8 million |
| Operating income | $7.7 million | $10.8 million | $16.3 million | $19.3 million |
| Net income (loss) attributable to company | $2.7 million | $4.8 million | $(1.5) million | $6.2 million |
| Net income (loss) attributable to common stockholders | $1.5 million | $3.6 million | $(5.1) million | $2.7 million |
| Interest expense | $6.3 million | $3.0 million | $16.2 million | $7.2 million |
- Income-property revenue rose 42.3% in Q3 and 43.0% for the nine-month period, primarily reflecting portfolio growth and acquisition/disposition timing. Q3 total revenue increased 23.2%; nine-month revenue increased 32.5%.
- Nine-month operating cash flow was $39.9 million, versus $34.1 million. Investing activities used $98.3 million, compared with $80.4 million; financing activities provided $66.8 million, compared with $61.8 million.
- At September 30, cash and cash equivalents were $7.0 million and restricted cash was $22.6 million. Of restricted cash, $21.8 million was held in escrow for reinvestment through like-kind exchanges.
- Long-term debt carrying value was $548.2 million (face value $549.8 million), up from $445.6 million at year-end 2022. The $300 million credit facility had $216 million outstanding and $84 million undrawn. Debt fair value was estimated at $517.7 million.
- Common dividends declared were $0.38 per share in Q3 and $1.14 for the first nine months; Series A preferred dividends were $0.40 and $1.20 per share, respectively.
- Non-GAAP nine-month FFO per diluted share was $1.20 versus $1.33; AFFO per diluted share was $1.39 versus $1.47. Q3 AFFO per diluted share was $0.48 versus $0.49. The company cautions that these measures are not substitutes for GAAP results or operating cash flow.
Material changes versus the prior comparable period
- For the nine months, net income attributable to the company shifted to a $1.5 million loss from $6.2 million income. Higher depreciation and amortization, PINE investment mark-to-market losses, and interest expense were key factors; increased income-property operating income and a $2.3 million contingent-obligation extinguishment partly offset them.
- Nine-month depreciation and amortization increased to $32.8 million from $20.4 million, and interest expense rose to $16.2 million from $7.2 million. Management attributed the interest increase to greater debt balances and higher variable rates, including the 2028 term loan and an assumed mortgage.
- The company acquired properties and land for total acquisition cost of approximately $80.3 million during the first nine months, including Plaza at Rockwall and properties at The Exchange at Gwinnett. It originated a $15 million first mortgage loan at 8.75% and reported $46.6 million of commercial loans and investments, versus $31.9 million at year-end 2022.
- Nine-month property dispositions totaled $22.9 million, generating $3.3 million in gains, compared with $81.1 million of dispositions and $4.7 million in gains in the first nine months of 2022.
- PINE investment fair value declined to $38.2 million from $42.0 million at year-end 2022; the nine-month statement included a $5.7 million unrealized investment loss. Other comprehensive income included $8.4 million of gains on cash-flow hedges.
Guidance, outlook, risks and unusual items
- Management’s 2023 investment guidance for income-producing properties, including structured investments, was $95 million to $100 million. Funding sources identified include operating cash flow, cash, property-sale proceeds, potential subsurface-interest sales, and credit-facility borrowings.
- Management said it expects sufficient liquidity for operations, capital requirements, and debt service over the next 12 months and beyond, citing cash, operating cash flow, $84 million of undrawn credit-facility capacity, and $137.7 million of remaining ATM program availability. The company was not active under the ATM program during the nine months.
- The company reported compliance with debt covenants. It had $10.9 million of remaining commitments for property improvements, generally expected to be completed within 12 months.
- Interest-rate exposure remains relevant: $116 million of the $216 million credit-facility balance was not fixed by swaps at quarter-end. A hypothetical 100-basis-point rate change would affect financial position, results, and cash flows by an estimated $1.2 million.
- Risks include commercial-property and tenant performance, retail competition, acquisition and disposition execution, loan credit risk, access to capital and debt service, inflation and rising rates, REIT qualification, PINE-related concentration and conflicts, and successful use of like-kind exchanges. The filing reported no material changes to previously disclosed risk factors and no expected material effect from ordinary-course legal proceedings.
- Unusual items included $1.4 million of nine-month impairment charges: $0.9 million related to Westcliff Shopping Center and $0.5 million for commercial-loan credit losses. Westcliff was sold on October 12, 2023, for $14.8 million. The company also recorded $2.3 million of income from extinguishing a contingent tenant-improvement obligation.
Most important facts for investors to verify
- Whether acquisition-driven rent growth and occupancy support the investment plan and guidance, including the remaining 4,000-square-foot Gwinnett acquisition under contract.
- Debt maturities, refinancing options, variable-rate exposure, hedge coverage, and the impact of interest expense on cash available for dividends.
- Reconciliation of GAAP losses with FFO/AFFO and whether recurring cash generation supports common and preferred dividends.
- Performance and valuation of the PINE investment, including exposure to its share price and management-fee relationship.
- Credit quality, collateral and repayment prospects for commercial loans and investments, including the recorded credit-loss reserve.
- Execution of planned 1031 exchanges and availability of liquidity; restricted escrow cash is not the same as unrestricted cash.