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CTO Realty Growth Stock: Old Dog Learned New Tricks (NYSE: CTO)

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NicolasMcComber/iStock Unpublished via Getty Images

Thesis: The peer review gap is closing

Who said old dogs can’t learn new tricks?

Longtime landowner and real estate developer Consolidated Tomoka Land Co. just converted to a REIT just over a year ago, becoming CTO Realty Growth (NYSE: CTO). Today, CTO has completed the divestment of nearly all of its inherited holdings, many of which (such as raw land) have generated no revenue, and spun off into a Sun Belt-focused mixed-use commercial REIT.

This transformation has paid off. Since early January 2020, CTO has outperformed its closest peers in retail and mixed-use REITs on a total return basis:

CTO performance against peers

CTO

On a price basis alone, CTO has roughly broken even since January 1, 2020. The REIT’s total return outperformance is entirely due to its generous dividend payout of $4 per share per year.

CTO vs peers in percentage change in total return price
Data by YCharts

Even so, CTO still offers a steep discount to its peers.

At a price of around $60 (at the time of this writing), the CTO’s AFFO per share guidance range of $4.10 to $4.20 for 2021 gives the REIT a price/AFFO ratio of ~14.5x. Additionally, I would expect the CTO’s 2021 AFFO/share to be at the high end of its guidance range, since the REIT had already generated $3.12 of AFFO/share in the first three quarters. of the year.

CTO’s AFFO multiple is lower than its peers by two or three turns. Although the CTO may deserve a discount due to its small size (22 properties; market cap of approximately $360 million) and high payout ratio (96% in the first three quarters of 2021), the portfolio Sun Belt REIT retail firm looks too attractive to continue trading this moo. As such, the valuation gap will likely continue to close over time, making CTO an attractive buying opportunity in a downturn.

The REIT currently offers a dividend yield of 6.67%.

CTO Real Estate Growth Update

CTO’s portfolio, comprised primarily of multi-tenant commercial properties, is focused on the fast-growing Sun Belt state markets, with Florida, Texas and Georgia being the REIT’s top three states by rent.

CTO portfolio

CTO

As you can see above, CTO properties are also located in densely populated areas of above average affluence. Jacksonville, just north of CTO’s headquarters in Daytona Beach, Florida, is the largest market in terms of base rent.

Main CTO markets

CTO

Almost all of these properties are located in the Sun Belt, and most are in cities with populations over one million.

At the end of September 2021, here is the breakdown of the portfolio by tenant and type of property:

Types of CTO assets

CTO

CTO owns only a few individual office buildings, and most of its office exposure comes from office space above retail stores in its mixed-use centers. Additionally, CTO’s only hotel ownership is land lease and CTO is not involved in the management or operations of the hotel.

At the end of September 2021, 51% of CTO’s annual base rent came from four shopping centers / mixed use.

Properties CTO Calendar

CTO

However, in the fourth quarter, CTO completed several significant acquisitions that further reshape the portfolio towards its target asset type of mixed-use shopping centers.

  • In early December, CTO announced the acquisition of a retail shopping center in a submarket of Raleigh, North Carolina, for $70.5 million. It is a 320,600 square foot center built in 2005 that is currently 97% occupied.
  • At the end of December, CTO announced the acquisition for $13.2 million of a 3-story office building in a submarket of Orlando, Florida. CTO will use part of the building to establish a new office for itself while renting the rest of the building to third-party tenants. CTO may also consider redeveloping the property and doubling its square footage at some point in the future.
  • Also in late December, CTO announced the acquisition of a mixed-use property in downtown Santa Fe, New Mexico that is used primarily as office space. It is a 137,000 square foot property purchased for $16.3 million.
  • Again, in late December, CTO announced the acquisition of a grocery-anchored retail center in an Atlanta, Georgia submarket for $34 million. The center is 69,000 square feet, 98% occupied and anchored by Sprouts. As part of the agreement, CTO has acquired the right of first refusal to purchase 37,000 additional retail spaces in the center currently under development.

Indeed, the full year of 2021 (the first full year as a REIT) has been a transformational year for the CTO portfolio.

On the one hand, the REIT sold $197.4 million in assets consisting of the following elements:

  • $162.3 million of income properties, the vast majority of which were single-tenant and 40% of which were office properties, at a weighted average cap rate of 6.1%.
  • A vacant plot of land in downtown Daytona Beach, Florida for $6.3 million.
  • Underground oil and mining rights to 84,000 acres of land for $4.6 million.
  • All remaining greenfield land in its joint venture land portfolio for $67 million ($24.4 million attributable to CTO).

On the other hand, CTO also acquired $249.1 million of income properties (almost exclusively multi-tenant retail/mixed-use centers) in the Sun Belt States for an average cap rate weighted 7.2%.

Notice the difference between CTO’s exit cap rates of 6.1% and its entry cap rates of 7.2%. This should produce accretive growth in 2022 and beyond. And, of course, for non-income-generating properties, recycling into income-producing properties is by nature accretive to cash flow.

Most of the time, these acquisitions were made with the proceeds from the sale of assets, cash on the balance sheet and funds available on the credit facility.

Net debt was just 29% of CTO’s enterprise value at the end of September, although that percentage has likely changed from the big four acquisitions completed in December 2021.

Total long-term debt on real estate assets (at cost) fell from 54.5% at the end of September to 43.6% at the end of December.

Additionally, all of CTO’s debt is unsecured, with the bulk of the $235 million in debt outstanding being short-term bank loans. Although no debt is due this year, almost half of the total is due next year.

CTO debt maturities

CTO

Although interest rates remain fairly low, refinancing more than $100 million in debt next year will be a hurdle for shareholders to watch.

Conclusion

There is one last point to mention. CTO externally manages and owns 16% of REIT sole tenant net lease Alpine Income Property Trust (NYSE: PIN). The few single-tenant net leasehold properties that CTO still owns could very well be sold to PINE eventually to free up capital to reinvest in CTO’s core type of property, multi-tenant retail.

At least until the end of 2024, when CTO’s initial 5-year management agreement with PINE expires, CTO will continue to receive both commission and dividend income from PINE.

Given the CTO’s last-minute trades in 2021, I would estimate the REIT will end the year with AFFO/share at the high end of its guidance range, implying AFFO/share between $4.18 and $4.20 $. If I’m right, the REIT’s payout ratio is just over 95%.

While I’d love to see the payout ratio drop to create a greater margin of safety for the dividend, there’s no denying that the CTO has done a good job of recycling capital accretively and transforming the portfolio primarily into mixed-use retail. Properties. Additionally, the location of these properties in dynamic Sun Belt markets should provide the REIT with some organic growth in the coming years as leases are renewed.

In short, CTO’s roughly 6.7% dividend yield looks attractive to investors comfortable with slightly above average risk. Additionally, the valuation discount to peers should gradually narrow if and when CTO proves its resilience as a business owner.