Short Seller Says Retail REIT Is A 'Sinking Ship'
A scathing short seller report accuses the management of CTO Realty Trust of using fuzzy accounting tactics to mislead investors as they take large salaries while knowingly pushing the REIT to the brink of failure.
Wolfpack Research, led by activist investor Dan David, revealed its short interest in a report Wednesday that accused executives at the retail REIT of covering up financial mismanagement by not including capital expenditures in its definition of adjusted funds from operations — a departure from industry standards — and severely diluting shareholders to help pay dividends.
“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,” Wolfpack researchers wrote in the report.
The short seller accuses CTO’s management of using a loan to hide the failure of one of its largest tenants and said its research revealed that the company has never had enough cash to cover its dividend since it converted to a REIT in 2021.
Wolfpack researchers say the shopping center REIT covered a $38M shortfall between 2021 and 2024 by increasing outstanding shares by 70% since December 2022, adding that executives at the REIT have “become addicted to dilution as a way of bridging the gap.”
“Management knows CTO is a sinking ship,” the researchers wrote. “We think management knows it cannot win against their peers, and that is driving them to loot CTO before it goes under.”
CTO couldn’t be reached for comment early Thursday.
The REIT’s stock has fallen by more than 7% since the report was released, erasing gains made over the last 12 months.
Short sellers like Wolfpack make money when share prices go down.
The REIT released first-quarter earnings data on May 1 that put net income-per-share at $0.01, with same-store net operating income rising 2.4% year-over-year.
CTO paid $80M in Q1 to acquire the 559K SF Ashley Park near Atlanta.
Its portfolio includes 24 properties totaling 5.2M SF, and the Wolfpack report takes aim at specific malls for allegedly being mismanaged. Wolfpack accuses CTO management of knowingly misleading investors on earnings calls about the performance of the Ashford Lane mall in Atlanta, which it acquired for $80M in 2022.
The report includes detailed appendices that quote from past employees as well as property managers and operators at the REIT's properties.
Retail assets, and shopping malls in particular, have been popular investment assets over the last two years. Regional centers and strip malls have proven resilient through the last decade of macroeconomic uncertainty, and major operators like Simon say they plan to sail through the ongoing trade war.
Still, Wolfpack’s researchers said CTO shareholders should “brace for imminent dilution,” saying the REIT’s cash is dwindling and its funds from operations continue to fail to cover its dividend.
“CTO’s problem is simple; they don’t have enough money,” they wrote.
CTO had $8.4M of cash on hand in its Q1 earnings report, down from $9M in Q4 but up from $6.8M a year ago.
