The Fragile Foundation of CTO Realty Growth: A Cautionary Tale for REIT Investors

The recent scandal surrounding CTO Realty Growth (CTO) has laid bare the vulnerabilities of a sector long celebrated for its income-generating potential: real estate investment trusts (REITs). Wolfpack Research's explosive 2025 report, “CTO: The B. Riley Of REITs,” has ignited a firestorm of scrutiny over the company's financial practices, dividend sustainability, and governance. For investors, the case underscores a critical lesson: even REITs with high yields can mask systemic risks through opaque accounting and self-serving management strategies.

The Anatomy of Earnings Manipulation

Wolfpack's allegations paint a troubling picture of CTO's financial engineering. At the core of the report is the company's manipulation of Adjusted Funds From Operations (AFFO), a key metric used to assess REIT performance. Unlike peers who include recurring capital expenditures (CapEx) in their AFFO calculations, CTO excludes these costs, artificially inflating its AFFO by approximately $38 million annually. This distortion, Wolfpack argues, is not merely a technicality—it is a deliberate strategy to justify management bonuses tied to the inflated metric. With 70% of executive compensation linked to this non-GAAP measure, the incentive to misrepresent financial health becomes glaringly apparent.

The implications are profound. By excluding CapEx, CTO's AFFO fails to reflect the true cash flow required to maintain its aging portfolio of struggling shopping centers. This creates a false narrative of financial stability, enabling the company to sustain a dividend that its cash reserves cannot support. The result? A reliance on aggressive share dilution—70% higher share count since late 2022—to fund operations, a practice that erodes shareholder value over time.

The Dividend Mirage and Legal Fallout

CTO's dividend, once a cornerstone of its appeal to income-focused investors, now appears unsustainable. Wolfpack's report details how the company's cash flow is insufficient to cover both the dividend and necessary CapEx, forcing it to issue new shares at depressed prices. This strategy, while temporarily propping up yields, has exacerbated dilution and raised red flags about long-term viability.

The fallout has been swift. Following the June 2025 report, CTO's stock plummeted, erasing billions in market value. Legal actions are now in motion: Hagens Berman, a national shareholders' rights firm, has launched an investigation into potential securities fraud, focusing on whether CTO misrepresented its asset valuations, tenant risks, and AFFO methodology. The firm has also flagged a specific case of alleged accounting misconduct—a defaulted tenant at CTO's Ashford Lane property, where the company avoided recording an impairment despite the tenant's bankruptcy.

A Broader Warning for REIT Investors

The CTO saga is not an isolated incident but a symptom of a larger issue in the REIT sector. Many REITs rely on non-GAAP metrics like AFFO to mask weak fundamentals, and investors must scrutinize these metrics with a critical eye. Key questions to ask include:
1. How does the REIT define AFFO? Does it exclude recurring CapEx, as CTO does?
2. What is the source of dividend funding? Is it cash flow, or is the company relying on dilution or asset sales?
3. Are management incentives aligned with long-term value creation? Bonuses tied to manipulated metrics often signal misaligned priorities.

Investors should also monitor share issuance trends and tenant concentration risks. CTO's heavy exposure to financially distressed tenants and its use of a “sham loan” to conceal a tenant's collapse highlight the dangers of opaque portfolio management.

The Path Forward: Due Diligence and Accountability

For the REIT sector to retain investor trust, transparency must become non-negotiable. Regulators and shareholders must demand standardized reporting practices and stricter oversight of non-GAAP metrics. Meanwhile, individual investors should prioritize REITs with:
- Conservative AFFO calculations that include all CapEx.
- Sustainable dividend coverage ratios (ideally above 80%).
- Governance structures that penalize short-termism and reward accountability.

The CTO case also underscores the power of whistleblowers. Hagens Berman's involvement—and the SEC's whistleblower program, which offers rewards of up to 30% of penalties—signals that accountability is increasingly within reach.

Conclusion: Vigilance in the Age of Earnings Artifice

CTO Realty Growth's unraveling is a stark reminder that high yields can mask high risks. As Wolfpack's report and the ensuing legal actions demonstrate, earnings manipulation and dividend overreach can devastate investor returns. For REIT investors, the lesson is clear: never take a company's financial story at face value. Scrutinize the numbers, question the assumptions, and demand transparency. In a market where integrity is the ultimate currency, due diligence is not just prudent—it is essential.