SEC Filing - CTO Realty Growth

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

☐	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 01-11350

CTO REALTY GROWTH, INC.

(Exact name of registrant as specified in its charter)


Maryland		59-0483700
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1140 N. Williamson Blvd., Suite 140
Daytona Beach, Florida		32114
(Address of principal executive offices)		(Zip Code)

(386) 274-2202

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class:	Trading Symbol	Name of each exchange on which registered:
COMMON STOCK, $0.01 PAR VALUE	CTO	NYSE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	☐	Accelerated Filer	☒

Non-accelerated Filer	☐	Smaller Reporting Company	☐

		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 22, 2021, there were 5,958,589 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

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INDEX


		Page
		No.
PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets – March 31, 2021 (Unaudited) and December 31, 2020		3

Consolidated Statements of Operations – Three months ended March 31, 2021 and 2020 (Unaudited)		4

Consolidated Statements of Comprehensive Income (Loss) – Three months ended March 31, 2021 and 2020 (Unaudited)		5

Consolidated Statements of Stockholders’ Equity – Three months ended March 31, 2021 and 2020 (Unaudited)		6

Consolidated Statements of Cash Flows – Three months ended March 31, 2021 and 2020 (Unaudited)		7

Notes to Consolidated Financial Statements (Unaudited)		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		45

Item 3. Quantitative and Qualitative Disclosures About Market Risk		57

Item 4. Controls and Procedures		57

PART II—OTHER INFORMATION		57

Item 1. Legal Proceedings		57

Item 1A. Risk Factors		58

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		58

Item 3. Defaults Upon Senior Securities		58

Item 4. Mine Safety Disclosures		58

Item 5. Other Information		58

Item 6. Exhibits		59

SIGNATURES		60

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CTO REALTY GROWTH, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)


	As of
	(Unaudited) March 31, 2021		December 31, 2020
ASSETS
Real Estate:
Land, at cost	$	179,923	$	166,512
Building and Improvements, at cost		317,870		305,614
Other Furnishings and Equipment, at cost		679		672
Construction in Process, at cost		551		323
Total Real Estate, at cost		499,023		473,121
Less, Accumulated Depreciation		(33,319)		(30,737)
Real Estate—Net		465,704		442,384
Land and Development Costs		7,074		7,083
Intangible Lease Assets—Net		53,215		50,176
Assets Held for Sale—See Note 25		4,505		833
Investment in Joint Ventures		48,686		48,677
Investment in Alpine Income Property Trust, Inc.		35,408		30,574
Mitigation Credits		2,622		2,622
Commercial Loan and Master Lease Investments		38,417		38,320
Cash and Cash Equivalents		4,691		4,289
Restricted Cash		609		29,536
Refundable Income Taxes		277		26
Other Assets—See Note 13		12,227		12,180
Total Assets	$	673,435	$	666,700
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Accounts Payable	$	739	$	1,047
Accrued and Other Liabilities—See Note 19		7,042		9,090
Deferred Revenue—See Note 20		3,463		3,319
Intangible Lease Liabilities—Net		23,396		24,163
Liabilities Held for Sale—See Note 25		831		831
Deferred Income Taxes—Net		3,343		3,521
Long-Term Debt		280,248		273,830
Total Liabilities		319,062		315,801
Commitments and Contingencies—See Note 23
Stockholders’ Equity:
Preferred Stock – 100,000,000 shares authorized; $0.01 par value, no shares issued or outstanding at March 31, 2021; 50,000 shares authorized; $100.00 par value, no shares issued or outstanding at December 31, 2020		—		—
Common Stock – 500,000,000 shares authorized; $0.01 par value, 5,957,079 shares issued and outstanding at March 31, 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		60		7,250
Treasury Stock – 0 shares at March 31, 2021 and 1,394,924 shares at December 31, 2020		—		(77,541)
Additional Paid-In Capital		13,341		83,183
Retained Earnings		341,645		339,917
Accumulated Other Comprehensive Loss		(673)		(1,910)
Total Stockholders’ Equity		354,373		350,899
Total Liabilities and Stockholders’ Equity	$	673,435	$	666,700

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

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CTO REALTY GROWTH, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except share, per share and dividend data)


	Three Months Ended
	March 31,		March 31,
	2021		2020
Revenues
Income Properties	$	11,449	$	11,003
Management Fee Income		669		702
Interest Income from Commercial Loan and Master Lease Investments		701		1,052
Real Estate Operations		1,893		81
Total Revenues		14,712		12,838
Direct Cost of Revenues
Income Properties		(2,917)		(2,113)
Real Estate Operations		(82)		(1,524)
Total Direct Cost of Revenues		(2,999)		(3,637)
General and Administrative Expenses		(3,132)		(3,092)
Impairment Charges		—		(1,905)
Depreciation and Amortization		(4,830)		(4,552)
Total Operating Expenses		(10,961)		(13,186)
Gain on Disposition of Assets		708		—
Gain on Extinguishment of Debt		—		637
Other Gains and Income		708		637
Total Operating Income		4,459		289
Investment and Other Income (Loss)		5,332		(13,186)
Interest Expense		(2,444)		(3,453)
Income (Loss) Before Income Tax Expense		7,347		(16,350)
Income Tax Benefit		438		4,088
Net Income (Loss)	$	7,785	$	(12,262)

Per Share Information—See Note 15:
Basic Net Income (Loss) per Share	$	1.32	$	(2.60)
Diluted Net Income (Loss) per Share	$	1.32	$	(2.60)

Weighted Average Number of Common Shares
Basic		5,879,085		4,711,396
Diluted		5,879,085		4,711,396

Dividends Declared and Paid	$	1.00	$	0.25

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

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CTO REALTY GROWTH, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)


	Three Months Ended
	March 31, 2021		March 31, 2020
Net Income (Loss)	$	7,785	$	(12,262)
Other Comprehensive Income (Loss):
Cash Flow Hedging Derivative - Interest Rate Swap (Net of Income Tax Expense of $0 and $(0.5) million, respectively)		1,237		(1,373)
Total Other Comprehensive Income (Loss), Net of Income Tax		1,237		(1,373)
Total Comprehensive Income (Loss)	$	9,022	$	(13,635)

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

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CTO REALTY GROWTH, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands, except per share data)

For the three months ended March 31, 2021:


									Accumulated
					Additional				Other
	Common		Treasury		Paid-In		Retained		Comprehensive		Stockholders'
	Stock		Stock		Capital		Earnings		Income (Loss)		Equity
Balance January 1, 2021	$	7,250	$	(77,541)	$	83,183	$	339,917	$	(1,910)	$	350,899
Net Income		—		—		—		7,785		—		7,785
Vested Restricted Stock and Performance Shares		—		—		(436)		—		—		(436)
Exercise of Stock Options and Stock Issuance		—		—		292		—		—		292
Stock Compensation Expense from Restricted Stock Grants and Equity Classified Stock Options		—		—		669		—		—		669
Par Value $0.01 per Share and Treasury Stock Derecognized at January 29, 2021		(7,190)		77,541		(70,351)		—		—		—
Equity Issuance Costs		—		—		(16)		—		—		(16)
Dividends Declared for the Period		—		—		—		(6,057)		—		(6,057)
Other Comprehensive Income		—		—		—		—		1,237		1,237
Balance March 31, 2021	$	60	$	—	$	13,341	$	341,645	$	(673)	$	354,373

For the three months ended March 31, 2020:


									Accumulated
					Additional				Other
	Common		Treasury		Paid-In		Retained		Comprehensive		Stockholders'
	Stock		Stock		Capital		Earnings		Income (Loss)		Equity
Balance January 1, 2020	$	6,017	$	(73,441)	$	26,690	$	326,073	$	74	$	285,413
Net Loss		—		—		—		(12,262)		—		(12,262)
Stock Repurchase		—		(3,915)		—		—		—		(3,915)
Equity Component of Convertible Debt		—		—		5,248		—		—		5,248
Vested Restricted Stock and Performance Shares		24		—		(562)		—		—		(538)
Stock Issuance		4		—		237		—		—		241
Stock Compensation Expense from Restricted Stock Grants and Equity Classified Stock Options		—		—		578		—		—		578
Dividends Declared for the Period		—		—		—		(1,184)		—		(1,184)
Other Comprehensive Loss, Net of Income Tax		—		—		—		—		(1,373)		(1,373)
Balance March 31, 2020	$	6,045	$	(77,356)	$	32,191	$	312,627	$	(1,299)	$	272,208

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

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CTO REALTY GROWTH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Three Months Ended
	March 31,		March 31,
	2021		2020
Cash Flow from Operating Activities:
Net Income (Loss)	$	7,785	$	(12,262)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:
Depreciation and Amortization		4,830		4,552
Amortization of Intangible Liabilities to Income Property Revenue		(396)		(474)
Amortization of Deferred Financing Costs to Interest Expense		165		150
Amortization of Discount on Convertible Debt		310		504
Gain on Disposition of Property, Plant, and Equipment and Intangible Assets		(708)		—
Gain on Extinguishment of Debt		—		(637)
Impairment Charges		—		1,905
Accretion of Commercial Loan Origination Fees		—		(88)
Non-Cash Imputed Interest		(103)		(103)
Deferred Income Taxes		(178)		(6,473)
Unrealized (Gain) Loss on Investment Securities		(4,834)		13,706
Non-Cash Compensation		958		819
Decrease (Increase) in Assets:
Refundable Income Taxes		(252)		—
Assets Held for Sale		(1)		—
Land and Development Costs		9		(73)
Impact Fees and Mitigation Credits		—		(237)
Other Assets		143		(574)
Increase (Decrease) in Liabilities:
Accounts Payable		(308)		(146)
Accrued and Other Liabilities		(1,225)		2,888
Deferred Revenue		143		(196)
Income Taxes Payable		—		559
Net Cash Provided By Operating Activities		6,338		3,820
Cash Flow from Investing Activities:
Acquisition of Property, Plant, and Equipment		(39,115)		(137,997)
Acquisition of Commercial Loan Investments and Master Lease Investments		—		(6,754)
Cash Contribution to Interest in Joint Venture		(9)		(5)
Proceeds from Disposition of Property, Plant, and Equipment, Net, and Assets Held for Sale		4,702		—
Net Cash Used In Investing Activities		(34,422)		(144,756)
Cash Flow from Financing Activities:
Proceeds from Long-Term Debt		84,000		56,641
Payments on Long-Term Debt		(77,183)		(21,589)
Cash Paid for Loan Fees		(873)		(1,880)
Cash Payments for Exercise of Stock Options and Stock Issuance		(4)		—
Cash Used to Purchase Common Stock		—		(3,915)
Cash Paid for Vesting of Restricted Stock		(436)		(538)
Cash Paid for Equity Issuance Costs		(16)		—
Dividends Paid		(5,929)		(1,184)
Net Cash Provided By (Used In) Financing Activities		(441)		27,535
Net Decrease in Cash and Cash Equivalents		(28,525)		(113,401)
Cash and Cash Equivalents, Beginning of Period		33,825		134,904
Cash and Cash Equivalents, End of Period	$	5,300	$	21,503

Reconciliation of Cash to the Consolidated Balance Sheets:
Cash and Cash Equivalents	$	4,691	$	18,593
Restricted Cash		609		2,910
Total Cash	$	5,300	$	21,503

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

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CTO REALTY GROWTH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited, in thousands)


	Three Months Ended
	March 31,		March 31,
	2021		2020
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Taxes, net of Refunds Received	$	(8)	$	(5)
Cash Paid for Interest	$	(1,395)	$	(3,140)

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Convertible Note Exchange	$	—	$	57,359
Equity Component of Convertible Debt	$	—	$	5,248
Dividends Declared and Unpaid	$	128	$	—

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

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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, 27 commercial real estate properties in 12 states in the United States. As of March 31, 2021, we owned 20 single-tenant and seven multi-tenant income-producing properties comprising 2.8 million square feet of gross leasable space. See Note 26, “Subsequent Events” for information related to the single-tenant income property sold subsequent to March 31, 2021.

In addition to our income property portfolio, as of March 31, 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 one commercial loan investment and two commercial properties, which are included in the 27 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 429,000 surface acres in 20 counties in the State of Florida and a portfolio of mitigation credits;

●

A retained interest in the Land JV which is seeking to sell 1,600 acres of undeveloped land in Daytona Beach, Florida; and

●

An interest in a joint venture (the “Mitigation Bank JV”) that owns a 2,500 acre parcel of land in the western part of Daytona Beach, Florida which is engaged in the operation of a mitigation bank, which, pursuant to a mitigation plan approved by the applicable state and federal authorities, produces mitigation credits that are marketed and sold to developers of land in the Daytona Beach area for the purpose of enabling the developers to obtain certain regulatory permits.

Our business also includes, as outlined above, the value of our investment in PINE. As of March 31, 2021, our investment totaled $35.4 million, or 22.4% of the PINE’s outstanding equity, including the units of limited partnership interest (“OP Units”) we hold in Alpine Income Property OP, LP (the “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

During the fourth quarter of 2020, the Company 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.

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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”), 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’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. CTO is a corporation organized in the state of Maryland and has been renamed “CTO Realty Growth, Inc.” CTO’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’s common stock on the New York Stock Exchange (the “NYSE”) under CTO FL’s ticker symbol, “CTO.” This application was approved, and CTO’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 spread of the COVID-19 Pandemic has continued to cause significant volatility in the U.S. and international markets, and in many industries, business activity has experienced periods of almost complete shutdown. There continues to be uncertainty around the duration and severity of business disruptions related to the COVID-19 Pandemic, as well as its impact on the U.S. economy and international economies.

The actions taken by federal, state and local governments to mitigate the spread of COVID-19, initially by ordering closures of non-essential businesses and ordering residents to generally stay at home, and subsequent phased re-openings, have resulted in some of our tenants temporarily closing their businesses, and for some, impacting their ability to pay rent.

The Company collected 100% of the Contractual Base Rent (“CBR”) due for the three months ended March 31, 2021. CBR represents the amount owed to the Company under the terms of its lease agreements in each respective month. The Company has previously agreed to defer or abate certain CBRs in exchange for additional lease term or other lease enhancing additions. In general, repayment of the deferred CBR, whereby an agreement has been reached by the Company and the tenant, will generally occur from the time of deferment, with ratable payments continuing, in some cases, into 2023. In connection with the leases in which rent was abated, other lease modifications, including extended lease terms

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and imposition of percentage rent, were agreed to by the Company and the tenants. Depending upon the duration of tenant closures and the overall economic downturn resulting from the COVID-19 Pandemic, we may find deferred rents difficult to collect. See Note 26, “Subsequent Events” for the Company’s disclosure related to April 2021 rent collections.

We have seen a positive uptick in our rent collections levels since the initial disruption experienced during the onset of the COVID-19 Pandemic. While this is a positive trend, in part driven by government mandated restrictions gradually being lifted, our rent collections could be below our tenants’ CBR and historical levels, which would adversely impact our results of operations and cash flows. The extent of such impact will depend on future developments, which are highly uncertain and cannot be predicted. Depending upon the duration of tenant closures, operating restrictions, and the overall economic downturn resulting from future disruption related to the COVID-19 Pandemic, we may find that deferred rents are difficult to collect, and we may experience higher vacancies.

An assessment of the current or identifiable potential financial and operational impacts on the Company as a result of the COVID-19 Pandemic are as follows:

●

The total borrowing capacity on the revolving credit facility (the “Credit Facility”) is based on the assets currently in the borrowing base, as defined by the Company’s Credit Facility agreement. Pursuant to the terms of the Credit Facility, any property in the borrowing base with a tenant that is more than 60 days past due on its contractual rent obligations would be automatically removed from the borrowing base and the Company’s borrowing capacity would be reduced. For the tenants requesting rent relief with which the Company has reached an agreement, such deferral and/or abatement agreements for current rent, under the terms of the Credit Facility, would not be past due if it adheres to such modification, and thus those properties would not be required to be removed from the borrowing base. The Company’s available borrowing capacity has not been limited as a result of the referenced terms of the Credit Facility.

●

As a result of the outbreak of the COVID-19 Pandemic, the federal government and the state of Florida issued orders encouraging everyone to remain in their residence and not go into work. In response to these orders and in the best interest of our employees and directors, we have implemented significant preventative measures to ensure the health and safety of our employees and members of our Board of Directors (the “Board”), including: (i) conducting all meetings of the Board and Committees of the Board telephonically or via a visual conferencing service, (ii) permitting the Company’s employees to work from home at their election, (iii) enforcing appropriate social distancing practices in the Company’s office, (iv) encouraging the Company’s employees to wash their hands often and use face masks, (v) providing hand sanitizer and other disinfectant products throughout the Company’s office, (vi) requiring employees who do not feel well in any capacity to stay at home, and (vii) requiring all third-party delivery services (e.g. mail, food delivery, etc.) to complete their service outside the front door of the Company’s office. The Company also offered COVID-19 testing to its employees to ensure a safe working environment. These preventative measures have not had any material adverse impact on the Company’s financial reporting systems, internal controls over financial reporting or disclosure controls and procedures. At this time, we have not laid off, furloughed, or terminated any employee in response to the COVID-19 Pandemic.

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 months ended March 31, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021.

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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 retained interests in the Land JV and the Mitigation Bank JV, as well as an equity investment in PINE. 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.

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 has not yet finalized the analysis related to the potential impact of ASU 2020-06.

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 March 31, 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. Additionally, in the first quarter of 2021, the Company increased non-cash compensation for the three months ended March 31, 2020 by $0.2 million through a reclassification from cash payments for exercise of stock options and stock issuance within financing activities on the accompanying consolidated statements of cash flows which is the result of timing related to the issuance of shares for director retainers.

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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 March 31, 2021 include certain amounts over the Federal Deposit Insurance Corporation limits.

Restricted Cash

Restricted cash totaled $0.6 million at March 31, 2021, of which $0.5 million is being held in a capital replacement reserve account in connection with our financing of six income properties 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. During the year ended December 31, 2016, in conjunction with the variable-rate mortgage loan secured by the Company’s income properly leased to Wells Fargo located in Raleigh, North Carolina (“Wells Fargo Raleigh”), the Company entered into an interest rate swap to fix the interest rate (the “Wells Interest Rate Swap”). The Wells Interest Rate Swap was terminated on March 12, 2021 in connection with the payoff of the variable-rate mortgage loan secured by Wells Fargo Raleigh (see Note 17, “Long-Term Debt”).

Effective March 31, 2020, in conjunction with the variable-rate Credit Facility, the Company entered into an interest rate swap to fix the interest rate on $100.0 million of the outstanding Credit Facility balance (the “Credit Facility $100.0 Million Interest Rate Swap”). Effective August 31, 2020, the Company entered into a separate interest rate swap to fix the interest rate on an additional $50.0 million of the outstanding Credit Facility balance. On March 10, 2021, the Company entered into a $50.0 million term loan agreement under its Credit Facility (the “Term Loan”), as further described in Note 17, “Long-Term Debt”. In connection with the Term Loan origination, the Company redesignated the rate swap that previously hedged $50.0 million of the outstanding Credit Facility balance to the Term Loan (the “Term Loan $50.0 Million Interest Rate Swap”).

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 the Wells Interest Rate Swap, Credit Facility $100.0 Million Interest Rate Swap, and Term Loan $50.0 Million Interest Rate 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 March 31, 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 as of March 31, 2021 and December 31, 2020, as defined in Note 17, “Long-Term Debt,” 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 held as of March 31, 2021 and December 31, 2020 and the mortgage notes and convertible debt held as of March 31, 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.”

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Fair Value Measurements

The Company’s estimates of fair value of financial and non-financial assets and liabilities is based on the framework established by 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:

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

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Level 2 – Valuation is based upon inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include option pricing models, discounted cash flow models and similar techniques.

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 basis 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 $1.9 million and $2.3 million as of March 31, 2021 and December 31, 2020, respectively.

Accounts receivable related to real estate operations, which are classified in other assets on the consolidated balance sheets, totaled $1.3 million as of March 31, 2021 and December 31, 2020, respectively. The accounts receivable as of March 31, 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 March 31, 2021 and December 31, 2020, the Company recorded an allowance for doubtful accounts of $0.6 million and $0.5 million, respectively.

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

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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 the management believes that it is likely that the tenant will renew the lease upon expiration, in which case the Company amortizes the value attributable to the renewal over the renewal period. The value of in-place leases and leasing costs are amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off.

Sales of Real Estate

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 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.

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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 March 31, 2021 (in thousands):


		Income Properties		Management Services		Commercial Loan Investments		Real Estate Operations		Total Revenues
Major Good / Service:
	Lease Revenue - Base Rent	$	9,181	$	—	$	—	$	—	$	9,181
	Lease Revenue - CAM		512		—		—		—		512
	Lease Revenue - Reimbursements		1,206		—		—		—		1,206
	Above / Below Market Lease Accretion		396		—		—		—		396
	Contributed Leased Assets Accretion		121		—		—		—		121
	Management Services		—		669		—		—		669
	Commercial Loan and Master Lease Investments		—		—		701		—		701
	Subsurface Revenue		—		—		—		1,893		1,893
	Interest and Other Revenue		33		—		—		—		33
	Total Revenues	$	11,449	$	669	$	701	$	1,893	$	14,712