CTO Realty Growth: Dividend Delusion or Distressed Value?

The recent report by Wolfpack Research has thrown CTO Realty Growth (NYSE: CTO) into the spotlight, questioning the sustainability of its dividend and the integrity of its financial reporting. For income-focused investors, the stakes are high: the company's 10% dividend yield—a key selling point—now faces existential threats. This analysis dissects Wolfpack's claims, evaluates CTO's defenses (or lack thereof), and weighs the risks and rewards for shareholders.

The Allegations: A House of Cards Built on Cash Flow?

Wolfpack's report paints a stark picture of a REIT in structural decline, with its dividend sustainability hinging on financial engineering rather than real estate fundamentals. Here are the core claims:

1. Dividend Funding via Share Dilution

Wolfpack alleges that CTO's dividends have exceeded cash flow since its 2021 REIT conversion. Between 2021–2024, the company faced a $38 million dividend shortfall, addressed by issuing new shares. This increased the share count by 70% since December 2022, diluting existing shareholders.
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- The math is grim: CTO's Q1 2025 cash reserves ($8.4 million) are insufficient to cover quarterly dividends ($14 million) and recurring CapEx ($5.7 million). Without further dilution or debt, a dividend cut seems inevitable.

2. Manipulated AFFO Metrics

CTO uses a non-GAAP Adjusted Funds From Operations (AFFO) metric that excludes recurring capital expenditures—a practice diverging from peers. This inflates AFFO, masking cash flow shortfalls.

• Worse, 70% of management's compensation is tied to this metric, creating a clear conflict of interest. Wolfpack notes that Core FFO per share fell from $0.48 (Q1 2024) to $0.46 (Q1 2025), despite stable AFFO reports—a discrepancy suggesting cost-cutting or accounting tricks.

3. Accounting Irregularities: The “Sham Loan”

Wolfpack accuses CTO of avoiding impairment charges on a defaulted tenant loan tied to its Ashford Lane property. The tenant stopped paying rent in late 2022, and its affiliate filed for bankruptcy in early 2023. By not impairing the loan, CTO may have overstated its asset value and liquidity.

4. Portfolio Quality Concerns

The report dismisses CTO's “high-quality retail portfolio” narrative, citing aging shopping centers with insufficient cash flow. Over $20 million in re-leasing costs and tenant bankruptcies highlight operational fragility.

CTO's Silence and Analyst Outlook: A Glass Half Empty?

As of June 2025, CTO has not publicly rebutted Wolfpack's claims—a silence that fuels skepticism. Analysts remain divided:
- Bullish Take: Some point to Q1 2025 positives, like the $79.8 million Ashley Park acquisition and strong leasing activity (112,000 sq ft at above-average rents). The average brokerage target is $21.71, implying a 25% upside from the June 2025 price of $17.31.
- Bearish Concerns: Governance flaws, the $20.5 million debt extinguishment charge in Q2, and a 6.6x net debt/EBITDA ratio raise liquidity risks. GuruFocus values CTO at $19.14, but this assumes no dividend cut—a big ask.

Regulatory and Legal Risks: The Sword of Damocles

Hagens Berman's investigation into potential securities law violations adds another layer of risk. If proven, CTO could face:
- Class-action lawsuits over misleading disclosures.
- SEC penalties for non-GAAP metric misuse or impaired loan concealment.
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- Such outcomes would pressure the stock further, especially if the dividend is cut.

Investment Decision: Exit, Hold, or Double Down?

Risks to Consider

• Dividend Cut: The most immediate risk. Without dilution or debt, CTO's cash flow cannot sustain the current payout.
• Governance Costs: Management's incentives tied to manipulated metrics suggest long-term mismanagement.
• Legal Fallout: A potential shareholder lawsuit could drain resources and erode investor confidence.

Potential Rewards (If Allegations Are Unfounded)

• Stock Rebound: If CTO provides transparency and validates its AFFO methodology, the $17.31 price could approach analyst targets.
• Bargain Buying: The 3.7% post-report drop may offer a discount if the company's operational positives outweigh governance concerns.

Data-Driven Recommendation

• The math is unfavorable: CTO's dividend yield (10%) is unsupported by cash flow. The 70% share dilution since 2022 suggests a Ponzi-like dynamic.

Conclusion: Exit or avoid CTO. The risks of a dividend cut, governance failures, and legal liabilities outweigh any potential upside. Investors seeking high yields should look elsewhere until CTO addresses:
1. AFFO methodology transparency.
2. A plan to reduce reliance on dilution.
3. Evidence justifying the Ashford Lane loan's valuation.

Final Take: CTO Realty Growth's stock is a minefield. For now, prioritize preservation over speculation.