CTO Realty Growth, Inc. quarterly report, Q1 FY2022

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CTO Realty Growth, Inc. — Q1 2022 Form 10-Q

Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Dollar figures below are in millions unless otherwise stated.

Business context

CTO is a primarily retail-oriented REIT. At quarter-end, it owned 21 commercial properties in nine states—seven single-tenant and 14 multi-tenant properties totaling 2.8 million square feet. Its other activities include management services for Alpine Income Property Trust (PINE), commercial loan and master lease investments, and Florida subsurface interests and mitigation credits. CTO held a 15.2% interest in PINE, valued at $38.6 million.

Financial results and key metrics

  • Revenue: $17.21 million, up 17.0% from $14.71 million. Income property revenue rose 32.5% to $15.17 million; management fees were $0.94 million; commercial loan and master lease interest income was $0.72 million; real estate operations revenue fell 79.5% to $0.39 million.
  • Operating results: Operating income was $3.49 million, down from $4.46 million. Income property segment operating income increased to $11.15 million from $8.53 million; its operating margin was approximately 73.5%, versus 74.5% a year earlier. Depreciation and amortization increased to $6.37 million from $4.83 million.
  • Net income and per-share results: Net income attributable to CTO was $0.20 million, compared with $7.79 million. After $1.20 million of preferred distributions, the common-stockholder result was a loss of $0.99 million, or $0.17 per diluted share, versus income of $7.79 million, or $1.32 per share. The decline included a $2.46 million non-cash unrealized loss on the PINE investment; Q1 2021 included a $4.83 million unrealized gain.
  • REIT supplemental measures: FFO attributable to common stockholders was $7.75 million ($1.31 per diluted share), Core FFO was $8.23 million ($1.39), and AFFO was $8.72 million ($1.48). The filing cautions that these non-GAAP measures are not substitutes for GAAP results or operating cash flow.
  • Cash flow: Operating cash flow was $11.43 million, versus $6.34 million. Investing activities used $0.02 million net, versus $34.42 million used; financing activities used $6.93 million, versus $0.44 million used. Cash, cash equivalents and restricted cash ended at $35.84 million, including $9.45 million unrestricted cash and $26.39 million restricted cash.
  • Debt and liquidity: Long-term debt was $298.08 million carrying value ($299.83 million face value), up from $278.27 million carrying value at year-end. The increase primarily reflected an assumed $17.8 million mortgage on the Price Plaza acquisition, partly offset by $1.0 million of revolver repayments. The $210 million credit facility had $66 million drawn and $144 million undrawn. CTO reported covenant compliance and said it expected liquidity to cover operations and obligations for the next 12 months.
  • Equity and dividends: CTO raised $2.8 million net through its ATM program by issuing 43,793 shares. Q1 common dividends declared were $1.08 per share; Series A preferred dividends were $0.40 per share.

Material changes and transactions

  • CTO acquired Price Plaza Shopping Center in Katy, Texas, for a purchase price of $39.1 million. The 205,813-square-foot center was 95% leased at acquisition; CTO assumed a $17.8 million mortgage at 4.06% maturing in August 2026.
  • CTO sold two single-tenant assets for total proceeds of $24.0 million, recording aggregate losses of approximately $0.2 million. The sales included the Carpenter Hotel ground lease, previously reported as a commercial loan and master lease investment.
  • Real estate operations revenue declined mainly because CTO sold about 4,750 acres of subsurface interests for $0.4 million, compared with about 25,000 acres sold for $1.9 million in Q1 2021.
  • Interest expense decreased to $1.90 million from $2.44 million. Changes in PINE’s share price produced the contrasting unrealized investment results noted above. Interest-rate swaps generated $8.01 million of other comprehensive income; this was not operating earnings.
  • CTO adopted ASU 2020-06 effective January 1, 2022, recording a $3.01 million net reduction to equity associated with its convertible notes. The 2025 Notes’ potential 1.0 million shares were excluded from diluted EPS for Q1 because they were antidilutive.

Outlook, risks and contingencies

  • Management stated 2022 planned investment in income-producing properties of $200 million to $250 million, funded through cash, operating cash flow, dispositions and 1031 exchanges, and potentially borrowings or subsurface-interest sales.
  • Management’s strategy is to grow and diversify income-producing properties, with a focus on multi-tenant, primarily retail-oriented assets. The PINE right-of-first-offer agreement generally limits CTO’s ability to invest in single-tenant net-lease properties.
  • Key disclosed risks include tenant and retail-sector performance, competition for acquisitions, borrower credit risk, access to capital and debt service, interest-rate exposure, real estate illiquidity, REIT qualification and tax rules, and the success of like-kind exchanges. A 100-basis-point rate change was estimated to affect financial position, results and cash flows by about $0.7 million at March 31, 2022. No material changes to previously disclosed risk factors were reported.
  • CTO had $15.39 million remaining on property capital-improvement commitments and an unfunded commitment of up to $8.7 million on its construction loan. The filing reports no off-balance-sheet arrangements and says pending ordinary-course legal matters are not expected to have a material effect.
  • After quarter-end, CTO announced a three-for-one common stock split. Also after quarter-end, it funded a $30 million, three-year preferred equity investment for the acquisition of Watters Creek in Allen, Texas.

Important facts for investors to verify

  • Whether acquisition activity and leasing performance support the stated $200 million–$250 million 2022 investment plan and related revenue growth.
  • How much reported and distributable cash is available after distinguishing unrestricted cash from restricted funds held largely for 1031 exchanges and other escrows.
  • Debt costs, maturities, covenant headroom and exposure to variable rates, including the impact of LIBOR transition and future refinancing.
  • The sustainability of common and preferred dividends relative to AFFO, operating cash flow, capital commitments and REIT distribution requirements.
  • The valuation and earnings volatility of CTO’s PINE investment, and the effect of its related-party management relationship and right-of-first-offer arrangements.
  • Funding and returns on the $30 million Watters Creek preferred investment and the construction loan, along with execution of the announced stock split.