CTO Realty Stock: A Good Fit For Dividend Portfolios With Attractive Valuation (NYSE:CTO)

CTO Realty Growth, Inc. (NYSE:CTO), incorporated in 2020 as a REIT and headquartered in Winter Park, FL, mainly owns and manages a portfolio of retail and mixed-use properties in Sunbelt regions.

I think that dividend portfolios could benefit from this REIT as the dividend yield is high but seems sustainable, and the shares are trading at a discount to NAV at best and at their fair value at worst. CTO’s portfolio is also well-diversified for its size, leverage is not too high, and the maturities are well-laddered.

Business & Portfolio

First of all, CTO Realty wasn’t always leasing retail properties. Besides being incorporated quite recently as a publicly traded REIT, it traces its roots back to 1902. Back then, it owned about 2 million acres of timberland in Florida and throughout the 1920s and 1930s, it focused on selling the land. It wasn’t until 1969 that it went public. Since then, it has continued to sell land and has been buying income properties. In the CEO’s own words:

We went from an agriculture-sort of company to income properties and a dividend-oriented company. […] Through that process, now virtually all of our assets are income-oriented. We do still have some legacy properties, but there isn’t much remaining from the land-focused predecessor company, Consolidated-Tomoka. As we’ve refined the portfolio, we’re very focused on properties in the Southeast and Southwest, as we look to acquire more high-quality, larger format retail properties in business friendly states with faster growing markets.

Today, the REIT’s portfolio consists of 20 properties that aggregate 3.9 million square feet and are spread across 8 states. The markets it operates in are diverse and well-populated. But most importantly, the portfolio is sufficiently diversified, considering the REIT’s small size:

The careful REIT investor is justified in feeling reluctant to invest in retail real estate; the advent of e-commerce is after all a threat to offline traffic. What about exceptions to this new “rule” though? As you can see above, CTO generates 22% of its ABR from grocery-anchored properties and 39% from retail power centers, both of which types are leased to well-known retailers and grocery stores. How consumers consume may have changed and this will have a long-lasting impact on retail, but large retailers have the resources to not only survive but thrive; e-commerce has practical value to offer, but it cannot replace the need (want in most cases) to go out to shop, eat, and receive services that cannot be offered online.

This REIT’s portfolio also includes office properties, but they were responsible for 4.7% of the cash base rent generated in the last quarter. The tenant base is also well-diversified, considering that the top tenant is Fidelity, which has an A+ credit rating from S&P and accounts for 5% of ABR. Last, in the latest quarterly report, the REIT reported that its WALT was 5.2 years, which seems average for retail leases.

Leverage & Liquidity

As of the end of the last quarter, almost 60% of CTO’s assets were funded with debt, which I see as acceptable. Debt/EBITDA may be at 9.42x, but the cost of debt is surprisingly low for such a small REIT, represented by a weighted average interest rate of 4.52%; the interest coverage was 2.95x based on last quarter’s figures.

The company also has access to a $300 million credit facility, of which, as of March 31, 2024, it had $209.5 million outstanding, leaving $90.5 million available for withdrawal. There is also an option for requesting additional revolving loan commitments, as long as the aggregate amount of those is not higher than $750 million.

Last, there are no maturities for this year and the following years don’t seem to represent a great refinancing risk considering the small amounts coming due:

Performance

After comparing the last quarterly figures annualized with the corresponding average figures of CTO’s last 3 fiscal years, the growth reflected seems great:

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Zooming in, rental revenue, same-store NOI, and AFFO per share experienced more than decent growth on a YoY basis:

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Occupancy also seems healthy at 94.3%, which is not much lower than other much larger retail REITs and let’s not forget that OCT also has some office properties. Moreover, occupancy reflects a 100 bps YoY increase.

Dividend & Valuation

CTO currently pays a quarterly dividend of $0.38 per share, resulting in a forward yield of 8.73%. Now, management has guided for a $1.74 to $1.82 AFFO per diluted share for this year. Being conservative and using the lower end of this range, the payout ratio is 87.35%. Additionally, the payment record shows consistency so far:

The high yield is not just attractive, but also reflective of good value here. The same goes for CTO’s AFFO yield of 10%, which is also based on the conservative assumption that the REIT is going to achieve the lower end of its AFFO target.

CTO is cheap on a peer-relative basis too, as it recently traded at an FFO multiple of 10.3x:

As of the last trading session, its P/FFO was also well below the average of the largest retail peers’ multiples:

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Moreover, it is now trading at an implied cap rate of 6.93%. Considering that the average cap rate for retail assets is forecast to average 6.9% in 2024 (the highest level in a very long time), the shares are “fairly” valued. But this is maybe too conservative. If interest rates go down to a more attractive level, we could see retail cap rates coming back to ~5%, based on which NAV per share would be ~$30, reflecting a discount of more than 40%. But this will take time to happen if it does.

Risks

The lack of conflicting data regarding valuation makes the shares look cheap. However, there is a risk that the current “undervaluation” is going to persist for too long if the market doesn’t recognize the value of this expanding business. Considering the size of this REIT, there is an opportunity risk here, which the high dividend yield could only partly make less severe.

Also, 35% of rental revenue comes from properties in Atlanta. So, there is a risk that population and employment trend changes may adversely affect the REIT’s bottom line in the long term if it doesn’t decrease its reliance on that market.

Verdict

Regardless, the dividend profile, strong performance, well-scheduled maturities, and valuation outweigh the risks. This appears to be a great fit for a dividend portfolio not just because of the yield but the potential undervaluation that provides a margin of safety. Therefore, I rate this a buy, and I am looking forward to future developments regarding the expansion of the business.

What do you think? Do you own this REIT or intend to? Let me know and I’ll get back to you soon. Also, please leave a comment if you found this post useful; it means a lot! Thank you for reading.