CTO Realty Growth, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. CTO is a primarily retail-focused REIT with 21 properties in nine states, totaling 2.8 million square feet, plus management services, commercial loans and investments, and Florida subsurface and mitigation-credit operations.
Financial performance and position
| Metric | Q2 2022 | Six months 2022 | Comparable 2021 |
|---|---|---|---|
| Total revenue | $19.5 million | $36.7 million | $14.3 million Q2; $29.0 million six months |
| Operating income (loss) | $5.0 million | $8.5 million | $(9.2) million Q2; $(4.7) million six months |
| Net income attributable to CTO | $1.2 million | $1.4 million | $(3.7) million Q2; $4.1 million six months |
| Net income (loss) attributable to common stockholders | $0.02 million | $(1.0) million | $(3.7) million Q2; $4.1 million six months |
| Operating cash flow | Not provided quarterly | $22.4 million | $18.3 million six months |
Q2 revenue rose 36.3%; six-month revenue rose 26.5%. Growth chiefly reflected acquired properties and higher management and loan income, partly offset by lower real estate operations revenue. Income-property revenue increased 41.4% in Q2 and 37.0% for the six months. Consolidated operating margin was approximately 25.8% in Q2 and 23.2% for the six months. Preferred distributions of $2.4 million contributed to the six-month common-stockholder loss despite positive net income attributable to CTO.
- REIT operating measures: Q2 FFO, Core FFO and AFFO attributable to common stockholders were $8.0 million, $8.5 million and $8.9 million, respectively; six-month amounts were $15.7 million, $16.7 million and $17.6 million. Reported diluted per-share amounts were $1.33, $1.41 and $1.48 for Q2, and $2.64, $2.81 and $2.96 for six months. These are non-GAAP measures and should not be treated as cash available for distribution.
- Cash and liquidity: June 30 cash and cash equivalents were $7.1 million; restricted cash was $27.2 million, including $24.5 million held for reinvestment through like-kind exchanges. Cash, cash equivalents and restricted cash totaled $34.3 million. The company reported $99.0 million of undrawn capacity on its $210 million revolver and $141.3 million of remaining ATM capacity.
- Debt: Long-term debt carrying value was $343.2 million ($344.8 million face value), up from $278.3 million at year-end 2021. The debt included $111 million on the revolver, $65 million and $100 million term loans, $51.0 million of convertible notes due 2025, and a $17.8 million mortgage due 2026. The revolver matures May 2023, with a one-year extension option. CTO reported compliance with debt covenants.
- Cash flow and investment: Six-month investing cash outflow was $54.4 million and financing cash inflow was $34.9 million. CTO acquired Price Plaza for $39.1 million and invested in commercial loans and preferred equity; six-month loan/investment acquisitions were $46.9 million. It paid $13.2 million in common dividends and $2.4 million in preferred dividends.
Material changes versus the prior period
- Revenue increased, led by portfolio growth; depreciation and amortization also rose to $13.1 million for the six months from $9.9 million.
- Six-month net income attributable to CTO declined to $1.4 million from $4.1 million. The comparison includes a $16.5 million Land JV impairment in 2021 and $5.4 million of 2021 disposition gains, while 2022 results included a $4.3 million non-cash unrealized loss on CTO’s PINE investment versus an $8.2 million gain in 2021.
- Real estate operations revenue fell to $1.2 million from $3.1 million for the six months, primarily due to fewer subsurface-interest sales. CTO sold two properties in the 2022 period for $24.0 million in total, with aggregate losses of about $0.2 million; the 2021 period included $65.5 million of dispositions and $5.3 million of gains.
- CTO’s PINE investment fair value was $38.5 million at June 30, down from $41.0 million at year-end 2021. Interest-rate swaps generated $10.6 million of six-month other comprehensive income, increasing accumulated other comprehensive income.
- A three-for-one common-stock split took effect for trading July 1, 2022. The filing’s June 30 share count was 6.1 million before the split; it became approximately 18.2 million afterward.
Outlook, commentary, risks and unusual items
- Management’s 2022 investment guidance was $250 million to $275 million in income-producing properties. Funding sources may include operating cash, property dispositions and 1031 exchanges, subsurface-interest transactions, and borrowing.
- On July 8, 2022, CTO acquired Madison Yards in Atlanta for $80.2 million. The filing states its going-in cap rate was below the range of CTO’s guidance for initial cash yields. Funding included restricted disposition proceeds, unrestricted cash and revolver draws.
- Management said it believed liquidity was sufficient for operations, capital needs and debt service over the next 12 months and foreseeable future. No specific earnings or FFO guidance was provided.
- Interest-rate exposure is material: $111 million of revolver borrowings was unhedged at June 30. A hypothetical 100-basis-point rate increase would affect financial position, results and cash flows by an estimated $1.1 million. CTO hedged specified term-loan balances with swaps.
- Remaining property capital-improvement commitments were $17.8 million; unfunded commitments on construction loans were $12.1 million. Key risks include tenant and retail-sector performance, real estate acquisition competition, borrower credit and collateral values, access to capital, debt service, REIT qualification, interest rates, and successful use of like-kind exchanges. CTO reported no material change in risk factors and did not expect routine legal proceedings to materially affect results.
- CTO adopted ASU 2020-06 in 2022, recording a $3.0 million net adjustment to equity and applying the if-converted method for the 2025 notes in diluted EPS; the notes were antidilutive in the periods presented. Q2 common EPS was reported as $0.00.
Important facts for investors to verify
- Whether the acquisition program can meet the $250–$275 million investment target while maintaining returns, especially given Madison Yards’ below-guidance initial yield.
- Upcoming refinancing and extension needs, particularly the $111 million revolver maturity in 2023, and the cost and availability of replacement financing.
- Performance, funding and collateral risks in the expanding commercial-loan portfolio, including the short-dated WaterStar loan and unfunded commitments.
- The sensitivity of reported earnings and equity to PINE’s share price and to interest rates, including the effect of hedges and unhedged revolver borrowings.
- Liquidity available for dividends and committed investment after accounting for restricted cash, capital improvements, loan funding and the post-quarter Madison Yards acquisition.
- Share-count, per-share and convertible-note conversion terms on a post-split basis; the filing reports the stock split and resulting conversion-rate adjustment effective July 1, 2022.