CTO Realty Growth: A Cautionary Tale for REIT Investors?

The real estate investment trust (REIT) sector has long been a magnet for income-focused investors, offering steady dividends and the allure of real estate appreciation. Yet, the recent saga of CTO Realty Growth, Inc. (CTO) underscores a critical truth: dividend yields can mask deeper governance and financial risks. As class-action lawsuits and a damning short-sell report from Wolfpack Research shake the company, the case of CTO serves as a stark reminder of the fragility of REIT sustainability when corporate accountability falters.

The Allegations: A House of Cards Built on AFFO

At the heart of the controversy lies CTO's manipulation of Adjusted Funds from Operations (AFFO), a key metric used to assess REIT profitability. Wolfpack Research's June 2025 report accused CTO of excluding recurring capital expenditures (capex) from its AFFO calculations—a practice that inflates the metric and creates a false sense of financial health. This manipulation, the report claims, allowed CTO to sustain a dividend payout ratio of 80.9% of AFFO in Q2 2025 while hiding a $38 million shortfall in cash flow.

The implications are profound. By excluding recurring capex, CTO's management allegedly prioritized short-term dividend stability over long-term operational sustainability. This misalignment of incentives—70% of executive compensation tied to the manipulated AFFO—raises questions about governance integrity. As reveals, the gap between AFFO and Core FFO narrowed slightly, but the underlying cash flow challenges remain unaddressed.

Share Dilution and Liquidity Risks: A Recipe for Shareholder Erosion

CTO's reliance on aggressive share dilution to fund dividends and capex has further eroded investor trust. Since late 2022, the company has increased its share count by 70%, a move that diluted existing shareholders and masked its liquidity crisis. With only $8.4 million in cash on hand as of June 2025, compared to quarterly dividend obligations of $14 million and recurring capex of $5.7 million, the company's financial position appears precarious.

The Wolfpack report also highlighted a “sham loan” at CTO's Ashford Lane property in Atlanta, where a defaulted tenant's bankruptcy was allegedly concealed. This accounting sleight of hand not only obscured the true state of CTO's assets but also exposed the company to regulatory scrutiny. The SEC's potential involvement could force a restatement of financials, further damaging credibility.

Governance Reforms: A Missing Link

Despite the firestorm, CTO has yet to implement meaningful governance reforms. While the company reaffirmed its 2025 guidance and maintained its dividend, there is no evidence of structural changes to align management incentives with shareholder interests. The Board's continued use of opaque metrics and lack of transparency in capex reporting suggest a culture of complacency.

In contrast, industry peers like Simon Property Group and Ventas, Inc. have adopted stricter governance frameworks, including clearer disclosures on recurring expenses and performance-based compensation tied to GAAP metrics. CTO's failure to follow suit leaves it vulnerable to further legal and reputational damage.

Investment Implications: Proceed with Caution

For income investors, CTO's 8.5% yield appears enticing, but the risks are asymmetric. A dividend cut or credit downgrade could trigger a sharp sell-off, as seen in the 5.4% stock price drop following the Wolfpack report. illustrates the volatility, with the stock trading near $17.10 as of August 8, 2025.

Investors should scrutinize REITs with high payout ratios, aggressive dilution, and non-GAAP metrics that diverge from GAAP. CTO's case highlights the need for due diligence on governance structures and the alignment of executive incentives. For now, CTO remains a high-risk bet, suitable only for those with a deep understanding of the risks and a tolerance for volatility.

Conclusion: The Cost of Ignoring Governance

CTO's story is a cautionary tale for the REIT sector. While dividend yields can dazzle, they are no substitute for sound governance and transparent financial reporting. As class-action lawsuits and regulatory scrutiny mount, the company's ability to restore investor trust will hinge on concrete reforms—not just reaffirmed guidance. For investors, the lesson is clear: sustainability in REITs begins with accountability.