CTO Realty Growth Inc (CTO)
CTO Realty Growth is an old deep value “favorite” that really has been stuck in the mud for a long time (ex dividends lets call it 10 years!). The Company used to be a hodgepodge of real estate and real estate tangential assets with a triple net lease component. They were focused on selling off land and recycling capital into becoming a pure play triple net lease player; but somehow ended up once again as a hodgepodge of real estate assets.
This is a case where private market values are far superior to public market values. This is an undersized REIT that should realistically be taken private/sold for parts. We believe value here including dividends received could easily be 50%+ from where it is currently trading; it just might need a little nudge to get there.
The Company is run by CEO John Albright; who is undoubtedly a creative and a talented investor, but typical REIT players don’t want great trades; they want good repeatable stories. We believe CTO has gone through too many iterations and it reminds us of stories like Winthrop or FCE that are just too complicated to be public.
Over the last few years the company has made so many pivots it is a bit dizzying. As an example here are the some of the asset types they now own; Structured investments (preferred stock on various “entertainment real estate deals” development loans against mixed use and retail locations and more); retail power centers and multi tenant retail, Land (just purchased this year);single tenant office (from a previous pivot back in 2018); operating partnership units in PINE (from the original pivot to NNN) and an external management contract.
We don’t necessarily mind the investments per se but NOT as part of a public vehicle. This team might do a great job running a PE fund but people invest in REITs for steady and predictable; this just isn’t. This is a series of interesting trades which makes it a difficult investment to get the typical REIT valuations and coverage one would prefer. There is a simple rule of thumb in the REIT space; investors want to allocate their own capital; they don’t want a CEO to allocate it for them. If an investor wants to bet on NNN they want a simple story to do it; O or EPRT; you want to be in lending? BXMT. This is just not what REIT investors want.
So what should be done? We will leave that to the reader but it feels to me like a sum of the parts makes the most sense.
The current Market capitalization is around $575mm with an enterprise value of around $1.2bb.
The structured investments at face are worth $104mm; lets assume that is fair.
Their shares in Pine are worth ~$40mm; and I would say their management fee at a 10x multiple is worth $40mm so lets call that combined ~$80mm (the contract can be canceled but I would also think the shares for PINE would rise in that case to at least be a partial offset).
So that leaves a remaining EV of ~$1.0bb.
They are currently running an ~annualized NOI of $84mm; we believe that $92mm is very achievable next year. We also believe many of these assets are monetizable in the private market at closer to a 7% cap rate versus the IMPLIED embedded value here of closer to 9% cap rate!
So if one were to walk through the below waterfall it implies an upside of over 45% today while you are receiving a juicy dividend.
Most of these assets are quite solid but as an undersized mix of assets it just will never trade where it should. Someone should take it private and sell it for parts as I am confident the public market peers would pay far more than the current market cap for this if this was offered to them as a clean private portfolio by JLL or CBRE. I also can’t imagine the board or other investors have much remaining patience with what has been a perennial underperformer.