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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 September 30, 2021

OR

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

For the transition period from                      to                     

Commission file number 001-11350

CTO REALTY GROWTH, INC.

(Exact name of registrant as specified in its charter)

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 Symbols

    

Name of each exchange on which registered:

Common Stock, $0.01 par value per share

CTO

NYSE

6.375% Series A Cumulative Redeemable

Preferred Stock, $0.01 par value per share

CTO PrA

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 October 21, 2021, there were 5,962,150 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

INDEX

Page

    

No.

PART I—FINANCIAL INFORMATION

Item 1.      Financial Statements

Consolidated Balance Sheets – September 30, 2021 (Unaudited) and December 31, 2020

3

Consolidated Statements of Operations – Three and nine months ended September 30, 2021 and 2020 (Unaudited)

4

Consolidated Statements of Comprehensive Income (Loss) – Three and nine months ended September 30, 2021 and 2020 (Unaudited)

5

Consolidated Statements of Stockholders’ Equity – Three and nine months ended September 30, 2021 and 2020 (Unaudited)

6

Consolidated Statements of Cash Flows – Nine months ended September 30, 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

47

Item 3.      Quantitative and Qualitative Disclosures About Market Risk

61

Item 4.      Controls and Procedures

61

PART II—OTHER INFORMATION

62

Item 1.      Legal Proceedings

62

Item 1A.   Risk Factors

62

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

62

Item 3.      Defaults Upon Senior Securities

62

Item 4.      Mine Safety Disclosures

62

Item 5.      Other Information

62

Item 6.      Exhibits

63

SIGNATURES

64

2

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CTO REALTY GROWTH, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

As of

    

(Unaudited) September 30,
2021

    

December 31,
2020

ASSETS

Real Estate:

Land, at Cost

$

162,297

$

166,512

Building and Improvements, at Cost

256,902

305,614

Other Furnishings and Equipment, at Cost

701

672

Construction in Process, at Cost

1,675

323

Total Real Estate, at Cost

421,575

473,121

Less, Accumulated Depreciation

(22,385)

(30,737)

Real Estate—Net

399,190

442,384

Land and Development Costs

6,702

7,083

Intangible Lease Assets—Net

64,624

50,176

Assets Held for Sale—See Note 25

835

833

Investment in Joint Ventures

25,575

48,677

Investment in Alpine Income Property Trust, Inc.

37,468

30,574

Mitigation Credits

3,405

2,622

Mitigation Credit Rights

21,573

Commercial Loan and Master Lease Investments

38,993

38,320

Cash and Cash Equivalents

7,005

4,289

Restricted Cash

68,546

29,536

Refundable Income Taxes

856

26

Deferred Income Taxes—Net

215

Other Assets—See Note 13

11,695

12,180

Total Assets

$

686,682

$

666,700

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:

Accounts Payable

$

1,402

$

1,047

Accrued and Other Liabilities—See Note 19

12,716

9,090

Deferred Revenue—See Note 20

3,656

3,319

Intangible Lease Liabilities—Net

3,036

24,163

Liabilities Held for Sale—See Note 25

831

831

Deferred Income Taxes—Net

3,521

Long-Term Debt

229,894

273,830

Total Liabilities

251,535

315,801

Commitments and Contingencies—See Note 23

Stockholders’ Equity:

Preferred Stock – 100,000,000 shares authorized; $0.01 par value, 6.375% Series A Cumulative Redeemable Preferred Stock, $25.00 Per Share Liquidation Preference, 3,000,000 shares issued and outstanding at September 30, 2021; 50,000 shares authorized; $100.00 par value, no shares issued or outstanding at December 31, 2020

30

Common Stock – 500,000,000 shares authorized; $0.01 par value, 5,960,912 shares issued and outstanding at September 30, 2021; 25,000,000 shares authorized; $1.00 par value, 7,310,680 shares issued and 5,915,756 shares outstanding at December 31, 2020

60

7,250

Treasury Stock – 0 shares at September 30, 2021 and 1,394,924 shares at December 31, 2020

(77,541)

Additional Paid-In Capital

86,899

83,183

Retained Earnings

348,681

339,917

Accumulated Other Comprehensive Loss

(523)

(1,910)

Total Stockholders’ Equity

435,147

350,899

Total Liabilities and Stockholders’ Equity

$

686,682

$

666,700

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

3

CTO REALTY GROWTH, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

    

2021

    

2020

    

2021

    

2020

Revenues

Income Properties

$

13,734

$

12,933

$

36,757

$

35,409

Management Fee Income

940

683

2,361

2,080

Interest Income from Commercial Loan and Master Lease Investments

726

413

2,136

2,300

Real Estate Operations

1,177

543

4,318

631

Total Revenues

16,577

14,572

45,572

40,420

Direct Cost of Revenues

Income Properties

(3,984)

(3,592)

(9,688)

(8,273)

Real Estate Operations

(252)

(1,682)

(867)

(3,263)

Total Direct Cost of Revenues

(4,236)

(5,274)

(10,555)

(11,536)

General and Administrative Expenses

(2,680)

(3,341)

(8,477)

(8,604)

Impairment Charges

(16,527)

(1,905)

Depreciation and Amortization

(5,567)

(4,761)

(15,428)

(14,334)

Total Operating Expenses

(12,483)

(13,376)

(50,987)

(36,379)

Gain on Disposition of Assets

22,666

289

28,106

7,365

Gain (Loss) on Extinguishment of Debt

(641)

1,141

Other Gains and Income

22,666

289

27,465

8,506

Total Operating Income

26,760

1,485

22,050

12,547

Investment and Other Income (Loss)

(797)

(1,030)

8,438

(5,746)

Interest Expense

(1,986)

(2,478)

(6,851)

(8,384)

Income (Loss) Before Income Tax Benefit (Expense)

23,977

(2,023)

23,637

(1,583)

Income Tax Benefit (Expense)

(30)

501

4,371

410

Net Income (Loss) Attributable to the Company

23,947

(1,522)

28,008

(1,173)

Distributions to Preferred Stockholders

(1,129)

(1,129)

Net Income (Loss) Attributable to Common Stockholders

$

22,818

$

(1,522)

$

26,879

$

(1,173)

Per Share Information—See Note 15:

Basic and Diluted Net Income (Loss) Attributable to Common Stockholders

$

3.87

$

(0.33)

$

4.56

$

(0.25)

Weighted Average Number of Common Shares

Basic

5,901,095

4,654,329

5,892,900

4,673,049

Diluted

5,901,095

4,654,329

5,892,900

4,673,049

Dividends Declared and Paid - Preferred Stock

$

0.3763

$

$

0.3763

$

Dividends Declared and Paid - Common Stock

$

1.00

$

0.40

$

3.00

$

0.90

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

4

CTO REALTY GROWTH, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

Three Months Ended

Nine Months Ended

    

September 30,

September 30,

September 30,

September 30,

2021

    

2020

    

2021

    

2020

Net Income (Loss) Attributable to the Company

$

23,947

$

(1,522)

$

28,008

$

(1,173)

Other Comprehensive Income (Loss):

Cash Flow Hedging Derivative - Interest Rate Swaps (Net of Income Tax Benefit (Expense) of $0, $0.02 million, $0, and ($0.5) million, respectively)

217

73

1,387

(1,793)

Total Other Comprehensive Income (Loss), Net of Income Tax

217

73

1,387

(1,793)

Total Comprehensive Income (Loss)

$

24,164

$

(1,449)

$

29,395

$

(2,966)

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

5

CTO REALTY GROWTH, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands)

For the three months ended September 30, 2021:

Preferred Stock

Common Stock

Treasury Stock

Additional Paid-In Capital

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

Stockholders' Equity

Balance July 1, 2021

$

$

60

$

$

13,676

$

331,895

$

(740)

$

344,891

Net Income Attributable to the Company

23,947

23,947

Issuance of Preferred Stock, Net of Underwriting Discount and Expenses

30

72,640

72,670

Exercise of Stock Options and Common Stock Issuance

(83)

(83)

Stock Compensation Expense from Restricted Stock Grants and Equity Classified Stock Options

666

666

Preferred Stock Dividends Declared for the Period

(1,129)

(1,129)

Common Stock Dividends Declared for the Period

(6,032)

(6,032)

Other Comprehensive Income

217

217

Balance September 30, 2021

$

30

$

60

$

$

86,899

$

348,681

$

(523)

$

435,147

For the three months ended September 30, 2020:

Preferred Stock

Common Stock

Treasury Stock

Additional Paid-In Capital

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

Stockholders' Equity

Balance July 1, 2020

$

$

6,047

$

(77,541)

$

32,888

$

324,075

$

(1,792)

$

283,677

Net Loss Attributable to the Company

(1,522)

(1,522)

Exercise of Stock Options and Common Stock Issuance

2

72

74

Stock Compensation Expense from Restricted Stock Grants and Equity Classified Stock Options

543

543

Common Stock Dividends Declared for the Period

(1,863)

(1,863)

Other Comprehensive Income, Net of Income Tax

73

73

Balance September 30, 2020

$

$

6,049

$

(77,541)

$

33,503

$

320,690

$

(1,719)

$

280,982

For the nine months ended September 30, 2021:

Preferred Stock

Common Stock

Treasury Stock

Additional Paid-In Capital

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

Stockholders' Equity

Balance January 1, 2021

$

$

7,250

$

(77,541)

$

83,183

$

339,917

$

(1,910)

$

350,899

Net Income Attributable to the Company

28,008

28,008

Vested Restricted Stock and Performance Shares

(436)

(436)

Issuance of Preferred Stock, Net of Underwriting Discount and Expenses

30

72,409

72,439

Common Stock Equity Issuance Costs

(197)

(197)

Exercise of Stock Options and Common Stock Issuance

289

289

Stock Compensation Expense from Restricted Stock Grants and Equity Classified Stock Options

2,002

2,002

Par Value $0.01 per Share and Treasury Stock Derecognized at January 29, 2021

(7,190)

77,541

(70,351)

Preferred Stock Dividends Declared for the Period

(1,129)

(1,129)

Common Stock Dividends Declared for the Period

(18,115)

(18,115)

Other Comprehensive Income

1,387

1,387

Balance September 30, 2021

$

30

$

60

$

$

86,899

$

348,681

$

(523)

$

435,147

For the nine months ended September 30, 2020:

Preferred Stock

Common Stock

Treasury Stock

Additional Paid-In Capital

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

Stockholders' Equity

Balance January 1, 2020

$

$

6,017

$

(73,441)

$

26,690

$

326,073

$

74

$

285,413

Net Loss Attributable to the Company

(1,173)

(1,173)

Stock Repurchase

(4,100)

(4,100)

Equity Component of Convertible Debt

5,248

5,248

Vested Restricted Stock and Performance Shares

24

(562)

(538)

Exercise of Stock Options and Common Stock Issuance

8

416

424

Stock Compensation Expense from Restricted Stock Grants and Equity Classified Stock Options

1,711

1,711

Common Stock Dividends Declared for the Period

(4,210)

(4,210)

Other Comprehensive Loss, Net of Income Tax

(1,793)

(1,793)

Balance September 30, 2020

$

$

6,049

$

(77,541)

$

33,503

$

320,690

$

(1,719)

$

280,982

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

6

CTO REALTY GROWTH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

Nine Months Ended

September 30, 2021

September 30, 2020

Cash Flow from Operating Activities:

Net Income (Loss) Attributable to the Company

$

28,008

$

(1,173)

Adjustments to Reconcile Net Income (Loss) Attributable to the Company to Net Cash Provided by Operating Activities:

Depreciation and Amortization

15,428

14,334

Amortization of Intangible Liabilities to Income Property Revenue

(820)

(1,352)

Amortization of Deferred Financing Costs to Interest Expense

444

338

Amortization of Discount on Convertible Debt

951

1,067

Gain on Disposition of Real Estate and Intangible Lease Assets and Liabilities

(28,106)

(5,788)

Gain on Disposition of Assets Held for Sale

(1,930)

Loss on Disposition of Commercial Loan and Master Lease Investments

353

Loss (Gain) on Extinguishment of Debt

641

(1,141)

Impairment Charges

16,527

1,905

Accretion of Commercial Loan and Master Lease Investment Origination Fees

(1)

(164)

Non-Cash Imputed Interest

(330)

(311)

Deferred Income Taxes

(3,736)

(10,756)

Unrealized (Gain) Loss on Investment Securities

(6,894)

7,098

Non-Cash Compensation

2,434

2,135

Decrease (Increase) in Assets:

Refundable Income Taxes

(830)

Assets Held for Sale

(1)

Land and Development Costs

381

(468)

Mitigation Credits and Mitigation Credit Rights

(16,007)

3,083

Other Assets

(945)

(2,793)

Increase (Decrease) in Liabilities:

Accounts Payable

1,084

321

Accrued and Other Liabilities

3,800

4,010

Deferred Revenue

337

(26)

Income Taxes Payable

3,158

Net Cash Provided By Operating Activities

12,365

11,900

Cash Flow from Investing Activities:

Acquisition of Real Estate and Intangible Lease Assets and Liabilities

(115,780)

(165,419)

Acquisition of Commercial Loan Investments and Master Lease Investments

(364)

(27,839)

Acquisition of Mitigation Credits

(2,981)

Restricted Cash Balance Received in Acquisition of Interest in Joint Venture

595

Cash Contribution to Interest in Joint Venture

(639)

(36)

Proceeds from Disposition of Property, Plant, and Equipment, Net, and Assets Held for Sale

108,449

49,646

Principal Payments Received on Commercial Loan and Master Lease Investments

20,981

Net Cash Used In Investing Activities

(7,739)

(125,648)

Cash Flow from Financing Activities:

Proceeds from Long-Term Debt

156,500

62,641

Payments on Long-Term Debt

(171,308)

(64,089)

Cash Paid for Loan Fees

(907)

(2,083)

Payments for Exercise of Stock Options and Common Stock Issuance

(146)

Proceeds from Issuance of Preferred Stock, Net of Underwriting Discount and Expenses

72,439

Cash Used to Purchase Common Stock

(4,100)

Cash Paid for Vesting of Restricted Stock

(452)

(538)

Cash Paid for Equity Issuance Costs

(197)

Dividends Paid - Preferred Stock

(1,129)

Dividends Paid - Common Stock

(17,700)

(4,210)

Net Cash Provided By (Used In) Financing Activities

37,100

(12,379)

Net Decrease in Cash and Cash Equivalents

41,726

(126,127)

Cash and Cash Equivalents, Beginning of Period

33,825

134,905

Cash and Cash Equivalents, End of Period

$

75,551

$

8,778

Reconciliation of Cash to the Consolidated Balance Sheets:

Cash and Cash Equivalents

$

7,005

$

6,352

Restricted Cash

68,546

2,426

Total Cash

$

75,551

$

8,778

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

7

CTO REALTY GROWTH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited, in thousands)

Nine Months Ended

September 30, 2021

September 30, 2020

Supplemental Disclosure of Cash Flow Information:

Cash Paid for Taxes, Net of Refunds Received

$

245

$

4,845

Cash Paid for Interest

$

4,986

$

7,096

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

Unrealized Gain (Loss) on Cash Flow Hedges

$

1,387

$

(1,793)

Convertible Note Exchange

$

$

57,359

Equity Component of Convertible Debt

$

$

5,248

Common Stock Dividends Declared and Unpaid

$

415

$

Assumption of Mortgage Note Payable by Buyer

$

30,000

$

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

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. DESCRIPTION OF BUSINESS

Description of Business

We are a publicly traded diversified real estate investment trust (“REIT”) that was founded in 1910. We own and manage, sometimes utilizing third-party property management companies, 19 commercial real estate properties in nine states in the United States. As of September 30, 2021, we owned 11 single-tenant and eight multi-tenant income-producing properties comprising 2.2 million square feet of gross leasable space.

In addition to our income property portfolio, as of September 30, 2021, our business included the following:

Management Services:

A fee-based management business that is engaged in managing Alpine Income Property Trust, Inc. (“PINE”) and the entity that currently holds 1,600 acres of undeveloped land in Daytona Beach, Florida (the “Land JV”), see Note 6, “Related Party Management Services Business”.

Commercial Loan and Master Lease Investments:

A portfolio of two commercial loan investments and two commercial properties, which are included in the 19 commercial real estate properties above, whose leases are classified as commercial loan and master lease investments.

Real Estate Operations:

A portfolio of subsurface mineral interests associated with approximately 415,000 surface acres in 20 counties in the State of Florida and a portfolio of mitigation credits (“Subsurface Interests”);

A retained interest in the Land JV, which has entered into an agreement to sell substantially all of its remaining 1,600 acres of undeveloped land in Daytona Beach, Florida; and

An inventory of historically owned mitigation credits as well as mitigation credits produced by the Company’s mitigation bank. The mitigation bank owns a 2,500 acre parcel of land in the western part of Daytona Beach, Florida and, pursuant to a mitigation plan approved by the applicable state and federal authorities, produces mitigation credits that are sold to developers of land in the Daytona Beach area for the purpose of enabling the developers to obtain certain regulatory permits for property development (the “Mitigation Bank”). Prior to the Interest Purchase (hereinafter defined in Note 8, “Investments in Joint Ventures”) completed on September 30, 2021, the Company held a 30% retained interest in the entity that owns the Mitigation Bank.

Our business also includes our investment in PINE. As of September 30, 2021, our investment totaled $37.5 million, or 15.7% of PINE’s outstanding equity, including the units of limited partnership interest (“OP Units”) we hold in Alpine Income Property OP, LP (the “PINE Operating Partnership”), which are redeemable for cash, based upon the value of an equivalent number of shares of PINE common stock at the time of the redemption, or shares of PINE common stock on a one-for-one basis, at PINE’s election. Our investment in PINE generates investment income through the dividends distributed by PINE. In addition to the dividends we receive from PINE, our investment in PINE may benefit from any appreciation in PINE’s stock price, although no assurances can be provided that such appreciation will occur, the amount by which our investment will increase in value, or the timing thereof. Any dividends received from PINE are included in investment and other income (loss) on the accompanying consolidated statements of operations.

REIT Conversion

As of December 31, 2020, the Company had completed certain internal reorganization transactions necessary to begin operating in compliance with the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes for the taxable year ended December 31, 2020.

9

In order to comply with certain REIT requirements set forth in the Internal Revenue Code of 1986, as amended (the “Code”), we hold certain of our non-REIT assets and operations through taxable REIT subsidiaries (“TRSs”) and subsidiaries of TRSs. A TRS is a subsidiary of a REIT that is generally subject to U.S. federal corporate income tax on its earnings. Net income from our TRSs either will be retained by our TRSs and used to fund their operations, or will be distributed to us, where it will either be reinvested by us into our business or available for distribution to our stockholders. However, distributions from our TRSs to us will not produce qualifying income for purposes of the 75% gross income test applicable to REITs and thus may be limited.

To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company’s annual REIT taxable income, without regard to the dividends paid deduction and excluding net capital gain, to its stockholders (which is computed and which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles). As a REIT, the Company is generally not subject to U.S. federal corporate income tax to the extent of its distributions to stockholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal income tax on its taxable income at regular corporate rates and generally will not be permitted to qualify for treatment as a REIT for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service (“IRS”) grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders. Even if the Company qualifies for taxation as a REIT, the Company may be subject to state and local taxes on its income and property and federal income and excise taxes on its undistributed income.

Merger

On January 29, 2021, in connection with the REIT conversion, the Company completed the merger of CTO Realty Growth, Inc., a Florida corporation (“CTO FL”), with and into CTO NEWCO REIT, Inc. (“CTO MD ”), a wholly owned subsidiary of CTO FL (the “Merger”) in order to reincorporate in Maryland and facilitate its ongoing compliance with the REIT requirements by ensuring that certain standard REIT ownership limitations and transfer restrictions apply to CTO MD’s capital stock.

As a result of the Merger, existing shares of CTO FL common stock were automatically converted, on a one-for-one basis, into shares of common stock of CTO MD. CTO MD is a corporation organized in the state of Maryland and has been renamed “CTO Realty Growth, Inc.”  CTO MD’s charter includes certain standard REIT provisions, including ownership limitations and transfer restrictions applicable to the Company’s capital stock. See Note 14, “Equity” for the Company’s disclosure related to the equity adjustments recorded during the three months ended March 31, 2021 in connection with the Merger.

In connection with the REIT conversion and the Merger, CTO FL applied to list CTO MD’s common stock on the New York Stock Exchange (the “NYSE”) under CTO FL’s ticker symbol, “CTO.”  This application was approved, and CTO MD’s common stock began trading on the NYSE on February 1, 2021 under the ticker symbol “CTO.”

COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus as a pandemic (the “COVID-19 Pandemic”), which has spread throughout the United States. The impact of the COVID-19 Pandemic has evolved rapidly, with many jurisdictions taking drastic measures to limit the spread of the virus by instituting quarantines or lockdowns and imposing travel restrictions. Such actions have created significant disruptions to global supply chains, and adversely impacted several industries, including airlines, hospitality, retail and the broader real estate industry.

As a result of the approval of multiple COVID-19 vaccines for use and the distribution of such vaccines among the general population, a number of jurisdictions have reopened and loosened restrictions. However, wide disparities in vaccination rates and continued vaccine hesitancy, combined with the emergence of COVID-19 variants and surges in COVID-19 cases, could trigger the reinstatement of further restrictions. Such restrictions could include mandatory business shut-downs, travel restrictions, reduced business operations and social distancing requirements.

10

The future impact of the COVID-19 Pandemic on the real estate industry and the Company’s financial condition and results of operations is uncertain and cannot be predicted currently since it depends on several factors beyond the control of the Company, including, but not limited to: (i) the uncertainty surrounding the severity and duration of the COVID-19 Pandemic, including possible recurrences and differing economic and social impacts of the COVID-19 Pandemic in various regions of the United States; (ii) the effectiveness of the United States public health response; (iii) the COVID-19 Pandemic’s impact on the United States and global economies; (iv) the timing, scope and effectiveness of additional governmental responses to the COVID-19 Pandemic; (v) the availability of a treatment and effectiveness of vaccines approved for COVID-19 and the willingness of individuals to get vaccinated; (vi) changes in how certain types of commercial property are used while maintaining social distancing and other techniques intended to control the impact of COVID-19; (vii) the impact of phase out of economic stimulus measures, the inflationary pressure of economic stimulus, and the eventual halt and reversal by the U.S. Treasury of asset purchases; and (viii) the uneven impact on the Company’s tenants, real estate values and cost of capital.

Contractual Base Rent (“CBR”) represents the amount owed to the Company under the current terms of its lease agreements. As a result of the COVID-19 Pandemic, during the year ended December 31, 2020, the Company agreed to defer or abate certain CBR in exchange for additional lease term or other lease enhancing additions. Repayments of the remaining balance of deferred CBR began in the third quarter of 2020, with payments continuing, in some cases, into 2023.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Information

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements, and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which provides a more complete understanding of the Company’s accounting policies, financial position, operating results, business properties, and other matters. The unaudited consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the financial position of the Company and the results of operations for the interim periods.

The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and other entities in which we have a controlling interest. Any real estate entities or properties included in the consolidated financial statements have been consolidated only for the periods that such entities or properties were owned or under control by us. All inter-company balances and transactions have been eliminated in the consolidated financial statements. The Company has a retained interest in the Land JV as well as an equity investment in PINE. Prior to the Interest Purchase (hereinafter defined in Note 8, “Investments in Joint Ventures”) completed on September 30, 2021, the Company also had a 30% retained interest in the entity that owns the Mitigation Bank. The Company has concluded that these entities are variable interest entities of which the Company is not the primary beneficiary and as a result, these entities are not consolidated.

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Among other factors, fluctuating market conditions that can exist in the national real estate markets and the volatility and uncertainty in the financial and credit markets make it possible that the estimates and assumptions, most notably those related to the Company’s investment in income properties, could change materially due to continued volatility in the real estate and financial markets, or as a result of a significant dislocation in those markets.

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Recently Issued Accounting Standards

Debt with Conversion and Other Options. In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06 related to simplifying the accounting for convertible instruments by removing certain separation models for convertible instruments. Among other things, the amendments in the update also provide for improvements in the consistency in EPS calculations by amending the guidance by requiring that an entity use the if-converted method for convertible instruments. The amendments in ASU 2020-06 are effective for reporting periods beginning after December 15, 2021. The Company intends to adopt ASU 2020-06 commencing January 1, 2022, at which time, the Company’s diluted EPS calculation will include the dilutive impact of the 2025 Notes (hereinafter defined), irrespective of intended cash settlement. Further, the Company elects, upon adoption, to utilize the modified retrospective approach, negating the required restatement of EPS for periods prior to adoption.

ASC Topic 326, Financial Instruments-Credit Losses. In June 2016, the FASB issued ASU 2016-13, which amends its guidance on the measurement of credit losses on financial instruments. The amendments in this update are effective for annual reporting periods beginning after December 31, 2019. ASU 2016-13 affects entities holding financial assets that are not accounted for at fair value through net income, including but not limited to, loans, trade receivables, and net investments in leases. The Company adopted the changes to FASB ASC 326, Financial Instruments-Credit Losses on January 1, 2020. The Company’s evaluation of current expected credit losses (“CECL”) resulted in a reserve of $0.3 million on the Company’s commercial loan and master lease investments portfolio during the three months ended March 31, 2020. See Note 5 “Commercial Loan and Master Lease Investments” for further information.

Reclassifications

Certain items in the consolidated balance sheet as of December 31, 2020 have been reclassified to conform to the presentation as of September 30, 2021. Specifically, in the first quarter of 2021, the Company reclassified deferred financing costs incurred in connection with its Credit Facility (as further described in Note 17, “Long-Term Debt”), net of accumulated amortization, as a component of other assets on the accompanying consolidated balance sheet. Accordingly, deferred financing costs of $1.2 million, net of accumulated amortization of $0.5 million, were reclassified from long-term debt to other assets as of December 31, 2020.

Cash and Cash Equivalents

Cash and cash equivalents includes cash on hand, bank demand accounts, and money market accounts having original maturities of 90 days or less. The Company’s bank balances as of September 30, 2021 include certain amounts over the Federal Deposit Insurance Corporation limits.

Restricted Cash

Restricted cash totaled $68.5 million at September 30, 2021, of which $67.8 million is being held in various escrow accounts to be reinvested through the like-kind exchange structure into other income properties, $0.6 million is being held in an escrow account in connection with the Mitigation Bank as required by the applicable state and federal permitting authorities, and $0.1 million is being held in an escrow account in connection with the sale of a ground lease located in Daytona Beach, Florida.

Derivative Financial Instruments and Hedging Activity

Interest Rate Swaps. The Company accounts for its cash flow hedging derivatives in accordance with FASB ASC Topic 815-20, Derivatives and Hedging. Depending upon the hedge’s value at each balance sheet date, the derivatives are included in either other assets or accrued and other liabilities on the consolidated balance sheet at its fair value. On the date each interest rate swap was entered into, the Company designated the derivatives as a hedge of the variability of cash flows to be paid related to the recognized long-term debt liabilities.

The Company documented the relationship between the hedging instruments and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge transactions. At the hedges’ inception, the Company formally assessed whether the derivatives that are used in hedging the transactions are highly effective in offsetting changes in cash flows of the hedged items, and we will continue to do so on an ongoing basis. As the terms of each interest rate

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swap and the associated debts are identical, both hedging instruments qualify for the shortcut method; therefore, it is assumed that there is no hedge ineffectiveness throughout the entire term of the hedging instruments.

Changes in fair value of the hedging instruments that are highly effective and designated and qualified as cash-flow hedges are recorded in other comprehensive income and loss, until earnings are affected by the variability in cash flows of the designated hedged items.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial assets and liabilities including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued and other liabilities at September 30, 2021 and December 31, 2020, approximate fair value because of the short maturity of these instruments. The carrying value of the Company’s Credit Facility (hereinafter defined) as of September 30, 2021 and December 31, 2020, approximates current market rates for revolving credit arrangements with similar risks and maturities. The face value of the Company’s fixed rate commercial loan and master lease investments, the 2026 Term Loan (hereinafter defined), and convertible debt held as of September 30, 2021 and December 31, 2020 are measured at fair value based on current market rates for financial instruments with similar risks and maturities (see Note 10, “Fair Value of Financial Instruments”).

Fair Value Measurements

The Company’s estimates of fair value of financial and non-financial assets and liabilities is based on the framework established by U.S. GAAP. The framework specifies a hierarchy of valuation inputs which was established to increase consistency, clarity and comparability in fair value measurements and related disclosures. U.S. GAAP describes a fair value hierarchy based upon three levels of inputs that may be used to measure fair value, two of which are considered observable and one that is considered unobservable. The following describes the three levels:

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

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

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

Recognition of Interest Income from Commercial Loan and Master Lease Investments

Interest income on commercial loan and master lease investments includes interest payments made by the borrower and the accretion of purchase discounts and loan origination fees, offset by the amortization of loan costs. Interest payments are accrued based on the actual coupon rate and the outstanding principal balance and purchase discounts and loan origination fees are accreted into income using the effective yield method, adjusted for prepayments.

Mitigation Credits

Mitigation credits are stated at historical cost. As these assets are sold, the related revenues and cost of sales are reported as revenues from, and direct costs of, real estate operations, respectively, in the consolidated statements of operations.

Accounts Receivable

Accounts receivable related to income properties, which are classified in other assets on the consolidated balance sheets, primarily consist of accrued tenant reimbursable expenses and other tenant receivables. Receivables related to income property tenants totaled $0.8 million and $2.3 million as of September 30, 2021 and December 31, 2020,

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respectively. The $1.5 million decrease is primarily attributable to a decrease in estimated accrued receivables for variable lease payments including common area maintenance, insurance, real estate taxes and other operating expenses.

Accounts receivable related to real estate operations, which are classified in other assets on the consolidated balance sheets, totaled $1.4 million and $1.3 million as of September 30, 2021 and December 31, 2020, respectively. The accounts receivable as of September 30, 2021 and December 31, 2020 are primarily related to the reimbursement of certain infrastructure costs completed by the Company in conjunction with two land sale transactions that closed during the fourth quarter of 2015 as more fully described in Note 13, “Other Assets.”

The collectability of the aforementioned receivables shall be considered and adjusted through an allowance for credit losses pursuant to ASC 326, Financial Instruments-Credit Losses. As of September 30, 2021 and December 31, 2020, the Company recorded an allowance for doubtful accounts of $0.2 million and $0.5 million, respectively, with the reduction being attributable to accounts receivable that were previously allowed for and written off against the allowance during the nine months ended September 30, 2021.

Purchase Accounting for Acquisitions of Real Estate Subject to a Lease

Investments in real estate are carried at cost less accumulated depreciation and impairment losses, if any. The cost of investments in real estate reflects their purchase price or development cost. We evaluate each acquisition transaction to determine whether the acquired asset meets the definition of a business. Under ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, an acquisition does not qualify as a business when there is no substantive process acquired or substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets or the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. Transaction costs related to acquisitions that are asset acquisitions are capitalized as part of the cost basis of the acquired assets, while transaction costs for acquisitions that are deemed to be acquisitions of a business are expensed as incurred. Improvements and replacements are capitalized when they extend the useful life or improve the productive capacity of the asset. Costs of repairs and maintenance are expensed as incurred.

In accordance with FASB guidance, the fair value of the real estate acquired with in-place leases is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases, and the value of leasing costs, based in each case on their relative fair values. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded as other assets or liabilities based on the present value. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term unless management believes that it is likely that the tenant will renew the lease upon expiration, in which case the Company amortizes the value attributable to the renewal over the renewal period. The value of in-place leases and leasing costs are amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off.

Sales of Real Estate

Gains and losses on sales of real estate are accounted for as required by FASB ASC Topic 606, Revenue from Contracts with Customers. The Company recognizes revenue from the sales of real estate when the Company transfers the promised goods and/or services in the contract based on the transaction price allocated to the performance obligations within the contract. As market information becomes available, real estate cost basis is analyzed and recorded at the lower of cost or market.

Income Taxes

The Company has elected to be taxed as a REIT for U.S. federal income tax purposes under the Code commencing with its taxable year ended December 31, 2020. The Company believes that, commencing with such taxable year, it has been organized and has operated in such a manner as to qualify for taxation as a REIT under the U.S. federal income tax laws. The Company intends to continue to operate in such a manner. As a REIT, the Company will be subject to U.S. federal and state income taxation at corporate rates on its net taxable income; the Company, however, may claim a

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deduction for the amount of dividends paid to its stockholders. Amounts distributed as dividends by the Company will be subject to taxation at the stockholder level only. While the Company must distribute at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, to qualify as a REIT, the Company intends to distribute all of its net taxable income. The Company is allowed certain other non-cash deductions or adjustments, such as depreciation expense, when computing its REIT taxable income and distribution requirement. These deductions permit the Company to reduce its dividend payout requirement under U.S. federal income tax laws. Certain states may impose minimum franchise taxes. To comply with certain REIT requirements, we hold certain of our non-REIT assets and operations through TRSs and subsidiaries of TRSs, which will be subject to applicable U.S. federal, state and local corporate income tax on their taxable income. For the periods presented, the Company held a total of five TRSs subject to taxation. The Company’s TRSs will file separately as C-Corporations.

For the Company’s TRSs, and prior to the three months ended December 31, 2020 preceding the Company’s REIT election, the Company uses the asset and liability method to account for income taxes. Deferred income taxes result primarily from the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes (see Note 22, “Income Taxes”). In June 2006, the FASB issued additional guidance, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements included in income taxes. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, and disclosure and transition. In accordance with FASB guidance included in income taxes, the Company has analyzed its various federal and state filing positions and believes that its income tax filing positions and deductions are well documented and supported. Additionally, the Company believes that its accruals for tax liabilities are adequate. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to the FASB guidance.

NOTE 3. REVENUE RECOGNITION

The Company implemented FASB ASC Topic 606, Revenue from Contracts with Customers effective January 1, 2018 utilizing the modified retrospective method.

The following table summarizes the Company’s revenue from continuing operations by segment, major good and/or service, and the related timing of revenue recognition for the three months ended September 30, 2021 (in thousands):

    

Income Properties

    

Management Services

    

Commercial Loan and Master Lease Investments

    

Real Estate Operations

    

Total Revenues

Major Good / Service:

Lease Revenue - Base Rent

$

10,705

$

$

$

$

10,705

Lease Revenue - CAM

1,287

1,287

Lease Revenue - Reimbursements

1,453

1,453

Above / Below Market Lease Accretion

86

86

Contributed Leased Assets Accretion

38

38

Management Services

940

940

Commercial Loan and Master Lease Investments

726

726

Mitigation Credit Sales

219

219

Subsurface Revenue - Other

958

958

Interest and Other Revenue

165

165

Total Revenues

$

13,734

$

940

$

726

$

1,177

$

16,577

Timing of Revenue Recognition:

Asset/Good Transferred at a Point in Time

$

$

$

$

1,177

$

1,177

Services Transferred Over Time

165

940

1,105

Over Lease Term

13,569

13,569

Commercial Loan and Master Lease Investment Related Revenue

726

726

Total Revenues

$

13,734

$

940

$

726

$

1,177

$

16,577

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The following table summarizes the Company’s revenue from continuing operations by segment, major good and/or service, and the related timing of revenue recognition for the three months ended September 30, 2020 (in thousands):