Investment Case Update: May 21, 2025

Market Capitalization: $588.2MM
Enterprise Value: $1.3B
Price: $17.86 (5/21/25)

What the Company Does

CTO is a real estate investment trust (REIT) with ownership interests in retail and mixed-use properties located in areas that have been growing faster than the rest of the continental United States. This has resulted in a heavy concentration in the southeast and southwest regions of the United States, also known as the “Sun Belt” states. CTO owns 24 properties spanning 5.2MM square feet with a leased occupancy rate of 93.8% as of 1Q25, with 70% of annualized base rent coming from retail tenants, 26% from mixed-use tenants, and 4% from office tenants. CTO’s largest tenants include Fidelity, AMC, Best Buy, and Dick’s Sporting Goods, among others.

Why We Own It

CTO offers strong growth prospects as the company’s recently constructed portfolio positions the REIT to continue to benefit from outsized tenant demand and limited supply. Based on CTO’s figures, the average annual household income was $141K in 2023 in the markets in which CTO operates, compared to the US average annual household income of $113K, and strong population growth could be on the horizon in CTO’s markets, as 95% of CTO’s rent comes from cities ranked in Urban Land Institute’s top 30 markets based on overall real estate prospects. Management is guiding for same-store net operating income growth of 1% this year as CTO continues to lease up recently developed/acquired properties along with mark-to-market rent upside from existing below-market leases. Additionally, management is optimistic about the re-leasing prospects on 10 anchor properties that were recently vacated after tenant bankruptcies, with new rents expected to be 40-60% higher than the previous in-place rents.

Despite CTO’s favorable portfolio positioning, shares currently trade at 9.1x FY26 funds from operations (FFO) estimates, or a roughly 28% discount to peers (FRT, IVT, SITC, UE, AKR, KIM, WSR, BRX, KRG, AAT). The stock also offers an 8.5% dividend yield, while none of its peers have dividend yields in excess of 7.0%.

How Management Allocates Capital

Management’s top capital allocation priority is developing and acquiring high-quality properties that offer opportunities for long-term cash flow growth, with management guiding for investments of $150MM this year. Operating as a REIT, CTO is required to distribute at least 90% of its annual taxable income, but management targets a payout ratio of 100%, which has resulted in twelve consecutive years of dividend increases and a 67% increase to CTO’s annualized dividend since 2020. CTO ended the first quarter with total debt of $604MM and a net debt to pro-forma EBITDA leverage ratio of 6.6x as of quarter-end, which is within the company’s typical 6-8x leverage range in recent years. After quarter-end, CTO retired the remaining $51MM of convertible notes due in April, which should provide management with ample liquidity (no additional maturities for 2025) to pursue larger format retail center acquisitions in what they believe is a very favorable environment with limited buyer competition.