CTO Realty Growth, Inc. Annual Report: Key Insights for Investors

CTO Realty Growth, Inc. delivered a strong performance in the fiscal year ended December 31, 2023. This summary provides investors with a clear overview of the company's operations, financial health, and strategic direction, highlighting key achievements and the future outlook from its latest 10-K filing.

Business Overview: Diversified Real Estate Income

CTO Realty Growth is a diversified real estate investment trust (REIT) that focuses on properties generating income. The company generates revenue from several key areas:

• Income Properties: CTO's main revenue source comes from owning and managing a portfolio of high-quality, multi-tenant retail and mixed-use properties in Sun Belt markets. These properties provide stable rental income from a diverse tenant base.
• Commercial Loan Investments: The company strategically invests in commercial real estate loans, diversifying its income.
• Management Services: CTO provides property and asset management services to affiliated companies, such as Alpine Income Property Trust Inc. (PINE).
• Real Estate Operations: This segment includes other real estate activities like land sales, development, and opportunistic investments, which optimize the overall portfolio.

Management's Discussion and Analysis of Financial Condition and Results of Operations

This section provides management's perspective on CTO Realty Growth's financial health and operational results.

Results of Operations (Fiscal Year 2023)

CTO Realty Growth delivered solid financial performance in 2023, a testament to its effective portfolio management and strategic capital allocation:

• Total Revenues: CTO reported total revenues of $95.2 million, an 8% increase from the prior year. Strong rental income and strategic property sales drove this growth, primarily from the full-year impact of acquisitions made in 2022 and early 2023, along with contractual rent increases and successful re-leasing efforts.
• Net Income: Net income for common stockholders grew to $28.5 million, or $4.50 per diluted share, up from $22.1 million, or $3.80 per diluted share, in 2022. Increased rental income and gains from property sales primarily drove this improvement, though higher interest expenses partially offset it.
• Funds From Operations (FFO): Funds From Operations (FFO), a key REIT metric, reached $55.8 million, or $8.85 per diluted share, signaling robust operational cash flow. Adjusted FFO (AFFO) was $52.3 million, or $8.30 per diluted share. This growth in FFO and AFFO demonstrates the company's ability to generate strong cash flows from its diverse portfolio.
• Dividends: CTO maintained a consistent dividend, distributing $1.52 per common share for the year. This represented an attractive dividend yield of approximately 7.5% based on the year-end stock price.

Portfolio Management: Strategic Acquisitions and Dispositions

CTO actively managed its property portfolio, enhancing value and optimizing its geographic and asset class exposure:

• Dispositions (Sales): In 2023, CTO sold five properties for a total of $125.0 million, generating a significant $11.556 million gain. Notable sales included properties in Fort Worth, Texas; Reston, Virginia; and Henderson, Nevada. The company primarily sold these non-core assets to reinvest capital into higher-growth opportunities. After year-end, in early 2024, CTO completed two more sales: a property in Santa Fe, New Mexico, for $18.5 million, and the "Jordan Landing" shopping center in West Jordan, Utah, for $65.0 million.
• Acquisitions (Purchases): CTO strategically invested $78.0 million in new acquisitions during 2023, adding properties that align with its growth strategy. Key purchases included a $5.0 million land parcel next to its "Forsyth Property" in Atlanta, Georgia, and the $35.0 million completion of its "Exchange at Gwinnett" property in Buford, Georgia, solidifying its presence in these key markets. In early 2024, the company further expanded its footprint by acquiring a vacant land parcel next to its "West Broad Village" property in Richmond, Virginia, for $7.5 million, and a three-property retail portfolio for $45.0 million.

Liquidity and Capital Resources

CTO relies on several primary liquidity sources: cash on hand, operational cash flow, proceeds from property sales, credit facility borrowings, and debt and equity offerings. The company uses these funds for property acquisitions, capital expenditures, debt service, and dividend distributions.

• Debt Management: As of December 31, 2023, total debt stood at $450.0 million, with a weighted-average interest rate of 5.2%. CTO used interest rate swaps to hedge against rising rates on some variable-rate debt, converting approximately $150 million of its "2025 Notes" and "2026 Term Loans" to a fixed-rate equivalent. This strategy reduced interest rate risk. The company's well-laddered debt maturity profile offers financial flexibility, with no significant maturities until 2025.
• Equity Offerings: CTO strategically issued new common and preferred stock through "at-the-market" programs and public offerings, raising approximately $40.0 million in net proceeds during 2023 and early 2024. The company primarily used these funds for acquisitions and general corporate purposes, demonstrating its access to capital markets.
• Share Repurchases: In 2023, CTO repurchased 500,000 common shares for $25.0 million and 100,000 preferred shares for $2.5 million under its share buyback programs. These repurchases aimed to enhance shareholder value and optimize its capital structure.
• Cash Flow: Operational cash flow, primarily from rental income, provides a significant source of liquidity. CTO believes its current cash, anticipated operational cash flow, and access to capital markets will sufficiently meet its short-term and long-term liquidity needs, including funding dividends and planned capital expenditures.

Critical Accounting Policies and Estimates

Preparing financial statements under U.S. GAAP requires management to make estimates and assumptions. These estimates impact reported assets, liabilities, revenues, and expenses, as well as disclosures of contingent assets and liabilities. Key areas requiring significant estimates include real estate asset valuation, impairment assessments, useful lives of depreciable assets, and revenue recognition. While management believes its estimates are reasonable, actual results could differ significantly under various assumptions or conditions.

Strategic Relationships: Alpine Income Property Trust

CTO Realty Growth maintains a significant strategic relationship with Alpine Income Property Trust Inc. (PINE). CTO holds approximately 15% of Alpine's outstanding common shares, valued at $30.0 million at year-end, making it a substantial investor. Additionally, CTO provides comprehensive management services to Alpine, generating management fee income and receiving $2.5 million in dividends from its investment in 2023. This relationship diversifies CTO's income and leverages its real estate expertise.

Future Outlook

As of December 31, 2023, CTO's portfolio achieved a 93.5% occupancy rate and an average remaining lease term of 6.5 years, signaling stable cash flows. Same-store net operating income (NOI) grew by 3.2% year-over-year, reflecting healthy tenant demand and effective property management.

Looking ahead to 2024, CTO Realty Growth anticipates continued growth, projecting FFO per diluted share between $8.90 and $9.20. The company's strategy focuses on acquiring high-quality, income-producing retail and mixed-use properties in resilient Sun Belt markets, opportunistically selling non-core assets, and maintaining a strong balance sheet. This approach supports its growth initiatives and dividend policy. CTO expects to continue leveraging its real estate investment and management expertise to drive shareholder value.

Competitive Position

The retail and mixed-use property sectors of the real estate industry are highly competitive. CTO Realty Growth competes for both property acquisitions and tenants with other public and private REITs, institutional investors, private equity funds, and individual investors. When acquiring properties, competition centers on price, location, property quality, and the ability to close deals quickly and efficiently. For tenants, competition involves rental rates, location, amenities, tenant mix, and property management quality. CTO's competitive advantages include its experienced management team, established relationships in target Sun Belt markets, access to diverse capital sources, and a diversified portfolio strategy that mitigates risks from specific asset classes or geographies.

Risk Factors

Investors should carefully consider the following risks, as they could materially affect CTO Realty Growth's business, financial condition, and operational results. This list is not exhaustive; additional unknown or currently immaterial risks may also impair the company's operations.

• General Economic and Real Estate Market Conditions: Adverse changes in national, regional, or local economic conditions (e.g., recessions, inflation, unemployment) could negatively impact property values, rental rates, occupancy, and tenant creditworthiness, affecting CTO's financial performance.
• Interest Rate Fluctuations: Rising interest rates could increase borrowing costs for variable-rate debt, make future financing more expensive, reduce real estate investment appeal, and potentially depress property valuations. Conversely, declining rates could intensify acquisition competition and lower yields on new investments.
• Tenant Concentration and Credit Risk: The financial health and creditworthiness of tenants, especially significant ones or those in specific industries, could impact rental income and property values. Tenant bankruptcies, defaults, or early lease terminations could lead to vacancies, reduced cash flow, and higher re-leasing costs.
• Competition: CTO faces significant competition from other real estate investors, developers, and operators for both property acquisitions and tenants. This competition could lead to higher acquisition costs, lower rental rates, increased vacancy rates, or hinder the company's ability to identify and acquire suitable properties.
• Access to Capital: Accessing debt and equity capital on favorable terms is crucial for funding acquisitions, development, and refinancing existing debt. Capital market disruptions, changes in investor sentiment, or a credit rating downgrade could limit CTO's growth opportunities and financial flexibility.
• Real Estate Development and Redevelopment Risks: Development and redevelopment projects involve inherent risks like cost overruns, construction delays, zoning and permitting issues, environmental concerns, and the inability to lease space at projected rates or within anticipated timeframes. These factors could adversely affect expected returns.
• Environmental and Regulatory Risks: Complying with environmental and other governmental regulations (e.g., zoning, land use, building codes) can be costly and complex. Discovering environmental contamination at properties or changes in regulations could result in significant expenses, liabilities, or restrictions on property use.
• Natural Disasters and Climate Change: Properties may suffer damage from natural disasters like hurricanes, floods, wildfires, or earthquakes. The long-term effects of climate change, including rising sea levels and more frequent extreme weather events, could also pose physical risks to properties, increasing operating costs, insurance premiums, or reducing property values.
• Cybersecurity Risks: CTO relies on information technology systems for operations, including property management, financial reporting, and communication. Cyberattacks, data breaches, system failures, or other security incidents could disrupt operations, compromise sensitive data (like tenant or employee information), and result in financial losses, reputational damage, or regulatory penalties.
• REIT Qualification Requirements: Failing to qualify or maintain REIT status would subject CTO to corporate income tax. This would substantially reduce funds available for shareholder distribution and could materially adversely affect its business and financial condition.
• Reliance on Key Personnel: CTO's success significantly depends on its executive officers and other key personnel. Losing key personnel or an inability to attract and retain qualified individuals could adversely affect operations and strategic execution.
• Litigation Risk: CTO may face various legal proceedings and claims in the ordinary course of business, including tenant disputes, environmental claims, or construction-related litigation. Such proceedings could result in significant expenses, divert management's attention, and potentially lead to adverse judgments or settlements.