CTO (CTO) Q2 2025: 86% Rent Spreads on Anchor Re-Tenanting Signal Leasing Upside Into 2026

July 30, 2025 | By EarningsIQ Research

CTO’s Q2 results underscore a leasing-driven mark-to-market story, with anchor replacements delivering standout rent spreads and a robust signed-not-open pipeline positioning the REIT for earnings tailwinds into 2026. Management’s disciplined capital strategy, proactive asset recycling, and focus on high-growth Sunbelt markets provide visibility, but operational downtime and elongated leasing cycles remain watchpoints for near-term cash flow timing.

Summary

• Anchor Leasing Drives Value Creation: Replacement of vacated anchors with new tenants is fueling double-digit rent spreads.
• Liquidity and Capital Management in Focus: Convertible note retirement and fixed-rate swaps reduce interest rate risk.
• Pipeline Converts to 2026 Tailwind: Signed-not-open leases and ongoing negotiations underpin next year’s earnings growth.

Performance Analysis

CTO’s Q2 performance was defined by strong leasing execution, with 227,000 square feet of new, renewal, and extension leases signed at an average cash rent of $25.43 per square foot. Notably, 190,000 square feet of comparable leasing generated a 22% cash rent spread, echoing year-to-date spreads of 27% on 299,000 square feet. The company’s mark-to-market strategy—replacing below-market anchor tenants with higher-rent concepts—has begun to materialize, particularly across 10 targeted anchor spaces where six are now resolved and new tenants like Burlington, Boot Barn, and Bob’s Discount Furniture are signed. These re-tenantings are delivering an 86% cash rent spread at key properties, such as Carolina Pavilion and Plaza at Rockwall, and management expects an overall 40% to 60% spread for the anchor program.

Leased occupancy remains high at 93.9%, with physical occupancy at 90.2%, reflecting the transition period as former anchors vacate and new tenants build out. The signed-not-open pipeline now stands at $4.6 million, representing 4.6% of in-place cash rents, and is poised to deliver incremental rent as tenants open—primarily in late 2025 and into 2026. On the balance sheet, CTO retired its $51 million convertible notes, reducing floating-rate debt exposure to just 12% of total debt, and ended the quarter with $85 million in liquidity. Net debt to EBITDA ticked higher sequentially to 6.9x, reflecting the Ashley Park acquisition and temporary earnings drag from anchor transitions, but is expected to improve as new leases commence.

• Anchor Re-Tenanting Delivers High Spreads: 86% cash rent increases at Carolina Pavilion and Rockwall validate the mark-to-market thesis.
• Signed-Not-Open Pipeline Builds Visibility: $4.6 million in signed leases not yet paying rent sets up a 2026 earnings tailwind.
• Balance Sheet De-Risked: Convertible note retirement and SOFR swaps limit rate exposure; term loan expected to further enhance liquidity.

While per-share Core FFO was flat year-over-year due to share issuance, underlying cash flow growth is masked by the lag between lease signing and rent commencement. The transition period remains a key variable for near-term results.

Executive Commentary

Strategic Positioning

1. Mark-to-Market Anchor Re-Tenanting

CTO’s strategy centers on unlocking below-market rents by proactively replacing vacated anchor tenants—many from retail bankruptcies—with higher-traffic, higher-rent concepts. The company has now resolved six of 10 targeted anchor boxes, with the remainder in active negotiations. Management expects 40% to 60% cash rent spreads on these spaces, providing a multi-year runway for internal growth as leases commence.

2. Sunbelt Market Focus and Portfolio Vibrancy

CTO’s portfolio is concentrated in high-growth, business-friendly Southeast and Southwest MSAs, where demographics and retailer demand remain robust. Recent leasing at Carolina Pavilion and Plaza at Rockwall highlights the company’s ability to attract national tenants and drive foot traffic, supporting rent growth and asset values. The company’s “signed-not-open” pipeline is a direct function of these market dynamics.

3. Disciplined Capital Allocation and Asset Recycling

Management is balancing new acquisitions with potential asset recycling, targeting value-add shopping centers in core markets while considering the sale of stabilized assets to fund growth. The recent convertible note retirement and fixed-rate swaps further limit interest rate risk and provide flexibility for future transactions. Net debt to EBITDA is expected to trend lower as new leases commence and acquisitions are balanced by dispositions.

4. Structured Investment Book and Embedded Options

CTO’s structured investment portfolio, including construction loans with acquisition rights (such as the Whole Foods-anchored site), acts as a shadow pipeline for future growth. While not a near-term earnings driver, these positions provide optionality and deepen relationships with developers in target markets.

5. Office Asset Transition and Credit Enhancement

The transition of the Albuquerque office property from a single-tenant (Fidelity) to a dual-credit tenancy (Fidelity and State of New Mexico) is expected to improve asset value, lease term, and marketability. The company will receive a payment from Fidelity for downsizing, with GAAP accounting smoothing the impact on reported rent.

Key Considerations

CTO’s Q2 results reflect a business model built on proactive leasing and value creation through asset repositioning, but also highlight the operational and timing complexities inherent in large-scale anchor transitions and capital recycling.

Key Considerations:

• Leasing Cycle Elongation: Anchor lease negotiations are taking longer due to tenant pipeline constraints, delaying rent commencement and cash flow realization.
• Operational Downtime: Vacancy from bankrupt tenants and anchor transitions temporarily suppresses occupancy and earnings until new tenants open.
• Capital Recycling Execution: Successful asset sales are needed to fund new acquisitions without increasing leverage beyond target levels.
• Interest Rate Management: Fixed-rate swaps and term loan plans de-risk the balance sheet, but execution timing and market rates remain variables.
• Sunbelt Market Outperformance: Continued demand from national retailers in core Southeast and Southwest markets underpins the leasing thesis, but exposure to regional economic shifts is a latent risk.

Risks

CTO’s near-term earnings are exposed to timing risk from elongated leasing cycles, construction delays, and downtime between anchor transitions. Asset recycling is necessary to limit leverage as new acquisitions are pursued, but disposition timing and pricing remain uncertain. Retail bankruptcies and consumer shifts could create additional vacancies, though management frames these as mark-to-market opportunities rather than threats. Office asset exposure is limited but subject to tenant retention and re-leasing risk.

Forward Outlook

For Q3 and Q4, CTO expects:

• Incremental rent from $4.6 million signed-not-open pipeline as tenants commence operations, primarily in late 2025 and into 2026
• Continued progress on leasing the remaining four anchor spaces, with announcements expected as leases are executed

For full-year 2025, management reaffirmed guidance:

• Core FFO of $1.80 to $1.86 per share
• AFFO of $1.93 to $1.98 per share

Management cited the timing of tenant openings and anchor lease-up as key drivers, with earnings lift more visible in late 2025 and into 2026. Guidance does not include any asset dispositions.

Takeaways

CTO’s Q2 results reinforce the company’s internal growth story, with anchor re-tenanting and a robust leasing pipeline providing a multi-year path for earnings expansion as new tenants open. Capital management and asset recycling will be critical to funding growth and maintaining balance sheet flexibility.

• Anchor Leasing Upside: Double-digit rent spreads from anchor replacements validate the mark-to-market strategy and set up future earnings lift.
• Timing Remains a Watchpoint: Delays in tenant build-out and leasing cycles could push earnings realization into 2026, requiring patience from investors.
• Capital Discipline Needed: Asset sales and term loan execution will determine whether growth can be achieved without leverage creep.

Conclusion

CTO’s Q2 2025 results highlight a business in transition, with significant embedded growth from anchor re-tenanting and a disciplined approach to capital allocation. The timing of rent commencement and asset recycling will be the key variables to watch as the company seeks to translate leasing momentum into sustained earnings growth.

Industry Read-Through

CTO’s success in capturing double-digit rent spreads on anchor replacements signals that demand for high-quality retail space in Sunbelt markets remains robust, even as legacy tenants exit. The operational downtime and elongated leasing cycles experienced by CTO are likely mirrored across the shopping center REIT sector, suggesting that reported occupancy and earnings may temporarily lag underlying leasing activity. Disciplined capital management and proactive asset recycling are emerging as best practices for retail REITs navigating a market defined by both disruption and opportunity. The experience with office asset transitions also provides a blueprint for REITs managing non-core properties amid shifting tenant needs.

CTO Real Estate Retail REIT Leasing Asset Recycling Sunbelt Anchor Tenants