CTO Realty Growth, Inc. (NYSE: CTO) is a small real estate investment trust with a market capitalization of less than $500 million. Nevertheless, the trust has plenty of room to grow in its defined niche of commercial properties. in high growth markets.
CTO Realty Growth forecasts a 15% increase in adjusted funds from operations in 2022, and the dividend is fully paid. Finally, the multiple at which the CTO is trading is attractive and may undervalue the FFO prospects of the trust.
Small but growing real estate portfolio in attractive markets
CTO Realty Growth is a trust with a market cap of $390 million, making it significantly smaller than other retail real estate investment trusts in the industry. CTO Realty Growth, on the other hand, is an attractive REIT to consider due to its sole focus on high-growth markets, which promises above-average funds from growing operations in the future.
CTO Realty Growth is a small trust, both in terms of market value and number of properties. In 2021, the REIT only owned 22 properties (9 single-tenant and 13 multi-tenant). Fourteen of these properties were retail, four were offices, three were mixed-use and one was a hospitality property.
In addition to its direct real estate investments, the trust holds a 16% interest in Alpine Income Property Trust (PINE), a $41 million publicly traded single-tenant net lease REIT. After deducting accumulated depreciation, the net real estate value of CTO Realty Growth’s assets in 2021 was $494.7 million.
Compared to trusts like Realty Income (O) or STORE Capital (STOR), CTO Realty Growth is barely on investors’ radar, but that could mean investors are missing out on gains as trust builds rapidly. CTO Realty Growth generated $70.3 million in total revenue from its real estate operations in 2021, a 25% year-over-year increase.
The trust’s focus on strong economic markets with above-average household incomes and robust population growth prospects is critical to its growth. CTO Realty Growth real estate is only found in markets with high potential for economic growth, such as Miami, Las Vegas, Dallas and Jacksonville. The REIT’s geographic focus is Florida, where 9 of the 22 trust properties are located. The concentration of fiduciary properties in high-growth markets translates into an attractive opportunity for above-average growth in funds from operations.
92% payout ratio and increased dividend
Based on the number of real estate assets currently in the trust’s portfolio, CTO Realty Growth generates approximately $26 million in adjusted funds from operations per year. The REIT outperforms its dividend with adjusted funds from operations and increased it by 8% in 1Q-22. The trust’s AFFO for 2021 was $4.36 per share, implying a payout ratio of 92%.
CTO Realty Growth’s payout ratio is also significantly higher than the payout ratios of the trust’s large retail trusts. In 2021, Realty Income had a payout ratio of 79%, while STORE Capital had a payout ratio of 73%. The majority of large retail REITs have payout ratios ranging from 70-85%.
AFFO outlook for 2022, multiple
CTO Realty Growth expects adjusted operating funds to be $4.90 to $5.15 per share in 2022, representing a 15% year-over-year increase. Trust advice implies an AFFO multiple of 13x. The multiple is low compared to large retail-focused REITs, which is likely due to the higher risk associated with CTO Realty Growth’s much smaller and less diversified real estate portfolio. Realty Income has an AFFO multiple of 19.2x and STORE Capital has an AFFO multiple of 14.0x. However, the trust’s lower valuation and smaller size provide an opportunity to ride a wave of growth at CTO Realty Growth.
The CTO Realty Growth forecast for 2022 assumes AFFO growth of 15%, implying the potential for strong growth in the trust’s quarterly cash dividend. CTO Realty Growth shares are currently yielding 6.26%, but the dividend is expected to be increased further next year given the expected strong growth in AFFOs.
Why CTO Realty Growth shares could see a lower valuation
Due to their lack of diversification, small REITs are at a disadvantage compared to large trusts. A Florida recession would hit CTO Realty Growth much harder than a large retail trust like Realty Income or STORE Capital.
On the other hand, limited diversification allows the trust to grow its operating funds faster. Going forward, CTO Realty Growth’s valuation multiple may prove to be more volatile than the multiples of its larger counterparts.
The CTO Realty Growth stock is a good buy because it has above-average potential for funds from operations and dividend growth. The trust’s focus on high growth markets makes it particularly attractive to investors seeking not only a high covered dividend yield, but also capital gains.