Summary
Wolfpack Research has taken a short position in CTO Realty Growth, Inc. (NYSE: CTO), alleging the REIT uses deceptive accounting tactics and unsustainable financial engineering to mislead investors about its dividend health. According to Wolfpack, CTO’s management is enriching themselves through non-GAAP manipulations and questionable business practices while the company teeters on financial instability.
Who is CTO Realty Growth, Inc.?
CTO Realty Growth is a retail-focused real estate investment trust (REIT) specializing in the acquisition and management of shopping centers across the U.S. Converted into a REIT in 2021, CTO has been active in property investments, often targeting aging and underperforming retail assets. The firm touts its high dividend yield, but faces mounting skepticism regarding the sustainability of its payouts.
Key Points from the Report
Deceptive AFFO Metrics: A Manufactured Illusion
- CTO excludes recurring capital expenditures from its Adjusted Funds From Operations (AFFO), a practice not followed by any of its shopping center REIT peers.
- If recurring capex were included, CTO’s 2024 AFFO would be $29.9M rather than the reported $50.7M, resulting in a $10M dividend shortfall.
- The company’s AFFO payout ratio in 2024 was an alarming 134.8%, and dividend coverage just 0.74x, well below the peer average of 1.47x.
Unsustainable Dividends Funded by Dilution
- Since 2022, CTO has increased its shares outstanding by 70%, masking its inability to fund dividends and capex from operations.
- Operating cash flow in Q1 2025 was $10.3M against dividends of $14.1M and recurring capex needs of $5.7M per quarter.
Sham Loan at Ashford Lane
- A $1.5M “loan” to a failing tenant (The Food Hall at Ashford Lane) was used to conceal non-payment and delay disclosures about default.
- CTO continued listing the tenant as a top performer even after rent stopped in November 2022, with bankruptcy following in early 2023.
- The loan was quietly reclassified as a capital improvement, avoiding impairment and misleading investors.
Property-Level Disasters
- Shops at Legacy: WeWork's exit led to a 34% ABR decline and 56% occupancy; future prospects dim with nearby competition rising.
- West Broad Village & Others: Southern University (CTO’s 7th largest tenant) is subleasing 1/3 of its space, suggesting an impending exit or renegotiation at lower rates.
- Recent Acquisitions: Properties acquired in 2024 have experienced tenant bankruptcies and require $12M in unplanned capex.
Executive Compensation Misaligned with Performance
- 70% of performance bonuses are tied to the inflated AFFO figure.
- If industry-standard AFFO were used, management would have missed bonus thresholds every year since 2021, potentially saving $8M in overpayments.
Overpaying for Properties to Inflate AFFO
- In 2024, $32.4M of CTO’s acquisitions were booked as intangible assets, which are rapidly amortized and added back to AFFO, artificially inflating results.
- This provides a perverse incentive to overpay for properties to boost management pay metrics.
Activ8 Finance Analysis
Wolfpack’s report paints a troubling picture of CTO Realty Growth as a REIT more focused on financial cosmetics than sustainable operations. The reliance on a manipulated AFFO metric not only distorts the company’s financial health but also directly influences executive compensation. Property mismanagement, increasing vacancies, and shareholder dilution exacerbate concerns. While CTO projects the image of a high-yield investment, the underlying cash flows and operational strategy suggest otherwise. Investors should scrutinize the REIT’s financial disclosures closely and remain aware of potential risks obscured by non-GAAP accounting practices.