SEC Filing - Alpine Income Property Trust

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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 September 30, 2023

☐	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 October 12, 2023 was 13,699,961.

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INDEX


		Page
		No.
PART I—FINANCIAL INFORMATION

Item 1. Financial Statements		3

Consolidated Balance Sheets – September 30, 2023 (Unaudited) and December 31, 2022		3

Consolidated Statements of Operations – Three and nine months ended September 30, 2023 and 2022 (Unaudited)		4

Consolidated Statements of Comprehensive Income – Three and nine months ended September 30, 2023 and 2022 (Unaudited)		5

Consolidated Statements of Stockholders’ Equity – Three and nine months ended September 30, 2023 and 2022 (Unaudited)		6

Consolidated Statements of Cash Flows – Nine months ended September 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		30

Item 3. Quantitative and Qualitative Disclosures About Market Risk		39

Item 4. Controls and Procedures		39

PART II—OTHER INFORMATION		39

Item 1. Legal Proceedings		39

Item 1A. Risk Factors		39

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42

Item 3. Defaults Upon Senior Securities		42

Item 4. Mine Safety Disclosures		42

Item 5. Other Information		42

Item 6. Exhibits		43

SIGNATURES		44

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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) September 30, 2023		December 31, 2022
ASSETS
Real Estate:
Land, at Cost	$	150,425	$	176,857
Building and Improvements, at Cost		332,654		322,510
Total Real Estate, at Cost		483,079		499,367
Less, Accumulated Depreciation		(31,517)		(22,313)
Real Estate—Net		451,562		477,054
Assets Held for Sale		4,410		—
Commercial Loans and Investments		6,874		—
Cash and Cash Equivalents		6,265		9,018
Restricted Cash		11,166		4,026
Intangible Lease Assets—Net		51,624		60,432
Straight-Line Rent Adjustment		1,483		1,668
Other Assets		24,293		21,233
Total Assets	$	557,677	$	573,431
LIABILITIES AND EQUITY
Liabilities:
Accounts Payable, Accrued Expenses, and Other Liabilities	$	5,625	$	4,411
Prepaid Rent and Deferred Revenue		1,884		1,479
Intangible Lease Liabilities—Net		5,184		5,050
Long-Term Debt		249,099		267,116
Total Liabilities		261,792		278,056
Commitments and Contingencies—See Note 18
Equity:
Preferred Stock, $0.01 par value per share, 100 million shares authorized, no shares issued and outstanding as of September 30, 2023 and December 31, 2022		—		—
Common Stock, $0.01 par value per share, 500 million shares authorized, 13,769,609 shares issued and outstanding as of September 30, 2023 and 13,394,677 shares issued and outstanding as of December 31, 2022		138		134
Additional Paid-in Capital		244,300		236,841
Retained Earnings		1,075		10,042
Accumulated Other Comprehensive Income		17,706		14,601
Stockholders' Equity		263,219		261,618
Noncontrolling Interest		32,666		33,757
Total Equity		295,885		295,375
Total Liabilities and Equity	$	557,677	$	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				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Revenues:
Lease Income	$	11,447	$	11,520	$	33,951	$	33,599
Interest Income from Commercial Loans and Investments		112		—		112		—
Total Revenues		11,559		11,520		34,063		33,599
Operating Expenses:
Real Estate Expenses		1,722		1,816		4,731		4,193
General and Administrative Expenses		1,652		1,460		4,823		4,370
Provision for Impairment		2,864		—		2,864		—
Depreciation and Amortization		6,528		5,866		19,286		17,232
Total Operating Expenses		12,766		9,142		31,704		25,795
Gain on Disposition of Assets		2,586		11,611		7,782		27,248
Gain (Loss) on Extinguishment of Debt		—		(284)		23		(284)
Net Income From Operations		1,379		13,705		10,164		34,768
Investment and Other Income		125		9		226		9
Interest Expense		(2,443)		(2,544)		(7,494)		(6,347)
Net Income (Loss)		(939)		11,170		2,896		28,430
Less: Net (Income) Loss Attributable to Noncontrolling Interest		102		(1,400)		(314)		(3,572)
Net Income (Loss) Attributable to Alpine Income Property Trust, Inc.	$	(837)	$	9,770	$	2,582	$	24,858

Per Common Share Data:
Net Income (Loss) Attributable to Alpine Income Property Trust, Inc.
Basic	$	(0.06)	$	0.82	$	0.18	$	2.11
Diluted	$	(0.05)	$	0.72	$	0.16	$	1.84

Weighted Average Number of Common Shares:
Basic		13,946,194		11,888,171		14,001,774		11,799,151
Diluted		15,649,688		13,591,665		15,705,268		13,502,645

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				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Net Income (Loss) Attributable to Alpine Income Property Trust, Inc.	$	(837)	$	9,770	$	2,582	$	24,858
Other Comprehensive Income
Cash Flow Hedging Derivative - Interest Rate Swaps		1,492		4,762		3,105		13,839
Total Other Comprehensive Income		1,492		4,762		3,105		13,839
Total Comprehensive Income	$	655	$	14,532	$	5,687	$	38,697

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 September 30, 2023:


	Common Stock at Par		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Stockholders' Equity		Noncontrolling Interest		Total Equity
Balance July 1, 2023	$	140	$	248,958	$	5,731	$	16,214	$	271,043	$	33,237	$	304,280
Net Loss		—		—		(837)		—		(837)		(102)		(939)
Stock Repurchases		(2)		(4,709)		—		—		(4,711)		—		(4,711)
Stock Issuance to Directors		—		79		—		—		79		—		79
Payment of Equity Issuance Costs		—		(28)		—		—		(28)		—		(28)
Cash Dividends ($0.275 per share)		—		—		(3,819)		—		(3,819)		(469)		(4,288)
Other Comprehensive Income		—		—		—		1,492		1,492		—		1,492
Balance September 30, 2023	$	138	$	244,300	$	1,075	$	17,706	$	263,219	$	32,666	$	295,885

For the three months ended September 30, 2022:


	Common Stock at Par		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Stockholders' Equity		Noncontrolling Interest		Total Equity
Balance July 1, 2022	$	119	$	208,706	$	2,301	$	10,999	$	222,125	$	32,631	$	254,756
Net Income		—		—		9,770		—		9,770		1,400		11,170
Stock Issuance to Directors		—		79		—		—		79		—		79
Stock Issuance, Net of Equity Issuance Costs		—		812		—		—		812		—		812
Cash Dividends ($0.275 per share)		—		—		(3,275)		—		(3,275)		(469)		(3,744)
Other Comprehensive Income		—		—		—		4,762		4,762		—		4,762
Balance September 30, 2022	$	119	$	209,597	$	8,796	$	15,761	$	234,273	$	33,562	$	267,835

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ALPINE INCOME PROPERTY TRUST, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

(Unaudited, in thousands, except per share data)

For the nine months ended September 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		—		—		2,582		—		2,582		314		2,896
Stock Repurchases		(3)		(5,073)		—		—		(5,076)		—		(5,076)
Stock Issuance to Directors		—		224		—		—		224		—		224
Stock Issuance, Net of Equity Issuance Costs		7		12,308		—		—		12,315		—		12,315
Cash Dividends ($0.825 per share)		—		—		(11,549)		—		(11,549)		(1,405)		(12,954)
Other Comprehensive Income		—		—		—		3,105		3,105		—		3,105
Balance September 30, 2023	$	138	$	244,300	$	1,075	$	17,706	$	263,219	$	32,666	$	295,885

For the nine months ended September 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		—		—		24,858		—		24,858		3,572		28,430
Stock Issuance to Directors		—		237		—		—		237		—		237
Stock Issuance, Net of Equity Issuance Costs		5		8,454		—		—		8,459		—		8,459
Cash Dividends ($0.815 per share)		—		—		(9,643)		—		(9,643)		(1,389)		(11,032)
Other Comprehensive Income		—		—		—		13,839		13,839		—		13,839
Balance September 30, 2022	$	119	$	209,597	$	8,796	$	15,761	$	234,273	$	33,562	$	267,835

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)


	Nine Months Ended
	September 30, 2023		September 30, 2022
Cash Flow From Operating Activities:
Net Income	$	2,896	$	28,430
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation and Amortization		19,286		17,232
Amortization of Intangible Lease Assets and Liabilities to Lease Income		(299)		(248)
Amortization of Deferred Financing Costs to Interest Expense		530		407
Accretion of Commercial Loans and Investments Origination Fees		(4)		—
Gain on Disposition of Assets		(7,782)		(27,248)
Provision for Impairment		2,864		—
Non-Cash Compensation		238		236
Decrease (Increase) in Assets:
Straight-Line Rent Adjustment		(386)		(737)
COVID-19 Rent Repayments		—		45
Other Assets		(237)		(837)
Increase (Decrease) in Liabilities:
Accounts Payable, Accrued Expenses, and Other Liabilities		1,233		566
Prepaid Rent and Deferred Revenue		405		(237)
Net Cash Provided By Operating Activities		18,744		17,609
Cash Flow From Investing Activities:
Acquisition of Real Estate, Including Capitalized Expenditures		(81,395)		(147,148)
Proceeds from Disposition of Assets		97,919		120,252
Acquisition of Commercial Loans and Investments		(6,870)		—
Net Cash Provided By (Used In) Investing Activities		9,654		(26,896)
Cash Flow from Financing Activities:
Proceeds from Long-Term Debt		4,750		222,500
Payments on Long-Term Debt		(23,000)		(203,500)
Cash Paid for Loan Fees		(46)		(484)
Repurchase of Common Stock		(5,076)		—
Proceeds From Stock Issuance, Net		12,315		8,459
Dividends Paid		(12,954)		(11,032)
Net Cash Provided By (Used In) Financing Activities		(24,011)		15,943
Net Increase in Cash and Cash Equivalents		4,387		6,656
Cash and Cash Equivalents and Restricted Cash, Beginning of Period		13,044		9,497
Cash and Cash Equivalents and Restricted Cash, End of Period	$	17,431	$	16,153

Reconciliation of Cash to the Consolidated Balance Sheets:
Cash and Cash Equivalents	$	6,265	$	3,834
Restricted Cash		11,166		12,319
Total Cash	$	17,431	$	16,153

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)


	Nine Months Ended
	September 30, 2023		September 30, 2022
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest	$	6,924	$	5,806

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Unrealized Gain on Cash Flow Hedge	$	3,105	$	13,839
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 138 net leased properties located in 103 markets in 35 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 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 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 September 30, 2023, we have a total ownership interest in the Operating Partnership of 89.0%, with CTO holding, directly and indirectly, a 7.9% ownership interest in the Operating Partnership. The remaining 3.1% 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

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 (“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: income properties and commercial loans and investments. The Company has no other reportable segments. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of evaluating financial performance.

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.

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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 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 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 September 30, 2023 and December 31, 2022, the Company’s allowance for doubtful accounts totaled $0.3 million and $0.4 million, respectively.

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. 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.

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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 September 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 $11.2 million as of September 30, 2023, of which $10.6 million is being held in various escrow accounts to be reinvested through the like-kind exchange structure into other income properties and $0.6 million is being held in an interest, tax, and insurance reserve account related to the Company’s commercial loan investment.

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 12, “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 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.

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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:

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Level 1 – Valuation is based upon quoted prices in active markets for identical assets or liabilities.

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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.

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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 nine months ended September 30, 2023, Walgreens accounted for 11% of total revenues. There were no tenants who accounted for more than 10% of total revenues during the nine months ended September 30, 2022.

As of September 30, 2023, 13%, 11%, and 10% 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.

RECLASSIFICATIONS

Certain items in the prior period’s consolidated statement of operations have been reclassified to conform to the presentation for the three and nine months ending September 30, 2023. There was no impact to retained earnings as a result of the reclassifications.

NOTE 3. PROPERTY PORTFOLIO

As of September 30, 2023, the Company’s property portfolio consisted of 138 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				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Lease Income
Lease Payments	$	10,049	$	9,927	$	30,187	$	29,818
Variable Lease Payments		1,398		1,593		3,764		3,781
Total Lease Income	$	11,447	$	11,520	$	33,951	$	33,599

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Minimum Future Rental Receipts. Minimum future rental receipts under non-cancelable operating leases, excluding percentage rent and other lease payments that are not fixed and determinable, having remaining terms in excess of one year subsequent to September 30, 2023, are summarized as follows (in thousands):


Year Ending December 31,	Amounts
Remainder of 2023	$	9,737
2024		38,763
2025		37,041
2026		36,192
2027		32,762
2028		28,859
2029 and Thereafter (Cumulative)		94,062
Total	$	277,416

2023 Activity. During the nine months ended September 30, 2023, the Company acquired 12 properties for a combined purchase price of $79.9 million, or a cost of $81.2 million including capitalized acquisition costs. The properties are located in seven different states and had a weighted average remaining lease term of 8.7 years at the time of acquisition. Of the total acquisition cost, $22.1 million was allocated to land, $53.0 million was allocated to buildings and improvements, $8.0 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 9.6 years at acquisition.

During the nine months ended September 30, 2023, the Company sold 22 properties for an aggregate sales price of $99.6 million, generating aggregate gains on sale of $7.8 million. Seven properties were classified as held for sale as of September 30, 2023.

2022 Activity. During the nine months ended September 30, 2022, the Company acquired 44 properties for a combined purchase price of $145.7 million, or a total cost of $147.0 million including capitalized acquisition costs. The properties are located in 22 states, leased to 17 different tenants, and had a weighted average remaining lease term of 8.9 years at the time of acquisition. Of the total acquisition cost, $37.0 million was allocated to land, $94.1 million was allocated to buildings and improvements, $17.6 million was allocated to intangible assets pertaining to the in-place lease value, leasing fees, and above market lease value, and $1.7 million was allocated to intangible liabilities for the below market lease value. The weighted average amortization period for the intangible assets and liabilities was 9.2 years at acquisition.

During the nine months ended September 30, 2022, the Company sold 11 properties for an aggregate sales price of $123.3 million, generating aggregate gains on sale of $27.2 million.

NOTE 4. COMMERCIAL LOANS AND INVESTMENTS

2023 Activity. On July 25, 2023, the Company originated a construction loan secured by the property and improvements to be constructed thereon for a 33-acre Wawa-anchored land development project in Greenwood, Indiana for $7.8 million. The construction loan matures on July 25, 2025, bears a fixed interest rate of 8.50% that increases to 9.25% on July 25, 2024, and requires payments of interest only prior to maturity. Funding of the loan will occur as the borrower completes the underlying construction. As of September 30, 2023, the Company has disbursed $6.9 million to the borrower.

The Company’s commercial loans and investments were comprised of the following at September 30, 2023 (in thousands):


Description	Date of Investment	Maturity Date	Original Face Amount		Current Face Amount		Carrying Value		Coupon Rate
Construction Loan – Wawa Land Development – Greenwood, IN	July 2023	July 2025	$	7,800	$	6,909	$	6,874	8.50%

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The carrying value of the commercial loans and investments at September 30, 2023 consisted of the following (in thousands). There were no commercial loans and investments as of December 31, 2022:


	As of
	September 30, 2023		December 31, 2022
Current Face Amount	$	6,909	$	—
Unaccreted Origination Fees		(35)		—
Total Commercial Loans and Investments	$	6,874	$	—

NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the carrying value and estimated fair value of the Company’s financial instruments not carried at fair value on the consolidated balance sheets at September 30, 2023 and December 31, 2022 (in thousands):


	September 30, 2023				December 31, 2022
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Cash and Cash Equivalents - Level 1	$	6,265	$	6,265	$	9,018	$	9,018
Restricted Cash - Level 1	$	11,166	$	11,166	$	4,026	$	4,026
Commercial Loans and Investments - Level 2	$	6,874	$	7,015	$	—	$	—
Long-Term Debt - Level 2	$	249,099	$	230,827	$	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 September 30, 2023 and December 31, 2022 (in thousands). See Note 12, “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)
September 30, 2023
2026 Term Loan Interest Rate Swap ⁽¹⁾	$	6,639	$	—	$	6,639	$	—
2027 Term Loan Interest Rate Swap ⁽²⁾	$	8,765	$	—	$	8,765	$	—
Credit Facility Interest Rate Swap ⁽³⁾	$	2,302	$	—	$	2,302	$	—
December 31, 2022
2026 Term Loan Interest Rate Swap ⁽¹⁾	$