CTO: THE B. RILEY OF REITS

We are short CTO Realty Growth (CTO) because we believe this management team, like our old friends at B. Riley (RILY), are lying to investors about the sustainability of their dividend while enriching themselves and are willing to engage in accounting shenanigans like using a sham loan to cover up a top tenant’s failure. Our analysis shows CTO, which is focused on buying and managing aging shopping centers, has not generated enough cash to pay its recurring capex and cover its dividends since converting to a REIT in 2021. Apparently, management has relied on dilution (increasing shares outstanding by 70% since December 2022) to cover a $38 million dividend shortfall from 2021 to 2024.

The linchpin of management’s deception is its manipulative definition of Adjusted Funds From Operation (AFFO) where they exclude recurring capex, unlike all of their self-identified shopping center REIT peers, tricking investors into hopping onto this never-ending dilution merry-go-round. Not only does management use its bullshit AFFO to lure in unsuspecting investors, but it uses that same non-GAAP metric for 70% of its performance pay, inflating $8 million in bonuses we think they never should have received, according to our analysis. Management’s AFFO bonus also incentivizes them to overpay for properties since any excess is categorized as an intangible asset and rapidly added back to AFFO.

We also discovered, after speaking with former employees and whistleblowers, that management used a sham loan to hide the collapse of a top tenant from shareholders at Ashford Lane. Evidently, this tenant stopped paying rent in November 2022, and an affiliate and its owner declared bankruptcy in January and March 2023 respectively, and yet CTO did not impair this “loan.” We believe management misled and lied to investors about what was happening concerning this tenant on its earnings calls for over 18 months. Our investigation of other properties (details below) reveals a host of problems like plummeting foot-traffic, escalating vacancies, collapsing rents, and ultimately free-falling property values.

We think CTO’s investors should brace themselves for imminent dilution. CTO has just $8.4 million in cash, while over the last 12 months CTO’s average quarterly cash from operations have been ~$17 million, but quarterly declared dividends have risen to $14 million and average recurring capex through 2023-2024 was $5.7 million a quarter. Management is also planning ~ $12 million in capex above its normal run-rate after the bankruptcy of several tenants. CTO’s problem is simple; they don’t have enough money.