Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-39143
ALPINE INCOME PROPERTY TRUST, INC.
(Exact name of registrant as specified in its charter)
Maryland
84-2769895
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
1140 N. Williamson Blvd., Suite 140
Daytona Beach, Florida
32114
(Address of principal executive offices)
(Zip Code)
(386) 274-2202
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading Symbol
Name of each exchange on which registered:
COMMON STOCK, $0.01 PAR VALUE
PINE
NYSE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s common stock outstanding on October 14, 2021 was 11,303,142.
INDEX
Page
No.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
3
Consolidated Balance Sheets – September 30, 2021 (Unaudited) and December 31, 2020
Consolidated Statements of Operations – Three and nine months ended September 30, 2021 and 2020 (Unaudited)
4
Consolidated Statements of Comprehensive Income – Three and nine months ended September 30, 2021 and 2020 (Unaudited)
5
Consolidated Statements of Stockholders’ Equity – Three and nine months ended September 30, 2021 and 2020 (Unaudited)
6
Consolidated Statements of Cash Flows – Nine months ended September 30, 2021 and 2020 (Unaudited)
7
Notes to Consolidated Financial Statements (Unaudited)
9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
Item 3. Quantitative and Qualitative Disclosures About Market Risk
38
Item 4. Controls and Procedures
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
41
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
42
SIGNATURES
43
2
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
As of
(Unaudited) September 30, 2021
December 31, 2020
ASSETS
Real Estate:
Land, at cost
$
133,329
83,210
Building and Improvements, at cost
231,328
142,679
Total Real Estate, at cost
364,657
225,889
Less, Accumulated Depreciation
(13,249)
(6,550)
Real Estate—Net
351,408
219,339
Cash and Cash Equivalents
6,706
1,894
Restricted Cash
600
—
Intangible Lease Assets—Net
52,685
36,881
Straight-Line Rent Adjustment
2,013
2,045
Other Assets
2,909
2,081
Total Assets
416,321
262,240
LIABILITIES AND EQUITY
Liabilities:
Accounts Payable, Accrued Expenses, and Other Liabilities
2,393
1,984
Prepaid Rent and Deferred Revenue
1,334
1,055
Intangible Lease Liabilities—Net
4,998
3,299
Long-Term Debt
190,195
106,809
Total Liabilities
198,920
113,147
Commitments and Contingencies—See Note 15
Equity:
Preferred Stock, $0.01 par value per share, 100 million shares authorized, no shares issued and outstanding as of September 30, 2021 and December 31, 2020
Common Stock, $0.01 par value per share, 500 million shares authorized, 11,299,548 shares issued and outstanding as of September 30, 2021 and 7,458,755 shares issued and outstanding as of December 31, 2020
113
75
Additional Paid-in Capital
198,019
132,878
Dividends in Excess of Net Income
(11,652)
(5,713)
Accumulated Other Comprehensive Income (Loss)
328
(481)
Stockholders' Equity
186,808
126,759
Noncontrolling Interest
30,593
22,334
Total Equity
217,401
149,093
Total Liabilities and Equity
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share, per share and dividend data)
Three Months Ended
Nine Months Ended
September 30, 2021
September 30, 2020
Revenues:
Lease Income
8,171
5,101
20,658
13,863
Total Revenues
Operating Expenses:
Real Estate Expenses
914
555
2,389
1,705
General and Administrative Expenses
1,371
1,119
3,687
3,535
Depreciation and Amortization
4,308
2,694
10,914
7,003
Total Operating Expenses
6,593
4,368
16,990
12,243
Gain on Disposition of Assets
544
287
Net Income from Operations
2,122
1,020
4,212
1,907
Interest Expense
1,066
384
2,299
977
Net Income
1,056
636
1,913
930
Less: Net Income Attributable to Noncontrolling Interest
(138)
(90)
(251)
(131)
Net Income Attributable to Alpine Income Property Trust, Inc.
918
546
1,662
799
Per Common Share Data:
Basic
0.08
0.07
0.18
0.10
Diluted
0.06
0.16
0.09
Weighted Average Number of Common Shares:
11,299,548
7,455,281
9,253,090
7,632,660
12,996,503
8,679,135
10,637,934
8,856,514
Dividends Declared and Paid
0.255
0.20
0.745
0.60
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
Other Comprehensive Income (Loss)
Cash Flow Hedging Derivative - Interest Rate Swaps
148
28
809
(619)
Total Other Comprehensive Income (Loss)
Total Comprehensive Income
574
2,471
180
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands, except per share data)
For the three months ended September 30, 2021:
Common Stock at Par
Balance July 1, 2021
197,978
(9,689)
188,582
29,858
218,440
138
Stock Issuance to Directors
79
Stock Issuance, Net of Equity Issuance Costs
(38)
Operating Units Issued
1,031
Cash Dividend ($0.255 per share)
(2,881)
(434)
(3,315)
Other Comprehensive Income
Balance September 30, 2021
For the three months ended September 30, 2020:
Balance July 1, 2020
133,038
(3,313)
(647)
129,157
22,727
151,884
90
68
Cash Dividend ($0.20 per share)
(1,492)
(244)
(1,736)
Balance September 30, 2020
133,106
(4,259)
128,307
22,573
150,880
For the nine months ended September 30, 2021:
Balance January 1, 2021
251
218
64,923
64,961
9,041
Cash Dividend ($0.745 per share)
(7,601)
(1,033)
(8,634)
For the nine months ended September 30, 2020:
Balance January 1, 2020
137,948
(498)
137,529
23,176
160,705
131
Stock Repurchase
(5,013)
171
Cash Dividend ($0.60 per share)
(4,560)
(734)
(5,294)
Other Comprehensive Loss
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flow from Operating Activities:
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Amortization of Intangible Lease Assets and Liabilities to Lease Income
(168)
(78)
Amortization of Deferred Financing Costs to Interest Expense
236
133
(544)
(287)
Non-Cash Compensation
231
201
Decrease (Increase) in Assets:
(393)
(1,237)
COVID-19 Rent Repayments
408
(538)
(654)
(589)
Increase (Decrease) in Liabilities:
869
774
278
1,044
Net Cash Provided By Operating Activities
13,090
7,356
Cash Flow from Investing Activities:
Acquisition of Real Estate, Including Capitalized Expenditures
(120,961)
(100,736)
Proceeds from Disposition of Assets
3,653
4,933
Net Cash Used In Investing Activities
(117,308)
(95,803)
Cash Flow from Financing Activities:
Proceeds from Long-Term Debt
217,121
95,000
Payments on Long-Term Debt
(162,431)
(6,692)
Cash Paid for Loan Fees
(1,387)
(10)
Repurchase of Common Stock
Proceeds From Stock Issuance, net
Dividends Paid
Net Cash Provided By Financing Activities
109,630
77,991
Net Increase (Decrease) in Cash and Cash Equivalents
5,412
(10,456)
Cash and Cash Equivalents, Beginning of Period
12,342
Cash and Cash Equivalents, End of Period
7,306
1,886
Reconciliation of Cash to the Consolidated Balance Sheets:
Total Cash
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest
2,030
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Unrealized Gain (Loss) on Cash Flow Hedge
Operating Units Issued in Exchange for Real Estate
Assumption of Mortgage Note Payable
30,000
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BUSINESS AND ORGANIZATION
BUSINESS
Alpine Income Property Trust, Inc. (the “Company” or “PINE”) is a real estate company that owns and operates a high-quality portfolio of commercial net lease properties. The terms “us,” “we,” “our,” and “the Company” as used in this report refer to Alpine Income Property Trust, Inc. together with our consolidated subsidiaries.
Our portfolio consists of 89 net leased retail and office properties located in 62 markets in 28 states. The properties in our portfolio are primarily subject to long-term, triple-net leases, which generally require the tenant to pay all of the property operating expenses such as real estate taxes, insurance, assessments and other governmental fees, utilities, repairs and maintenance and certain capital expenditures.
The Company has no employees and is externally managed by Alpine Income Property Manager, LLC, a Delaware limited liability company and a wholly owned subsidiary of CTO Realty Growth, Inc. (our “Manager”). CTO Realty Growth, Inc. (NYSE: CTO) is a Maryland corporation that is a publicly traded diversified REIT and the sole member of our Manager (“CTO”).
ORGANIZATION
The Company is a Maryland corporation that was formed on August 19, 2019. On November 26, 2019, the Company closed its initial public offering (“IPO”) of shares of its common stock (the “Offering”) as well as a concurrent private placement of shares of common stock to CTO. Net proceeds from the Offering and the concurrent CTO Private Placement (defined below) were used to purchase 15 properties from CTO. Additionally, CTO contributed to Alpine Income Property OP, LP, the Company’s operating partnership (the “Operating Partnership”), five additional properties in exchange for operating partnership units (“OP Units”).
The price per share paid in the Offering and the concurrent private placement was $19.00 (the “IPO Price”). The Offering raised $142.5 million in gross proceeds from the issuance of 7,500,000 shares of our common stock. We also raised $7.5 million from the concurrent private placement to CTO from the issuance of 394,737 shares of our common stock (“CTO Private Placement”). Included in the Offering was CTO’s purchase of 421,053 shares of our common stock for $8.0 million, representing a cash investment by CTO of $15.5 million. A total of $125.9 million of proceeds from the Offering were utilized to acquire 15 properties in our initial portfolio. The remaining five properties in our initial portfolio were contributed by CTO in exchange for 1,223,854 OP Units for a value of $23.3 million based on the IPO Price. The Company incurred a total of $12.0 million of transaction costs, which included underwriting fees of $9.4 million. Upon completion of the Offering, the CTO Private Placement, and the other transactions executed at the time of our listing on the New York Stock Exchange (the “NYSE”) under the symbol “PINE” (collectively defined as the “Formation Transactions”), CTO owned 22.3% of our outstanding common stock (assuming the OP Units issued to CTO in the Formation Transactions are exchanged for shares of our common stock on a one-for-one basis).
We conduct the substantial majority of our operations through, and substantially all of our assets are held by, the Operating Partnership. Our wholly owned subsidiary, Alpine Income Property GP, LLC (“PINE GP”), is the sole general partner of the Operating Partnership. As of September 30, 2021, we have a total ownership interest in the Operating Partnership of 86.9%, with CTO holding, directly and indirectly, a 9.4% ownership interest in the Operating Partnership. The remaining 3.7% ownership interest is held by an unrelated third party in connection with the issuance of 479,640 OP Units valued at $9.0 million in the aggregate, or $18.85 per unit, based on the Company’s trailing ten day average closing share price. The issuance of 479,640 OP Units includes (i) 424,951 OP Units issued as partial consideration for the portfolio of nine net lease properties acquired on June 30, 2021 and (ii) 54,689 OP Units issued in connection with the acquisition of one net lease property on July 12, 2021 (see Note 3, “Income Property Portfolio”). Our interest in the Operating Partnership generally entitles us to share in cash distributions from, and in the profits and losses of, the Operating Partnership in proportion to our percentage ownership. We, through PINE GP, generally have the exclusive power under
the partnership agreement to manage and conduct the business and affairs of the Operating Partnership, subject to certain approval and voting rights of the limited partners. Our Board of Directors (the “Board”) manages our business and affairs.
The Company has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company’s annual REIT taxable income, without regard to the dividends paid deduction or net capital gain, to its stockholders (which is computed and which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles). As a REIT, the Company is generally not subject to U.S. federal corporate income tax to the extent of its distributions to stockholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal income tax on its taxable income at regular corporate rates and generally will not be permitted to qualify for treatment as a REIT for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders. Even if the Company qualifies for taxation as a REIT, the Company may be subject to state and local taxes on its income and property and federal income and excise taxes on its undistributed income.
COVID-19 PANDEMIC
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus as a pandemic (the “COVID-19 Pandemic”), which has spread throughout the United States. The spread of the COVID-19 Pandemic and its variants have continued to cause significant volatility in the U.S. and international markets, and in many industries, business activity has experienced periods of almost complete shutdown. There continues to be uncertainty around the duration and severity of business disruptions related to the COVID-19 Pandemic and its variants, as well as their impact on the U.S. economy and international economies.
Contractual Base Rent (“CBR”) represents the amount owed to the Company under the current terms of its lease agreements. As a result of the COVID-19 Pandemic, during the year ended December 31, 2020, the Company agreed to defer or abate certain CBR in exchange for additional lease term or other lease enhancing additions. Repayments of the remaining balance of deferred CBR began in the third quarter of 2020, with payments continuing, in some cases, through mid-year 2022.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period presented. Actual results could differ from those estimates.
Among other factors, fluctuating market conditions that can exist in the national real estate markets and the volatility and uncertainty in the financial and credit markets make it possible that the estimates and assumptions, most notably those related to PINE’s investment in income properties, could change materially due to continued volatility in the real estate and financial markets, or as a result of a significant dislocation in those markets.
LONG-LIVED ASSETS
The Company follows Financial Accounting Standards Board (“FASB”) ASC Topic 360-10, Property, Plant, and Equipment in conducting its impairment analyses. The Company reviews the recoverability of long-lived assets, primarily real estate, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Examples of situations considered to be triggering events include: a substantial decline in operating cash flows during the period, a current or projected loss from operations, an income property not fully leased or leased at
10
rates that are less than current market rates, and any other quantitative or qualitative events deemed significant by management. Long-lived assets are evaluated for impairment by using an undiscounted cash flow approach, which considers future estimated capital expenditures. Impairment of long-lived assets is measured at fair value less cost to sell.
PURCHASE ACCOUNTING FOR ACQUISITIONS OF REAL ESTATE SUBJECT TO A LEASE
Investments in real estate are carried at cost less accumulated depreciation and impairment losses, if any. The cost of investments in real estate reflects their purchase price or development cost. We evaluate each acquisition transaction to determine whether the acquired asset meets the definition of a business. Under Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, an acquisition does not qualify as a business when there is no substantive process acquired or substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets or the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. Transaction costs related to acquisitions that are asset acquisitions are capitalized as part of the cost basis of the acquired assets, while transaction costs for acquisitions that are deemed to be acquisitions of a business are expensed as incurred. Improvements and replacements are capitalized when they extend the useful life or improve the productive capacity of the asset. Costs of repairs and maintenance are expensed as incurred.
In accordance with FASB guidance, the fair value of the real estate acquired with in-place leases is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases, and the value of leasing costs, based in each case on their relative fair values. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded as other assets or liabilities based on the present value. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term unless the management believes that it is likely that the tenant will renew the lease upon expiration, in which case the Company amortizes the value attributable to the renewal over the renewal period. The value of in-place leases and leasing costs are amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off.
INCOME PROPERTY LEASE REVENUE
The rental arrangements associated with the Company’s income property portfolio are classified as operating leases. The Company recognizes lease income on these properties on a straight-line basis over the term of the lease. Accordingly, contractual lease payment increases are recognized evenly over the term of the lease. The periodic difference between lease income recognized under this method and contractual lease payment terms (i.e., straight-line rent) is recorded as a deferred operating lease receivable and is included in straight-line rent adjustment on the accompanying consolidated balance sheets. The Company’s leases provide for reimbursement from tenants for variable lease payments including common area maintenance, insurance, real estate taxes and other operating expenses. A portion of our variable lease payment revenue is estimated each period and is recognized as rental income in the period the recoverable costs are incurred and accrued.
The collectability of tenant receivables and straight-line rent adjustments is determined based on, among other things, the aging of the tenant receivable, management’s evaluation of credit risk associated with the tenant and industry of the tenant, and a review of specifically identified accounts using judgment. As of September 30, 2021 and December 31, 2020, the Company had recorded an allowance for doubtful accounts of $0.1 million.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, bank demand accounts, and money market accounts having original maturities of 90 days or less. The Company’s bank balances as of September 30, 2021 and December 31, 2020 include certain amounts over the Federal Deposit Insurance Corporation limits. The carrying value of cash and cash equivalents is
11
reported at Level 1 in the fair value hierarchy, which represents valuation based upon quoted prices in active markets for identical assets or liabilities.
RESTRICTED CASH
Restricted cash totaled $0.6 million at September 30, 2021 which is being held in a capital replacement and leasing commissions reserve account in connection with our financing of six income properties.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITY
Interest Rate Swaps. The Company accounts for its cash flow hedging derivatives in accordance with FASB ASC Topic 815-20, Derivatives and Hedging. Depending upon the hedge’s value at each balance sheet date, the derivatives are included in either other assets or accounts payable, accrued expenses, and other liabilities on the consolidated balance sheet at its fair value. On the date each interest rate swap was entered into, the Company designated the derivatives as a hedge of the variability of cash flows to be paid related to the recognized long-term debt liabilities.
The Company documented the relationship between the hedging instruments and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge transactions. At the hedges’ inception, the Company formally assessed whether the derivatives that are used in hedging the transactions are highly effective in offsetting changes in cash flows of the hedged items, and we will continue to do so on an ongoing basis. As the terms of the interest rate swaps and the associated debts are identical, both hedging instruments qualify for the shortcut method, therefore, it is assumed that there is no hedge ineffectiveness throughout the entire term of the hedging instruments.
Changes in fair value of the hedging instruments that are highly effective and designated and qualified as cash-flow hedges are recorded in other comprehensive income and loss, until earnings are affected by the variability in cash flows of the designated hedged items (see Note 9, “Interest Rate Swaps”).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company’s financial assets and liabilities including cash and cash equivalents, restricted cash, accounts receivable included in other assets, accounts payable, and accrued expenses and other liabilities at September 30, 2021 and December 31, 2020, approximate fair value because of the short maturity of these instruments. The carrying value of the Company’s Credit Facility, hereinafter defined, as of September 30, 2021 and December 31, 2020, approximates current market rates for revolving credit arrangements with similar risks and maturities. The Company estimates the fair value of its mortgage note payable and term loans based on incremental borrowing rates for similar types of borrowing arrangements with the same remaining maturity and on the discounted estimated future cash payments to be made for other debt. The discount rate used to calculate the fair value of debt approximates current lending rates for loans and assumes the debt is outstanding through maturity. Since such amounts are estimates that are based on limited available market information for similar transactions, which is a Level 2 non-recurring measurement, there can be no assurance that the disclosed value of any financial instrument could be realized by immediate settlement of the instrument.
FAIR VALUE MEASUREMENTS
The Company’s estimates of fair value of financial and non-financial assets and liabilities is based on the framework established by GAAP. The framework specifies a hierarchy of valuation inputs which was established to increase consistency, clarity and comparability in fair value measurements and related disclosures. GAAP describes a fair value hierarchy based upon three levels of inputs that may be used to measure fair value, two of which are considered observable and one that is considered unobservable. The following describes the three levels:
12
CONCENTRATION OF RISK
Certain of the tenants in the portfolio of 89 properties accounted for more than 10% of total revenues during the nine months ended September 30, 2021 and 2020.
During the nine months ended September 30, 2021, the property leased to Wells Fargo Bank, NA represented 13% of total revenues. During the nine months ended September 30, 2020, the properties leased to Wells Fargo Bank, NA and Hilton Grand Vacations represented 20% and 13% of total revenues, respectively.
As of September 30, 2021 and December 31, 2020, based on square footage, 11% and 17%, respectively, of the Company’s real estate portfolio was located in the State of Florida and 11% and 15%, respectively, of the Company’s real estate portfolio was located in the State of North Carolina. Additionally, as of September 30, 2021, more than 10% of the Company’s real estate portfolio, based on square footage, was located in the State of Texas and more than 10% of the Company’s real estate portfolio was located in the States of Oregon and Michigan as of December 31, 2020.
RECLASSIFICATIONS
Certain items in the consolidated balance sheet as of December 31, 2020 have been reclassified to conform to the presentation as of September 30, 2021. Specifically, in the first quarter of 2021, the Company reclassified deferred financing costs, net of accumulated amortization, as a component of other assets on the accompanying consolidated balance sheet. Accordingly, deferred financing costs of $0.9 million, net of accumulated amortization of $0.2 million, were reclassified from long-term debt to other assets as of December 31, 2020. Additionally, in the third quarter of 2021, the Company increased non-cash compensation for the nine months ended September 30, 2020 by $0.03 million through a reclassification from accounts payable, accrued expenses, and other liabilities within operating activities on the accompanying consolidated statements of cash flows which is the result of timing related to the issuance of shares for director retainers.
NOTE 3. INCOME PROPERTY PORTFOLIO
As of September 30, 2021, the Company’s income property portfolio consisted of 89 properties with total square footage of 2.7 million.
Leasing revenue consists of long-term rental revenue from retail and office income properties, which is recognized as earned, using the straight-line method over the life of each lease.
The components of leasing revenue are as follows (in thousands):
Lease Payments
7,418
4,721
18,850
12,762
Variable Lease Payments
753
380
1,808
1,101
Total Lease Income
13
Minimum Future Rental Receipts. Minimum future rental receipts under non-cancelable operating leases, excluding percentage rent and other lease payments that are not fixed and determinable, having remaining terms in excess of one year subsequent to September 30, 2021, are summarized as follows (in thousands):
Year Ending December 31,
Amounts
Remainder of 2021
8,167
2022
32,264
2023
32,181
2024
31,465
2025
30,467
2026 and thereafter (cumulative)
118,512
Total
253,056
2021 Activity. During the nine months ended September 30, 2021, the Company acquired 42 income properties for a combined purchase price of $158.7 million, or an acquisition cost of $160.0 million including capitalized acquisition costs. Of the total acquisition cost, $52.1 million was allocated to land, $89.6 million was allocated to buildings and improvements, $20.5 million was allocated to intangible assets pertaining to the in-place lease value, leasing fees, and above market lease value, and $2.2 million was allocated to intangible liabilities for the below market lease value. The weighted average amortization period for the intangible assets and liabilities was 8.4 years at acquisition.
14
The leases attributable to the income properties acquired during the nine months ended September 30, 2021 are described below:
Description
Location
Date of Acquisition
Square-Feet
Purchase Price ($000's)
Remaining Lease Term at Acquisition Date (in years)
Dollar General
Cut and Shoot, TX
1/25/2021
9,096
1,727
14.8
Del Rio, TX
9,219
1,403
14.0
Seguin, TX
9,155
1,290
14.1
At Home
Canton, OH
3/09/2021
89,902
8,571
8.4
Pet Supplies Plus
8,400
1,135
6.6
Salon Lofts
4,000
694
7.0
Sportsman Warehouse
Albuquerque, NM
3/29/2021
48,974
7,100
Burlington Stores, Inc.
North Richland Hills, TX
4/23/2021
70,891
11,528
7.8
Academy Sports
Florence, SC
6/22/2021
58,410
7,650
7.7
Big Lots
Durant, OK
6/25/2021
36,794
1,836
5.5
Orscheln
37,965
2,017
1.7
Lowe's
Katy, TX
6/30/2021
131,644
14,672
11.1
Harris Teeter
Charlotte, NC
45,089
8,273
6.8
Rite Aid
Renton, WA
16,280
7,200
5.1
Walgreens
Clermont, FL
13,650
5,085
7.2
Germantown, MD
25,589
4,670
9.6
Phoenix, AZ
34,512
4,599
Circle K
Indianapolis, IN
4,283
2,800
(1)
3.4
Burger King
Plymouth, NC
3,142
1,736
Dollar Tree
Demopolis, AL
10,159
1,615
8.7
Firestone
Pittsburgh, PA
10,629
1,468
Advance Auto Parts
Ware, MA
6,889
1,396
3.6
Grease Monkey
Stockbridge, GA
1,846
1,318
12.3
Hardee's
Boaz, AL
3,542
1,185
9.4
Schlotzsky's
Sweetwater, TX
2,431
1,147
Athens, GA
6,871
1,127
Family Dollar
Burlington, NC
7/01/2021
11,394
1,618
9.8
O'Reilly Auto Parts
Duluth, MN
7/12/2021
11,182
1,030
6.4
Tractor Supply
Washington Court House, OH
8/27/2021
39,984
2,370
10.8
Harbor Freight
Midland, MI
8/31/2021
14,624
1,750
4.8
Camping World
9/14/2021
66,033
10,451
Ludington, MI
6,604
1,050
10.3
New Baltimore, MI
6,784
Stillwell, OK
9/17/2021
9,828
1,576
10.5
Angels Camp, CA
9/22/2021
7,066
2,125
4.5
Walmart
Hempstead, TX
9/28/2021
52,190
4,450
5.3
7-Eleven
Olathe, KS
9/30/2021
4,146
3,782
5.7
Turnersville, NJ
89,460
7,181
8.1
Boston Market
2,627
1,027
8.3
Verizon
6,027
3,568
5.8
St. Paul, MN
7,201
2,305
7.1
Hobby Lobby
Aberdeen, SD
49,034
3,150
10,023
1,081
Office Depot
30,346
3,814
2.3
Valero (2)
Jackson, MS
1,920
1,067
20.0
Leland, MS
3,375
Total / Weighted Average
1,129,210
158,664
15
On July 21, 2021, the Company disposed of one income property, classified as held for sale as of June 30, 2021, leased to Outback Steakhouse located in Huntersville, North Carolina, for a sales price of $3.8 million, generating a gain on sale of $0.5 million.
2020 Activity. During the nine months ended September 30, 2020, the Company acquired 26 income properties for a combined purchase price of $99.3 million, or an acquisition cost of $100.3 million including capitalized acquisition costs. Of the total acquisition cost, $25.8 million was allocated to land, $59.7 million was allocated to buildings and improvements, $16.1 million was allocated to intangible assets pertaining to the in-place lease value, leasing fees, and above market lease value, and $1.3 million was allocated to intangible liabilities for the below market lease value. The weighted average amortization period for the intangible assets and liabilities was 10.2 years at acquisition.
The net lease income properties acquired during the nine months ended September 30, 2020 are described below:
Conn's HomePlus
Hurst, TX
1/10/2020
37,957
6,100
11.6
Austin, TX
1/13/2020
6,400
5,762
15.0
Georgetown, TX
7,726
4,301
Lehigh Gas Wholesale Services, Inc.
Highland Heights, KY
2/03/2020
2,578
4,250
American Multi-Cinema, Inc.
Tyngsborough, MA
2/19/2020
39,474
7,055
10.1
Tulsa, OK
2/28/2020
84,180
12,486
Long John Silver's
3,000
264
Old Time Pottery
Orange Park, FL
6,312
10.4
Freddy's Frozen Custard
3,200
303
Arden, NC
6/24/2020
55,000
7,987
11.2
Howell, MI
6/30/2020
214,172
20,590
Advanced Auto Parts
Severn, MD
9/14/2020
6,876
2,588
14.5
Heuvelton, NY
9,342
1,462
12.1
Winthrop, NY
9,167
1,589
11.0
Salem, NY
9,199
1,485
13.0
Harrisville, NY
9,309
1,466
13.3
Newtonsville, OH
9,290
1,164
9.7
Hammond, NY
1,384
Barker, NY
9,275
1,439
13.2
Chazy, NY
9,277
1,673
Milford, ME
9/21/2020
9,128
1,606
13.1
Limestone, ME
1,456
Bingham, ME
9,345
1,522
Willis, TX
9/23/2020
9,138
1,774
14.9
Somerville, TX
9,252
1,472
Odessa, TX
9/30/2020
9,127
1,792
673,978
99,282
On September 25, 2020, the Company disposed of one income property, classified as held for sale as of June 30, 2020, leased to Outback Steakhouse located in Charlottesville, Virginia, for a sales price of $5.1 million, generating a gain on sale of $0.3 million.
16
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying value and estimated fair value of the Company’s financial instruments not carried at fair value on the consolidated balance sheets at September 30, 2021 and December 31, 2020 (in thousands):
Carrying Value
Estimated Fair Value
Cash and Cash Equivalents - Level 1
Restricted Cash - Level 1
Long-Term Debt - Level 2
195,283
The estimated fair values are not necessarily indicative of the amount the Company could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts.
The following tables present the fair value of assets (liabilities) measured on a recurring basis by Level as of September 30, 2021 and December 31, 2020 (in thousands):
Fair Value at Reporting Date Using
Fair Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
2026 Term Loan Interest Rate Swap (1)
197
2027 Term Loan Interest Rate Swap (2)
Credit Facility Interest Rate Swap (3)
17
NOTE 5. INTANGIBLE ASSETS AND LIABILITIES
Intangible assets and liabilities consist of the value of above-market and below-market leases, the value of in-place leases, and the value of leasing costs, based in each case on their fair values. Intangible assets and liabilities consisted of the following as of September 30, 2021 and December 31, 2020 (in thousands):
Intangible Lease Assets:
Value of In-Place Leases
41,090
27,494
Value of Above Market In-Place Leases
3,182
2,187
Value of Intangible Leasing Costs
16,966
11,459
Sub-total Intangible Lease Assets
61,238
41,140
Accumulated Amortization
(8,553)
Sub-total Intangible Lease Assets—Net
Intangible Lease Liabilities:
Value of Below Market In-Place Leases
(5,736)
(3,674)
Sub-total Intangible Lease Liabilities
738
375
Sub-total Intangible Lease Liabilities—Net
(4,998)
(3,299)
Total Intangible Assets and Liabilities—Net
47,687
33,582
The following table reflects the net amortization of intangible assets and liabilities during the three and nine months ended September 30, 2021 and 2020 (in thousands):
Amortization Expense
1,637
1,038
4,134
2,646
Increase to Income Properties Revenue
(77)
(30)
Net Amortization of Intangible Assets and Liabilities
1,560
1,008
3,966
2,568
The estimated future amortization expense (income) related to net intangible assets and liabilities is as follows (in thousands):
Future Amortization Expense
Future Accretion to Income Property Revenue
Net Future Amortization of Intangible Assets and Liabilities
1,819
(74)
1,745
7,276
(297)
6,979
7,274
6,977
7,044
(285)
6,759
6,496
(239)
6,257
2026 and thereafter
20,063
(1,093)
18,970
49,972
(2,285)
As of September 30, 2021, the weighted average amortization period of both the total intangible assets and liabilities was 8.9 years.
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NOTE 6. OTHER ASSETS
Other assets consisted of the following (in thousands):
Tenant Receivables
338
164
Accrued Unbilled Tenant Receivables—Net of Allowance for Doubtful Accounts (1)
772
119
Prepaid Insurance
72
606
Deposits on Acquisitions
680
100
Prepaid and Deposits—Other
205
442
Deferred Financing Costs—Net
461
650
Interest Rate Swaps
381
Total Other Assets
NOTE 7. ACCOUNTS PAYABLE, ACCRUED EXPENSES, AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consisted of the following (in thousands):
Accounts Payable
107
450
Accrued Expenses
1,300
474
Due to CTO
933
579
Interest Rate Swap
53
481
Total Accounts Payable, Accrued Expenses, and Other Liabilities
NOTE 8. LONG-TERM DEBT
As of September 30, 2021, the Company’s outstanding indebtedness, at face value, was as follows (in thousands):
Face Value Debt
Stated Interest Rate
Maturity Date
Credit Facility
21,500
30-Day LIBOR + [1.35% - 1.95%]
November 2023
2026 Term Loan (1)
60,000
May 2026
2027 Term Loan (2)
80,000
30-Day LIBOR + [1.25% - 1.90%]
January 2027
Mortgage Note Payable – CMBS Portfolio
4.33%
October 2034
Total Debt/Weighted – Average Rate
191,500
2.30%
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Credit Facility. On November 26, 2019, the Company and the Operating Partnership entered into a credit agreement (the “Credit Facility Credit Agreement”) with a group of lenders for a senior unsecured revolving credit facility (the “Credit Facility”) in the maximum aggregate initial original principal amount of up to $100.0 million. The Credit Facility includes an accordion feature that may allow the Operating Partnership to increase the availability under the Credit Facility by an additional $50.0 million, subject to meeting specified requirements and obtaining additional commitments from lenders. BMO Capital Markets Corp. and Raymond James Bank, N.A. are joint lead arrangers and joint bookrunners, with Bank of Montreal (“BMO”) as administrative agent. The Credit Facility has a base term of four years, with the ability to extend the base term for one year.
On June 30, 2020, the Company and the Operating Partnership executed the first amendment to the Credit Facility Credit Agreement whereby the tangible net worth covenant was adjusted to be more reflective of market terms.
On October 16, 2020, the Company and the Operating Partnership executed the second amendment to the Credit Facility (the “Second Amendment”), with the addition of two lenders, Huntington National Bank and Truist Bank. As a result of the Second Amendment, the Credit Facility has a total borrowing capacity of $150.0 million with the ability to increase that capacity up to $200.0 million during the term, utilizing an accordion feature, subject to lender approval.
On May 19, 2021, the Company and the Operating Partnership executed the third amendment to the Credit Facility (the “Third Amendment”). Among other things, the Third Amendment revised the Credit Facility Credit Agreement to provide that as of the last day of each fiscal quarter, the Operating Partnership shall not permit the ratio of Unsecured Indebtedness to Borrowing Base Value (as defined in the Credit Facility Credit Agreement) to be greater than 0.60 to 1:00. Prior to the Third Amendment, the Credit Facility Credit Agreement provided that as of the last day of each fiscal quarter, the Operating Partnership could not permit the ratio of Unsecured Indebtedness to Total Asset Value (as defined in the Credit Facility Credit Agreement) to be greater than 0.60 to 1:00.
Pursuant to the Credit Facility Credit Agreement, the indebtedness outstanding under the Credit Facility accrues at a rate ranging from the 30-day LIBOR plus 135 basis points to the 30-day LIBOR plus 195 basis points, based on the total balance outstanding under the Credit Facility as a percentage of the total asset value of the Operating Partnership, as defined in the Credit Facility Credit Agreement. The Credit Facility also accrues a fee of 15 to 25 basis points for any unused portion of the borrowing capacity based on whether the unused portion is greater or less than 50% of the total borrowing capacity.
The Operating Partnership is subject to customary restrictive covenants under the Credit Facility Credit Agreement, the 2026 Term Loan Credit Agreement (hereinafter defined), and the 2027 Term Loan Credit Agreement (hereinafter defined), collectively referred to herein as the “Credit Agreements”, including, but not limited to, limitations on the Operating Partnership’s ability to: (a) incur indebtedness; (b) make certain investments; (c) incur certain liens; (d) engage in certain affiliate transactions; and (e) engage in certain major transactions such as mergers. The Credit Agreements also contain financial covenants covering the Operating Partnership, including but not limited to, tangible net worth and fixed charge coverage ratios.
At September 30, 2021, the current commitment level under the Credit Facility was $150.0 million and the Company had an outstanding balance of $21.5 million.
2026 Term Loan. On May 21, 2021, the Operating Partnership, the Company and certain subsidiaries of the Company entered into a term loan credit agreement (the “2026 Term Loan Credit Agreement”) for a term loan (the “2026 Term Loan”) in an aggregate principal amount of $60.0 million with a maturity of five years. Truist Securities, Inc. is acting as sole lead arranger and sole book runner, with Truist Bank, N.A. as administrative agent. Truist Bank, N.A., Bank of Montreal, Raymond James Bank, N.A. and Stifel Bank are lenders under the 2026 Term Loan. In addition, the Operating Partnership may request up to three incremental term loan commitments in an aggregate amount not to exceed $100.0 million.
20
2027 Term Loan. On September 30, 2021, the Operating Partnership, the Company and certain subsidiaries of the Company entered into a term loan credit agreement (the “2027 Term Loan Credit Agreement”) for a term loan (the “2027 Term Loan”) in an aggregate principal amount of $80.0 million (the “Term Commitment”) maturing in January 2027. KeyBanc Capital Markets Inc., Regions Capital Markets, and U.S. Bank National Association are acting as joint lead arrangers, with KeyBanc Capital Markets Inc. as sole book runner, and KeyBank National Association as administrative agent. KeyBank National Association, Regions Bank, U.S. Bank National Association, Bank of Montreal, Raymond James Bank, and The Huntington National Bank are lenders under the 2027 Term Loan. In addition, the Operating Partnership may request up to three incremental term loan commitments in an aggregate amount, together with the Term Commitment, not to exceed $200.0 million.
Mortgage Notes Payable. On June 30, 2021, in connection with the acquisition of the CMBS Portfolio from CTO, the Company assumed an existing $30.0 million secured mortgage, which bears a fixed interest rate of 4.33%. The mortgage note matures in October 2034 and is prepayable without penalty beginning in October 2024. Additionally, on June 30, 2021, in connection with the acquisition of two net lease properties from an unrelated third party, the Company assumed mortgage notes totaling an aggregate of $1.6 million, which balance was repaid on July 1, 2021.
Long-term debt as of September 30, 2021 and December 31, 2020 consisted of the following (in thousands):
Due Within One Year
2026 Term Loan
2027 Term Loan
Financing Costs, net of accumulated amortization
(1,305)
Total Long-Term Debt
Payments applicable to reduction of principal amounts as of September 30, 2021 will be required as follows (in thousands):
Amount
170,000
Total Long-Term Debt - Face Value
The carrying value of long-term debt as of September 30, 2021 consisted of the following (in thousands):
Current Face Amount
In addition to the $1.3 million of financing costs, net of accumulated amortization included in the table above, as of September 30, 2021, the Company also had financing costs, net of accumulated amortization related to the Credit Facility of $0.5 million which is included in other assets on the consolidated balance sheets. These costs are amortized on a straight-line basis over the term of the Credit Facility and are included in interest expense in the Company’s accompanying consolidated statements of operations.
21
The following table reflects a summary of interest expense incurred and paid during the three and nine months ended September 30, 2021 and 2020 (in thousands):
979
339
2,063
844
87
45
Total Interest Expense
Total Interest Paid
925
308
The Company was in compliance with all of its debt covenants as of September 30, 2021.
NOTE 9. INTEREST RATE SWAPS
The Company has entered into interest rate swap agreements to hedge against changes in future cash flows resulting from fluctuating interest rates related to the below noted borrowings. The interest rate agreements were 100% effective during the nine months ended September 30, 2021. Accordingly, the changes in fair value on the interest rate swaps have been classified in accumulated other comprehensive income (loss). The fair value of the interest rate swap agreements are included in other assets and accrued and other liabilities, respectively, on the consolidated balance sheets. Information related to the Company’s interest rate swap agreements are noted below (in thousands):
Hedged Item
Effective Date
Rate
Fair Value as of September 30, 2021
5/21/2021
5/21/2026
0.81% + applicable spread
11/26/2024
0.53% + applicable spread
178
2027 Term Loan (3)
1/31/2027
1.60% + applicable spread
(47)
NOTE 10. EQUITY
SHELF REGISTRATION
On December 1, 2020, the Company filed a shelf registration statement on Form S-3, relating to the registration and potential issuance of its common stock, preferred stock, warrants, rights, and units with a maximum aggregate offering price of up to $350.0 million. The Securities and Exchange Commission declared the Form S-3 effective on December 11, 2020.
ATM PROGRAM
On December 14, 2020, the Company implemented a $100.0 million “at-the-market” equity offering program (the “2020 ATM Program”) pursuant to which the Company may sell, from time to time, shares of the Company’s common stock. During the nine months ended September 30, 2021, the Company sold 610,229 shares under the 2020 ATM Program for $11.1 million at a weighted average price of $18.19 per share, generating net proceeds of $10.9 million after deducting fees totaling $0.2 million paid on the sales. The Company was not active under the 2020 ATM Program during the three months ended September 30, 2021.
22
FOLLOW-ON PUBLIC OFFERING
In June 2021, the Company completed a follow-on public offering of 3,220,000 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 420,000 shares of common stock. Upon closing, the Company issued 3,220,000 shares and received net proceeds of $54.3 million, after deducting the underwriting discount and expenses.
NONCONTROLLING INTEREST
As of September 30, 2021, CTO holds, directly and indirectly, a 9.4% noncontrolling ownership interest in the Operating Partnership as a result of 1,223,854 OP Units issued to CTO at the time of the Company’s Formation Transactions, as further described in Note 1, “Business and Organization.” An additional 3.7% noncontrolling ownership interest is held by an unrelated third party in connection with the issuance of 479,640 OP Units valued at $9.0 million, reflecting $18.85 per unit, based on the Company’s trailing ten day average closing share price. The issuance of 479,640 OP Units includes (i) 424,951 OP Units issued as partial consideration for the portfolio of nine net lease properties acquired on June 30, 2021 and (ii) 54,689 OP Units issued in connection with the acquisition of one net lease property on July 12, 2021.
DIVIDENDS
The Company has elected to be taxed as a REIT for U.S. federal income tax purposes under the Internal Revenue Code. To qualify as a REIT, the Company must annually distribute, at a minimum, an amount equal to 90% of its taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, and must distribute 100% of its taxable income (including net capital gains) to eliminate corporate federal income taxes payable by the Company. Because taxable income differs from cash flow from operations due to non-cash revenues and expenses (such as depreciation and other items), in certain circumstances, the Company may generate operating cash flow in excess of its dividends, or alternatively, may need to make dividend payments in excess of operating cash flows. During the three and nine months ended September 30, 2021, the Company declared and paid cash dividends on its common stock and OP Units of $0.255 per share and $0.745 per share, respectively.
23
NOTE 11. COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income attributable to the Company for the period by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per common share are determined based on the assumption of the conversion of OP Units on a one-for-one basis using the treasury stock method at average market prices for the periods.
The following is a reconciliation of basic and diluted earnings per common share (in thousands, except share and per share data):
Weighted Average Number of Common Shares Outstanding
Weighted Average Number of Common Shares Applicable to OP Units using Treasury Stock Method (1)
1,696,955
1,223,854
1,384,844
Total Shares Applicable to Diluted Earnings per Share
NOTE 12. SHARE REPURCHASES
In March 2020, the Board approved a $5.0 million stock repurchase program (the “$5.0 Million Repurchase Program”). During the first half of 2020, the Company repurchased 456,237 shares of its common stock on the open market for a total cost of $5.0 million, or an average price per share of $11.02 which completed the $5.0 Million Repurchase Program. There were no repurchases of the Company’s common stock during the nine months ended September 30, 2021.
NOTE 13. STOCK-BASED COMPENSATION
In connection with the closing of the IPO, the Company adopted the Individual Equity Incentive Plan (the “Individual Plan”) and the Manager Equity Incentive Plan (the “Manager Plan”), which are collectively referred to herein as the Equity Incentive Plans. The purpose of the Equity Incentive Plans is to provide equity incentive opportunities to members of the Manager’s management team and employees who perform services for the Company, the Company’s independent directors, advisers, consultants and other personnel, either individually or via grants of incentive equity to the Manager.
On November 26, 2019, in connection with the closing of the IPO, the Company granted restricted shares of common stock to each of the non-employee directors under the Individual Plan. Each of the non-employee directors received an award of 2,000 restricted shares of common stock on November 26, 2019. The restricted shares will vest in substantially equal installments on each of the first, second and third anniversaries of the grant date. As of September 30, 2021, the first increment of this award had vested, leaving 5,336 shares unvested. In addition, the restricted shares are subject to a holding period beginning on the grant date and ending on the date that the grantee ceases to serve as a member of the Board (the “Holding Period”). During the Holding Period, the restricted shares may not be sold, pledged or otherwise
24
transferred by the grantee. Except for the grant of these 8,000 restricted shares of Common Stock, the Company has not made any grants under the Equity Incentive Plans. Any future grants under the Equity Incentive Plans will be approved by the compensation committee of the Board. The 2019 non-employee director share awards had an aggregate grant date fair value of $0.2 million. The Company’s determination of the grant date fair value of the three-year vest restricted stock awards was calculated by multiplying the number of shares issued by the Company’s stock price at the grant date. Compensation cost is recognized on a straight-line basis over the vesting period and is included in general and administrative expenses in the Company’s consolidated statements of operations. Award forfeitures are accounted for in the period in which they occur. During each of the three months ended September 30, 2021 and 2020, the Company recognized stock compensation expense totaling $0.01 million. During each of the nine months ended September 30, 2021 and 2020, the Company recognized stock compensation expense totaling $0.04 million.
A summary of activity for these awards during the nine months ended September 30, 2021 is presented below:
Non-Vested Restricted Shares
Shares
Wtd. Avg. Fair Value
Outstanding at January 1, 2021
5,336
18.80
Granted
Vested
Expired
Forfeited
Non-Vested at September 30, 2021
As of September 30, 2021, there was $0.06 million of unrecognized compensation cost related to the three-year vest restricted shares, which will be recognized over a remaining period of 1.2 years.
Each member of the Board has the option to receive his or her annual retainer in shares of Company common stock rather than cash. The number of shares awarded to the directors making such election is calculated quarterly by dividing the amount of the quarterly retainer payment due to such director by the trailing 20-day average price of the Company’s common stock as of the last business day of the calendar quarter, rounded down to the nearest whole number of shares. During the nine months ended September 30, 2021, the expense recognized for the value of the Company’s common stock received by non-employee directors totaled $0.2 million, or 10,572 shares, of which 3,453 shares were issued on April 1, 2021, 3,525 shares were issued on July 1, 2021, and 3,594 shares were issued on October 1, 2021. During the nine months ended September 30, 2020, the expense recognized for the value of the Company’s common stock received by non-employee directors totaled $0.2 million, or 10,986 shares, of which 4,098 shares were issued on April 1, 2020, 3,414 shares were issued on July 1, 2020, and 3,474 shares were issued on October 1, 2020.
Stock compensation expense for the three and nine months ended September 30, 2021 and 2020 is summarized as follows (in thousands):
Stock Compensation Expense – Director Restricted Stock
Stock Compensation Expense – Director Retainers Paid in Stock
66
54
193
163
Total Stock Compensation Expense (1)
25
NOTE 14. RELATED PARTY MANAGEMENT COMPANY
We are externally managed by the Manager, a wholly owned subsidiary of CTO. In addition to the CTO Private Placement, CTO purchased from us $8.0 million in shares of our common stock, or 421,053 shares, in the IPO. Upon completion of the Formation Transactions, CTO owned 22.3% of our outstanding common stock (assuming the OP Units issued to CTO in the Formation Transactions are exchanged for shares of our common stock on a one-for-one basis).
On November 26, 2019, we entered into the Management Agreement with the Manager (the “Management Agreement”). Pursuant to the terms of the Management Agreement, our Manager manages, operates and administers our day-to-day operations, business and affairs, subject to the direction and supervision of the Board and in accordance with the investment guidelines approved and monitored by the Board. We pay our Manager a base management fee equal to 0.375% per quarter of our “total equity” (as defined in the Management Agreement and based on a 1.5% annual rate), calculated and payable in cash, quarterly in arrears.
Our Manager has the ability to earn an annual incentive fee based on our total stockholder return exceeding an 8% cumulative annual hurdle rate (the “Outperformance Amount”) subject to a high-water mark price. We would pay our Manager an incentive fee to with respect to each annual measurement period in the amount of the greater of (i) $0.00 and (ii) the product of (a) 15% multiplied by (b) the Outperformance Amount multiplied by (c) the weighted average shares. No incentive fee was due for the year ended December 31, 2020.
The initial term of the Management Agreement will expire on November 26, 2024 and will automatically renew for an unlimited number of successive one-year periods thereafter, unless the agreement is not renewed or is terminated in accordance with its terms.
Our independent directors will review our Manager’s performance and the management fees annually and, following the initial term, the Management Agreement may be terminated annually upon the affirmative vote of two-thirds of our independent directors or upon a determination by the holders of a majority of the outstanding shares of our common stock, based upon (i) unsatisfactory performance by the Manager that is materially detrimental to us or (ii) a determination that the management fees payable to our Manager are not fair, subject to our Manager’s right to prevent such termination due to unfair fees by accepting a reduction of management fees agreed to by two-thirds of our independent directors. We may also terminate the Management Agreement for cause at any time, including during the initial term, without the payment of any termination fee, with 30 days’ prior written notice from the Board. During the initial term of the Management Agreement, we may not terminate the Management Agreement except for cause.
We will pay directly or reimburse our Manager for certain expenses, if incurred by our Manager. We will not reimburse any compensation expenses incurred by our Manager or its affiliates. Expense reimbursements to our Manager will be made in cash on a quarterly basis following the end of each quarter. In addition, we will pay all of our operating expenses, except those specifically required to be borne by our Manager pursuant to the Management Agreement.
During the three and nine months ended September 30, 2021, the Company incurred management fee expenses which totaled $0.9 million and $2.3 million, respectively. The Company also paid dividends on the common stock and OP Units owned by affiliates of the Manager in the amount of $0.5 million and $1.7 million for the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2020, the Company incurred management fee expenses which totaled $0.6 million and $1.9 million, respectively. The Company also paid dividends on the common stock and OP Units owned by affiliates of the Manager in the amount of $0.4 million and $1.2 million for the three and nine months ended September 30, 2020, respectively.
The following table represents amounts due from the Company to CTO (in thousands):
Management Fee due to CTO
910
631
Other
(52)
Total (1)
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Exclusivity and ROFO Agreement
On November 26, 2019, we also entered into an exclusivity and right of first offer (“ROFO”) agreement with CTO. During the term of the exclusivity and ROFO agreement, CTO will not, and will cause each of its affiliates (which for purposes of the exclusivity and ROFO agreement will not include our company and our subsidiaries) not to, acquire, directly or indirectly, a single-tenant, net leased property, unless CTO has notified us of the opportunity and we have affirmatively rejected the opportunity to acquire the applicable property or properties.
The terms of the exclusivity and ROFO agreement do not restrict CTO or any of its affiliates from providing financing for a third party’s acquisition of single-tenant, net leased properties or from developing and owning any single-tenant, net leased property.
Pursuant to the exclusivity and ROFO agreement, neither CTO nor any of its affiliates (which for purposes of the exclusivity and ROFO agreement does not include our company and our subsidiaries) may sell to any third party any single-tenant, net leased property that was owned by CTO or any of its affiliates as of the closing date of the IPO or that is developed and owned by CTO or any of its affiliates after the closing date of the IPO, without first offering us the right to purchase such property.
The term of the exclusivity and ROFO agreement will continue for so long as the Management Agreement with our Manager is in effect.
On April 6, 2021, the Company entered into a purchase and sale agreement with a certain subsidiary of CTO for the purchase of one net lease property (the “Single Property”) for $11.5 million. The acquisition of the Single Property was completed on April 23, 2021.
On April 2, 2021, the Company entered into a separate purchase and sale agreement with certain subsidiaries of CTO for the purchase of the CMBS Portfolio. The terms of the purchase and sale agreement, as amended on April 20, 2021, provided a total purchase price of $44.5 million for the CMBS Portfolio. The acquisition of the CMBS Portfolio was completed on June 30, 2021.
The entry into the purchase and sale agreements, and subsequent completion of acquisitions, are a result of the Company exercising its right to purchase the Single Property and CMBS Portfolio under the ROFO agreement.
Conflicts of Interest
Conflicts of interest may exist or could arise in the future with CTO and its affiliates, including our Manager, the individuals who serve as our executive officers and executive officers of CTO, any individual who serves as a director of our company and as a director of CTO and any limited partner of the Operating Partnership. Conflicts may include, without limitation: conflicts arising from the enforcement of agreements between us and CTO or our Manager; conflicts in the amount of time that executive officers and employees of CTO, who are provided to us through our Manager, will spend on our affairs versus CTO’s affairs; and conflicts in future transactions that we may pursue with CTO and its affiliates. We do not generally expect to enter into joint ventures with CTO, but if we do so, the terms and conditions of our joint venture investment will be subject to the approval of a majority of disinterested directors of the Board.
In addition, we are subject to conflicts of interest arising out of our relationships with our Manager. Pursuant to the Management Agreement, our Manager is obligated to supply us with our senior management team. However, our Manager is not obligated to dedicate any specific CTO personnel exclusively to us, nor are the CTO personnel provided to us by our Manager obligated to dedicate any specific portion of their time to the management of our business. Additionally, our Manager is a wholly owned subsidiary of CTO. All of our executive officers are executive officers and employees of CTO and one of our officers (John P. Albright) is also a member of CTO’s board of directors. As a result, our Manager and the CTO personnel it provides to us may have conflicts between their duties to us and their duties to, and interests in, CTO.
We may acquire or sell single-tenant, net leased properties in which our Manager or its affiliates have or may have an interest. Similarly, our Manager or its affiliates may acquire or sell single-tenant, net leased properties in which we have or may have an interest. Although such acquisitions or dispositions may present conflicts of interest, we nonetheless may pursue and consummate such transactions. Additionally, we may engage in transactions directly with our Manager or its affiliates, including the purchase and sale of all or a portion of a portfolio asset. If we acquire a single-tenant, net leased
27
property from CTO or one of its affiliates or sell a single-tenant, net leased property to CTO or one of its affiliates, the purchase price we pay to CTO or one of its affiliates or the purchase price paid to us by CTO or one of its affiliates may be higher or lower, respectively, than the purchase price that would have been paid to or by us if the transaction were the result of arms’ length negotiations with an unaffiliated third party.
In deciding whether to issue additional debt or equity securities, we will rely, in part, on recommendations made by our Manager. While such decisions are subject to the approval of the Board, our Manager is entitled to be paid a base management fee that is based on our “total equity” (as defined in the Management Agreement). As a result, our Manager may have an incentive to recommend that we issue additional equity securities at dilutive prices.
All of our executive officers are executive officers and employees of CTO. These individuals and other CTO personnel provided to us through our Manager devote as much time to us as our Manager deems appropriate. However, our executive officers and other CTO personnel provided to us through our Manager may have conflicts in allocating their time and services between us, on the one hand, and CTO and its affiliates, on the other. During a period of prolonged economic weakness or another economic downturn affecting the real estate industry or at other times when we need focused support and assistance from our Manager and the CTO executive officers and other personnel provided to us through our Manager, we may not receive the necessary support and assistance we require or that we would otherwise receive if we were self-managed.
Additionally, the exclusivity and ROFO agreement does contain exceptions to CTO’s exclusivity for opportunities that include only an incidental interest in single-tenant, net leased properties. Accordingly, the exclusivity and ROFO agreement will not prevent CTO from pursuing certain acquisition opportunities that otherwise satisfy our then-current investment criteria.
Our directors and executive officers have duties to our company under applicable Maryland law in connection with their management of our company. At the same time, PINE GP has fiduciary duties, as the general partner, to the Operating Partnership and to the limited partners under Delaware law in connection with the management of the Operating Partnership. These duties as a general partner to the Operating Partnership and its partners may come into conflict with the duties of our directors and executive officers to us. Unless otherwise provided for in the relevant partnership agreement, Delaware law generally requires a general partner of a Delaware limited partnership to adhere to fiduciary duty standards under which it owes its limited partners the highest duties of loyalty and care and which generally prohibits such general partner from taking any action or engaging in any transaction as to which it has a conflict of interest. The partnership agreement provides that in the event of a conflict between the interests of our stockholders on the one hand and the limited partners of the Operating Partnership on the other hand, PINE GP will endeavor in good faith to resolve the conflict in a manner not adverse to either our stockholders or the limited partners; provided, however, that so long as we own a controlling interest in the Operating Partnership, any such conflict that we, in our sole and absolute discretion, determine cannot be resolved in a manner not adverse to either our stockholders or the limited partners of the Operating Partnership shall be resolved in favor of our stockholders, and we shall not be liable for monetary damages for losses sustained, liabilities incurred or benefits not derived by the limited partners in connection with such decisions.
NOTE 15. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
From time to time, the Company may be a party to certain legal proceedings, incidental to the normal course of business. The Company is not currently a party to any pending or threatened legal proceedings that we believe could have a material adverse effect on the Company’s business or financial condition.
NOTE 16. SUBSEQUENT EVENTS
The Company reviewed all subsequent events and transactions through October 21, 2021, the date the consolidated financial statements were issued. There were no reportable subsequent events or transactions.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When we refer to “we,” “us,” “our,” “PINE,” or “the Company,” we mean Alpine Income Property Trust, Inc. and its consolidated subsidiaries. References to “Notes to Financial Statements” refer to the Notes to the Consolidated Financial Statements of Alpine Income Property Trust, Inc. included in this Quarterly Report on Form 10-Q. Some of the comments we make in this section are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section below entitled “Special Note Regarding Forward-Looking Statements.” Certain factors that could cause actual results or events to differ materially from those the Company anticipates or projects are described in “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and of this Quarterly Report on Form 10-Q.
Special Note Regarding Forward-Looking Statements
This Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Certain statements contained in this report (other than statements of historical fact) are forward-looking statements. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “will,” “could,” “may,” “should,” “plan,” “potential,” “predict,” “forecast,” “project,” and similar expressions and variations thereof identify certain of such forward-looking statements, which speak only as of the dates on which they were made. Forward-looking statements are made based upon management’s expectations and beliefs concerning future developments and their potential effect upon the Company. There can be no assurance that future developments will be in accordance with management’s expectations or that the effect of future developments on the Company will be those anticipated by management.
Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. These risks and uncertainties include, but are not limited to, the strength of the real estate market; the impact of a prolonged recession or downturn in economic conditions; our ability to successfully execute acquisition or development strategies; any loss of key management personnel; changes in local, regional, and national economic conditions affecting the real estate development business and income properties; the impact of competitive real estate activity; the loss of any major income property tenants; the ultimate geographic spread, severity and duration of pandemics such as the outbreak of COVID-19 and its variants, actions that may be taken by governmental authorities to contain or address the impact of such pandemics, and the potential negative impacts of such pandemics on the global economy and our financial condition and results of operations; and the availability of capital. These risks and uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements.
See “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and of this Quarterly Report on Form 10-Q. for further discussion of these risks. Given these uncertainties, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.
OVERVIEW
We are a real estate company that owns and operates a high-quality portfolio of commercial properties located in the United States. Our properties are generally leased on a long-term basis and located primarily in, or in close proximity to major metropolitan statistical areas, or MSAs, and in growth markets and other markets in the United States with favorable economic and demographic conditions. Our properties are primarily leased to industry leading, creditworthy tenants, many of which operate in industries we believe are resistant to the impact of e-commerce or defensive in nature against economic uncertainty or disruption. The properties in our portfolio are primarily triple-net leases which generally require the tenant to pay all of the property operating expenses such as real estate taxes, insurance, assessments and other governmental fees, utilities, repairs and maintenance and certain capital expenditures. Our portfolio consists of 89 net leased retail and office properties located in 62 markets in 28 states. Twenty of these properties, representing our initial portfolio, were acquired
from CTO Realty Growth, Inc. (“CTO”) in the formation transactions, utilizing $125.9 million of proceeds from our initial public offering of our common stock (the “IPO”) and the issuance of 1,223,854 units of our operating partnership (the “OP Units”) that had an initial value of $23.3 million based on the IPO price of $19.00 per share (the “IPO Price”). The remaining 69 properties were acquired subsequent to the year ended December 31, 2019. Six properties in our portfolio are long-term ground leases where we are the lessor to the tenant.
We seek to acquire, own and operate primarily freestanding, commercial real estate properties primarily located in our target markets leased primarily pursuant to triple-net, long-term leases. Within our target markets, we will focus on investments primarily in retail properties. We will target tenants in industries that we believe are favorably impacted by current macroeconomic trends that support consumer spending, such as strong and growing employment and positive consumer sentiment, as well as tenants in industries that have demonstrated resistance to the impact of the growing e-commerce retail sector. We also will seek to invest in properties that are net leased to tenants that we determine have attractive credit characteristics, stable operating histories and healthy rent coverage levels, are well-located within their market and have rent levels at or below market rent levels. Furthermore, we believe that the size of our company will, for at least the near term, allow us to focus our investment activities on the acquisition of single properties or smaller portfolios of properties that represent a transaction size that most of our publicly-traded net lease REIT peers will not pursue on a consistent basis.
Our objective is to maximize cash flow and value per share by generating stable and growing cash flows and attractive risk-adjusted returns through owning, operating and growing a diversified portfolio of high-quality net leased commercial properties with strong long-term real estate fundamentals. The 89 properties in our portfolio are 100% occupied and represent 2.7 million of gross rentable square feet. As of September 30, 2021, our leases have a weighted-average remaining lease term of 7.8 years based on annualized base rent.
Our strategy for investing in income-producing properties is focused on factors including, but not limited to, long-term real estate fundamentals and target markets, including major markets or those markets experiencing significant economic growth. We employ a methodology for evaluating targeted investments in income-producing properties which includes an evaluation of: (i) the attributes of the real estate (e.g., location, market demographics, comparable properties in the market, etc.); (ii) an evaluation of the existing tenant(s) (e.g., credit-worthiness, property level sales, tenant rent levels compared to the market, etc.); (iii) other market-specific conditions (e.g., tenant industry, job and population growth in the market, local economy, etc.); and (iv) considerations relating to the Company’s business and strategy (e.g., strategic fit of the asset type, property management needs, alignment with the Company’s structure, etc.).
The Company has no employees and is externally managed by Alpine Income Property Manager, LLC, a Delaware limited liability company and a wholly owned subsidiary of CTO (our “Manager”). CTO is a Maryland corporation that is a publicly traded diversified REIT and the sole member of our Manager.
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As of September 30, 2021, the Company owned 89 income properties in 28 states. The following is a summary of the leases attributable to these properties:
Type
Rentable Square Feet
Remaining Term (Years)
Contractual Rent Escalations
Annualized Base Rent ($000's) (1)
Office
Wells Fargo
Portland, OR
212,363
4.3
No
3,137
Hilton Grand Vacations
Orlando, FL
102,019
5.2
Yes
1,825
Retail
1,369
LA Fitness
Brandon, FL
45,000
10.6
958
917
7.3
859
Kohl's
Glendale, AZ
87,875
9.3
842
801
768
Raleigh, NC
116,334
732
Container Store
23,329
726
705
Cinemark
Reno, NV
52,474
3.0
695
31,895
684
641
Live Nation Entertainment, Inc.
East Troy, WI
(2)
11.5
634
7.6
628
7.9
573
Winston-Salem, NC
8.5
562
558
9.9
507
Dick's Sporting Goods
McDonough, GA
46,315
473
Jo-Ann Fabric
Saugus, MA
22,500
468
452
8.8
439
13.5
377
Birmingham, AL
14,516
7.5
364
Alpharetta, GA
15,120
4.1
363
Best Buy
30,038
334
329
9.2
326
300
14.3
276
Tacoma, WA
14,125
259
Albany, GA
14,770
11.3
258
253
221
7-Eleven (3)
219
3.2
210
Scrubbles Car Wash (3)
Jacksonville, FL
4,512
16.1
189
Cheddar's (3)
8,146
6.0
186
Lynn, MA
9,228
2.5
160
1.4
150
149
13.4
142
128
Kermit, TX
10,920
13.9
126
125
124
10.0
13.8
117
115
9.5
3.3
112
110
6.1
31
11.9
105
104
103
102
Boston Market (3)
101
Freddy's Frozen Custard (3)
99
98
96
91
12.0
85
Valero (5)
83
9.1
80
78
63
Long John Silver's (3)
(4)
2,719,667
32,699
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COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
The following presents the Company’s results of operations for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020 (in thousands):
$ Variance
% Variance
3,070
60.2%
359
64.7%
252
22.5%
1,614
59.9%
2,225
50.9%
257
89.5%
1,102
108.0%
682
177.6%
420
66.0%
(48)
53.3%
372
68.1%
Revenue and Direct Cost of Revenues
Revenue from our income property operations during the three months ended September 30, 2021 and 2020, totaled $8.2 million and $5.1 million, respectively. The $3.1 million increase in revenues is reflective of the Company’s volume of acquisitions. The direct costs of revenues for our income property operations totaled $0.9 million and $0.5 million for the three months ended September 30, 2021 and 2020, respectively. The $0.4 million increase in the direct cost of revenues is also attributable to the Company’s expanded income property portfolio.
The following table represents the Company’s general and administrative expenses for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020 (in thousands):
Management Fee to Manager
279
44.2%
Director Stock Compensation Expense
19.7%
Director & Officer Insurance Expense
127
111
14.4%
Additional General and Administrative Expense
255
311
(56)
(18.0)%
Total General and Administrative Expenses
General and administrative expenses totaled $1.4 million and $1.1 million during the three months ended September 30, 2021 and 2020, respectively. The $0.3 million increase is primarily attributable to growth in the Company’s equity base, which led to increased management fee expenses totaling $0.3 million.
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Depreciation and amortization expense totaled $4.3 million and $2.7 million during the three months ended September 30, 2021 and 2020, respectively. The $1.6 million increase in the depreciation and amortization expense is reflective of the Company’s expanded income property portfolio.
Interest expense totaled $1.1 million and $0.4 million during the three months ended September 30, 2021 and 2020, respectively. The $0.7 million increase in interest expense is attributable to the higher average outstanding debt balance during the three months ended September 30, 2021 as compared to the same period in 2020. The overall increase in the Company’s long-term debt was primarily utilized to fund the acquisition of income properties during 2021 and 2020.
Net income totaled $1.1 million and $0.6 million during the three months ended September 30, 2021 and 2020, respectively. The increase in net income is attributable to the factors described above in addition to the $0.5 million gain on disposition of assets during the three months ended September 30, 2021, an increase of $0.3 million from the comparable prior year period.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
The following presents the Company’s results of operations for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020 (in thousands):
6,795
49.0%
40.1%
152
4.3%
3,911
55.8%
4,747
38.8%
120.9%
1,322
135.3%
983
105.7%
(120)
91.6%
863
Revenue from our income property operations during the nine months ended September 30, 2021 and 2020, totaled $20.7 million and $13.9 million, respectively. The $6.8 million increase in revenues is reflective of the Company’s volume of acquisitions. The direct costs of revenues for our income property operations totaled $2.4 million and $1.7 million for the nine months ended September 30, 2021 and 2020, respectively. The $0.7 million increase in the direct cost of revenues is also attributable to the Company’s expanded income property portfolio.
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The following table represents the Company’s general and administrative expenses for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020 (in thousands):
2,269
1,923
346
18.0%
14.9%
385
340
13.2%
802
1,071
(269)
(25.1)%
General and administrative expenses totaled $3.7 million and $3.5 million during the nine months ended September 30, 2021 and 2020, respectively. The $0.2 million increase is primarily related to an increase in management fee expenses of $0.3 million attributable to growth in the Company’s equity base, partially offset by an additional $0.3 million of costs incurred, during the first quarter of 2020, associated with audit services related to the 2019 annual audit.
Depreciation and amortization expense totaled $10.9 million and $7.0 million during the nine months ended September 30, 2021 and 2020, respectively. The $3.9 million increase in the depreciation and amortization expense is reflective of the Company’s expanded income property portfolio.
Interest expense totaled $2.3 million and $1.0 million during the nine months ended September 30, 2021 and 2020, respectively. The $1.3 million increase in interest expense is attributable to the higher average outstanding debt balance during the nine months ended September 30, 2021 as compared to the same period in 2020. The overall increase in the Company’s long-term debt was primarily utilized to fund the acquisition of income properties during 2021 and 2020.
Net income totaled $1.9 million and $0.9 million for the nine months ended September 30, 2021 and 2020, respectively. The increase in net income is attributable to the factors described above in addition to the $0.5 million gain on disposition of assets during the nine months ended September 30, 2021, an increase of $0.3 million from the comparable prior year period.
LIQUIDITY AND CAPITAL RESOURCES
Cash totaled $7.3 million at September 30, 2021, including restricted cash of $0.6 million, see Note 2 “Summary of Significant Accounting Policies” under the heading Restricted Cash for the Company’s disclosure related to its restricted cash balance at September 30, 2021.
Long-Term Debt. As of September 30, 2021, the Company had $128.5 million available on the Credit Facility. See Note 8, “Long-Term Debt” for the Company’s disclosure related to its long-term debt balance at September 30, 2021.
Acquisitions and Investments. As noted previously, the Company acquired 42 income properties during the nine months ended September 30, 2021 for an aggregate purchase price of $158.7 million, as further described in Note 3, “Income Property Portfolio”.
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Dispositions. During the nine months ended September 30, 2021, the Company disposed of one income property, classified as held for sale as of June 30, 2021, leased to Outback Steakhouse located in Huntersville, North Carolina, for a sales price of $3.8 million, generating a gain on sale of $0.5 million, as described in Note 3, “Income Property Portfolio”.
Capital Expenditures. As of September 30, 2021 the Company had no commitments related to capital expenditures.
We believe we will have sufficient liquidity to fund our operations, capital requirements, maintenance, and debt service requirements over the next twelve months and into the foreseeable future, with cash on hand, cash flow from our operations and $128.5 million of available capacity on the existing $150.0 million Credit Facility, based on our current borrowing base of income properties, as of September 30, 2021.
The Board and management consistently review the allocation of capital with the goal of providing the best long-term return for our stockholders. These reviews consider various alternatives, including increasing or decreasing regular dividends, repurchasing the Company’s securities, and retaining funds for reinvestment. Annually, the Board reviews our business plan and corporate strategies, and makes adjustments as circumstances warrant. Management’s focus is to continue our strategy of investing in net leased income properties by utilizing the capital we raised in the IPO and available borrowing capacity from the Credit Facility to increase our portfolio of income-producing properties, providing stabilized cash flows with strong risk-adjusted returns primarily in larger metropolitan areas and growth markets.
Non-GAAP Financial Measures
Our reported results are presented in accordance with GAAP. We also disclose Funds From Operations (“FFO”) and Adjusted Funds From Operations (“AFFO”) both of which are non-GAAP financial measures. We believe these two non-GAAP financial measures are useful to investors because they are widely accepted industry measures used by analysts and investors to compare the operating performance of REITs.
FFO and AFFO do not represent cash generated from operating activities and are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as reported on our statement of cash flows as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures.
We compute FFO in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT. NAREIT defines FFO as GAAP net income or loss adjusted to exclude extraordinary items (as defined by GAAP), net gain or loss from sales of depreciable real estate assets, impairment write-downs associated with depreciable real estate assets and real estate related depreciation and amortization, including the pro rata share of such adjustments of unconsolidated subsidiaries. To derive AFFO, we modify the NAREIT computation of FFO to include other adjustments to GAAP net income related to non-cash revenues and expenses such as straight-line rental revenue, amortization of deferred financing costs, amortization of capitalized lease incentives and above- and below-market lease related intangibles, and non-cash compensation. Such items may cause short-term fluctuations in net income but have no impact on operating cash flows or long-term operating performance. We use AFFO as one measure of our performance when we formulate corporate goals.
FFO is used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers primarily because it excludes the effect of real estate depreciation and amortization and net gains or losses on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. We believe that AFFO is an additional useful supplemental measure for investors to consider because it will help them to better assess our operating performance without the distortions created by other non-cash revenues or expenses. FFO and AFFO may not be comparable to similarly titled measures employed by other companies.
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Reconciliation of Non-GAAP Measures (in thousands, except share data):
Funds from Operations
4,820
3,043
12,283
7,646
Adjustments:
(129)
(300)
COVID-19 Rent Repayments (Deferrals), Net
Amortization of Intangible Assets and Liabilities to Lease Income
Accretion of Tenant Contribution
(6)
(3)
(17)
Recurring Capital Expenditures
(41)
(34)
Adjusted Funds from Operations
4,797
2,907
12,539
6,083
Other Data (in thousands, except per share data):
FFO
FFO per Diluted Share
0.37
0.35
1.15
0.86
AFFO
AFFO per Diluted Share
0.34
1.18
0.69
OFF-BALANCE SHEET ARRANGEMENTS
None.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses. Actual results could differ from those estimates.
Our significant accounting policies are summarized in Note 2, “Summary of Significant Accounting Policies” included in this Quarterly Report on Form 10-Q and more fully described in the notes to the consolidated and combined financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020. Judgments and estimates of uncertainties are required in applying our accounting policies in many areas. During the nine months ended
37
September 30, 2021, there have been no material changes to the critical accounting policies affecting the application of those accounting policies as noted in our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined in Item 10(f)(1) of Regulation S-K. As a result, pursuant to Item 305(e) of Regulation S-K, we are not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation, as required by Rules 13a-15 and 15d-15 under the Exchange Act, was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act). Based on that evaluation, our CEO and CFO have concluded that the design and operation of the Company’s disclosure controls and procedures were effective as of September 30, 2021, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the three months ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may be a party to certain legal proceedings, incidental to the normal course of our business. We are not currently a party to any pending or threatened legal proceedings that we believe could have a material adverse effect on our business or financial condition.
ITEM 1A. RISK FACTORS
As of September 30, 2021, there have been no material changes in our risk factors from those set forth under the heading Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “Form 10-K”). However, the following risk factors expand upon and supplement those risk factors disclosed in the Form 10-K to provide additional specificity to the matters covered by such risk factors and should be read in conjunction with the risk factors set forth in the Form 10-K. These are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company.
Risks Related to Our Business
We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.
Our results of operations depend on our ability to lease our properties, including renewing expiring leases, leasing vacant space, re-leasing space in properties where leases are expiring, and leasing space related to new project development. In leasing or re-leasing our properties, we may be unable to optimize our tenant mix or execute leases on more economically favorable terms than the prior in-place lease. Our tenants may decline, or may not have the financial resources available, to renew their leases, and there can be no assurance that leases that are renewed will have terms that are as economically favorable to us as the expiring lease terms. If tenants do not renew their leases as they expire, we will have to source new tenants to lease our properties, and there can be no assurance that we will be able to find new tenants or that our properties will be re-leased at rental rates equal to or above the previous in-place lease or current average rental
rates or that substantial rent abatements, tenant improvement allowances, early termination rights or below-market renewal options will not be offered to attract new tenants. We may experience increased costs in connection with re-leasing our properties, which could materially and adversely affect us.
We may be unable to identify and complete suitable property acquisitions or developments, which may impede our growth, and our future acquisitions and developments may not yield the returns we expect.
Our ability to expand through acquisitions and developments requires us to identify and complete acquisitions and new property developments that are consistent with our investment and growth strategy and our investment criteria and to successfully integrate newly acquired properties into our portfolio. Our Manager continually evaluates investment opportunities for us, but our ability to acquire or develop new properties on favorable terms and successfully operate them may be constrained by the following significant risks:
If any of these risks are realized, we may be materially and adversely affected.
The development of new projects and/or properties may cause us to experience unexpected costs and have other risks that could materially and adversely affect us.
We may develop new projects to enhance the opportunity for achieving attractive risk-adjusted returns. New project development is subject to a number of risks, including risks associated with the availability and timely receipt of zoning and other regulatory approvals, the timely completion of construction (including risks from factors beyond our control, such as weather, labor conditions or material shortages) and risks of cost overruns due to construction delays or other factors that may increase the expected costs of a project. These risks could result in substantial unanticipated delays and, under certain circumstances, provide a tenant the opportunity to delay rent commencement, reduce rent or terminate a lease. In addition, we may incur costs in connection with projects that are ultimately not pursued to completion. Any new development projects may be financed. If such financing is not available on acceptable terms, our development activities may not be pursued or may be curtailed. In addition, such activities would likely reduce the available borrowing capacity on the revolving credit facility or any other credit facilities that we may have in place in the future, which would limit our ability to use those sources of capital for the acquisition of properties and other operating needs. The risks associated with
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new project development activities, including but not necessarily limited to those noted above, could materially and adversely affect us.
The success of our activities related to new project development in which we will retain an ownership interest is partly dependent on the availability of suitable undeveloped land at acceptable prices.
Our success in developing projects that we will retain an ownership interest in is partly dependent upon the availability of undeveloped land suitable for the intended development. The availability of undeveloped land for purchase at acceptable prices depends on a number of factors outside of our control, including the risk of competitive over-bidding on land and governmental regulations that restrict the potential uses of land. If the availability of suitable land opportunities decreases, the number of development projects we may be able to undertake could be reduced. Thus, the lack of availability of suitable land opportunities could have a material adverse effect on our results of operations and growth prospects.
Risks Related to Other Aspects of our Operation and as a Public Company
Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unanticipated expenditures that materially and adversely affect us.
Our properties are and will be subject to the Americans with Disabilities Act, or the ADA. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. While our tenants are and will be obligated by law to comply with the ADA and typically obligated under our leases to cover costs associated with compliance, if required changes involve greater expenditures than anticipated or if the changes must be made on a more accelerated basis than anticipated, the ability of our tenants to cover costs could be adversely affected. We could be required to expend our own funds to comply with the provisions of the ADA, which could materially and adversely affect us.
In addition, we are and will be required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We may be required to make substantial capital expenditures to comply with those requirements and may be required to obtain approvals from various authorities with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. There can be no assurance that existing laws and regulatory policies will not adversely affect us or the timing or cost of any future acquisitions, developments or renovations, or that additional regulations will not be adopted that increase such delays or result in additional costs. Additionally, failure to comply with any of these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. While we intend to only acquire properties that we believe are currently in substantial compliance with all regulatory requirements, these requirements may change, and new requirements may be imposed which would require significant unanticipated expenditures by us and could materially and adversely affect us.
Risks Related to Our Financing Activities
Our growth depends on external sources of capital, including debt financings, that are outside of our control and may not be available to us on commercially reasonable terms or at all.
In order to maintain our qualification as a REIT, we are required under the Code, among other things, to distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we are subject to income tax at the U.S. federal corporate income tax rate to the extent that we distribute less than 100% of our net taxable income. Because of these distribution requirements, we may not have sufficient liquidity from our operating cash flows to fund future capital needs, including any acquisition financing. Consequently, we may rely on third-party sources, including lenders, to fund our capital needs. We may not be able to obtain debt financing on favorable terms or at all. Any additional debt we incur will increase our leverage and likelihood of default. Our access to third-party sources of capital depends, in part, on:
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If we cannot obtain capital from third-party sources, we may not be able to acquire or develop properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations or make the cash distributions to our stockholders necessary to maintain our qualification as a REIT, which would materially and adversely affect us.
Our organizational documents have no limitation on the amount of additional indebtedness that we may incur in the future. As a result, we may become highly leveraged in the future, which could materially and adversely affect us.
We have entered into the Credit Facility and, in the future, we may incur additional indebtedness to finance future acquisitions and development, redevelopment and renovation projects and for general corporate purposes. There are no restrictions in our charter or bylaws that limit the amount or percentage of indebtedness that we may incur nor restrict the form in which our indebtedness will be incurred (including recourse or non-recourse debt or cross-collateralized debt). A substantial level of indebtedness in the future could have adverse consequences for our business and otherwise materially and adversely affect us because it could, among other things:
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit 3.1
Articles of Amendment and Restatement of Alpine Income Property Trust, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 3, 2019).
Exhibit 3.2
Second Amended and Restated Bylaws of Alpine Income Property Trust, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 22, 2021).
Exhibit 4.1
Specimen Common Stock Certificate of Alpine Income Property Trust, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-11/A (File No. 333-234304) filed with the Commission on October 29, 2019).
Exhibit 10.1
Credit Agreement, dated as of September 30, 2021, among Alpine Income Property, OP, LP, Alpine Income Property Trust, Inc., the other Guarantors from time to time parties thereto, the Lenders from time to time parties thereto, and KeyBank National Association filed as Exhibit 10.1 with this Quarterly Report on Form 10-Q for the quarter ended September 30, 2021.
Exhibit 31.1
Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2
Certification filed pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
Exhibit 32.1
Certification furnished pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2
Exhibit 101.INS
Inline XBRL Instance Document
Exhibit 101.SCH
Inline XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF
Inline XBRL Taxonomy Definition Linkbase Document
Exhibit 101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
October 21, 2021
By:
/s/ John P. Albright
John P. Albright
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Matthew M. Partridge
Matthew M. Partridge, Senior Vice President and
Chief Financial Officer and Treasurer
(Principal Financial Officer)
/s/ Lisa M. Vorakoun
Lisa M. Vorakoun, Vice President and
Chief Accounting Officer
(Principal Accounting Officer)