CTO Realty Growth: A Discounted Way To Play The Retail Boom

The Buy Thesis - CTO Realty Growth (NYSE:CTO) is a retail-focused REIT with strong organic leasing prospects and is currently trading at a low multiple of 11X AFFO and a 7.5% dividend yield [1] Why CTO trades cheaply - Retail real estate is experiencing a renaissance, shifting from a feared asset class to a respected growth play, with increasing demand for space and rising market rental rates [2] - The diversified REIT sector, which includes many retail properties, trades at sharp discounts due to its association with office properties, leading to intentional reclassifications among REITs [2][4] Property portfolio and leasing prospects - As of Q2 2024, CTO's portfolio consists of 62.5% retail, 4.5% office, and 33% mixed-use properties, with a significant portion of retail properties benefiting from high job and population growth areas [5] - CTO reported a 41% leasing spread in the first half of 2024, with 128% increases on new leases and 5% increases on renewals [6][5] Balance sheet and interest expense - CTO has a debt to EBITDA ratio of 6.11X, which is above the average for REITs, but its interest expense is covered 3.6X by revenues, and most of its debt is at a low fixed rate of 4.23% [9][11] - The company faces refinancing risks as most of its debt matures in the next three years, with potential increases in interest expenses if market rates rise [10][11] Valuation - The estimated equity value per share for CTO is between $23.65 and $27.06, with a midpoint of over $25 per share, suggesting a fair value of $25.50 per share, representing a 27% upside from the current price of $20.03 [12][14] - CTO's AFFO/share guidance for the full year is $1.97, which would imply a 13X AFFO multiple, lower than the retail peers' average of 17X due to specific risks associated with the company [13][14] Overall Thesis - The properties and growth prospects of CTO are considered substantially stronger than what is implied by its low AFFO multiple, presenting a favorable risk-reward scenario for investors [16]