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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 March 31, 2024

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 001-11350

CTO REALTY GROWTH, INC.

(Exact name of registrant as specified in its charter)

Maryland

    

59-0483700

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

369 N. New York Avenue, Suite 201

Winter Park, Florida

32789

(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 Symbols

    

Name of each exchange on which registered:

Common Stock, $0.01 par value per share

CTO

NYSE

6.375% Series A Cumulative Redeemable

Preferred Stock, $0.01 par value per share

CTO-PA

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  

As of April 25, 2024, there were 22,946,442 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

INDEX

Page

    

No.

PART I—FINANCIAL INFORMATION

Item 1.      Financial Statements

Consolidated Balance Sheets – March 31, 2024 (Unaudited) and December 31, 2023

3

Consolidated Statements of Operations – Three months ended March 31, 2024 and 2023 (Unaudited)

4

Consolidated Statements of Comprehensive Income – Three months ended March 31, 2024 and 2023 (Unaudited)

5

Consolidated Statements of Stockholders’ Equity – Three months ended March 31, 2024 and 2023 (Unaudited)

6

Consolidated Statements of Cash Flows – Three months ended March 31, 2024 and 2023 (Unaudited)

7

Notes to Consolidated Financial Statements (Unaudited)

9

Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

36

Item 3.      Quantitative and Qualitative Disclosures About Market Risk

46

Item 4.      Controls and Procedures

46

PART II—OTHER INFORMATION

46

Item 1.      Legal Proceedings

46

Item 1A.   Risk Factors

46

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3.      Defaults Upon Senior Securities

47

Item 4.      Mine Safety Disclosures

47

Item 5.      Other Information

47

Item 6.      Exhibits

48

SIGNATURES

49

2

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CTO REALTY GROWTH, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

As of

(Unaudited)

    

March 31, 2024

    

December 31, 2023

ASSETS

Real Estate:

Land, at Cost

$

234,681

$

222,232

Building and Improvements, at Cost

599,901

559,389

Other Furnishings and Equipment, at Cost

865

857

Construction in Process, at Cost

3,320

3,997

Total Real Estate, at Cost

838,767

786,475

Less, Accumulated Depreciation

(56,810)

(52,012)

Real Estate—Net

781,957

734,463

Land and Development Costs

358

731

Intangible Lease Assets—Net

101,039

97,109

Investment in Alpine Income Property Trust, Inc.

35,643

39,445

Mitigation Credits

536

1,044

Commercial Loans and Investments

66,552

61,849

Cash and Cash Equivalents

6,760

10,214

Restricted Cash

8,057

7,605

Refundable Income Taxes

27

246

Deferred Income Taxes—Net

2,190

2,009

Other Assets—See Note 11

37,964

34,953

Total Assets

$

1,041,083

$

989,668

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:

Accounts Payable

$

2,638

$

2,758

Accrued and Other Liabilities—See Note 17

14,541

18,373

Deferred Revenue—See Note 18

5,290

5,200

Intangible Lease Liabilities—Net

14,353

10,441

Long-Term Debt

542,020

495,370

Total Liabilities

578,842

532,142

Commitments and Contingencies—See Note 21

Stockholders’ Equity:

Preferred Stock – 100,000,000 shares authorized; $0.01 par value, 6.375% Series A Cumulative Redeemable Preferred Stock, $25.00 Per Share Liquidation Preference, 2,978,808 shares issued and outstanding at March 31, 2024 and December 31, 2023

30

30

Common Stock – 500,000,000 shares authorized; $0.01 par value, 22,909,058 shares issued and outstanding at March 31, 2024 and 22,643,034 shares issued and outstanding at December 31, 2023

229

226

Additional Paid-In Capital

169,924

168,435

Retained Earnings

277,654

281,944

Accumulated Other Comprehensive Income

14,404

6,891

Total Stockholders’ Equity

462,241

457,526

Total Liabilities and Stockholders’ Equity

$

1,041,083

$

989,668

The accompanying notes are an integral part of these consolidated financial statements.

3

CTO REALTY GROWTH, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except share and per share data)

Three Months Ended

March 31,

March 31,

    

2024

    

2023

Revenues

Income Properties

$

24,623

$

22,432

Management Fee Income

1,105

1,098

Interest Income From Commercial Loans and Investments

1,351

795

Real Estate Operations

1,048

392

Total Revenues

28,127

24,717

Direct Cost of Revenues

Income Properties

(6,753)

(7,153)

Real Estate Operations

(819)

(85)

Total Direct Cost of Revenues

(7,572)

(7,238)

General and Administrative Expenses

(4,216)

(3,727)

Provision for Impairment

(48)

(479)

Depreciation and Amortization

(10,931)

(10,316)

Total Operating Expenses

(22,767)

(21,760)

Gain on Disposition of Assets

9,163

Other Gain

9,163

Total Operating Income

14,523

2,957

Investment and Other Loss

(3,259)

(4,291)

Interest Expense

(5,529)

(4,632)

Income Before Income Tax Benefit (Expense)

5,735

(5,966)

Income Tax Benefit (Expense)

107

(27)

Net Income (Loss) Attributable to the Company

5,842

(5,993)

Distributions to Preferred Stockholders

(1,187)

(1,195)

Net Income (Loss) Attributable to Common Stockholders

$

4,655

$

(7,188)

Per Share Information—See Note 13:

Basic Net Income (Loss) Attributable to Common Stockholders

$

0.21

$

(0.32)

Diluted Net Income (Loss) Attributable to Common Stockholders

$

0.20

$

(0.32)

Weighted Average Number of Common Shares

Basic

22,551,241

22,704,829

Diluted

26,057,652

22,704,829

The accompanying notes are an integral part of these consolidated financial statements.

4

CTO REALTY GROWTH, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)

Three Months Ended

March 31, 2024

    

March 31, 2023

Net Income (Loss) Attributable to the Company

$

5,842

$

(5,993)

Other Comprehensive Income (Loss):

Cash Flow Hedging Derivative - Interest Rate Swaps

7,513

(4,891)

Total Other Comprehensive Income (Loss)

7,513

(4,891)

Total Comprehensive Income (Loss)

$

13,355

$

(10,884)

The accompanying notes are an integral part of these consolidated financial statements.

5

CTO REALTY GROWTH, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands)

For the three months ended March 31, 2024:

Preferred Stock

Common Stock

Additional Paid-In Capital

Retained Earnings

Accumulated Other Comprehensive Income

Stockholders' Equity

Balance January 1, 2024

$

30

$

226

$

168,435

$

281,944

$

6,891

$

457,526

Net Income Attributable to the Company

5,842

5,842

Stock Repurchase

(664)

(664)

Vested Restricted Stock and Performance Shares

1

(1,275)

(1,274)

Exercise of Stock Options and Stock Issuance to Directors

380

380

Stock Issuance, Net of Equity Issuance Costs

2

2,062

2,064

Stock-Based Compensation Expense

986

986

Preferred Stock Dividends Declared for the Period

(1,187)

(1,187)

Common Stock Dividends Declared for the Period

(8,945)

(8,945)

Other Comprehensive Income

7,513

7,513

Balance March 31, 2024

$

30

$

229

$

169,924

$

277,654

$

14,404

$

462,241

For the three months ended March 31, 2023:

Preferred Stock

Common Stock

Additional Paid-In Capital

Retained Earnings

Accumulated Other Comprehensive Income

Stockholders' Equity

Balance January 1, 2023

$

30

$

229

$

172,471

$

316,279

$

15,761

$

504,770

Net Loss Attributable to the Company

(5,993)

(5,993)

Stock Repurchase

(3)

(5,006)

(5,009)

Vested Restricted Stock and Performance Shares

1

(1,029)

(1,028)

Exercise of Stock Options and Stock Issuance to Directors

241

241

Stock Issuance, Net of Equity Issuance Costs

(71)

(71)

Stock-Based Compensation Expense

830

830

Preferred Stock Dividends Declared for the Period

(1,195)

(1,195)

Common Stock Dividends Declared for the Period

(9,025)

(9,025)

Other Comprehensive Loss

(4,891)

(4,891)

Balance March 31, 2023

$

30

$

227

$

167,436

$

300,066

$

10,870

$

478,629

The accompanying notes are an integral part of these consolidated financial statements.

6

CTO REALTY GROWTH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

Three Months Ended

March 31, 2024

March 31, 2023

Cash Flow from Operating Activities:

Net Income (Loss) Attributable to the Company

$

5,842

$

(5,993)

Adjustments to Reconcile Net Income (Loss) Attributable to the Company to Net Cash Provided by Operating Activities:

Depreciation and Amortization

10,931

10,316

Amortization of Intangible Liabilities to Income Property Revenue

474

679

Amortization of Deferred Financing Costs to Interest Expense

256

241

Amortization of Discount on Convertible Debt

40

39

Gain on Disposition of Real Estate and Intangible Lease Assets and Liabilities

(4,618)

Gain on Disposition of Subsurface Interests

(4,545)

Provision for Impairment

48

479

Accretion of Commercial Loans and Investments Origination Fees

(33)

(28)

Non-Cash Imputed Interest

(7)

Deferred Income Taxes

(181)

27

Unrealized Loss on Investment Securities

4,657

4,918

Non-Cash Compensation

1,387

1,072

Decrease (Increase) in Assets:

Refundable Income Taxes

219

Land and Development Costs

(54)

2

Mitigation Credits and Mitigation Credit Rights

508

55

Other Assets

(1,888)

(1,748)

Increase (Decrease) in Liabilities:

Accounts Payable

(120)

226

Accrued and Other Liabilities

(1,249)

(1,787)

Deferred Revenue

90

829

Net Cash Provided By Operating Activities

11,757

9,327

Cash Flow from Investing Activities:

Acquisition of Real Estate and Intangible Lease Assets and Liabilities, Including Capitalized Expenditures

(73,412)

(7,798)

Acquisition of Commercial Loans and Investments

(6,575)

(16,061)

Proceeds from Disposition of Property, Plant, and Equipment, Net

19,527

Proceeds from Disposition of Subsurface Interests

4,974

Principal Payments Received on Commercial Loans and Investments

1,857

400

Acquisition of Investment Securities

(2,100)

Proceeds from the Sale of Investment Securities

1,655

Net Cash Used In Investing Activities

(51,974)

(25,559)

Cash Flow From Financing Activities:

Proceeds from Long-Term Debt

56,000

39,000

Payments on Long-Term Debt

(9,500)

(19,600)

Cash Paid for Loan Fees

(3)

(30)

Cash Received Exercise of Stock Options and Common Stock Issuance

380

241

Cash Used to Purchase Common Stock

(664)

(5,009)

Cash Paid for Vesting of Restricted Stock

(1,274)

(1,028)

Proceeds from (Cash Paid for) Issuance of Common Stock, Net

2,064

(71)

Dividends Paid - Preferred Stock

(1,187)

(1,195)

Dividends Paid - Common Stock

(8,601)

(8,658)

Net Cash Provided By Financing Activities

37,215

3,650

Net Decrease in Cash, Cash Equivalents and Restricted Cash

(3,002)

(12,582)

Cash, Cash Equivalents and Restricted Cash, Beginning of Period

17,819

21,194

Cash, Cash Equivalents and Restricted Cash, End of Period

$

14,817

$

8,612

Reconciliation of Cash to the Consolidated Balance Sheets:

Cash and Cash Equivalents

$

6,760

$

7,023

Restricted Cash

8,057

1,589

Total Cash

$

14,817

$

8,612

7

CTO REALTY GROWTH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited, in thousands)

Three Months Ended

March 31, 2024

March 31, 2023

Supplemental Disclosure of Cash Flow Information:

Cash Paid for Taxes, Net of Refunds Received

$

193

$

Cash Paid for Interest (1)

$

(4,751)

$

(4,268)

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

Unrealized Gain (Loss) on Cash Flow Hedges

$

7,513

$

(4,891)

Common Stock Dividends Declared and Unpaid

$

344

$

367

(1)

Includes capitalized interest of $0.1 million during the three months ended March 31, 2024 and 2023.

The accompanying notes are an integral part of these consolidated financial statements.

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. DESCRIPTION OF BUSINESS

We are a publicly traded, self-managed equity REIT that focuses on the ownership, management, and repositioning of high-quality retail and mixed-use properties located primarily in what we believe to be faster growing, business-friendly markets exhibiting accommodative business tax policies, outsized relative job and population growth, and where retail demand exceeds supply. We have pursued our investment strategy by investing primarily through fee simple ownership of our properties, commercial loans and preferred equity.

As of March 31, 2024, we own and manage, sometimes utilizing third-party property management companies, 20 commercial real estate properties in 8 states in the United States, comprising 3.9 million square feet of gross leasable space. In addition to our income property portfolio, as of March 31, 2024, our business included the following:

Management Services: A fee-based management business that is engaged in managing Alpine Income Property Trust, Inc. (“PINE”) as well as; (i) a portfolio of assets pursuant to the Portfolio Management Agreement (hereinafter defined) and (ii) Subsurface Interests (hereinafter defined) pursuant to the Subsurface Management Agreement (hereinafter defined), as further described in Note 5, “Management Services Business”.

Commercial Loans and Investments: A portfolio of four commercial loan investments and one preferred equity investment which is classified as a commercial loan investment.

Real Estate Operations: An inventory of mitigation credits produced by the Company’s formerly owned mitigation bank. During the three months ended March 31, 2024, the Company sold its portfolio of subsurface mineral interests associated with approximately 352,000 surface acres in 19 counties in the State of Florida (“Subsurface Interests”), as further described in Note 6, “Real Estate Operations”. As part of the Subsurface Interests sale, the Company entered into a management agreement with the buyer to provide ongoing management services (the “Subsurface Management Agreement”).

Our business also includes our investment in PINE. As of March 31, 2024, the fair value of our investment totaled $35.6 million, or 15.7% of PINE’s outstanding equity, including the units of limited partnership interest (“OP Units”) we hold in Alpine Income Property OP, LP (the “PINE Operating Partnership”), which are redeemable for cash, based upon the value of an equivalent number of shares of PINE common stock at the time of the redemption, or shares of PINE common stock on a one-for-one basis, at PINE’s election. Our investment in PINE generates investment income through the dividends distributed by PINE. In addition to the dividends we receive from PINE, our investment in PINE may benefit from any appreciation in PINE’s stock price, although no assurances can be provided that such appreciation will occur, the amount by which our investment will increase in value, or the timing thereof. Any dividends received from PINE are included in investment and other income (loss) on the accompanying consolidated statements of operations.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Information

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements, and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, which provides a more complete understanding of the Company’s accounting policies, financial position, operating results, business, properties, and other matters. The unaudited consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the financial position of the Company and the results of operations for the interim periods.

The results of operations for the three months ended March 31, 2024 are not necessarily indicative of results to be expected for the year ending December 31, 2024.

9

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and other entities in which we have a controlling interest. Any real estate entities or properties included in the consolidated financial statements have been consolidated only for the periods that such entities or properties were owned or under control by us. All inter-company balances and transactions have been eliminated in the consolidated financial statements. As of March 31, 2024, the Company has an equity investment in PINE.

Segment Reporting

ASC Topic 280, Segment Reporting, establishes standards related to the manner in which enterprises report operating segment information. The Company operates in four primary business segments including income properties, management services, commercial loans and investments, and real estate operations, as further discussed within Note 22, “Business Segment Data”.  The Company has no other reportable segments. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on a disaggregated basis for purposes of allocating and evaluating financial performance.

Use of Estimates in the Preparation of Financial Statements

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, 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. 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 the Company’s investments 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.

Cash and Cash Equivalents

Cash and cash equivalents includes 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 March 31, 2024 and December 31, 2023 include certain amounts over the Federal Deposit Insurance Corporation limits.

Restricted Cash

Restricted cash totaled $8.1 million at March 31, 2024, of which $6.6 million is being held in an escrow account to be reinvested through the like-kind exchange structure into other income properties, and $1.5 million is being held in three interest and/or real estate tax reserve accounts related to the Company’s commercial loans and investments.

Derivative Financial Instruments and Hedging Activity

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 accrued and other liabilities on the consolidated balance sheet at their 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 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 a quarterly basis.

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 16, “Interest Rate Swaps”).

10

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, accounts payable, and accrued and other liabilities at March 31, 2024 and December 31, 2023, approximate fair value because of the short maturity of these instruments. The carrying value of the Company’s Credit Facility (hereinafter defined) as of March 31, 2024 and December 31, 2023, approximates current market rates for revolving credit arrangements with similar risks and maturities. The face value of the Company’s fixed rate commercial loans and investments, the 2026 Term Loan (hereinafter defined), the 2027 Term Loan (hereinafter defined), the 2028 Term Loan (hereinafter defined), mortgage note, and convertible debt held as of March 31, 2024 and December 31, 2023 are measured at fair value based on current market rates for financial instruments with similar risks and maturities (see Note 8, “Fair Value of Financial Instruments”).

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 U.S. 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. U.S. 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:

Level 1 – Valuation is based upon quoted prices in active markets for identical assets or liabilities.
Level 2 – Valuation is based upon inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include option pricing models, discounted cash flow models and similar techniques.

Recognition of Interest Income from Commercial Loans and Investments

Interest income on commercial loans and investments includes interest payments made by the borrower and the accretion of purchase discounts and loan origination fees, offset by the amortization of loan costs. Interest payments are accrued based on the actual coupon rate and the outstanding principal balance and purchase discounts and loan origination fees are accreted into income using the effective yield method, adjusted for prepayments.

Mitigation Credits

Mitigation credits are stated at historical cost. As these assets are sold, the related revenues and cost of sales are reported as revenues from, and direct costs of, real estate operations, respectively, in the consolidated statements of operations.

Accounts Receivable

Accounts receivable related to income properties, which are classified in other assets on the consolidated balance sheets, primarily consist of accrued tenant reimbursable expenses and other tenant receivables. Receivables related to income property tenants totaled $4.6 million as of March 31, 2024 and December 31, 2023.

Accounts receivable related to real estate operations, which are classified in other assets on the consolidated balance sheets, totaled $0.6 million as of March 31, 2024 and December 31, 2023. The accounts receivable as of March 31, 2024 and December 31, 2023 are primarily related to the reimbursement of certain infrastructure costs completed by the Company in conjunction with two land sale transactions that closed during the fourth quarter of 2015 as more fully described in Note 11, “Other Assets.”

The amount due from the buyer of the golf operations for the rounds surcharge the Company paid to the City of Daytona Beach, totaled $0.1 million as of March 31, 2024 and December 31, 2023.

11

The collectability of the aforementioned receivables shall be considered and adjusted through an allowance for doubtful accounts which is included in income property revenue on the consolidated statements of operations. As of March 31, 2024 and December 31, 2023, the Company’s allowance for doubtful accounts totaled $1.7 million.

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 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 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.

The Company incurs costs related to the development and leasing of its properties. Such costs include, but are not limited to, tenant improvements, leasing commissions, rebranding, facility expansion and other capital improvements, and are included in construction in progress during the development period. When a construction project is considered to be substantially complete, the capitalized costs are reclassified to the appropriate real estate asset and depreciation begins. The Company assesses the level of construction activity to determine the amount, if any, of interest expense to be capitalized to the underlying construction projects.

Sales of Real Estate

When income properties are disposed of, the related cost basis of the real estate, intangible lease assets, and intangible lease liabilities, net of accumulated depreciation and/or amortization, and any accrued straight-line rental income balance for the underlying operating leases are removed, and gains or losses from the dispositions are reflected in net income within gain (loss) on disposition of assets. In accordance with the FASB guidance, gains or losses on sales of real estate are generally recognized using the full accrual method.

Gains and losses on land sales, in addition to the sale of Subsurface Interests and mitigation credits, are accounted for as required by FASB ASC Topic 606, Revenue from Contracts with Customers. The Company recognizes revenue from such sales when the Company transfers the promised goods in the contract based on the transaction price allocated to the performance obligations within the contract. As market information becomes available, the underlying cost basis is analyzed and recorded at the lower of cost or market.

Income Taxes

The Company elected to be taxed as a REIT for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Code”) commencing with its taxable year ended December 31, 2020. The Company believes that, commencing with such taxable year, it has been organized and has operated in such a manner as to qualify for taxation

12

as a REIT under the U.S. federal income tax laws. The Company intends to continue to operate in such a manner. As a REIT, the Company will be subject to U.S. federal and state income taxation at corporate rates on its net taxable income; the Company, however, may claim a deduction for the amount of dividends paid to its stockholders. Amounts distributed as dividends by the Company will be subject to taxation at the stockholder level only. While the Company must distribute at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, to qualify as a REIT, the Company intends to distribute all of its net taxable income. The Company is allowed certain other non-cash deductions or adjustments, such as depreciation expense, when computing its REIT taxable income and distribution requirement. These deductions permit the Company to reduce its dividend payout requirement under U.S. federal income tax laws. Certain states may impose minimum franchise taxes. To comply with certain REIT requirements, the Company holds certain of its non-REIT assets and operations through TRSs and subsidiaries of TRSs, which are subject to applicable U.S. federal, state and local corporate income tax on their taxable income. For the taxable year ended December 31, 2023, the Company held a total of two TRSs, each subject to taxation and the separate filing of its corporate income tax returns. As of January 1, 2024, the Company consolidated its TRSs into one TRS subject to taxation and the filing of a single corporate income tax return.

The Company uses the asset and liability method to account for income taxes for the Company’s TRS. Deferred income taxes result primarily from the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes (see Note 20, “Income Taxes”). In June 2006, the FASB issued additional guidance, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements included in income taxes. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, and disclosure and transition. In accordance with FASB guidance included in income taxes, the Company has analyzed its various federal and state filing positions and believes that its income tax filing positions and deductions are well documented and supported. Additionally, the Company believes that its accruals for tax liabilities are adequate. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to the FASB guidance.

 

 

 

NOTE 3. INCOME PROPERTIES

Leasing revenue consists of long-term rental revenue from retail, office, and commercial income properties, which is recognized as earned, using the straight-line method over the life of each lease. Lease payments below include straight-line base rental revenue as well as the non-cash accretion of above and below market lease amortization. The variable lease payments are comprised of percentage rent and reimbursements from tenants for common area maintenance, insurance, real estate taxes, and other operating expenses.

The components of leasing revenue are as follows (in thousands):

Three Months Ended

March 31, 2024

March 31, 2023

Leasing Revenue

Lease Payments

$

18,501

$

18,038

Variable Lease Payments

6,122

4,394

Total Leasing Revenue

$

24,623

$

22,432

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Minimum future base 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 March 31, 2024, are summarized as follows (in thousands):

Year Ending December 31,

    

Amounts

Remainder of 2024

$

59,154

2025

74,369

2026

66,574

2027

55,666

2028

43,931

2029

30,874

2030 and Thereafter (Cumulative)

86,442

Total

$

417,010

2024 Acquisitions. During the three months ended March 31, 2024, the Company acquired one multi-tenant income property and one building within an existing multi-tenant income property for an aggregate purchase price of $71.0 million, or a total acquisition cost of $71.1 million, as follows:

The Marketplace at Seminole Towne Center, a multi-tenant income property located in Sanford, Florida, for a purchase price of $68.7 million, or a total acquisition cost of $68.8 million including capitalized acquisition costs. The Marketplace at Seminole Towne Center comprises 315,066 square feet, was 98% occupied at acquisition, and had a weighted average remaining lease term of 4.7 years at acquisition.
One property, totaling 4,000 square feet, within the 28,100 square foot retail portion of Phase II of The Exchange at Gwinnett located in Buford, Georgia for an aggregate purchase price of $2.3 million including capitalized acquisition costs. The weighted average remaining lease term at acquisition is 10.0 years. As a result of this acquisition, the Company has acquired the entire retail portion of Phase II of the Exchange at Gwinnett. The Company previously purchased the Sprouts-anchored Phase I portion of The Exchange at Gwinnett in December 2021.

Of the aggregate $71.1 million total acquisition cost, $12.9 million was allocated to land, $52.0 million was allocated to buildings and improvements, and $11.2 million was allocated to intangible assets pertaining to the in-place lease value, leasing costs, and above market lease value and $5.0 million was allocated to intangible liabilities for the below market lease value. The amortization period for the intangible assets and liabilities was 4.9 years at acquisition.

2024 Dispositions. During the three months ended March 31, 2024, the Company sold one mixed use income property in downtown Santa Fe, NM for $20.0 million resulting in a gain of $4.6 million.

2023 Acquisitions. During the three months ended March 31, 2023, the Company acquired one 6,000 square foot property within the 28,100 square foot retail portion of Phase II of The Exchange at Gwinnett located in Buford, Georgia for a purchase price of $3.3 million. The 6,000 square foot building is leased to one tenant with 9.8 years remaining on the lease at acquisition.

2023 Dispositions. There were no income property dispositions during the three months ended March 31, 2023.

NOTE 4. COMMERCIAL LOANS AND INVESTMENTS

Our investments in commercial loans or similarly structured investments, such as preferred equity, mezzanine loans or other subordinated debt, have been and are expected to continue to be secured by real estate or the borrower’s pledge of its ownership interest in the entity that owns the real estate. The investments are associated with commercial real estate located in the United States and its territories, and are current or performing with either a fixed or floating rate. Some of these loans may be syndicated in either a pari-passu or senior/subordinated structure. Commercial first mortgage loans generally provide for a higher recovery rate due to their senior position in the underlying collateral. Commercial mezzanine loans are typically secured by a pledge of the borrower’s equity ownership in the underlying commercial real estate. Unlike a mortgage, a mezzanine loan is not secured by a lien on the property. An investor’s rights in a mezzanine loan are usually governed by an intercreditor agreement that provides holders with the rights to cure defaults and exercise control on certain decisions of any senior debt secured by the same commercial property.

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2024 Activity. On March 26, 2024, the Company originated a construction loan secured by the property and improvements to be constructed thereon consisting of seven outparcel locations, known as the Hypoluxo Project, located in Lake Worth, Florida for $10.0 million. The construction loan matures on September 26, 2025, bears a fixed interest rate of 11.0%, and requires interest only payments prior to maturity. Funding of the loan will occur as the borrower completes the underlying construction. As of March 31, 2024, the Company had funded $6.7 million to the borrower, leaving a remaining commitment of $3.3 million to the borrower.

On February 2, 2024, the borrower under the construction loan originated in January 2022 and secured by the property and improvements constructed thereon for the second phase of The Exchange at Gwinnett project located in Buford, Georgia repaid the principal balance of $1.9 million, leaving no remaining balance outstanding as of March 31, 2024. There is no remaining commitment to the borrower as of March 31, 2024.

2023 Activity. On February 21, 2023, the borrower of the mortgage note secured by the 4311 Maple Avenue property located in Dallas, Texas repaid the principal balance of $0.4 million, leaving no remaining balance outstanding as of March 31, 2023.

On March 1, 2023, the Company originated a $15.0 million first mortgage loan secured by the Founders Square property located in Dallas, Texas. The loan is interest-only with a term of three years with a fixed interest rate of 8.75%. The Company received an origination fee of 1.0% or $0.15 million.

During the three months ended March 31, 2023, the Company funded $1.2 million to the borrower under the construction loan originated in January 2022 and secured by the property and improvements to be constructed thereon for the second phase of The Exchange at Gwinnett project located in Buford, Georgia. As of March 31, 2023, the remaining commitment to the borrower was $4.3 million.

On December 20, 2023, simultaneous with the sale of the property, the Company originated a $15.4 million first mortgage loan secured by the Sabal Pavilion property located in Tampa, Florida. The loan is interest-only with a term of six months with a fixed interest rate of 7.50%. Subsequent to March 31, 2024, the borrower repaid the mortgage loan at a $0.2 million discount, for proceeds to the Company of $15.2 million.

Watters Creek Investment. On April 7, 2022, the Company entered into a preferred equity agreement to provide $30.0 million of funding towards the total investment in Watters Creek at Montgomery Farm, a grocery-anchored, mixed-use property located in Allen, Texas (the “Watters Creek Investment”). The Watters Creek Investment matures on April 6, 2025, has two one-year extension options, bears a fixed interest rate of 8.50% at the time of acquisition with increases during the initial term as well as the option terms, and requires payments of interest only prior to maturity. At closing, an origination fee of $0.15 million was received by the Company. The Watters Creek Investment represents $30.0 million, or approximately 23%, of funding towards the total investment in Watters Creek at Montgomery Farm, a grocery-anchored, mixed-use property located in Allen, Texas (the “Watters Creek Property”). The remaining funding is comprised of a combination of third-party sponsorship equity and a secured first mortgage.

The Company’s variable interest in the entity underlying the Watters Creek Investment is primarily due to the inherent credit risk associated with the $30.0 million fixed-return preferred investment. The day-to-day operations, including asset management and leasing, of the Watters Creek Property are managed by an unrelated third-party. Pursuant to FASB ASC Topic 810, Consolidation, the Company determined we are not the primary beneficiary of the entity underlying the Watters Creek Investment; accordingly, the entity was not consolidated. The investment was recorded in the consolidated balance sheets as a commercial loan investment at the time of acquisition. The significant factors related to this determination included, but were not limited to, the Company not having the power to direct the activities of the entity underlying the Watters Creek Investment due to (i) the day-to-day operations being managed by an unrelated third-party and (ii) the Company’s position as minority lender with fixed returns and maturity dates for the repayment of the $30.0 million preferred investment.

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The Company’s commercial loans and investments were comprised of the following at March 31, 2024 (in thousands):

Description

    

Date of Investment

    

Maturity Date

    

Original Face Amount

    

Current Face Amount

    

Carrying Value

    

Coupon Rate

Preferred Investment – Watters Creek – Allen, TX

April 2022

April 2025

$

30,000

$

30,000

$

29,949

8.75%

Mortgage Note – Founders Square – Dallas, TX

March 2023

March 2026

15,000

15,000

14,904

8.75%

Promissory Note – Main Street – Daytona Beach, FL

June 2023

May 2033

400

400

400

7.00%

Mortgage Note – Sabal Pavilion – Tampa, FL

December 2023

June 2024

15,400

15,400

15,397

7.50%

Construction Loan - Hypoluxo - Lake Worth, FL

March 2024

September 2025

10,000

6,675

6,577

11.00%

$

70,800

$

67,475

$

67,227

CECL Reserve

(675)

Total Commercial Loans and Investments

$

66,552

The Company’s commercial loans and investments were comprised of the following at December 31, 2023 (in thousands):

Description

    

Date of Investment

    

Maturity Date

    

Original Face Amount

    

Current Face Amount

    

Carrying Value

    

Coupon Rate

Construction Loan – The Exchange At Gwinnett – Buford, GA

January 2022

January 2024

$

8,700

$

1,857

$

1,854

7.25%

Preferred Investment – Watters Creek – Allen, TX

April 2022

April 2025

30,000

30,000

29,937

8.75%

Mortgage Note – Founders Square – Dallas, TX

March 2023

March 2026

15,000

15,000

14,892

8.75%

Promissory Note – Main Street – Daytona Beach, FL

June 2023

May 2033

400

400

400