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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 June 30, 2022

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 July 14, 2022 was 11,867,278.

Table of Contents

INDEX

Page

    

No.

PART I—FINANCIAL INFORMATION

Item 1.     Financial Statements

3

Consolidated Balance Sheets – June 30, 2022 (Unaudited) and December 31, 2021

3

Consolidated Statements of Operations – Three and six months ended June 30, 2022 and 2021 (Unaudited)

4

Consolidated Statements of Comprehensive Income – Three and six months ended June 30, 2022 and 2021 (Unaudited)

5

Consolidated Statements of Stockholders’ Equity – Three and six months ended June 30, 2022 and 2021 (Unaudited)

6

Consolidated Statements of Cash Flows – Six months ended June 30, 2022 and 2021 (Unaudited)

8

Notes to Consolidated Financial Statements (Unaudited)

10

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

28

Item 3. Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.     Controls and Procedures

35

PART II—OTHER INFORMATION

36

Item 1.     Legal Proceedings

36

Item 1A.  Risk Factors

36

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

36

Item 3.     Defaults Upon Senior Securities

36

Item 4.     Mine Safety Disclosures

36

Item 5.     Other Information

36

Item 6.     Exhibits

37

SIGNATURES

38

2

Table of Contents

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

(Unaudited) June 30, 2022

    

December 31, 2021

ASSETS

Real Estate:

Land, at Cost

$

180,569

$

178,172

Building and Improvements, at Cost

304,129

266,236

Total Real Estate, at Cost

484,698

444,408

Less, Accumulated Depreciation

(17,527)

(15,419)

Real Estate—Net

467,171

428,989

Assets Held for Sale

2,435

Cash and Cash Equivalents

2,427

8,851

Restricted Cash

15,131

646

Intangible Lease Assets—Net

61,371

58,821

Straight-Line Rent Adjustment

1,912

1,838

Other Assets

16,909

6,369

Total Assets

$

567,356

$

505,514

LIABILITIES AND EQUITY

Liabilities:

Accounts Payable, Accrued Expenses, and Other Liabilities

$

4,788

$

2,363

Prepaid Rent and Deferred Revenue

1,662

2,033

Intangible Lease Liabilities—Net

5,177

5,476

Long-Term Debt

300,973

267,740

Total Liabilities

312,600

277,612

Commitments and Contingencies—See Note 16

Equity:

Preferred Stock, $0.01 par value per share, 100 million shares authorized, no shares issued and outstanding as of June 30, 2022 and December 31, 2021

Common Stock, $0.01 par value per share, 500 million shares authorized, 11,863,589 shares issued and outstanding as of June 30, 2022 and 11,454,815 shares issued and outstanding as of December 31, 2021

119

114

Additional Paid-in Capital

208,706

200,906

Retained Earnings (Dividends in Excess of Net Income)

2,301

(6,419)

Accumulated Other Comprehensive Income

10,999

1,922

Stockholders' Equity

222,125

196,523

Noncontrolling Interest

32,631

31,379

Total Equity

254,756

227,902

Total Liabilities and Equity

$

567,356

$

505,514

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

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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, 2022

    

June 30, 2021

    

June 30, 2022

    

June 30, 2021

Revenues:

Lease Income

$

11,280

$

6,597

$

22,079

$

12,487

Total Revenues

11,280

6,597

22,079

12,487

Operating Expenses:

Real Estate Expenses

1,285

824

2,377

1,475

General and Administrative Expenses

1,479

1,286

2,910

2,316

Depreciation and Amortization

5,694

3,463

11,366

6,606

Total Operating Expenses

8,458

5,573

16,653

10,397

Gain on Disposition of Assets

15,637

15,637

Net Income From Operations

18,459

1,024

21,063

2,090

Interest Expense

2,123

678

3,803

1,233

Net Income

16,336

346

17,260

857

Less: Net Income Attributable to Noncontrolling Interest

(2,054)

(42)

(2,172)

(113)

Net Income Attributable to Alpine Income Property Trust, Inc.

$

14,282

$

304

$

15,088

$

744

Per Common Share Data:

Net Income Attributable to Alpine Income Property Trust, Inc.

Basic

$

1.21

$

0.03

$

1.28

$

0.09

Diluted

$

1.05

$

0.03

$

1.12

$

0.08

Weighted Average Number of Common Shares:

Basic

11,844,108

8,853,259

11,753,904

8,212,902

Diluted

13,547,602

10,081,783

13,457,398

9,439,104

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

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ALPINE INCOME PROPERTY TRUST, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)

Three Months Ended

Six Months Ended

    

June 30, 2022

    

June 30, 2021

    

June 30, 2022

    

June 30, 2021

Net Income Attributable to Alpine Income Property Trust, Inc.

$

14,282

$

304

$

15,088

$

744

Other Comprehensive Income (Loss)

Cash Flow Hedging Derivative - Interest Rate Swaps

2,245

(15)

9,077

661

Total Other Comprehensive Income (Loss)

2,245

(15)

9,077

661

Total Comprehensive Income

$

16,527

$

289

$

24,165

$

1,405

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

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ALPINE INCOME PROPERTY TRUST, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands, except per share data)

For the three months ended June 30, 2022:

    

Common Stock at Par

    

Additional Paid-in Capital

    

Retained Earnings (Dividends in Excess of Net Income)

    

Accumulated Other Comprehensive Income

    

Stockholders' Equity

    

Noncontrolling Interest

    

Total Equity

Balance April 1, 2022

$

118

$

207,035

$

(8,779)

$

8,754

$

207,128

$

31,037

$

238,165

Net Income

14,282

14,282

2,054

16,336

Stock Issuance to Directors

79

79

79

Stock Issuance, Net of Equity Issuance Costs

1

1,592

1,593

1,593

Cash Dividends ($0.27 per share)

(3,202)

(3,202)

(460)

(3,662)

Other Comprehensive Income

2,245

2,245

2,245

Balance June 30, 2022

$

119

$

208,706

$

2,301

$

10,999

$

222,125

$

32,631

$

254,756

For the three months ended June 30, 2021:

    

Common Stock at Par

    

Additional Paid-in Capital

    

Retained Earnings (Dividends in Excess of Net Income)

    

Accumulated Other Comprehensive Income (Loss)

    

Stockholders' Equity

    

Noncontrolling Interest

    

Total Equity

Balance April 1, 2021

$

79

$

140,591

$

(7,169)

$

195

$

133,696

$

22,112

$

155,808

Net Income

304

304

42

346

Stock Issuance to Directors

73

73

73

Stock Issuance, Net of Equity Issuance Costs

34

57,314

57,348

57,348

Operating Units Issued

8,010

8,010

Cash Dividends ($0.25 per share)

(2,824)

(2,824)

(306)

(3,130)

Other Comprehensive Loss

(15)

(15)

(15)

Balance June 30, 2021

$

113

$

197,978

$

(9,689)

$

180

$

188,582

$

29,858

$

218,440

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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, 2022:

    

Common Stock at Par

    

Additional Paid-in Capital

    

Retained Earnings (Dividends in Excess of Net Income)

    

Accumulated Other Comprehensive Income

    

Stockholders' Equity

    

Noncontrolling Interest

    

Total Equity

Balance January 1, 2022

$

114

$

200,906

$

(6,419)

$

1,922

$

196,523

$

31,379

$

227,902

Net Income

15,088

15,088

2,172

17,260

Stock Issuance to Directors

158

158

158

Stock Issuance, Net of Equity Issuance Costs

5

7,642

7,647

7,647

Cash Dividends ($0.54 per share)

(6,368)

(6,368)

(920)

(7,288)

Other Comprehensive Income

9,077

9,077

9,077

Balance June 30, 2022

$

119

$

208,706

$

2,301

$

10,999

$

222,125

$

32,631

$

254,756

For the six months ended June 30, 2021:

    

Common Stock at Par

    

Additional Paid-in Capital

    

Retained Earnings (Dividends in Excess of Net Income)

    

Accumulated Other Comprehensive Income (Loss)

    

Stockholders' Equity

    

Noncontrolling Interest

    

Total Equity

Balance January 1, 2021

$

75

$

132,878

$

(5,713)

$

(481)

$

126,759

$

22,334

$

149,093

Net Income

744

744

113

857

Stock Issuance to Directors

139

139

139

Stock Issuance, Net of Equity Issuance Costs

38

64,961

64,999

64,999

Operating Units Issued

8,010

8,010

Cash Dividends ($0.49 per share)

(4,720)

(4,720)

(599)

(5,319)

Other Comprehensive Income

661

661

661

Balance June 30, 2021

$

113

$

197,978

$

(9,689)

$

180

$

188,582

$

29,858

$

218,440

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

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ALPINE INCOME PROPERTY TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

Six Months Ended

June 30, 2022

June 30, 2021

Cash Flow From Operating Activities:

Net Income

$

17,260

$

857

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

Depreciation and Amortization

11,366

6,606

Amortization of Intangible Lease Assets and Liabilities to Lease Income

(170)

(91)

Amortization of Deferred Financing Costs to Interest Expense

257

149

Gain on Disposition of Assets

(15,637)

Non-Cash Compensation

157

152

Decrease (Increase) in Assets:

Straight-Line Rent Adjustment

(528)

(264)

COVID-19 Rent Repayments

45

385

Other Assets

278

46

Increase (Decrease) in Liabilities:

Accounts Payable, Accrued Expenses, and Other Liabilities

595

906

Prepaid Rent and Deferred Revenue

(371)

120

Net Cash Provided By Operating Activities

13,252

8,866

Cash Flow From Investing Activities:

Acquisition of Real Estate, Including Capitalized Expenditures

(110,062)

(65,930)

Proceeds from Disposition of Assets

71,446

Net Cash Used In Investing Activities

(38,616)

(65,930)

Cash Flow from Financing Activities:

Proceeds from Long-Term Debt

162,500

85,621

Payments on Long-Term Debt

(129,000)

(80,809)

Cash Paid for Loan Fees

(434)

(838)

Proceeds From Stock Issuance, Net

7,647

64,999

Dividends Paid

(7,288)

(5,319)

Net Cash Provided By Financing Activities

33,425

63,654

Net Decrease in Cash and Cash Equivalents

8,061

6,590

Cash and Cash Equivalents, Beginning of Period

9,497

1,894

Cash and Cash Equivalents, End of Period

$

17,558

$

8,484

Reconciliation of Cash to the Consolidated Balance Sheets:

Cash and Cash Equivalents

$

2,427

$

6,294

Restricted Cash

15,131

2,190

Total Cash

$

17,558

$

8,484

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

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ALPINE INCOME PROPERTY TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited, in thousands)

Six Months Ended

June 30, 2022

June 30, 2021

Supplemental Disclosure of Cash Flow Information:

Cash Paid for Interest

$

3,352

$

1,105

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

Unrealized Gain on Cash Flow Hedge

$

9,077

$

661

Right-of-Use Assets and Operating Lease Liability

$

1,831

$

Operating Units Issued in Exchange for Real Estate

$

$

8,010

Underwriting Discounts on Capital Raised Through Issuance of Common Stock

$

$

2,866

Assumption of Mortgage Note Payable

$

$

30,000

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

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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 143 net leased properties located in 98 markets in 35 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 real estate investment trust (“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. 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 from CTO. The remaining five properties in our initial portfolio were contributed by CTO in exchange for 1,223,854 units of the operating partnership (the “OP Units”) for a value of $23.3 million based on the IPO Price. As of June 30, 2022, eight of the properties included within our initial portfolio have been sold. Subsequent to June 30, 2022, one additional property included within our initial portfolio was sold. 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 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, 2022, we have a total ownership interest in the Operating Partnership of 87.4%, with CTO holding, directly and indirectly, a 9.1% ownership interest in the Operating Partnership. The remaining 3.5% 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. The issuance of 479,640 OP Units includes (i) 424,951 OP Units issued as consideration for the portfolio of nine net lease properties acquired on June 30, 2021 and (ii) 54,689 OP Units issued as consideration for the acquisition of one net lease property on July 12, 2021 (see Note 3, “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.

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 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, without regard to the dividends paid deduction or 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.

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 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”) Accounting Standards Codification (“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, 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.

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.

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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.

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 gain 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.

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, 2022 and December 31, 2021, the Company’s allowance for doubtful accounts totaled $0.3 million.  

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, 2022 and December 31, 2021 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.

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RESTRICTED CASH

Restricted cash totaled $15.1 million as of June 30, 2022 of which $0.7 million is being held in a capital replacement and leasing commissions reserve account in connection with our financing of six properties and $14.4 million is being held in various escrow accounts to be reinvested through the like-kind exchange structure into other income properties.

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 10, “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 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 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:

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

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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

 

There were no tenants who accounted for more than 10% of total revenues during the six months ended June 30, 2022. Wells Fargo Bank, NA accounted for 15% of total revenues during the six months ended June 30, 2021.

As of June 30, 2022 and December 31, 2021, 21% and 20%, respectively, of the Company’s real estate portfolio, based on square footage, was located in the state of Texas.

NOTE 3. PROPERTY PORTFOLIO

As of June 30, 2022, the Company’s property portfolio consisted of 143 properties with total square footage of 3.3 million.

Leasing revenue consists of long-term rental revenue from retail and office 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, 2022

June 30, 2021

June 30, 2022

June 30, 2021

Lease Income

Lease Payments

$

10,160

$

5,986

$

19,891

$

11,432

Variable Lease Payments

1,120

611

2,188

1,055

Total Lease Income

$

11,280

$

6,597

$

22,079

$

12,487

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, 2022, are summarized as follows (in thousands):  

 

Year Ending December 31,

    

Amounts

Remainder of 2022

$

19,597

2023

38,681

2024

37,621

2025

36,069

2026

35,202

2027

31,916

2028 and Thereafter (Cumulative)

117,851

Total

$

316,937

 

2022 Activity. During the six months ended June 30, 2022, the Company acquired 35 properties for a combined purchase price of $109.1 million, or a total cost of $110.0 million including capitalized acquisition costs. The properties are located in 17 states, leased to 12 different tenants, and had a weighted average remaining lease term of 9.4 years at the time of acquisition. Of the total acquisition cost, $31.1 million was allocated to land, $67.0 million was allocated to buildings and improvements, $13.1 million was allocated to intangible assets pertaining to the in-place lease value, leasing fees, and above market lease value, and $1.2 million was allocated to intangible liabilities for the below market lease value. The weighted average amortization period for the intangible assets and liabilities was 9.7 years at acquisition.

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During the six months ended June 30, 2022, the Company sold five properties for an aggregate sales price of $72.8 million, generating aggregate gains on sale of $15.6 million. One property was classified as held for sale as of June 30, 2022.  

2021 Activity. During the six months ended June 30, 2021, the Company acquired 23 properties for a combined purchase price of $103.2 million, or a total cost of $103.8 million including capitalized acquisition costs. Of the total acquisition cost, $34.1 million was allocated to land, $57.5 million was allocated to buildings and improvements, $13.9 million was allocated to intangible assets pertaining to the in-place lease value, leasing fees, and above market lease value, and $1.5 million was allocated to intangible liabilities for the below market lease value. The weighted average amortization period for the intangible assets and liabilities was 8.3 years at acquisition. No properties were sold during the six months ended June 30, 2021.

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 June 30, 2022 and December 31, 2021 (in thousands):

June 30, 2022

December 31, 2021

    

Carrying Value

    

Estimated Fair Value

    

Carrying Value

    

Estimated Fair Value

Cash and Cash Equivalents - Level 1

$

2,427

$

2,427

$

8,851

$

8,851

Restricted Cash - Level 1

$

15,131

$

15,131

$

646

$

646

Long-Term Debt - Level 2

$

300,973

$

296,198

$

267,740

$

272,637

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 measured on a recurring basis by level as of June 30, 2022 and December 31, 2021 (in thousands). See Note 10, “Interest Rate Swaps” for further disclosure related to the Company’s interest rate swaps.

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)

June 30, 2022

2026 Term Loan Interest Rate Swap (1)

$

4,640

$

$

4,640

$

2027 Term Loan Interest Rate Swap (2)

$

6,359

$

$

6,359

$

December 31, 2021

2026 Term Loan Interest Rate Swap (1)

$

945

$

$

945

$

2027 Term Loan Interest Rate Swap (2)

$

977

$

$

977

$

(1)Effective May 21, 2021, as amended on April 14, 2022 in connection with the 2026 Term Loan Amendment (hereinafter defined), the Company utilized interest rate swaps to fix SOFR and achieve a weighted average fixed interest rate of 0.80% plus the applicable spread on $60.0 million of the $100.0 million 2026 Term Loan (hereinafter defined) balance (prior to the 2026 Term Loan Amendment, the swap was to fix LIBOR at a weighted average fixed interest rate of 0.81%).
(2)Effective September 30, 2021, as amended on April 14, 2022 in connection with the 2027 Term Loan Amendment (hereinafter defined), the Company utilized interest rate swaps, inclusive of its redesignation of the existing $50.0 million interest rate swap entered into as of April 30, 2020, to fix SOFR and achieve a weighted average fixed interest rate of 0.51% plus the applicable spread on $80.0 million of the $100.0 million 2027 Term Loan (hereinafter defined) balance (prior to the 2027 Term Loan Amendment, the swap was to fix LIBOR at a weighted average fixed interest rate of 0.53%). On September 30, 2021, the Company entered into an additional interest rate swap to extend the fixed interest rate through maturity on January 31, 2027.

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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 June 30, 2022 and December 31, 2021 (in thousands):

As of

June 30, 2022

December 31, 2021

Intangible Lease Assets:

Value of In-Place Leases

$

48,035

$

45,301

Value of Above Market In-Place Leases

4,022

3,623

Value of Intangible Leasing Costs

20,450

19,066

Sub-total Intangible Lease Assets

72,507

67,990

Accumulated Amortization

(11,136)

(9,169)

Sub-total Intangible Lease Assets—Net

61,371

58,821

Intangible Lease Liabilities:

Value of Below Market In-Place Leases

(6,063)

(6,397)

Sub-total Intangible Lease Liabilities

(6,063)

(6,397)

Accumulated Amortization

886

921

Sub-total Intangible Lease Liabilities—Net

(5,177)

(5,476)

Total Intangible Assets and Liabilities—Net

$

56,194

$

53,345

The following table reflects the net amortization of intangible assets and liabilities during the three and six months ended June 30, 2022 and 2021 (in thousands):

Three Months Ended

Six Months Ended

June 30, 2022

June 30, 2021

June 30, 2022

June 30, 2021

Amortization Expense

$

2,165

$

1,303

$

4,291

$

2,498

Accretion to Properties Revenue

(69)

(50)

(170)

(91)

Net Amortization of Intangible Assets and Liabilities

$

2,096

$

1,253

$

4,121

$

2,407

The estimated future amortization expense (income) related to net intangible assets and liabilities is as follows (in thousands):

Year Ending December 31,

Future Amortization Expense

Future Accretion to Property Revenue

Net Future Amortization of Intangible Assets and Liabilities

Remainder of 2022

$

4,324

$

(143)

$

4,181

2023

8,420

(292)