CTO Realty Growth: Fraud Allegations and the Dividend Death Spiral

Wolfpack Research's June 2025 report on CTO Realty Growth, Inc. (NYSE: CTO) has ignited a firestorm of scrutiny, casting doubt on the company's dividend sustainability and financial integrity. The allegations—sham loans, manipulated accounting, and overpriced acquisitions—are now threatening to unravel the stock's valuation. With Pomerantz LLP's securities fraud investigation underway and shares down 5.4% in one day post-report, investors face a critical question: Is CTO a value trap or an opportunity to profit from short-term volatility?

The Fraud Allegations: More Than Accounting Shenanigans

Wolfpack's report paints a damning picture of CTO's financial practices, focusing on three pillars:
1. Dividend Sustainability Fraud: CTO has paid out $38 million more in dividends than its cash flow from operations since 2021. To mask this shortfall, the company increased its share count by 70% since late 2022—a dilution tactic that punishes existing shareholders.
2. The "Sham Loan" Deception: A $79.8 million loan tied to the Ashford Lane property was allegedly kept on the books despite its top tenant defaulting in late 2022 and an affiliate filing for bankruptcy in early 2023. By not impairing the loan, CTO inflated its balance sheet, misleading investors about its true financial health.
3. Manipulated AFFO Metrics: Unlike peers, CTO excludes recurring capital expenditures (CapEx) from its Adjusted Funds From Operations (AFFO). This inflates cash flow figures, allowing management to justify $8 million in bonuses tied to 70% of their performance pay—a clear conflict of interest.

These claims are supported by Wolfpack's analysis of CTO's portfolio, which reveals that many properties are aging shopping centers generating insufficient cash flow to cover maintenance costs. The result? A company reliant on ever-greater dilution to stay afloat.

The Dividend Death Spiral: A Self-Inflicted Wound

The most immediate threat to shareholders is the dividend sustainability crisis. With only $8.4 million in cash as of March 2025 and $603.8 million in debt, CTO lacks the liquidity to fund dividends without further share issuance. This creates a vicious cycle:
- Dilution: Every new share issued to fund dividends reduces existing shareholders' equity.
- Investor Exit: As word spreads about the fraud allegations, income-seeking investors will flee, pushing the stock lower.
- Rating Downgrades: Credit agencies may downgrade CTO's debt, raising borrowing costs and exacerbating cash flow pressures.

If Wolfpack's claims are accurate, the dividend—currently $0.49 per share annually—is at risk of being slashed or eliminated entirely. Such an event would trigger a collapse in the stock price, as income investors abandon the stock.

Legal Risks: The Sword of Damocles

Pomerantz LLP's investigation into potential securities fraud adds another layer of risk. If the SEC or courts find merit in Wolfpack's allegations, CTO could face:
- Restatements: Correcting AFFO to include CapEx would likely reduce reported cash flow, further weakening valuation metrics.
- Fines and Settlements: Legal costs from class-action lawsuits could drain the already thin cash reserves.
- Reputational Damage: A fraud conviction would make it nearly impossible for CTO to raise capital in the future.

The SEC's whistleblower program—which offers up to 30% of recoveries for original information—further incentivizes insiders to come forward, raising the likelihood of additional revelations.

Valuation: A House of Cards?

CTO's valuation hinges on two assumptions now under attack:
1. Dividend Safety: The stock trades at a premium multiple because investors assumed the dividend was sustainable. If that's proven false, the multiple will contract sharply.
2. Property Quality: The company's narrative of owning “high-quality retail and mixed-use properties” is contradicted by Wolfpack's evidence of distressed assets. A reassessment of portfolio value could force a writedown.

Until these issues are resolved, CTO's valuation is a mirage. The current price—$17.10 as of June 25—already reflects some discounting of risk, but further declines are likely if the fraud claims gain traction.

Investment Decision: Exit While You Can

The risks here are asymmetrically skewed against shareholders:
- Upside: Limited, unless CTO can disprove Wolfpack's claims (unlikely given the specificity of the allegations).
- Downside: Catastrophic. A dividend cut, legal settlements, or a ratings downgrade could push the stock to $10 or lower.

Actionable Advice:
- Sell Immediately: Avoid the “value trap” of believing the stock is cheap. CTO's fundamentals are deteriorating, and legal risks are existential.
- Avoid New Positions: Wait until the fraud allegations are resolved and CTO's financial statements are independently audited.
- Monitor Pomerantz's Investigation: Any progress toward a settlement or ruling will determine the stock's near-term trajectory.

Conclusion

CTO Realty Growth's story is no longer about real estate fundamentals—it's a tale of financial engineering and regulatory risk. The Wolfpack report has exposed a company clinging to its dividend via dilution and accounting tricks, while its properties decay. With Pomerantz's investigation escalating and the dividend's sustainability in doubt, investors should treat CTO as a “sell” until proven otherwise. This isn't a value play; it's a potential disaster waiting to unfold.

Final Note: The SEC's ongoing scrutiny of non-GAAP metrics like AFFO means CTO's accounting practices are under a microscope. Investors who stay should do so with extreme caution—and a stop-loss order.