CTO Realty Growth, Inc. (NYSE: CTO-PA) is a publicly traded, self-managed equity REIT that focuses on the ownership, management, and repositioning of high-quality retail and mixed-use properties located primarily in what it believes to be faster growing, business-friendly markets exhibiting accommodative business tax policies, outsized relative job and population growth, and where retail demand exceeds supply. The company has delivered consistent financial results, reporting annual net income of $5,530,000, annual revenue of $109,119,000, annual operating cash flow of $46,421,000, and annual free cash flow of -$56,528,000 in its latest fiscal year.
Business Overview
CTO Realty Growth's portfolio consists of 20 commercial real estate properties in 8 states, comprising 3.9 million square feet of gross leasable space. The company's income property operations accounted for 92.1% of its identifiable assets as of June 30, 2023, and 88.6% of its consolidated revenues for the six months ended June 30, 2023. The company's management services business generates fee-based income from managing Alpine Income Property Trust, Inc. (PINE) as well as a portfolio of assets pursuant to a portfolio management agreement and the company's subsurface interests pursuant to a subsurface management agreement. Additionally, the company's commercial loans and investments segment consists of a portfolio of three commercial loan investments and one preferred equity investment.The company's strategy for investing in income-producing properties is focused on factors including, but not limited to, long-term real estate fundamentals and target markets, including markets it believes to be faster growing, business-friendly markets exhibiting accommodative business tax policies, outsized relative job and population growth. CTO Realty Growth employs a methodology for evaluating targeted investments in income-producing properties which includes an evaluation of the attributes of the real estate, an evaluation of the existing tenant(s), other market-specific conditions, and considerations relating to the company's business and strategy.
Financials
For the three months ended June 30, 2023, CTO Realty Growth reported total revenue of $28,845,000, compared to $26,047,000 during the three months ended June 30, 2022, representing a 10.7% increase. This increase was primarily attributable to increased income produced by the company's recent income property acquisitions versus that of properties disposed of by the company during the comparative period, as well as more same-store revenue from its properties owned during each period. Additionally, revenues from the company's commercial loans and investments increased, which was offset by reduced revenues from its real estate operations.Net income (loss) attributable to the company totaled $1,183,000 and $1,800,000 during the three months ended June 30, 2023 and 2022, respectively, representing a $0.6 million decrease. This decrease is attributable to factors such as increased interest expense, partially offset by the growth in total revenue.
For the six months ended June 30, 2023, CTO Realty Growth reported total revenue of $56,972,000, compared to $50,764,000 during the six months ended June 30, 2022, representing a 12.2% increase. This increase was primarily attributable to increased income produced by the company's recent income property acquisitions versus that of properties disposed of by the company during the comparative period, as well as more same-store revenue from its properties owned during each period. Additionally, revenues from the company's commercial loans and investments increased, which was partially offset by reduced revenues from its real estate operations.
Net income (loss) attributable to the company totaled $7,025,000 and $(4,193,000) during the six months ended June 30, 2023 and 2022, respectively, representing a $7.3 million increase. This increase is primarily attributable to an $8.2 million increase in gain on disposition of assets.
Liquidity
As of June 30, 2023, CTO Realty Growth had cash and cash equivalents totaling $4,794,000 and restricted cash of $1,363,000. The company's cash flows provided by operating activities totaled $24,640,000 during the six months ended June 30, 2023, compared to $25,021,000 during the six months ended June 30, 2022, a decrease of $381,000. This decrease is primarily the result of an increase in interest expense as the result of higher overall debt balances during the six months ended June 30, 2023, offset by increased cash flows provided by income properties and commercial loans and investments.The company's cash flows used in investing activities totaled $40,745,000 during the six months ended June 30, 2023, compared to $106,424,000 during the six months ended June 30, 2022, a decrease of $65,679,000. This decrease is primarily the result of a decrease in acquisition activity of income properties, net of sales of income properties and principal repayments received on commercial loan investments.
The company's cash flows provided by financing activities totaled $4,443,000 during the six months ended June 30, 2023, compared to $70,276,000 during the six months ended June 30, 2022, a decrease of $65,833,000. This decrease is primarily related to a $108,900,000 decrease in cash inflows provided by net debt activity, partially offset by proceeds from preferred equity issuances of $33,000,000, proceeds from common stock issuances of $6,400,000 and a decrease in cash outflows of $4,400,000 due to fewer repurchases of the company's common and preferred stock.
Acquisitions and Investments
During the six months ended June 30, 2023, CTO Realty Growth acquired the Marketplace at Seminole Towne Center, a multi-tenant income property located in Sanford, Florida, for a purchase price of $68,700,000, or a total acquisition cost of $68,800,000 including capitalized acquisition costs. The company also acquired a vacant land parcel for future development within its previously acquired West Broad Village property in Richmond, Virginia, for a purchase price of $1,500,000, and the remaining 4,000 square foot property within the 28,100 square foot retail portion of Phase II of The Exchange at Gwinnett located in Buford, Georgia for an aggregate purchase price of $2,300,000 including capitalized acquisition costs.Additionally, the company originated one structured investment, to provide $10,000,000 of funding towards the construction of improvements on seven outparcel locations located in Lake Worth, Florida, of which $6,700,000 was funded as of June 30, 2023.
During the six months ended June 30, 2022, the company acquired the Plaza at Rockwall, a multi-tenant income property located in Rockwall, Texas for a purchase price of $61,200,000, or a total acquisition cost of $61,300,000 including capitalized acquisition costs. The company also acquired four properties, totaling 24,100 square feet, within the 28,100 square foot retail portion of Phase II of The Exchange at Gwinnett located in Buford, Georgia, for an aggregate purchase price of $14,600,000, or a total acquisition cost of $14,700,000 including capitalized acquisition costs.
Dispositions
During the six months ended June 30, 2023, CTO Realty Growth sold one mixed-use income property in downtown Santa Fe, NM for $20,000,000, resulting in a gain of $4,600,000. During the six months ended June 30, 2022, the company sold one income property, an outparcel of the multi-tenant property known as Eastern Commons, located in Henderson, Nevada, for $2,100,000, resulting in a gain of $800,000.Outlook
CTO Realty Growth has increased its guidance for full year 2023 investments in income-producing properties, including structured investments, to a range of $200,000,000 to $250,000,000. The company expects to fund future acquisitions utilizing cash on hand, cash from operations, proceeds from the dispositions of income properties through 1031 like-kind exchanges, borrowings on its credit facility, if available, and additional financing sources.The company has also increased its full year 2023 core FFO guidance to a range of $1.81 to $1.86 per share, representing a 12% increase at the midpoint, and its AFFO guidance to a range of $1.95 to $2.00 per share, representing an 11% increase at the midpoint. This increase in guidance is attributable to the company's strong first half results, the timing and volume of anticipated acquisitions, and the company's current outlook.
Risks and Challenges
While CTO Realty Growth has delivered consistent financial performance and is eyeing attractive acquisition opportunities, the company faces certain risks and challenges. These include risks related to the ownership of commercial real estate, competition from e-commerce retail sales, the ability to successfully execute on asset acquisitions or dispositions, the potential loss of revenues from its income property portfolio or certain tenants, and risks related to its investment in PINE and the potential conflicts of interest in that relationship.Additionally, the company may suffer losses when a borrower defaults on a loan and the value of the underlying collateral is less than the amount due, and its real estate investments are generally illiquid. The company may also be unable to obtain debt or equity capital on favorable terms, if at all, and servicing its debt requires a significant amount of cash, which could impact its ability to pay dividends or make other investments.