Business Context and Reporting Period
This Form 8-K, filed on November 26, 2019, by Consolidated-Tomoka Land Co. (CTO), reports the completion of a strategic transaction involving the sale and contribution of 20 single-tenant, net-leased properties to Alpine Income Property Trust, Inc. ("Alpine"). CTO established a management relationship with Alpine, a newly formed REIT, and entered into several definitive agreements to facilitate the transaction and future operations.
Key Financial Metrics and Transaction Values
- Asset Sale Proceeds: CTO sold 15 properties to Alpine for aggregate cash consideration of $125.9 million.
- Asset Contributions: CTO contributed 5 properties to Alpine's Operating Partnership in exchange for 1,223,854 OP units with an initial value of $23.3 million.
- Equity Investment: CTO purchased 394,737 shares of Alpine common stock in a private placement for $7.5 million and 421,053 shares in Alpine's IPO for $8.0 million.
- Management Fees: CTO's subsidiary will receive a base management fee of 0.375% per quarter (1.5% annualized) of Alpine's total equity, plus a potential 15% incentive fee on outperformance.
- Tax Protection: The transaction includes a tax protection agreement covering approximately $9.1 million of built-in gain, with Alpine indemnifying CTO for up to $3.1 million of taxable gain upon future dispositions.
Material Changes and Agreements
The filing details significant changes to CTO's capital structure and operational agreements:
- Credit Facility Amendment: CTO amended its revolving credit facility to temporarily reduce the minimum fixed charge coverage ratio, allowing for the redeployment of proceeds from the property sales. The amendment also increased the investment limit in REIT stock to accommodate the purchase of Alpine shares.
- Management Agreement: CTO's wholly-owned subsidiary became the manager of Alpine. The agreement includes a termination fee of three times the average annual base and incentive fees if terminated without cause.
- Exclusivity and Right of First Offer (ROFO): CTO granted Alpine a right of first offer on future acquisitions or dispositions of single-tenant, net-leased properties, subject to specific exceptions (e.g., portfolio acquisitions, 1031 exchanges).
- Asset Assignment: CTO agreed to assign two purchase contracts for properties totaling approximately $14.5 million to Alpine without compensation.
Outlook, Risks, and Contingencies
Management commentary indicates a strategic shift to redeploy capital from the sold properties into Alpine equity and other investments. Key risks and contingencies include:
- Tax Liabilities: While a tax protection agreement is in place, CTO remains exposed to tax liabilities if Alpine disposes of contributed properties within 10 years in a taxable transaction, though indemnification is capped at $3.1 million.
- Management Fee Termination: The management agreement can be terminated by Alpine's independent directors or shareholders if performance is unsatisfactory or fees are deemed unfair, potentially impacting CTO's future revenue stream from Alpine.
- ROFO Constraints: The exclusivity agreement may limit CTO's flexibility in disposing of or acquiring certain properties without first offering them to Alpine.
Investor Verification Checklist
- Verify the pro forma financial impact of the $125.9 million cash inflow and the $23.3 million asset contribution on CTO's balance sheet and liquidity.
- Confirm the specific terms of the temporary reduction in the fixed charge coverage ratio and the duration of this covenant relief.
- Review the full text of the Tax Protection Agreement to understand the specific triggers for the $3.1 million indemnification cap.
- Assess the valuation of the 1,223,854 OP units received and their potential impact on CTO's future earnings.
- Monitor the status of the two assigned purchase contracts valued at $14.5 million to ensure they close as expected.