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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 June 30, 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 001-39143

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.)

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 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 July 11, 2024 was 13,631,757.

INDEX

Page

    

No.

PART I—FINANCIAL INFORMATION

Item 1.     Financial Statements

3

Consolidated Balance Sheets – June 30, 2024 (Unaudited) and December 31, 2023

3

Consolidated Statements of Operations – Three and six months ended June 30, 2024 and 2023 (Unaudited)

4

Consolidated Statements of Comprehensive Income – Three and six months ended June 30, 2024 and 2023 (Unaudited)

5

Consolidated Statements of Stockholders’ Equity – Three and six months ended June 30, 2024 and 2023 (Unaudited)

6

Consolidated Statements of Cash Flows – Six months ended June 30, 2024 and 2023 (Unaudited)

8

Notes to Consolidated Financial Statements (Unaudited)

10

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

34

Item 3. Quantitative and Qualitative Disclosures About Market Risk

43

Item 4.     Controls and Procedures

43

PART II—OTHER INFORMATION

43

Item 1.     Legal Proceedings

43

Item 1A.  Risk Factors

43

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

43

Item 3.     Defaults Upon Senior Securities

43

Item 4.     Mine Safety Disclosures

44

Item 5.     Other Information

44

Item 6.     Exhibits

45

SIGNATURES

46

2

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALPINE INCOME PROPERTY TRUST, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

As of

June 30, 2024 (Unaudited)

    

December 31, 2023

ASSETS

Real Estate:

Land, at Cost

$

152,678

$

149,314

Building and Improvements, at Cost

334,312

328,993

Total Real Estate, at Cost

486,990

478,307

Less, Accumulated Depreciation

(41,879)

(34,714)

Real Estate—Net

445,111

443,593

Assets Held for Sale

3,943

4,410

Commercial Loans and Investments

44,730

35,080

Cash and Cash Equivalents

3,260

4,019

Restricted Cash

3,136

9,712

Intangible Lease Assets—Net

45,761

49,292

Straight-Line Rent Adjustment

1,545

1,409

Other Assets

18,291

17,045

Total Assets

$

565,777

$

564,560

LIABILITIES AND EQUITY

Liabilities:

Accounts Payable, Accrued Expenses, and Other Liabilities

$

7,238

$

5,736

Prepaid Rent and Deferred Revenue

3,216

2,627

Intangible Lease Liabilities—Net

5,017

4,907

Obligation Under Participation Agreement

13,632

Long-Term Debt

268,320

275,677

Total Liabilities

297,423

288,947

Commitments and Contingencies—See Note 20

Equity:

Preferred Stock, $0.01 par value per share, 100 million shares authorized, no shares issued and outstanding as of June 30, 2024 and December 31, 2023

Common Stock, $0.01 par value per share, 500 million shares authorized, 13,626,589 shares issued and outstanding as of June 30, 2024 and 13,659,207 shares issued and outstanding as of December 31, 2023

136

137

Additional Paid-in Capital

243,019

243,690

Dividends in Excess of Net Income

(9,907)

(2,359)

Accumulated Other Comprehensive Income

10,780

9,275

Stockholders' Equity

244,028

250,743

Noncontrolling Interest

24,326

24,870

Total Equity

268,354

275,613

Total Liabilities and Equity

$

565,777

$

564,560

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

3

ALPINE INCOME PROPERTY TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

Three Months Ended

Six Months Ended

June 30, 2024

June 30, 2023

June 30, 2024

June 30, 2023

Revenues:

Lease Income

$

11,330

$

11,348

$

22,794

$

22,504

Interest Income from Commercial Loans and Investments

986

1,889

Other Revenue

174

273

Total Revenues

12,490

11,348

24,956

22,504

Operating Expenses:

Real Estate Expenses

1,800

1,575

3,728

3,009

General and Administrative Expenses

1,602

1,656

3,144

3,171

Provision for Impairment

657

688

Depreciation and Amortization

6,352

6,423

12,734

12,758

Total Operating Expenses

10,411

9,654

20,294

18,938

Gain on Disposition of Assets

918

743

918

5,196

Gain on Extinguishment of Debt

23

Net Income From Operations

2,997

2,437

5,580

8,785

Investment and Other Income

56

91

125

101

Interest Expense

(2,831)

(2,438)

(5,766)

(5,051)

Net Income (Loss)

222

90

(61)

3,835

Less: Net (Income) Loss Attributable to Noncontrolling Interest

(18)

(10)

5

(416)

Net Income (Loss) Attributable to Alpine Income Property Trust, Inc.

$

204

$

80

$

(56)

$

3,419

Per Common Share Data:

Net Income (Loss) Attributable to Alpine Income Property Trust, Inc.

Basic

$

0.01

$

0.01

$

$

0.24

Diluted

$

0.01

$

0.01

$

$

0.22

Weighted Average Number of Common Shares:

Basic

13,624,932

14,059,173

13,623,070

14,030,025

Diluted

14,848,786

15,762,667

14,846,924

15,733,519

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

4

ALPINE INCOME PROPERTY TRUST, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)

Three Months Ended

Six Months Ended

June 30, 2024

    

June 30, 2023

June 30, 2024

    

June 30, 2023

Net Income (Loss)

$

222

$

90

$

(61)

$

3,835

Other Comprehensive Income (Loss)

Cash Flow Hedging Derivative - Interest Rate Swaps

(715)

4,379

1,640

1,613

Total Other Comprehensive Income (Loss)

(715)

4,379

1,640

1,613

Total Comprehensive Income (Loss)

$

(493)

$

4,469

$

1,579

$

5,448

Less: Comprehensive (Income) Loss Attributable to Noncontrolling Interest

Net (Income) Loss Attributable to Noncontrolling Interest

(18)

(10)

5

(416)

Other Comprehensive (Income) Loss Attributable to Noncontrolling Interest

59

(135)

Comprehensive (Income) Loss Attributable to Noncontrolling Interest

41

(10)

(130)

(416)

Comprehensive Income (Loss) Attributable to Alpine Income Property Trust, Inc.

$

(452)

$

4,459

$

1,449

$

5,032

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

5

ALPINE INCOME PROPERTY TRUST, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands, except per share data)

For the three months ended June 30, 2024:

    

Common Stock at Par

   

Additional Paid-in Capital

   

Dividends in Excess of Net Income

   

Accumulated Other Comprehensive Income

   

Stockholders' Equity

   

Noncontrolling Interest

   

Total Equity

Balance April 1, 2024

$

136

$

242,944

$

(6,364)

$

11,436

$

248,152

$

24,704

$

272,856

Net Income

204

204

18

222

Stock Repurchases

Stock Issuance to Directors

80

80

80

Stock Issuance, Net of Equity Issuance Costs

(5)

(5)

(5)

Cash Dividends ($0.275 per share)

(3,747)

(3,747)

(337)

(4,084)

Other Comprehensive Loss

(656)

(656)

(59)

(715)

Balance June 30, 2024

$

136

$

243,019

$

(9,907)

$

10,780

$

244,028

$

24,326

$

268,354

For the three months ended June 30, 2023:

Common Stock at Par

   

Additional Paid-in Capital

   

Retained Earnings

   

Accumulated Other Comprehensive Income

   

Stockholders' Equity

   

Noncontrolling Interest

   

Total Equity

Balance April 1, 2023

    

$

141

$

249,288

$

9,514

$

11,835

$

270,778

$

33,694

$

304,472

Net Income

80

80

10

90

Stock Repurchases

(1)

(364)

(365)

(365)

Stock Issuance to Directors

79

79

79

Payment of Equity Issuance Costs

(45)

(45)

(45)

Cash Dividends ($0.275 per share)

(3,863)

(3,863)

(467)

(4,330)

Other Comprehensive Income

4,379

4,379

4,379

Balance June 30, 2023

$

140

$

248,958

$

5,731

$

16,214

$

271,043

$

33,237

$

304,280

6

ALPINE INCOME PROPERTY TRUST, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

(Unaudited, in thousands, except per share data)

For the six months ended June 30, 2024:

Common Stock at Par

   

Additional Paid-in Capital

   

Dividends in Excess of Net Income

   

Accumulated Other Comprehensive Income

   

Stockholders' Equity

   

Noncontrolling Interest

   

Total Equity

Balance January 1, 2024

    

$

137

$

243,690

$

(2,359)

$

9,275

$

250,743

$

24,870

$

275,613

Net Loss

(56)

(56)

(5)

(61)

Stock Repurchases

(1)

(774)

(775)

(775)

Stock Issuance to Directors

159

159

159

Stock Issuance, Net of Equity Issuance Costs

(56)

(56)

(56)

Cash Dividends ($0.550 per share)

(7,492)

(7,492)

(674)

(8,166)

Other Comprehensive Income

1,505

1,505

135

1,640

Balance June 30, 2024

$

136

$

243,019

$

(9,907)

$

10,780

$

244,028

$

24,326

$

268,354

For the six months ended June 30, 2023:

    

Common Stock at Par

   

Additional Paid-in Capital

   

Retained Earnings

   

Accumulated Other Comprehensive Income

   

Stockholders' Equity

   

Noncontrolling Interest

   

Total Equity

Balance January 1, 2023

$

134

$

236,841

$

10,042

$

14,601

$

261,618

$

33,757

$

295,375

Net Income

3,419

3,419

416

3,835

Stock Repurchases

(1)

(364)

(365)

(365)

Stock Issuance to Directors

145

145

145

Stock Issuance, Net of Equity Issuance Costs

7

12,336

12,343

12,343

Cash Dividends ($0.550 per share)

(7,730)

(7,730)

(936)

(8,666)

Other Comprehensive Income

1,613

1,613

1,613

Balance June 30, 2023

$

140

$

248,958

$

5,731

$

16,214

$

271,043

$

33,237

$

304,280

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

7

ALPINE INCOME PROPERTY TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

Six Months Ended

June 30, 2024

June 30, 2023

Cash Flow From Operating Activities:

Net Income (Loss)

$

(61)

$

3,835

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

Depreciation and Amortization

12,734

12,758

Amortization of Intangible Lease Assets and Liabilities to Lease Income

(225)

(189)

Amortization of Deferred Financing Costs to Interest Expense

360

351

Accretion of Commercial Loans and Investments Origination Fees

(63)

Gain on Disposition of Assets

(918)

(5,196)

Provision for Impairment

688

Non-Cash Compensation

159

159

Decrease (Increase) in Assets:

Straight-Line Rent Adjustment

(154)

(274)

Other Assets

49

(221)

Increase (Decrease) in Liabilities:

Accounts Payable, Accrued Expenses, and Other Liabilities

1,634

2,156

Prepaid Rent and Deferred Revenue

588

297

Net Cash Provided By Operating Activities

14,791

13,676

Cash Flow From Investing Activities:

Acquisition of Real Estate, Including Capitalized Expenditures

(15,946)

(61,672)

Proceeds from Disposition of Assets

6,384

77,775

Acquisition of Commercial Loans and Investments

(10,315)

Principal Payments Received on Commercial Loan Investments

14,263

Net Cash Provided By (Used In) Investing Activities

(5,614)

16,103

Cash Flow from Financing Activities:

Proceeds from Long-Term Debt

23,500

1,250

Payments on Long-Term Debt

(31,000)

(19,500)

Cash Paid for Loan Fees

(15)

(30)

Repurchase of Common Stock

(775)

(365)

Proceeds From (Payments For) Stock Issuance, Net

(56)

12,343

Dividends Paid

(8,166)

(8,666)

Net Cash Used In Financing Activities

(16,512)

(14,968)

Net Increase (Decrease) in Cash and Cash Equivalents

(7,335)

14,811

Cash and Cash Equivalents and Restricted Cash, Beginning of Period

13,731

13,044

Cash and Cash Equivalents and Restricted Cash, End of Period

$

6,396

$

27,855

Reconciliation of Cash to the Consolidated Balance Sheets:

Cash and Cash Equivalents

$

3,260

$

7,755

Restricted Cash

3,136

20,100

Total Cash

$

6,396

$

27,855

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

8

ALPINE INCOME PROPERTY TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited, in thousands)

Six Months Ended

June 30, 2024

June 30, 2023

Supplemental Disclosure of Cash Flow Information:

Cash Paid for Interest

$

5,503

$

4,681

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

Unrealized Gain on Cash Flow Hedge

$

1,640

$

1,613

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

9

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 investment trust (“REIT”) 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 137 net leased properties located in 34 states. The properties in our portfolio are primarily subject to long-term, net leases, which generally require the tenant to pay directly or reimburse us for property operating expenses such as real estate taxes, insurance, assessments and other governmental fees, utilities, repairs and maintenance and certain capital expenditures. The Company may also acquire or originate commercial loans and investments. Our investments in commercial loans are generally secured by real estate or the borrower’s pledge of its ownership interest in an entity that owns real estate. See Note 4, “Commercial Loans and Investments” for further disclosure related to the Company’s commercial loans and investments.

The Company operates in two primary business segments: income properties and commercial loans and investments.

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 REIT and the sole member of our Manager (“CTO”). All of our executive officers also serve as executive officers of CTO, and one of our executive officers and directors, John P. Albright, also serves as an executive officer and director of 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”). We conduct the substantial majority of our operations through Alpine Income Property OP, LP (the “Operating Partnership”). Our wholly owned subsidiary, Alpine Income Property GP, LLC (“PINE GP”), is the sole general partner of the Operating Partnership. Substantially all of our assets are held by, and our operations are conducted through, the Operating Partnership. As of June 30, 2024, we have a total ownership interest in the Operating Partnership of 91.8%, with CTO holding, directly and indirectly, an 8.2% ownership interest in the Operating Partnership. 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”) oversees our business and affairs. 

 The Company has 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”). 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, determined without regard to the dividends paid deduction and excluding net capital gain, to its stockholders (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.

10

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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. All significant inter-company balances and transactions have been eliminated in the consolidated financial statements.

SEGMENT REPORTING

 

Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 280, Segment Reporting, establishes standards related to the manner in which enterprises report operating segment information. The Company operates in two primary business segments including income properties and commercial loans and investments, as further discussed within Note 21, “Business Segment Data”. The Company has no other reportable segments. The Company’s chief executive officer, who is the Company’s 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 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 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.

REAL ESTATE

The Company’s real estate assets are comprised of the properties in its portfolio, and are stated at cost, less accumulated depreciation and amortization. Such properties are depreciated on a straight-line basis over their estimated useful lives. Renewals and betterments are capitalized to the applicable property accounts. The cost of maintenance and repairs is expensed as incurred. The cost of property retired or otherwise disposed of, and the related accumulated depreciation or amortization, are removed from the accounts, and any resulting gain or loss is recorded in the statement of operations. The amount of depreciation of real estate, exclusive of amortization related to intangible assets, recognized for the three months ended June 30, 2024 and June 30, 2023, was $4.2 million. The amount of depreciation of real estate, exclusive of amortization related to intangible assets, recognized for the six months ended June 30, 2024 and June 30, 2023, was $8.4 million and $8.3 million, respectively.

LONG-LIVED ASSETS

 

The Company follows 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, and real estate held for sale, 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, a property not fully leased or leased at 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.

11

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 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.

ASSETS HELD FOR SALE

Investments in real estate which are determined to be “held for sale” pursuant to FASB Topic 360-10, Property, Plant, and Equipment are reported separately on the consolidated balance sheets at the lesser of carrying value or fair value, less costs to sell. Real estate investments classified as held for sale are not depreciated.

SALES OF REAL ESTATE

When 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 gains on dispositions of assets. In accordance with the FASB guidance, gains or losses on sales of real estate are generally recognized using the full accrual method.

 

PROPERTY LEASE REVENUE

 

The rental arrangements associated with the Company’s 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.

12

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 June 30, 2024 and December 31, 2023, the Company’s allowance for doubtful accounts totaled $0.2 million and $0.4 million, respectively.

COMMERCIAL LOANS AND INVESTMENTS

Investments in commercial loans and investments held for investment are recorded at historical cost, net of unaccreted origination costs and current expected credit losses (“CECL”) reserve.

Pursuant to ASC 326, Financial Instruments - Credit Losses, the Company measures and records a provision for CECL each time a new investment is made or a loan is repaid, as well as if changes to estimates occur during a quarterly measurement period. We are unable to use historical data to estimate expected credit losses as we have incurred no losses to date. Management utilizes a loss-rate method and considers macroeconomic factors to estimate its CECL allowance, which is calculated based on the amortized cost basis of the commercial loans.

Sales of participations in commercial loans and investments are evaluated for achievement of the characteristics of participating interest pursuant to ASC 860, Transfers and Servicing. If the sale of a participation has all of the characteristics of a participating interest, it achieves sale accounting and the commercial loan or investment is presented net of the participating interest. If the sale of a participation does not have all of the characteristics of a participating interest, it does not achieve sale accounting and is treated as a secured borrowing.  As of June 30, 2024, the Company’s participation in commercial loans and investments purchased by a third-party did not achieve sale accounting and has been presented as an Obligation under Participation Agreement within the liabilities portion of the Company’s consolidated balance sheet.

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 loan origination fees, offset by the amortization of loan costs, if any. 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.

OPERATING LAND LEASE EXPENSE

The Company is the lessee under operating land leases for certain of its properties, which leases are classified as operating leases pursuant to FASB ASC Topic 842, Leases. The corresponding lease expense is recognized on a straight-line basis over the term of the lease and is included in real estate expenses in the accompanying consolidated statements of operations.

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 June 30, 2024 and December 31, 2023 include certain amounts over the Federal Deposit Insurance Corporation limits. The carrying value of cash and cash equivalents is 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 $3.1 million as of June 30, 2024, which is being held in interest, tax, insurance, and/or capital expenditure reserve accounts related to the Company’s commercial loans and investments.

13

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 accounts payable, accrued expenses, and other liabilities on the accompanying 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 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 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 14, “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 June 30, 2024 and December 31, 2023, approximate fair value because of the short maturity of these instruments. The carrying value of the Credit Facility, hereinafter defined, approximates current market rates for revolving credit arrangements with similar risks and maturities. The Company estimates the fair value of its commercial loans and investments 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:

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.

CONCENTRATION OF CREDIT RISK

 

Certain individual tenants in the Company’s portfolio of properties accounted for more than 10% of lease income from the Company’s income properties during the six months ended June 30, 2024 and 2023.

14

During the six months ended June 30, 2024 and 2023, Walgreens accounted for 11% and 12% of total revenues, respectively.

As of June 30, 2024 and December 31, 2023, 13%, 11%, and 11% of the Company’s real estate portfolio, based on square footage, was located in the states of Texas, New Jersey, and Michigan, respectively.

RECLASSIFICATIONS

Certain items in the prior period’s consolidated balance sheet and consolidated statement of operations have been reclassified to conform to the presentation for the three and six months ended June 30, 2024. Specifically, tax, insurance, and capital expenditure reserve accounts related to the Company’s commercial loans and investments were previously included within Prepaid Rent and Deferred Revenue and are now included within Accounts Payable, Accrued Expenses, and Other Liabilities on the accompanying consolidated balance sheets. Additionally, interest income earned on deposits at financial institutions was previously included within Lease Income and is now included within Investment and Other Income on the accompanying consolidated statement of operations. There was no impact to retained earnings as a result of the reclassifications.

 

 

NOTE 3. PROPERTY PORTFOLIO

As of June 30, 2024, the Company’s property portfolio consisted of 137 properties with total square footage of 3.8 million.

Leasing revenue consists of long-term rental revenue from net leased commercial 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 payments 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

    

Six Months Ended

June 30, 2024

June 30, 2023

June 30, 2024

June 30, 2023

Lease Income

Lease Payments

$

9,902

$

9,975

$

19,764

$

20,138

Variable Lease Payments

1,428

1,373

3,030

2,366

Total Lease Income

$

11,330

$

11,348

$

22,794

$

22,504

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 June 30, 2024, are summarized as follows (in thousands):  

 

Year Ending December 31,

    

Amounts

Remainder of 2024

$

19,786

2025

38,955

2026

38,165

2027

34,633

2028

30,988

2029

26,217

2030 and Thereafter (Cumulative)

73,885

Total

$

262,629

15

2024 Activity. During the six months ended June 30, 2024, the Company acquired two properties for a combined purchase price of $15.6 million, or a cost of $15.7 million including capitalized acquisition costs. The properties are located in two different states, leased to three different tenants, and had a weighted average remaining lease term of 4.5 years at the time of acquisition. Of the total acquisition cost, $5.0 million was allocated to land, $10.2 million was allocated to buildings and improvements, $1.4 million was allocated to intangible assets pertaining to the in-place lease value, leasing fees, and above market lease value, and $0.9 million was allocated to intangible liabilities for the below market lease value. The weighted average amortization period for the intangible assets and liabilities was 4.6 years at acquisition.

During the six months ended June 30, 2024, the Company sold two properties for an aggregate sales price of $6.6 million, generating aggregate gains on sale of $0.9 million.

2023 Activity. During the six months ended June 30, 2023, the Company acquired nine properties for a combined purchase price of $60.5 million, or a cost of $61.6 million including capitalized acquisition costs. The properties are located in four different states, leased to 14 different tenants, and had a weighted average remaining lease term of 7.5 years at the time of acquisition. Of the total acquisition cost, $16.4 million was allocated to land, $40.2 million was allocated to buildings and improvements, $5.5 million was allocated to intangible assets pertaining to the in-place lease value, leasing fees, and above market lease value, and $0.5 million was allocated to intangible liabilities for the below market lease value. The weighted average amortization period for the intangible assets and liabilities was 8.8 years at acquisition.

During the six months ended June 30, 2023, the Company sold 14 properties for an aggregate sales price of $79.1 million, generating aggregate gains on sale of $5.2 million.

NOTE 4. COMMERCIAL LOANS AND INVESTMENTS

2024 Activity. On January 30, 2024, the Company originated a construction loan secured by the property and improvements to be constructed thereon for six retail outparcels in Lawrenceville, Georgia for $7.2 million. The construction loan matures on January 30, 2026, bears a fixed interest rate of 11.25% and requires interest-only payments prior to maturity. Funding of the loan will occur as the borrower completes the underlying construction. As of June 30, 2024, the Company has disbursed $5.7 million to the borrower.

On May 31, 2024, the Company sold a $13.6 million A-1 participation interest (the “Loan Participation Sale”) in its $23.4 million Mortgage Note (hereinafter defined) originated in 2023. The senior participation of $13.6 million is entitled to an 8.0% yield on its respective portion of the outstanding principal balance and has priority preference with respect to all principal and interest payments of the Mortgage Note. After adjusting for the Loan Participation Sale, the Company’s remaining investment in the Mortgage Note is $9.7 million. This sale did not achieve sale accounting pursuant to ASC 860, Transfers and Servicing, and accordingly, is treated as a secured borrowing. See Note 12, “Obligation Under Participation Agreement” for further information. 

On June 14, 2024, the Company originated a construction loan secured by the property and improvements to be constructed thereon for a 6-acre land development project anchored by Wawa and McDonalds in Mount Carmel, Ohio for $6.1 million. The construction loan matures on September 14, 2025, bears a fixed interest rate of 11.50% and requires interest-only payments prior to maturity. Funding of the loan will occur as the borrower completes the underlying construction. As of June 30, 2024, the Company has disbursed $4.7 million to the borrower.