Alpine Income Property Trust, Inc. (PINE) FY 2021 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 Financial Statements” refer to the Notes to the Consolidated and Combined 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 and combined 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 the operations are conducted through our Operating Partnership.
We seek to acquire, own and operate primarily freestanding, commercial real estate properties located in the United States leased primarily pursuant to triple-net, long-term leases. We focus on investments primarily in retail properties. We target tenants in industries that we believe are favorably impacted by current macroeconomic trends that support consumer spending, such as strong and growing employment and positive consumer sentiment, as well as tenants in industries that have demonstrated resistance to the impact of the growing 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 determine have attractive credit characteristics, stable operating histories and healthy rent coverage levels, are well-located within their respective markets and 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.
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.).
Our operating results for the year ended December 31, 2021 were in-line with our expectations and primarily driven by our investment activity of acquiring net lease properties at valuations and yields generally consistent with our target investment parameters.
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During the year ended December 31, 2021, the Company acquired 68 properties for total acquisition volume of $260.3 million. During the year ended December 31, 2021, the Company disposed of three properties for an aggregate sales price of $28.3 million, generating combined gains on sale of $9.7 million.
As of December 31, 2021, we owned 113 properties with an aggregate gross leasable area of 3.3 million square feet, located in 32 states, with a weighted average remaining lease term of 7.9 years. Our portfolio was 100% leased as of December 31, 2021.
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 and combined financial statements.
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | For the Year Ended December 31, 2021 | For the Year Ended December 31, 2020 | For the Period from November 26, 2019 to December 31, 2019 | | For the Period from January 1, 2019 to November 25, 2019 | |||||||
| | | The Company | | Predecessor | ||||||||
| Total Revenues | | $ | 30,128 | | $ | 19,248 | | $ | 1,394 | | $ | 11,837 |
| | | | | | | | | | | | | |
| Net Income (Loss) From Operations | | $ | 15,164 | | $ | 2,610 | | $ | (4) | | $ | 3,631 |
| | | | | | | | | | | | | |
| Net Income (Loss) | | $ | 11,462 | | $ | 1,146 | | $ | (45) | | $ | 3,631 |
| Less: Net (Income) Loss Attributable to Noncontrolling Interest | | | (1,498) | | | (161) | | | 6 | | | — |
| Net Income (Loss) Attributable to Alpine Income Property Trust, Inc. | | $ | 9,964 | | $ | 985 | | $ | (39) | | $ | 3,631 |
| | | | | | | | | | | | | |
| Net Income (Loss) Per Share Attributable to Alpine Income Property Trust, Inc. | | | | | | | | | | | | |
| Basic | | $ | 1.02 | | $ | 0.13 | | $ | — | | | N/A |
| Diluted | | $ | 0.89 | | $ | 0.11 | | $ | — | | | N/A |
| | | | | | | | | | | | | |
| Dividends Declared and Paid | | $ | 1.015 | | $ | 0.820 | | $ | 0.058 | | | N/A |
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Balance Sheet Data (in thousands):
| | | | | | | |
|---|---|---|---|---|---|---|
| | | As of December 31, | ||||
| | | 2021 | | 2020 | ||
| Total Real Estate, at Cost | | $ | 444,408 | | $ | 225,889 |
| Real Estate—Net | | $ | 428,989 | | $ | 219,339 |
| Cash and Cash Equivalents | | $ | 8,851 | | $ | 1,894 |
| Intangible Lease Assets—Net | | $ | 58,821 | | $ | 36,881 |
| Straight-Line Rent Adjustment | | $ | 1,838 | | $ | 2,045 |
| Other Assets | | $ | 6,369 | | $ | 2,081 |
| Total Assets | | $ | 505,514 | | $ | 262,240 |
| Accounts Payable, Accrued Expenses, and Other Liabilities | | $ | 2,363 | | $ | 1,984 |
| Prepaid Rent and Deferred Revenue | | $ | 2,033 | | $ | 1,055 |
| Intangible Lease Liabilities—Net | | $ | 5,476 | | $ | 3,299 |
| Long-Term Debt | | $ | 267,740 | | $ | 106,809 |
| Total Liabilities | | $ | 277,612 | | $ | 113,147 |
| Total Equity | | $ | 227,902 | | $ | 149,093 |
Non-GAAP Financial Measures
Our reported results are presented in accordance with accounting principles generally accepted in the United States of America (“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 extraordinary items (as defined by GAAP), net gain or loss from sales of depreciable real estate assets, impairment write-downs associated with depreciable real estate assets and real estate related depreciation and amortization, including the pro rata share of such adjustments of unconsolidated subsidiaries. To derive AFFO, we modify the NAREIT computation of FFO to include other adjustments to GAAP net income related to non-cash revenues and expenses such as straight-line rental revenue, amortization of deferred financing costs, amortization of above- and below-market lease related intangibles, 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):
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2021 | | For the Year Ended December 31, 2020 | | For the Period from November 26, 2019 to December 31, 2019 | | For the Period from January 1, 2019 to November 25, 2019 | ||||
| | The Company | | Predecessor | |||||||||
| Net Income (Loss) | | $ | 11,462 | | $ | 1,146 | | $ | (45) | | $ | 3,631 |
| Depreciation and Amortization | | | 15,939 | | | 9,949 | | | 687 | | | 4,859 |
| Gain on Disposition of Assets | | | (9,675) | | | (287) | | | — | | | — |
| Funds From Operations | | $ | 17,726 | | $ | 10,808 | | $ | 642 | | $ | 8,490 |
| Adjustments: | | | | | | | | | | | | |
| Straight-Line Rent Adjustment | | | (607) | | | (1,524) | | | (68) | | | (410) |
| COVID-19 Rent Repayments (Deferrals), Net | | | 430 | | | (378) | | | — | | | — |
| Non-Cash Compensation | | | 309 | | | 268 | | | 4 | | | 509 |
| Amortization of Deferred Financing Costs to Interest Expense | | | 362 | | | 188 | | | 16 | | | — |
| Amortization of Deferred Expenses to Lease Income | | | — | | | — | | | — | | | 277 |
| Amortization of Intangible Assets and Liabilities to Lease Income | | | (257) | | | (108) | | | (5) | | | (234) |
| Other Non-Cash (Income) Expense | | | (18) | | | (22) | | | — | | | — |
| Recurring Capital Expenditures | | | (41) | | | (43) | | | — | | | — |
| Non-Recurring Acquisition Cost Charge | | | — | | | — | | | 216 | | | — |
| Adjusted Funds From Operations | | $ | 17,904 | | $ | 9,189 | | $ | 805 | | $ | 8,632 |
| | | | | | | | | | | | | |
| Weighted Average Number of Common Shares: | | | | | | | | | | | | |
| Basic | | | 9,781,066 | | | 7,588,349 | | | 7,902,737 | | | N/A |
| Diluted | | | 11,246,227 | | | 8,812,203 | | | 9,126,591 | | | N/A |
Other Data (in thousands, except per share data):
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2021 | | For the Year Ended December 31, 2020 | | For the Period from November 26, 2019 to December 31, 2019 | | For the Period from January 1, 2019 to November 25, 2019 | ||||
| | | The Company | | Predecessor | ||||||||
| FFO | | $ | 17,726 | | $ | 10,808 | | $ | 642 | | $ | 8,490 |
| FFO per Diluted Share | | $ | 1.58 | | $ | 1.23 | | $ | 0.07 | | | N/A |
| | | | | | | | | | | | | |
| AFFO | | $ | 17,904 | | $ | 9,189 | | $ | 805 | | $ | 8,632 |
| AFFO per Diluted Share | | $ | 1.59 | | $ | 1.04 | | $ | 0.09 | | | N/A |
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COMPARISON OF THE YEARS ENDED DECEMBER 31, 2021 AND 2020
The following presents the Company’s results of operations for the year ended December 31, 2021, as compared to the year ended December 31, 2020 (in thousands):
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | For the Year Ended December 31, 2021 | | For the Year Ended December 31, 2020 | | $ Variance | | % Variance | |||
| Revenues: | | | | | | | | | | | |
| Lease Income | | $ | 30,128 | | $ | 19,248 | | $ | 10,880 | | 56.5% |
| Total Revenues | | | 30,128 | | | 19,248 | | | 10,880 | | 56.5% |
| Operating Expenses: | | | | | | | | | | | |
| Real Estate Expenses | | | 3,673 | | | 2,316 | | | 1,357 | | 58.6% |
| General and Administrative Expenses | | | 5,027 | | | 4,660 | | | 367 | | 7.9% |
| Depreciation and Amortization | | | 15,939 | | | 9,949 | | | 5,990 | | 60.2% |
| Total Operating Expenses | | | 24,639 | | | 16,925 | | | 7,714 | | 45.6% |
| Gain on Disposition of Assets | | | 9,675 | | | 287 | | | 9,388 | | 3271.1% |
| Net Income From Operations | | | 15,164 | | | 2,610 | | | 12,554 | | 481.0% |
| Interest Expense | | | 3,702 | | | 1,464 | | | 2,238 | | 152.9% |
| Net Income | | | 11,462 | | | 1,146 | | | 10,316 | | 900.2% |
| Less: Net Income Attributable to Noncontrolling Interest | | | (1,498) | | | (161) | | | (1,337) | | (830.4%) |
| Net Income Attributable to Alpine Income Property Trust, Inc. | | $ | 9,964 | | $ | 985 | | $ | 8,979 | | 911.6% |
Revenue and Direct Cost of Revenues
Revenue from our property operations during the years ended December 31, 2021 and 2020 totaled $30.1 million and $19.2 million, respectively. The increase in revenues is reflective of the Company’s volume of acquisitions. The direct costs of revenues for our property operations totaled $3.7 million and $2.3 million during the years ended December 31, 2021 and 2020, respectively. The increase in the direct cost of revenues is also attributable to the Company’s expanded property portfolio.
General and Administrative Expenses
The following table represents the Company’s general and administrative expenses for the year ended December 31, 2021 as compared to the year ended December 31, 2020 (in thousands):
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | For the Year Ended December 31, 2021 | | For the Year Ended December 31, 2020 | | $ Variance | | % Variance | |||
| Management Fee to Manager | | $ | 3,182 | | $ | 2,554 | | $ | 628 | | 24.6% |
| Director Stock Compensation Expense | | | 309 | | | 268 | | | 41 | | 15.3% |
| Director & Officer Insurance Expense | | | 499 | | | 459 | | | 40 | | 8.7% |
| Additional General and Administrative Expense | | | 1,037 | | | 1,379 | | | (342) | | (24.8)% |
| Total General and Administrative Expenses | | $ | 5,027 | | $ | 4,660 | | $ | 367 | | 7.9% |
General and administrative expenses totaled $5.0 million and $4.7 million during the years ended December 31, 2021 and 2020, respectively. The $0.4 million increase is primarily attributable to growth in the Company’s equity base, which led to increased management fee expenses totaling $0.6 million.
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Depreciation and Amortization
Depreciation and amortization expense totaled $15.9 million and $9.9 million during the years ended December 31, 2021 and 2020, respectively. The $6.0 million increase in the depreciation and amortization expense is reflective of the Company’s expanded property portfolio.
Interest Expense
Interest expense totaled $3.7 million and $1.5 million during the years ended December 31, 2021 and 2020, respectively. The $2.2 million increase in interest expense is attributable to the higher average outstanding debt balance during the year ended December 31, 2021 as compared to the same period in 2020. The overall increase in the Company’s long-term debt was primarily utilized to fund the acquisition of properties during 2021 and 2020.
Net Income (Loss)
Net income (loss) totaled $11.5 million and $1.1 million during the years ended December 31, 2021 and 2020, respectively. The increase in net income is attributable to the factors described above in addition to the $9.7 million gain on disposition of assets during the year ended December 31, 2021, an increase of $9.4 million from the comparable prior year period.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2020, THE PERIOD FROM NOVEMBER 26, 2019 TO DECEMBER 31, 2019, AND THE PREDECESSOR PERIOD FROM JANUARY 1, 2019 TO NOVEMBER 25, 2019
The following presents the Company’s results of operations for the year ended December 31, 2020, as compared to the period from November 26, 2019 to December 31, 2019 and the Predecessor period from January 1, 2019 to November 25, 2019 (in thousands)(1):
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | For the Year Ended December 31, 2020 | | For the Period from November 26, 2019 to December 31, 2019 | | For the Period from January 1, 2019 to November 25, 2019 | |||
| | | The Company | | Predecessor | |||||
| Revenues: | | | | | | | | | |
| Lease Income | | $ | 19,248 | | $ | 1,394 | | $ | 11,837 |
| Total Revenues | | | 19,248 | | | 1,394 | | | 11,837 |
| Operating Expenses: | | | | | | | | | |
| Real Estate Expenses | | | 2,316 | | | 372 | | | 1,664 |
| General and Administrative Expenses | | | 4,660 | | | 339 | | | 1,683 |
| Depreciation and Amortization | | | 9,949 | | | 687 | | | 4,859 |
| Total Operating Expenses | | | 16,925 | | | 1,398 | | | 8,206 |
| Gain on Disposition of Assets | | | 287 | | | — | | | — |
| Net Income (Loss) From Operations | | | 2,610 | | | (4) | | | 3,631 |
| Interest Expense | | | 1,464 | | | 41 | | | — |
| Net Income (Loss) | | | 1,146 | | | (45) | | | 3,631 |
| Less: Net (Income) Loss Attributable to Noncontrolling Interest | | | (161) | | | 6 | | | — |
| Net Income (Loss) Attributable to Alpine Income Property Trust, Inc. | | $ | 985 | | $ | (39) | | $ | 3,631 |
| Column 1 | Column 2 |
|---|---|
| (1) | Results of operations prior to November 26, 2019 represent the Predecessor activity of CTO. Subsequent to November 26, 2019, upon the acquisition of the initial portfolio from CTO, the results of operations are presented on a new basis of accounting pursuant to ASC 805-10. |
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Revenue and Direct Cost of Revenues
Revenue from our property operations totaled $19.3 million during the year ended December 31, 2020, $1.4 million during the period from November 26, 2019 to December 31, 2019 and $11.8 million during the Predecessor period from January 1, 2019 to November 25, 2019. The increase in revenues is reflective of the Company’s volume of acquisitions. The direct costs of revenues for our property operations totaled $2.3 million during the year ended December 31, 2020, $0.4 million during the period from November 26, 2019 to December 31, 2019, and $1.7 million during the Predecessor period from January 1, 2019 to November 25, 2019. The increase in the direct cost of revenues is also attributable to the Company’s expanded property portfolio.
General and Administrative Expenses
The following table represents the Company’s general and administrative expenses for the year ended December 31, 2020 as compared to the period from November 26, 2019 to December 31, 2019 and the Predecessor period from January 1, 2019 to November 25, 2019 (in thousands):
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | For the Year Ended December 31, 2020 | | For the Period from November 26, 2019 to December 31, 2019 | | For the Period from January 1, 2019 to November 25, 2019 | |||
| | | The Company | | Predecessor | |||||
| Management Fee to Manager | | $ | 2,554 | | $ | 254 | | $ | — |
| Director Stock Compensation Expense (1) | | | 268 | | | 4 | | | 509 |
| Director & Officer Insurance Expense | | | 459 | | | 44 | | | — |
| Additional General and Administrative Expense | | | 1,379 | | | 37 | | | — |
| Allocation of Predecessor General and Administrative Expense | | | — | | | — | | | 1,174 |
| Total General and Administrative Expenses | | $ | 4,660 | | $ | 339 | | $ | 1,683 |
| Column 1 | Column 2 |
|---|---|
| (1) | For the Predecessor period presented, stock compensation expense represents an allocation from CTO. |
General and administrative expenses totaled $4.7 million during the year ended December 31, 2020, $0.3 million during the period from November 26, 2019 to December 31, 2019, and $1.7 million during the Predecessor period from January 1, 2019 to November 25, 2019. Changes in general and administrative expenses are primarily due to the changes in the nature of such expenses, as the Predecessor period from January 1, 2019 to November 25, 2019 represents an allocation of the Predecessor parent company expenses versus actual general and administrative expenses incurred by the Company. The Predecessor general and administrative expenses were not indicative of the amount of general and administrative expenses the Company has incurred on an annual basis subsequent to the IPO. During the year ended December 31, 2020, general and administrative expenses were primarily impacted by the recognition of $2.6 million of management fee expenses, of which costs totaled $0.3 million and zero, respectively, for the period from November 26, 2019 to December 31, 2019 and for the Predecessor period from January 1, 2019 to November 25, 2019, in addition to $0.3 million of costs associated with audit services related to the 2019 annual audit. The fees associated with our annual audit are recognized as the services are incurred, which typically occurs ratably throughout the year.
Depreciation and Amortization
Depreciation and amortization expense totaled $9.9 million during the year ended December 31, 2020, $0.7 million during the period from November 26, 2019 to December 31, 2019, and $4.9 million during the Predecessor period from January 1, 2019 to November 25, 2019. The increase in the depreciation and amortization expense is reflective of the Company’s expanded property portfolio.
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Interest Expense
Interest expense totaled $1.5 million during the year ended December 31, 2020, less than $0.1 million during the period from November 26, 2019 to December 31, 2019, and zero during the Predecessor period from January 1, 2019 to November 25, 2019. The increase in interest expense is related to the outstanding balance on the Company’s Credit Facility to fund the acquisition of 29 properties during the year ended December 31, 2020.
Net Income (Loss)
Net income (loss) totaled $1.1 million for the year ended December 31, 2020, less than $(0.1) million for the period from November 26, 2019 to December 31, 2019, and $3.6 million for the Predecessor period from January 1, 2019 to November 25, 2019. The decrease in net income for the year ended December 31, 2020, as compared to the period from November 26, 2019 to December 31, 2019 and the Predecessor period from January 1, 2019 to November 25, 2019 is attributable to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents. Cash totaled $9.5 million at December 31, 2021, including restricted cash of $0.6 million, of which restricted cash balance is being held in a capital replacement and leasing commissions reserve account in connection with our financing of six properties.
Long-Term Debt. As of December 31, 2021, the Company had $51.0 million available on the Credit Facility. See Note 9, “Long-Term Debt” in the notes to the consolidated and combined financial statements in Item 8 for the Company’s disclosure related to its long-term debt balance at December 31, 2021.
Acquisitions and Investments. As noted previously, the Company acquired 68 properties during the year ended December 31, 2021 for an aggregate purchase price of $260.3 million, as further described in Note 4 “Property Portfolio” in the notes to the consolidated and combined financial statements in Item 8.
Dispositions. During the year ended December 31, 2021, the Company disposed of three properties for a total disposition volume of $28.3 million, generating aggregate gains of $9.7 million, as further described in Note 4 “Property Portfolio” in the notes to the consolidated and combined financial statements in Item 8.
Capital Expenditures. As of December 31, 2021, the Company had no commitments related to capital expenditures.
The Company is contractually obligated under its various long-term debt agreements. In the aggregate, the Company is obligated under such agreements to repay $269.0 million on long-term basis, to be repaid in excess of one year, with no payments due within one year.
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 and $51.0 million of available capacity on the existing $150.0 million Credit Facility, based on our current borrowing base of properties, as of December 31, 2021.
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 raised in the IPO 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.
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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 68 properties for a combined purchase price of $260.3 million for the year ended December 31, 2021 and 29 properties for a combined purchase price of $116.6 million for the year ended December 31, 2020.
See Note 3, “Summary of Significant Accounting Policies”, for further discussion of the Company’s accounting estimates and policies.