CTO Realty Growth, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. CTO is a self-managed equity REIT focused primarily on retail and mixed-use real estate. At quarter-end, it owned 24 properties in nine states—eight single-tenant and 16 multi-tenant properties, totaling 4.2 million square feet—and held commercial loan investments and a 14.8% investment in Alpine Income Property Trust (PINE). Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $26.0 | $19.5 | $50.8 | $36.7 |
| Operating income | $5.7 | $5.0 | $8.6 | $8.5 |
| Net income (loss) attributable to the Company | $1.8 | $1.2 | $(4.2) | $1.4 |
| Net income (loss) attributable to common stockholders | $0.6 | $0.02 | $(6.6) | $(1.0) |
| Interest expense | $5.2 | $2.3 | $9.8 | $4.2 |
Operating income as a share of revenue was approximately 21.8% in Q2 2023 versus 25.8% in Q2 2022, and 17.0% for the first half of 2023 versus 23.2% in the prior-year period. The filing does not present these as formal margin measures.
- REIT operating measures: Q2 FFO attributable to common stockholders was $9.0 million ($0.40 per diluted share), Core FFO was $9.6 million ($0.43), and AFFO was $10.8 million ($0.48). For the first half, FFO was $17.2 million ($0.76), Core FFO $18.5 million ($0.82), and AFFO $20.6 million ($0.91). Per-share measures declined from the comparable 2022 periods despite higher total amounts. These are non-GAAP measures and are not substitutes for cash flow or GAAP earnings.
- Cash flow: First-half operating cash flow was $25.0 million, up from $22.4 million. Investing activities used $106.4 million, compared with $54.4 million used a year earlier; financing activities provided $70.3 million versus $34.9 million. Cash, cash equivalents, and restricted cash ended the period at $10.1 million, down from $21.2 million at year-end 2022.
- Debt and liquidity: Long-term debt carrying value was $541.8 million at June 30, 2023, compared with $445.6 million at December 31, 2022. The $300 million revolving facility had $209.6 million drawn and $90.4 million undrawn. Cash and cash equivalents were $7.3 million; restricted cash was $2.8 million. Management stated it expects sufficient liquidity for operations and obligations over the next 12 months and foreseeable future, citing cash, operating cash flow, ATM capacity, and undrawn facility availability. The company reported compliance with debt covenants.
- Distributions: Common dividends declared were $0.38 per share in Q2 and $0.76 per share for the first half, compared with $0.37 and $0.73, respectively, in 2022. Series A preferred dividends were $0.40 per share for Q2 and $0.80 for the first half.
Material changes versus comparable periods
- Revenue rose 33.8% in Q2 and 38.4% in the first half, primarily due to income from acquired properties. Income property revenue increased 39.0% in Q2 and 43.3% in the first half.
- CTO acquired Plaza at Rockwall in Texas for a total cost of approximately $61.3 million and four retail properties at The Exchange at Gwinnett in Georgia for approximately $14.7 million. It originated a $15 million first mortgage loan on Founders Square in Dallas at a fixed 8.75% rate. The company was under contract to acquire one remaining Gwinnett property for $2.3 million.
- Interest expense increased by $2.9 million in Q2 and $5.6 million in the first half, reflecting higher debt and variable rates. Depreciation and amortization also rose with portfolio growth.
- First-half GAAP net loss was driven in part by a $6.1 million non-cash unrealized loss on the PINE investment and increased interest and depreciation expense. CTO reported a $2.3 million Q2 gain from extinguishing a contingent tenant-improvement obligation; it also recorded a $0.5 million first-quarter provision for credit losses on commercial loans and investments.
- CTO sold an Eastern Commons outparcel for $2.1 million, recognizing a $0.8 million gain. It repurchased $5.0 million of common stock in Q1 and a small additional amount in Q2; it also repurchased 746 Series A preferred shares during the first half.
Outlook, risks, and contingencies
Management’s 2023 investment guidance for income-producing properties, including structured investments, was $95 million to $150 million. Expected funding sources include cash, operating cash flow, dispositions and like-kind exchanges, possible sales of subsurface interests, and borrowings. No earnings or FFO guidance is provided in the filing.
Management highlighted commercial real estate and tenant risks, acquisition competition and execution, borrower credit risk, property illiquidity, access to capital, debt-service capacity, and the effects of inflation, rising interest rates, economic weakness, and banking-sector stress. Variable-rate debt remains an exposure: at June 30, $109.6 million of the revolving facility balance was not hedged; management estimated a 100-basis-point rate change would affect financial position, results, and cash flows by $1.1 million. Legal proceedings incidental to the business were not expected to have a material effect. The company had $11.5 million of remaining commitments for capital improvements, generally expected to be completed within 12 months. No material changes to the risks in the 2022 Form 10-K were reported.
Important facts for investors to verify
- Whether acquired properties meet occupancy, leasing, and return expectations, and whether the remaining Gwinnett acquisition closes.
- Current property occupancy, tenant concentration, lease expirations, and the effect of tenant operating performance on rental cash flows.
- Commercial loan and preferred investment performance, collateral coverage, and changes in credit-loss reserves.
- Debt costs, hedge coverage, covenant headroom, refinancing needs, and liquidity after acquisitions, dividends, and repurchases.
- How PINE’s share price and dividends affect CTO’s investment income, reported earnings, and asset value.
- Whether projected investment spending and dividend distributions remain supported by operating cash flow and available financing.