Good day and thank you for standing by. And welcome to CTO Realty Growth Inc. Q3 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Partridge, Chief Financial Officer. Please, go ahead.

Good morning, everyone, and thank you for joining us today for the CTO Realty Growth third quarter 2022 operating results conference call. With me today is our CEO and President, John Albright. Before we begin, I'd like to remind everyone that many of our comments today are considered forward-looking statements under federal securities law. The Company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we undertake no duty to update these statements. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the Company's Form 10-K, Form 10-Q, and other SEC filings. You can find our SEC reports, earnings release, supplemental and most recent investor presentation on our website at ctoreit.com. With that, I’ll now turn the call over to John.

Thanks, Matt, and good morning, everyone. I'm very pleased with our team's strong execution during the third quarter across all phases of our business. We opportunistically sold several legacy properties, including our multi-tenanted office property. And as we discussed during our last earnings call, we invested it into our first public-anchored asset Madison Yards in Atlanta Georgia. We also completed a number of capital markets transactions that fortified our balance sheet, continue to have good success with our leasing initiatives and drove more than 36% year-over-year AFFO growth during the quarter. On top of it all, we had a nice start to the fourth quarter with our acquisition of West Broad Village in Richmond Virginia, which is a very high-quality property that we believe has great long-term upside. If you look at our transaction activities over the past four months, we found some excellent grocery anchor opportunities as we continued our portfolio repositioning efforts by taking advantage of the disruption in the market and executing on strategic asset recycling. During the quarter, we sold 245 Riverside, our loan remaining office property in Jacksonville Florida. And we also sold two single-tenant assets in our master lease property outside of Miami and Hialeah, Florida for a total disposition volume of $57 million at a 6.3% blended exit cap rate. These disposition proceeds and the proceeds from our asset sales during the first half of the year effectively match funded our purchase of Madison Yards. As we've highlighted in the past, the 162,500 square foot property sits on a great infill location along the belt line in Atlanta Georgia. It was an opportunity to enhance our portfolio's tenant quality, while also improving our geographic exposure by further investing in Atlanta, which we believe is one of the best markets in the country. The…

Thanks, John. With the inclusion of West Broad Village, our income property portfolio consists of 19 properties, comprising approximately 3.1 million square feet of rentable space across 15 markets. Our largest markets are now Atlanta, Georgia, Dallas, Texas, Richmond, Virginia and Raleigh, North Carolina, where we've seen strong tenant demand, excellent population growth and above average wage growth. Fidelity continues to be our largest tenant exposure, but with the shift in portfolio makes that John talked about, we've added a number of high-quality retail tenants to our top 20 tenant list and we've nearly finalized our transition to retail and mixed-use assets. At quarter end, our portfolio was 92% occupied, and we reported leased occupancy of more than 94%. Total revenues for the third quarter increased nearly 40% to $23 million and year-to-date total revenues have increased by 31% to $60 million. The $6.5 million year-over-year increase in quarterly revenues, $4.5 million was driven by income property and structured investment revenue gains, while the other $2 million was from mitigation credit and subsurface sales. Our year-over-year same property NOI growth for the quarter was 12% with Crossroads Towne Center in Chandler, Arizona, the strand in Jacksonville, Florida and our restaurants in Daytona Beach, representing the largest contributions to the growth. Our same-property NOI statistics only include asset owned for the entirety of the measurement period in both 2022 and 2021. And to the effects of the properties we acquired in the fourth quarter of 2021 and year-to-date 2022 do not impact these results for the quarter. Third quarter 2022, core FFO was $0.47 per share, representing a 38% increase compared to the third quarter of 2021. And third quarter 2022 AFFO was $0.49 per share representing, a 36% increase over the third quarter of 2021. Year-to-date core FFO was $1.41…

Thanks Matt. This was a great quarter of execution regardless of some of the challenges at hand. We believe our rock-solid balance sheet, strong market, high-quality portfolio and embedded same-store NOI growth from our year-to-date and future leasing activity, have us well positioned to continue delivering outsized earnings and cash flow growth through the end of the year and for the foreseeable future. We appreciate all of our team's hard work, and I want to thank our investors and partners for their continued support. With that we will open it up for questions. Operator?

And thank you. [Operator Instructions] And one moment for our first question. And our first question comes from Gaurav Mehta from EF Hutton. Your line is now open.

Good morning. Thanks for taking my question. I was hoping, if you could provide some color on what you guys are seeing in the transaction market as far as cap rates.

Yes. So it's, kind of, interesting. There's not a lot of activity going on right now with regards to transactions because there's a little bit of a standoff between buyers and sellers. And people that obviously is a challenging environment if you're looking to sell a property because there's really no debt market for secured debt. So if you're out in the market trying to sell something you probably have to sell something. And I would say that roughly on those, sort of, situations kind of like us people only want a really good deal. So I'd say cap rates are out like 100 basis points or more depending on the kind of quality of the property. But so right now there's not a lot of transactions happening. There's probably less inventory out there being sold because people are determining this not a great time to be selling an asset.

Okay. Maybe second question, I think, in your prepared remarks you mentioned a few times about strong tenant demand. I was hoping if you could maybe provide some color on -- have you seen any sign of weakness or softness from your tenants or demand continues to remain strong for your properties?

Yes. We keep on -- we expect it to soften up. It hasn't softened up. The only softness we've seen and heard about is really from local tenants in the markets where our properties are located but the more national regional tenants the demand is still strong.

Okay. Thank you.

Sure.

And thank you. And one moment for our next question. Our next question comes from Rob Stevenson from Janney Montgomery Scott. Your line is now open.

Good morning, guys. John can you talk a little bit about where the rent is on the WeWork space versus market? And how much term is left on that lease?

Yes. So roughly, there's definitely eight years or nine years left on term and the rent is probably $2 above market. So the opportunity there will be getting -- going after the guarantee and what's owed and then bringing in another tenant. And there's been the words already kind of gotten out in the market even though they haven't really done any sort of official notice and there's we've had a bunch of operators that want to take over the space.

Sort of, similar co-working type of thing?

Correct.

Okay. And then given your comments on Regal at your Raleigh location, I mean, do you want them to stay? Is it better for you longer term if they go if they turn back in the lease and you could do something else with the space? I mean how far down the road have you guys gotten in terms of game planning what winds up happening if Regal leaves?

Yes. I mean, I would say that look, I think, Regal in that location is a really nice use because it's a very neighborhood, kind of, a community center. It was very activated for families that live around there. So I think it's a nice complement. But if they decide that it's done work for them we do have great alternatives. So it's just a lot more work to make that happen because it's not going to be using the theater box or lease. We wouldn't pursue another theater. We pursue an alternate use which is better credit and that, sort of, thing. So which those uses would be nice complements as well but I just think the theater actually works pretty well for the center.

Okay. And then how is AMC doing in the new Atlanta asset and any of the other movie theaters that you guys have are you concerned about at this point?

Yes. So AMC at Madison Yards, I mean, that's one of their newest theaters probably in the country. I mean it opened up right before pandemic and it's not super large and they've been very consistent at least when the new shows like Top Gun and Everything came around, it was very strong. I suspect without any kind of banner movies coming out right now it's probably slipped off a little bit. But the center is so packed with people that if there's a good theater and there's so many people live around – are good show and there's a lot of people live around there, it would be a hassle to go to a movie somewhere else just because of the traffic in Atlanta. So it has a nice capture audience there. And again it's only eight screens. So it's not an enormous project.

Okay. And then Matt, is there any material delay in terms of some of the leases that you signed and when they start flowing through the top line? Just trying to reconcile a little bit the difference between third quarter FFO, or core FFO and the fourth quarter implied guidance?

Yeah there is. I mean there's about $2.3 million, $2.4 million of rent that's been signed that hasn't commenced. And that's all on space that's currently not cash flowing. So there's some pretty good tailwind heading into next year that will come online probably late fourth quarter, whereas, maybe originally we thought it was early fourth quarter. So there's been some timing delays on certain things. We had a few pull up into the third quarter as well. So they're constantly moving around.

Okay. Thanks guys. Appreciate the time.

Thank you sir.

And thank you. And one moment for our next question. And our next question comes from Matthew Erdner from JonesTrading. Your line is now open.

Hey guys, it’s Matthew for Jason. Congrats on the good quarter. Could you provide an update of the leasing efforts at Ashford Lane?

Yeah. Ashford Lane has been incredibly busy. We're in a great situation there in that we've signed a restaurant tenant for the last remaining space at the lawn and we'll be moving that tenant that's there now to the second floor office space. So we've upgraded that use in a much higher paying tenant. And then we're getting -- we're leasing office vacancy with relocating the existing tenant. And then we've had another lease sign this week, smaller tenants. And we have two or three other leases in the works right now. So it feels really good that this one is going to be fully stabilized by the end of the year or first quarter next year. But there could be a situation where we just wait for the right tenant on some of the spaces that are left. But yeah everything has been very strong there.

Got it. That’s awesome. And then in terms of asking rents, what are the expectations on increases I guess there? And then for next year if you guys have any coming online?

Matt, you want to…?

When you say expectations of increases, are you talking about relative to replacing existing rents that might be expiring?

Yeah.

Yeah. I mean in the quarter, we only had two lease -- new leases that we signed that were replacing existing tenants and those were up 47%. But that's probably not a good expectation for next year but that gives you a sense of the strength of the market and the quality of the assets and where rents are headed.

I mean, there's some that are double because the tenants that have been there have been there for a while and that submarket has just gotten so much denser. So the anything that has a tenant that's been there while, the uplift on it is pretty strong.

Awesome. Thank you guys.

Thank you.

And thank you. And one moment for our next question. And our next question comes from Craig Kucera from B. Riley Securities. Your line is now open.

Yeah, thanks. Good morning guys. John, given the challenges that developers are finding in the debt markets in particular, are you seeing more opportunities that you might move forward on in your structured investment portfolio?

The answer is yes, Craig. I mean there are some good opportunities that seem to be starting to percolate. And we can earn equity like yields of being in a first mortgage or med situation. We don't have anything kind of right in front of us that we're going to be printing a ticket anytime soon. But I will say that that area should be very active for the rest of the year.

Got it. And Matt your G&A expense was a little higher this quarter I think higher than expend at some time. And I'm just curious were there any onetime expenses affiliated with the corporate move to Orlando or should we expect that to be more of a recurring level due to some staffing increases and maybe some additional office expense?

Yes. No, no one-time items, just continuing to build out the team as we bring on more managed assets and build out about the infrastructure.

Got it. And can you give me some color on the – I think you have about a 350 basis point delta between what you've leased and economic occupancy. How are you thinking about the pace of when those leases will take occupancy and start paying cash over the next year or so?

Yes. I think there's a handful of them that will come online between now and the end of the year, and then there's another handful that will come online in the first quarter but some of these will take a little bit longer into the – I'll call it the middle of next year to come online just because the tenants have to do their build-out. So there's a free rent period and things like that.

Got it. And just one more for me. I'd be curious you had some success selling mitigation credits and monetizing some of those types of non-core assets. Were those utilized by standard developers and can you talk about sort of the market for sales right now in that piece of your business?

Yes. So that was for basically development projects that are still going forward and we expect some additional sales that happen probably at the very end of the year or maybe slip over into January. It seems like everything's kind of slipping. But projects, we haven't heard a project kind of being shelved because of the environment. I think Florida has that unique kind of tailwind for needs for the development. So, so far so good.

Okay, thanks.

Thank you.

Thank you. And one moment for our next question. And our next question comes from RJ Milligan from Raymond James. Your line is now open.

Hey, good morning, guys. This is John Paul [ph] on for RJ. If you guys did $0.47 of core FFO in 3Q, which comes out to around $1.88 annualized, which is above consensus for 2023. Just curious if there are any onetime items in that 3Q number and how we should think about the run rate going forward.

Yes. Good to hear from you John Paul. I think in Q3, we had the interest expense from some of the structured investments that will get paid off this quarter and then as we head into the first quarter of next year. And so either those proceeds will be used to pay down debt or to John's point, we might find some other opportunities on the financing side to put that capital back to work. So it's a little uncertain on the redeployment side for that as capital. And then we had some accrual true-ups and some percentage rent in the third quarter, which we're hopeful the percentage rent will continue but it will obviously be performance driven by the tenants. But I think we're not in a position yet to provide formal guidance for next year but the $1.88 run rate certainly seems appropriate as a starting point.

Got it. That’s helpful. Thank you, Matt. And then additionally my other question was on leverage. It looks like it ticked down to 6.4 times this quarter. Just wondering if you could remind us of your leverage targets and how you expect to kind of manage the balance sheet moving into next year?

Yes. So it did tick down. But I'll remind everybody that we did bring it back up a little bit to fund a portion of the West Broad acquisition in October. I think you can expect us to run it in that six to seven times range, but we could end up a low or above it, just given the size of the company, it doesn't take a lot to move it. The other thing, I'd highlight is that, with the convertible notes, the conversion price is below the stock price today. And so that's $50 million of debt that will likely convert to equity in 2025. So, from sort of a pro forma leverage perspective accounting for that, we're pretty under levered relative to our long-term targets.

Thanks. That’s it from me. I’ll turn it over.

Thanks.

Thank you. And one moment for our next question. And our next question comes from Michael Gorman from BTIG. Your line is now open.

Yes, thanks. Good morning. John, I was wondering -- sorry if I missed it, but you talked about the pause in the acquisition markets which certainly makes sense and something we're seeing across property types. I wonder, what your sense is for kind of what -- where the market would clear right now versus maybe 90 days ago or even six months ago, right? Because we keep hearing there's a ton of dry powder. On the private side, REIT balance sheets are in pretty good shape. Certainly, ours is as well and are looking for opportunities. So, I'm kind of curious to your thoughts on what it would take for the market to start clearing in terms of price adjustments?

Yes. So, I think that again, it's probably 100 basis points, if you're talking about like a power center, it could be higher, it could be 125, 150 basis points to clear. But if you're talking about high-quality grocer-anchored, you're probably talking about 50 basis points to 75 basis points. I just got back from [indiscernible] and that was kind of a discussion around with a lot of different sorts of owners and buyers in capital and that was the consensus that if you have a really high-quality grocer deal, you're probably seeing 50 to 75 basis points. But if you're kind of power center, you're 100, 150 basis points something like that. So, in this environment, we're definitely kind of looking for those really good opportunities, where you can take advantage of the dislocation, but you don't want to buy something that's just marginally, you really want something that's high quality kind of like what we just bought in West Broad.

Okay. Great. That’s helpful. That makes sense. And then, either John or Matt, just talking about the share repurchases in the quarter. I understand, it was a relatively small amount and it was below where the stock is today, which is always a good sign. But I'm just curious, how you balance that out versus the longer-term growth trajectory of the company and the liquidity in the shares balancing -- taking advantage of an opportunity where the stock is clearly mispriced, versus that long-term liquidity and long-term capital base?

Yes. I mean, look, we've been very active in share repurchases when it makes sense throughout the time I've been here. And so we're always really looking about always driving accretion to NAV. So, we don't worry about so much liquidity and growth of the company so much. We're just really about driving NAV and value. And so -- but we hope that we will get those opportunities to grow the company. And given the growth we have on these results and what we have kind of the tailwinds we have with the portfolio, we feel pretty good about where the company is going to be next year. So, why not take advantage of the stock the market for CTO has always been a bit of a lagger from -- just because we're just not as well covered. So we're just -- we feel like we're -- even though we've been around 115 years, we feel like we're still a new company because people -- some people haven't heard of us and they're starting to learn more about us, and as we continue to upgrade our portfolio. So I know, I'm giving you a really full winded answer. But -- so we'll always take advantage of dislocations in the market, when there's volatility and people are seeking liquidity and panicking. But we'll -- as you saw in the quarter also, we did issue some shares. So, just taking advantage of dislocations and when it presents itself.

Great. Thanks. Appreciate the time guys. Thank you.

Thank you.

Thank you. And I am showing no further questions. I would now like to turn the call back over to John Albright for closing remarks. End of Q&A:

Thank you, very much for attending the call and look forward to talking with you during the quarter. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.