CTO Realty Growth, Inc. Q2 FY2025 earnings call

• Leasing: Signed 227,000 sq ft of new leases, renewals, and extensions in Q2; YTD 339,000 sq ft leased. 10 anchor spaces now fully controlled, with 6 resolved and new leases executed for 5. - Property progress: Carolina Pavilion has 4 anchor spaces with 2 leased, expecting unlevered double-digit yield; Plaza at Rockwall has Staples replaced by Barnes & Noble and Boot Barn signed; Fidelity Office property in Albuquerque has lease amendment to reduce Fidelity's space and bring in State of New Mexico. - Balance sheet: Settled convertible notes, ended Q2 with $606.8 million debt, $85 million liquidity, net debt to EBITDA 6.9x.

During the second quarter, CTO Realty Growth achieved strong operating results driven by leasing momentum. They signed approximately 227,000 square feet of new leases, renewals, and extensions at an average cash base rent of $25.43 per square foot, with 190,000 square feet of comparable leases at a 22% cash rent spread. Year-to-date, they completed 339,000 square feet of leasing, including 299,000 square feet of comparable leasing at a 27% cash rent spread. Their property portfolio of 5.3 million square feet was 93.9% leased and 90.2% occupied at quarter-end.

• Reaffirmed full year 2025 core FFO of $1.80 to $1.86 and AFFO of $1.93 to $1.98. - Leasing pipeline and progress on anchor spaces will provide earnings tailwinds in 2026.

• Potential delays in leasing negotiations for remaining 4 anchor spaces. - Uncertainties in property dispositions and structured investments' timing.

Q: I wanted to ask you around your comments around Fidelity Office property where you mentioned they are vacating half of that and you have State of Mexico coming in. Can you provide some more color on what happened with that property as far as Fidelity exiting half of that? And do you expect any CapEx associated with State of Mexico?

A: Sure. So the building -- when Forest City built the building for Fidelity, it was built in 2 separate sort of building structures. So Fidelity could have the flexibility to downsize and bring in another tenant. And that's actually kind of what's happening. Fidelity is going to pay us a payment for that downsizing. And then at the same time, we did get lucky that state of New Mexico had a very big demand for more modern space to bring some agencies out of some older facilities. And so they are extremely happy about locating here and have moved very fast in this process. And I wouldn't be surprised if they take additional space in the future. So that's going to allow us to monetize this asset probably late this year or early next year after we get everything settled down. But yes, it's going to be a good situation for us.

Q: Second question I have is around acquisitions. I think you mentioned that you are looking at one shopping center for a potential acquisition. And if you were to acquire that property, should we expect leverage to go up in the near term to fund that acquisition?

A: Maybe in the near term. But as I mentioned, I think last earnings, we are looking to recycle some assets. So we would not see the kind of leverage after recycling tick up at all.

Q: And then lastly, can you remind if you have any dispositions in your guidance?

A: Yes, there's no dispositions in the current guidance.

Q: Are the Fidelity and the state of New Mexico leases, are those second quarter leases or are those third quarter leases?

A: The Fidelity is -- so we have an agreement with them to downsize. We're still working through the exact square footage there. So it's going to be approximately half, but just have to work through kind of the common areas and stuff like that, the lobby and all to make sure that it works for both tenants. So it's not 100% finalized, but it's substantially done, and we do have an agreement in place. It's just fine-tuning the layout and the exact square footage. And then the state of New Mexico was signed and it was this quarter.

Q: Okay. So that was in the 226,000 and changes of leasing that you reported for the second quarter?

A: It is not. If you look at our leasing spreads and all, that is just retail leases. We sporadically have some office leases here and there that aren't just representative of the majority of our portfolio. And so as we disclosed on that schedule, it does exclude those. So that was not in there.

Q: And then at this point, given that we're a month into the third quarter, any significant leasing that you guys have signed thus far? And where does the signed not open pipeline sort of sit today versus the $4.6 million at June 30?

A: I mean, we're working on a fair amount of leases. Again, actually, if you take all of our vacancy that's remaining, we're negotiating either LOIs or leases on majority of the remaining vacancy. So we're just not there yet. I would say probably the next 60 days is kind of where things will be getting signed.

Q: So it seems like you're still seeing a lot of strength on the leasing side. Could you kind of talk about how those processes go? And then with those kind of 4 that aren't signed yet that have multiple offers or maybe multiple tenants that want to go in, how you guys are kind of evaluating the credit and which tenant you guys want to go in that spot?

A: Yes. Thanks for the question. I mean, look, we're pleasantly surprised at the strength of leasing and the tenants that we're talking about are kind of household names. So good credits. I think where it becomes a little bit more challenging is we do have other tenants that are interested. And if you split a box and bring in 2 tenants, maybe you make more money, but it costs more money, takes a little longer. So it's kind of high-class problems, but we're really going with more easier sort of solutions with credit, and it will be a little faster. But having said that, nothing happens fast these days. Just a lot of -- these lease negotiations have been taking quite a bit of time as these tenants have a pretty full deck of other leases that they're working on as well. So it's just -- the process is elongated these days, but the good news is we have a lot of good options on the leasing side. And as mentioned, given that out of our vacancy that we're really talking to about almost 70% of it that we're negotiating one form or the other, it's great to see.

Q: And then you mentioned the kind of the process with it taking long. And then kind of on that turnover with the 94% to be recognized next year, what do you see as risks that would cause less than 94% to be recognized in '26?

A: The good news is, as you know, on our acquisitions, we've been buying properties with low embedded lease rates. So the mark-to- market is fairly opportunistic and would be terrific to have happen. So we're not really concerned about lease rollover because it's more opportunity if unexpectedly tenants do not stay in the spaces. So it's nothing that kind of keeps us up at night, if you will.

Q: So as I think about the physical occupancy, the decline kind of quarter-over-quarter, is there anything other than maybe some of the moving pieces around the retenanting of the anchor boxes and the Staples to Barnes & Noble conversion that you called out that was driving that? Just any other color there would be helpful.

A: No. It's really what we've talked about for some time now. It's all the usual suspects as far as that went bankrupt in the industry, Party City, JOANN's, Conn's. So it's really just dealing with big lots, dealing with those -- so nothing out of the ordinary of what's been talked about in the industry.

Q: Was the Staples to Barnes & Noble conversion in those numbers? Or was that a seamless transition or something that's going to occur in like 3Q, 4Q?

A: Yes. So this quarter, the real driver was JOANN's and Party City. Party City left at the very beginning of the quarter, JOANN's kind of in the middle. The Staples, their lease goes until, I believe it is November. And so that will happen in the fourth quarter, John, where they will vacate. So the dip of 80 bps or so this quarter was largely JOANN's and Party City.

Q: And any kind of temporary loss of rent there as it transitions to Barnes & Noble? Or is that something that -- because of the demand for that space because you had a tenant in place that it should be pretty seamless?

A: There'll be a little downtime towards the very end of this year or early next year, but it will not be in an extended period of time.

Q: I know we talked about the Fidelity leasing situation, a decent amount. But just am I right in interpreting that -- and the negotiations are still ongoing, but am I right in interpreting that there could be a potential lease termination fee paid to you as a result of this? And understanding you're trying to dispose of the asset at some point here in the coming quarters, is the rent that you're getting from the building going to be relatively the same once you split it into 2 tenants? Or is there any kind of change in rent around reducing the size for Fidelity and bringing in the state of New Mexico.

A: Yes. So 2 pieces there. Fidelity will make a payment to us, John. The way the accounting will likely work on that is it will just get blended in with their rent on the half that they maintain and keep for several years. So don't expect to see like a pop to miscellaneous income or anything in the fourth quarter related to a big term fee, and that is not baked into the guidance. It will just generally kind of be the way GAAP will treat that, even though we'll get a nice little cash payment in the fourth quarter, is it will just blend it in with the rent on the remaining space over the remaining term. There won't be a roll down in rent there. There'll just maybe be a little bit of downtime, but there will not be a roll down in rent.

Q: On the potential shopping center acquisition you talked about, should we expect term loan financing to kind of come either before or maybe around that transaction? Do you view those kind of as being one in one? Or is that something where you feel comfortable taking more on the line? And I think you said 3Q, 4Q for executing on the term loan. But I just kind of was wondering how related financing might be to closing that transaction.

A: Yes. I mean the timing may not line up right on top of each other. But based on conversations we've had with our bank group, we don't have any concerns about terming that out. So we'll just want to make sure we get the best execution there that we can get. It would be great to kind of have a similar time line there to keep a little more liquidity on the line, but there could be just a little bit of period of time there where the acquisition comes down before the new term loan and/or disposition gets completed. But there won't be a large gap there.