CTO Realty Growth, a company known for its focus on high-quality retail properties, might not seem like the most exciting investment opportunity in today's market. With retail performing well and office spaces facing challenges, the company appears to be taking a conservative approach. However, a closer look at their recent earnings call transcripts reveals a potential catalyst that many analysts may be overlooking: a single office property in Albuquerque, New Mexico leased to Fidelity Investments. Could this seemingly unremarkable asset be the secret weapon that propels CTO to significant gains in 2025?

The current market narrative surrounding CTO largely revolves around their retail portfolio, and for good reason. They've demonstrated strong leasing momentum, achieving substantial rent increases and cultivating a robust pipeline of "signed but not open" leases. Their move toward larger-format retail centers and strategic property sales further reinforces this perception. However, John Albright, CEO of CTO, devoted a surprising amount of time during the Q4 2023 earnings call to discuss the seemingly insignificant Fidelity office asset. He presented a remarkably detailed overview of the developing Mesa del Sol master-planned community where the property is located, outlining a convincing case for growth in the area.

Albright described a confluence of factors creating a surge in demand for office space: increased government spending at the nearby Sandia National Laboratories and Kirtland Air Force Base attracting contractors, Netflix's billion-dollar investment in expanding its movie studios just a short distance away, and numerous new residential and commercial developments. He even mentioned an Australian helium energy company establishing a presence in Mesa del Sol. This isn't just empty talk; these are tangible developments driving a localized spike in demand for office space.

It's important to recognize that CTO's current projections for 2024 haven't fully factored in the potential upside of the Fidelity asset. They are currently in negotiations with Fidelity for a lease extension, a move that could significantly boost the building's marketability and value. A successful lease extension could create an opportunity for a highly profitable sale of the property in late 2024 or early 2025.

"Let's explore some hypothetical scenarios. Assuming a conservative cap rate spread of 150 basis points between the sale of the Fidelity asset and a subsequent retail acquisition, CTO could potentially unlock significant value. If the Fidelity asset sells at a 7.5% cap rate (consistent with their recent non-office property sales), a reinvestment at a 6% cap rate would represent a substantial return on investment. Considering the robust growth dynamics outlined by Albright, even a 7% cap rate on the Fidelity sale could be attainable, further amplifying the potential for gains."

Projected Leased Occupancy Growth

CTO's guidance also predicts a significant increase in leased occupancy to between 95% and 96% by the end of 2024. This suggests a 200 to 300 basis point improvement, driven primarily by their current "signed but not open" pipeline. This surge in occupancy, coupled with the potential sale of the Fidelity asset, lays the groundwork for explosive growth in 2025.

While the departure of WeWork and vacancy at the Regal theater present short-term headwinds for same-store NOI, CTO is actively seeking replacements. Notably, the new tenant replacing Regal is expected to pay rent at a double-digit percentage increase over Regal's pre-bankruptcy rate, further strengthening CTO's growth prospects for 2025.

Financial Highlights

CTO Realty Growth is quietly maneuvering itself into a position for a potentially remarkable year in 2025. While their retail portfolio will undoubtedly contribute to this success, the strategic repositioning of the under-the-radar Fidelity office asset could prove to be the unexpected catalyst for substantial shareholder returns. Investors should keep a watchful eye on this dark horse; it may very well take the market by surprise.

"Fun Fact: Mesa del Sol, where the Fidelity asset is located, was originally envisioned as a massive mixed-use development encompassing over 12,900 acres. It's a testament to the scale and ambition of the project that's transforming this part of Albuquerque."