Market Capitalization: $440.7M
Enterprise Value: $1.04B
Price: $19.06 (9/13/24)

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 20 properties spanning 3.9MM square feet with a leased occupancy rate of 94.6% as of 2Q24, with 62% of annualized base rent coming from retail tenants, 33% from mixed-use tenants, and 5% from office tenants. CTO’s largest tenants include Fidelity, AMC, Best Buy, and Whole Foods, 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 nearly $137K in 2023 in the markets in which CTO operates, compared to the US average annual household income of $107K1, and strong population growth could be on the horizon in CTO’s markets, as 73% of CTO’s rent comes from cities ranked in Urban Land Institute’s top 20 markets2 based on overall real estate prospects. Management is guiding for same- store net operating income growth of 3% this year as CTO continues to lease up recently developed/acquired properties along with mark-to-market rent upside from existing below-market leases, as leased occupancy is expected to rise approximately 200bps by year-end to the 95-96% range.

Despite CTO’s favorable portfolio positioning, shares currently trade at a roughly 33% discount to peers (FRT, IVT, SITC, UE, AKR, KIM, WSR, BRX, KRG, AAT) based on 2025 funds from operations (FFO) estimates. The stock also offers an 8.0% dividend yield, while none of its peers have dividend yields in excess of 5.0%.

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 $125MM and dispositions of $100MM 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 second quarter with total debt of $484MM and a net debt to pro-forma EBITDA leverage ratio of 7.5x as of quarter-end, which is within the company’s typical 6-8x leverage range in recent years. After the end of 1Q24, CTO paid down the remaining $15MM of floating rate debt under its revolving credit facility, which management highlighted should provide them with ample liquidity to pursue larger format retail center acquisitions in what they believe is a very favorable environment with limited buyer competition.