Executive Summary / Key Takeaways

• The Distressed-to-Value Arbitrage: CTO Realty Growth is converting the 2024-2025 wave of retailer bankruptcies into a multi-year earnings tailwind, re-leasing 10 vacated anchor spaces at significantly higher rents, with cash spreads exceeding 50%, while competitors view the same disruption as a headwind, demonstrating management's ability to extract value from market dislocations.

• Public-Private Valuation Gap: Trading at 9.52x forward FFO and an 8.36% dividend yield—near five-year lows—CTO is aggressively exploiting its own discount through $9.3 million in share repurchases and capital recycling, creating a self-reinforcing cycle where cheap equity funds accretive acquisitions and buybacks.

• Leasing Momentum Accelerates: Year-to-date leasing of 482,000 square feet at 21.7% average spreads, combined with a $5.5 million signed-not-open pipeline representing 5.3% of cash rents, positions CTO for 2026 earnings inflection as approximately 73% of SNO tenants commence rent in 2026.

• Balance Sheet Deleveraging in Progress: Net debt/EBITDA improved to 6.7x in Q3 2025 from 6.9x in Q2, with management expecting an additional 0.5x reduction as anchor re-leasing and SNO tenants come online, funded by $170 million in liquidity and strategic asset sales.

• Critical Execution Variables: The investment thesis hinges on two factors: successful re-leasing of the remaining four anchor spaces by mid-2026 and maintaining acquisition discipline in an increasingly competitive Sun Belt retail market where private equity capital is driving cap rates lower.

Setting the Scene: The Sun Belt Retail REIT with a Capital Allocation Edge

CTO Realty Growth, incorporated in 2010 and headquartered in Daytona Beach, Florida, has evolved from a traditional real estate operator into a self-managed equity REIT that specializes in turning retail distress into dividend income. The company's strategy centers on owning, managing, and repositioning high-quality retail and mixed-use properties in faster-growing U.S. markets characterized by business-friendly tax policies, strong job and population growth, and supply-constrained retail environments. This geographic focus—primarily in the Southeast and Southwest—provides a structural tailwind as population migration drives retail demand while new construction remains limited.

The 2019 transformation marked a strategic inflection point. On November 26, 2019, as part of Alpine Income Property Trust's (PINE) IPO, CTO divested 15 properties for $125.9 million in cash and contributed five properties to the PINE Operating Partnership in exchange for 1.22 million OP units, while simultaneously investing $15.5 million in PINE common stock. This transaction accomplished three critical objectives: it monetized assets at attractive valuations, established a fee-based management platform generating $3.6 million in annual revenue, and created a permanent capital vehicle for net lease investments, allowing CTO to focus exclusively on multi-tenant retail properties under an exclusivity agreement. The subsequent REIT election in 2020 completed the transformation, positioning CTO as a pure-play retail REIT with a unique ancillary income stream.

The current retail landscape presents what management calls a "unique mark-to-market opportunity." The 2024-2025 bankruptcy cycle claimed 10 anchor tenants across CTO's portfolio, including Big Lots (BIG), Conn's (CONN), American Freight, Party City, and Jo-Ann (JOAN). While this created temporary vacancy and a 6.7x net debt/EBITDA ratio that appears elevated, the underlying economics are compelling. These vacated tenants were paying below-market rents averaging $12-15 per square foot, while replacement tenants—Burlington (BURL), Boot Barn (BOOT), Bassett Furniture (BSET), Slick City Action Park, and Bob's Discount Furniture—are signing leases at $23-25 per square foot. This significant cash spread differential (representing over 50% increases in rent) transforms a near-term headwind into a three-year earnings catalyst, as six of the ten spaces are already leased and the remaining four are in active negotiations.

Strategic Differentiation: The Art of Retail Property Repositioning

CTO's competitive moat lies not in technological innovation but in a proprietary methodology for identifying and executing value-add retail investments. The company's evaluation framework assesses properties across four dimensions: property attributes (location, demographics, traffic patterns), tenant creditworthiness, market conditions (supply/demand balance, population growth), and strategic fit within the portfolio. This disciplined approach has enabled CTO to acquire $227 million of retail properties in 2024 at a weighted average yield of 9.3% while simultaneously disposing of non-core assets, including $38 million in income property sales and $5 million in subsurface mineral interests.

The PINE relationship serves as a strategic differentiator that no peer can replicate. CTO's 23.5% ownership stake in PINE provides three distinct advantages: a $3.6 million annual management fee stream with 7.2% growth, co-investment opportunities in net lease assets that would otherwise compete with CTO's acquisition pipeline, and a permanent capital partner for asset recycling. When CTO identifies a single-tenant property that no longer fits its multi-tenant strategy, it can offer the asset to PINE, capturing disposition proceeds while maintaining exposure through its equity stake. This ecosystem creates a capital-efficient growth model that avoids the dilutive equity issuance common among smaller REITs.

The leasing execution capability represents CTO's core operational technology. Year-to-date leasing of 482,000 square feet at 21.7% average spreads demonstrates tenant demand for CTO's properties that far exceeds market averages. The Q3 2025 leasing velocity of 143,000 square feet at $23 per square foot, with comparable leases achieving 10.3% spreads, shows that even in a challenging retail environment, CTO's properties command premium rents. The Shops at Legacy exemplifies this execution: following WeWork's bankruptcy, CTO signed a 20,000 square foot private members-only social club in Q3 2024 and a 30,000 square foot co-working operator in October 2025, pushing occupancy to 85% and replacing a credit-impaired tenant with higher-quality, traffic-driving uses.

Financial Performance: Evidence of the Value-Creation Model

CTO's Q3 2025 results validate the distressed-to-value thesis. Total revenue increased $6 million year-over-year to $37.8 million, largely driven by a $4.9 million (17.2%) increase in Income Properties revenue and a $1.5 million (94.6%) surge in Commercial Loans and Investments. The Income Properties segment, representing 88.6% of nine-month revenues, generated $24.2 million in operating income, reflecting both acquisition growth and same-property NOI expansion of 2.3%. This same-property growth is particularly noteworthy because it occurred while 10 anchor spaces sat vacant, indicating that the remaining 90% of the portfolio is performing strongly enough to offset the drag.

The Commercial Loans segment's 94.6% revenue growth to $3.1 million demonstrates the capital allocation flexibility that distinguishes CTO from pure-play property REITs. The $40 million first mortgage loan originated in November 2024 for a Whole Foods Market-anchored development in Atlanta carries a 12.15% initial fixed rate and includes a right of first refusal to purchase the property. This structured investment strategy generates superior risk-adjusted returns while maintaining optionality on future acquisitions, a capability that competitors like Gladstone Commercial and One Liberty Properties lack due to their focus on direct property ownership.

Balance sheet management shows disciplined deleveraging. The $150 million term loan financing closed in September 2025—comprising a new $125 million 2030 loan and a $25 million upsizing of the 2029 facility—retired a $65 million 2026 maturity and reduced revolving credit usage, enhancing liquidity to $170 million. Net debt/EBITDA improved to 6.7x from 6.9x in Q2, with management explicitly stating that the $5.5 million SNO pipeline alone would reduce this ratio by 0.5x once tenants commence rent. This deleveraging trajectory contrasts favorably with Armada Hoffler Properties , which carries higher development-driven leverage, and Community Healthcare Trust (CHCT), which maintains elevated debt levels to fund healthcare acquisitions.

The convertible note settlement in Q2 2025, while creating a $20.4 million extinguishment charge excluded from core FFO, eliminated $51 million of 3.875% debt and replaced it with a mix of cash and equity, reducing future interest expense and simplifying the capital structure. Post-settlement, only $74 million (12%) of CTO's $607 million debt portfolio bears floating SOFR rates, with $100 million hedged at 3.32% through April 2025 swaps, creating near-term interest rate certainty that peers like GOOD (with 20% floating rate exposure) cannot match.

Outlook and Guidance: The 2026 Inflection Story

Management's raised 2025 guidance signals confidence in the underlying trajectory. Core FFO guidance increased to $1.84-1.87 per share from $1.80-1.86, while AFFO guidance rose to $1.96-1.99 per share from $1.93-1.98. This upward revision, driven by stronger-than-expected leasing and faster progress on anchor re-leasing, implies 122% dividend coverage at the current $0.38 quarterly distribution. The guidance increase is particularly meaningful because it comes despite absorbing a $0.05 per share impact from the convertible note settlement and a $0.10 per share drag from vacant anchor spaces.

The SNO pipeline provides visibility into 2026 earnings acceleration. The $5.5 million pipeline represents 5.3% of annual cash base rents, with management projecting a ramp of $0.5 million in Q1 2026, $1 million in Q2, $1 million in Q3, and $1.5 million in Q4, totaling $4 million (approximately 73% of the pipeline) recognized next year. This $4 million revenue increase, combined with an estimated $3-4 million from the six already-leased anchor spaces, creates a $7-8 million earnings tailwind that would drive core FFO per share above $2.00 in 2026 even without additional acquisitions.

The anchor re-leasing timeline remains on track. Management expects the majority of the six leased spaces to commence rent in the first half of 2026, with the remaining four spaces targeted for lease execution by year-end 2025 and rent commencement in late 2026 or early 2027. This timing aligns with the SNO ramp, creating a synchronized earnings inflection. The quality of replacement tenants—Burlington, Boot Barn, and Bassett Furniture—suggests higher traffic and sales productivity than the bankrupt predecessors, potentially driving further upside through percentage rent and co-tenancy benefits.

The acquisition pipeline remains active. Management disclosed plans to acquire a South Florida shopping center before year-end 2025, which would be temporarily funded by the revolving credit facility and ultimately financed through asset recycling. This capital rotation strategy—selling lower-cap-rate stabilized assets to fund higher-yielding value-add acquisitions—demonstrates discipline in a market where private equity buyers like Blackstone (BX) are driving cap rates to historic lows. The Albuquerque office building, now 100% leased to Fidelity and the State of New Mexico, is being positioned for sale in late 2025 or early 2026, with proceeds earmarked for debt reduction or accretive reinvestment.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is execution failure on the anchor re-leasing timeline. While six of ten spaces are leased, the remaining four require successful negotiation and tenant build-out. If lease commencement slips from mid-2026 to late 2026 or early 2027, the 2026 earnings inflection could be delayed, compressing the valuation multiple and potentially forcing a dividend reconsideration. Management's comment that "nothing happens fast these days" and that lease negotiations "have been taking quite a bit of time" acknowledges this risk, though the depth of tenant demand (with "a lot of good options on the leasing side") provides mitigation.

Retailer credit quality remains a persistent concern. The 2024-2025 bankruptcy cycle, while creating opportunity, also signals broader stress in the retail sector. If the economic environment deteriorates further, replacement tenants could default before rent commencement, or existing tenants could fail, creating new vacancies that offset the anchor re-leasing gains. Management's observation that "credits have gotten a little better" in Q3 2025 is encouraging, but the portfolio's exposure to discretionary retailers and regional tenants creates vulnerability that healthcare-focused REITs like CHCT avoid.

Interest rate sensitivity poses a structural risk. While 88% of CTO's debt is fixed or hedged, the 6.7x net debt/EBITDA ratio remains elevated relative to the 5.0-6.0x range typical for investment-grade REITs. If SOFR rates increase due to Federal Reserve policy shifts, the $74 million floating rate exposure could pressure interest expense, and the cost of new debt could limit acquisition accretion. The term loan's 4.2% fixed rate (via swaps) is attractive today but could become punitive if rates decline, creating refinancing risk in 2029-2030.

Competition for Sun Belt retail assets is intensifying. The influx of pension and sovereign capital into shopping centers, as noted by management, are compressing cap rates and making value-add acquisitions more difficult. If CTO cannot source acquisitions at its targeted 9%+ yields, growth could slow, and the company could be forced to accept lower returns or increase leverage to maintain pace, eroding the margin of safety.

Valuation Context: Pricing a Self-Help Story

At $17.66 per share, CTO trades at 9.52x the midpoint of 2025 core FFO guidance ($1.855 per share), a multiple that reflects market skepticism about retail real estate rather than the company's specific prospects. This valuation compares favorably to small-cap REIT peers: Gladstone Commercial (GOOD) trades at 12.74x EBITDA with lower growth, One Liberty Properties (OLP) at 15.16x EBITDA with volatile earnings, and Armada Hoffler (AHH) at 13.67x EBITDA while generating losses. CTO's 8.36% dividend yield, while high, is well-covered at 122% of core FFO, contrasting with GOOD's 631% payout ratio and AHH's 284% ratio.

The price-to-book ratio of 1.04x suggests the market values CTO's assets only modestly above historical cost, despite the portfolio's mark-to-market potential. The six re-leased anchor spaces alone, generating an estimated $3-4 million of incremental annual rent at a 6.5% cap rate, represent $46-62 million of value creation not reflected on the balance sheet. This disconnect between public market valuation and private market reality creates the arbitrage opportunity that management is exploiting through buybacks.

Enterprise value of $1.18 billion and net debt of $607 million imply an implied cap rate of approximately 8.1% on the income property portfolio, based on Q3 2025 annualized NOI of $96 million. This cap rate is 150-200 basis points wider than recent private market transactions for comparable Sun Belt retail centers, validating management's claim that "the best acquisition investment is our own stock." The $216.5 million remaining availability under the ATM program provides additional firepower to exploit this gap.

Conclusion: A Retail REIT Built for This Moment

CTO Realty Growth has positioned itself to benefit from the retail sector's disruption rather than suffer from it. The company's ability to re-lease bankrupt anchor spaces at significantly higher rents, with spreads exceeding 50%, demonstrates a tenant relationships and market knowledge that transforms vacancy into value. This operational excellence, combined with disciplined capital allocation—buying back stock at 9.52x FFO while selling assets at private market valuations—creates a compelling self-help story that doesn't depend on multiple expansion.

The central thesis hinges on execution of the 2026 earnings inflection. If management delivers on the $7-8 million combined benefit from SNO tenants and anchor re-leasing, core FFO per share will exceed $2.00 in 2026, making the current valuation appear mispriced. The 8.36% dividend yield provides income while investors wait for this inflection, with 122% coverage offering substantial safety.

The key variables to monitor are lease commencement timing for the four remaining anchor spaces and acquisition discipline in an increasingly competitive market. Success on both fronts will validate CTO's positioning as a specialized retail REIT that creates value through cycles, while failure could expose the elevated leverage and delay the earnings inflection that underpins the investment case. For investors willing to underwrite management's execution, CTO offers a rare combination of immediate income and visible earnings growth in a sector many have written off.