CTO Realty: A Fast-Growing 7.6% Yield Not To Miss (NYSE:CTO)

Every REIT had to start somewhere, even big names like Realty Income Corp. (O), which got its start from a single humble Taco Bell (YUM) location. It pays to spot and invest in growing names when they are cheap, especially when they also sport a high dividend. This brings me to CTO Realty Growth (NYSE:CTO), which fits the aforementioned description. This article highlights why CTO is potentially a great fit for a value and income portfolio.

Why CTO?

CTO Realty Growth is a REIT that owns and operates single and multi-tenant retail and office properties with strong fundamentals. Notably, it also acts as the external manager for the net lease REIT, Alpine Income Property Trust (PINE), in which it has a 16% equity ownership stake worth around $39M. This arrangement results in a stable stream of management fee income for CTO.

What some may not realize is that CTO actually has 46 consecutive years of paying a common dividend, with growth in the past 10 consecutive years. It converted to a REIT only recently, in December of 2020, and it’s grown the dividend every quarter this year.

CTO differentiates itself through asset-level value creation from the bottom up. This means that rather than herding through lots of stabilized properties at low cap rates, it seeks to acquire properties at meaningful discounts to replacement cost with in-place below market rents, then performing renovations and other value-added activities to reposition the property and lease up the tenant base.

This results in far higher same-property NOI than other REITs, including a 24% YoY increase in same property NOI during the second quarter. Importantly, CTO is translating top line growth to bottom-line shareholder value, with AFFO per share growing by 38% YoY. As noted earlier, CTO grew its dividend again this quarter by 12% compared to the prior year period, and the dividend is well protected by a 75.7% payout ratio.

CTO does carry a bit more leverage than safer “sleep well at night” REITs such as Realty Income Corp. with a net debt to Pro Forma EBITDA ratio of 6.6x. However, this is by no means in danger zone, and is reasonable considering the fast-growing nature of the company. Plus, CTO has what I would consider a safe fixed charge coverage ratio of 3.4x and a net debt to total enterprise value of 41%.

Importantly, CTO continues to find attractive investment opportunities in the current market, as it recently acquired Madison Yards, a newly built, grocery-anchored (by Publix) retail property in the densely populated and fast-growing tier 1 market of Atlanta, Georgia for the purchase price of $80 million. Management highlighted how it was able to close on this trophy property in the recent conference call:

Normally, we would have been priced out of this type of assets and we were at the beginning of the year, but we have had strong relationship with a seller who is focused on certainty of close, given the challenging debt market, which is how we ended up acquiring the property at a more favorable yield. For us, this was a scenario where we are able to significantly up-tier our portfolio quality by taking the proceeds from our first quarter lower growth Carpenter Hotel and Party City property sales or reinvest at a higher yield into this grocery-anchored trophy property that have base rent increases in all the one of the leases.

Meanwhile, I find CTO to be attractive at the current price of $19.97 with a forward P/FFO of 12.0. I believe CTO should be trading in the 14 to 16x P/FFO range considering its experienced management team and its history of value creation. Analysts expect to see FFO/share growth of 26% and 7% for this year and next, and have a strong buy rating on the stock with an average price target of $23.83, translating to potential double digit returns over the next 12 months.

Investor Takeaway

CTO Realty Growth is a fast-growing small-cap REIT that continues to generate value for shareholders with its differentiated business model. It trades at a reasonably low valuation considering its growth prospects, and offers investors an attractive dividend yield of 7.6%. As such, I find this under-the-radar REIT to be a good buy for income, value and long-term growth.