UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2021
OR
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-11350
CTO REALTY GROWTH, INC.
(Exact name of registrant as specified in its charter)
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Maryland |
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59-0483700 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
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1140 N. Williamson Blvd., Suite 140 |
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Daytona Beach, Florida |
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32114 |
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(Address of principal executive offices) |
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(Zip Code) |
(386) 274-2202
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class: |
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Trading Symbols |
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Name of each exchange on which registered: |
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Common Stock, $0.01 par value per share |
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CTO |
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NYSE |
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6.375% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share |
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CTO PrA |
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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.
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Large Accelerated Filer |
☐ |
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Accelerated Filer |
☒ |
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Non-accelerated Filer |
☐ |
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Smaller Reporting Company |
☐ |
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Emerging Growth Company |
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 21, 2021, there were 5,962,150 shares of the registrant’s common stock, $0.01 par value per share, outstanding.
INDEX
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Page |
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No. |
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Consolidated Balance Sheets – September 30, 2021 (Unaudited) and December 31, 2020 |
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3 |
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4 |
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5 |
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6 |
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Consolidated Statements of Cash Flows – Nine months ended September 30, 2021 and 2020 (Unaudited) |
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7 |
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9 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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47 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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61 |
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61 |
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62 |
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62 |
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62 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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62 |
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62 |
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62 |
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62 |
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63 |
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64 |
2
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CTO REALTY GROWTH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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As of |
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(Unaudited) September 30,
|
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December 31,
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ASSETS |
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Real Estate: |
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Land, at Cost |
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$ |
162,297 |
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$ |
166,512 |
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Building and Improvements, at Cost |
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256,902 |
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305,614 |
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Other Furnishings and Equipment, at Cost |
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|
701 |
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672 |
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Construction in Process, at Cost |
|
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1,675 |
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|
323 |
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Total Real Estate, at Cost |
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421,575 |
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473,121 |
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Less, Accumulated Depreciation |
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(22,385) |
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(30,737) |
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Real Estate—Net |
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399,190 |
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442,384 |
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Land and Development Costs |
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6,702 |
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7,083 |
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Intangible Lease Assets—Net |
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64,624 |
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50,176 |
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Assets Held for Sale—See Note 25 |
|
|
835 |
|
|
833 |
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Investment in Joint Ventures |
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25,575 |
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48,677 |
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Investment in Alpine Income Property Trust, Inc. |
|
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37,468 |
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30,574 |
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Mitigation Credits |
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3,405 |
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2,622 |
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Mitigation Credit Rights |
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21,573 |
|
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— |
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Commercial Loan and Master Lease Investments |
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38,993 |
|
|
38,320 |
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Cash and Cash Equivalents |
|
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7,005 |
|
|
4,289 |
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Restricted Cash |
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68,546 |
|
|
29,536 |
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Refundable Income Taxes |
|
|
856 |
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26 |
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Deferred Income Taxes—Net |
|
|
215 |
|
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— |
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Other Assets—See Note 13 |
|
|
11,695 |
|
|
12,180 |
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Total Assets |
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$ |
686,682 |
|
$ |
666,700 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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|
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Liabilities: |
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Accounts Payable |
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$ |
1,402 |
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$ |
1,047 |
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Accrued and Other Liabilities—See Note 19 |
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12,716 |
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9,090 |
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Deferred Revenue—See Note 20 |
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3,656 |
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3,319 |
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Intangible Lease Liabilities—Net |
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3,036 |
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24,163 |
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Liabilities Held for Sale—See Note 25 |
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|
831 |
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831 |
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Deferred Income Taxes—Net |
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— |
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3,521 |
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Long-Term Debt |
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229,894 |
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273,830 |
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Total Liabilities |
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251,535 |
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315,801 |
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Commitments and Contingencies—See Note 23 |
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Stockholders’ Equity: |
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Preferred Stock – 100,000,000 shares authorized; $0.01 par value, 6.375% Series A Cumulative Redeemable Preferred Stock, $25.00 Per Share Liquidation Preference, 3,000,000 shares issued and outstanding at September 30, 2021; 50,000 shares authorized; $100.00 par value, no shares issued or outstanding at December 31, 2020 |
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30 |
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— |
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Common Stock – 500,000,000 shares authorized; $0.01 par value, 5,960,912 shares issued and outstanding at September 30, 2021; 25,000,000 shares authorized; $1.00 par value, 7,310,680 shares issued and 5,915,756 shares outstanding at December 31, 2020 |
|
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60 |
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7,250 |
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Treasury Stock – 0 shares at September 30, 2021 and 1,394,924 shares at December 31, 2020 |
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— |
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(77,541) |
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Additional Paid-In Capital |
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86,899 |
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83,183 |
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Retained Earnings |
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348,681 |
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339,917 |
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Accumulated Other Comprehensive Loss |
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(523) |
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(1,910) |
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Total Stockholders’ Equity |
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435,147 |
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350,899 |
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Total Liabilities and Stockholders’ Equity |
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$ |
686,682 |
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$ |
666,700 |
The accompanying notes are an integral part of these consolidated financial statements.
3
CTO REALTY GROWTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share, per share and dividend data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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September 30, |
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September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Revenues |
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Income Properties |
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$ |
13,734 |
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$ |
12,933 |
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$ |
36,757 |
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$ |
35,409 |
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Management Fee Income |
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|
940 |
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683 |
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2,361 |
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2,080 |
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Interest Income from Commercial Loan and Master Lease Investments |
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726 |
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413 |
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2,136 |
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2,300 |
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Real Estate Operations |
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1,177 |
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543 |
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4,318 |
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|
631 |
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Total Revenues |
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16,577 |
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14,572 |
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|
45,572 |
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|
40,420 |
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Direct Cost of Revenues |
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|
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Income Properties |
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(3,984) |
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(3,592) |
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(9,688) |
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(8,273) |
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Real Estate Operations |
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(252) |
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(1,682) |
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(867) |
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(3,263) |
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Total Direct Cost of Revenues |
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|
(4,236) |
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(5,274) |
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(10,555) |
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|
(11,536) |
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General and Administrative Expenses |
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(2,680) |
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|
(3,341) |
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(8,477) |
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(8,604) |
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Impairment Charges |
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— |
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— |
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(16,527) |
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|
(1,905) |
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Depreciation and Amortization |
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(5,567) |
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(4,761) |
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(15,428) |
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(14,334) |
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Total Operating Expenses |
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(12,483) |
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(13,376) |
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(50,987) |
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(36,379) |
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Gain on Disposition of Assets |
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22,666 |
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|
289 |
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|
28,106 |
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|
7,365 |
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Gain (Loss) on Extinguishment of Debt |
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— |
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— |
|
|
(641) |
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|
1,141 |
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Other Gains and Income |
|
|
22,666 |
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|
289 |
|
|
27,465 |
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|
8,506 |
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Total Operating Income |
|
|
26,760 |
|
|
1,485 |
|
|
22,050 |
|
|
12,547 |
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Investment and Other Income (Loss) |
|
|
(797) |
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|
(1,030) |
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|
8,438 |
|
|
(5,746) |
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Interest Expense |
|
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(1,986) |
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|
(2,478) |
|
|
(6,851) |
|
|
(8,384) |
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Income (Loss) Before Income Tax Benefit (Expense) |
|
|
23,977 |
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|
(2,023) |
|
|
23,637 |
|
|
(1,583) |
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Income Tax Benefit (Expense) |
|
|
(30) |
|
|
501 |
|
|
4,371 |
|
|
410 |
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Net Income (Loss) Attributable to the Company |
|
|
23,947 |
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(1,522) |
|
|
28,008 |
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(1,173) |
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Distributions to Preferred Stockholders |
|
|
(1,129) |
|
|
— |
|
|
(1,129) |
|
|
— |
|
Net Income (Loss) Attributable to Common Stockholders |
|
$ |
22,818 |
|
$ |
(1,522) |
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$ |
26,879 |
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$ |
(1,173) |
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Per Share Information—See Note 15: |
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|
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Basic and Diluted Net Income (Loss) Attributable to Common Stockholders |
|
$ |
3.87 |
|
$ |
(0.33) |
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$ |
4.56 |
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$ |
(0.25) |
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Weighted Average Number of Common Shares |
|
|
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|
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|
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Basic |
|
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5,901,095 |
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|
4,654,329 |
|
|
5,892,900 |
|
|
4,673,049 |
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Diluted |
|
|
5,901,095 |
|
|
4,654,329 |
|
|
5,892,900 |
|
|
4,673,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Dividends Declared and Paid - Preferred Stock |
|
$ |
0.3763 |
|
$ |
— |
|
$ |
0.3763 |
|
$ |
— |
|
Dividends Declared and Paid - Common Stock |
|
$ |
1.00 |
|
$ |
0.40 |
|
$ |
3.00 |
|
$ |
0.90 |
The accompanying notes are an integral part of these consolidated financial statements.
4
CTO REALTY GROWTH, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)
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Three Months Ended |
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Nine Months Ended |
||||||||
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September 30, |
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September 30, |
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September 30, |
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September 30, |
||||
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2021 |
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2020 |
|
2021 |
|
2020 |
||||
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Net Income (Loss) Attributable to the Company |
|
$ |
23,947 |
|
$ |
(1,522) |
|
$ |
28,008 |
|
$ |
(1,173) |
|
Other Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
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Cash Flow Hedging Derivative - Interest Rate Swaps (Net of Income Tax Benefit (Expense) of $0, $0.02 million, $0, and ($0.5) million, respectively) |
|
|
217 |
|
|
73 |
|
|
1,387 |
|
|
(1,793) |
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Total Other Comprehensive Income (Loss), Net of Income Tax |
|
|
217 |
|
|
73 |
|
|
1,387 |
|
|
(1,793) |
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Total Comprehensive Income (Loss) |
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$ |
24,164 |
|
$ |
(1,449) |
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$ |
29,395 |
|
$ |
(2,966) |
The accompanying notes are an integral part of these consolidated financial statements.
5
CTO REALTY GROWTH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)
For the three months ended September 30, 2021:
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|
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|
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|
|
Preferred Stock |
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Common Stock |
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Treasury Stock |
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Additional Paid-In Capital |
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Retained Earnings |
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Accumulated Other Comprehensive Income (Loss) |
|
Stockholders' Equity |
|||||||
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Balance July 1, 2021 |
|
$ |
— |
|
$ |
60 |
|
$ |
— |
|
$ |
13,676 |
|
$ |
331,895 |
|
$ |
(740) |
|
$ |
344,891 |
|
Net Income Attributable to the Company |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
23,947 |
|
|
— |
|
|
23,947 |
|
Issuance of Preferred Stock, Net of Underwriting Discount and Expenses |
|
|
30 |
|
|
— |
|
|
— |
|
|
72,640 |
|
|
— |
|
|
— |
|
|
72,670 |
|
Exercise of Stock Options and Common Stock Issuance |
|
|
— |
|
|
— |
|
|
— |
|
|
(83) |
|
|
— |
|
|
— |
|
|
(83) |
|
Stock Compensation Expense from Restricted Stock Grants and Equity Classified Stock Options |
|
|
— |
|
|
— |
|
|
— |
|
|
666 |
|
|
— |
|
|
— |
|
|
666 |
|
Preferred Stock Dividends Declared for the Period |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,129) |
|
|
— |
|
|
(1,129) |
|
Common Stock Dividends Declared for the Period |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(6,032) |
|
|
— |
|
|
(6,032) |
|
Other Comprehensive Income |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
217 |
|
|
217 |
|
Balance September 30, 2021 |
|
$ |
30 |
|
$ |
60 |
|
$ |
— |
|
$ |
86,899 |
|
$ |
348,681 |
|
$ |
(523) |
|
$ |
435,147 |
For the three months ended September 30, 2020:
For the nine months ended September 30, 2021:
For the nine months ended September 30, 2020:
The accompanying notes are an integral part of these consolidated financial statements.
6
CTO REALTY GROWTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
||||
|
|
|
September 30, 2021 |
|
September 30, 2020 |
||
|
Cash Flow from Operating Activities: |
|
|
|
|
|
|
|
Net Income (Loss) Attributable to the Company |
|
$ |
28,008 |
|
$ |
(1,173) |
|
Adjustments to Reconcile Net Income (Loss) Attributable to the Company to Net Cash Provided by Operating Activities: |
|
|
|
|
|
|
|
Depreciation and Amortization |
|
|
15,428 |
|
|
14,334 |
|
Amortization of Intangible Liabilities to Income Property Revenue |
|
|
(820) |
|
|
(1,352) |
|
Amortization of Deferred Financing Costs to Interest Expense |
|
|
444 |
|
|
338 |
|
Amortization of Discount on Convertible Debt |
|
|
951 |
|
|
1,067 |
|
Gain on Disposition of Real Estate and Intangible Lease Assets and Liabilities |
|
|
(28,106) |
|
|
(5,788) |
|
Gain on Disposition of Assets Held for Sale |
|
|
— |
|
|
(1,930) |
|
Loss on Disposition of Commercial Loan and Master Lease Investments |
|
|
— |
|
|
353 |
|
Loss (Gain) on Extinguishment of Debt |
|
|
641 |
|
|
(1,141) |
|
Impairment Charges |
|
|
16,527 |
|
|
1,905 |
|
Accretion of Commercial Loan and Master Lease Investment Origination Fees |
|
|
(1) |
|
|
(164) |
|
Non-Cash Imputed Interest |
|
|
(330) |
|
|
(311) |
|
Deferred Income Taxes |
|
|
(3,736) |
|
|
(10,756) |
|
Unrealized (Gain) Loss on Investment Securities |
|
|
(6,894) |
|
|
7,098 |
|
Non-Cash Compensation |
|
|
2,434 |
|
|
2,135 |
|
Decrease (Increase) in Assets: |
|
|
|
|
|
|
|
Refundable Income Taxes |
|
|
(830) |
|
|
— |
|
Assets Held for Sale |
|
|
(1) |
|
|
— |
|
Land and Development Costs |
|
|
381 |
|
|
(468) |
|
Mitigation Credits and Mitigation Credit Rights |
|
|
(16,007) |
|
|
3,083 |
|
Other Assets |
|
|
(945) |
|
|
(2,793) |
|
Increase (Decrease) in Liabilities: |
|
|
|
|
|
|
|
Accounts Payable |
|
|
1,084 |
|
|
321 |
|
Accrued and Other Liabilities |
|
|
3,800 |
|
|
4,010 |
|
Deferred Revenue |
|
|
337 |
|
|
(26) |
|
Income Taxes Payable |
|
|
— |
|
|
3,158 |
|
Net Cash Provided By Operating Activities |
|
|
12,365 |
|
|
11,900 |
|
Cash Flow from Investing Activities: |
|
|
|
|
|
|
|
Acquisition of Real Estate and Intangible Lease Assets and Liabilities |
|
|
(115,780) |
|
|
(165,419) |
|
Acquisition of Commercial Loan Investments and Master Lease Investments |
|
|
(364) |
|
|
(27,839) |
|
Acquisition of Mitigation Credits |
|
|
— |
|
|
(2,981) |
|
Restricted Cash Balance Received in Acquisition of Interest in Joint Venture |
|
|
595 |
|
|
|
|
Cash Contribution to Interest in Joint Venture |
|
|
(639) |
|
|
(36) |
|
Proceeds from Disposition of Property, Plant, and Equipment, Net, and Assets Held for Sale |
|
|
108,449 |
|
|
49,646 |
|
Principal Payments Received on Commercial Loan and Master Lease Investments |
|
|
— |
|
|
20,981 |
|
Net Cash Used In Investing Activities |
|
|
(7,739) |
|
|
(125,648) |
|
Cash Flow from Financing Activities: |
|
|
|
|
|
|
|
Proceeds from Long-Term Debt |
|
|
156,500 |
|
|
62,641 |
|
Payments on Long-Term Debt |
|
|
(171,308) |
|
|
(64,089) |
|
Cash Paid for Loan Fees |
|
|
(907) |
|
|
(2,083) |
|
Payments for Exercise of Stock Options and Common Stock Issuance |
|
|
(146) |
|
|
— |
|
Proceeds from Issuance of Preferred Stock, Net of Underwriting Discount and Expenses |
|
|
72,439 |
|
|
— |
|
Cash Used to Purchase Common Stock |
|
|
— |
|
|
(4,100) |
|
Cash Paid for Vesting of Restricted Stock |
|
|
(452) |
|
|
(538) |
|
Cash Paid for Equity Issuance Costs |
|
|
(197) |
|
|
— |
|
Dividends Paid - Preferred Stock |
|
|
(1,129) |
|
|
— |
|
Dividends Paid - Common Stock |
|
|
(17,700) |
|
|
(4,210) |
|
Net Cash Provided By (Used In) Financing Activities |
|
|
37,100 |
|
|
(12,379) |
|
Net Decrease in Cash and Cash Equivalents |
|
|
41,726 |
|
|
(126,127) |
|
Cash and Cash Equivalents, Beginning of Period |
|
|
33,825 |
|
|
134,905 |
|
Cash and Cash Equivalents, End of Period |
|
$ |
75,551 |
|
$ |
8,778 |
|
|
|
|
|
|
|
|
|
Reconciliation of Cash to the Consolidated Balance Sheets: |
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
$ |
7,005 |
|
$ |
6,352 |
|
Restricted Cash |
|
|
68,546 |
|
|
2,426 |
|
Total Cash |
|
$ |
75,551 |
|
$ |
8,778 |
The accompanying notes are an integral part of these consolidated financial statements.
7
CTO REALTY GROWTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
||||
|
|
|
September 30, 2021 |
|
September 30, 2020 |
||
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
Cash Paid for Taxes, Net of Refunds Received |
|
$ |
245 |
|
$ |
4,845 |
|
Cash Paid for Interest |
|
$ |
4,986 |
|
$ |
7,096 |
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Non-Cash Investing and Financing Activities: |
|
|
|
|
|
|
|
Unrealized Gain (Loss) on Cash Flow Hedges |
|
$ |
1,387 |
|
$ |
(1,793) |
|
Convertible Note Exchange |
|
$ |
— |
|
$ |
57,359 |
|
Equity Component of Convertible Debt |
|
$ |
— |
|
$ |
5,248 |
|
Common Stock Dividends Declared and Unpaid |
|
$ |
415 |
|
$ |
— |
|
Assumption of Mortgage Note Payable by Buyer |
|
$ |
30,000 |
|
$ |
— |
The accompanying notes are an integral part of these consolidated financial statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS
Description of Business
We are a publicly traded diversified real estate investment trust (“REIT”) that was founded in 1910. We own and manage, sometimes utilizing third-party property management companies, 19 commercial real estate properties in nine states in the United States. As of September 30, 2021, we owned 11 single-tenant and eight multi-tenant income-producing properties comprising 2.2 million square feet of gross leasable space.
In addition to our income property portfolio, as of September 30, 2021, our business included the following:
Management Services:
| ● | A fee-based management business that is engaged in managing Alpine Income Property Trust, Inc. (“PINE”) and the entity that currently holds 1,600 acres of undeveloped land in Daytona Beach, Florida (the “Land JV”), see Note 6, “Related Party Management Services Business”. |
Commercial Loan and Master Lease Investments:
| ● | A portfolio of two commercial loan investments and two commercial properties, which are included in the 19 commercial real estate properties above, whose leases are classified as commercial loan and master lease investments. |
Real Estate Operations:
| ● | A portfolio of subsurface mineral interests associated with approximately 415,000 surface acres in 20 counties in the State of Florida and a portfolio of mitigation credits (“Subsurface Interests”); |
| ● | A retained interest in the Land JV, which has entered into an agreement to sell substantially all of its remaining 1,600 acres of undeveloped land in Daytona Beach, Florida; and |
| ● | An inventory of historically owned mitigation credits as well as mitigation credits produced by the Company’s mitigation bank. The mitigation bank owns a 2,500 acre parcel of land in the western part of Daytona Beach, Florida and, pursuant to a mitigation plan approved by the applicable state and federal authorities, produces mitigation credits that are sold to developers of land in the Daytona Beach area for the purpose of enabling the developers to obtain certain regulatory permits for property development (the “Mitigation Bank”). Prior to the Interest Purchase (hereinafter defined in Note 8, “Investments in Joint Ventures”) completed on September 30, 2021, the Company held a 30% retained interest in the entity that owns the Mitigation Bank. |
Our business also includes our investment in PINE. As of September 30, 2021, our investment totaled $37.5 million, or 15.7% of PINE’s outstanding equity, including the units of limited partnership interest (“OP Units”) we hold in Alpine Income Property OP, LP (the “PINE Operating Partnership”), which are redeemable for cash, based upon the value of an equivalent number of shares of PINE common stock at the time of the redemption, or shares of PINE common stock on a one-for-one basis, at PINE’s election. Our investment in PINE generates investment income through the dividends distributed by PINE. In addition to the dividends we receive from PINE, our investment in PINE may benefit from any appreciation in PINE’s stock price, although no assurances can be provided that such appreciation will occur, the amount by which our investment will increase in value, or the timing thereof. Any dividends received from PINE are included in investment and other income (loss) on the accompanying consolidated statements of operations.
REIT Conversion
As of December 31, 2020, the Company had completed certain internal reorganization transactions necessary to begin operating in compliance with the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes for the taxable year ended December 31, 2020.
9
In order to comply with certain REIT requirements set forth in the Internal Revenue Code of 1986, as amended (the “Code”), we hold certain of our non-REIT assets and operations through taxable REIT subsidiaries (“TRSs”) and subsidiaries of TRSs. A TRS is a subsidiary of a REIT that is generally subject to U.S. federal corporate income tax on its earnings. Net income from our TRSs either will be retained by our TRSs and used to fund their operations, or will be distributed to us, where it will either be reinvested by us into our business or available for distribution to our stockholders. However, distributions from our TRSs to us will not produce qualifying income for purposes of the 75% gross income test applicable to REITs and thus may be limited.
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 and excluding net capital gain, to its stockholders (which is computed and 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 (“IRS”) 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.
Merger
On January 29, 2021, in connection with the REIT conversion, the Company completed the merger of CTO Realty Growth, Inc., a Florida corporation (“CTO FL”), with and into CTO NEWCO REIT, Inc. (“CTO MD ”), a wholly owned subsidiary of CTO FL (the “Merger”) in order to reincorporate in Maryland and facilitate its ongoing compliance with the REIT requirements by ensuring that certain standard REIT ownership limitations and transfer restrictions apply to CTO MD’s capital stock.
As a result of the Merger, existing shares of CTO FL common stock were automatically converted, on a one-for-one basis, into shares of common stock of CTO MD. CTO MD is a corporation organized in the state of Maryland and has been renamed “CTO Realty Growth, Inc.” CTO MD’s charter includes certain standard REIT provisions, including ownership limitations and transfer restrictions applicable to the Company’s capital stock. See Note 14, “Equity” for the Company’s disclosure related to the equity adjustments recorded during the three months ended March 31, 2021 in connection with the Merger.
In connection with the REIT conversion and the Merger, CTO FL applied to list CTO MD’s common stock on the New York Stock Exchange (the “NYSE”) under CTO FL’s ticker symbol, “CTO.” This application was approved, and CTO MD’s common stock began trading on the NYSE on February 1, 2021 under the ticker symbol “CTO.”
COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus as a pandemic (the “COVID-19 Pandemic”), which has spread throughout the United States. The impact of the COVID-19 Pandemic has evolved rapidly, with many jurisdictions taking drastic measures to limit the spread of the virus by instituting quarantines or lockdowns and imposing travel restrictions. Such actions have created significant disruptions to global supply chains, and adversely impacted several industries, including airlines, hospitality, retail and the broader real estate industry.
As a result of the approval of multiple COVID-19 vaccines for use and the distribution of such vaccines among the general population, a number of jurisdictions have reopened and loosened restrictions. However, wide disparities in vaccination rates and continued vaccine hesitancy, combined with the emergence of COVID-19 variants and surges in COVID-19 cases, could trigger the reinstatement of further restrictions. Such restrictions could include mandatory business shut-downs, travel restrictions, reduced business operations and social distancing requirements.
10
The future impact of the COVID-19 Pandemic on the real estate industry and the Company’s financial condition and results of operations is uncertain and cannot be predicted currently since it depends on several factors beyond the control of the Company, including, but not limited to: (i) the uncertainty surrounding the severity and duration of the COVID-19 Pandemic, including possible recurrences and differing economic and social impacts of the COVID-19 Pandemic in various regions of the United States; (ii) the effectiveness of the United States public health response; (iii) the COVID-19 Pandemic’s impact on the United States and global economies; (iv) the timing, scope and effectiveness of additional governmental responses to the COVID-19 Pandemic; (v) the availability of a treatment and effectiveness of vaccines approved for COVID-19 and the willingness of individuals to get vaccinated; (vi) changes in how certain types of commercial property are used while maintaining social distancing and other techniques intended to control the impact of COVID-19; (vii) the impact of phase out of economic stimulus measures, the inflationary pressure of economic stimulus, and the eventual halt and reversal by the U.S. Treasury of asset purchases; and (viii) the uneven impact on the Company’s tenants, real estate values and cost of capital.
Contractual Base Rent (“CBR”) represents the amount owed to the Company under the current terms of its lease agreements. As a result of the COVID-19 Pandemic, during the year ended December 31, 2020, the Company agreed to defer or abate certain CBR in exchange for additional lease term or other lease enhancing additions. Repayments of the remaining balance of deferred CBR began in the third quarter of 2020, with payments continuing, in some cases, into 2023.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements, and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which provides a more complete understanding of the Company’s accounting policies, financial position, operating results, business properties, and other matters. The unaudited consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the financial position of the Company and the results of operations for the interim periods.
The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and other entities in which we have a controlling interest. Any real estate entities or properties included in the consolidated financial statements have been consolidated only for the periods that such entities or properties were owned or under control by us. All inter-company balances and transactions have been eliminated in the consolidated financial statements. The Company has a retained interest in the Land JV as well as an equity investment in PINE. Prior to the Interest Purchase (hereinafter defined in Note 8, “Investments in Joint Ventures”) completed on September 30, 2021, the Company also had a 30% retained interest in the entity that owns the Mitigation Bank. The Company has concluded that these entities are variable interest entities of which the Company is not the primary beneficiary and as a result, these entities are not consolidated.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Among other factors, fluctuating market conditions that can exist in the national real estate markets and the volatility and uncertainty in the financial and credit markets make it possible that the estimates and assumptions, most notably those related to the Company’s investment in income properties, could change materially due to continued volatility in the real estate and financial markets, or as a result of a significant dislocation in those markets.
11
Recently Issued Accounting Standards
Debt with Conversion and Other Options. In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06 related to simplifying the accounting for convertible instruments by removing certain separation models for convertible instruments. Among other things, the amendments in the update also provide for improvements in the consistency in EPS calculations by amending the guidance by requiring that an entity use the if-converted method for convertible instruments. The amendments in ASU 2020-06 are effective for reporting periods beginning after December 15, 2021. The Company intends to adopt ASU 2020-06 commencing January 1, 2022, at which time, the Company’s diluted EPS calculation will include the dilutive impact of the 2025 Notes (hereinafter defined), irrespective of intended cash settlement. Further, the Company elects, upon adoption, to utilize the modified retrospective approach, negating the required restatement of EPS for periods prior to adoption.
ASC Topic 326, Financial Instruments-Credit Losses. In June 2016, the FASB issued ASU 2016-13, which amends its guidance on the measurement of credit losses on financial instruments. The amendments in this update are effective for annual reporting periods beginning after December 31, 2019. ASU 2016-13 affects entities holding financial assets that are not accounted for at fair value through net income, including but not limited to, loans, trade receivables, and net investments in leases. The Company adopted the changes to FASB ASC 326, Financial Instruments-Credit Losses on January 1, 2020. The Company’s evaluation of current expected credit losses (“CECL”) resulted in a reserve of $0.3 million on the Company’s commercial loan and master lease investments portfolio during the three months ended March 31, 2020. See Note 5 “Commercial Loan and Master Lease Investments” for further information.
Reclassifications
Certain items in the consolidated balance sheet as of December 31, 2020 have been reclassified to conform to the presentation as of September 30, 2021. Specifically, in the first quarter of 2021, the Company reclassified deferred financing costs incurred in connection with its Credit Facility (as further described in Note 17, “Long-Term Debt”), net of accumulated amortization, as a component of other assets on the accompanying consolidated balance sheet. Accordingly, deferred financing costs of $1.2 million, net of accumulated amortization of $0.5 million, were reclassified from long-term debt to other assets as of December 31, 2020.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, bank demand accounts, and money market accounts having original maturities of 90 days or less. The Company’s bank balances as of September 30, 2021 include certain amounts over the Federal Deposit Insurance Corporation limits.
Restricted Cash
Restricted cash totaled $68.5 million at September 30, 2021, of which $67.8 million is being held in various escrow accounts to be reinvested through the like-kind exchange structure into other income properties, $0.6 million is being held in an escrow account in connection with the Mitigation Bank as required by the applicable state and federal permitting authorities, and $0.1 million is being held in an escrow account in connection with the sale of a ground lease located in Daytona Beach, Florida.
Derivative Financial Instruments and Hedging Activity
Interest Rate Swaps. The Company accounts for its cash flow hedging derivatives in accordance with FASB ASC Topic 815-20, Derivatives and Hedging. Depending upon the hedge’s value at each balance sheet date, the derivatives are included in either other assets or accrued and other liabilities on the consolidated balance sheet at 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 formally assessed whether the derivatives that are used in hedging the transactions are highly effective in offsetting changes in cash flows of the hedged items, and we will continue to do so on an ongoing basis. As the terms of each interest rate
12
swap and the associated debts are identical, both hedging instruments qualify for the shortcut method; therefore, it is assumed that there is no hedge ineffectiveness throughout the entire term of the hedging instruments.
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.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial assets and liabilities including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued and other liabilities at September 30, 2021 and December 31, 2020, approximate fair value because of the short maturity of these instruments. The carrying value of the Company’s Credit Facility (hereinafter defined) as of September 30, 2021 and December 31, 2020, approximates current market rates for revolving credit arrangements with similar risks and maturities. The face value of the Company’s fixed rate commercial loan and master lease investments, the 2026 Term Loan (hereinafter defined), and convertible debt held as of September 30, 2021 and December 31, 2020 are measured at fair value based on current market rates for financial instruments with similar risks and maturities (see Note 10, “Fair Value of Financial Instruments”).
Fair Value Measurements
The Company’s estimates of fair value of financial and non-financial assets and liabilities is based on the framework established by U.S. GAAP. The framework specifies a hierarchy of valuation inputs which was established to increase consistency, clarity and comparability in fair value measurements and related disclosures. U.S. GAAP describes a fair value hierarchy based upon three levels of inputs that may be used to measure fair value, two of which are considered observable and one that is considered unobservable. The following describes the three levels:
| ● | Level 1 – Valuation is based upon quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2 – Valuation is based upon inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| ● | Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include option pricing models, discounted cash flow models and similar techniques. |
Recognition of Interest Income from Commercial Loan and Master Lease Investments
Interest income on commercial loan and master lease investments includes interest payments made by the borrower and the accretion of purchase discounts and loan origination fees, offset by the amortization of loan costs. Interest payments are accrued based on the actual coupon rate and the outstanding principal balance and purchase discounts and loan origination fees are accreted into income using the effective yield method, adjusted for prepayments.
Mitigation Credits
Mitigation credits are stated at historical cost. As these assets are sold, the related revenues and cost of sales are reported as revenues from, and direct costs of, real estate operations, respectively, in the consolidated statements of operations.
Accounts Receivable
Accounts receivable related to income properties, which are classified in other assets on the consolidated balance sheets, primarily consist of accrued tenant reimbursable expenses and other tenant receivables. Receivables related to income property tenants totaled $0.8 million and $2.3 million as of September 30, 2021 and December 31, 2020,
13
respectively. The $1.5 million decrease is primarily attributable to a decrease in estimated accrued receivables for variable lease payments including common area maintenance, insurance, real estate taxes and other operating expenses.
Accounts receivable related to real estate operations, which are classified in other assets on the consolidated balance sheets, totaled $1.4 million and $1.3 million as of September 30, 2021 and December 31, 2020, respectively. The accounts receivable as of September 30, 2021 and December 31, 2020 are primarily related to the reimbursement of certain infrastructure costs completed by the Company in conjunction with two land sale transactions that closed during the fourth quarter of 2015 as more fully described in Note 13, “Other Assets.”
The collectability of the aforementioned receivables shall be considered and adjusted through an allowance for credit losses pursuant to ASC 326, Financial Instruments-Credit Losses. As of September 30, 2021 and December 31, 2020, the Company recorded an allowance for doubtful accounts of $0.2 million and $0.5 million, respectively, with the reduction being attributable to accounts receivable that were previously allowed for and written off against the allowance during the nine months ended September 30, 2021.
Purchase Accounting for Acquisitions of Real Estate Subject to a Lease
Investments in real estate are carried at cost less accumulated depreciation and impairment losses, if any. The cost of investments in real estate reflects their purchase price or development cost. We evaluate each acquisition transaction to determine whether the acquired asset meets the definition of a business. Under ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, an acquisition does not qualify as a business when there is no substantive process acquired or substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets or the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. Transaction costs related to acquisitions that are asset acquisitions are capitalized as part of the cost basis of the acquired assets, while transaction costs for acquisitions that are deemed to be acquisitions of a business are expensed as incurred. Improvements and replacements are capitalized when they extend the useful life or improve the productive capacity of the asset. Costs of repairs and maintenance are expensed as incurred.
In accordance with FASB guidance, the fair value of the real estate acquired with in-place leases is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases, and the value of leasing costs, based in each case on their relative fair values. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded as other assets or liabilities based on the present value. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term unless management believes that it is likely that the tenant will renew the lease upon expiration, in which case the Company amortizes the value attributable to the renewal over the renewal period. The value of in-place leases and leasing costs are amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off.
Sales of Real Estate
Gains and losses on sales of real estate are accounted for as required by FASB ASC Topic 606, Revenue from Contracts with Customers. The Company recognizes revenue from the sales of real estate when the Company transfers the promised goods and/or services in the contract based on the transaction price allocated to the performance obligations within the contract. As market information becomes available, real estate cost basis is analyzed and recorded at the lower of cost or market.
Income Taxes
The Company has elected to be taxed as a REIT for U.S. federal income tax purposes under the Code commencing with its taxable year ended December 31, 2020. The Company believes that, commencing with such taxable year, it has been organized and has operated in such a manner as to qualify for taxation as a REIT under the U.S. federal income tax laws. The Company intends to continue to operate in such a manner. As a REIT, the Company will be subject to U.S. federal and state income taxation at corporate rates on its net taxable income; the Company, however, may claim a
14
deduction for the amount of dividends paid to its stockholders. Amounts distributed as dividends by the Company will be subject to taxation at the stockholder level only. While the Company must distribute at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, to qualify as a REIT, the Company intends to distribute all of its net taxable income. The Company is allowed certain other non-cash deductions or adjustments, such as depreciation expense, when computing its REIT taxable income and distribution requirement. These deductions permit the Company to reduce its dividend payout requirement under U.S. federal income tax laws. Certain states may impose minimum franchise taxes. To comply with certain REIT requirements, we hold certain of our non-REIT assets and operations through TRSs and subsidiaries of TRSs, which will be subject to applicable U.S. federal, state and local corporate income tax on their taxable income. For the periods presented, the Company held a total of five TRSs subject to taxation. The Company’s TRSs will file separately as C-Corporations.
For the Company’s TRSs, and prior to the three months ended December 31, 2020 preceding the Company’s REIT election, the Company uses the asset and liability method to account for income taxes. Deferred income taxes result primarily from the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes (see Note 22, “Income Taxes”). In June 2006, the FASB issued additional guidance, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements included in income taxes. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, and disclosure and transition. In accordance with FASB guidance included in income taxes, the Company has analyzed its various federal and state filing positions and believes that its income tax filing positions and deductions are well documented and supported. Additionally, the Company believes that its accruals for tax liabilities are adequate. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to the FASB guidance.
NOTE 3. REVENUE RECOGNITION
The Company implemented FASB ASC Topic 606, Revenue from Contracts with Customers effective January 1, 2018 utilizing the modified retrospective method.
The following table summarizes the Company’s revenue from continuing operations by segment, major good and/or service, and the related timing of revenue recognition for the three months ended September 30, 2021 (in thousands):
15
The following table summarizes the Company’s revenue from continuing operations by segment, major good and/or service, and the related timing of revenue recognition for the three months ended September 30, 2020 (in thousands):
The following table summarizes the Company’s revenue from continuing operations by segment, major good and/or service, and the related timing of revenue recognition for the nine months ended September 30, 2021 (in thousands):
16
The following table summarizes the Company’s revenue from continuing operations by segment, major good and/or service, and the related timing of revenue recognition for the nine months ended September 30, 2020 (in thousands):
NOTE 4. INCOME PROPERTIES
Leasing revenue consists of long-term rental revenue from retail, office, and commercial income properties, and billboards, 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 components of leasing revenue are as follows (in thousands):
Minimum future base rental revenue on non-cancelable leases subsequent to September 30, 2021, for the next five years ended December 31 are summarized as follows (in thousands):
|
|
|
|
|
|
Year Ending December 31, |
|
Amounts |
|
|
Remainder of 2021 |
|
$ |
10,183 |
|
2022 |
|
|
40,355 |
|
2023 |
|
|
38,997 |
|
2024 |
|
|
37,702 |
|
2025 |
|
|
36,890 |
|
2026 and thereafter (cumulative) |
|
|
191,808 |
|
Total |
|
$ |
355,935 |
17
2021 Acquisitions. During the nine months ended September 30, 2021, the Company acquired three multi-tenant income properties for an aggregate purchase price of $111.0 million, or a total acquisition cost of $111.3 million including capitalized acquisition costs. Of the total acquisition cost, $40.4 million was allocated to land, $41.4 million was allocated to buildings and improvements, and $29.5 million was allocated to intangible assets pertaining to the in-place lease value, leasing costs, and above market lease value and $0.05 million was allocated to intangible liabilities for the below market lease value. The weighted average amortization period for the intangible assets and liabilities was 7.1 years at acquisition.
The properties acquired during the nine months ended September 30, 2021 are described below:
2021 Dispositions. During the nine months ended September 30, 2021, the Company disposed of one multi-tenant income property and 13 single-tenant income properties.
The properties disposed of during the nine months ended September 30, 2021 are described below (in thousands):
|
(1) |
On June 30, 2021, the Company sold six single-tenant income properties (the “CMBS Portfolio”) to PINE for an aggregate purchase price of $44.5 million. |
|
(2) |
Represents a single-tenant outparcel to Crossroads, the Company’s multi-tenant income property located in Chandler, Arizona. |
|
(3) |
Represents a single-tenant property at The Strand, the Company’s multi-tenant income property located in Jacksonville, Florida. |
|
(4) |
Property or outparcel represents a ground lease. |
2020 Acquisitions. During the nine months ended September 30, 2020, the Company acquired two multi-tenant income properties and two single-tenant income properties for an aggregate purchase price of $185.1 million, or a total acquisition cost of $185.7 million including capitalized acquisition costs. Of the total acquisition cost, $50.0 million was allocated to land, $94.6 million was allocated to buildings and improvements, $21.9 million was allocated to intangible assets pertaining to the in-place lease value, leasing fees, and above market lease value, and $1.8 million was allocated to intangible liabilities for the below market lease value. The remaining $21.0 million was classified as a commercial loan investment, as noted below. The weighted average amortization period for the intangible assets and liabilities was approximately 4.5 years at acquisition.
18
The properties acquired during the nine months ended September 30, 2020 are described below:
|
(1) |
The lease with the Master Tenant – Hialeah (“Master Tenant – Hialeah Lease”) includes three tenant repurchase options. Pursuant to FASB ASC Topic 842, Leases, the $21.0 million investment has been recorded in the accompanying consolidated balance sheet as of December 31, 2020 as a commercial loan investment. See Note 5, “Commercial Loan and Master Lease Investments.” |
2020 Dispositions. During the nine months ended September 30, 2020, the Company disposed of one multi-tenant income property and seven single-tenant income properties.
The properties disposed of during the nine months ended September 30, 2020 are described below (in thousands):
|
(1) |
Property represents a ground lease. |
NOTE 5. COMMERCIAL LOAN AND MASTER LEASE INVESTMENTS
Our investments in commercial loans or similar structured finance investments, such as mezzanine loans or other subordinated debt, have been and are expected to continue to be secured by real estate or the borrower’s pledge of its ownership interest in the entity that owns the real estate. The loans we invest in or originate are for commercial real estate located in the United States and its territories, and are current or performing with either a fixed or floating rate. Some of these loans may be syndicated in either a pari-passu or senior/subordinated structure. Commercial first mortgage loans generally provide for a higher recovery rate due to their senior position in the underlying collateral. Commercial mezzanine loans are typically secured by a pledge of the borrower’s equity ownership in the underlying commercial real estate. Unlike a mortgage, a mezzanine loan is not secured by a lien on the property. An investor’s rights in a mezzanine loan are usually governed by an intercreditor agreement that provides holders with the rights to cure defaults and exercise control on certain decisions of any senior debt secured by the same commercial property.
2021 Activity. On June 30, 2021, the Company originated a loan in connection with the sale of a land parcel with an existing structure located in Daytona Beach, Florida. The principal loan amount of $0.4 million bears interest at a fixed rate of 10.00% and has an initial term of 1.5 years.
19
The Company’s commercial loan and master lease investments were comprised of the following at September 30, 2021 (in thousands):
The Company’s commercial loan and master lease investments were comprised of the following at December 31, 2020 (in thousands):
The carrying value of the commercial loan and master lease investments portfolio at September 30, 2021 and December 31, 2020 consisted of the following (in thousands):
NOTE 6. RELATED PARTY MANAGEMENT SERVICES BUSINESS
Alpine Income Property Trust. Pursuant to the Company’s management agreement with PINE, the Company generates a base management fee equal to 0.375% per quarter of PINE’s total equity (as defined in the management agreement and based on a 1.5% annual rate), calculated and payable in cash, quarterly in arrears. The structure of the base fee provides the Company with an opportunity for the base fee to grow should PINE’s independent board members determine to raise additional equity capital in the future. The Company also has an opportunity to achieve additional cash flows as manager of PINE pursuant an annual incentive fee based on PINE’s total stockholder return exceeding an 8% cumulative annual hurdle rate (the “Outperformance Amount”) subject to a high-water mark price. PINE would pay the Company an incentive fee with respect to each annual measurement period in the amount of the greater of (i) $0.00 and (ii) the product of (a) 15% multiplied by (b) the Outperformance Amount multiplied by (c) the weighted average shares. No incentive fee was earned for the year ended December 31, 2020.
During the three and nine months ended September 30, 2021, the Company earned management fee revenue from PINE totaling $0.9 million and $2.3 million, respectively. Dividend income for the three and nine months ended September 30, 2021 totaled $0.5 million and $1.5 million, respectively. During the three and nine months ended September 30, 2020, the Company earned management fee revenue from PINE totaling $0.6 million and $1.9 million, respectively. Dividend income for the three and nine months ended September 30, 2020 totaled $0.4 million and $1.2 million, respectively. Management fee revenue from PINE, included in management services, and dividend income, included in investment and other income (loss), are reflected in the accompanying consolidated statements of operations.
20
The following table represents amounts due from PINE to the Company as of September 30, 2021 and December 31, 2020 which are included in other assets on the consolidated balance sheets (in thousands):
On November 26, 2019, as part of the initial public offering (the “IPO”) of PINE on the NYSE, the Company sold PINE 15 properties for aggregate cash consideration of $125.9 million. Additionally, in connection with the IPO, the Company contributed to the PINE Operating Partnership five properties in exchange for an aggregate of 1,223,854 OP Units, which had an initial value of $23.3 million.
During the three months ended June 30, 2021, PINE exercised its right to purchase the following properties from the Company pursuant to the exclusivity and right of first offer agreement (i) the CMBS Portfolio for a purchase price of $44.5 million, and (ii) one single-tenant income property for a purchase price of $11.5 million. In connection with the sale of the CMBS Portfolio, PINE assumed the related $30.0 million mortgage note payable which resulted in a loss on the extinguishment of debt of $0.5 million due to the write off of unamortized debt issuance costs. These sales were completed during the three months ended June 30, 2021.
Land JV. Pursuant to the terms of the operating agreement for the Land JV, the initial amount of the management fee was $20,000 per month. The management fee is evaluated quarterly and as land sales occur in the Land JV, the basis for our management fee is reduced as the management fee is based on the value of real property that remains in the Land JV. The monthly management fee as of September 30, 2021 was $10,000 per month.
During the three and nine months ended September 30, 2021 the Company earned management fee revenue from the Land JV totaling $0.03 million and $0.09 million, respectively, and was collected in full during the periods earned. During the three and nine months ended September 30, 2020 the Company earned management fee revenue from the Land JV totaling $0.05 million and $0.2 million, respectively, and was collected in full during the periods earned. Management fee revenue from the Land JV is included in management services in the accompanying consolidated statements of operations.
NOTE 7. REAL ESTATE OPERATIONS
Real Estate Operations
Land and development costs at September 30, 2021 and December 31, 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of |
||||
|
|
|
September 30, 2021 |
|
December 31, 2020 |
||
|
Land and Development Costs |
|
$ |
6,022 |
|
$ |
6,377 |
|
Subsurface Interests |
|
|
680 |
|
|
706 |
|
Total Land and Development Costs |
|
$ |
6,702 |
|
$ |
7,083 |
21
Revenue from continuing real estate operations consisted of the following for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Daytona Beach Development. The Company owns a six-acre parcel of land with existing structures in downtown Daytona Beach and other contiguous parcels that were acquired for an aggregate of $4.1 million, representing the substantial portion of an entire city block in downtown Daytona Beach adjacent to International Speedway Boulevard, a major thoroughfare in Daytona Beach. As of September 30, 2021, we have incurred $1.6 million in raze and entitlement costs related to these parcels which is included in land and development costs on the consolidated balance sheets. During the three months ended September 30, 2021, the Company entered into a purchase and sale agreement to sell the six-acre parcel for a sales price of $6.25 million. The closing of the sale is anticipated to occur prior to year-end and is subject to completion of customary due diligence and closing conditions.
Mitigation Credits. The Company owns mitigation credits and mitigation credit rights with an aggregate cost basis of $25.0 million as of September 30, 2021, representing a $22.4 million increase from the balance as of December 31, 2020. During the three months ended September 30, 2021, the Company completed the Interest Purchase, hereinafter defined in Note 8, “Investments in Joint Ventures”. As a result of the Interest Purchase, as of September 30, 2021, the Company owns 100% of the Mitigation Bank, and therefore its underlying assets, which includes an inventory of mitigation credits. Certain of the mitigation credits are currently available for sale with the remainder to become available as they are released to the Mitigation Bank by the applicable state and federal authorities pursuant to the completion of phases of the approved mitigation plans (“Mitigation Credit Rights”). At the time of the Interest Purchase on September 30, 2021, the Company’s cost basis in the newly acquired mitigation credits and mitigation credit rights totaled $0.9 million and $21.6 million, respectively, which is comprised of (i) $15.6 million of the $18.0 million Interest Purchase allocated to the mitigation credit assets and (ii) the $6.9 million previously recorded value of the retained interest in the entity that owns the Mitigation Bank.
The Mitigation Bank engages in the creation and sale of both federal and state wetland mitigation credits. These credits are created pursuant to the applicable permits that have been issued by the federal and state regulatory agencies that exercise jurisdiction over the awarding of such credits, but no assurances can be given as to the ultimate issuance, marketability or value of the credits. The Mitigation Bank received the permit from the state regulatory agency on June 8, 2018 (the “State Permit”). The state regulatory agency may award up to 355 state credits under the State Permit. On August 6, 2018, the state regulatory agency awarded the initial 88.84 credits under the State Permit. The Company anticipates another 8.95 state credits to be issued prior to the end of 2021. The Mitigation Bank received the permit from the federal regulatory agency on September 8, 2021 (the “Federal Permit”). The federal regulatory agency may award up to 173.91 federal credits under the Federal Permit. On September 8, 2021, the federal regulatory agency awarded the initial 17.39 credits under the Federal Permit. The Company intends to sell the mitigation credits produced by the Mitigation Bank or may sell the Mitigation Bank in its entirety. No assurance can be given that the Company will be able to consummate any such sales or regarding the likelihood, timing, or final terms of any such potential sales.
Revenues and the cost of sales of mitigation credit sales are reported as revenues from, and direct costs of, real estate operations, respectively, in the consolidated statements of operations. During the three months and nine months ended September 30, 2021, the Company sold mitigation credits for proceeds of $0.2 million with a cost basis of $0.1 million. During the nine months ended September 30, 2020, proceeds from mitigation credit sales totaled less than $0.01 million, none of which were completed during the three months ended September 30, 2020. Additionally, during the nine months ended September 30, 2020, an aggregate charge to cost of sales was recorded for $3.1 million which was comprised of (i) 42 mitigation credits with a cost basis of $2.9 million that were provided at no cost to buyers and (ii) the Company’s purchase of two mitigation credits for $0.2 million.
22
Subsurface Interests. As of September 30, 2021, the Company owns 415,000 acres of Subsurface Interests. The Company leases certain of the Subsurface Interests to mineral exploration firms for exploration. The Company’s subsurface operations consist of revenue from the leasing of exploration rights and in some instances, additional revenues from royalties applicable to production from the leased acreage. During the nine months ended September 30, 2021, the Company sold approximately 39,200 acres of subsurface oil, gas, and mineral rights for a sales price of $3.5 million, which revenues are included within real estate operations in the consolidated statements of operations. During the nine months ended September 30, 2020, the Company sold 345 acres of subsurface oil, gas, and mineral rights for a sales price of $0.4 million, which revenues are included within real estate operations in the consolidated statements of operations. Revenues received from oil royalties totaled $0.03 million and $0.02 million during the nine months ended September 30, 2021 and 2020, respectively.
The Company is not prohibited from selling any or all of its Subsurface Interests. The Company may release surface entry rights or other rights upon request of a surface owner for a negotiated release fee typically based on a percentage of the surface value. Should the Company complete a transaction to sell all or a portion of its Subsurface Interests or complete a release transaction, the Company may utilize the like-kind exchange structure in acquiring one or more replacement investments including income-producing properties. Cash payments for the release of surface entry rights totaled $0.1 million and $0.2 million during the nine months ended September 30, 2021 and 2020, respectively.
Land Impairments. There were no impairment charges on the Company’s undeveloped land holdings, or its income property portfolio during the three and nine months ended September 30, 2021 and 2020. The $16.5 million impairment charge recognized during the three months ended June 30, 2021 is related to the Company’s retained interest in the Land JV as a result of the estimated proceeds to be received in connection with the contract entered into with Timberline Acquisition Partners, an affiliate of Timberline Real Estate Partners (“Timberline”), for the sale of substantially all of its remaining land, including any land that was previously under contract, for a sales price of $67.0 million. As a result of the sale of approximately 8 acres for $0.8 million completed by the Land JV during the three months ended September 30, 2021, the sales price was reduced to $66.2 million.
NOTE 8. INVESTMENTS IN JOINT VENTURES
The Company’s Investment in Joint Ventures was as follows as of September 30, 2021 and December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of |
||||
|
|
|
September 30, 2021 |
|
December 31, 2020 |
||
|
Land JV |
|
$ |
25,575 |
|
$ |
41,765 |
|
Mitigation Bank JV |
|
|
— |
|
|
6,912 |
|
Total Investment in Joint Ventures |
|
$ |
25,575 |
|
$ |
48,677 |
Land JV. The Company’s retained interest in the Land JV represents a notional 33.5% stake in the venture, the value of which may be realized in the form of distributions based on the timing and the amount of proceeds achieved when the land is ultimately sold by the Land JV. As of June 30, 2021, the Land JV had completed $79.7 million in land sales since its inception in mid-October 2019. During the second quarter of 2021, the Land JV entered into a binding contract with Timberline, for the sale of substantially all of its remaining 1,600 acres of land, including any parcels that were previously under contract, for a sales price of $67.0 million. As a result of the sale of approximately 8 acres for $0.8 million completed by the Land JV during the three months ended September 30, 2021, the sales price was reduced to $66.2 million. Completion of the sale to Timberline under the above-referenced contract would result in estimated proceeds to the Company, after distributions to the other member of the Land JV, and before taxes, of $25.6 million. Accordingly, during the three months ended June 30, 2021, the Company recorded an impairment charge of $16.5 million to reduce the balance of the investment in the Land JV to the amount of the estimated proceeds from the potential sale to Timberline. The closing of the sale to Timberline is anticipated to occur prior to year-end and is subject to completion of customary due diligence and closing conditions. As of September 30, 2021, the Company, as manager of the Land JV, continues to pursue the sale of individual parcels within the remaining 1,600 acres, which sales would be subject to approval by Timberline.
The Company currently serves as the manager of the Land JV and is responsible for day-to-day operations at the direction of the partners of the Land JV (the “JV Partners”). All major decisions and certain other actions that can be taken by the manager must be approved by the unanimous consent of the JV Partners (the “Unanimous Actions”). Unanimous Actions include such matters as the approval of pricing for all land parcels in the Land JV; approval of contracts for the sale of land that contain material revisions to the standard purchase contract of the Land JV; entry into any lease agreement
23
affiliated with the Land JV; entering into listing or brokerage agreements; approval and amendment of the Land JV’s operating budget; obtaining financing for the Land JV; admission of additional members; and dispositions of the Land JV’s real property for amounts less than market value. Pursuant to the Land JV’s operating agreement, the Land JV paid the manager a management fee in the initial amount of $20,000 per month. The management fee is evaluated quarterly and as land sales occur in the Land JV, the basis for our management fee is reduced as the management fee is based on the value of real property that remains in the Land JV. The monthly management fee as of September 30, 2021 was $10,000 per month.
The investment in joint ventures on the Company’s consolidated balance sheets includes the Company’s ownership interest in the Land JV. We have concluded the Land JV is a variable interest entity and is accounted for under the equity method of accounting as the Company is not the primary beneficiary as defined in FASB ASC Topic 810, Consolidation. The significant factors related to this determination include, but are not limited to, the Land JV being jointly controlled by the members through the use of unanimous approval for all material actions. Under the guidance of FASB ASC 323, Investments-Equity Method and Joint Ventures, the Company uses the equity method to account for the Land JV investment.
The following table provides summarized financial information of the Land JV as of September 30, 2021 and December 31, 2020 (in thousands):
The following table provides summarized financial information of the Land JV for the three and nine months ended September 30, 2021 and 2020 (in thousands):
The Company’s share of the Land JV’s net income (loss) was zero for the three and nine months ended September 30, 2021 and 2020. Pursuant to ASC 323, certain adjustments are made when calculating the Company’s share of net income, including adjustments required to reflect the investor’s share of changes in investee’s capital to reflect distributions from the venture. Additionally, basis differences are also considered. The Company recorded the retained interest in the Land JV of $48.9 million at the estimated fair market value based on the relationship of the $97.0 million sales price of the 66.5% equity interest to the 33.5% retained interest. The Land JV recorded the assets contributed by the Company at carry-over basis pursuant to ASC 845 which states that transfers of nonmonetary assets should typically be recorded at the transferor’s historical cost basis. Accordingly, the Company’s basis difference in the 33.5% retained equity interest will be evaluated each quarter upon determining the Company’s share of the Land JV’s net income. Although no adjustment was required related to the Company’s share of the Land JV’s net income for the three and nine months ended September 30, 2021 or 2020, the Company did record an impairment of $16.5 million during the three months ended June 30, 2021 on the retained equity interest as a result of the estimated proceeds to be received from the potential sale to Timberline.
24
Mitigation Bank. The mitigation bank transaction completed in June 2018 consisted of the sale of a 70% interest in the entity that owns the Mitigation Bank (the “Mitigation Bank JV”). The purchaser of the 70% interest in the Mitigation Bank JV is comprised of certain funds and accounts managed by an investment advisor subsidiary of BlackRock, Inc. (“BlackRock”). The Company retained a 30% non-controlling interest in the Mitigation Bank JV. A third-party was retained by the Mitigation Bank JV as the day-to-day manager of the Mitigation Bank JV property, responsible for the maintenance, generation, tracking, and other aspects of wetland mitigation credits. Prior to September 30, 2021, the investment in joint ventures included on the Company’s consolidated balance sheets included $6.9 million related to the fair market value of the 30% retained interest in the Mitigation Bank JV.
On September 30, 2021, the Company, through a wholly owned and fully consolidated TRS, purchased the remaining 70% interest in the Mitigation Bank JV from BlackRock for $18.0 million (the “Interest Purchase”) resulting in a net cash payment by the Company of $16.1 million after utilizing the available cash in the Mitigation Bank JV of $1.9 million. The $16.1 million portion of the Interest Purchase was funded using available cash and the Company’s revolving credit facility. As a result of the Interest Purchase, the Mitigation Bank JV is now wholly owned by the Company and is referred to as the Mitigation Bank. Pursuant to ASU 2017-01, Business Combinations: Clarifying the Definition of a Business, the Interest Purchase represents an asset acquisition as substantially all of the fair value of the gross assets acquired are concentrated in a group of similar identifiable assets, i.e. the mitigation credits and mitigation credit rights. Accordingly, the Company recorded the Interest Purchase by allocating the total cost of the asset group to the individual assets acquired. The Company’s total cost of the Interest Purchase totaled $24.9 million which is comprised of (i) the $18.0 million Interest Purchase and (ii) the $6.9 million previously recorded value of the retained interest in the entity that owns the Mitigation Bank. In connection with the Interest Purchase, the previously recorded value of $6.9 million of the retained interest was eliminated and the $24.9 million total cost was allocated as follows: (i) $1.8 million to cash and cash equivalents, (ii) $0.6 million to restricted cash, (iii) $0.9 million to the mitigation credits, and (iv) $21.6 million to the mitigation credit rights.
During the period from June 2018 through the date of the Interest Purchase on September 30, 2021, the operations of the Mitigation Bank JV are summarized as follows. The operating agreement of the Mitigation Bank JV (the “Operating Agreement”) was executed in conjunction with the mitigation bank transaction and stipulated that the Company should have arranged for sales of the Mitigation Bank JV’s mitigation credits to unrelated third parties totaling no less than $6.0 million of revenue to the Mitigation Bank JV, net of commissions, by the end of 2020, utilizing a maximum of 60 mitigation credits (the “Minimum Sales Requirement”). The Operating Agreement stipulated that if the Minimum Sales Requirement was not achieved, then BlackRock had the right, but was not required, to cause the Company to purchase the number of mitigation credits necessary to reach the Minimum Sales Requirement (the “Minimum Sales Guarantee”). As a result of not having achieved the Minimum Sales Requirement prior to December 31, 2020, during the nine months ended September 30, 2021, the Company had active discussions with BlackRock whereby BlackRock did not cause the Company to effectuate the Minimum Sales Guarantee, rather, the Company purchased the remaining 70% interest in the Mitigation Bank JV from BlackRock.
During June 2018, upon closing the Mitigation Bank JV, the Company estimated the fair value of the Minimum Sales Guarantee at $0.1 million which was recorded as a reduction in the gain on the transaction and was included in accrued and other liabilities in the Company’s consolidated balance sheet. As a result of the Interest Purchase, as of September 30, 2021, there is no remaining liability related to the Minimum Sales Guarantee.
Additionally, the Operating Agreement provided BlackRock had the right to cause the Company to purchase a maximum of 8.536 mitigation credits per quarter (the “Commitment Amount”) from the Mitigation Bank JV at a price equal to 60% of the then fair market value for mitigation credits (the “Put Right”). The Put Right was applicable even if the Mitigation Bank JV had not yet been awarded a sufficient number of mitigation credits by the applicable federal and state regulatory agencies. Further, in any quarter that BlackRock did not exercise its Put Right, the unexercised Commitment Amount for the applicable quarter may have been rolled over to future calendar quarters. However, the Operating Agreement also stipulated that any amount of third-party sales of mitigation credits would reduce the Put Rights outstanding on a one-for-one basis, if the sales price of the third-party sales equaled or exceeded the prices stipulated by the Put Right. Further, any sales of mitigation credits to third parties at the requisite minimum prices in a quarter that exceeded the quarterly amount of the Put Right would reduce the Put Rights in future calendar quarters on a one-for-one basis. The initial maximum potential of future payments for the Company pursuant to the Put Right was $27.0 million. During June 2018, the Company estimated the fair value of the Put Right to be $0.2 million, which was recorded as a reduction in the gain on the transaction and was included in accrued and other liabilities in the Company’s consolidated
25
balance sheet. As a result of the Interest Purchase, as of September 30, 2021, there is no remaining liability related to the Put Right.
During the nine months ended September 30, 2021, BlackRock did not exercise its Put Right. During the year ended December 31, 2020, BlackRock exercised its Put Right and put 48 mitigation credits to the Company inclusive of (i) 20 mitigation credits acquired during the three months ended March 31, 2020 totaling $1.5 million, or $75,000 per credit, (ii) 20 mitigation credits acquired during the three months ended September 30, 2020 totaling $1.5 million, or $75,000 per credit, and (iii) 8 mitigation credits acquired during the three months ended December 31, 2020 totaling $0.6 million, or $75,000 per credit. For periods prior to the Interest Purchase completed on September 30, 2021, the Company evaluated the impact of the exercised Put Right on the fair value of the Company’s investment in the Mitigation Bank JV of $6.9 million, and on the fair value of the mitigation credits purchased, noting no impairment issues.
The following tables provide summarized financial information of the Mitigation Bank JV as of September 30, 2021 and December 31, 2020 (in thousands). No balances remain as of September 30, 2021 as a result of the Interest Purchase:
The following table provides summarized financial information of the Mitigation Bank JV for the three and nine months ended September 30, 2021 and 2020 (in thousands):
The Company’s share of the Mitigation Bank JV’s net income (loss) was zero for the three and nine months ended September 30, 2021 and 2020. Pursuant to ASC 323, certain adjustments are made when calculating the Company’s share of net income, including adjustments required to reflect the investor’s share of changes in investee’s capital to reflect distributions from the venture. Additionally, basis differences are also considered. The Company recorded the initial retained interest in the Mitigation Bank JV of $6.8 million in June 2018 at the estimated fair market value based on the relationship of the $15.3 million sales price of the 70% equity interest to the 30% retained interest. The Mitigation Bank JV recorded the assets contributed by the Company at carry-over basis pursuant to ASC 845 which states that transfers of nonmonetary assets should typically be recorded at the transferor’s historical cost basis. Accordingly, the Company’s basis difference in the 30% retained equity interest was evaluated each quarter upon determining the Company’s share of the Mitigation Bank JV’s net income. As a result of the Interest Purchase, such evaluation will no longer be required subsequent to September 30, 2021.
26
NOTE 9. INVESTMENT SECURITIES
On November 26, 2019, the Company purchased 394,737 shares of PINE common stock for a total purchase price of $7.5 million in a private placement. Also, on November 26, 2019, the Company purchased 421,053 shares of PINE common stock in the IPO for a total purchase price of $8.0 million. As of September 30, 2021, the Company owns, in the aggregate, 2.04 million shares of PINE, or 15.7% of PINE’s total shares outstanding for an investment value of $37.5 million, which total includes 1.2 million of OP Units, or 9.4%, the Company received in exchange for the contribution of certain income properties to the PINE Operating Partnership, in addition to 815,790 shares of common stock owned by the Company, or 6.3%. The Company has elected the fair value option related to the aggregate investment in securities of PINE pursuant to ASC 825, otherwise such investments would have been accounted for under the equity method.
The Company calculates the unrealized gain or loss based on the closing stock price of PINE at each respective balance sheet date. The unrealized, non-cash gains and losses resulting from the changes in the closing stock price of PINE are included in investment and other income (loss) in the consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020.
The Company’s available-for-sale securities as of September 30, 2021 and December 31, 2020 are summarized below (in thousands):
NOTE 10. 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, 2021 and December 31, 2020 (in thousands):
To determine estimated fair values of the financial instruments listed above, market rates of interest, which include credit assumptions, were used to discount contractual cash flows. 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.
27
The following table presents the fair value of assets (liabilities) measured on a recurring basis by level as of September 30, 2021 and December 31, 2020 (in thousands):
|
(1) |
Effective March 31, 2020, the Company utilized an interest rate swap to fix LIBOR and achieve a fixed interest rate of 0.73% plus the applicable spread on $100.0 million of the outstanding balance on the Credit Facility, hereinafter defined. |
|
(2) |
Effective March 10, 2021, the Company redesignated the interest rate swap, entered into as of August 31, 2020, to fix LIBOR and achieve a fixed interest rate of 0.22% plus the applicable spread on $50.0 million outstanding principal balance on the 2026 Term Loan, hereinafter defined. |
|
(3) |
Effective August 31, 2021, the Company utilized an interest rate swap to fix LIBOR and achieve a fixed interest rate of 0.77% plus the applicable spread on the remaining $15.0 million outstanding principal balance on the 2026 Term Loan, hereinafter defined. |
|
(4) |
Effective March 12, 2021, in connection with the payoff of the $23.2 million variable-rate mortgage loan secured by Wells Fargo Raleigh, the interest rate swap was terminated. |
No assets were measured on a non-recurring basis as of September 30, 2021 or December 31, 2020.
NOTE 11. INTANGIBLE LEASE 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 September 30, 2021 and December 31, 2020 (in thousands):
During the nine months ended September 30, 2021, the value of in-place leases increased by $5.5 million, the value of above-market in-place leases increased by $8.6 million, the value of intangible leasing costs increased by $1.7 million, and the value of below-market in-place leases decreased by $32.6 million. Such increases reflect 2021 acquisitions, net of 2021 dispositions. Net accumulated amortization increased by $12.8 million, for a net increase during the nine months ended September 30, 2021 of $35.6 million.
28
The $32.6 million decrease in the value of below market in-place leases is primarily attributable to the disposition of the Company’s office property in Raleigh, North Carolina leased to Wells Fargo, which unamortized below market in-place lease value was $31.6 million prior to its disposition during the three months ended September 30, 2021.
The following table reflects the net amortization of intangible assets and liabilities during the three and nine months ended September 30, 2021 and 2020 (in thousands):
The estimated future amortization expense (income) related to net intangible assets and liabilities is as follows (in thousands):
As of September 30, 2021, the weighted average amortization period of total intangible assets and liabilities was 8.1 years and 8.2 years, respectively.
NOTE 12. IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The fair value of long-lived assets required to be assessed for impairment is determined on a non-recurring basis using Level 3 inputs in the fair value hierarchy. These Level 3 inputs may include, but are not limited to, executed purchase and sale agreements on specific properties, third party valuations, discounted cash flow models, and other model-based techniques.
There were no impairment charges on the Company’s undeveloped land holdings, or its income property portfolio during the three and nine months ended September 30, 2021 and 2020. The $16.5 million impairment charge recognized during the three months ended June 30, 2021 is related to the Company’s retained interest in the Land JV as a result of the estimated proceeds to be received in connection with the contract entered into with Timberline for the sale of substantially all of its remaining land, including any land that was previously under contract, for a sales price of $67.0 million. As a result of the sale of approximately 8 acres for $0.8 million completed by the Land JV during the three months ended September 30, 2021, the sales price was reduced to $66.2 million.
29
NOTE 13. OTHER ASSETS
Other assets consisted of the following as of September 30, 2021 and December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of |
||||
|
|
|
September 30, 2021 |
|
December 31, 2020 |
||
|
Income Property Tenant Receivables |
|
$ |
824 |
|
$ |
2,330 |
|
Income Property Straight-line Rent Adjustment and COVID-19 Deferral Balance |
|
|
4,970 |
|
|
4,686 |
|
Operating Leases - Right-of-Use Asset |
|
|
198 |
|
|
246 |
|
Golf Rounds Surcharge |
|
|
363 |
|
|
454 |
|
Cash Flow Hedge - Interest Rate Swap |
|
|
328 |
|
|
— |
|
Infrastructure Reimbursement Receivables |
|
|
1,358 |
|
|
1,336 |
|
Prepaid Expenses, Deposits, and Other |
|
|
1,768 |
|
|
1,693 |
|
Due from Alpine Income Property Trust, Inc. |
|
|
1,355 |
|
|
666 |
|
Financing Costs, Net of Accumulated Amortization |
|
|
531 |
|
|
769 |
|
Total Other Assets |
|
$ |
11,695 |
|
$ |
12,180 |
Income Property Straight-Line Rent Adjustment. As of September 30, 2021 and December 31, 2020, the straight-line rent adjustment includes a balance of $0.2 million and $1.0 million, respectively, of deferred rent related to the COVID-19 Pandemic. Pursuant to the interpretive guidance issued by the FASB in April 2020 on lease modifications, for leases in which deferred rent agreements were reached, the Company has continued to account for the lease concessions by recognizing the normal straight-line rental income and as the deferred rents are repaid by the tenant, the straight-line receivable will be reduced.
Infrastructure Reimbursement Receivables. As of September 30, 2021 and December 31, 2020, the infrastructure reimbursement receivables were all related to the land sales within the Tomoka Town Center. The balance as of September 30, 2021 consisted of $0.9 million due from Tanger for infrastructure reimbursement to be repaid in six remaining annual installments of approximately $0.2 million each, net of a discount of $0.1 million, and $0.4 million due from Sam’s Club for infrastructure reimbursement to be repaid in four remaining annual installments of $0.1 million each, net of a discount of $0.03 million.
NOTE 14. EQUITY
MERGER
As a result of the Merger, as described in Note 1, “Description of Business”, the Company is authorized to issue 500,000,000 shares of common stock, $0.01 par value per share, and 100,000,000 shares of preferred stock, $0.01 par value per share. Prior to the Merger, the Company’s common stock had a par value of $1.00 per share. Accordingly, a $7.2 million adjustment to reduce common stock with a corresponding increase to additional paid-in capital was made during the three months ended March 31, 2021 and is reflected in the accompanying consolidated statements of stockholders’ equity.
Additionally, as a result of the Merger and pursuant to Maryland state law, the Company’s treasury stock ceased to be outstanding and was returned to unissued status. Accordingly, a $77.5 million adjustment to eliminate treasury stock with a corresponding decrease to additional paid-in capital was made during the three months ended March 31, 2021 and is reflected in the accompanying consolidated statements of stockholders’ equity.
SHELF REGISTRATION
On April 1, 2021, the Company filed a shelf registration statement on Form S-3, relating to the registration and potential issuance of its common stock, preferred stock, debt securities, warrants, rights, and units with a maximum aggregate offering price of up to $350.0 million. The Securities and Exchange Commission declared the Form S-3 effective on April 19, 2021.
30
ATM PROGRAM
On April 30, 2021, the Company implemented a $150.0 million “at-the-market” equity offering program (the “ATM Program”) pursuant to which the Company may sell, from time to time, shares of the Company’s common stock. The Company was not active under the ATM Program during the nine months ended September 30, 2021.
PREFERRED STOCK
On June 28, 2021, the Company priced a public offering of 3,000,000 shares of its 6.375% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”) at a public offering price of $25.00 per share. The offering closed on July 6, 2021 and generated total net proceeds to the Company of $72.4 million, after deducting the underwriting discount and expenses. The Series A Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company. The Series A Preferred Stock has no maturity date and will remain outstanding unless redeemed.
The Series A Preferred Stock is not redeemable by the Company prior to July 6, 2026 except under limited circumstances intended to preserve the Company’s qualification as a REIT for U.S. federal income tax purposes or upon the occurrence of a change of control, as defined in the Articles Supplementary designating the Series A Preferred Stock (the “Articles Supplementary”). Upon such change in control, the Company may redeem, at its election, the Series A Preferred Stock at a redemption price of $25.00 per share plus any accumulated and unpaid dividends up to, but excluding the date of redemption, and in limited circumstances, the holders of preferred stock shares may convert some or all of their Series A Preferred Stock into shares of the Company’s common stock at conversion rates set forth in the Articles Supplementary.
The following details the public offering (in thousands, except per share data):
DIVIDENDS
The Company has elected to be taxed as a REIT for U.S. federal income tax purposes under the Code commencing with its taxable year ended December 31, 2020. To qualify as a REIT, the Company must annually distribute, at a minimum, an amount equal to 90% of its taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, and must distribute 100% of its taxable income (including net capital gains) to eliminate corporate federal income taxes payable by the Company. Because taxable income differs from cash flow from operations due to non-cash revenues and expenses (such as depreciation and other items), in certain circumstances, the Company may generate operating cash flow in excess of its dividends, or alternatively, may need to make dividend payments in excess of operating cash flows.
The following table outlines dividends declared and paid for each issuance of CTO’s stock during the three and nine months ended September 30, 2021 and 2020 (in thousands, except per share data):
31
NOTE 15. COMMON STOCK AND EARNINGS (LOSS) PER SHARE
Basic earnings per common share is computed by dividing net income (loss) attributable to common stockholders during the period by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is based on the assumption of the conversion of stock options and vesting of restricted stock at the beginning of each period using the treasury stock method at average cost for the periods.
The following is a reconciliation of basic and diluted earnings per common share for each of the periods presented (in thousands, except share and per share data):
There were no potentially dilutive securities for the three and nine month periods ended September 30, 2021 or 2020. The effect of 41,558 potentially dilutive securities were not included for the nine months ended September 30, 2020 as the effect would be anti-dilutive.
The Company intends to settle its 3.875% Convertible Senior Notes due 2025 (the “2025 Notes”) in cash upon conversion with any excess conversion value to be settled in shares of our common stock. Pursuant to ASC 260, Earnings per Share, the Company has overcome the presumption of share settlement and, therefore, there is no dilutive impact for the three or nine months ended September 30, 2021. The Company intends to adopt ASU 2020-06 commencing January 1, 2022, at which time, the Company’s diluted EPS calculation will include the dilutive impact of the 2025 Notes, irrespective of intended cash settlement. Further, the Company elects, upon adoption, to utilize the modified retrospective approach, negating the required restatement of EPS for periods prior to adoption.
NOTE 16. SHARE REPURCHASES
In February 2020, the Company’s Board approved a $10.0 million stock repurchase program (the “$10.0 Million Repurchase Program”). During the nine months ended September 30, 2020, the Company repurchased 88,565 shares of its common stock on the open market for a total cost of $4.1 million, or an average price per share of $46.29. The shares of the Company’s common stock repurchased during the nine months ended September 30, 2020 were returned to the Company’s treasury. There were no repurchases of the Company’s common stock during the nine months ended September 30, 2021. The $10.0 Million Repurchase Program does not have an expiration date.
As a result of the Merger and pursuant to Maryland state law, the Company’s treasury stock ceased to be outstanding and was returned to unissued status. Accordingly, a $77.5 million adjustment to eliminate treasury stock with a corresponding decrease to additional paid-in capital was made during the three months ended March 31, 2021 and is reflected in the accompanying consolidated statements of stockholders’ equity.
32
NOTE 17. LONG-TERM DEBT
Our consolidated indebtedness as of September 30, 2021 was $235.7 million. The consolidated indebtedness was comprised of $109.0 million outstanding under our revolving credit facility (the “Credit Facility”), inclusive of the $65.0 million term loan (the “2026 Term Loan”) balance, and $61.7 million principal amount of 2025 Notes.
Long-term debt, at face value, totaled $235.7 million at September 30, 2021, representing a decrease of $44.8 million from the balance of $280.5 million at December 31, 2020. The $44.8 million decrease in long-term debt was related to the impact of (i) origination of the $50.0 million 2026 Term Loan under the Company’s Credit Facility and subsequent exercise of the accordion option of $15.0 million, (ii) net repayments on the Credit Facility totaling $55.8 million, (iii) assumption of the $30.0 million fixed-rate mortgage note by the buyer in connection with the disposition of the CMBS Portfolio during the second quarter of 2021, (iv) payoff of the $23.2 million variable-rate mortgage note, and (v) repurchase of $0.8 million aggregate amount of convertible notes. In connection with the payoff of the variable-rate mortgage note originated with Wells Fargo, the associated interest rate swap was terminated on March 12, 2021.
As of September 30, 2021, the Company’s outstanding indebtedness, at face value, was as follows (in thousands):
(1) Effective March 31, 2020, the Company utilized an interest rate swap to fix LIBOR and achieve a fixed interest rate of 0.73% plus the applicable spread on $100.0 million of the outstanding balance on the Credit Facility.
|
(2) |
The Company utilized interest rate swaps on the $65.0 million 2026 Term Loan balance, including (i) its redesignation of the existing $50.0 million interest rate swap, entered into as of August 31, 2020, and (ii) a $15.0 million interest rate swap effective August 31, 2021, to fix LIBOR and achieve a weighted average fixed interest rate of 0.35% plus the applicable spread. |
Credit Facility. The Credit Facility, with Bank of Montreal (“BMO”) as the administrative agent for the lenders thereunder, is unsecured with regard to our income property portfolio but is guaranteed by certain wholly owned subsidiaries of the Company. The Credit Facility bank group is led by BMO and also includes Truist Bank and Wells Fargo. On September 7, 2017, the Company executed the second amendment and restatement of the Credit Facility (the “2017 Amended Credit Facility”). As a result of the 2021 Revolver Amendment, as defined below, The Huntington National Bank has been added as a lender to the Company’s Credit Facility and 2026 Term Loan.
On May 24, 2019, the Company executed the second amendment to the 2017 Amended Credit Facility (the “May 2019 Revolver Amendment”). As a result of the May 2019 Revolver Amendment, the Credit Facility had a total borrowing capacity of $200.0 million with the ability to increase that capacity up to $300.0 million during the term, subject to lender approval. The Credit Facility provides the lenders with a security interest in the equity of the Company subsidiaries that own the properties included in the borrowing base. The indebtedness outstanding under the Credit Facility accrues interest at a rate ranging from the 30-day LIBOR plus 135 basis points to the 30-day LIBOR plus 195 basis points based on the total balance outstanding under the Credit Facility as a percentage of the total asset value of the Company, as defined in the 2017 Amended Credit Facility, as amended by the May 2019 Revolver Amendment. The Credit Facility also accrues a fee of 15 to 25 basis points for any unused portion of the borrowing capacity based on whether the unused portion is greater or less than 50% of the total borrowing capacity. Pursuant to the May 2019 Revolver Amendment, the Credit Facility matures on May 24, 2023, with the ability to extend the term for 1 year.
On November 26, 2019, the Company entered into the third amendment to the 2017 Amended Credit Facility (the “November 2019 Revolver Amendment”), which further amends the 2017 Amended Credit Facility. The November 2019 Revolver Amendment included, among other things, an adjustment of certain financial maintenance covenants, including a temporary reduction of the minimum fixed charge coverage ratio to allow the Company to redeploy the proceeds received from the sale of certain income properties to PINE, and an increase in the maximum amount the Company may invest in stock and stock equivalents of real estate investment trusts to allow the Company to invest in the common stock and OP Units.
33
On July 1, 2020, the Company entered into the fourth amendment to the 2017 Amended Credit Facility (the “July 2020 Revolver Amendment”) whereby the tangible net worth covenant was adjusted to be more reflective of market terms. The July 2020 Revolver Amendment was effective as of March 31, 2020.
On November 12, 2020, the Company entered into the fifth amendment to the 2017 Amended Credit Facility (the “November 2020 Revolver Amendment”). The November 2020 Revolver Amendment provided that, among other things, (i) the Company must comply with certain adjusted additional financial maintenance requirements, including (x) a new restricted payments covenant which limits the type and amount of cash distributions that may be made by the Company and (y) an adjusted fix charges ratio, which now excludes certain onetime expenses for purposes of calculation and (ii) the Company must, from and after the date that the Company elects to qualify as a REIT, maintain its status as a REIT.
On March 10, 2021, the Company entered into the sixth amendment to the 2017 Amended Credit Facility (the “2021 Revolver Amendment”). The 2021 Revolver Amendment included, among other things, (i) increase of the revolving credit commitment from $200.0 million to $210.0 million, (ii) addition of the 2026 Term Loan in the aggregate amount of $50.0 million, (iii) updates to certain financing rate provisions provided therein, and (iv) joinder of The Huntington National Bank as a 2026 Term Loan lender and Credit Facility lender. The 2021 Revolver Amendment also includes accordion options that allow the Company to request additional 2026 Term Loan lender commitments up to a total of $150.0 million and additional Credit Facility lender commitments up to a total of $300.0 million. During the three months ended June 30, 2021, the Company exercised the 2026 Term Loan accordion option for $15.0 million, increasing total lender commitments to $65.0 million.
At September 30, 2021, the current commitment level under the Credit Facility was $210.0 million. The available borrowing capacity under the Credit Facility was $101.0 million, based on the level of borrowing base assets. As of September 30, 2021, the Credit Facility had a $109.0 million balance outstanding.
The Credit Facility is subject to customary restrictive covenants including, but not limited to, limitations on the Company’s ability to: (a) incur indebtedness; (b) make certain investments; (c) incur certain liens; (d) engage in certain affiliate transactions; and (e) engage in certain major transactions such as mergers. In addition, the Company is subject to various financial maintenance covenants including, but not limited to, a maximum indebtedness ratio, a maximum secured indebtedness ratio, and a minimum fixed charge coverage ratio. The Credit Facility also contains affirmative covenants and events of default including, but not limited to, a cross default to the Company’s other indebtedness and upon the occurrence of a change in control. The Company’s failure to comply with these covenants or the occurrence of an event of default could result in acceleration of the Company’s debt and other financial obligations under the Credit Facility.
Mortgage Notes Payable. On March 12, 2021, the Company repaid its $23.2 million variable-rate mortgage note payable and terminated the associated rate swap utilized to achieve a fixed interest rate of 3.17%. On June 30, 2021, the Company’s $30.0 million fixed-rate mortgage note payable was assumed by the buyer in connection with the disposition of the CMBS Portfolio during the second quarter of 2021. There are no mortgage notes payable as of September 30, 2021.
Convertible Debt. The Company’s $75.0 million aggregate principal amount of 4.50% Convertible Notes (the “2020 Notes”) were scheduled to mature on March 15, 2020; however, the Company completed the Note Exchanges, hereinafter defined, on February 4, 2020. The initial conversion rate was 14.5136 shares of common stock for each $1,000 principal amount of the 2020 Notes, which represented an initial conversion price of $68.90 per share of common stock.
On February 4, 2020, the Company closed privately negotiated exchange agreements with certain holders of its outstanding 2020 Notes pursuant to which the Company issued $57.4 million principal amount of the 2025 Notes in exchange for $57.4 million principal amount of the 2020 Notes (the “Note Exchanges”). In addition, the Company closed a privately negotiated purchase agreement with an investor, who had not invested in the 2020 Notes, and issued $17.6 million principal amount of the 2025 Notes (the “New Notes Placement,” and together with the Note Exchanges, the “Convert Transactions”). The Company used $5.9 million of the proceeds from the New Notes Placement to repurchase $5.9 million of the 2020 Notes. As a result of the Convert Transactions there was a total of $75.0 million aggregate principal amount of 2025 Notes outstanding.
In exchange for issuing the 2025 Notes pursuant to the Note Exchanges, the Company received and cancelled the exchanged 2020 Notes. The $11.7 million of net proceeds from the New Notes Placement were used to redeem at maturity on March 15, 2020 $11.7 million of the aggregate principal amount of the 2020 Notes that remained outstanding.
34
During the year ended December 31, 2020, the Company repurchased $12.5 million aggregate principal amount of 2025 Notes at a $2.6 million discount, resulting in a gain on extinguishment of debt of $1.1 million. All such repurchases were made during first and second quarter of 2020. During the nine months ended September 30, 2021, the Company repurchased $0.8 million aggregate principal amount of 2025 Notes at a $0.01 million premium, resulting in a loss on extinguishment of debt of $0.1 million. Following the repurchase of the 2025 Notes, $61.7 million aggregate principal amount of the 2025 Notes remains outstanding at September 30, 2021.
The 2025 Notes represent senior unsecured obligations of the Company and pay interest semi-annually in arrears on each April 15th and October 15th, commencing on April 15, 2020, at a rate of 3.875% per annum. The 2025 Notes mature on April 15, 2025 and may not be redeemed by the Company prior to the maturity date. The conversion rate for the 2025 Notes was initially 12.7910 shares of the Company’s common stock per $1,000 of principal of the 2025 Notes (equivalent to an initial conversion price of $78.18 per share of the Company’s common stock). The initial conversion price of the 2025 Notes represented a premium of 20% to the $65.15 closing sale price of the Company’s common stock on the NYSE American on January 29, 2020. If the Company’s Board increases the quarterly dividend above the $0.13 per share in place at issuance, the conversion rate is adjusted with each such increase in the quarterly dividend amount. After the third quarter 2021 dividend, the conversion rate is equal to 19.1756 shares of common stock for each $1,000 principal amount of 2025 Notes, which represents an adjusted conversion price of $52.15 per share of common stock. At the maturity date, the 2025 Notes are convertible into cash, common stock or a combination thereof, subject to various conditions, at the Company’s option. Should certain corporate transactions or events occur prior to the stated maturity date, the Company will increase the conversion rate for a holder that elects to convert its 2025 Notes in connection with such corporate transaction or event.
The conversion rate is subject to adjustment in certain circumstances. Holders may not surrender their 2025 Notes for conversion prior to January 15, 2025 except upon the occurrence of certain conditions relating to the closing sale price of the Company’s common stock, the trading price per $1,000 principal amount of 2025 Notes, or specified corporate events including a change in control of the Company. The Company may not redeem the 2025 Notes prior to the stated maturity date and no sinking fund is provided for the 2025 Notes. The 2025 Notes are convertible, at the election of the Company, into solely cash, solely shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. The Company intends to settle the 2025 Notes in cash upon conversion, with any excess conversion value to be settled in shares of our common stock. In accordance with U.S. GAAP, the 2025 Notes were accounted for as a liability with a separate equity component recorded for the conversion option. A liability was recorded for the 2025 Notes on the issuance date at fair value based on a discounted cash flow analysis using current market rates for debt instruments with similar terms. The difference between the initial proceeds from the 2025 Notes and the estimated fair value of the debt instruments resulted in a debt discount, with an offset recorded to additional paid-in capital representing the equity component. As of September 30, 2021, the unamortized debt discount of our 2025 Notes was $5.1 million.
Long-term debt consisted of the following (in thousands):
35
Payments applicable to reduction of principal amounts as of September 30, 2021 will be required as follows (in thousands):
|
|
|
|
|
|
As of September 30, 2021 |
|
Amount |
|
|
Remainder of 2021 |
|
$ |
— |
|
2022 |
|
|
— |
|
2023 |
|
|
109,000 |
|
2024 |
|
|
— |
|
2025 |
|
|
61,688 |
|
2026 and thereafter |
|
|
65,000 |
|
Total Long-Term Debt - Face Value |
|
$ |
235,688 |
The carrying value of long-term debt as of September 30, 2021 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
Total |
|
|
Current Face Amount |
|
$ |
235,688 |
|
Unamortized Discount on Convertible Debt |
|
|
(5,130) |
|
Financing Costs, net of accumulated amortization |
|
|
(664) |
|
Total Long-Term Debt |
|
$ |
229,894 |
In addition to the $0.7 million of financing costs, net of accumulated amortization included in the table above, as of September 30, 2021, the Company also had financing costs, net of accumulated amortization related to the Credit Facility of $0.5 million which is included in other assets on the consolidated balance sheets. These costs are amortized on a straight-line basis over the term of the Credit Facility and are included in interest expense in the Company’s accompanying consolidated statements of operations.
The following table reflects a summary of interest expense incurred and paid during the three and nine months ended September 30, 2021 and 2020 (in thousands):
The Company was in compliance with all of its debt covenants as of September 30, 2021 and December 31, 2020.
36
NOTE 18. INTEREST RATE SWAPS
The Company has entered into interest rate swap agreements to hedge against changes in future cash flows resulting from fluctuating interest rates related to the below noted borrowings. The interest rate agreements were 100% effective during the nine months ended September 30, 2021. Accordingly, the changes in fair value on the interest rate swaps have been classified in accumulated other comprehensive income (loss). The fair value of the interest rate swap agreements are included in other assets and accrued and other liabilities, respectively, on the consolidated balance sheets. Information related to the Company’s interest rate swap agreements are noted below (in thousands):
|
(1) |
Effective March 10, 2021, the Company redesignated the interest rate swap, entered into as of August 31, 2020, that previously hedged $50.0 million of the outstanding principal balance on the Credit Facility. |
|
(2) |
The interest rate swap agreement hedges the identical $50.0 million portion of the 2026 Term Loan borrowing under different terms and commences concurrent to the interest rate agreement maturing on March 29, 2024. |
NOTE 19. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of |
||||
|
|
|
September 30,
|
|
December 31,
|
||
|
Accrued Property Taxes |
|
$ |
3,646 |
|
$ |
945 |
|
Reserve for Tenant Improvements |
|
|
2,334 |
|
|
1,353 |
|
Tenant Security Deposits |
|
|
1,559 |
|
|
824 |
|
Accrued Construction Costs |
|
|
161 |
|
|
1,783 |
|
Accrued Interest |
|
|
1,072 |
|
|
602 |
|
Environmental Reserve |
|
|
101 |
|
|
106 |
|
Cash Flow Hedge - Interest Rate Swaps |
|
|
851 |
|
|
1,910 |
|
Operating Leases - Liability |
|
|
191 |
|
|
245 |
|
Other |
|
|
2,801 |
|
|
1,322 |
|
Total Accrued and Other Liabilities |
|
$ |
12,716 |
|
$ |
9,090 |
Reserve for Tenant Improvements. In connection with the acquisition of the Shops at Legacy property in Plano, Texas on June 23, 2021, the Company received $1.9 million from the seller of the property for tenant improvement allowances, leasing commissions and other capital improvements. This amount was included in accrued and other liabilities on the consolidated balance sheets. Through September 30, 2021, payments totaling $0.4 million were made, leaving a remaining commitment of $1.5 million.
Environmental Reserve. During the year ended December 31, 2014, the Company accrued an environmental reserve of $0.1 million in connection with an estimate of additional costs required to monitor a parcel of less than one acre of land owned by the Company in Highlands County, Florida, on which environmental remediation work had previously been performed. The Company engaged legal counsel who, in turn, engaged environmental engineers to review the site and the prior monitoring test results. During the year ended December 31, 2015, their review was completed, and the Company made an additional accrual of $0.5 million, representing the low end of the range of possible costs estimated by the engineers to be between $0.5 million and $1.0 million to resolve this matter subject to the approval of the state department of environmental protection (the “FDEP”). The FDEP issued a Remedial Action Plan Modification Approval Order (the “FDEP Approval”) in August 2016 which supports the approximate $0.5 million accrual made in 2015. The Company is implementing the remediation plan pursuant to the FDEP Approval. During the fourth quarter of 2017, the Company made an additional accrual of less than $0.1 million for the second year of monitoring as the low end of the original range of
37
estimated costs was increased for the amount of monitoring now anticipated. Since the total accrual of $0.7 million was made, $0.6 million in costs have been incurred through September 30, 2021, leaving a remaining accrual of $0.1 million.
Operating Leases – Liability. The Company implemented FASB ASC Topic 842, Leases, effective January 1, 2019, resulting in a cumulative effect adjustment to increase right-of-use assets and related liabilities for operating leases for which the Company is the lessee.
NOTE 20. DEFERRED REVENUE
Deferred revenue consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of |
||||
|
|
|
September 30,
|
|
December 31,
|
||
|
Prepaid Rent |
|
$ |
2,455 |
|
$ |
2,684 |
|
Tenant Contributions |
|
|
587 |
|
|
625 |
|
Other Deferred Revenue |
|
|
614 |
|
|
10 |
|
Total Deferred Revenue |
|
$ |
3,656 |
|
$ |
3,319 |
Tenant Contributions. In connection with the construction of the Company’s beachfront restaurant formerly leased to Cocina 214 in Daytona Beach, Florida, pursuant to the lease agreement, the tenant contributed $1.9 million towards the completion of the building and tenant improvements through direct payments to various third-party construction vendors. The tenant contribution is being recognized ratably over the remaining term of the lease into income property rental revenue. As a result of the lease termination agreement, entered into on July 16, 2019 by the Company and Cocina 214, the balance of the tenant contribution liability was reduced by $1.0 million, leaving a balance of $0.7 million to be recognized into income property rental revenue ratably over the remaining term of the original Cocina 214 lease. A total of $0.1 million was recognized into income property rental revenue through September 30, 2021, leaving a balance of $0.6 million to be recognized over the remaining term of the lease.
NOTE 21. STOCK-BASED COMPENSATION
SUMMARY OF STOCK-BASED COMPENSATION
A summary of share activity for all equity classified stock compensation during the nine months ended September 30, 2021, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Award |
|
Shares Outstanding at 1/1/2021 |
|
Granted Shares |
|
Vested / Exercised Shares |
|
Expired Shares |
|
Forfeited Shares |
|
Shares Outstanding at 9/30/2021 |
||||||
|
Equity Classified - Performance Share Awards - Peer Group Market Condition Vesting |
|
|
55,851 |
|
|
48,134 |
|
|
(17,418) |
|
|
— |
|
|
— |
|
|
86,567 |
|
Equity Classified - Market Condition Restricted Shares - Stock Price Vesting |
|
|
22,000 |
|
|
— |
|
|
— |
|
|
(22,000) |
|
|
— |
|
|
— |
|
Equity Classified - Three Year Vest Restricted Shares |
|
|
38,479 |
|
|
43,050 |
|
|
(21,220) |
|
|
— |
|
|
(3,435) |
|
|
56,874 |
|
Equity Classified - Non-Qualified Stock Option Awards |
|
|
80,000 |
|
|
20,332 |
|
|
(78,791) |
|
|
— |
|
|
— |
|
|
21,541 |
|
Total Shares |
|
|
196,330 |
|
|
111,516 |
|
|
(117,429) |
|
|
(22,000) |
|
|
(3,435) |
|
|
164,982 |
As contemplated under the terms of the Second Amended and Restated 2010 Equity Incentive Plan (together with its predecessor plan, the “2010 Plan”), on January 20, 2021, in order to address the dilutive effect of the stock component of the special distribution that was paid to the Company’s stockholders on December 21, 2020 in connection with the Company’s REIT conversion, the Board’s Compensation Committee made an equitable adjustment (the “Equitable Adjustment”) to certain of the awards outstanding as of December 31, 2020. Accordingly, during the three months ended
38
March 31, 2021, the 111,516 shares granted includes 46,237 shares attributable to the Equitable Adjustment which resulted in no incremental compensation cost.
Effective as of August 4, 2017, the Company entered into amendments to the employment agreements and certain stock option award agreements and restricted share award agreements whereby such awards will fully vest following a change in control (as defined in the executive’s employment agreement) only if the executive’s employment is terminated without cause or if the executive resigns for good reason (as such terms are defined in the executive’s employment agreement), in each case, at any time during the 24-month period following the change in control.
Amounts recognized in the financial statements for stock-based compensation are as follows (in thousands):
EQUITY-CLASSIFIED STOCK COMPENSATION
Performance Share Awards – Peer Group Market Condition Vesting
Performance shares have been granted to certain employees under the 2010 Plan. The performance share awards entitle the recipient to receive, upon the vesting thereof, shares of common stock of the Company equal to between 0% and 150% of the number of performance shares awarded. The number of shares of common stock ultimately received by the award recipient is determined based on the Company’s total stockholder return as compared to the total stockholder return of a certain peer group during a three-year performance period. The Company granted a total of 48,134 performance shares during the three months ended March 31, 2021, of which 15,988 were attributable to the Equitable Adjustment.
The Company used a Monte Carlo simulation pricing model to determine the fair value of its awards that are based on market conditions. The determination of the fair value of market condition-based awards is affected by the Company’s stock price as well as assumptions regarding a number of other variables. These variables include expected stock price volatility over the requisite performance term of the awards, the relative performance of the Company’s stock price and stockholder returns to companies in its peer group, annual dividends, and a risk-free interest rate assumption. Compensation cost is recognized regardless of the achievement of the market conditions, provided the requisite service period is met.
As of September 30, 2021, there was $1.8 million of unrecognized compensation cost, adjusted for estimated 1.8 years.
A summary of activity during the nine months ended September 30, 2021 is presented below:
39
Market Condition Restricted Shares– Stock Price Vesting
Restricted Company common stock has been granted to certain employees under the 2010 Plan. The restricted Company common stock outstanding from these grants vest in increments based upon the price per share of the Company common stock during the term of employment (or within sixty days after termination of employment by the Company without cause), meeting or exceeding the target trailing thirty-day average closing prices. Effective January 28, 2021, the 22,000 shares outstanding, consisting of 18,000 shares with a $70 per share price vesting criteria and 4,000 shares with a $75 per share price vesting criteria, expired prior to vesting.
The Company used a Monte Carlo simulation pricing model to determine the fair value of its awards that are based on market conditions. The determination of the fair value of market condition-based awards is affected by the Company’s stock price as well as assumptions regarding a number of other variables. These variables include expected stock price volatility over the requisite performance term of the awards, the relative performance of the Company’s stock price and stockholder returns to companies in its peer group, annual dividends, and a risk-free interest rate assumption. Compensation cost is recognized regardless of the achievement of the market conditions, provided the requisite service period is met.
As of September 30, 2021, there is no unrecognized compensation cost related to market condition restricted stock.
A summary of the activity for these awards during the nine months ended September 30, 2021 is presented below:
Three Year Vest Restricted Shares
Restricted shares have been granted to certain employees under the 2010 Plan. One-third of the restricted shares will vest on each of the first, second, and third anniversaries of January 28 of the applicable year provided the grantee is an employee of the Company on those dates. In addition, any unvested portion of the restricted shares will vest upon a change in control. The Company granted a total of 43,050 shares of three-year restricted Company common stock during the three months ended March 31, 2021, of which 9,917 were attributable to the Equitable Adjustment.
The Company’s determination of the fair value of the three-year vest restricted stock awards was calculated by multiplying the number of shares issued by the Company’s stock price at the grant date, less the present value of expected dividends during the vesting period. Compensation cost is recognized on a straight-line basis over the vesting period.
As of September 30, 2021, there was $1.8 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to the three-year vest non-vested restricted shares, which will be recognized over a remaining weighted average period of 1.9 years.
A summary of activity for these awards nine months ended September 30, 2021 is presented below:
40
Non-Qualified Stock Option Awards
Stock option awards have been granted to certain employees under the 2010 Plan. The vesting period of the options awards granted ranged from a period of one to three years. All options had vested as of December 31, 2018. The option expires on the earliest of: (a) the tenth anniversary of the grant date; (b) twelve months after the employee’s death or termination for disability; or (c) thirty days after the termination of employment for any reason other than death or disability. Effective January 20, 2021, as a result of the Equitable Adjustment, the number of shares covered by the options then outstanding were increased by a total of 20,332 with an adjustment to the respective exercise prices.
The Company used the Black-Scholes valuation pricing model to determine the fair value of its non-qualified stock option awards. The determination of the fair value of the awards is affected by the stock price as well as assumptions regarding a number of other variables. These variables include expected stock price volatility over the term of the awards, annual dividends, and a risk-free interest rate assumption.
A summary of the activity for these awards during the nine months ended September 30, 2021 is presented below:
The total intrinsic value of options exercised during the nine months ended September 30, 2021 totaled $0.9 million. As of September 30, 2021, there is no unrecognized compensation cost related to non-qualified, non-vested stock option awards.
NON-EMPLOYEE DIRECTOR STOCK COMPENSATION
Each member of the Company’s Board of Directors has the option to receive his or her annual retainer and meeting fees in shares of Company common stock rather than cash. The number of shares awarded to the directors making such election is calculated quarterly by dividing (i) the sum of (A) the amount of the quarterly retainer payment due to such director plus (B) meeting fees earned by such director during the quarter, by (ii) the closing price of the Company’s common stock on the last business day of the quarter for which such payment applied, rounded down to the nearest whole number of shares.
Commencing in 2019, each non-employee director serving as of the beginning of each calendar year shall receive an annual award of the Company’s common stock valued at $20,000 for the years ended December 31, 2019 and 2020 and $35,000 for the year ending December 31, 2021 (the “Annual Award”). The number of shares awarded is calculated based on the trailing 20-day average price of the Company’s common stock as of the date two business days prior to the date of the award, rounded down to the nearest whole number of shares. Commencing in 2021, non-employee directors will no longer receive meeting fees, but will receive additional retainers for service on Board committees, as set forth in the Company’s Non-Employee Director Compensation Policy available on the Company’s website (www.ctoreit.com).
During the nine months ended September 30, 2021 and 2020, the expense recognized for the value of the Company’s common stock received by non-employee directors totaled $0.5 million or 9,684 shares, and $0.4 million, or 8,143 shares, respectively. The expense recognized during the nine months ended September 30, 2021 and 2020 includes the Annual Award received during the first quarter of each respective year which totaled $0.2 million and $0.1 million, respectively.
41
NOTE 22. INCOME TAXES
The Company has elected to be taxed as a REIT for U.S. federal income tax purposes under the Code commencing with its taxable year ended December 31, 2020. The Company believes that, commencing with such taxable year, it has been organized and has operated in such a manner as to qualify for taxation as a REIT under the U.S. federal income tax laws. The Company intends to continue to operate in such a manner. As a REIT, the Company will be subject to U.S. federal and state income taxation at corporate rates on its net taxable income; the Company, however, may claim a deduction for the amount of dividends paid to its stockholders. Amounts distributed as dividends by the Company will be subject to taxation at the stockholder level only. While the Company must distribute at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, to qualify as a REIT, the Company intends to distribute all of its net taxable income. The Company is allowed certain other non-cash deductions or adjustments, such as depreciation expense, when computing its REIT taxable income and distribution requirement. These deductions permit the Company to reduce its dividend payout requirement under U.S. federal income tax laws. Certain states may impose minimum franchise taxes. To comply with certain REIT requirements, the Company holds certain of its non-REIT assets and operations through TRS and subsidiaries of TRSs, which will be subject to applicable U.S. federal, state and local corporate income tax on their taxable income. For the periods presented, the Company held a total of five TRSs subject to taxation. The Company’s TRSs will file separately as C-Corporations.
As a result of the Company’s election to be taxed as a REIT, during the year ended December 31, 2020, a $82.5 million deferred tax benefit was recorded to de-recognize the deferred tax assets and liabilities associated with the entities included in the REIT. A significant portion of the deferred tax benefit recognized relates to the de-recognition of deferred tax liabilities resulting from Internal Revenue Code Section 1031 like-kind exchanges (“1031 Exchanges”). The Company will be subject to corporate income taxes related to assets held by it that are sold during the 5-year period following the date of conversion to the extent such sold assets had a built-in gain as of January 1, 2020. The Company generally does not intend to dispose of any REIT assets after the REIT conversion within the 5-year period, unless various tax planning strategies, including 1031 Exchanges or other deferred tax structures are available to mitigate the built-in gain tax liability of conversion.
NOTE 23. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, the Company may be a party to certain legal proceedings, incidental to the normal course of its business. While the outcome of the legal proceedings cannot be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon our financial condition or results of operations.
Buc-ee’s. On March 31, 2021, the Company and its wholly-owned subsidiary, Indigo Development LLC, a Florida limited liability company (collectively, “CTO”) filed a Complaint for Declaratory Relief in the Circuit Court, Seventh Judicial Circuit, in and for Volusia County, Florida (Case No. 2021-30415-CICI) against Buc-ee’s Ltd., a Texas limited partnership (“Buc-ee’s”), in connection with a dispute over funds deposited in escrow by CTO in the amount of $0.8 million (the “Escrowed Funds”). The Escrowed Funds were deposited simultaneously with CTO’s sale to Buc-ee’s in March 2018 of 35 acres of real property located in Daytona Beach, Volusia County, Florida (the “Buc-ee’s Parcel”). Pursuant to a post-closing escrow agreement between CTO and Buc-ee’s, the Escrowed Funds were to be released to CTO once CTO had obtained certain wetlands-related permits for the benefit of a portion of the Buc-ee’s Parcel. CTO was ultimately successful in obtaining the permits, although the permits were issued later than originally contemplated by the escrow agreement. Buc-ee’s was aware of and acquiesced to CTO’s continuing efforts and expenditures in obtaining the permits, including after the date originally contemplated in the escrow agreement; however, not until after the permits were issued did Buc-ee’s inform CTO that Buc-ee’s would not agree to release the Escrowed Funds to CTO. CTO’s complaint seeks a declaratory judgment determining the parties’ entitlement to the Escrowed Funds and to reimburse CTO for its costs associated with seeking legal relief. CTO has asked for a hearing with the court but the date for the hearing has not yet been set; the parties to the dispute are proceeding with the pre-trial discovery process.
42
Contractual Commitments – Expenditures
The Company has committed to fund the following capital improvements. The improvements, which are related to several properties, are estimated to be completed generally within twelve months. These commitments, as of September 30, 2021, are as follows (in thousands):
|
|
|
|
|
|
|
|
As of September 30, 2021 |
|
|
Total Commitment (1) |
|
$ |
15,810 |
|
Less Amount Funded |
|
|
(3,716) |
|
Remaining Commitment |
|
$ |
12,094 |
(1) Commitment includes tenant improvements, leasing commissions, rebranding, facility expansion and other capital improvements.
43
NOTE 24. BUSINESS SEGMENT DATA
The Company operates in four primary business segments: income properties, management services, commercial loan and master lease investments, and real estate operations. Our income property operations consist primarily of income-producing properties, and our business plan is focused on investing in additional income-producing properties. Our income property operations accounted for 74.0% and 80.0% of our identifiable assets as of September 30, 2021 and December 31, 2020, respectively, and 80.7% and 87.6% of our consolidated revenues for the nine months ended September 30, 2021 and 2020, respectively. Our management fee income consists of the management fees earned for the management of PINE and the Land JV. As of September 30, 2021, our commercial loan and master lease investments portfolio consisted of two commercial loan investment and two commercial properties whose leases are classified as commercial loan and master lease investments. Our continuing real estate operations consists of revenues generated from leasing and royalty income from our interests in subsurface oil, gas, and mineral rights, and the generation and sale of mitigation credits.
The Company evaluates performance based on profit or loss from operations. The Company’s reportable segments are strategic business units that offer different products. They are managed separately because each segment requires different management techniques, knowledge, and skills.
Information about the Company’s operations in different segments for the three and nine months ended September 30, 2021 and 2020 are as follows (in thousands):
44
Identifiable assets of each segment as of September 30, 2021 and December 31, 2020 are as follows (in thousands):
Operating income represents income from continuing operations before loss on early extinguishment of debt, interest expense, investment income, and income taxes. General and corporate expenses are an aggregate of general and administrative expenses and depreciation and amortization expense. Identifiable assets by segment are those assets that are used in the Company’s operations in each segment. Real Estate Operations includes the identifiable assets of the Land JV, the Mitigation Bank, and Subsurface Interests. Corporate and other assets consist primarily of cash and restricted cash, property, plant, and equipment related to the other operations, as well as the general and corporate operations.
The Management Services segment had no capital expenditures as of September 30, 2021 or December 31, 2020.
NOTE 25. ASSETS AND LIABILITIES HELD FOR SALE
Assets and liabilities held for sale as of September 30, 2021 and December 31, 2020 are summarized below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2021 |
||||
|
|
|
Land JV |
|
Total Assets (Liabilities) Held for Sale |
||
|
Restricted Cash |
|
$ |
835 |
|
$ |
835 |
|
Total Assets Held for Sale |
|
$ |
835 |
|
$ |
835 |
|
|
|
|
|
|
|
|
|
Deferred Revenue |
|
$ |
(831) |
|
$ |
(831) |
|
Total Liabilities Held for Sale |
|
$ |
(831) |
|
$ |
(831) |
Deferred Revenue on Land Sales. In conjunction with the land sale to Buc-ee’s in March 2018, the Company funded an escrow account for $0.8 million related to the portion of the acreage sold for which the Company was obligated to perform wetlands mitigation. As a result of the Company’s obligation, $0.8 million of the sales price collected at closing was deferred and the revenue was to be recognized upon the Company’s performance of the obligation. See Note 23, “Commitments and Contingencies” for further discussion related to the escrowed funds.
45
NOTE 26. SUBSEQUENT EVENTS
The Company reviewed all subsequent events and transactions through October 28, 2021, the date the consolidated financial statements were issued.
Purchase and Sale Agreement
On October 18, 2021, the Company entered into a Purchase and Sale Agreement (the “PSA”) with a partnership between (i) a real estate developer and owner and (ii) an institutional money manager (combined, the “Seller”) for the purchase of a retail center in the Raleigh, North Carolina Metropolitan Area (the “Property”). The terms of the PSA provide that the total purchase price for the Property will be $70.5 million subject to adjustment for closing prorations. Certain customary closing conditions must be met before or at the closing and are not currently satisfied. Accordingly, until the closing of the purchase of the Property, there can be no assurance that the Company will acquire the Property.
There were no other reportable subsequent events or transactions.
46
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When we refer to “we,” “us,” “our,” or “the Company,” we mean CTO Realty Growth, Inc. and its consolidated subsidiaries. References to “Notes to Financial Statements” refer to the Notes to the Consolidated Financial Statements of CTO Realty Growth, Inc. included in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q, including the documents that are incorporated by reference, that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Also, when the Company uses any of the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” or similar expressions, the Company is making forward-looking statements. Management believes the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions. However, the Company’s actual results could differ materially from those set forth in the forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update or revise such forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law. The risks and uncertainties that could cause our actual results to differ materially from those presented in our forward-looking statements, include, but are not limited to, the following:
| ● | we are subject to risks related to the ownership of commercial real estate that could affect the performance and value of our properties; |
| ● | our business is dependent upon our tenants successfully operating their businesses, and their failure to do so could materially and adversely affect us; |
| ● | competition that traditional retail tenants face from e-commerce retail sales, or the integration of brick and mortar stores with e-commerce retail operators, could adversely affect our business; |
| ● | we operate in a highly competitive market for the acquisition of income properties and more established entities or other investors may be able to compete more effectively for acquisition opportunities than we can; |
| ● | the loss of revenues from our income property portfolio or certain tenants would adversely impact our results of operations and cash flows; |
| ● | our revenues include receipt of management fees and potentially incentive fees derived from our provision of management services to Alpine Income Property Trust, Inc. (“PINE”) and the loss or failure, or decline in the business or assets, of PINE could substantially reduce our revenues; |
| ● | there are various potential conflicts of interest in our relationship with PINE, including our executive officers and/or directors who are also officers and/or directors of PINE, which could result in decisions that are not in the best interest of our stockholders; |
| ● | a prolonged downturn in economic conditions could adversely impact our business, particularly with regard to our ability to maintain revenues from our income-producing assets and our ability to monetize parcels of land the Land JV (as defined below); |
| ● | a part of our investment strategy is focused on investing in commercial loan and master lease investments which may involve credit risk; |
| ● | we may suffer losses when a borrower defaults on a loan and the value of the underlying collateral is less than the amount due; |
| ● | the Company’s real estate investments are generally illiquid; |
| ● | if we are not successful in utilizing the like-kind exchange structure in deploying the proceeds from dispositions of income properties, or our like-kind exchange transactions are disqualified, we could incur significant taxes and our results of operations and cash flows could be adversely impacted; |
| ● | the Company may be unable to obtain debt or equity capital on favorable terms, if at all, or additional borrowings may impact our liquidity or ability to monetize any assets securing such borrowings; |
| ● | servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to service or pay our debt; |
| ● | our operations and properties could be adversely affected in the event of natural disasters, pandemics, or other significant disruptions; |
| ● | we may encounter environmental problems which require remediation or the incurrence of significant costs to resolve, which could adversely impact our financial condition, results of operations, and cash flows; |
47
| ● | failure to qualify as real estate investment trust (“REIT”) for U.S. federal income tax purposes, or failure to remain qualified as a REIT, would cause us to be taxed a regular corporation, which would substantially reduce funds available for distribution to stockholders; |
| ● | the risk that the REIT requirements could limit our financial flexibility; |
| ● | our limited experience operating as a REIT; |
| ● | our ability to pay dividends consistent with the REIT requirements, and expectations as to timing and amounts of such dividends; |
| ● | the ability of our board of directors (the “Board”) to revoke our REIT status without stockholder approval; |
| ● | our exposure to changes in U.S. federal and state income tax laws, including changes to the REIT requirements; and |
| ● | an epidemic or pandemic (such as the outbreak and worldwide spread of the novel coronavirus (the “COVID-19 Pandemic”)), and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, may precipitate or materially exacerbate one or more of the above-mentioned and/or other risks and may significantly disrupt or prevent us from operating our business in the ordinary course for an extended period. |
The Company describes the risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors” (Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020), “Quantitative and Qualitative Disclosures about Market Risk” (Part I, Item 3 of this Quarterly Report on Form 10-Q), and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” (Part I, Item 2 of this Quarterly Report on Form 10-Q).
OVERVIEW
We are a publicly traded diversified REIT that was founded in 1910. We own and manage, sometimes utilizing third-party property management companies, 19 commercial real estate properties in nine states in the United States. As of September 30, 2021, we owned 11 single-tenant and eight multi-tenant income-producing properties comprising 2.2 million square feet of gross leasable space.
In addition to our income property portfolio, as of September 30, 2021, our business included the following:
Management Services:
| ● | A fee-based management business that is engaged in managing PINE and the entity that currently holds 1,600 acres of undeveloped land in Daytona Beach, Florida (the “Land JV”), see Note 6, “Related Party Management Services Business”. |
Commercial Loan and Master Lease Investments:
| ● | A portfolio of two commercial loan investments and two commercial properties, which are included in the 19 commercial real estate properties above, whose leases are classified as commercial loan and master lease investments. |
Real Estate Operations:
| ● | A portfolio of subsurface mineral interests associated with approximately 415,000 surface acres in 20 counties in the State of Florida and a portfolio of mitigation credits (“Subsurface Interests”); |
| ● | A retained interest in the Land JV, which has entered into an agreement to sell substantially all of its remaining 1,600 acres of undeveloped land in Daytona Beach, Florida; and |
| ● | An inventory of historically owned mitigation credits as well as mitigation credits produced by the Company’s mitigation bank. The mitigation bank owns a 2,500 acre parcel of land in the western part of Daytona Beach, Florida and, pursuant to a mitigation plan approved by the applicable state and federal authorities, produces mitigation credits that are sold to developers of land in the Daytona Beach area for the purpose of enabling the developers to obtain certain regulatory permits for property development (the “Mitigation Bank”). Prior to the Interest Purchase (hereinafter defined in Note 8, “Investments in Joint Ventures”) completed on September 30, 2021, the Company held a 30% retained interest in the entity that owns the Mitigation Bank. |
48
Our business also includes our investment in PINE. As of September 30, 2021, our investment totaled $37.5 million, or 15.7% of PINE’s outstanding equity, including the units of limited partnership interest (“OP Units”) we hold in Alpine Income Property OP, LP (the “PINE Operating Partnership”), which are redeemable for cash, based upon the value of an equivalent number of shares of PINE common stock at the time of the redemption, or shares of PINE common stock on a one-for-one basis, at PINE’s election. Our investment in PINE generates investment income through the dividends distributed by PINE. In addition to the dividends we receive from PINE, our investment in PINE may benefit from any appreciation in PINE’s stock price, although no assurances can be provided that such appreciation will occur, the amount by which our investment will increase in value, or the timing thereof. Any dividends received from PINE are included in investment and other income (loss) on the accompanying consolidated statements of operations.
Our strategy for investing in income-producing properties is focused on factors including, but not limited to, long-term real estate fundamentals and target markets, including major markets or those markets experiencing significant economic growth. We employ a methodology for evaluating targeted investments in income-producing properties which includes an evaluation of: (i) the attributes of the real estate (e.g. location, market demographics, comparable properties in the market, etc.); (ii) an evaluation of the existing tenant(s) (e.g. credit-worthiness, property level sales, tenant rent levels compared to the market, etc.); (iii) other market-specific conditions (e.g. tenant industry, job and population growth in the market, local economy, etc.); and (iv) considerations relating to the Company’s business and strategy (e.g. strategic fit of the asset type, property management needs, alignment with the Company’s 1031 like-kind exchange structure, etc.).
Our focus on acquiring income-producing investments includes a continual review of our existing income property portfolio to identify opportunities to recycle our capital through the sale of income properties based on, among other possible factors, the current or expected performance of the property and favorable market conditions. We sold one multi-tenant income property and 13 single-tenant income properties during the nine months ended September 30, 2021, as further described in Note 4 “Income Properties”. As a result of entering the exclusivity and right of first offer agreement with PINE (the “Exclusivity and ROFO Agreement”) which generally prevents us from investing in single-tenant net lease income properties, our income property investment strategy will be focused primarily on multi-tenant retail and office properties. We may pursue this strategy by monetizing certain of our single-tenant properties, and should we do so, we would seek to utilize the 1031 like-kind exchange structure to preserve the tax-deferred gain on the original transaction(s) that pertains to the replacement asset.
We believe investment in income-producing assets provides attractive opportunities for generally stable cash flows and the potential for increased returns over the long run. In 2020, we experienced a short term decrease in cash from operations as our tenants were impacted by the COVID-19 Pandemic and certain tenants’ rents were abated or deferred during the year. A prolonged imposition of mandated closures or other social-distancing guidelines as a result of the COVID-19 Pandemic may adversely impact more our tenants’ ability to generate sufficient revenues, and could force additional tenants to default on their leases, or result in the bankruptcy or insolvency of tenants, which would diminish the rental revenue we receive under our leases. The rapid development and fluidity of the pandemic precludes any prediction as to the ultimate adverse impact on our business.
Our current portfolio of 11 single-tenant income properties generates $15.4 million of revenues from annualized straight-line base lease payments and had a weighted average remaining lease term of 24.1 years as of September 30, 2021. Our current portfolio of eight multi-tenant properties generates $29.0 million of revenue from annualized straight-line base lease payments and had a weighted average remaining lease term of 6.4 years as of September 30, 2021.
We self-developed two single-tenant net lease restaurant properties on a six-acre beachfront parcel in Daytona Beach, Florida. The development was completed in January of 2018 and rent commenced from both tenants pursuant to their separate leases. On a limited basis, we have acquired and may continue to selectively acquire other real estate, either vacant land or land with existing structures, that we would demolish and develop into additional income properties. Through September 30, 2021, we have invested $5.7 million, including raze and entitlement costs, to acquire six acres in downtown Daytona Beach that is located in an opportunity zone. During the three months ended September 30, 2021, the Company entered into a purchase and sale agreement to sell the six-acre parcel for a sales price of $6.25 million. The closing of the sale is anticipated to occur prior to year-end and is subject to completion of customary due diligence and closing conditions. Our investments in vacant land or land with existing structures would target opportunistic acquisitions of select sites, which may be distressed, with an objective of having short investment horizons. Should we pursue such acquisitions, we may seek to partner with developers to develop these sites rather than self-develop the properties.
49
REIT CONVERSION
As of December 31, 2020, the Company had completed certain internal reorganization transactions necessary to begin operating in compliance with the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes for the taxable year ended December 31, 2020. Such election was made with the Company’s filing of its 2020 tax return in October 2021.
COVID-19 PANDEMIC
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus as a pandemic (the “COVID-19 Pandemic”), which has spread throughout the United States. The impact of the COVID-19 Pandemic has evolved rapidly, with many jurisdictions taking drastic measures to limit the spread of the virus by instituting quarantines or lockdowns and imposing travel restrictions. Such actions have created significant disruptions to global supply chains, and adversely impacted several industries, including airlines, hospitality, retail and the broader real estate industry.
As a result of the approval of multiple COVID-19 vaccines for use and the distribution of such vaccines among the general population, a number of jurisdictions have reopened and loosened restrictions. However, wide disparities in vaccination rates and continued vaccine hesitancy, combined with the emergence of COVID-19 variants and surges in COVID-19 cases, could trigger the reinstatement of further restrictions. Such restrictions could include mandatory business shut-downs, travel restrictions, reduced business operations and social distancing requirements.
The future impact of the COVID-19 Pandemic on the real estate industry and the Company’s financial condition and results of operations is uncertain and cannot be predicted currently since it depends on several factors beyond the control of the Company, including, but not limited to: (i) the uncertainty surrounding the severity and duration of the COVID-19 Pandemic, including possible recurrences and differing economic and social impacts of the COVID-19 Pandemic in various regions of the United States; (ii) the effectiveness of the United States public health response; (iii) the COVID-19 Pandemic’s impact on the United States and global economies; (iv) the timing, scope and effectiveness of additional governmental responses to the COVID-19 Pandemic; (v) the availability of a treatment and effectiveness of vaccines approved for COVID-19 and the willingness of individuals to get vaccinated; (vi) changes in how certain types of commercial property are used while maintaining social distancing and other techniques intended to control the impact of COVID-19; (vii) the impact of phase out of economic stimulus measures, the inflationary pressure of economic stimulus, and the eventual halt and reversal by the U.S. Treasury of asset purchases; and (viii) the uneven impact on the Company’s tenants, real estate values and cost of capital.
Contractual Base Rent (“CBR”) represents the amount owed to the Company under the current terms of its lease agreements. As a result of the COVID-19 Pandemic, during the year ended December 31, 2020, the Company agreed to defer or abate certain CBR in exchange for additional lease term or other lease enhancing additions. Repayments of the remaining balance of deferred CBR began in the third quarter of 2020, with payments continuing, in some cases, into 2023.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
Revenue
Total revenue for the three months ended September 30, 2021 is presented in the following summary and indicates the changes as compared to the same period in 2020 (in thousands):
Total revenue for the three months ended September 30, 2021 increased to $16.6 million, compared to $14.6 million during the same period in 2020. The increase in total revenue is primarily attributable to income produced by the
50
Company’s recent income property acquisitions versus that of properties disposed of by the Company during the comparative period, in addition to increased revenue from real estate operations related to the sale of Subsurface Interests and mitigation credits, as described below. Revenues further benefited from increased revenue related to the Company’s portfolio of commercial loan and master lease investments, in addition to increased management fee income from PINE.
Income Properties
Revenue and operating income from our income property operations totaled $13.7 million and $9.8 million, respectively, during the three months ended September 30, 2021, compared to revenue and operating income of $12.9 million and $9.3 million, respectively, for the three months ended September 30, 2020. The direct costs of revenues for our income property operations totaled $4.0 million and $3.6 million for the three months ended September 30, 2021 and 2020, respectively. The slight increase in revenues during the three months ended September 30, 2021 is primarily related to the timing of acquisitions versus dispositions. Our increase in operating income from our income property operations reflects increased rent revenues, offset by an increase of $0.4 million in our direct costs of revenues which is also related to the timing of acquisitions versus dispositions.
Management Services
Revenue from our management services totaled $0.9 million during the three months ended September 30, 2021, including $0.9 million and $0.03 million earned from PINE and the Land JV, respectively. Revenue from our management services totaled $0.7 million during the three months ended September 30, 2020, including $0.6 million and $0.05 million earned from PINE and the Land JV, respectively.
Commercial Loan and Master Lease Investments
Interest income from our commercial loan and master lease investments totaled $0.7 million and $0.4 million during the three months ended September 30, 2021 and 2020, respectively. The increase is due to the timing of investing in the Company’s commercial loan and master lease investment portfolio, as further described below.
2021 Portfolio. As of September 30, 2021, the Company’s commercial loan and master lease investments portfolio included two commercial loan investments and two commercial properties. The timing of the investments includes (i) the origination of one commercial loan investment during the fourth quarter of 2020, (ii) the origination of one commercial loan investment during the second quarter of 2021, and (iii) the acquisition of two commercial properties during the third quarter of 2020 and 2019, individually, which are accounted for as commercial loan investments due to future repurchase rights.
2020 Portfolio. As of September 30, 2020, the Company’s commercial loan and master lease investments portfolio included one commercial loan investment and two commercial properties, of which two were originated during the year
51
ended December 31, 2019, and one was originated during the three months ended September 30, 2020. The commercial loan investment was repaid in full by the buyer of the Company’s former golf operations during the fourth quarter of 2020.
Real Estate Operations
During the three months ended September 30, 2021, operating income from real estate operations was $0.9 million on revenues totaling $1.2 million. During the three months ended September 30, 2020, the operating loss from real estate operations was $1.1 million on revenues totaling $0.5 million. The operating income during the three months ended September 30, 2021 was primarily due to the sale of approximately 4,700 acres of Subsurface Interests totaling $0.9 million, in addition to the sale of 2 mitigation credits for $0.2 million, which revenues were offset by $0.2 million aggregate cost of sales, as compared to the three months ended September 30, 2020, which includes the sale of approximately 345 acres of Subsurface Interests totaling $0.4 million, offset by the charge of $1.6 million attributable to 21 mitigation credits provided at no cost to buyers.
General and Administrative Expenses
Total general and administrative expenses for the three months ended September 30, 2021 is presented in the following summary and indicates the changes as compared to the same period in 2020 (in thousands):
Gains (Losses)
2021 Dispositions. As previously noted, the Company disposed of four income properties during the three months ended September 30, 2021, which properties are described below (in thousands):
|
(1) |
Represents a single-tenant outparcel to Crossroads, the Company’s multi-tenant income property located in Chandler, Arizona. |
|
(2) |
Represents a single-tenant property at The Strand, the Company’s multi-tenant income property located in Jacksonville, Florida. |
|
(3) |
Property or outparcel represents a ground lease. |
2020 Dispositions. During the three months ended September 30, 2020, the Company disposed of three single-tenant income properties, which properties are described below (in thousands):
52
|
(1) |
Property represents a ground lease. |
Investment and Other Income (Loss)
During the three months ended September 30, 2021, the closing stock price of PINE decreased by $0.65 per share, with a closing price of $18.37 on September 30, 2021. During the three months ended September 30, 2020, the closing stock price of PINE decreased by $0.71 per share, with a closing price of $15.55 on September 30, 2020. The decreases resulted in unrealized, non-cash losses on the Company’s investment in PINE of $1.3 million and $1.4 million, respectively, which is included in investment and other income (loss) in the consolidated statements of operations for the three months ended September 30, 2021 and 2020, respectively.
The Company earned dividend income from the investment in PINE of $0.5 million and $0.4 million during the three months ended September 30, 2021 and 2020, respectively.
Interest Expense
Interest expense totaled $2.0 million and $2.5 million for the three months ended September 30, 2021 and 2020, respectively. The decrease of $0.5 million is primarily the result of the net decrease in long-term debt outstanding during the three months ended September 30, 2021 as compared to the same period in 2020, which is primarily driven by the use of proceeds received from Company’s 6.375% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”) offering.
Net Income (Loss)
Net income (loss) attributable to the Company totaled $23.9 million and ($1.5) million for the three months ended September 30, 2021 and 2020, respectively. The increase in net income is attributable to the factors described above.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
Revenue
Total revenue for the nine months ended September 30, 2021 is presented in the following summary and indicates the changes as compared to the same period in 2020 (in thousands):
Total revenue for the nine months ended September 30, 2021 increased to $45.6 million, compared to $40.4 million during the same period in 2020. The increase in total revenue is primarily attributable to increased revenue from real estate operations related to the sale of Subsurface Interests and mitigation credits, as described below, in addition to increased
53
income produced by the Company’s recent income property acquisitions versus that of properties disposed of by the Company during the comparative period. Revenues further benefited from increased management fee income from PINE. These increases were offset by a decrease in revenue generated from the Company’s portfolio of commercial loan and master lease investments.
Income Properties
Revenue and operating income from our income property operations totaled $36.8 million and $27.1 million, respectively, during the nine months ended September 30, 2021, compared to revenue and operating income of $35.4 million and $27.1 million, respectively, for the nine months ended September 30, 2020. The direct costs of revenues for our income property operations totaled $9.7 million and $8.3 million for the nine months ended September 30, 2021 and 2020, respectively. The increase in revenues of $1.3 million, or 3.8%, during the nine months ended September 30, 2021 is primarily related to the timing of acquisitions versus dispositions. The slight decrease in operating income from our income property operations reflects increased rent revenues, offset by an increase of $1.4 million in our direct costs of revenues which is also related to the timing of acquisitions versus dispositions.
Management Services
Revenue from our management services totaled $2.4 million during the nine months ended September 30, 2021, including $2.3 million and $0.09 million earned from PINE and the Land JV, respectively. Revenue from our management services totaled $2.1 million during the nine months ended September 30, 2020, including $1.9 million and $0.2 million earned from PINE and the Land JV, respectively.
Commercial Loan and Master Lease Investments
Interest income from our commercial loan and master lease investments totaled $2.1 million and $2.3 million during the nine months ended September 30, 2021 and 2020, respectively. The decrease is due to the timing of investing in the Company’s commercial loan and master lease investment portfolio, as further described below.
2021 Portfolio. As of September 30, 2021, the Company’s commercial loan and master lease investments portfolio included two commercial loan investments and two commercial properties. The timing of the investments includes (i) the origination of one commercial loan investment during the fourth quarter of 2020, (ii) the origination of one commercial loan investment during the second quarter of 2021, and (iii) the acquisition of two commercial properties during the third quarter of 2020 and 2019, individually, which are accounted for as commercial loan investments due to future repurchase rights.
54
2020 Portfolio. As of September 30, 2020, the Company’s commercial loan and master lease investments portfolio included one commercial loan investment and two commercial properties, of which two were originated during the year ended December 31, 2019, and one was originated during the nine months ended September 30, 2020. The commercial loan investment was repaid in full by the buyer of the Company’s former golf operations during the fourth quarter of 2020.
Real Estate Operations
During the nine months ended September 30, 2021, operating income from real estate operations was $3.5 million on revenues totaling $4.3 million. During the nine months ended September 30, 2020, the operating loss from real estate operations was $2.6 million on revenues totaling $0.6 million. The operating income during the nine months ended September 30, 2021 was primarily due to the sale of approximately 39,200 acres of Subsurface Interests totaling $3.5 million, in addition to the sale of two mitigation credits for $0.2 million, which revenues were offset by $0.3 million aggregate cost of sales as compared to the nine months ended September 30, 2020 which includes the charge of $2.9 million attributable to 42 mitigation credits provided at no cost to buyers in addition to the purchase of two mitigation credits totaling $0.2 million.
General and Administrative Expenses
Total general and administrative expenses for the nine months ended September 30, 2021 is presented in the following summary and indicates the changes as compared to the same period in 2020 (in thousands):
Gains (Losses) and Impairment Charges
2021 Dispositions. As previously noted, the Company disposed of one multi-tenant income property and 13 single-tenant income properties during the nine months ended September 30, 2021, which properties are described below (in thousands):
|
(1) |
On June 30, 2021, the Company sold six single-tenant income properties (the “CMBS Portfolio”) to PINE for an aggregate purchase price of $44.5 million. |
|
(2) |
Represents a single-tenant outparcel to Crossroads, the Company’s multi-tenant income property located in Chandler, Arizona. |
|
(3) |
Represents a single-tenant property at The Strand, the Company’s multi-tenant income property located in Jacksonville, Florida. |
|
(4) |
Property or outparcel represents a ground lease. |
55
2020 Dispositions. During the nine months ended September 30, 2020, the Company disposed of one multi-tenant income property and seven single-tenant income properties, which properties are described below (in thousands):
|
(1) |
Property represents a ground lease. |
Commercial Loan and Master Lease Investments. In light of the COVID-19 Pandemic, during the three months ended March 31, 2020, the Company began marketing its commercial loan portfolio in advance of their upcoming maturities to further strengthen the Company’s liquidity. The Company received multiple bids including a bid offering a value that was at a discount to par. Additionally, the Company implemented guidance regarding current expected credit losses (“CECL”) effective January 1, 2020, which resulted in an allowance reserve of $0.3 million. The CECL reserve combined with the impairment related to marketing the loan portfolio resulted in an aggregate impairment charge on the loan portfolio of $1.9 million.
During the nine months ended September 30, 2020, the Company sold four of its commercial loan investments in two separate transactions generating aggregate proceeds of $20.0 million, resulting in a loss of $0.4 million during the three months ended June 30, 2020. The total loss on the loan portfolio disposition, including the impairment and CECL reserve charges in the three months ended March 31, 2020, was $2.1 million.
There were no losses on the Company’s commercial loan and master lease investments portfolio during the nine months ended September 30, 2021.
2025 Note Repurchases. During the nine months ended September 30, 2021, the Company repurchased $0.8 million aggregate principal amount of 2025 Notes at a $0.01 million premium, resulting in a loss on extinguishment of debt of $0.1 million. During the nine months ended September 30, 2020, the Company repurchased $12.5 million aggregate principal amount of the 2025 Notes at a cash discount of $2.6 million, resulting in a gain on extinguishment of debt of $1.1 million, net of the pro-rata share of the conversion value.
Mortgage Note Payable. In connection with the disposition of the CMBS Portfolio during the second quarter of 2021 and related assumption by the buyer of the Company’s $30.0 million fixed-rate mortgage note payable, the Company recognized a $0.5 million loss on extinguishment of debt related to the write-off of unamortized financing costs.
Impairment Charges. There were no impairment charges on the Company’s undeveloped land holdings, or its income property portfolio during the nine months ended September 30, 2021 and 2020. The $16.5 million impairment charge, net of the $4.1 million related income tax benefit, recognized during the three months ended June 30, 2021 is related to the Company’s retained interest in the Land JV as a result of the estimated proceeds to be received in connection with the contract entered into with Timberline Acquisition Partners, an affiliate of Timberline Real Estate Partners, for the sale of substantially all of its remaining land, including any land that was previously under contract, for a sales price of $67.0 million. As a result of the sale of approximately 8 acres for $0.8 million completed by the Land JV during the three months ended September 30, 2021, the sales price was reduced to $66.2 million.
Investment and Other Income (Loss)
During the nine months ended September 30, 2021, the closing stock price of PINE increased by $3.38 per share, with a closing price of $18.37 on September 30, 2021. During the nine months ended September 30, 2020, the closing stock price of PINE decreased by $3.48 per share, with a closing price of $15.55 on September 30, 2020. The increase
56
(decrease) resulted in an unrealized, non-cash gain (loss) on the Company’s investment in PINE of $6.9 million and ($7.1) million which is included in investment and other income (loss) in the consolidated statements of operations for the nine months ended September 30, 2021 and 2020, respectively.
The Company earned dividend income from the investment in PINE of $1.5 million and $1.2 million during the nine months ended September 30, 2021 and 2020, respectively.
Interest Expense
Interest expense totaled $6.9 million and $8.4 million for the nine months ended September 30, 2021 and 2020, respectively. The decrease of $1.5 million is primarily the result of the net decrease in long-term debt outstanding during the nine months ended September 30, 2021 as compared to the same period in 2020, which is primarily driven by the use of proceeds received from the Series A Preferred Stock offering and other loan repayments, offset by draws related to the Company’s income property acquisition activity.
Net Income (Loss)
Net income (loss) attributable to the Company totaled $28.0 million and ($1.2) million for the nine months ended September 30, 2021 and 2020, respectively. The increase in net income is attributable to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $7.0 million at September 30, 2021, while restricted cash totaled $68.5 million, see Note 2 “Summary of Significant Accounting Policies” under the heading Restricted Cash for the Company’s disclosure related to its restricted cash balance at September 30, 2021.
Our total cash balance at September 30, 2021 reflected cash flows provided by our operating activities totaling $12.4 million during the nine months ended September 30, 2021 compared to cash flows provided by operating activities totaling $11.9 million for the nine months ended September 30, 2020, an increase of $0.5 million. The increase of $0.5 million is primarily related to the increase in the cash flows provided by real estate operations of $3.1 million which was driven by the sale of $3.5 million of Subsurface Interests. The increase in cash flows provided by real estate operations was primarily offset by various other differences with regard to timing of payments within other assets, accounts payable, and accrued and other liabilities.
Our cash flows used in investing activities totaled $7.7 million for the nine months ended September 30, 2021, compared to cash flows used in investing activities of $125.6 million for the nine months ended September 30, 2020, a decrease of $117.9 million. The decrease in cash used in investing activities of $117.9 million is primarily related to decreased cash outflows of $80.0 million comprised of $49.6 million related to income property acquisitions, the origination of three commercial loan and master lease investments totaling $27.5 million, and $2.9 million related to the cost basis of 42 mitigation credits provided at no cost to buyers during the nine months ended September 30, 2020, in addition to increased cash inflows of $58.8 million related to proceeds received on the disposition of income properties during the nine months ended September 30, 2021, primarily attributable to the disposition of the Company’s office property in Raleigh, North Carolina leased to Wells Fargo. These increases were partially offset by the decrease of cash inflows of $21.0 million related to four commercial loan and master lease investments sold during the nine months ended September 30, 2020.
Our cash flows provided by financing activities totaled $37.1 million for the nine months ended September 30, 2021, compared to cash flows used in financing activities of $12.4 million for the nine months ended September 30, 2020, an increase of $49.5 million. The increase of $49.5 million is primarily related to $72.4 million net proceeds received from the Company’s issuance of 3,000,000 shares of its Series A Preferred Stock during the nine months ended September 30, 2021, in addition to decreased cash outflows of $4.1 million related to stock buybacks during the nine months ended September 30, 2020, which aggregate increases were partially offset by increased cash outflows of $14.6 million of dividends paid during the nine months ended September 30, 2021 in addition to the net impact of $13.4 million increased cash outflows inclusive of (i) origination of the $50.0 million 2026 Term Loan under the Company’s Credit Facility and subsequent exercise of the accordion option for $15.0 million, (ii) net repayments on the Company’s Credit Facility of $55.8 million, (iii) payoff of the $23.2 million variable-rate mortgage note, and (iv) convertible note repurchases of $0.8
57
million during the nine months ended September 30, 2021, as compared to net draws on the Credit Facility of $9.0 million and convertible note repurchases of $9.9 million during the same period in 2020.
Long-Term Debt. As of September 30, 2021, the Company had $101.0 million available on the Credit Facility. See Note 17, “Long-Term Debt” for the Company’s disclosure related to its long-term debt balance at September 30, 2021.
Acquisitions and Investments. As noted previously, the Company acquired three multi-tenant income properties during the nine months ended September 30, 2021 for an aggregate purchase price of $111.0 million, as further described in Note 4, “Income Properties”.
The Company’s guidance for 2021 investments in income-producing properties totals between $225.0 million and $250.0 million. We expect to fund future acquisitions utilizing cash on hand, cash from operations, proceeds from the dispositions of income properties through 1031 like-kind exchanges, and potentially the sale of all or a portion of our Subsurface Interests, and borrowings on our Credit Facility, if available. We expect dispositions of income properties and subsurface interests will qualify under the like-kind exchange deferred-tax structure, and additional financing sources.
Dispositions. During the nine months ended September 30, 2021, the Company disposed of one multi-tenant income property and 13 single-tenant income properties, which dispositions included four ground leases, for a total disposition volume of $140.8 million, generating aggregate gains of $28.0 million, as further described in Note 4, “Income Properties”.
Contractual Commitments – Expenditures.
The Company has committed to fund the following capital improvements. The improvements, which are related to several properties, are estimated to be completed generally within twelve months. These commitments, as of September 30, 2021, are as follows (in thousands):
|
|
|
|
|
|
|
|
As of September 30, 2021 |
|
|
Total Commitment (1) |
|
$ |
15,810 |
|
Less Amount Funded |
|
|
(3,716) |
|
Remaining Commitment |
|
$ |
12,094 |
(1) Commitment includes tenant improvements, leasing commissions, rebranding, facility expansion and other capital improvements.
As of September 30, 2021, we have no other contractual requirements to make capital expenditures.
Off-Balance Sheet Arrangements. None.
Other Matters. We believe we will have sufficient liquidity to fund our operations, capital requirements, maintenance, and debt service requirements over the next twelve months and into the foreseeable future, with cash on hand, cash flow from our operations and $101.0 million available capacity on the existing $210.0 million Credit Facility, based on our current borrowing base of income properties, as of September 30, 2021.
Our Board and management consistently review the allocation of capital with the goal of providing the best long-term return for our stockholders. These reviews consider various alternatives, including increasing or decreasing regular dividends, repurchasing the Company’s securities, and retaining funds for reinvestment. Annually, the Board reviews our business plan and corporate strategies, and makes adjustments as circumstances warrant. Management’s focus is to continue our strategy to diversify our portfolio by redeploying proceeds from like-kind exchange transactions and utilizing our Credit Facility to increase our portfolio of income-producing properties, providing stabilized cash flows with strong risk-adjusted returns primarily in larger metropolitan areas and growth markets.
We believe that we currently have a reasonable level of leverage. Our strategy is to utilize leverage, when appropriate and necessary, and proceeds from sales of income properties, the disposition or payoffs on our commercial loan and master lease investments, and certain transactions in our subsurface interests, to acquire income properties. We may also acquire or originate commercial loan and master lease investments, invest in securities of real estate companies, or make other shorter-term investments. Our targeted investment classes may include the following:
58
| ● | Multi-tenant office and retail properties in major metropolitan areas and growth markets, typically stabilized; |
| ● | Single-tenant retail and office, double or triple net leased, properties in major metropolitan areas and growth markets that are compliant with our commitments under the Exclusivity and ROFO agreement; |
| ● | Purchase or origination of ground leases, that are compliant with our commitments under the Exclusivity and ROFO agreement; |
| ● | Self-developed properties on Company-owned land including select retail and office; |
| ● | Joint venture development using Company-owned land; |
| ● | Origination or purchase of commercial loan and master lease investments with loan terms of 1-10 years with strong risk-adjusted yields secured by property types to include hotel, office, retail, residential, land and industrial; |
| ● | Select regional area investments using Company market knowledge and expertise to earn strong risk-adjusted yields; and |
| ● | Real estate related investment securities, including commercial mortgage backed securities, preferred or common stock, and corporate bonds. |
Our investments in income-producing properties are typically subject to long-term leases. For multi-tenant properties, each tenant typically pays its proportionate share of the aforementioned operating expenses of the property, although for such properties we typically incur additional costs for property management services. Single-tenant leases are typically in the form of triple or double net leases and ground leases. Triple-net leases generally require the tenant to pay property operating expenses such as real estate taxes, insurance, assessments and other governmental fees, utilities, repairs and maintenance, and capital expenditures.
Non-U.S. GAAP Financial Measures
Our reported results are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). We also disclose Funds From Operations (“FFO”) and Adjusted Funds From Operations (“AFFO”), both of which are non-U.S. GAAP financial measures. We believe these two non-U.S. GAAP financial measures are useful to investors because they are widely accepted industry measures used by analysts and investors to compare the operating performance of REITs.
FFO and AFFO do not represent cash generated from operating activities and are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operating activities as reported on our statement of cash flows as a liquidity measure and should be considered in addition to, and not in lieu of, U.S. GAAP financial measures.
We compute FFO in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT. NAREIT defines FFO as U.S. GAAP net income or loss adjusted to exclude extraordinary items (as defined by U.S. GAAP), net gain or loss from sales of depreciable real estate assets, impairment write-downs associated with depreciable real estate assets and real estate related depreciation and amortization, including the pro rata share of such adjustments of unconsolidated subsidiaries. The Company also excludes the gains or losses from sales of assets incidental to the primary business of the REIT which specifically include the sales of mitigation credits, impact fee credits, subsurface sales, and the land sales gains included in discontinued operations. To derive AFFO, we modify the NAREIT computation of FFO to include other adjustments to U.S. GAAP net income related to non-cash revenues and expenses such as straight-line rental revenue, amortization of deferred financing costs, amortization of capitalized lease incentives and above- and below-market lease related intangibles, and non-cash compensation. Such items may cause short-term fluctuations in net income but have no impact on operating cash flows or long-term operating performance. We use AFFO as one measure of our performance when we formulate corporate goals.
FFO is used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers primarily because it excludes the effect of real estate depreciation and amortization and net gains or losses on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. We believe that AFFO is an additional useful supplemental measure for investors to consider because it will help them to better assess our operating performance without the distortions created by other non-cash revenues or expenses. FFO and AFFO may not be comparable to similarly titled measures employed by other companies.
59
Reconciliation of Non-U.S. GAAP Measures (in thousands, except share and dividend data):
Other Data (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
|
September 30, 2021 |
|
September 30, 2020 |
|
September 30, 2021 |
|
September 30, 2020 |
||||
|
FFO Attributable to Common Stockholders |
|
$ |
6,071 |
|
$ |
5,517 |
|
$ |
16,232 |
|
$ |
17,339 |
|
FFO per Common Share - Diluted |
|
$ |
1.03 |
|
$ |
1.19 |
|
$ |
2.75 |
|
$ |
3.71 |
|
AFFO Attributable to Common Stockholders |
|
$ |
6,422 |
|
$ |
6,033 |
|
$ |
18,403 |
|
$ |
15,658 |
|
AFFO per Common Share - Diluted |
|
$ |
1.09 |
|
$ |
1.30 |
|
$ |
3.12 |
|
$ |
3.35 |
60
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses. Actual results could differ from those estimates.
Our significant accounting policies are summarized in Note 2, “Summary of Significant Accounting Policies” included in this Quarterly Report on Form 10-Q and more fully described in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020. Judgments and estimates of uncertainties are required in applying our accounting policies in many areas. During the nine months ended September 30, 2021, there have been no material changes to the critical accounting policies affecting the application of those accounting policies as noted in our Annual Report on Form 10-K for the year ended December 31, 2020.
Refer to Note 2, “Summary of Significant Accounting Policies” for the Company’s disclosure related to recently issued accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk (i.e. the risk of loss arising from adverse changes in market rates and prices), to which we are exposed is interest rate risk relating to our debt. We may utilize overnight sweep accounts and short-term investments as a means to minimize the interest rate risk. We do not believe that interest rate risk related to cash equivalents and short-term investments, if any, is material due to the nature of the investments.
We are primarily exposed to interest rate risk relating to our own debt in connection with our Credit Facility, as this facility carries a variable rate of interest. Our borrowings on our $210.0 million revolving Credit Facility bear a variable rate of interest based on the 30-day LIBOR plus a rate of between 135 basis points and 195 basis points based on our level of borrowing as a percentage of our total asset value. The Company has entered into interest rate swap agreements to hedge against changes in future cash flows resulting from fluctuating interest rates related to certain of its debt borrowings, see Note 18, “Interest Rate Swaps”. As of September 30, 2021, the outstanding balance on our Credit Facility was $109.0 million. A hypothetical change in the interest rate of 100 basis points (i.e., 1%) would affect our financial position, results of operations, and cash flows by $1.1 million. By virtue of fixing the variable rate, our exposure to changes in interest rates is minimal but for the impact on other comprehensive income and loss. Management’s objective is to limit the impact of interest rate changes on earnings and cash flows and to manage our overall borrowing costs.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation, as required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act). Based on that evaluation, our CEO and CFO have concluded that the design and operation of the Company’s disclosure controls and procedures were effective as of September 30, 2021, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the three months ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
61
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may be a party to certain legal proceedings, incidental to the normal course of its business. While the outcome of the legal proceedings cannot be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon our financial condition or results of operations.
Buc-ee’s. On March 31, 2021, the Company and its wholly-owned subsidiary, Indigo Development LLC, a Florida limited liability company (collectively, “CTO”) filed a Complaint for Declaratory Relief in the Circuit Court, Seventh Judicial Circuit, in and for Volusia County, Florida (Case No. 2021-30415-CICI) against Buc-ee’s Ltd., a Texas limited partnership (“Buc-ee’s”), in connection with a dispute over funds deposited in escrow by CTO in the amount of $0.8 million (the “Escrowed Funds”). The Escrowed Funds were deposited simultaneously with CTO’s sale to Buc-ee’s in March 2018 of 35 acres of real property located in Daytona Beach, Volusia County, Florida (the “Buc-ee’s Parcel”). Pursuant to a post-closing escrow agreement between CTO and Buc-ee’s, the Escrowed Funds were to be released to CTO once CTO had obtained certain wetlands-related permits for the benefit of a portion of the Buc-ee’s Parcel. CTO was ultimately successful in obtaining the permits, although the permits were issued later than originally contemplated by the escrow agreement. Buc-ee’s was aware of and acquiesced to CTO’s continuing efforts and expenditures in obtaining the permits, including after the date originally contemplated in the escrow agreement; however, not until after the permits were issued did Buc-ee’s inform CTO that Buc-ee’s would not agree to release the Escrowed Funds to CTO. CTO’s complaint seeks a declaratory judgment determining the parties’ entitlement to the Escrowed Funds and to reimburse CTO for its costs associated with seeking legal relief. CTO has asked for a hearing with the court but the date for the hearing has not yet been set; the parties to the dispute are proceeding with the pre-trial discovery process.
ITEM 1A. RISK FACTORS
For a discussion of the Company’s potential risks and uncertainties, see the information under the heading Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The risks described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company.
As of September 30, 2021, there have been no material changes in our risk factors from those set forth within the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
62
ITEM 6. EXHIBITS
(a) Exhibits:
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(3.1) |
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(3.2) |
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(3.3) |
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(4.1) |
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(10.1) |
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(10.2) |
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*(10.3) |
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† (10.4) |
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**Exhibit 31.1 |
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Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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**Exhibit 31.2 |
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Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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**Exhibit 32.1 |
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**Exhibit 32.2 |
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Exhibit 101.INS |
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Inline XBRL Instance Document |
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Exhibit 101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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Exhibit 101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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Exhibit 101.DEF |
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Inline XBRL Taxonomy Definition Linkbase Document |
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Exhibit 101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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Exhibit 101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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Exhibit 104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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* |
Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(2). The omitted information is not material and is the type of information that the Company customarily and actually treats as private and confidential. |
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** |
In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
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† |
Management Contract or Compensatory Plan or Arrangement. |
63
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CTO REALTY GROWTH, INC. |
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(Registrant) |
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October 28, 2021 |
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By: |
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/s/ John P. Albright |
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John P. Albright President and Chief Executive Officer (Principal Executive Officer) |
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October 28, 2021 |
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By: |
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/s/ Matthew M. Partridge |
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Matthew M. Partridge, Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) |
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October 28, 2021 |
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By: |
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/s/ Lisa M. Vorakoun |
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Lisa M. Vorakoun, Vice President and Chief Accounting Officer (Principal Accounting Officer) |
64
Exhibit 10.1
CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THE EXHIBIT BECAUSE IT IS BOTH NOT MATERIAL AND IS THE TYPE THAT THE REGISTRANT TREATS AS PRIVATE OR CONFIDENTIAL. REDACTED INFORMATION IS INDICATED BY [****].
FIRST AMENDMENT TO
CONTRACT FOR SALE AND PURCHASE
This FIRST AMENDMENT TO CONTRACT FOR SALE AND PURCHASE (“First Amendment”) is entered into effective as of July 30, 2021 (“Effective Date”), between CRISP39 - 3 LLC, a Florida limited liability company, CRISP39 - 4 LLC, a Florida limited liability company, CRISP39 - 6 LLC, a Florida limited liability company, CRISP39 - 7 LLC, a Florida limited liability company, CRISP39 - 8 LLC, a Florida limited liability company (jointly and severally, collectively, “Seller”), TIMBERLINE ACQUISITION PARTNERS, LLC, a Texas limited liability company (“Buyer”), and LHC14 OLD DELAND LLC, a Delaware limited liability company (“LHC14”).
A.Pursuant to that certain Contract for Sale and Purchase, dated effective as of June 23, 2021, between Buyer and Seller (“Purchase Agreement”), Buyer agreed to purchase and Seller agreed to sell the Portfolio (as defined in the Purchase Agreement); and
B.Seller and Buyer now desire to amend the Purchase Agreement to include as if originally therein set forth, the terms and conditions set forth in this First Amendment;
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are acknowledged, Seller and Buyer agree as follows:
27.Purchase Contract. Seller and Buyer acknowledge and agree that LHC14 Old DeLand LLC, a Delaware limited liability company and affiliate of Seller (“LHC14”), in consultation with Buyer, entered into that certain Vacant Land Contract, dated July 30, 2021, with [****], a true, correct and complete copy of which is set forth on Exhibit G attached hereto (the “Purchase Contract”). Buyer and Seller acknowledge and agree that, subject to Buyer’s approval of any amendments to the Purchase Contract, the Purchase Contract shall be assigned to Buyer effective as of the consummation of Closing, whereby Buyer shall assume all obligations, liabilities, requirements, and benefits of LHC14 under the Purchase Contract, including any deposits made by LHC14 pursuant to the Purchase Contract; provided, however,
Buyer shall refund to LHC14 the amount of any deposits made by LHC14 pursuant to the Purchase Contract at Closing. Buyer hereby agrees to indemnify Seller and LHC14 for any claims against Seller or LCH14 due to any act of Buyer or Buyer’s employees, agents or contractors while performing any inspections or similar investigations in connection with the Purchase Contract.
[Signatures on Next Page]
IN WITNESS WHEREOF, the parties have caused this First Amendment to be duly executed to be effective as of the Effective Date.
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“SELLER” |
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CRISP39 - 3 LLC, a Florida limited liability company |
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By: |
Crisp39 SPV LLC, |
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a Florida limited liability company, |
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its sole member |
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By: |
CTO TRS Crisp39 LLC, |
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a Delaware limited liability company, |
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its Manager |
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By: |
CTO Realty Growth, Inc. (f/k/a |
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Consolidated-Tomoka Land Co.), |
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a Maryland corporation, |
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its sole member |
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By: |
/s/ Steven R. Greathouse |
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Name: |
Steven R. Greathouse |
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Title: |
Chief Investment Officer |
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Date: August 10, 2021 |
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CRISP39 - 4 LLC, |
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a Florida limited liability company |
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By: |
Crisp39 SPV LLC, |
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a Florida limited liability company, |
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its sole member |
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By: |
CTO TRS Crisp39 LLC, |
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a Delaware limited liability company, |
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its Manager |
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By: |
CTO Realty Growth, Inc. (f/k/a |
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Consolidated-Tomoka Land Co.), |
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a Maryland corporation, |
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its sole member |
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By: |
/s/ Steven R. Greathouse |
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Name: |
Steven R. Greathouse |
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Title: |
Chief Investment Officer |
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Date: August 10, 2021 |
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CRISP39 - 6 LLC, |
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a Florida limited liability company |
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By: |
Crisp39 SPV LLC, |
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a Florida limited liability company, |
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its sole member |
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By: |
CTO TRS Crisp39 LLC, |
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a Delaware limited liability company, |
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its Manager |
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By: |
CTO Realty Growth, Inc. (f/k/a |
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Consolidated-Tomoka Land Co.), |
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a Maryland corporation, |
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its sole member |
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By: |
/s/ Steven R. Greathouse |
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Name: |
Steven R. Greathouse |
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Title: |
Chief Investment Officer |
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Date: August 10, 2021 |
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CRISP39 - 7 LLC, |
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a Florida limited liability company |
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By: |
Crisp39 SPV LLC, |
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a Florida limited liability company, |
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its sole member |
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By: |
CTO TRS Crisp39 LLC, |
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a Delaware limited liability company, |
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its Manager |
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By: |
CTO Realty Growth, Inc. (f/k/a |
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Consolidated-Tomoka Land Co.), |
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a Maryland corporation, |
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its sole member |
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By: |
/s/ Steven R. Greathouse |
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Name: |
Steven R. Greathouse |
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Title: |
Chief Investment Officer |
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Date: August 10, 2021 |
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CRISP39 - 8 LLC, |
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a Florida limited liability company |
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By: |
Crisp39 SPV LLC, |
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a Florida limited liability company, |
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its sole member |
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By: |
CTO TRS Crisp39 LLC, |
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a Delaware limited liability company, |
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its Manager |
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By: |
CTO Realty Growth, Inc. (f/k/a |
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Consolidated-Tomoka Land Co.), |
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a Maryland corporation, |
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its sole member |
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By: |
/s/ Steven R. Greathouse |
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Name: |
Steven R. Greathouse |
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Title: |
Chief Investment Officer |
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Date: August 10, 2021 |
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“BUYER” |
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TIMBERLINE ACQUISITION PARTNERS, LLC, a Texas limited liability company [****] Date: August 17, 2021 |
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“LHC14” |
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LHC14 OLD DELAND LLC, a Delaware limited liability company By: /s/ Steven R. Greathouse Name: Steven R. Greathouse Title: Chief Investment Officer Date: August 10, 2021 |
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Exhibit G to Contract for Sale and Purchase
[Exhibit G to Contract for Purchase Sale and Purchase]
Exhibit 10.2
CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THE EXHIBIT BECAUSE IT IS BOTH NOT MATERIAL AND IS THE TYPE THAT THE REGISTRANT TREATS AS PRIVATE OR CONFIDENTIAL. REDACTED INFORMATION IS INDICATED BY [****].
SECOND AMENDMENT
TO
CONTRACT FOR SALE AND PURCHASE
This SECOND AMENDMENT FOR SALE AND PURCHASE (this “Second Amendment”) dated effective September 10, 2021, is made by and between CRISP39 – 3 LLC, a Florida limited liability company, CRISP39 – 4 LLC, a Florida limited liability company, CRISP39 – 6 LLC, a Florida limited liability company, CRISP39 – 7 LLC, a Florida limited liability company, and CRISP39 – 8 LLC, a Florida limited liability company (collectively, “Seller”), and TIMBERLINE ACQUISITION PARTNERS, LLC, a Texas limited liability company (“Buyer”).
RECITALS
A.Pursuant to that certain Contract for Sale and Purchase, dated effective as of June 23, 2021, between Buyer and Seller, and amended by First Amendment to Contract for Sale and Purchase dated July 30, 2021, between Buyer and Seller (as amended, the “Purchase Agreement”), Buyer agreed to purchase and Seller agreed to sell the Portfolio (as defined in the Purchase Agreement); and
B.Seller and Buyer now desire to amend the Purchase Agreement to include as if originally therein set forth, the terms and conditions set forth in this Second Amendment;
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller and Buyer do hereby agree that the Purchase Agreement is hereby amended as follows:
This Contract shall be closed and the closing documents delivered on [****] (the “Closing”), unless modified by other provisions of this Contract; provided, however, Buyer may, in Buyer’s sole discretion, extend the Closing for a period of up to [****] days upon providing Seller prior written notice of Buyer’s
election to extend the Closing, whereby the Purchase Price shall be increased by [****] per each day which Buyer extends the Closing pursuant to this Paragraph 9.
[SIGNATURE PAGES FOLLOWS]
IN WITNESS WHEREOF, the parties shave caused this Second Amendment to be duly executed to be effective as of the Effective Date.
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“SELLER” |
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CRISP39 - 3 LLC, |
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a Florida limited liability company |
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By: |
Crisp39 SPV LLC, |
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a Florida limited liability company,
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By: |
CTO TRS Crisp39 LLC, |
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a Delaware limited liability company, |
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its Manager |
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By: |
CTO Realty Growth, Inc. (f/k/a |
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Consolidated-Tomoka Land Co.), |
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a Maryland corporation, |
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its sole member |
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By: |
/s/ John P. Albright |
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Name: |
John P. Albright |
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Title: |
President and Chief Executive Officer |
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Date: August 10, 2021 |
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[Signature Page to Second Amendment to Contract for Sale and Purchase]
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CRISP39 - 4 LLC, |
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a Florida limited liability company |
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By: |
Crisp39 SPV LLC, |
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a Florida limited liability company, |
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its sole member |
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By: |
CTO TRS Crisp39 LLC, |
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a Delaware limited liability company, |
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its Manager |
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By: |
CTO Realty Growth, Inc. (f/k/a |
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Consolidated-Tomoka Land Co.), |
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a Maryland corporation, |
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its sole member |
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By: |
/s/ John P. Albright |
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Name: |
John P. Albright |
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Title: |
President and Chief Executive Officer |
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Date: September 10, 2021 |
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[Signature Page to Second Amendment to Contract for Sale and Purchase]
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CRISP39 - 6 LLC, |
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a Florida limited liability company |
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By: |
Crisp39 SPV LLC, |
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a Florida limited liability company, |
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its sole member |
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By: |
CTO TRS Crisp39 LLC, |
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a Delaware limited liability company, |
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its Manager |
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By: |
CTO Realty Growth, Inc. (f/k/a |
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Consolidated-Tomoka Land Co.), |
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a Maryland corporation, |
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its sole member |
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By: |
/s/ John P. Albright |
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Name: |
John P. Albright |
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Title: |
President and Chief Executive Officer |
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Date: September 10, 2021 |
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CRISP39 - 7 LLC, |
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a Florida limited liability company |
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By: |
Crisp39 SPV LLC, |
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a Florida limited liability company, |
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its sole member |
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By: |
CTO TRS Crisp39 LLC, |
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a Delaware limited liability company, |
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its Manager |
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By: |
CTO Realty Growth, Inc. (f/k/a |
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Consolidated-Tomoka Land Co.), |
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a Maryland corporation, |
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its sole member |
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By: |
/s/ John P. Albright |
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Name: |
John P. Albright |
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Title: |
President and Chief Executive Officer |
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Date: September 10, 2021 |
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[Signature Page to Second Amendment to Contract for Sale and Purchase]
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CRISP39 - 8 LLC, |
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a Florida limited liability company |
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By: |
Crisp39 SPV LLC, |
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a Florida limited liability company, |
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its sole member |
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By: |
CTO TRS Crisp39 LLC, |
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a Delaware limited liability company, |
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its Manager |
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By: |
CTO Realty Growth, Inc. (f/k/a |
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Consolidated-Tomoka Land Co.), |
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a Maryland corporation, |
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its sole member |
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By: |
/s/ John P. Albright |
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Name: |
John P. Albright |
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Title: |
President and Chief Executive Officer |
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Date: September 10, 2021 |
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[Signature Page to Second Amendment to Contract for Sale and Purchase]
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“BUYER” |
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TIMBERLINE ACQUISITION PARTNERS, LLC, a Texas limited liability company [****] Date: September 10, 2021 |
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[Signature Page to Second Amendment to Contract for Sale and Purchase]
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“LHC14” |
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LHC14 OLD DELAND LLC, a Delaware limited liability company By: /s/ John P. Albright Name: John P. Albright Title: President and Chief Executive Officer Date: September 10, 2021 |
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[Signature Page to Second Amendment to Contract for Sale and Purchase]
Exhibit 10.4
CTO REALTY GROWTH, INC.
THIRD AMENDED AND RESTATED 2010 EQUITY INCENTIVE PLAN
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1. |
Purpose. The purposes of the Third Amended and Restated CTO Realty Growth, Inc., 2010 Equity Incentive Plan (as amended from time to time, the “Plan”) are to (i) align Employees’ and Nonemployee Directors’ long-term financial interests with those of the Company’s stockholders; (ii) attract and retain Employees and Nonemployee Directors by providing compensation opportunities that are competitive with other companies; and (iii) provide incentives to those Employees and Nonemployee Directors who contribute significantly to the long-term performance and growth of the Company and its Subsidiaries. |
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2. |
Definitions. As used in this Plan, the following terms shall be defined as set forth below: |
(a)“Award” means any Option, Stock Appreciation Right, Restricted Shares, Restricted Share Units, Performance Shares, Performance Units, or Stock Payments granted under the Plan.
(b)“Award Agreement” means an agreement, certificate, resolution or other form of writing or other evidence approved by the Committee which sets forth the terms and conditions of an Award. An Award Agreement may be in an electronic medium, may be limited to a notation on the Company’s books and records and, if approved by the Committee, need not be signed by a representative of the Company or a Grantee.
(c)“Base Price” means the price to be used as the basis for determining the Spread upon the exercise of a Stock Appreciation Right.
(d)“Board” means the Board of Directors of the Company.
(e)“Change in Control” means any of the following events:
(1) any person (as such term is used in Section 13(d) of the Exchange Act) or group (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Exchange Act), other than a subsidiary of the Company or any employee benefit plan (or any related trust) of the Company or a subsidiary, becomes the beneficial owner of 50% or more of the Company’s outstanding voting shares and other outstanding voting securities that are entitled to vote generally in the election of directors (“Voting Securities”); or
(2)approval by the stockholders of the Company and consummation of either of the following:
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a. |
a merger, reorganization, consolidation or similar transaction (any of the foregoing, a “Merger”) as a result of which the persons who were the respective beneficial owners of the outstanding Common Stock and/or the Voting Securities immediately before such Merger are not expected to beneficially own, immediately after such Merger, directly or indirectly, more than 50% of, respectively, the outstanding voting shares and the combined voting power of the voting securities resulting from such merger in substantially the same proportions as immediately before such Merger; |
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b. |
a plan of liquidation of the Company or a plan or agreement for the sale or other disposition of all or substantially all of the assets of the Company; or |
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c. |
a change in the composition of the Board such that, during any 12-month period, the individuals who, as of the beginning of such period, constitute the Board (the “Existing Board”) cease for any reason to constitute more than 50% of the Board; provided, however, that any individual becoming a member of the Board subsequent to the beginning of such period whose election, or nomination for |
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Exhibit 10.4
election by the Company’s stockholders, was approved by a vote of at least two-thirds of the directors immediately prior to the date of such appointment or election will be considered as though such individual were a member of the Existing Board.
(f) “Code” means the Internal Revenue Code of 1986, as amended from time to time.
(g)“Committee” means the committee of the Board described in Section 4 of the Plan.
(h)“Company” means CTO Realty Growth, Inc., a Maryland corporation, or any successor corporation.
(i)“Employee” means any person, including an officer, employed on an hourly or salaried basis by the Company or a Subsidiary.
(j)“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time.
(k)“Fair Market Value” on a given date means:
(1)if the Stock is listed on a national securities exchange in the United States, the closing sale price reported as having occurred on the primary exchange with which the Stock is listed and traded on such date, or, if there is no such sale on that date, then on the last preceding date on which such a sale was reported;
(2) if the Stock is not listed on any national securities exchange but is quoted in the National Market System of the National Association of Securities Dealers Automated Quotation System the trade price of the last sale reported on such date, or, if there is no such sale on that date, then on the last preceding date on which a sale was reported; or
(3) if the Stock is not listed on a national securities exchange nor quoted in the National Market System of the National Association of Securities Dealers Automated Quotation System on a last sale basis, the amount determined by the Committee to be the fair market value based upon a good faith attempt to value the Stock accurately.
(l)“Grant Date” means the date specified by the Committee on which a grant of an Award shall become effective, which shall not be earlier than the date on which the Committee takes action with respect thereto.
(m) “Grantee” means an Employee or Nonemployee Director who has been selected by the Committee to receive an Award and to whom an Award has been granted.
(n) “Incentive Stock Option” means any Option that is intended to qualify as an “incentive stock option” under Code Section 422 or any successor provision.
(o) “Negative Discretion” means the discretion of the Committee, as authorized by Section 10 of the Plan, to eliminate or reduce the amount payable for a Qualified Performance-Based Award; provided that the exercise of such discretion would not cause the Qualified Performance-Based Award to fail to qualify as “performance-based compensation” under Section 162(m) of the Code.
(p)“Nonemployee Director” means a member of the Board who is not an Employee.
(q) “Nonqualified Stock Option” means an Option that is not intended to qualify as an Incentive Stock Option.
(r) “Option” means any option to purchase Shares granted under Section 5 of the Plan.
(s)“Option Price” means the purchase price payable upon the exercise of an Option.
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Exhibit 10.4
(t) “Performance Objectives” means, for Awards granted prior to or on the Section 162(m) Cutoff Date, the performance objectives established pursuant to this Plan for Grantees who have received Awards. Performance Objectives may be described in terms of Company-wide objectives or objectives that are related to the performance of the individual Grantee or the Subsidiary, division, department or function within the Company or Subsidiary in which the Grantee is employed. Performance Objectives may be measured on an absolute or relative basis. Relative performance may be measured by a group of peer companies or by a financial market index. Any Performance Objectives applicable to a Qualified Performance-Based Award shall be limited to specified levels of or increases in the Company’s or Subsidiary’s:
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return on invested capital; |
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free cash flow; |
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economic value added (net operating profit after tax less cost of capital); |
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total stockholder return; |
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operating ratio; |
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cost reduction (or limits on cost increases); |
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debt to capitalization; |
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debt to equity; |
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earnings; |
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earnings before interest and taxes; |
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earnings before interest, taxes, depreciation and amortization; |
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earnings per share (including or excluding nonrecurring items); |
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earnings per share before extraordinary items; |
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income from operations (including or excluding nonrecurring items); |
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income from operations compared to capital spending; |
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net income (including or excluding nonrecurring items, extraordinary items and/or the accumulative effect of accounting changes); |
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net sales; |
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price per share of common stock; |
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return on assets; |
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return on capital employed; |
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return on equity; |
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return on investment; |
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return on sales; and |
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sales volume. |
The Committee is authorized at any time during the first 90 days of a Performance Period (or, if later or earlier, within the maximum period allowed under Section 162(m) of the Code with respect to a Qualified Performance-Based Award), in its sole and absolute discretion, to adjust, or modify the level of achievement required for, a Performance Objective (to the extent permitted under Section 162(m) of the Code for Qualified Performance-Based Award) in order to prevent the dilution or enlargement of the rights of a Grantee based on the following events:
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(1) |
asset write-downs; |
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litigation or claim judgments or settlements; |
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the effect of changes in tax laws, accounting principles, or other laws or regulatory rules affecting reported results; |
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reorganization and restructuring programs; |
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extraordinary nonrecurring items (as recognized by generally accepted accounting principles); |
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acquisitions or divestitures; |
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foreign exchange gains and losses; and |
(8) a change in the Company’s fiscal year.
For Awards granted after the Section 162(m) Cutoff Date, “Performance Objectives” means any performance objectives or metrics selected by the Committee and specified in an Award Agreement (which may, for the avoidance of doubt, include one or more of the performance metrics set forth in this Section 2(t)).
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Exhibit 10.4
(u)“Performance Period” means a period of time established under Section 8 of the Plan within which the Performance Objectives relating to a Performance Share, Performance Unit, Restricted Shares or Restricted Share Units are to be achieved.
(v)“Performance Share” means a bookkeeping entry that records the equivalent of one Share awarded pursuant to Section 8 of the Plan.
(w)“Performance Unit” means a bookkeeping entry that records a unit equivalent to $1.00 awarded pursuant to Section 8 of the Plan.
(x)“Qualified Performance-Based Award” means an Award or portion of an Award that is intended to satisfy the requirements for “qualified performance-based compensation” under Code Section 162(m). The Committee shall designate any Qualified Performance-Based Award as such at the time of grant. If the Committee designates an Award as a Qualified Performance-Based Award, then the lapsing of restrictions thereon and the distribution of Shares pursuant thereto, as applicable, shall be subject to satisfaction of one, or more than one, Performance Objectives. The Committee shall determine the performance targets that will be applied with respect to each Qualified Performance-Based Award at the time of grant, but in no event later than 90 days after the commencement of the period of service to which the performance target(s) relate. Notwithstanding any contrary provision of the Plan, the Committee may not increase the number of Shares granted pursuant to any Qualified Performance-Based Award, nor may it waive the achievement of any performance target established pursuant to this Section 2(x). Prior to the payment of any Qualified Performance-Based Award, the Committee shall certify in writing that the performance target(s) applicable to such Award was met. The Committee shall have the power to impose such other restrictions on Qualified Performance-Based Awards as it may deem necessary or appropriate to ensure that such Awards satisfy all requirements for “performance-based compensation” within the meaning of Code Section 162(m), the regulations promulgated thereunder, and any successors thereto.
(y)“Restricted Shares” mean Shares granted under Section 7 of the Plan.
(z)“Restricted Share Unit” means an Award granted under Section 7 of the Plan and denominated in units representing rights to receive Shares.
(aa)“Shares” means shares of the Common Stock of the Company, par value $1.00 per share, or any security into which Shares may be converted by reason of any transaction or event of the type referred to in Section 13 of the Plan.
(bb)“Spread” means, in the case of a Stock Appreciation Right, the amount by which the Fair Market Value on the date when any such right is exercised exceeds the Base Price specified in such right.
(cc)“Stock Appreciation Right” means a right granted under Section 6 of the Plan.
(dd)“Stock Payment” means Shares granted under Section 9 of the Plan.
(ee)“Subsidiary” means a corporation or other entity in which the Company has a direct or indirect ownership or other equity interest, provided that for purposes of determining whether any person may be a Grantee for purposes of any grant of Incentive Stock Options, “Subsidiary” means any corporation (within the meaning of the Code) in which the Company owns or controls directly or indirectly more than 50 percent of the total combined voting power represented by all classes of stock issued by such corporation at the time of such grant.
(ff)“Ten Percent Stockholder” means a person who owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its affiliates.
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3. |
Shares Available Under the Plan. |
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Exhibit 10.4
(a)Reserved Shares. Subject to adjustment as provided in Section 13 of the Plan, the maximum number of Shares that may be issued or transferred with respect to Awards shall not in the aggregate exceed 895,000 Shares. Such Shares may be Shares of original issuance, Shares held in Treasury or Shares that have been reacquired by the Company. Any awards granted under the Plan on or after its original effective date of April 28, 2010 that consist of (i) Options, Stock Appreciation Rights, Restricted Share Units, or Performance Units or that, at any time, are forfeited, expire or are canceled or settled without issuance of Shares or Restricted Shares that are forfeited pursuant to Section 7(c) or the Restricted Share Award Agreement shall not count towards the maximum number of Shares that may be issued under the Plan as set forth in this Section 3(a) and shall be available for future Awards. Notwithstanding the foregoing, any and all Shares that are (i) tendered in payment of an Option exercise price (whether by attestation or by other means); (ii) withheld by the Company to satisfy any tax withholding obligation; or (iii) covered by a Stock Appreciation Right (without regard to the number of Shares that are actually issued to the Grantee upon exercise) shall be considered issued pursuant to the Plan and shall not be added to the maximum number of Shares that may be issued under the Plan as set forth in this Section 3(a).
(b)Reduction Ratio. For purposes of Section 3(a) of the Plan, each Share issued or transferred pursuant to an Award other than an Option or Stock Appreciation Right shall reduce the number of Shares available for issuance or transfer under the Plan by 1.41 Shares. For the avoidance of doubt, if any Award to which this Section 3(b) applies is disregarded for purposes of determining the maximum number of Shares issuable or transferrable under the Plan pursuant to Section 3(a), then the Plan’s Share reserve shall be increased by the same number of Shares that had previously served to reduce the Plan’s Share reserve in connection with such Award, including any amount due to the application of the 1.41 multiplier described above.
(c)ISO Maximum. In no event shall the number of Shares issued upon the exercise of Incentive Stock Options exceed 210,000 Shares, subject to adjustment as provided in Section 13 of the Plan.
(d) Maximum Calendar Year Award. No Grantee may receive Awards representing more than 50,000 Shares in any one calendar year, subject to adjustment as provided in Section 13 of the Plan. No Nonemployee Director may receive in any one calendar year more than $300,000 in the aggregate in (i) Awards (as calculated by the Award’s fair value as determined in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, or any successor thereto as of the Grant Date) and (y) cash compensation (including, retainers and cash-based awards).
(e)Maximum Calendar Year Award for Qualified Performance-Based Awards. No Grantee may receive Qualified Performance-Based Awards consisting of Options and Stock Appreciation Rights that in the aggregate represent more than 50,000 Shares in any one calendar year. No Grantee may receive Qualified Performance-Based Awards other than Options or Stock Appreciation Rights that in the aggregate represent more than 50,000 Shares in any one calendar year. The maximum amount that can be paid in any calendar year to any Grantee pursuant to a Performance Unit that is a Qualified Performance-Based Award shall be the maximum amount allowed under Section 162(m) of the Internal Revenue Code. The limits in this Section 3(e) shall only apply to Awards granted prior to or on the Section 162(m) Cutoff Date
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Plan Administration. This Plan shall be administered by a Committee appointed by the Board from among its members, provided that if the Board does not appoint a Committee, the term “Committee” means the Board, except in those instances where the text clearly indicates otherwise. Notwithstanding anything herein to the contrary, the Committee shall consist solely of two (2) or more members of the Board who are (i) “non-employee directors” (within the meaning of Rule 16b-3 under the Exchange Act) for purposes of exercising administrative authority with respect to Awards granted to Eligible Persons who are subject to Section 16 of the Exchange Act; (ii) “independent” (within the meaning of the rules of the national securities exchange on which the Company’s Shares are listed), to the extent required; and (iii) at such times as relief is sought from the imposition under Section 162(m) of the Code of a limitation on the deduction of compensation relating to an Award, “outside directors” (within the meaning of Section 162(m) of the Code), to the extent required to receive such relief. Subject to the provisions of the Plan, the Committee shall have the authority, in its sole and absolute discretion: |
(a)to determine the Fair Market Value of the Common Stock;
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Exhibit 10.4
(b)to select the Employees and Nonemployee Directors to whom Awards will be granted under the Plan;
(c)to determine whether, when, to what extent and in what types and amounts Awards are granted under the Plan;
(d)to determine the number of Shares to be covered by each Award granted under the Plan;
(e)to determine the forms of Award Agreements, which need not be the same for each grant or for each Grantee, and which may be delivered electronically, for use under the Plan;
(f)to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted under the Plan.
(g)to construe and interpret the terms of the Plan and Awards;
(h)to prescribe, amend and rescind rules and regulations relating to the Plan;
(i)to modify or amend each Award, provided that no modification or amendment of an Award shall impair the rights of the Grantee, unless mutually agreed otherwise between the Grantee and the Company, which agreement must be in writing and signed by the Grantee and the Company.
(j)to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously authorized by the Committee;
(k)to provide any notice or other communication required or permitted by the Plan in either written or electronic form; and
(l)to make all other determinations deemed necessary or advisable for administering the Plan.
The interpretation and construction by the Committee of any provision of this Plan or of any Award Agreement and any determination by the Committee pursuant to any provision of this Plan or any such agreement, notification or document, shall be final and conclusive. No member of the Committee shall be liable to any person for any such action taken or determination made in good faith.
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5. |
Options. The Committee may from time to time authorize grants to Grantees of Options to purchase Shares upon such terms and conditions as the Committee may determine in accordance with the following provisions: |
(a)Number of Shares. Each grant shall specify the number of Shares to which it pertains.
(b)Option Price. Each grant shall specify an Option Price per Share, which shall be equal to or greater than the Fair Market Value per Share on the Grant Date (or equal to or greater than 110% of the Fair Market Value with respect to Incentive Stock Options granted to Ten Percent Stockholders).
(c)Consideration. Each grant shall specify the form of consideration to be paid in satisfaction of the Option Price and the manner of payment of such consideration, which may include (i) cash in the form of currency or check or other cash equivalent acceptable to the Company, (ii) nonforfeitable, unrestricted Shares owned by the Grantee at the time of exercise and for at least six (6) months prior to the time of exercise and which have a value at the time of exercise that is equal to the Option Price, (iii) any other legal consideration that the Committee may deem appropriate on such basis as the Committee may determine in accordance with this Plan, or (iv) any combination of the foregoing.
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Exhibit 10.4
(d)Cashless Exercise. To the extent permitted by applicable law, any grant may provide for deferred payment of the Option Price from the proceeds of sale through a bank or broker on the date of exercise of some or all of the Shares to which the exercise relates.
(e)Vesting. Each Option grant may specify a period of continuous employment of the Grantee by the Company or any Subsidiary (or, in the case of a Nonemployee Director, service on the Board) that is necessary before the Options or installments thereof shall become exercisable, and any grant may provide for the earlier exercise of such rights in the event of a change in control of the Company or other similar transaction or event.
(f)ISO Dollar Limitation. Options granted under this Plan may be Incentive Stock Options, Nonqualified Stock Options or a combination of the foregoing, provided that only Nonqualified Stock Options may be granted to Nonemployee Directors. Each grant shall specify whether (or the extent to which) the Option is an Incentive Stock Option or a Nonqualified Stock Option. Notwithstanding any such designation, to the extent that the aggregate Fair Market Value of the Shares as of the Grant Date with respect to which Options designated as Incentive Stock Options are exercisable for the first time by a Grantee during any calendar year (under all plans of the Company) exceeds $100,000, such Options shall be treated as Nonqualified Stock Options.
(g)Exercise Period. No Option granted under this Plan may be exercised more than ten years from the Grant Date (or five years from the Grant Date for a Ten Percent Stockholder).
(h)Award Agreement. Each grant shall be evidenced by an Award Agreement containing such terms and provisions as the Committee may determine consistent with this Plan.
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6. |
Stock Appreciation Rights. The Committee may from time to time authorize grants to Grantees of Stock Appreciation Rights. A Stock Appreciation Right is the right of the Grantee to receive from the Company an amount, which shall be determined by the Committee and shall be expressed as a percentage (not exceeding 100 percent) of the Spread at the time of the exercise of such right. Any grant of Stock Appreciation Rights under this Plan shall be upon such terms and conditions as the Committee may determine in accordance with the following provisions: |
(a)Payment in Shares. Each grant shall specify that the amount payable upon the exercise of a Stock Appreciation Right shall be paid by the Company in Shares.
(b)Exercise Period. Any grant may specify (i) a waiting period or periods before Stock Appreciation Rights shall become exercisable and (ii) permissible dates or periods on or during which Stock Appreciation Rights shall be exercisable.
(c)Award Agreement. Each grant shall be evidenced by an Award Agreement which shall describe the subject Stock Appreciation Rights, specify the Base Price (which shall be equal to or greater than the Fair Market Value on the Grant Date), state that the Stock Appreciation Rights are subject to all of the terms and conditions of this Plan and contain such other terms and provisions as the Committee may determine consistent with this Plan.
(d)Exercise Period. No Stock Appreciation Right granted under this Plan may be exercised more than ten years from the Grant Date.
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7. |
Restricted Shares and Restricted Share Units. The Committee may from time to time authorize grants to Grantees of Restricted Shares and Restricted Share Units upon such terms and conditions as the Committee may determine in accordance with the following provisions: |
(a)Transfer of Shares. Each grant of Restricted Shares shall constitute an immediate transfer of the ownership of Shares to the Grantee in consideration of the performance of services, subject to the substantial risk of forfeiture and restrictions on transfer hereinafter referred to. Upon expiration of the Restriction Period
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Exhibit 10.4
and satisfaction of any other terms or conditions and as set forth in the Restricted Share Award Agreement, the Restricted Share shall immediately become nonforfeitable and the Shares underlying such award of Restricted Shares shall be released by the Company to the Grantee without restrictions on transfer. The Shares released by the Company hereunder may at the Company’s option be either (i) evidenced by a certificate registered in the name of the Grantee or his or her designee; or (ii) credited to a book-entry account for the benefit of the Grantee maintained by the Company’s stock transfer agent or its designee. Restricted Share Units shall become payable to a Grantee in Shares at the time or times determined by the Committee and set forth in the Restricted Share Unit Award Agreement.
(b)Consideration. Each grant may be made without additional consideration from the Grantee or in consideration of a payment by the Grantee that is less than the Fair Market Value on the Grant Date.
(c)Substantial Risk of Forfeiture. Each grant shall provide that the Restricted Shares or Restricted Share Units covered thereby shall be subject to a “substantial risk of forfeiture” within the meaning of Code Section 83 for a period to be determined by the Committee on the Grant Date, and any grant or sale may provide for the earlier termination of such risk of forfeiture in the event of a Change in Control of the Company or other similar transaction or event. If a Grantee ceases to be an Employee or a Nonemployee Director, the number of Shares subject to the Award, if any, to which the Grantee shall be entitled shall be determined in accordance with the applicable Award Agreement. All remaining Shares underlying Restricted Shares or Restricted Share Units as to which restrictions apply at the date of termination of employment or service shall be forfeited subject to such exceptions, if any, authorized by the Committee.
(d)Voting Rights. Unless otherwise determined by the Committee, an Award of Restricted Shares shall entitle the Grantee to voting rights during the period for which such substantial risk of forfeiture is to continue. Unless otherwise determined by the Committee, a Grantee shall not have any rights as a stockholder with respect to Shares underlying an Award of Restricted Share Unit until such time, if any, as the underlying Shares are actually issued to the Grantee, which may, at the option of the Company be either (i) evidenced by delivery of a certificate registered in the name of the Grantee or his or her designee; or (ii) credited to a book-entry account for the benefit of the Grantee maintained by the Company’s stock transfer agent or its designee.
(e)Restrictions on Transfer. Each grant shall provide that, during the period for which such substantial risk of forfeiture is to continue, the transferability of the Restricted Shares shall be prohibited or restricted in the manner and to the extent prescribed by the Committee on the Grant Date.
(f)Performance-Based Restricted Shares and Restricted Share Units. Any grant or the vesting thereof may be further conditioned upon the attainment of Performance Objectives established by the Committee in accordance with the applicable provisions of Section 8 of the Plan regarding Performance Shares and Performance Units.
(g)Award Agreements. Each grant shall be evidenced by an Award Agreement containing such terms and provisions as the Committee may determine consistent with this Plan. Unless otherwise directed by the Committee, all certificates representing Restricted Shares, together with a stock power that shall be endorsed in blank by the Grantee with respect to such Shares, shall be held in custody by the Company until all restrictions thereon lapse.
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Performance Shares and Performance Units. The Committee may from time to time authorize grants of Performance Shares and Performance Units, which shall become payable to the Grantee upon the achievement of specified Performance Objectives, upon such terms and conditions as the Committee may determine in accordance with the following provisions: |
(a)Number of Performance Shares or Units. Each grant shall specify the number of Performance Shares or Performance Units to which it pertains, which may be subject to adjustment to reflect changes in compensation or other factors.
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Exhibit 10.4
(b)Performance Period. The Performance Period with respect to each Performance Share or Performance Unit shall be set forth in the Award Agreement and may be subject to earlier termination in the event of a change in control of the Company or other similar transaction or event.
(c)Performance Objectives. Each grant shall specify the Performance Objectives that are to be achieved by the Grantee.
(d)Threshold Performance Objectives. Each grant may specify in respect of the specified Performance Objectives a minimum acceptable level of achievement below which no payment will be made and may set forth a formula for determining the amount of any payment to be made if performance is at or above such minimum acceptable level but falls short of the maximum achievement of the specified Performance Objectives.
(e)Payment of Performance Shares and Units. Each grant shall specify the time and manner of payment of Performance Shares or Performance Units that shall have been earned, and any grant may specify that any such amount may be paid by the Company in cash, Shares or any combination thereof and may either grant to the Grantee or reserve to the Committee the right to elect among those alternatives.
(f)Maximum Payment. Any grant of Performance Shares may specify that the amount payable with respect thereto may not exceed a maximum specified by the Committee on the Grant Date. Any grant of Performance Units may specify that the amount payable, or the number of Shares issued, with respect thereto may not exceed maximums specified by the Committee on the Grant Date.
(g)Dividend Equivalents. Subject to Section 16(g), any grant of Performance Shares may provide for the payment to the Grantee of dividend equivalents thereon in cash or additional Shares, provided however that the Award Agreement shall provide that the Grantee shall not receive any dividends unless and until such time as the Performance Shares are earned and paid, and provided further that if the payment or crediting of dividends or dividend equivalents is in respect of an Award that is subject to Code Section 409A, then the payment or crediting of such dividends or dividend equivalents shall conform to the requirements of Code Section 409A and such requirements shall be specified in writing.
(h)Adjustment of Performance Objectives. If provided in the terms of the grant, the Committee may adjust Performance Objectives and the related minimum acceptable level of achievement if, in the sole judgment of the Committee, events or transactions have occurred after the Grant Date that are unrelated to the performance of the Grantee and result in distortion of the Performance Objectives or the related minimum acceptable level of achievement.
(i)Award Agreement. Each grant shall be evidenced by an Award Agreement which shall state that the Performance Shares or Performance Units are subject to all of the terms and conditions of this Plan and such other terms and provisions as the Committee may determine consistent with this Plan.
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9. |
Stock Payments. If not prohibited by applicable law, the Committee may from time to time issue unrestricted Shares to Grantees, in such amounts and subject to such terms and conditions as the Committee shall from time to time in its sole discretion determine. A Stock Payment may be granted as, or in payment of, Nonemployee Director fees, bonuses (including without limitation any compensation that is intended to qualify as performance-based compensation for purposes of Code Section 162(m)), or to provide incentives or recognize special achievements or contributions. |
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10. |
Reduction or Elimination of Qualified Performance-Based Awards. In determining the actual amount to be paid with respect to a Qualified Performance-Based Award, the Committee may reduce or eliminate the amount payable through the use of Negative Discretion if, in its sole judgment, such reduction or elimination is appropriate. For the avoidance of doubt, the Committee shall not have the discretion to (i) grant or provide for a payment in respect of a Qualified Performance-Based Award to the extent the applicable Performance Objectives for the Performance Period have not been attained, or (ii) pay any amount in excess of the limitations set forth in Section 3(e) of the Plan. |
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Exhibit 10.4
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11. |
Clawback. Notwithstanding anything to the contrary herein, any Award or any payment made in respect of any Award that is subject to recovery under any law, government regulation, exchange listing requirement or Company policy will be subject to such deductions and/or recoupment by the Company as may be required pursuant to such law, government regulation, exchange listing requirement or Company policy (or any policy adopted by the Company pursuant to any such law, government regulation or exchange listing requirement). |
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12. |
Nontransferability. No Award granted under this Plan shall be transferable by a Grantee other than by will or the laws of descent and distribution, and Options and Stock Appreciation Rights shall be exercisable during a Grantee’s lifetime only by the Grantee or, in the event of the Grantee’s legal incapacity, by his guardian or legal representative acting in a fiduciary capacity on behalf of the Grantee under state law. Any attempt to transfer an Award in violation of this Plan shall render such Award null and void. |
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Adjustments. The Committee shall make or provide for such adjustments in the (a) number of Shares covered by outstanding Awards, (b) prices per share applicable to outstanding Options and Stock Appreciation Rights, and (c) kind of shares covered by Awards (including shares of another issuer), as the Committee determines in good faith to be equitably required in order to prevent dilution or enlargement of the rights of Grantees that otherwise would result from (x) any stock dividend, stock split, combination or exchange of Shares, recapitalization or other change in the capital structure of the Company, (y) any merger, consolidation, spin-off, spin-out, split-off, split-up, reorganization, partial or complete liquidation or other distribution of assets (other than a normal cash dividend), issuance of rights or warrants to purchase securities or (z) any other corporate transaction or event having an effect similar to any of the foregoing. Moreover, in the event of any such transaction or event, the Committee may provide in substitution for any or all outstanding Awards under this Plan such alternative consideration as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all Awards so replaced. The Committee may also make or provide for such adjustments in each of the limitations specified in Section 3 of the Plan as the Committee in its sole discretion may in good faith determine to be appropriate in order to reflect any transaction or event described in this Section 13. |
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Fractional Shares. The Company shall not be required to issue any fractional Shares pursuant to this Plan. The Committee may provide for the elimination of fractions or for the settlement thereof in cash. |
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Withholding Taxes. To the extent that the Company is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by a Grantee or other person under this Plan, it shall be a condition to the receipt of such payment or the realization of such benefit that the Grantee or such other person make arrangements satisfactory to the Company for payment of all such taxes required to be withheld. At the discretion of the Committee, such arrangements may include relinquishment of a portion of such benefit. |
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Amendments and Other Matters. |
(a)Plan Amendments. This Plan may be amended from time to time by the Board, but no such amendment shall increase any of the limitations specified in Section 3 of the Plan, other than to reflect an adjustment made in accordance with Section 13 of the Plan, without the further approval of the stockholders of the Company. The Board may condition any amendment on the approval of the stockholders of the Company if such approval is necessary or deemed advisable with respect to the applicable listing or other requirements of a national securities exchange or other applicable laws, policies or regulations. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Grantee, unless mutually agreed otherwise between the Grantee and the Company, which agreement must be in writing and signed by the Grantee and the Company.
(b)Repricing and Cash Buyouts Prohibited. The Committee shall not (i) reprice any outstanding Option or Stock Appreciation Right, directly or indirectly, or (ii) cancel or surrender in exchange for cash or another Award any outstanding Option or Stock Appreciation Right that is “underwater” (i.e., with an Option Price or exercise price, as applicable, that is equal to or greater than the Fair Market Value of a Share), in each case, without the approval of the stockholders of the Company, provided that nothing herein shall prevent the Committee from taking any action provided for in Section 13 of the Plan.
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Exhibit 10.4
(c)No Employment Right. This Plan shall not confer upon any Grantee any right with respect to continuance of employment or other service with the Company or any Subsidiary and shall not interfere in any way with any right that the Company or any Subsidiary would otherwise have to terminate any Grantee’s employment or other service at any time.
(d)Tax Qualification. To the extent that any provision of this Plan would prevent any Option that was intended to qualify under particular provisions of the Code from so qualifying, such provision of this Plan shall be null and void with respect to such Option, provided that such provision shall remain in effect with respect to other Options, and there shall be no further effect on any provision of this Plan.
(e)Change in Control. The Committee may, in its sole discretion, provide for immediate and full vesting of an Award upon the occurrence of a Change in Control of the Company. Should the Committee determine to make such a provision with respect to the grant of an Award, a representation to that effect shall be set forth in the Award Agreement.
(f)Minimum Vesting Requirements. Notwithstanding anything to the contrary contained herein, and subject to Section 16(e), no portion of any Award shall vest over a period of less than one year following the Grant Date (the “Minimum Vesting Requirements”); provided, however, that the Committee may, in its sole discretion, (i) accelerate the vesting of any Award or otherwise lapse or waive the Minimum Vesting Requirements upon (A) the termination of employment of the Grantee or (B) a Change in Control (subject to the requirements of Section 16(e)) and (ii) grant Awards that are not subject to the Minimum Vesting Requirements with respect to 5% or less of the Shares available for issuance under the Plan (as set forth in Section 3(a), as may be adjusted pursuant to Section 13).
(g)Dividends on Unvested Equity. Any Award (other than Options and Stock Appreciation Rights) may provide for the payment to the Grantee of dividends or dividend equivalents thereon in cash or additional Shares; provided, however, that the Award Agreement shall provide that any dividends or dividend equivalents shall be subject to the same restrictions on vesting and forfeiture as apply to the underlying Award to which such dividends or dividend equivalents relate; provided, further, that, if the payment or crediting of dividends or dividend equivalents is in respect of an Award that is subject to Code Section 409A, then the payment or crediting of such dividends or dividend equivalents shall conform to the requirements of Code Section 409A and such requirements shall be specified in writing.
(h)Section 162(m). The provisions in the Plan relating to Section 162(m) shall only apply to Qualified Performance-Based Awards granted prior to or on November 2, 2017 (the “Section 162(m) Cutoff Date”). Amendments made to the Plan in connection with the amendment and restatement of the Plan in 2018 are not intended to be a material modification of the Plan with respect to any awards granted under the Plan prior to or on the Section 162(m) Cutoff Date.
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17. |
Effective Date. This Third Amended and Restated 2010 Equity Incentive Plan became effective upon its adoption by the Board of Directors on July 28, 2021. It replaced and superseded the Second Amended and Restated Consolidated-Tomoka Land Co. 2010 Equity Incentive Plan, which became effective upon its adoption by the stockholders of the Company on April 29, 2020. |
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18. |
Termination. This Third Amended and Restated 2010 Equity Incentive Plan shall terminate on April 25, 2028, and no Award shall be granted after that date. |
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19. |
Governing Law. The Plan and any Award Agreements shall be administered, interpreted and enforced under the laws of the State of Maryland without regard to conflicts of laws thereof. |
Plan adopted by the Board of Directors on February 18, 2020; approved by stockholders on April 28, 2010.
Amendment adopted by the Board of Directors on January 23, 2013; approved by stockholders on April 24, 2013.
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Exhibit 10.4
Amendment adopted by the Board of Directors on January 22, 2014; approved by stockholders on April 23, 2014.
Amendment adopted by the Board of Directors on August 8, 2016 (stockholder approval not required—minor amendment).
Amendment adopted by the Board of Directors on February 21, 2018; approved by stockholders on April 25, 2018.
Amendment adopted by the Board of Directors on March 3, 2020; approved by stockholders on April 29, 2020.
Amendment adopted by the Board of Directors on July 28, 2021 (stockholder approval not required—minor amendment).
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Exhibit 31.1
CERTIFICATIONS
I, John P. Albright, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of CTO Realty Growth, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: October 28, 2021
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By: |
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/s/ John P. Albright |
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John P. Albright |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Exhibit 31.2
CERTIFICATIONS
I, Matthew M. Partridge, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of CTO Realty Growth, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: October 28, 2021
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By: |
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/s/ Matthew M. Partridge |
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Matthew M. Partridge, Senior Vice President and Chief Financial Officer and Treasurer (Principal Financial Officer) |
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CTO Realty Growth, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John P. Albright, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: October 28, 2021
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By: |
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/s/ John P. Albright |
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John P. Albright |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CTO Realty Growth, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Matthew M. Partridge, Senior Vice President, Chief Financial Officer, and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: October 28, 2021
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By: |
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/s/ Matthew M. Partridge |
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Matthew M. Partridge, Senior Vice President and Chief Financial Officer and Treasurer (Principal Financial Officer) |
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