Alpine Income Property Trust, Inc. (PINE) 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 we refer to “we,” “us,” “our,” “PINE,” or “the Company,” we mean Alpine Income Property Trust, Inc. and its consolidated subsidiaries. References to “Notes to the Financial Statements” refer to the Notes to the Consolidated Financial Statements of Alpine Income Property Trust, Inc. included in Item 8 of this Annual Report on Form 10-K. Also, when the Company uses any of the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” or similar expressions, the Company is making forward-looking statements. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements. Certain factors that could cause actual results or events to differ materially from those the Company anticipates or projects are described in “Item 1A. Risk Factors” of this Annual Report on Form 10-K. Given these uncertainties, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Annual Report on Form 10-K or any document incorporated herein by reference. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this Annual Report on Form 10-K.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report.
Overview
Alpine Income Property Trust, Inc. is a Maryland corporation that conducts its operations so as to qualify as a REIT for U.S. federal income tax purposes. Substantially all of our operations are conducted through our Operating Partnership.
We seek to acquire, own and operate primarily freestanding, commercial retail real estate properties located in the United States primarily leased pursuant to long-term net leases. We target tenants in industries that we believe are favorably impacted by macroeconomic trends that support consumer spending, stable and growing employment, and positive consumer sentiment, as well as tenants in industries that have demonstrated resistance to the impact of the e-commerce retail sector or who use a physical presence as a component of their omnichannel strategy. We also seek to invest in properties that are net leased to tenants that we believe have attractive credit characteristics, stable operating histories, healthy rent coverage levels, are well-located within their respective markets and/or have rents at-or-below market rent levels. Furthermore, we believe that the size of our company allows us, for at least the near term, to focus our investment activities on the acquisition of single properties or smaller portfolios of properties that represent a transaction size that most of our publicly-traded net lease REIT peers will not pursue on a consistent basis.
The Company operates in two primary business segments: income properties and commercial loans and investments.
The Company has no employees and is externally managed by our Manager, a Delaware limited liability company and a wholly owned subsidiary of CTO. CTO is a Maryland corporation that is a publicly traded diversified REIT and the sole member of our Manager. See Note 18, “Related Party Management Company” in the Notes to the Financial Statements for further discussion of the Company’s related party transactions with CTO.
Our strategy for investing in income-producing properties is focused on factors including, but not limited to, long-term real estate fundamentals, including those markets experiencing significant economic growth. We employ a methodology for evaluating targeted investments in income-producing properties which includes an evaluation of: (i) the attributes of the real estate (e.g., location, market demographics, comparable properties in the market, etc.); (ii) an evaluation of the existing tenant(s) (e.g., credit-worthiness, property level sales, tenant rent levels compared to the market, etc.); (iii) other market-specific conditions (e.g., tenant industry, job and population growth in the market, local economy, etc.); and (iv) considerations relating to the Company’s business and strategy (e.g., strategic fit of the asset type, property management needs, alignment with the Company’s structure, etc.).
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During the year ended December 31, 2023, the Company acquired 14 properties for total acquisition volume of $82.9 million. During the year ended December 31, 2023, the Company sold 24 properties for an aggregate sales price of $108.3 million, generating aggregate gains on sale of $9.3 million.
As of December 31, 2023, we owned 138 properties with an aggregate gross leasable area of 3.8 million square feet, located in 35 states, with a weighted average remaining lease term of 7.0 years. Our portfolio was 99% occupied as of December 31, 2023.
We may also acquire or originate commercial loans and investments associated with commercial real estate located in the United States. Our investments in commercial loans are generally secured by real estate or the borrower’s pledge of its ownership interest in an entity that owns real estate. During the year ended December 31, 2023, the Company originated three commercial loans with a total funding commitment of $38.6 million. As of December 31, 2023, the Company’s commercial loan investments portfolio included two construction loans and one mortgage note with a total carrying value of $35.1 million.
Historical Financial Information
The following table summarizes our selected historical financial information for each of the last three fiscal years (in thousands, except per share and dividend data). The selected financial information has been derived from our audited consolidated financial statements.
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Year Ended | |||||||
| | December 31, 2023 | December 31, 2022 | December 31, 2021 | ||||||
| Total Revenues | | $ | 45,644 | | $ | 45,191 | | $ | 30,126 |
| | | | | | | | | | |
| Net Income From Operations | | $ | 13,142 | | $ | 43,482 | | $ | 15,162 |
| | | | | | | | | | |
| Net Income | | $ | 3,266 | | $ | 33,955 | | $ | 11,462 |
| Less: Net Income Attributable to Noncontrolling Interest | | | (349) | | | (4,235) | | | (1,498) |
| Net Income Attributable to Alpine Income Property Trust, Inc. | | $ | 2,917 | | $ | 29,720 | | $ | 9,964 |
| | | | | | | | | | |
| Net Income Per Share Attributable to Alpine Income Property Trust, Inc. | | | | | | | | | |
| Basic | | $ | 0.21 | | $ | 2.48 | | $ | 1.02 |
| Diluted | | $ | 0.19 | | $ | 2.17 | | $ | 0.89 |
| | | | | | | | | | |
| Dividends Declared and Paid | | $ | 1.100 | | $ | 1.090 | | $ | 1.015 |
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Balance Sheet Data (in thousands):
| | | | | | | |
|---|---|---|---|---|---|---|
| | | As of December 31, | ||||
| | | 2023 | | 2022 | ||
| Total Real Estate, at Cost | | $ | 478,307 | | $ | 499,367 |
| Real Estate—Net | | $ | 443,593 | | $ | 477,054 |
| Assets Held For Sale | | $ | 4,410 | | $ | — |
| Commercial Loans and Investments | | $ | 35,080 | | $ | — |
| Cash and Cash Equivalents and Restricted Cash | | $ | 13,731 | | $ | 13,044 |
| Intangible Lease Assets—Net | | $ | 49,292 | | $ | 60,432 |
| Straight-Line Rent Adjustment | | $ | 1,409 | | $ | 1,668 |
| Other Assets | | $ | 17,045 | | $ | 21,233 |
| Total Assets | | $ | 564,560 | | $ | 573,431 |
| Accounts Payable, Accrued Expenses, and Other Liabilities | | $ | 5,197 | | $ | 4,411 |
| Prepaid Rent and Deferred Revenue | | $ | 3,166 | | $ | 1,479 |
| Intangible Lease Liabilities—Net | | $ | 4,907 | | $ | 5,050 |
| Long-Term Debt | | $ | 275,677 | | $ | 267,116 |
| Total Liabilities | | $ | 288,947 | | $ | 278,056 |
| Total Equity | | $ | 275,613 | | $ | 295,375 |
Non-GAAP Financial Measures
Our reported results are presented in accordance with GAAP. We also disclose FFO and AFFO, both of which are non-GAAP financial measures. We believe these two non-GAAP financial measures are useful to investors because they are widely accepted industry measures used by analysts and investors to compare the operating performance of REITs.
FFO and AFFO do not represent cash generated from operating activities and are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered alternatives to net income as a performance measure or cash flows from operations as reported on our statement of cash flows as a liquidity measure and should be considered in addition to, and not in lieu of, GAAP financial measures.
We compute FFO in accordance with the definition adopted by 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. To derive AFFO, we further modify the NAREIT computation of FFO to include other adjustments to GAAP net income related to non-cash revenues and expenses such as loss on extinguishment of debt, amortization of above- and below-market lease related intangibles, straight-line rental revenue, amortization of deferred financing costs, non-cash compensation, and other non-cash income or expense. Such items may cause short-term fluctuations in net income but have no impact on operating cash flows or long-term operating performance. We use AFFO as one measure of our performance when we formulate corporate goals.
FFO is used by management, investors and analysts to facilitate meaningful comparisons of operating performance between periods and among our peers primarily because it excludes the effect of real estate depreciation and amortization and net gains or losses on sales, which are based on historical costs and implicitly assume that the value of real estate diminishes predictably over time, rather than fluctuating based on existing market conditions. We believe that AFFO is an additional useful supplemental measure for investors to consider because it will help them to better assess our operating performance without the distortions created by other non-cash revenues or expenses. FFO and AFFO may not be comparable to similarly titled measures employed by other companies.
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Reconciliation of Non-GAAP Measures (in thousands, except share data):
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Year Ended | |||||||
| | | December 31, 2023 | | December 31, 2022 | | December 31, 2021 | |||
| Net Income | | $ | 3,266 | | $ | 33,955 | | $ | 11,462 |
| Depreciation and Amortization | | | 25,758 | | | 23,564 | | | 15,939 |
| Provision for Impairment | | | 3,220 | | | — | | | — |
| Gain on Disposition of Assets | | | (9,334) | | | (33,801) | | | (9,675) |
| Funds From Operations | | $ | 22,910 | | $ | 23,718 | | $ | 17,726 |
| Adjustments: | | | | | | | | | |
| Loss (Gain) on Extinguishment of Debt | | | (23) | | | 727 | | | — |
| Amortization of Intangible Assets and Liabilities to Lease Income | | | (417) | | | (328) | | | (257) |
| Straight-Line Rent Adjustment | | | (402) | | | (935) | | | (607) |
| COVID-19 Rent Repayments | | | — | | | 45 | | | 430 |
| Non-Cash Compensation | | | 318 | | | 310 | | | 309 |
| Amortization of Deferred Financing Costs to Interest Expense | | | 710 | | | 599 | | | 362 |
| Other Non-Cash Expense | | | 115 | | | 100 | | | (18) |
| Recurring Capital Expenditures | | | — | | | — | | | (41) |
| Adjusted Funds From Operations | | $ | 23,211 | | $ | 24,236 | | $ | 17,904 |
| | | | | | | | | | |
| Weighted Average Number of Common Shares: | | | | | | | | | |
| Basic | | | 13,925,362 | | | 11,976,001 | | | 9,781,066 |
| Diluted | | | 15,560,524 | | | 13,679,495 | | | 11,246,227 |
Other Data (in thousands, except per share data):
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Year Ended | |||||||
| | | December 31, 2023 | | December 31, 2022 | | December 31, 2021 | |||
| FFO | | $ | 22,910 | | $ | 23,718 | | $ | 17,726 |
| FFO per Diluted Share | | $ | 1.47 | | $ | 1.73 | | $ | 1.58 |
| | | | | | | | | | |
| AFFO | | $ | 23,211 | | $ | 24,236 | | $ | 17,904 |
| AFFO per Diluted Share | | $ | 1.49 | | $ | 1.77 | | $ | 1.59 |
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COMPARISON OF THE YEARS ENDED DECEMBER 31, 2023 AND 2022
The following presents the Company’s results of operations for the year ended December 31, 2023, as compared to the year ended December 31, 2022 (in thousands):
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Year Ended | | | | | | ||||
| | | December 31, 2023 | | December 31, 2022 | | $ Variance | | % Variance | |||
| Revenues: | | | | | | | | | | | |
| Lease Income | | $ | 44,967 | | $ | 45,191 | | $ | (224) | | (0.5)% |
| Interest Income from Commercial Loans and Investments | | | 637 | | | — | | | 637 | | 100.0% |
| Other Revenue | | | 40 | | | — | | | 40 | | 100.0% |
| Total Revenues | | | 45,644 | | | 45,191 | | | 453 | | 1.0% |
| Operating Expenses: | | | | | | | | | | | |
| Real Estate Expenses | | | 6,580 | | | 5,435 | | | 1,145 | | 21.1% |
| General and Administrative Expenses | | | 6,301 | | | 5,784 | | | 517 | | 8.9% |
| Provision for Impairment | | | 3,220 | | | — | | | 3,220 | | 100.0% |
| Depreciation and Amortization | | | 25,758 | | | 23,564 | | | 2,194 | | 9.3% |
| Total Operating Expenses | | | 41,859 | | | 34,783 | | | 7,076 | | 20.3% |
| Gain on Disposition of Assets | | | 9,334 | | | 33,801 | | | (24,467) | | (72.4)% |
| Gain (Loss) on Extinguishment of Debt | | | 23 | | | (727) | | | 750 | | 103.2% |
| Net Income From Operations | | | 13,142 | | | 43,482 | | | (30,340) | | (69.8)% |
| Investment and Other Income | | | 289 | | | 12 | | | 277 | | 2308.3% |
| Interest Expense | | | (10,165) | | | (9,539) | | | (626) | | (6.6)% |
| Net Income | | | 3,266 | | | 33,955 | | | (30,689) | | (90.4)% |
| Less: Net Income Attributable to Noncontrolling Interest | | | (349) | | | (4,235) | | | 3,886 | | 91.8% |
| Net Income Attributable to Alpine Income Property Trust, Inc. | | $ | 2,917 | | $ | 29,720 | | $ | (26,803) | | (90.2)% |
Lease Income and Real Estate Expenses
Revenue from our income properties during the years ended December 31, 2023 and 2022 totaled $45.0 million and $45.2 million, respectively. The decrease in revenues is reflective of the Company’s volume of dispositions, offset by acquisitions, as well as certain one-time reduced revenues related to tenant credit loss and bankruptcy. The direct costs of revenues for our income properties totaled $6.6 million and $5.4 million during the years ended December 31, 2023 and 2022, respectively. The $1.1 million increase in the direct cost of revenues is reflective of a portion of portfolio expenses being non-recoverable pursuant to tenant leases, as well as certain non-recoverable expenses related to transaction costs and legal fees associated with the seven assets leased to one tenant that filed for bankruptcy during the year ended December 31, 2023.
Commercial Loans and Investments
Interest income from commercial loans and investments totaled $0.6 million for the year ended December 31, 2023. The income is attributable to three loans originated by the Company during the year ended December 31, 2023. There were no commercial loans and investments generating interest income during the year ended December 31, 2022.
Other Revenue
Other revenue totaled less than $0.1 million for the year ended December 31, 2023. The revenue is attributable to fees earned from a revenue sharing agreement the Company entered into with CTO as further described in Note 18, “Related Party Management Company” in the Notes to the Financial Statements. There were no revenue sharing agreements generating income during the year ended December 31, 2022.
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General and Administrative Expenses
The following table represents the Company’s general and administrative expenses for the year ended December 31, 2023 as compared to the year ended December 31, 2022 (in thousands):
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | December 31, 2023 | | December 31, 2022 | | $ Variance | | % Variance | |||
| Management Fee to Manager | | $ | 4,356 | | $ | 3,828 | | $ | 528 | | 13.8% |
| Director Stock Compensation Expense | | | 318 | | | 310 | | | 8 | | 2.6% |
| Director & Officer Insurance Expense | | | 247 | | | 366 | | | (119) | | (32.5)% |
| Additional General and Administrative Expense | | | 1,380 | | | 1,280 | | | 100 | | 7.8% |
| Total General and Administrative Expenses | | $ | 6,301 | | $ | 5,784 | | $ | 517 | | 8.9% |
General and administrative expenses totaled $6.3 million and $5.8 million during the years ended December 31, 2023 and 2022, respectively. The $0.5 million increase is primarily attributable to growth in the Company’s equity base, which led to an increase in management fee expense of $0.5 million.
Provision for Impairment
During the year ended December 31, 2023, the Company recorded a $3.2 million impairment charge of which $0.3 million represents the current expected credit losses (“CECL”) reserve related to our commercial loans and investments and $2.9 million represents the provision for losses related to our income properties as further described in Note 7, “Provision for Impairment” in the Notes to the Financial Statements. There were no impairment charges on the Company’s income property portfolio during the year ended December 31, 2022.
Depreciation and Amortization
Depreciation and amortization expense totaled $25.8 million and $23.5 million during the years ended December 31, 2023 and 2022, respectively. The $2.3 million increase in the depreciation and amortization expense is reflective of the Company’s change in portfolio as well as the timing of acquisitions versus dispositions. Several ground lease assets were disposed of during the earlier part of 2023 which were re-invested into more depreciable assets on a relative basis.
Gain on Disposition of Assets
During the year ended December 31, 2023, the Company sold 24 properties for an aggregate sales price of $108.3 million, generating aggregate gains on sale of $9.3 million. During the year ended December 31, 2022, the Company sold 16 properties for an aggregate sales price of $154.6 million, generating aggregate gains on sale of $33.8 million.
Gain (Loss) on Extinguishment of Debt
During the year ended December 31, 2022, the Company recorded a $0.7 million loss on the extinguishment of debt attributable to the write off of unamortized loan costs in connection with the CMBS Loan defeasance and the termination of the Prior Revolving Credit Facility, as defined in Note 12, “Long-Term Debt” in the Notes to the Financial Statements.
Investment and Other Income
Investment and other income totaled $0.3 million and less than $0.1 million during the years ended December 31, 2023 and 2022, respectively. The increase is attributable to higher interest rates on bank deposits.
Interest Expense
Interest expense totaled $10.1 million and $9.5 million during the years ended December 31, 2023 and 2022, respectively. The $0.6 million increase in interest expense is attributable to the higher average interest rates during the year ended December 31, 2023 as compared to the year ended December 31, 2022. The overall increase in the Company’s
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long-term debt was primarily utilized to fund the acquisition of properties and commercial loans and investments during 2023 and 2022.
Net Income
Net income totaled $3.3 million and $34.0 million during the years ended December 31, 2023 and 2022, respectively. The decrease in net income is attributable to the factors described above, most significantly to the $24.5 million decrease in gain on disposition of assets during the year ended December 31, 2023. The decreased gain on disposition of assets is the result of reduced disposition activity during the year ended December 31, 2023.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2022 AND 2021
The following presents the Company’s results of operations for the year ended December 31, 2022, as compared to the year ended December 31, 2021 (in thousands):
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Year Ended | | | | | | ||||
| | | December 31, 2022 | | December 31, 2021 | | $ Variance | | % Variance | |||
| Revenues: | | | | | | | | | | | |
| Lease Income | | $ | 45,191 | | $ | 30,126 | | $ | 15,065 | | 50.0% |
| Total Revenues | | | 45,191 | | | 30,126 | | | 15,065 | | 50.0% |
| Operating Expenses: | | | | | | | | | | | |
| Real Estate Expenses | | | 5,435 | | | 3,673 | | | 1,762 | | 48.0% |
| General and Administrative Expenses | | | 5,784 | | | 5,027 | | | 757 | | 15.1% |
| Depreciation and Amortization | | | 23,564 | | | 15,939 | | | 7,625 | | 47.8% |
| Total Operating Expenses | | | 34,783 | | | 24,639 | | | 10,144 | | 41.2% |
| Gain on Disposition of Assets | | | 33,801 | | | 9,675 | | | 24,126 | | 249.4% |
| Loss on Extinguishment of Debt | | | (727) | | | — | | | (727) | | (100.0)% |
| Net Income From Operations | | | 43,482 | | | 15,162 | | | 28,320 | | 186.8% |
| Investment and Other Income | | | 12 | | | 2 | | | 10 | | 500.0% |
| Interest Expense | | | (9,539) | | | (3,702) | | | (5,837) | | (157.7)% |
| Net Income | | | 33,955 | | | 11,462 | | | 22,493 | | 196.2% |
| Less: Net Income Attributable to Noncontrolling Interest | | | (4,235) | | | (1,498) | | | (2,737) | | (182.7)% |
| Net Income Attributable to Alpine Income Property Trust, Inc. | | $ | 29,720 | | $ | 9,964 | | $ | 19,756 | | 198.3% |
Lease Income and Real Estate Expenses
Revenue from our income properties during the years ended December 31, 2022 and 2021 totaled $45.2 million and $30.1 million, respectively. The increase in revenues is reflective of the Company’s volume of acquisitions, offset by dispositions. The direct costs of revenues for our income properties totaled $5.4 million and $3.7 million during the years ended December 31, 2022 and 2021, respectively. The increase in the direct cost of revenues is also attributable to the Company’s expanded property portfolio.
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General and Administrative Expenses
The following table represents the Company’s general and administrative expenses for the year ended December 31, 2022 as compared to the year ended December 31, 2021 (in thousands):
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | December 31, 2022 | | December 31, 2021 | | $ Variance | | % Variance | |||
| Management Fee to Manager | | $ | 3,828 | | $ | 3,182 | | $ | 646 | | 20.3% |
| Director Stock Compensation Expense | | | 310 | | | 309 | | | 1 | | 0.3% |
| Director & Officer Insurance Expense | | | 366 | | | 499 | | | (133) | | (26.7)% |
| Additional General and Administrative Expense | | | 1,280 | | | 1,037 | | | 243 | | 23.4% |
| Total General and Administrative Expenses | | $ | 5,784 | | $ | 5,027 | | $ | 757 | | 15.1% |
General and administrative expenses totaled $5.8 million and $5.0 million during the years ended December 31, 2022 and 2021, respectively. The $0.8 million increase is primarily attributable to growth in the Company’s equity base, which led to an increase in management fee expense of $0.6 million.
Depreciation and Amortization
Depreciation and amortization expense totaled $23.5 million and $15.9 million during the years ended December 31, 2022 and 2021, respectively. The $7.6 million increase in the depreciation and amortization expense is reflective of the Company’s expanded property portfolio.
Gain on Disposition of Assets
During the year ended December 31, 2022, the Company sold 16 properties for an aggregate sales price of $154.6 million, generating aggregate gains on sale of $33.8 million. During the year ended December 31, 2021, the Company sold three properties for an aggregate sales price of $28.3 million, generating aggregate gains on sale of $9.7 million.
Loss on Extinguishment of Debt
Simultaneous with the Company entering into the 2022 Amended and Restated Credit Agreement, the Company’s then-existing revolving credit facility (the “Prior Revolving Credit Facility”) was terminated, which resulted in $0.3 million of unamortized deferred financing costs written off during the year ended December 31, 2022 with no such expense during the year ended December 31, 2021.
Interest Expense
Interest expense totaled $9.5 million and $3.7 million during the years ended December 31, 2022 and 2021, respectively. The $5.8 million increase in interest expense is attributable to the higher average outstanding debt balance during the year ended December 31, 2022 as compared to the same period in 2021, as well as increasing rates on the Company’s variable rate Credit Facility indebtedness. The overall increase in the Company’s long-term debt was primarily utilized to fund the acquisition of properties during 2022 and 2021.
Net Income
Net income totaled $34.0 million and $11.5 million during the years ended December 31, 2022 and 2021, respectively. The increase in net income is attributable to the factors described above in addition to the $24.1 million increase in gain on disposition of assets during the year ended December 31, 2022. The increased gain on disposition of assets is the result of more disposition activity during the year ended December 31, 2022, with proceeds from such dispositions being reinvested into income properties through the like-kind exchange structure. The increase in gain on disposition of assets was partially offset by the $0.7 million loss on extinguishment of debt incurred during the year ended December 31, 2022, incurred as a result of the write off of unamortized loan costs in connection with the CMBS Loan defeasance and the termination of the Prior Revolving Credit Facility, as hereinafter defined in Note 12, “Long-Term Debt”.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents and Restricted Cash. Cash totaled $13.7 million at December 31, 2023, including restricted cash of $9.7 million. See Note 2 “Summary of Significant Accounting Policies” under the heading Restricted Cash in the Notes to the Financial Statements for the Company’s disclosure related to its restricted cash balance at December 31, 2023.
Our total cash balance at December 31, 2023, reflected net cash provided by our operating activities totaling $25.6 million during the year ended December 31, 2023, compared to net cash provided by operating activities totaling $24.6 million for the year ended December 31, 2022, an increase of $1.0 million. The increase of $1.0 million is primarily related to the cash reserves received from the borrowers associated with the Company’s commercial loans and investments, as well as increased interest income earned on deposits at financial institutions.
Our net cash used in investing activities totaled $13.6 million for the year ended December 31, 2023, compared to net cash used in investing activities of $38.8 million for the year ended December 31, 2022, a decrease of $25.2 million. The decrease in net cash used in investing activities of $25.2 million is primarily related to a net decrease in cash outflows of $60.6 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 $35.4 million in additional cash outflows related to investments in the Company’s commercial loans and investment portfolio for which there were no such outflows during the year ended December 31, 2022.
Our net cash used in financing activities totaled $11.4 million for the year ended December 31, 2023, compared to net cash provided by financing activities of $17.7 million for the year ended December 31, 2022, for a decrease in cash inflows from financing activities of $29.1 million. The decrease of $29.1 million is primarily related to a $9.0 million decrease in net proceeds from long-term debt during the year ended December 31, 2023 as well as $2.0 million less cash paid for loan fees the year ended December 31, 2023. These amounts were offset by $23.5 million less proceeds received from sales of common stock under the Company’s “at-the-market” equity offering programs during the year ended December 31, 2023 and $14.6 million more cash used to repurchase the Company’s common stock during the year ended December 31, 2023.
Long-Term Debt. As of December 31, 2023, the Company had $173.5 million of undrawn commitments available on its Credit Facility. See Note 12, “Long-Term Debt” in the Notes to the Financial Statements for the Company’s disclosure related to its long-term debt balance at December 31, 2023.
Acquisitions and Investments. As noted previously, the Company acquired 14 properties during the year ended December 31, 2023, for an aggregate purchase price of $82.9 million, as further described in Note 3 “Property Portfolio” in the Notes to the Financial Statements. The Company also invested in three commercial loans with a total funding commitment of $38.6 million. As of December 31, 2023, the Company’s commercial loan investments portfolio included two construction loans and one mortgage note with a total carrying value of $35.1 million. See Note 4, “Commercial Loans and Investments” in the Notes to the Financial Statements for additional disclosures related to the Company’s commercial loans and investments as of December 31, 2023.
Dispositions. During the year ended December 31, 2023, the Company sold 24 properties for a total sales price of $108.3 million, generating aggregate gains on sale of $9.3 million, as further described in Note 3 “Property Portfolio” in the Notes to the Financial Statements.
Capital Expenditures. As of December 31, 2023, the Company had no commitments related to capital expenditures.
The Company is committed to fund two construction loans as described in Note 4, “Commercial Loans and Investments” in the Notes to the Financial Statements. The unfunded portion of the construction loans totaled $3.0 million as of December 31, 2023.
The Company is contractually obligated under its various long-term debt agreements. In the aggregate, the Company is obligated under such agreements to repay $276.5 million on long-term basis, to be repaid in excess of one year, with no payments due within one year.
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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, $109.5 million of availability under the 2022 ATM Program, and $173.5 million of undrawn commitments available on its existing $250.0 million Credit Facility, as of December 31, 2023.
The Board and management consistently review the allocation of capital with the goal of providing the best long-term return for our stockholders. These reviews consider various alternatives, including increasing or decreasing regular dividends, repurchasing the Company’s securities, and retaining funds for reinvestment. Annually, the Board reviews our business plan and corporate strategies, and makes adjustments as circumstances warrant. Management’s focus is to continue our strategy of investing in net leased properties by utilizing the capital we raise and available borrowing capacity from the Credit Facility to increase our portfolio of income-producing properties, providing stabilized cash flows with strong risk-adjusted returns primarily in larger metropolitan areas and growth markets.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates include those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Company’s financial condition or results of operations. Our most significant estimate is as follows:
Purchase Accounting for Acquisitions of Real Estate Subject to a Lease. As required by GAAP, the fair value of the real estate acquired with in-place leases is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases, and the value of leasing costs, based in each case on their relative fair values. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded as other assets or liabilities based on the present value. The assumptions underlying the allocation of relative fair values are based on market information including, but not limited to: (i) the estimate of replacement cost of improvements under the cost approach, (ii) the estimate of land values based on comparable sales under the sales comparison approach, and (iii) the estimate of future benefits determined by either a reasonable rate of return over a single year’s net cash flow, or a forecast of net cash flows projected over a reasonable investment horizon under the income capitalization approach. The underlying assumptions are subject to uncertainty and thus any changes to the allocation of fair value to each of the various line items within the Company’s consolidated balance sheets could have an impact on the Company’s financial condition as well as results of operations due to resulting changes in depreciation and amortization as a result of the fair value allocation. The acquisitions of real estate subject to this estimate totaled 14 properties for a combined purchase price of $82.9 million for the year ended December 31, 2023 and 51 properties for a combined purchase price of $187.4 million for the year ended December 31, 2022.
See Note 2, “Summary of Significant Accounting Policies” in the Notes to the Financial Statements for further discussion of the Company’s accounting estimates and policies.