CTO Realty Growth, Inc. (CTO) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When the Company uses any words such as “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 current expectations and reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements. Certain factors or risks 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.
Our Business
We are a publicly traded, self-managed equity REIT that focuses on the ownership, management, and repositioning of high-quality retail and mixed-use properties located primarily in what we believe to be faster growing, business-friendly markets exhibiting accommodative business tax policies, outsized relative job and population growth, and where retail demand exceeds supply. We have pursued our investment strategy by investing primarily through fee simple ownership of our properties, commercial loans and preferred equity.
As of December 31, 2023, we own and manage, sometimes utilizing third-party property management companies, 20 commercial real estate properties in 8 states in the United States, comprising 3.7 million square feet of gross leasable space. In addition to our income property portfolio, as of December 31, 2023, our business included the following:
Management Services: A fee-based management business that is engaged in managing PINE as well as a portfolio of assets pursuant to the Portfolio Management Agreement, both as further described in Note 5, “Management Services Business” in the notes to the consolidated financial statements in Item 8.
Commercial Loans and Investments: A portfolio of four commercial loan investments and one preferred equity investment which is classified as a commercial loan investment.
Real Estate Operations: A portfolio of subsurface mineral interests associated with approximately 352,000 surface acres in 19 counties in the State of Florida (“Subsurface Interests”); and an inventory of mitigation credits produced by the Company’s formerly owned mitigation bank.
Our business also includes our investment in PINE. As of December 31, 2023, the fair value of our investment totaled $39.4 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.
On December 10, 2021, the entity that held approximately 1,600 acres of undeveloped land in Daytona Beach, Florida (the “Land JV”), of which the Company previously held a 33.5% retained interest, completed the sale of all of its remaining land holdings for $66.3 million to Timberline Acquisition Partners, LLC an affiliate of Timberline Real Estate Partners (the “Land JV Sale”). Proceeds to the Company after distributions to the other member of the Land JV, and before taxes, were $24.5 million. Prior to the completion of the Land JV Sale, the Company was engaged in managing the Land
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JV, as further described in Note 5, “Management Services Business” in the notes to the consolidated financial statements in Item 8. As a result of the Land JV Sale and corresponding dissolution of the Land JV, the Company no longer holds a retained interest in the Land JV as of December 31, 2021.
The Company operates in four primary business segments: income properties, management services, commercial loans and investments, and real estate operations.
REIT Conversion and Merger
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, commencing with the taxable year ended December 31, 2020. See Item 1, “Business” for information related to the Company’s REIT conversion and related transactions. On January 29, 2021, in connection with the REIT conversion, the Company completed the Merger in order to reincorporate in Maryland and facilitate its ongoing compliance with the REIT requirements.
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Selected Historical Financial Information
The following table summarizes our selected historical financial information for each of the last five fiscal years (in thousands except per share amounts). The selected financial information has been derived from our audited consolidated financial statements. Additional data for fiscal years 2023, 2022, and 2021 is included elsewhere in this report.
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Fiscal Years Ended | ||||||||||||
| | 2023 | 2022 | 2021 | 2020 | 2019 | ||||||||||
| Total Revenues | | $ | 109,119 | | $ | 82,320 | | $ | 70,272 | | $ | 56,381 | | $ | 44,941 |
| | | | | | | | | | | | | | | | |
| Operating Income | | $ | 26,506 | | $ | 10,667 | | $ | 23,345 | | $ | 12,280 | | $ | 34,199 |
| | | | | | | | | | | | | | | | |
| Net Income Attributable to the Company | | $ | 5,530 | | $ | 3,158 | | $ | 29,940 | | $ | 78,509 | | $ | 114,973 |
| Distributions to Preferred Stockholders | | | (4,772) | | | (4,781) | | | (2,325) | | | — | | | — |
| Net Income (Loss) Attributable to Common Stockholders | | $ | 758 | | $ | (1,623) | | $ | 27,615 | | $ | 78,509 | | $ | 114,973 |
| | | | | | | | | | | | | | | | |
| Per Share Information: | | | | | | | | | | | | | | | |
| Basic: | | | | | | | | | | | | | | | |
| Income (Loss) From Continuing Operations Attributable to Common Stockholders | | $ | 0.03 | | $ | (0.09) | | $ | 1.56 | | $ | 5.56 | | $ | 1.11 |
| Income From Discontinued Operations (Net of Income Tax) Attributable to Common Stockholders | | | — | | | — | | | — | | | — | | | 6.57 |
| Basic Net Income (Loss) per Share Attributable to Common Stockholders | | $ | 0.03 | | $ | (0.09) | | $ | 1.56 | | $ | 5.56 | | $ | 7.68 |
| | | | | | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | | | | | |
| Income (Loss) From Continuing Operations Attributable to Common Stockholders | | $ | 0.03 | | $ | (0.09) | | $ | 1.56 | | $ | 5.56 | | $ | 1.11 |
| Income From Discontinued Operations (Net of Income Tax) Attributable to Common Stockholders | | | — | | | — | | | — | | | — | | | 6.56 |
| Diluted Net Income (Loss) per Share Attributable to Common Stockholders | | $ | 0.03 | | $ | (0.09) | | $ | 1.56 | | $ | 5.56 | | $ | 7.67 |
| | | | | | | | | | | | | | | | |
| Dividends Declared and Paid - Preferred Stock | | $ | 1.59 | | $ | 1.59 | | $ | — | | $ | — | | $ | — |
| Dividends Declared and Paid - Common Stock | | $ | 1.52 | | $ | 1.49 | | $ | 1.33 | | $ | 4.63 | | $ | 0.15 |
| | | | | | | | | | | | | | | | |
| Summary of Financial Position: | | | | | | | | | | | | | | | |
| Real Estate—Net | | $ | 734,463 | | $ | 734,721 | | $ | 494,695 | | $ | 442,384 | | $ | 370,591 |
| Total Assets | | $ | 989,668 | | $ | 986,545 | | $ | 733,139 | | $ | 666,700 | | $ | 704,194 |
| Stockholders’ Equity | | $ | 457,526 | | $ | 504,770 | | $ | 430,480 | | $ | 350,899 | | $ | 285,413 |
| Long-Term Debt | | $ | 495,370 | | $ | 445,583 | | $ | 278,273 | | $ | 273,830 | | $ | 286,310 |
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Non-U.S. GAAP Financial Measures
Our reported results are presented in accordance with U.S. GAAP. We also disclose Funds From Operations (“FFO”), Core Funds From Operations (“Core FFO”), and Adjusted Funds From Operations (“AFFO”), each of which are non-U.S. GAAP financial measures. We believe these 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, Core 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 GAAP net income or loss adjusted to exclude real estate related depreciation and amortization, as well as extraordinary items (as defined by GAAP) such as net gain or loss from sales of depreciable real estate assets, impairment write-downs associated with depreciable real estate assets and impairments associated with the implementation of current expected credit losses on commercial loans and investments at the time of origination, 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, subsurface sales, investment securities, and land sales, in addition to the mark-to-market of the Company’s investment securities and interest related to the 2025 Convertible Senior Notes, if the effect is dilutive. To derive Core FFO, we modify the NAREIT computation of FFO to include other adjustments to GAAP net income related to gains and losses recognized on the extinguishment of debt, amortization of above- and below-market lease related intangibles, and other unforecastable market- or transaction-driven non-cash items. To derive AFFO, we further modify the NAREIT computation of FFO and Core FFO to include other adjustments to GAAP net income related to non-cash revenues and expenses such as straight-line rental revenue, non-cash compensation, and other non-cash amortization, as well as adding back the interest related to the 2025 Convertible Senior Notes, if the effect is dilutive. 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 Core FFO and AFFO are additional useful supplemental measures for investors to consider because they will help them to better assess our operating performance without the distortions created by other non-cash revenues or expenses. FFO, Core FFO, and AFFO may not be comparable to similarly titled measures employed by other companies.
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Reconciliation of Non-U.S. GAAP Measures (in thousands):
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Year Ended | |||||||
| | | December 31, 2023 | | December 31, 2022 | | December 31, 2021 | |||
| Net Income Attributable to the Company | | $ | 5,530 | | $ | 3,158 | | $ | 29,940 |
| Add Back: Effect of Dilutive Interest Related to 2025 Notes (1) | | | — | | | — | | | — |
| Net Income Attributable to the Company, If-Converted | | | | | | | | | |
| Depreciation and Amortization of Real Estate | | | 44,107 | | | 28,799 | | | 20,581 |
| Loss (Gain) on Disposition of Assets, Net of Income Tax | | | (7,543) | | | 4,170 | | | (28,316) |
| Gain on Disposition of Other Assets | | | (2,272) | | | (2,992) | | | (4,924) |
| Provision for Impairment | | | 1,556 | | | — | | | 13,283 |
| Realized and Unrealized Loss (Gain) on Investment Securities | | | 3,689 | | | 1,697 | | | (10,340) |
| Extinguishment of Contingent Obligation | | | (2,815) | | | — | | | — |
| Income Tax Expense from Non-FFO Items and De-Recognition of REIT Deferred Tax Assets and Liabilities | | | — | | | — | | | 1,840 |
| Funds from Operations | | | 42,252 | | | 34,832 | | | 22,064 |
| Distributions to Preferred Stockholders | | | (4,772) | | | (4,781) | | | (2,325) |
| Funds From Operations Attributable to Common Stockholders | | | 37,480 | | | 30,051 | | | 19,739 |
| Loss on Extinguishment of Debt | | | — | | | — | | | 3,431 |
| Amortization of Intangibles to Lease Income | | | 2,303 | | | 2,161 | | | (404) |
| Less: Effect of Dilutive Interest Related to 2025 Notes (1) | | | — | | | — | | | — |
| Core Funds From Operations Attributable to Common Stockholders | | | 39,783 | | | 32,212 | | | 22,766 |
| Adjustments: | | | | | | | | | |
| Straight-Line Rent Adjustment | | | (1,159) | | | (2,166) | | | (2,443) |
| COVID-19 Rent Repayments | | | 46 | | | 105 | | | 842 |
| Other Depreciation and Amortization | | | (91) | | | (232) | | | (676) |
| Amortization of Loan Costs, Discount on Convertible Debt, and Capitalized Interest | | | 821 | | | 774 | | | 1,864 |
| Non-Cash Compensation | | | 3,673 | | | 3,232 | | | 3,168 |
| Non-Recurring G&A | | | — | | | — | | | 155 |
| Adjusted Funds From Operations Attributable to Common Stockholders | | $ | 43,073 | | $ | 33,925 | | $ | 25,676 |
| | | | | | | | | | |
| Weighted Average Number of Common Shares: | | | | | | | | | |
| Basic | | | 22,529,703 | | | 18,508,201 | | | 17,676,809 |
| Diluted (2) | | | 22,529,703 | | | 18,508,201 | | | 17,676,809 |
| | | | | | | | | | |
| Dividends Declared and Paid - Preferred Stock | | $ | 1.59 | | $ | 1.59 | | $ | 0.77 |
| Dividends Declared and Paid - Common Stock | | $ | 1.52 | | $ | 1.49 | | $ | 1.33 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (1) | As applicable, includes interest expense, amortization of discount, amortization of fees, and other changes in net income or loss that would result from the assumed conversion of the 2025 Convertible Senior Notes to derive FFO effective January 1, 2022 due to the implementation of ASU 2020-06 which requires presentation on an if-converted basis. For the years ended December 31, 2023 and 2022, a total of $2.1 million and $2.2 million of interest, respectively, was not included as the impact of the 2025 Notes, if-converted, would be antidilutive to the net income (loss) attributable to common stockholders in each respective period. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (2) | A total of 3.3 million shares and 3.1 million shares, representing the dilutive impact of the 2025 Notes, upon adoption of ASU 2020-06 effective January 1, 2022, were not included in the computation of diluted net loss attributable to common stockholders for the years ended December 31, 2023 or 2022, respectively, because they were antidilutive to the net income (loss) attributable to common stockholders in each respective period. |
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Other Data (in thousands except per share data):
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Year Ended | |||||||
| | | December 31, 2023 | | December 31, 2022 | | December 31, 2021 | |||
| FFO Attributable to Common Stockholders | | $ | 37,480 | | $ | 30,051 | | $ | 19,739 |
| FFO Attributable to Common Stockholders per Common Share - Diluted | | $ | 1.66 | | $ | 1.62 | | $ | 1.12 |
| | | | | | | | | | |
| Core FFO Attributable to Common Stockholders | | $ | 39,783 | | $ | 32,212 | | $ | 22,766 |
| Core FFO Attributable to Common Stockholders per Common Share - Diluted (1) | | $ | 1.77 | | $ | 1.74 | | $ | 1.29 |
| | | | | | | | | | |
| AFFO Attributable to Common Stockholders | | $ | 43,073 | | $ | 33,925 | | $ | 25,676 |
| AFFO Attributable to Common Stockholders per Common Share - Diluted (1) | | $ | 1.91 | | $ | 1.83 | | $ | 1.45 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (1) | A total of 3.3 million shares and 3.1 million shares, representing the dilutive impact of the 2025 Notes, upon adoption of ASU 2020-06 effective January 1, 2022, were not included in the computation of diluted net loss attributable to common stockholders for the years ended December 31, 2023 or 2022, respectively, because they were antidilutive to the net income (loss) attributable to common stockholders in each respective period. |
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2023 AND 2022
Revenue
Total revenue for the year ended December 31, 2023 is presented in the following summary and indicates the changes as compared to the year ended December 31, 2022 (in thousands):
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Year Ended | | | | | | ||||
| Operating Segment | | December 31, 2023 | | December 31, 2022 | | $ Variance | | % Variance | |||
| Income Properties | | $ | 96,663 | | $ | 68,857 | | $ | 27,806 | | 40.4% |
| Management Services | | | 4,388 | | | 3,829 | | | 559 | | 14.6% |
| Commercial Loans and Investments | | | 4,084 | | | 4,172 | | | (88) | | (2.1)% |
| Real Estate Operations | | | 3,984 | | | 5,462 | | | (1,478) | | (27.1)% |
| Total Revenue | | $ | 109,119 | | $ | 82,320 | | $ | 26,799 | | 32.6% |
Total revenue for the year ended December 31, 2023 increased to $109.1 million, compared to $82.3 million during the year ended December 31, 2022. The increase in total revenue is primarily attributable to increased revenue produced by the Company’s income property acquisitions during the latter part of the year ended December 31, 2022 and in the year ended December 31, 2023 versus that of properties disposed. Revenues further benefited from increased management fee income from PINE of $0.6 million. These increases were offset by a $1.5 million decrease in real estate operations which is primarily due to more mitigation credit sales occurring during the year ended December 31, 2022 versus December 31, 2023.
Income Properties
Revenue and operating income from our income property operations totaled $96.7 million and $68.2 million, respectively, during the year ended December 31, 2023, compared to total revenue and operating income of $68.9 million and $48.5 million, respectively, for the year ended December 31, 2022. The direct costs of revenues for our income property operations totaled $28.5 million and $20.4 million for the years ended December 31, 2023 and 2022, respectively. The increase in revenues of $27.8 million, or 40.4%, during the year ended December 31, 2023 is primarily attributable to the Company’s income property acquisitions during the latter part of the year ended December 31, 2022 and in the year ended December 31, 2023.
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Management Services
Revenue from our management services totaled $4.4 million during the year ended December 31, 2023, and was earned primarily from PINE with less than $0.1 million earned from the Portfolio Management Agreement. Revenue from our management services totaled $3.8 million during the year ended December 31, 2022 and was earned from PINE.
Commercial Loans and Investments
Interest income from our commercial loans and investments totaled $4.1 million and $4.2 million during the years ended December 31, 2023 and 2022, respectively. The decrease is due to the timing of investments and repayments by borrowers within the Company’s commercial loans and investment portfolio.
Real Estate Operations
During the year ended December 31, 2023, operating income from real estate operations was $2.3 million on revenues totaling $4.0 million. During the year ended December 31, 2022, operating income from real estate operations was $3.0 million on revenues totaling $5.5 million. The operating income during the years ended December 31, 2023 and 2022 was the result of mitigation credit sales and sales of Subsurface Interests. There were more mitigation credit sales and sales of Subsurface Interests during the year ended December 31, 2022 versus the year ended December 31, 2023.
General and Administrative Expenses
Total general and administrative expenses for the year ended December 31, 2023 is presented in the following summary and indicates the changes as compared to the year ended December 31, 2022 (in thousands):
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Year Ended | | | | | | ||||
| General and Administrative Expenses (in thousands) | | December 31, 2023 | | December 31, 2022 | | $ Variance | | % Variance | |||
| Recurring General and Administrative Expenses | | $ | 10,576 | | $ | 9,667 | | $ | 909 | | 9.4% |
| Non-Cash Stock Compensation | | | 3,673 | | | 3,232 | | | 441 | | 13.6% |
| Total General and Administrative Expenses | | $ | 14,249 | | $ | 12,899 | | $ | 1,350 | | 10.5% |
Gains (Losses) on Disposition of Assets and Provision for Impairment
Gain on Disposition of Assets – 2023 Dispositions. During the year ended December 31, 2023, the Company sold nine income properties, including (i) an outparcel of the multi-tenant property known as Eastern Commons, located in Henderson, Nevada, for $2.1 million, (ii) four outparcels of the multi-tenant property known as Crossroads Towne Center, located in Chandler, Arizona, for an aggregate sale price of $11.5 million, (iii) a single tenant office property located in Reston, Virginia leased to General Dynamics for $18.5 million, (iv) a multi-tenant property known as Westcliff, located in Fort Worth, Texas, for $14.8 million, (v) a multi-tenant property known as Eastern Commons, located in Henderson, Nevada, for $18.2 million, (vi) a single tenant office property known as Sabal Pavilion located in Tampa, Florida for $22.0 million. The sales of these nine properties reflect a total disposition volume of $87.1 million and resulted in aggregate gains on sales of $6.6 million, which consisted of aggregate gains on disposition of $8.2 million, aggregate losses on disposition of $0.7 million, and an impairment charge prior to sale of $0.9 million.
Loss on Disposition of Assets – 2022 Dispositions. During the year ended December 31, 2022, the Company sold six income properties, including (i) Party City, a single-tenant income property located in Oceanside, New York for $6.9 million, (ii) the Carpenter Hotel ground lease, a single-tenant income property located in Austin, Texas, which was recorded as a commercial loan investment prior to its disposition, for $17.1 million, (iii) the multi-tenant Westland Gateway Plaza located in Hialeah, Florida, which was recorded as a commercial loan investment prior to its disposition, for $22.2 million, (iv) Chuy’s, a single-tenant property, located in Jacksonville, Florida for $5.8 million, (v) Firebirds, a single-tenant property, located in Jacksonville, Florida for $5.5 million, and (vi) 245 Riverside, a multi-tenant office
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income property located in Jacksonville, Florida for $23.6 million. The sale of these six properties reflect a total disposition volume of $81.1 million, resulting in aggregate gains on sales of $4.7 million.
The $4.7 million in aggregate income property sale gains were offset by an $11.9 million loss on the sale of the Company’s Mitigation Bank during the year ended December 31, 2022.
Provision for Impairment. In the aggregate, $1.5 million of impairment charges were recorded during the year ended December 31, 2023, as described below, with no such charges during the year ended December 31, 2022.
During the year ended December 31, 2023, the Company recorded a $0.9 million impairment charge on the sale of the Westcliff Property. The purchase and sale agreement for the Company’s sale of the Westcliff Property was executed on July 28, 2023. The impairment charge of $0.9 million represents the sales price, less the book value of the asset as of September 30, 2023, less costs to sell. The sale of the Westcliff Property closed on October 12, 2023.
During the year ended December 31, 2023, the Company recorded a $0.6 million impairment charge representing the provision for credit losses related to our commercial loans and investments.
Depreciation and Amortization
Depreciation and amortization totaled $44.2 million and $28.9 million during the years ended December 31, 2023 and 2022, respectively. The increase of $15.3 million is primarily due to the increase in the Company’s income property portfolio.
Investment and Other Income
During the year ended December 31, 2023, the closing stock price of PINE decreased by $2.17 per share, with a closing price of $16.91 on December 31, 2023. During the year ended December 31, 2022, the closing stock price of PINE decreased by $0.96 per share, with a closing price of $19.08 on December 31, 2022. The decreases resulted in unrealized, non-cash losses on the Company’s investment in PINE of $4.7 million and $1.7 million which is included in investment and other income in the consolidated statements of operations for the years ended December 31, 2023 and 2022, respectively.
The Company earned dividend income from the investment in PINE of $2.5 million and $2.3 million during the years ended December 31, 2023 and 2022, respectively.
The Company derecognized two contingent obligations through a $2.8 million increase in investment and other income during the year ended December 31, 2023, pursuant to two leases whereby the Company’s obligation to fund certain tenant improvements was eliminated or expired prior to being exercised. The liabilities were previously included in Accrued and Other Liabilities on the Company’s consolidated balance sheets.
Interest Expense
Interest expense totaled $22.4 million and $11.1 million for the years ended December 31, 2023 and 2022, respectively. The increase of $11.3 million resulted primarily from overall higher leverage as well as higher marginal interest rates and higher interest rates on the non-fixed portion of the Credit Facility balance.
Net Income
Net income attributable to the Company totaled $5.5 million and $3.2 million during the years ended December 31, 2023 and 2022, respectively. The increase in net income is attributable to the factors described above.
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COMPARISON OF THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Revenue
Total revenue for the year ended December 31, 2022 is presented in the following summary and indicates the changes as compared to the year ended December 31, 2021 (in thousands):
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Year Ended | | | | | | ||||
| Operating Segment | | December 31, 2022 | | December 31, 2021 | | $ Variance | | % Variance | |||
| Income Properties | | $ | 68,857 | | $ | 50,679 | | $ | 18,178 | | 35.9% |
| Management Services | | | 3,829 | | | 3,305 | | | 524 | | 15.9% |
| Commercial Loans and Investments | | | 4,172 | | | 2,861 | | | 1,311 | | 45.8% |
| Real Estate Operations | | | 5,462 | | | 13,427 | | | (7,965) | | (59.3)% |
| Total Revenue | | $ | 82,320 | | $ | 70,272 | | $ | 12,048 | | 17.1% |
Total revenue for the year ended December 31, 2022 increased to $82.3 million, compared to $70.3 million during the year ended December 31, 2021. The increase in total revenue is primarily attributable to increased revenue 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 as well as increases in revenue generated from the Company’s portfolio of commercial loans and investments. These increases were offset by an $8.0 million decrease in real estate operations primarily due to a non-recurring land sale during the year ended December 31, 2021.
Income Properties
Revenue and operating income from our income property operations totaled $68.9 million and $48.5 million, respectively, during the year ended December 31, 2022, compared to total revenue and operating income of $50.7 million and $36.9 million, respectively, for the year ended December 31, 2021. The direct costs of revenues for our income property operations totaled $20.4 million and $13.8 million for the years ended December 31, 2022 and 2021, respectively. The increase in revenues of $18.2 million, or 35.9%, during the year ended December 31, 2022 is primarily related to the significant acquisition volume of multi-tenant properties.
Management Services
Revenue from our management services totaled $3.8 million during the year ended December 31, 2022, and was earned from PINE. Revenue from our management services totaled $3.3 million during the year ended December 31, 2021, including $3.2 million and $0.1 million earned from PINE and the Land JV, respectively.
Commercial Loans and Investments
Interest income from our commercial loans and investments totaled $4.2 million and $2.9 million during the years ended December 31, 2022 and 2021, respectively. The increase is due to the timing of investments and repayments by borrowers within the Company’s commercial loans and investment portfolio.
Real Estate Operations
During the year ended December 31, 2022, operating income from real estate operations was $3.0 million on revenues totaling $5.5 million. During the year ended December 31, 2021, operating income from real estate operations was $4.8 million on revenues totaling $13.4 million. The operating income during the year ended December 31, 2022 was primarily due to mitigation credit sales and sales of Subsurface Interests. The decreased operating income during the year ended December 31, 2022 is primarily due to the sale of the Daytona Beach Development for $6.25 million which occurred during the year ended December 31, 2021.
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General and Administrative Expenses
Total general and administrative expenses for the year ended December 31, 2022 is presented in the following summary and indicates the changes as compared to the year ended December 31, 2021 (in thousands):
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Year Ended | | | | | | ||||
| General and Administrative Expenses (in thousands) | | December 31, 2022 | | December 31, 2021 | | $ Variance | | % Variance | |||
| Recurring General and Administrative Expenses | | $ | 9,667 | | $ | 7,879 | | $ | 1,788 | | 22.7% |
| Non-Cash Stock Compensation | | | 3,232 | | | 3,168 | | | 64 | | 2.0% |
| REIT Conversion and Other Non-Recurring Items | | | — | | | 155 | | | (155) | | (100.0)% |
| Total General and Administrative Expenses | | $ | 12,899 | | $ | 11,202 | | $ | 1,697 | | 15.1% |
Gains (Losses) and Impairment Charges
2022 Dispositions. During the year ended December 31, 2022, the Company sold six income properties, including (i) Party City, a single-tenant income property located in Oceanside, New York for $6.9 million, (ii) the Carpenter Hotel ground lease, a single-tenant income property located in Austin, Texas, which was recorded as a commercial loan investment prior to its disposition, for $17.1 million, (iii) the multi-tenant Westland Gateway Plaza located in Hialeah, Florida, which was recorded as a commercial loan investment prior to its disposition, for $22.2 million, (iv) Chuy’s, a single-tenant property, located in Jacksonville, Florida for $5.8 million, (v) Firebirds, a single-tenant property, located in Jacksonville, Florida for $5.5 million, and (vi) 245 Riverside, a multi-tenant office income property located in Jacksonville, Florida for $23.6 million. The sale of these six properties reflect a total disposition volume of $81.1 million, resulting in aggregate gains of $4.7 million.
The $4.7 million in aggregate income property sale gains were offset by an $11.9 million loss on the sale of the Company’s Mitigation Bank during the year ended December 31, 2022.
2021 Dispositions. During the year ended December 31, 2021, the Company disposed of one multi-tenant income property and 14 single-tenant income properties, including (i) World of Beer/Fuzzy’s Taco Shop, a multi-tenant income property located in Brandon, Florida for $2.3 million, (ii) Moe’s Southwest Grill, a single-tenant income property located in Jacksonville, Florida for $2.5 million, (iii) Burlington, a single-tenant income property located in North Richland Hills, Texas for $11.5 million, (iv) Staples, a single-tenant income property located in Sarasota, Florida for $4.7 million, (v) the CMBS Portfolio, sold to PINE, consisting of six single-tenant income properties for $44.5 million, (vi) Chick-fil-A, a single-tenant property, located in Chandler, Arizona for $2.9 million, (vii) JPMorgan Chase Bank, a single-tenant property, located in Chandler, Arizona for $4.7 million, (viii) Fogo De Chao, a single-tenant property, located in Jacksonville, Florida for $4.7 million, (ix) Wells Fargo, a single-tenant office income property located in Raleigh, North Carolina for $63.0 million, and (x) 24 Hour Fitness, a single-tenant income property located in Falls Church, VA for $21.5 million. The sale of the properties reflect a total disposition volume of $162.3 million, resulting in aggregate gains of $28.2 million.
Impairment Charges. There were no impairment charges on the Company’s undeveloped land holdings, or its income property portfolio, during the years ended December 31, 2022 or 2021. The $17.6 million impairment charge recognized during the year ended December 31, 2021 is related to the Company’s previously held retained interest in the Land JV. The aggregate impairment charge of $17.6 million is a result of eliminating the investment in joint ventures based on the final proceeds received through distributions of the Land JV in connection with closing the sale of substantially all of the Land JV’s remaining land with Timberline, for a final sales price of $66.3 million.
Loss on Extinguishment of Debt. During the year ended December 31, 2021, the Company repurchased $11.4 million aggregate principal amount of 2025 Notes at a $1.6 million premium, resulting in a loss on extinguishment of debt of $2.9 million. Additionally, in connection with the disposition of the CMBS Portfolio during the year ended December 31, 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. There were no losses on extinguishment of debt during the year ended December 31, 2022.
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Depreciation and Amortization
Depreciation and amortization totaled $28.9 million and $20.6 million during the years ended December 31, 2022 and 2021, respectively. The increase of $8.3 million is primarily due to the increase in the Company’s income property portfolio.
Investment and Other Income (Loss)
During the year ended December 31, 2022, the closing stock price of PINE decreased by $0.96 per share, with a closing price of $19.08 on December 31, 2022. During the year ended December 31, 2021, the closing stock price of PINE increased by $5.05 per share, with a closing price of $20.04 on December 31, 2021. The increase (decrease) resulted in an unrealized, non-cash gain (loss) on the Company’s investment in PINE of $(1.7) million and $10.3 million which is included in investment and other income (loss) in the consolidated statements of operations for the years ended December 31, 2022 and 2021, respectively.
The Company earned dividend income from the investment in PINE of $2.3 million and $2.1 million during the years ended December 31, 2022 and 2021, respectively.
Interest Expense
Interest expense totaled $11.1 million and $8.9 million for the years ended December 31, 2022 and 2021, respectively. The increase of $2.2 million resulted primarily from overall higher leverage as well as higher interest rates than the variable rate Credit Facility.
Net Income
Net income attributable to the Company totaled $3.2 million and $29.9 million during the years ended December 31, 2022 and 2021, respectively. The decrease in net income is attributable to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash totaled $17.8 million at December 31, 2023, including restricted cash of $7.6 million, see Note 2 “Summary of Significant Accounting Policies” under the heading Restricted Cash in the notes to the consolidated financial statements in Item 8 for the Company’s disclosure related to its restricted cash balance at December 31, 2023.
Our total cash balance at December 31, 2023, reflected cash flows provided by our operating activities totaling $46.4 million during the year ended December 31, 2023, compared to the prior year’s cash flows provided by operating activities totaling $56.1 million for the year ended December 31, 2022, a decrease of $9.7 million. The decrease of $9.7 million is primarily due to the transaction during the year ended December 31, 2022 whereby the Company sold the Mitigation Bank for a sales price of $8.1 million, which was not a recurring cash flow during the year ended December 31, 2023.
Our cash flows used in investing activities totaled $52.6 million for the year ended December 31, 2023, compared to cash flows used in investing activities of $267.6 million for the year ended December 31, 2022, a decrease of $215.0 million. The decrease in cash used in investing activities of $215.0 million is primarily related to a net decrease in cash outflows of $254.5 million during the year ended December 31, 2023 related to the timing of income property acquisitions versus dispositions, which decrease in cash outflows was partially offset by $40.1 million in additional cash outflows, net proceeds received, related to the timing of certain investments in the Company’s commercial loans and investment portfolio.
Our cash flows provided by financing activities totaled $2.8 million for the year ended December 31, 2023, compared to cash flows provided by financing activities of $201.4 million for the year ended December 31, 2022, a decrease in cash flows received of $198.6 million. The decrease of $198.6 million is primarily related to a decrease in net debt of $97.5 million as well as $98.2 million net decrease in proceeds from capital markets activity which consisted of a common stock offering and ATM activity during the year ended December 31, 2022 with a higher volume of common stock repurchases during the year ended December 31, 2023.
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See Note 16, “Long-Term Debt” in the notes to the consolidated financial statements in Item 8 for the Company’s disclosure related to its long-term debt balance at December 31, 2023.
Acquisitions and Investments. During the year ended December 31, 2023, the Company acquired four additional buildings within an existing multi-tenanted retail income property, one multi-tenanted retail income property, and one vacant land parcel adjacent to an existing multi-tenanted retail property owned by the Company for an aggregate purchase price of $80.0 million, or a total acquisition cost of $80.3 million, as further described in Note 3, “Income Properties” in the notes to the consolidated financial statements in Item 8.
We expect to fund future acquisitions utilizing cash on hand, cash from operations, proceeds from the dispositions of income properties through Section 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 year ended December 31, 2023, the Company sold nine properties for an aggregate sales price of $87.1 million. The sales of the properties generated aggregate gains of $6.6 million.
Contractual Obligations. The Company has committed to fund the following capital improvements. The improvements, which are related to several properties, are estimated to be generally completed within twelve months. These commitments, as of December 31, 2023, are as follows (in thousands):
| | | | |
|---|---|---|---|
| | | As of December 31, 2023 | |
| Total Commitment (1) | | $ | 17,888 |
| Less Amount Funded | | | (4,236) |
| Remaining Commitment | | $ | 13,652 |
(1) Commitment includes tenant improvements, leasing commissions, rebranding, facility expansion and other capital improvements.
The Company is also contractually obligated under its various long-term debt and operating lease agreements. In the aggregate, the Company is obligated under such agreements to repay $496.8 million due in excess of one year.
As of December 31, 2023, we have no other contractual requirements to make capital expenditures.
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, proceeds from the completion of the sales of assets utilizing the reverse like-kind 1031 exchange structure, and $137.0 million of undrawn commitments available on the existing $300.0 million Credit Facility as of December 31, 2023.
COMMON STOCK REPURCHASE PROGRAM
On February 16, 2023, the Board approved a common stock repurchase program (the “February $5.0 Million Common Stock Repurchase Program”). Pursuant to the February $5.0 Million Common Stock Repurchase Program, the Company was authorized to repurchase shares of its common stock for a total purchase price of up to $5.0 million. During the year ended December 31, 2023, prior to March 31, 2023, the Company repurchased 303,354 shares of its common stock on the open market for a total cost of $5.0 million, or an average price per share of $16.48, pursuant to the February $5.0 Million Common Stock Repurchase Program. Accordingly, as of March 31, 2023, no shares of the Company’s common stock remained available for repurchase under the February $5.0 Million Common Stock Repurchase Program.
On April 25, 2023, the Board approved a common stock repurchase program, which is expected to be in effect until the approved dollar amount has been used to repurchase shares (the “April $5.0 Million Common Stock Repurchase Program”). Pursuant to the April $5.0 Million Common Stock Repurchase Program, the Company may repurchase shares of its common stock for a total purchase price of up to $5.0 million. Shares may be purchased under the April $5.0 Million Common Stock Repurchase Program in open market transactions, including through block purchases, through privately negotiated transactions or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The April $5.0 Million Common Stock Repurchase
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Program does not obligate the Company to acquire any particular amount of shares of its common stock and may be modified or suspended. During the year ended December 31, 2023, the Company repurchased 65,946 shares of its common stock on the open market for a total cost of $1.0 million, or an average price per share of $15.72, pursuant to the April $5.0 Million Common Stock Repurchase Program, leaving $4.0 million remaining of the April $5.0 Million Common Stock Repurchase Program as of December 31, 2023.
In the aggregate, under the February $5.0 Million Common Stock Repurchase Program and April $5.0 Million Common Stock Repurchase Program, the Company repurchased 369,300 shares of its common stock on the open market for a total cost of $6.0 million, or an average price per share of $16.35.
SERIES A PREFERRED STOCK REPURCHASE PROGRAM
On February 16, 2023, the Company’s Board of Directors approved a Series A Preferred Stock repurchase program, which is expected to be in effect until the approved dollar amount has been used to repurchase shares (the “Series A Preferred Stock Repurchase Program”). Pursuant to the Series A Preferred Stock Repurchase Program, the Company may repurchase shares of its Series A Preferred Stock for a total purchase price of up to $3.0 million. Shares may be purchased under the Series A Preferred Stock Repurchase Program in open market transactions, including through block purchases, through privately negotiated transactions or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 under the Exchange Act. The Series A Preferred Stock Repurchase Program does not obligate the Company to acquire any particular amount of shares of its Series A Preferred Stock and may be modified or suspended. During the year ended December 31, 2023, the Company repurchased 21,192 shares of Series A Preferred Stock on the open market for a total cost of $0.4 million, or an average price per share of $18.45.
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.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates include those estimates made in accordance with U.S. 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 U.S. 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 four additional buildings within an existing multi-tenanted retail income property and one multi-tenanted retail income property for a combined acquisition cost of $76.0 million for the year ended December 31, 2023 and four multi-tenanted retail income properties and one portfolio of three single-tenant properties for a combined acquisition cost of $315.6 million for the year ended December 31, 2022.
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See Note 2, “Summary of Significant Accounting Policies”, for further discussion of the Company’s accounting estimates and policies.