Alpine Income Property Trust, Inc. (PINE) Earnings Call Transcript & Summary

Thank you, operator. Good morning, and it's a pleasure to have everyone join this conference call, where we'll go over how Alpine Income Property Trust performed during the quarter that closed on June 30, 2020. I'm John Albright, and I serve as the company's President and CEO. Joining me today are Mark Patten, who holds the Chief Financial Officer role, and Dan Smith, our General Counsel and Corporate Secretary. In a little while, Mark and I will walk through the specifics of the financial results we posted for the second quarter and for the six months. To kick things off, I'll hand things over to Mark so he can give you the usual disclosures about what we say on this call today, along with a few points about how our call will be formatted.

Thank you, John. Hello, everybody. On this call, we might say some things that count as forward-looking statements according to Federal Securities Law. What the company really achieves later on could be quite different from what these forward-looking statements describe. Also, we might not put out updates to those forward-looking statements so they match what happens after they were spoken. The factors and risks that might make actual results vary materially from what we expect get disclosed periodically in more detail in the company's SEC filings and in the earnings release we put out yesterday evening. I want to mention that we filed our Q2 2020 investor presentation yesterday evening, and it's up on our website now. Our investor presentation has extra information that could be helpful to you and that we might refer to during this. So with that, I'll hand things back to John.

Appreciate it, Mark. Just like every one of our rate peers, we devoted the back half of Q1 2020 and a big chunk of Q2 to collaborating with our tenants so they could get through the fallout from the COVID-19 pandemic. We do believe we've tackled the problems that required tackling — you can see that in our 89% collection rate on July rent and in the fact that every tenant issue got resolved except one. Still, we're aware that uncertainty lingers around the latest pandemic-related developments and the chance of more disruption ahead. During our first quarter call, we mentioned that acquisition activity for that quarter had beaten what we expected, though we put those efforts on hold once the COVID-19 pandemic hit. It's good to say we got our investment activities going again late in the second quarter, aiming at credit and quality. In June, we closed on the acquisition of two single-tenant retail properties — the first, leased to Walmart, sits outside Lansing, Michigan, cost us roughly $20.6 million, and carries 6.6 years left on its lease. The second, leased to Hobby Lobby in Asheville, North Carolina, was picked up for about $8 million and has 11.2 years remaining on its lease. Those two deals closed at a weighted average going-in cap rate of 6.7%. When the quarter ended, our portfolio stood at 31 properties totaling more than 1.3 million square feet of rentable space across 14 states, and worth noting, roughly 61% of our annualized base rent sits within 10 of the ULI top 25 markets. Beyond that, retail now makes up 70% of our portfolio while office accounts for 30%, consisting of a single office property leased to Wells Fargo plus two leased to Hilton Grand Vacations. Throughout these tough times, our three office properties kept performing reliably. Even so, we're definitely happy to bring another Hobby Lobby into the portfolio, along with our very first Walmart. Our hope is that the economy and our tenants' businesses keep getting better, and that the disruption from the COVID pandemic will quickly be behind us. I'll share a bit more perspective on the results and activities shortly. Before that, though, let me hand things to Mark, who will walk through several aspects of our second quarter operating results as well as some of our balance sheet activities.

Thanks, John. Like John said, we closed out the quarter having completed two excellent acquisitions, and our collection results kept climbing sharply, with especially robust collections during June and even more so in July. Per our release, quarterly total revenue came in at roughly $4.6 million, which is 10% above Q1, lifting our revenue for the year to date to about $8.8 million. FFO for the quarter was roughly $2.6 million, or about $0.29 per share, representing a gain of over $500,000 versus Q1, or 26%, with per-share growth of almost 32%. AFFO came to approximately 1.4 million, or roughly $0.16 per share, down about $439,000 from Q1. Deferred rent of approximately $625,000 weighed on our AFFO, tied to tenant arrangements arising from resolving the COVID-19 impact. Once those deferred rent payments come in, we anticipate this drag will be fully eliminated. G&A likewise moved in a favorable direction versus the first quarter, falling by roughly $152,000, or almost 12%, mainly driven by a $211,000 reduction in audit tax fees, since Q1 had included recognition of approximately $288,000 tied to the 2019 annual audit. Finally, interest expense ran about $94,000 above the first quarter's figure, reaching $343,000 in Q2, reflecting a larger outstanding balance on our credit facility, which stems from borrowings made late in Q1 connected to the COVID-19 pandemic, plus the draws taken late in Q2 to fund buying the properties leased to Walmart and Hobby Lobby that John mentioned before. On liquidity, available borrowing capacity under the credit facility is roughly $30 million. On that facility, I'll add that we're in discussions with our lending group about possibly tapping some portion of the $50 million accordion feature to support our ongoing acquisition activity. Last, I'd like to walk through where our portfolio stands on collections for the three months of Q2 and for July. Steven and his team have done a remarkable job engaging with our tenants as they coped with the COVID-19 pandemic's effects, which for certain tenants are still continuing. As of last Friday, July collections reached 89%, with only 2% of rent unresolved, tied to the property leased to Old Time Pottery in Jacksonville, Florida. We anticipate July collections rising to about 94% by month's end as we finalize agreements with LA Fitness. June collections were 83%, up from 74% in May and 75% in April. I'll also note that 28 of our 31 properties are open—either fully or under modified or limited operations. Those 28 properties account for roughly 90% of our AVR. Now I'll hand it back to John.

Thanks, Mark. To wrap up what we had ready to say, I want to go over a few of the quarter's key points. It wasn't just that we were happy to begin buying properties again toward the end of the quarter — we're especially happy about how good the deals were, namely a Walmart site and another Hobby Lobby site. We're also noting that we've brought back our outlook for the whole of 2020, which includes our anticipated figures for the entire year for both FFO and AFFO, and those numbers take into account what we expect from the COVID-19 pandemic, with the assumption that nothing seriously goes wrong soon. We also said we're aiming for roughly $105 million in total acquisitions, which we believe is within reach since we closed on close to $76 million of purchases by the time the second quarter ended. On top of that, we finished $5 million under the repurchase plan during the second quarter. Like we've told you before, we saw this as a sensible way to use capital, because the equity markets were badly thrown off by the COVID-19 pandemic, and that left our shares trading at a clear discount to how we see the company's NAV. I want to say thank you to Mark, since this call is the last one he'll join us for, and I wish him the best as he moves on to new work at Essential Properties. We've kicked off the hunt for a replacement CFO and have spoken with a number of people. Our goal is to settle on someone during the third quarter. To finish, we want to say how sincerely we hope that our shareholders, friends, and colleagues stay in good health through this difficult moment in our country's history. We continue to feel hopeful that the effects of the COVID-19 pandemic will fade away before long and that the U.S. economy will bounce back strongly, which would help both our tenants and our shareholders. That's all we had to say. Right now, we'll take your questions. Operator? Thanks, Operator. There's just one thing I want to clear up. During what we had prepared, we said we had gathered 89% of contractual base rent, and as most people listening will see in our earnings release, the figure has risen to 94%. The reason is that we got a payment from LA Fitness, and that pushed us to 94%. So that's a correction to what we had ready to say. Thank you.

Thanks a lot, everyone. To start, I believe all of you have performed really well when it comes to handling collections in this climate. Whenever you extend deferrals, how is that arrangement structured — is it a period of three months, after which the amount is split across 12, and then they begin paying it back starting now until midway through next year? Is that the way it operates? And regarding AFFO, should we be gradually increasing the cash portion of those rent deferrals as we unwind it in a similar fashion and over the same period?

Yes. Appreciate it, Barry.

Yeah.

So go ahead.

No, no, no — what I said was yes.

Now, regarding rent deferrals, you see every imaginable type of negotiation taking place. Still, it's simple to — or rather, a reasonable thing to assume is that what a tenant typically requested, and this sort of thing was happening, was on the early end of the pandemic, when nobody knew when reopening would occur. The general initial request, broadly speaking, went like this: come on, let us have three months, then we'll settle up across the following 12 months. Fair to say we didn't say yes to many of those — when deferment and re-spreading of rent did occur, it was over a shorter window and far lumpier, with a great deal of it truly landing in this year's back half. So at this point, since many tenants have reopened and their businesses are re-establishing themselves more, we're certainly not getting any further requests from them. Actually, just so you have a reference point: we were in the middle of talks with a tenant about how to structure a re-spread of rent involving a deferment. And during those talks, they wound up paying their rent in full. That came about when one half of the house didn't really — while speaking with the other half, the real estate department was attempting to work out an arrangement. And the finance department, I suppose, chose to just pay the rent. So in any case, that hopefully provides a bit of flavour regarding how those negotiations went. But most of the deferred rent is getting paid during this year's back half.

All right, that's useful. That's useful. Has Hilton asked for any concessions?

Well, I'd rather not get into the details tenant by tenant, but speaking broadly, with a company like Hilton, you can safely figure that, we — and I brought this up on a prior earnings call — tenants, many tenants were making requests. And we were glad to put forward proposals that would serve our interests, so to speak, that would amount to a stronger economic arrangement for us. So, in the case of a tenant such as Hilton, we would definitely offer them certain choices as a way to be accommodating and to maintain good client relationships and good relationships with our tenants; and you can safely figure that, they concluded they were better off simply staying with the rents they currently have. And pursuing some, kind of, arrangement with us that we believed would be more advantageous for our shareholders.

All right, that's clear. And for my final question, changing topics: whenever you all evaluate the acquisitions, the pipeline, and the products available in the market, is there less right now since sellers are holding back, or are you still seeing a decent volume of product, just like, say, at the start of the year?

Yeah. I'd say there's — I'd say perhaps fewer products out there. However, sellers and counterparties are far more motivated. So fewer buyers exist, which benefits us; and what's available on the market is genuinely up for sale rather than just testing what offers they might receive, with less enthusiasm for actually selling; and in fact, recently we've been seeing a lot of properties that we encountered previously and either declined or bid on, and the seller didn't complete a deal with us, or didn't express interest. Now buyers are returning and saying, okay, the seller truly wants to sell this property. So that's positive. So we're noticing greater eagerness from the seller side. If you're listed for sale, you want to get it sold.

OK, that clears things up completely. Sounds good, thank you both.

Appreciate it.

Morning, everyone. John, could you explain the operational situation at the Old Time Pottery site, since they aren't making payments and aren't in deferral — is it still open? Might they file for bankruptcy? Is there any reason why they haven't at least signed a deferral agreement with you?

They have filed for bankruptcy, yes, yet the store remains open, and a payment did come in from them. We've therefore been holding conversations with them, and they want to hold onto that location. Essentially, we've been discussing with them what that arrangement would involve. They did not reject the lease. As you're aware, they need to begin paying — and they have begun, which is a positive. The rent at that site is quite low, which is what drew us to the property: just $4.50 per square foot, while the market rate sits well above that figure. Not exactly double, but fairly near it. In any case, it's a profitable spot for them. They chose not to reject it, and negotiations with them are ongoing.

From that angle, do they actually need every bit of it — I believe it's around 84,000 square feet? In other words, could that be a candidate for downsizing and reallocating space, or do they still want essentially the whole footprint there?

Yes. That's a good size for them; so it's not as though they need — in fact, it would work in our favor if they only wanted half, since we could split it up then and achieve stronger rents, and they could pay more while we'd secure stronger rents from a different tenant beside them, but in reality they do require that square footage.

All right, and then regarding the pattern in those talks about abatement, does it mean that once we get to August, assuming nothing changes, we'll basically reach a stage where those abatements have mostly disappeared? I mean, how do you folks view that relative to only the deferral component?

Well, we don't anticipate entering into a lease at this moment, and we don't anticipate repeating this whole exercise. Most of our tenants, as you're aware, are publicly traded, and a few of the tenants we might have had concerns about — if you look at At Home and Container Store — their shares have seen a significant rally. And so, I'd say all of them are in a stronger position, or feeling stronger, or have additional liquidity options. Therefore, my sense is we won't repeat this exercise unless something drastic occurs in the worldwide market or the domestic market once more; so I'd say our current position is fairly solid.

All right. And the final thing from me. What's the Board's view on raising the dividend? What measures are they relying on? You know, there's reported AFFO, which subtracts the deferral amount, and there's a normalized AFFO figure you could examine, which reflects the deferrals being repaid across the rest of this year. In deciding whether to keep boosting the dividend, how are they weighing the different metrics? Keep it steady for now until the picture clears up? What do those conversations look like at the Board these days?

Yes. I mean, since we're expanding the company, and given what we expect — that we'll see additional high quality acquisitions take place at some point in the third quarter — clearly we review the dividend each quarter, and we're certainly glad to declare another $0.20 dividend. But for the first year, that was the expectation: as the company grows, the dividend would stay at this level, depending on how the portfolio does and how acquisitions do; though I think as we bring on more acquisitions, you can figure there will be a greater upward push on the dividend. But as you're aware, during the last quarter, we drew on our credit line, purely to be proactive. We're bearing that negative arbitrage, and we had a significant amount of cash sitting on the balance sheet while paying interest on it; and it wasn't until quite recently that we put that capital to work; so now we're back to highly accretive income streams flowing into the company. So, to truly address your questions, once we've got more acquisitions and cash flow is growing, we hope to sort of revisit this, and hopefully the dividend moves upward.

All right, and then just one more. Whenever you consider the kinds of deals you might pursue during the second half of this year, your cap rate guidance spans 6.7% to 7.5%. The Q2 transactions involving a Hobby Lobby and the Walmart came in toward the bottom of that range, reflecting their quality. Will you keep gravitating toward the higher-quality properties — meaning the lower portion of the cap rate range — for acquisitions in the back half of 2020, or will you begin blending other types of assets back in?