CTO Realty Growth: Dividend Sustainability Under Siege as Governance Concerns Mount

Wolfpack Research's recent short report on CTO Realty Growth has reignited scrutiny over the REIT's ability to sustain its dividend payments and the governance practices that may be compromising shareholder value. The report, which accuses CTO of financial mismanagement and misleading investors, raises critical questions about the company's long-term viability. For investors, the stakes are high: CTO's dividend yield of over 10% has been a key draw, but Wolfpack's claims suggest that this dividend may be unsustainable—and its governance structure may be designed to protect management rather than shareholders.

The Wolfpack Report: A Detailed Accusation

Wolfpack's report centers on three interconnected issues: dividend sustainability, financial metric manipulation, and governance flaws. Since converting to a REIT in 2021, CTO has relied on share dilution to plug a reported $38 million dividend shortfall between 2021 and 2024. This strategy, the report argues, has inflated the share count by 70% since late 2022, diluting existing shareholders' stakes.

Dividend Sustainability: The Numbers Don't Add Up

REITs are legally required to distribute at least 90% of their taxable income to shareholders, which often strains cash flow. Wolfpack alleges that CTO's dividend payments have consistently exceeded its cash flow, forcing it to issue new shares to raise capital. For instance, CTO's Q1 2025 net income for common stockholders plunged by 91.8%, yet its “Core FFO” and “AFFO” metrics—key to its dividend rationale—remained stable. This discrepancy suggests that the company's reported metrics may be excluding critical costs, such as recurring capital expenditures, to maintain the illusion of financial health.

AFFO: A Metric of Convenience?

Wolfpack highlights a critical flaw in CTO's use of Adjusted Funds From Operations (AFFO). Unlike peers, CTO excludes recurring capital expenditures (CapEx) from its AFFO calculation. This exclusion artificially inflates the metric, making it appear more sustainable than it is. The report notes that this manipulated AFFO metric constitutes 70% of management's compensation, creating a clear conflict of interest. By prioritizing a metric that rewards them over shareholder-friendly metrics like free cash flow, management may be incentivized to maintain dividends at the expense of long-term stability.

The Sham Loan and Hidden Risks

The report also details a potential accounting misstep involving a defaulted tenant at CTO's Ashford Lane property. The tenant stopped paying rent in late 2022, and its affiliate and owner filed for bankruptcy in early 2023. Wolfpack alleges that CTO avoided impairing the loan tied to this property, masking a potential loss. This omission, they argue, misrepresents the company's true financial condition.

Governance Concerns: Management's Interests vs. Shareholders

Wolfpack's broader critique centers on governance. The repeated use of share dilution to fund dividends and CapEx not only dilutes shareholders but also signals a lack of viable alternatives to shore up cash flow. Meanwhile, the compensation structure—tied to an opaque AFFO metric—suggests that management's interests are misaligned with shareholders.

The Bottom Line: Time to Exercise Caution

CTO's Q1 2025 results reaffirmed its 2025 outlook, projecting AFFO per share between $1.93 and $1.98. However, Wolfpack's analysis reveals that CTO's cash reserves ($8.4 million) are insufficient to cover its quarterly dividend ($14 million) and recurring CapEx ($5.7 million), even before accounting for planned additional investments. The company's reliance on share sales to fund these obligations raises red flags about its long-term sustainability.

Investment Implications

For investors, the report underscores two key risks:
1. Dividend Cut Risk: If dilution becomes untenable or markets reject further share issuance, CTO may be forced to slash its dividend, eroding its key selling point.
2. Governance Risk: The compensation structure and accounting practices suggest management may prioritize short-term gains over shareholder value.

While CTO's management has not publicly refuted Wolfpack's claims, investors should demand transparency on the following:
- A clear explanation of why recurring CapEx is excluded from AFFO.
- Evidence that the Ashford Lane loan impairment decision was justified.
- A plan to reduce reliance on share dilution for funding dividends.

Final Take

CTO Realty Growth's situation is a cautionary tale about the dangers of prioritizing dividends over sustainable cash flow and governance rigor. While the stock's high yield may tempt income-focused investors, Wolfpack's findings suggest that the risks of a dividend cut or further dilution are significant. Until CTO addresses these concerns, investors would be prudent to treat its shares with skepticism—or avoid them altogether.