CTO Realty Growth: As You’re Buying Groceries, Consider Buying This REIT (NYSE:CTO)

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Today, I’m revisiting CTO Realty Growth (NYSE:CTO), a company which specializes in the acquisition and management of mainly retail properties across 9 States. As of the end of the second quarter of this year, the company owned 22 properties, with a total building footprint of 2.8 million square feet and average occupancy rate of 91%. The last time I wrote an article about this company was 17 months ago when it was trading at $17.57 per share. Despite that 26% of total return, I believe that CTO Realty Growth has the potential to withstand the economic uncertainty and provide its shareholders with premium returns, for the following reasons:

Reason #1: Retail, but not just any retail

According to real estate theory and empirical evidence, in times of economic slowdown and uncertainty, the real estate sector which gets the first hit is retail. And it makes sense consumer-wise: As real income remains steady at the very best, consumers cut their expenses. That’s why retail is considered as one of the riskiest classes of commercial real estate. However, this is not entirely true with CTO. The company had the wisdom to invest in grocery-anchored retail properties. These types of properties usually lift some of the excess risk associated with traditional retail properties. Due to their nature, grocery-anchored properties will always attract visitors, despite the prevailing economic conditions, and that’s the first thing to a thriving retail center.

According to JLL Research, grocery-anchored retail centers are in fact a defensive submarket of the real estate universe, being generally immune to the e-commerce threat, while at the same time providing steady returns.

CTO Realty Growth is currently generating almost two-thirds of its total annual base rent from retail properties, the majority of which are grocery-anchored. Another 19% is generated from mixed-use properties. The company’s course towards this particular submarket is reaffirmed by its recent transactions. Two months ago, the company purchased Madison Yards grocery-anchored property in Atlanta, GA, a class-A property built in 2019, for $80 million and also provided $30 million of preferred equity for the acquisition and repositioning of Watters Creek in Allen, TX.

Reason #2: As above, so below

We’re used to REITs that develop, acquire, manage, and sell properties that are built on the ground. But an additional reason why I like CTO is its list of non-income-producing assets, such as mitigation credits and mining rights. The company maintains a portfolio of surface oil, gas, and mineral rights in Florida, with a total acreage of 365k and a mitigation land of 2.5k acres in western Daytona Beach. According to the company’s investor presentation, these non-income-producing assets have the potential to drive CTO’s FFO higher when monetized. According to the U.S. Mineral Exchange, the average value per acre for a land with mineral rights that are not leased ranges between $0 and $250. Looking at recent rights sales, the realized price per acre is $60, which leads us to a potential value of the rights portfolio of $22 million. This is a material cash inflow for a company with available cash and cash equivalents of $27 million. It is also worth mentioning that the company very recently sold another part of its non-income-producing assets, valued at $3 million.

Reason #3: Strong tenant and lease fundamentals

Starting with the company’s lease plan and expiration schedule, we can see that it is well-laddered and that next year, expiring leases correspond to just 7.4% of the annual base rent. Average lease term for all leases lies at 8.1 years, while for new leases, this figure rises to 10.1 years. By looking into the rent per square foot (PSF) of the renewed leases, we can see some rate easing, reaching 7%, which was anticipated. However, from an “all leases” standpoint, rates appear a little increased, as compared to the previous quarter.

The company’s tenant base is well diversified, with no single tenant contributing more than 10% of the company’s annual base rent. In such terms, the largest tenant of CTO is Fidelity Investments, followed by Ford Motor Credit, contributing 6.7% and 4.3% of the company’s annual base rent, respectively. From a tenant credit rating standpoint, one-third of the company’s ABR is generated from rated tenants. In addition, the company is slowly moving towards multi-tenant properties, in an attempt to lower its revenue risk even further.

Reason #4: Nice dividend yield and FFO growth

In times of increased inflation, investors seek high-yielding opportunities. CTO Realty Growth is one of them, as its forward dividend is currently yielding 7.3%. Based on the projected AFFO per diluted share, for the FY 2022, of $1.73, we’re talking about a dividend payout ratio of 84.4%. In fact, CTO’s FFO increased by 25% in 2022, on a YoY basis. In addition, 57% of the projected FFO figure is already made during the first half of 2022. This may direct to some rental rate easing during the second half of the year or more. But still, at 1.73 projected FY 2022 AFFO per share, we’re talking about a P/FFO ratio of 11.5x, which is quite decent for a REIT investing in quality properties.

Conclusions and potential risks

I anticipate some turbulence along the way, as market volatility will continue, at least towards the end of Q1 2023. However, CTO Realty Growth is a nice investment opportunity for yield-seeking investors, who also wouldn’t say no to some capital appreciation. It is worth saying, though, that the company has an ongoing ATM program, which last time they used it, they issued 88k shares at a price of $66.03 each, for total proceeds of $5.7 million. However, from the guidance, it seems that they don’t plan to issue any more shares for the remainder of this year. In my book, CTO Realty Growth has more upside potential, and if not, you still get a nice 7.3% dividend yield backed by a relatively recession-immune real estate asset class. So, it is a “Yea” from me.



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