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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, 2023

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)

(407) 904-3324

(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 13, 2023 was 14,049,941.

Table of Contents

INDEX

Page

    

No.

PART I—FINANCIAL INFORMATION

Item 1.     Financial Statements

3

Consolidated Balance Sheets – June 30, 2023 (Unaudited) and December 31, 2022

3

Consolidated Statements of Operations – Three and six months ended June 30, 2023 and 2022 (Unaudited)

4

Consolidated Statements of Comprehensive Income – Three and six months ended June 30, 2023 and 2022 (Unaudited)

5

Consolidated Statements of Stockholders’ Equity – Three and six months ended June 30, 2023 and 2022 (Unaudited)

6

Consolidated Statements of Cash Flows – Six months ended June 30, 2023 and 2022 (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

36

Item 4.     Controls and Procedures

36

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

37

Item 3.     Defaults Upon Senior Securities

37

Item 4.     Mine Safety Disclosures

37

Item 5.     Other Information

37

Item 6.     Exhibits

38

SIGNATURES

39

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, 2023

    

December 31, 2022

ASSETS

Real Estate:

Land, at Cost

$

151,703

$

176,857

Building and Improvements, at Cost

332,202

322,510

Total Real Estate, at Cost

483,905

499,367

Less, Accumulated Depreciation

(28,569)

(22,313)

Real Estate—Net

455,336

477,054

Assets Held for Sale

5,488

Cash and Cash Equivalents

7,755

9,018

Restricted Cash

20,100

4,026

Intangible Lease Assets—Net

53,402

60,432

Straight-Line Rent Adjustment

1,736

1,668

Other Assets

22,868

21,233

Total Assets

$

566,685

$

573,431

LIABILITIES AND EQUITY

Liabilities:

Accounts Payable, Accrued Expenses, and Other Liabilities

$

6,547

$

4,411

Prepaid Rent and Deferred Revenue

1,776

1,479

Intangible Lease Liabilities—Net

5,062

5,050

Long-Term Debt

249,020

267,116

Total Liabilities

262,405

278,056

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, 2023 and December 31, 2022

Common Stock, $0.01 par value per share, 500 million shares authorized, 14,045,001 shares issued and outstanding as of June 30, 2023 and 13,394,677 shares issued and outstanding as of December 31, 2022

140

134

Additional Paid-in Capital

248,958

236,841

Retained Earnings

5,731

10,042

Accumulated Other Comprehensive Income

16,214

14,601

Stockholders' Equity

271,043

261,618

Noncontrolling Interest

33,237

33,757

Total Equity

304,280

295,375

Total Liabilities and Equity

$

566,685

$

573,431

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, 2023

June 30, 2022

June 30, 2023

June 30, 2022

Revenues:

Lease Income

$

11,439

$

11,280

$

22,605

$

22,079

Total Revenues

11,439

11,280

22,605

22,079

Operating Expenses:

Real Estate Expenses

1,575

1,285

3,009

2,377

General and Administrative Expenses

1,656

1,479

3,171

2,910

Depreciation and Amortization

6,423

5,694

12,758

11,366

Total Operating Expenses

9,654

8,458

18,938

16,653

Gain on Disposition of Assets

743

15,637

5,196

15,637

Gain on Extinguishment of Debt

23

Net Income From Operations

2,528

18,459

8,886

21,063

Interest Expense

2,438

2,123

5,051

3,803

Net Income

90

16,336

3,835

17,260

Less: Net Income Attributable to Noncontrolling Interest

(10)

(2,054)

(416)

(2,172)

Net Income Attributable to Alpine Income Property Trust, Inc.

$

80

$

14,282

$

3,419

$

15,088

Per Common Share Data:

Net Income Attributable to Alpine Income Property Trust, Inc.

Basic

$

0.01

$

1.21

$

0.24

$

1.28

Diluted

$

0.01

$

1.05

$

0.22

$

1.12

Weighted Average Number of Common Shares:

Basic

14,059,173

11,844,108

14,030,025

11,753,904

Diluted

15,762,667

13,547,602

15,733,519

13,457,398

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, 2023

    

June 30, 2022

June 30, 2023

    

June 30, 2022

Net Income Attributable to Alpine Income Property Trust, Inc.

$

80

$

14,282

$

3,419

$

15,088

Other Comprehensive Income

Cash Flow Hedging Derivative - Interest Rate Swaps

4,379

2,245

1,613

9,077

Total Other Comprehensive Income

4,379

2,245

1,613

9,077

Total Comprehensive Income

$

4,459

$

16,527

$

5,032

$

24,165

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, 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

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 ($0.270 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

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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, 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

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 ($0.540 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

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, 2023

June 30, 2022

Cash Flow From Operating Activities:

Net Income

$

3,835

$

17,260

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

Depreciation and Amortization

12,758

11,366

Amortization of Intangible Lease Assets and Liabilities to Lease Income

(189)

(170)

Amortization of Deferred Financing Costs to Interest Expense

351

257

Gain on Disposition of Assets

(5,196)

(15,637)

Non-Cash Compensation

159

157

Decrease (Increase) in Assets:

Straight-Line Rent Adjustment

(274)

(528)

COVID-19 Rent Repayments

45

Other Assets

(221)

278

Increase (Decrease) in Liabilities:

Accounts Payable, Accrued Expenses, and Other Liabilities

2,156

595

Prepaid Rent and Deferred Revenue

297

(371)

Net Cash Provided By Operating Activities

13,676

13,252

Cash Flow From Investing Activities:

Acquisition of Real Estate, Including Capitalized Expenditures

(61,672)

(110,062)

Proceeds from Disposition of Assets

77,775

71,446

Net Cash Provided By (Used In) Investing Activities

16,103

(38,616)

Cash Flow from Financing Activities:

Proceeds from Long-Term Debt

1,250

162,500

Payments on Long-Term Debt

(19,500)

(129,000)

Cash Paid for Loan Fees

(30)

(434)

Repurchase of Common Stock

(365)

Proceeds From Stock Issuance, Net

12,343

7,647

Dividends Paid

(8,666)

(7,288)

Net Cash Provided By (Used In) Financing Activities

(14,968)

33,425

Net Increase in Cash and Cash Equivalents

14,811

8,061

Cash and Cash Equivalents and Restricted Cash, Beginning of Period

13,044

9,497

Cash and Cash Equivalents and Restricted Cash, End of Period

$

27,855

$

17,558

Reconciliation of Cash to the Consolidated Balance Sheets:

Cash and Cash Equivalents

$

7,755

$

2,427

Restricted Cash

20,100

15,131

Total Cash

$

27,855

$

17,558

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, 2023

June 30, 2022

Supplemental Disclosure of Cash Flow Information:

Cash Paid for Interest

$

4,681

$

3,352

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

Unrealized Gain on Cash Flow Hedge

$

1,613

$

9,077

Right-of-Use Assets and Operating Lease Liability

$

$

1,831

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 107 markets in 34 states. The properties in our portfolio are primarily subject to long-term, net leases, which generally require the tenant to pay 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 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”). 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, 2023, we have a total ownership interest in the Operating Partnership of 89.2%, with CTO holding, directly and indirectly, a 7.8% ownership interest in the Operating Partnership. The remaining 3.0% ownership interest is held by an unrelated third party in connection with the issuance of units of the Operating Partnership (“OP Units”) as consideration for a portfolio of net lease properties acquired during the year ended December 31, 2021. 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 or provides oversight of 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, 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.

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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, 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.

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.

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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 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, 2023 and December 31, 2022, the Company’s allowance for doubtful accounts totaled $0.4 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, 2023 and December 31, 2022 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 $20.1 million as of June 30, 2023 due to property dispositions that occurred during the three months ended June 30, 2023 (See Note 3, “Property Portfolio”), which is held in various escrow accounts to be reinvested through the like-kind exchange structure into other income properties.

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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, 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 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

 

During the six months ended June 30, 2023, Walgreens accounted for 12% of total revenues. There were no tenants who accounted for more than 10% of total revenues during the six months ended June 30, 2022.

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As of June 30, 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. As of December 31, 2022, 19% 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, 2023, the Company’s property portfolio consisted of 143 properties with total square footage of 3.9 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, 2023

June 30, 2022

June 30, 2023

June 30, 2022

Lease Income

Lease Payments

$

9,975

$

10,160

$

20,138

$

19,891

Variable Lease Payments

1,464

1,120

2,467

2,188

Total Lease Income

$

11,439

$

11,280

$

22,605

$

22,079

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, 2023, are summarized as follows (in thousands):  

 

Year Ending December 31,

    

Amounts

Remainder of 2023

$

19,720

2024

38,648

2025

36,917

2026

35,994

2027

32,617

2028

28,734

2029 and Thereafter (Cumulative)

101,338

Total

$

293,968

 

2023 Activity. During the six months ended June 30, 2023, the Company acquired 9 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. Five properties were classified as held for sale as of June 30, 2023.

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

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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.

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.

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, 2023 and December 31, 2022 (in thousands):

June 30, 2023

December 31, 2022

    

Carrying

Value

    

Estimated Fair Value

    

Carrying

Value

    

Estimated Fair Value

Cash and Cash Equivalents - Level 1

$

7,755

$

7,755

$

9,018

$

9,018

Restricted Cash - Level 1

$

20,100

$

20,100

$

4,026

$

4,026

Long-Term Debt - Level 2

$

249,020

$

230,904

$

267,116

$

250,568

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, 2023 and December 31, 2022 (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, 2023

2026 Term Loan Interest Rate Swap (1)

$

6,374

$

$

6,374

$

2027 Term Loan Interest Rate Swap (2)

$

8,332

$

$

8,332

$

Credit Facility Interest Rate Swap (3)

$

1,508

$

$

1,508

$

December 31, 2022

2026 Term Loan Interest Rate Swap (1)

$

6,125

$

$

6,125

$

2027 Term Loan Interest Rate Swap (2)

$

8,476

$

$

8,476

$

(1)As of June 30, 2023, the Company has utilized interest rate swaps to fix SOFR and achieve a weighted average fixed interest rate of 2.05% plus 0.10% and the applicable spread on the $100 million 2026 Term Loan (hereinafter defined) balance. See Note 10, “Interest Rate Swaps” for further disclosure related to the Company’s interest rate swaps.
(2)As of June 30, 2023, the Company has utilized interest rate swaps to fix SOFR and achieve a weighted average fixed interest rate of 1.18% plus 0.10% and the applicable spread on the $100 million 2027 Term Loan (hereinafter defined) balance. See Note 10, “Interest Rate Swaps” for further disclosure related to the Company’s interest rate swaps.
(3)As of June 30, 2023, the Company has utilized an interest rate swap to fix SOFR and achieve a fixed interest rate of 3.21% plus 0.10% and the applicable spread on $50 million of the outstanding balance on the Credit Facility (hereinafter defined). See Note 10, “Interest Rate Swaps” for further disclosure related to the Company’s interest rate swaps.

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Table of Contents

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, 2023 and December 31, 2022 (in thousands):

As of

June 30, 2023

December 31, 2022

Intangible Lease Assets:

Value of In-Place Leases

$

48,037

$

49,974

Value of Above Market In-Place Leases

3,116

3,897

Value of Intangible Leasing Costs

19,275

20,579

Sub-total Intangible Lease Assets

70,428

74,450

Accumulated Amortization

(17,026)

(14,018)

Sub-total Intangible Lease Assets—Net

53,402

60,432

Intangible Lease Liabilities:

Value of Below Market In-Place Leases

(6,527)

(6,130)

Sub-total Intangible Lease Liabilities

(6,527)

(6,130)

Accumulated Amortization

1,465

1,080

Sub-total Intangible Lease Liabilities—Net

(5,062)

(5,050)

Total Intangible Assets and Liabilities—Net

$

48,340

$

55,382

The following table reflects the net amortization of intangible assets and liabilities during the three and six months ended June 30, 2023 and 2022 (in thousands):

Three Months Ended

Six Months Ended

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

Amortization Expense

$

2,213

$

2,165

$

4,503

$

4,291

Accretion to Properties Revenue

(102)

(69)

(189)

(170)

Net Amortization of Intangible Assets and Liabilities

$

2,111

$

2,096

$

4,314

$