ALPINE INCOME PROPERTY TRUST, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
Forward-looking statements
When we refer to "we," "us," "our," "PINE," or "the Company," we meanAlpine Income Property Trust, Inc. and its consolidated subsidiaries. References to "Notes to Financial Statements" refer to the Notes to the Consolidated and Combined Financial Statements ofAlpine Income Property Trust, Inc. included in Item 8 of this Annual Report on Form 10-K. 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. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, the Company's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that could cause actual results or events to differ materially from those the Company anticipates or projects are described in "Item 1A. Risk Factors" of this Annual Report on Form 10-K. Given these uncertainties, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Annual Report on Form 10-K or any document incorporated herein by reference. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this Annual Report on Form 10-K.
The following discussion and analysis should be read in conjunction with the consolidated and combined financial statements and related notes included elsewhere in this report.
Overview
We seek to acquire, own and operate primarily freestanding, commercial real estate properties located inthe United States leased primarily pursuant to triple-net, long-term leases. We focus on investments primarily in retail properties. We target tenants in industries that we believe are favorably impacted by current macroeconomic trends that support consumer spending, such as strong and growing employment and positive consumer sentiment, as well as tenants in industries that have demonstrated resistance to the impact of the growing e-commerce retail sector or who use a physical presence as a component of their omnichannel strategy. We also seek to invest in properties that are net leased to tenants that we determine have attractive credit characteristics, stable operating histories and healthy rent coverage levels, are well-located within their respective markets and have rents at-or-below market rent levels. Furthermore, we believe that the size of our company allows us, for at least the near term, to focus our investment activities on the acquisition of single properties or smaller portfolios of properties that represent a transaction size that most of our publicly-traded net lease REIT peers will not pursue on a consistent basis. Our strategy for investing in income-producing properties is focused on factors including, but not limited to, long-term real estate fundamentals, including 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 structure, etc.). Our operating results for the year endedDecember 31, 2021 were in-line with our expectations and primarily driven by our investment activity of acquiring net lease properties at valuations and yields generally consistent with our target investment parameters. 47 Table of Contents
During the year endedDecember 31, 2021 , the Company acquired 68 properties for total acquisition volume of$260.3 million . During the year endedDecember 31, 2021 , the Company disposed of three properties for an aggregate sales price of$28.3 million , generating combined gains on sale of$9.7 million . As ofDecember 31, 2021 , we owned 113 properties with an aggregate gross leasable area of 3.3 million square feet, located in 32 states, with a weighted average remaining lease term of 7.9 years. Our portfolio was 100% leased as ofDecember 31, 2021 .
Historical financial information
The following table summarizes our selected historical financial information for
each of the last three fiscal years (in thousands, except per share and dividend
data). The selected financial information has been derived from our audited
consolidated and combined financial statements.
For the
Period from
November For the Period
For the Year 26, 2019 to from January 1,
Ended For the Year Ended December 2019 to November
December 31, 2021 December 31, 2020 31, 2019 25, 2019
The Company Predecessor
Total Revenues $ 30,128 $ 19,248 $ 1,394 $ 11,837
Net Income (Loss) From Operations $ 15,164 $ 2,610 $ (4) $ 3,631
Net Income (Loss) $ 11,462 $ 1,146 $ (45) $ 3,631
Less: Net (Income) Loss
Attributable to Noncontrolling
Interest (1,498) (161) 6 -
Net Income (Loss) Attributable to
Alpine Income Property Trust, Inc. $ 9,964 $ 985 $ (39) $ 3,631
Net Income (Loss) Per Share
Attributable to Alpine Income
Property Trust, Inc.
Basic $ 1.02 $ 0.13 $ - N/A
Diluted $ 0.89 $ 0.11 $ - N/A
Dividends Declared and Paid $ 1.015 $ 0.820 $ 0.058 N/A
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Balance sheet data (in thousands):
As of December 31,
2021 2020
Total Real Estate , at Cost $ 444,408 $ 225,889
Real Estate-Net $ 428,989 $ 219,339
Cash and Cash Equivalents $ 8,851 $ 1,894
Intangible Lease Assets-Net $ 58,821 $ 36,881
Straight-Line Rent Adjustment $ 1,838 $ 2,045
Other Assets $ 6,369 $ 2,081
Total Assets $ 505,514 $ 262,240
Accounts payable, accrued liabilities and other liabilities
1,984
Prepaid Rent and Deferred Revenue$ 2,033 $
1,055
Intangible Lease Liabilities-Net$ 5,476 $
3,299 Long-Term Debt$ 267,740 $ 106,809 Total Liabilities$ 277,612 $ 113,147 Total Equity$ 227,902 $ 149,093 Non-GAAP Financial Measures
Our reported results are presented in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). We also disclose FFO and AFFO, both of which are non-GAAP financial measures. We believe these two non-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 operations as reported on our statement of cash flows as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures. We compute FFO in accordance with the definition adopted by theBoard of Governors of theNational Association of Real Estate Investment Trusts , or NAREIT. NAREIT defines FFO as GAAP net income or loss adjusted to exclude extraordinary items (as defined by 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. To derive AFFO, we modify the NAREIT computation of FFO to include other adjustments to GAAP net income related to non-cash revenues and expenses such as straight-line rental revenue, amortization of deferred financing costs, amortization of above- and below-market lease related intangibles, non-cash compensation, and other non-cash income or expense. 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. 49 Table of Contents
Reconciliation of non-GAAP measures (in thousands, except share data):
For the
For the Period Period of
For the Year For the Year
from november
Ended Ended
26, 2019 to 2019 to
December 31 ,December 31 ,
2021 2020 2019 2019
The Company Predecessor
Net Income (Loss)$ 11,462 $ 1,146 $ (45)$ 3,631 Depreciation and Amortization 15,939 9,949 687 4,859 Gain on Disposition of Assets (9,675) (287) - - Funds From Operations$ 17,726 $ 10,808 $ 642$ 8,490 Adjustments: Straight-Line Rent Adjustment (607) (1,524) (68) (410) COVID-19 Rent Repayments (Deferrals), Net 430 (378) - - Non-Cash Compensation 309 268 4 509 Amortization of Deferred Financing Costs to Interest Expense 362 188 16 - Amortization of Deferred Expenses to Lease Income - - - 277 Amortization of Intangible Assets and Liabilities to Lease Income (257) (108) (5) (234) Other Non-Cash (Income) Expense (18) (22) - - Recurring Capital Expenditures (41) (43) - - Non-Recurring Acquisition Cost Charge - - 216 -
Adjusted operating funds
805$ 8,632 Weighted Average Number of Common Shares: Basic 9,781,066 7,588,349 7,902,737 N/A Diluted 11,246,227 8,812,203 9,126,591 N/A
Other data (in thousands, except data per share):
For the For the
Period from Period from
November 26, January 1,
2019 to 2019 to
For the Year Ended For the Year Ended December 31, November 25,
December 31, 2021 December 31, 2020 2019 2019
The Company Predecessor
FFO $ 17,726 $ 10,808 $ 642 $ 8,490
FFO per Diluted Share $ 1.58 $ 1.23$ 0.07 N/A AFFO $ 17,904 $ 9,189$ 805 $ 8,632 AFFO per Diluted Share $ 1.59 $ 1.04
$ 0.09 N/A 50 Table of Contents
COMPARISON OF FINANCIAL YEARS
The following presents the Company's results of operations for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 (in thousands): For the Year Ended For the Year Ended December 31, 2021 December 31, 2020 $ Variance % Variance Revenues: Lease Income $ 30,128 $ 19,248$ 10,880 56.5% Total Revenues 30,128 19,248 10,880 56.5% Operating Expenses: Real Estate Expenses 3,673 2,316 1,357 58.6% General and Administrative Expenses 5,027 4,660 367 7.9% Depreciation and Amortization 15,939 9,949 5,990 60.2% Total Operating Expenses 24,639 16,925 7,714 45.6% Gain on Disposition of Assets 9,675 287 9,388 3271.1% Net Income From Operations 15,164
2,610 12,554 481.0% Interest Expense 3,702 1,464 2,238 152.9% Net Income 11,462 1,146 10,316 900.2% Less: Net Income Attributable to Noncontrolling Interest (1,498) (161) (1,337) (830.4%) Net Income Attributable to Alpine Income Property Trust, Inc. $ 9,964 $
985$ 8,979 911.6%
Revenue and direct cost of revenue
Revenue from our property operations during the years endedDecember 31, 2021 and 2020 totaled$30.1 million and$19.2 million , respectively. The increase in revenues is reflective of the Company's volume of acquisitions. The direct costs of revenues for our property operations totaled$3.7 million and$2.3 million during the years endedDecember 31, 2021 and 2020, respectively. The increase in the direct cost of revenues is also attributable to the Company's expanded property portfolio.
General and administrative expenses
The following table represents the Company's general and administrative expenses for the year endedDecember 31, 2021 as compared to the year ended December
31,
2020 (in thousands):
For the Year For the Year
Ended Ended $
December 31, 2021 December 31, 2020 Variance % Variance
Management Fee to Manager $ 3,182 $ 2,554 $ 628 24.6%
Director Stock Compensation Expense 309 268 41 15.3%
Director & Officer Insurance Expense 499 459 40 8.7%
Additional General and Administrative Expense 1,037 1,379 (342) (24.8)%
Total General and Administrative Expenses $ 5,027 $
4,660$ 367 7.9% General and administrative expenses totaled$5.0 million and$4.7 million during the years endedDecember 31, 2021 and 2020, respectively. The$0.4 million increase is primarily attributable to growth in the Company's equity base, which led to increased management fee expenses totaling$0.6 million . 51 Table of Contents
Depreciation and amortization
Depreciation and amortization expense totaled$15.9 million and$9.9 million during the years endedDecember 31, 2021 and 2020, respectively. The$6.0 million increase in the depreciation and amortization expense is reflective of the Company's expanded property portfolio. Interest Expense Interest expense totaled$3.7 million and$1.5 million during the years endedDecember 31, 2021 and 2020, respectively. The$2.2 million increase in interest expense is attributable to the higher average outstanding debt balance during the year endedDecember 31, 2021 as compared to the same period in 2020. The overall increase in the Company's long-term debt was primarily utilized to fund the acquisition of properties during 2021 and 2020. Net Income (Loss) Net income (loss) totaled$11.5 million and$1.1 million during the years endedDecember 31, 2021 and 2020, respectively. The increase in net income is attributable to the factors described above in addition to the$9.7 million gain on disposition of assets during the year endedDecember 31, 2021 , an increase of$9.4 million from the comparable prior year period. COMPARISON OF THE YEAR ENDEDDECEMBER 31, 2020 , THE PERIOD FROMNOVEMBER 26, 2019 TODECEMBER 31, 2019 , AND THE PREDECESSOR PERIOD FROMJANUARY 1, 2019
TONOVEMBER 25, 2019 The following presents the Company's results of operations for the year endedDecember 31, 2020 , as compared to the period fromNovember 26, 2019 toDecember 31, 2019 and the Predecessor period fromJanuary 1, 2019 toNovember 25, 2019 (in thousands)(1): For the Period from November 26, 2019 to For the Period from For the Year Ended December 31, January 1, 2019 to December 31, 2020 2019 November 25, 2019 The Company Predecessor Revenues: Lease Income $ 19,248$ 1,394 $ 11,837 Total Revenues 19,248 1,394 11,837 Operating Expenses: Real Estate Expenses 2,316 372 1,664
General and Administrative Expenses 4,660
339 1,683 Depreciation and Amortization 9,949 687 4,859 Total Operating Expenses 16,925 1,398 8,206 Gain on Disposition of Assets 287 - -
Net Income (Loss) From Operations 2,610
(4) 3,631 Interest Expense 1,464 41 - Net Income (Loss) 1,146 (45) 3,631 Less: Net (Income) Loss Attributable to Noncontrolling Interest (161) 6 - Net Income (Loss) Attributable to Alpine Income Property Trust, Inc. $ 985$ (39) $ 3,631
(1) Results of operations before
CTO activity. After
initial portfolio of the CTO, the results of operations are presented on a new
basis of accounting pursuant to ASC 805-10.
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Revenue and direct cost of revenue
Revenue from our property operations totaled$19.3 million during the year endedDecember 31, 2020 ,$1.4 million during the period fromNovember 26, 2019 toDecember 31, 2019 and$11.8 million during the Predecessor period fromJanuary 1, 2019 toNovember 25, 2019 . The increase in revenues is reflective of the Company's volume of acquisitions. The direct costs of revenues for our property operations totaled$2.3 million during the year endedDecember 31, 2020 ,$0.4 million during the period fromNovember 26, 2019 toDecember 31, 2019 , and$1.7 million during the Predecessor period fromJanuary 1, 2019 toNovember 25, 2019 . The increase in the direct cost of revenues is also attributable to the Company's expanded property portfolio.
General and administrative expenses
The following table represents the Company's general and administrative expenses for the year endedDecember 31, 2020 as compared to the period fromNovember 26, 2019 toDecember 31, 2019 and the Predecessor period fromJanuary 1, 2019 toNovember 25, 2019 (in thousands): For the Period from For the Period November 26, from January For the Year 2019 to 1, 2019 to Ended December 31, November 25, December 31, 2020 2019 2019 The Company Predecessor Management Fee to Manager $ 2,554 $ 254 $ -
Director Stock Compensation Expense (1) 268 4 509 Director & Officer Insurance Expense 459 44 - Additional General and Administrative Expense 1,379 37 - Allocation of Predecessor General and Administrative Expense - - 1,174 Total General and Administrative Expenses $ 4,660 $
339
(1) For the Predecessor period presented, the stock-based compensation expense represents
an allocation from CTO. General and administrative expenses totaled$4.7 million during the year endedDecember 31, 2020 ,$0.3 million during the period fromNovember 26, 2019 toDecember 31, 2019 , and$1.7 million during the Predecessor period fromJanuary 1, 2019 toNovember 25, 2019 . Changes in general and administrative expenses are primarily due to the changes in the nature of such expenses, as the Predecessor period fromJanuary 1, 2019 toNovember 25, 2019 represents an allocation of the Predecessor parent company expenses versus actual general and administrative expenses incurred by the Company. The Predecessor general and administrative expenses were not indicative of the amount of general and administrative expenses the Company has incurred on an annual basis subsequent to the IPO. During the year endedDecember 31, 2020 , general and administrative expenses were primarily impacted by the recognition of$2.6 million of management fee expenses, of which costs totaled$0.3 million and zero, respectively, for the period fromNovember 26, 2019 toDecember 31, 2019 and for the Predecessor period fromJanuary 1, 2019 toNovember 25, 2019 , in addition to$0.3 million of costs associated with audit services related to the 2019 annual audit. The fees associated with our annual audit are recognized as the services are incurred, which typically occurs ratably throughout the year.
Depreciation and amortization
Depreciation and amortization expense totaled$9.9 million during the year endedDecember 31, 2020 ,$0.7 million during the period fromNovember 26, 2019 toDecember 31, 2019 , and$4.9 million during the Predecessor period fromJanuary 1, 2019 toNovember 25, 2019 . The increase in the depreciation and amortization expense is reflective of the Company's expanded property portfolio. 53 Table of Contents Interest Expense Interest expense totaled$1.5 million during the year endedDecember 31, 2020 , less than$0.1 million during the period fromNovember 26, 2019 toDecember 31, 2019 , and zero during the Predecessor period fromJanuary 1, 2019 toNovember 25, 2019 . The increase in interest expense is related to the outstanding balance on the Company's Credit Facility to fund the acquisition of 29 properties during the year endedDecember 31, 2020 . Net Income (Loss) Net income (loss) totaled$1.1 million for the year endedDecember 31, 2020 , less than$(0.1) million for the period fromNovember 26, 2019 toDecember 31, 2019 , and$3.6 million for the Predecessor period fromJanuary 1, 2019 toNovember 25, 2019 . The decrease in net income for the year endedDecember 31, 2020 , as compared to the period fromNovember 26, 2019 toDecember 31, 2019 and the Predecessor period fromJanuary 1, 2019 toNovember 25, 2019 is attributable to the factors described above.
CASH AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash totaled$9.5 million atDecember 31, 2021 , including restricted cash of$0.6 million , of which restricted cash balance is being held in a capital replacement and leasing commissions reserve account in connection with our financing of six properties.
Long-term debt. From
Acquisitions and Investments. As noted previously, the Company acquired 68 properties during the year endedDecember 31, 2021 for an aggregate purchase price of$260.3 million , as further described in Note 4 "Property Portfolio" in the notes to the consolidated and combined financial statements in Item 8. Dispositions. During the year endedDecember 31, 2021 , the Company disposed of three properties for a total disposition volume of$28.3 million , generating aggregate gains of$9.7 million , as further described in Note 4 "Property Portfolio" in the notes to the consolidated and combined financial statements in Item 8.
Capital expenditure. From
The Company is contractually obligated under its various long-term debt agreements. In the aggregate, the Company is obligated under such agreements to repay$269.0 million on long-term basis, to be repaid in excess of one year, with no payments due within one year. 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$51.0 million of available capacity on the existing$150.0 million Credit Facility, based on our current borrowing base of properties,
as ofDecember 31, 2021 .
The 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 of investing in net leased properties by utilizing
the capital we raised in the IPO and available borrowing capacity from the
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.
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CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates include those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Company's financial condition or results of operations. Our most significant estimate is as follows: Purchase Accounting for Acquisitions of Real Estate Subject to a Lease. As required by GAAP, 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 assumptions underlying the allocation of relative fair values are based on market information including, but not limited to: (i) the estimate of replacement cost of improvements under the cost approach, (ii) the estimate of land values based on comparable sales under the sales comparison approach, and (iii) the estimate of future benefits determined by either a reasonable rate of return over a single year's net cash flow, or a forecast of net cash flows projected over a reasonable investment horizon under the income capitalization approach. The underlying assumptions are subject to uncertainty and thus any changes to the allocation of fair value to each of the various line items within the Company's consolidated balance sheets could have an impact on the Company's financial condition as well as results of operations due to resulting changes in depreciation and amortization as a result of the fair value allocation. The acquisitions of real estate subject to this estimate totaled 68 properties for a combined purchase price of$260.3 million for the year endedDecember 31, 2021 and 29 properties for a combined purchase price of$116.6 million for the year endedDecember 31, 2020 .
See Note 3, “Summary of Significant Accounting Policies”, for a more detailed discussion of the Company’s accounting estimates and policies.
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