CTO Realty Growth: Buy Commons for 8% Dividend Yield (NYSE:CTO)

CTO Real Estate Growth (NYSE: CTO) has been a silent giant in the retail REIT space, up 18% on a total return basis year-to-date and over the past year. declaring a quarterly cash dividend of $0.38 per share, unchanged from the prior period and $1.52 per share for an annualized dividend yield of 8%. I last covered REIT in May, when there was still significant uncertainty about when the Fed would begin cutting interest rates. Market confidence around the start of rate cuts has now coalesced around the September 18 FOMC meeting, with the CME FedWatch tool also placing the likelihood of a 50 basis point cut at material. 50%. That’s because falling U.S. consumer spending, rising unemployment and low gas prices set the stage for the first rate cut in four years.

This bodes well for REITs with CTOs set to benefit significantly from this, with a total debt balance of $484 million as of the last reported fiscal 2Q24. That generated a monthly interest expense of $5.6 million, up $400,000 from the CTO’s compensation a year ago. The REIT reported second-quarter revenue of $28.85 million, up 10.8% year over year and beating consensus by $1.44 million. Critically, operating funds during the quarter at $0.45 per share beat consensus estimates and were up 2 cents from CTO’s $0.43 per share a year ago. I own a significant number of CTO common shares, with their nearly 8% dividend yield backed by a 118% Q2 FFO coverage ratio.

Commercial property portfolio and FFO

CTO’s portfolio consisted of 20 properties spread over 3.9 million square feet with an annualized base rent of $81.1 million at the end of the second quarter. About 94% of CTO’s square footage is derived from multi-tenant properties, with the REIT’s weighted average remaining lease term of 4.9 years. Occupancy, at 92.6 percent at the end of the second quarter, rose from 91.4 percent a year ago. CTO is very active in acquisitions and dispositions, with the REIT recently announcing the acquisition of three outdoor malls in Florida and North Carolina for $137.5 million. The REIT has completed $230 million in acquisitions and $38 million in dispositions to date.

The REIT also has a growing structured investment business built primarily on commercial loans to existing relationships. Thus, a construction loan of $10 million was generated at a fixed interest rate of 11% for seven outparcel locations in Lake Worth, Florida. The loan is interest-only until it matures on September 26, 2025. While it is riskier, it is a small part of CTO’s operations, and commercial mortgage loans are senior to the underlying collateral.

Debt maturities, lease spreads and valuation multiple

CTO signed 16 leases spanning 78,593 square feet during the second quarter. On a comparable basis, the company signed 11 leases totaling 57,878 square feet at an average cash base rent of $23.34 per square foot, a positive difference of 8.8% versus year-over-year compensation ago $21.45 per square foot. The positive lease margins highlight the value proposition of the REIT portfolio and are set against debt-free maturities for the remainder of 2024. CTO faces $51 million of unsecured debt maturing next year and another $83 million of debt that will decrease in 2026.

The REIT had cash and cash equivalents of $4.8 million at the end of the quarter, down from $10.2 million at the beginning of the year, but with liquidity of $155 million. CTO accessed his preferences (NYSE:CTO.PR.A) for liquidity during the quarter with the public offering of an additional 1,700,000 Series A shares in April for net proceeds of $33.1 million. The REIT also has a to-market program that saw the sale of 250,000 common shares for net proceeds of $4.3 million as the 200 basis point spread between leased occupancy and physical occupancy of 94.6 % will generate nearly $5 million in the future. cash rents, which are expected to be realized by 2025 as new tenants come into possession.

CTO currently trades at 9.71 times its free cash flow, up from its near-term lows but still below its historical best-fit line in the mid-teens. This implies continued capital growth with the commons as the Fed embarks on the long-awaited move to cut interest rates, currently at a 23-year high. Bears would be right to point out that a sharp re-acceleration of inflation would derail the market’s exuberance over the intensity and pace of rate cuts and send the commons back down. That risk is exciting for most REITs, but the 8% dividend yield and strong coverage remain reasons to go higher in the commons.