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

Thanks, operator. Hello, everybody, and thanks for being with us this morning for Alpine Income Property Trust's conference call covering operating results for the third quarter of 2020. It's a pleasure to have Matt Partridge, who is our new Chief Financial Officer, here with me today. Before we get started, I'll hand things over to Matt so he can give the usual disclosures about today's call. Matt?

Thanks, John. Before we go further, I want to note that a number of the remarks we're making on this call fall under the category of forward-looking statements as defined by Federal Securities Law. It's possible that the Company's actual future results will end up differing substantially from what these forward-looking statements describe; and no obligation is assumed by us to revise or update any of them. The factors and risks capable of making actual results diverge materially from our expectations get disclosed periodically, with more detail, in the Company's Form 10-K, Form 10-Q, and other SEC filings. Our SEC reports, available in our earnings release, include reconciliations of the non-GAAP financial measures we utilize, and you can find those on our website at alpinereit.com. Having said that, I'll hand the call back to John now.

Appreciate that, Matt. The third quarter was a strong one for Alpine, and we're pushing toward a 100% contractual base rent collection rate across all three months of that quarter. Now that most of the Q2 negotiations are finished, we could turn our attention back to growing the business actively during the third quarter, carrying out our focused acquisition approach of putting money into income producing properties, where solid real estate fundamentals draw high quality tenants. During the third quarter, we put capital into 15 properties across five states, spending $23.9 million, with an average weighted going-in cap rate of roughly 6.8%. Worth highlighting: 100% of the annualized base rent we acquired comes from Dollar General and Advance Auto Parts, both of them investment grade rated tenants, and the weighted average lease term on the third quarter investment was 13 years at acquisition. Alongside our third quarter acquisition activity, we also disposed of our Outback Steakhouse in Charlottesville, Virginia, at a price of $5.1 million. That came to a 5.75% cap rate on in-place net operating income, which, when combined with the going-in cap rate on what we bought and the investment grade credit tied to those assets, we see as strongly accretive to the portfolio on a risk adjusted basis. So far this year, we've picked up 26 properties for about $99.3 million at a weighted average going-in cap rate of 6.9%. We're especially pleased that what we bought this year consisted mostly of new credits and high performing sectors. To be specific, over the first nine months of 2020, we made selective investments in five new retail sectors and markedly grew our concentration in grocery, convenience store, dollar store and auto parts sectors, all of which deliver excellent incremental diversification. Those investments also gave us the chance to team up with 10 new retail tenants, among them sector leading operators like Walmart, 7-Eleven and Dollar General — together those three account for roughly 18% of our annualized base rent, and Walmart and Dollar General are now two of our top five tenants. At first, even after more than doubling the number of assets in our portfolio over the first three quarters of the year, we've still managed to keep an outsized portfolio level of exposure to top tier markets, as shown by close to two-thirds of our annualized base rents originating from 10 of the ULI's top 30 markets for 2021. At the close of the third quarter, our portfolio stood 100% occupied, made up of 45 income properties totaling almost 1.5 million square-feet of rentable space across 17 states, with every one of our top five tenants a leader in its respective industry. Looking ahead to the fourth quarter and past it, a good deal of uncertainty remains around the underlying economy and how it will affect how our current and prospective tenants operate. Even so, it’s a pleasure to report that for October, all of the contractual base rents came in — 100%. Along with the transaction activity we’d already announced and a growing acquisition pipeline, we’ve raised our acquisition guidance to $110 million, up from $105 million; and we’ve lifted the midpoint on the FFO and AFFO guidance we gave earlier. With that, I’ll hand the call over to Matt now so he can go through our financial results and balance sheet activity.

Thanks, John. Like John mentioned, we saw great rent collection numbers in Q3, bringing in 100% of contractual base rents across all three months. Because we managed the portfolio proactively and that led to these solid collection patterns, we posted total revenues of $5.1 million for the quarter. I want to remind everyone that this 100% collection rate reflects rents that were contractually owed each month and takes into account rent deferrals or abatements that were agreed to before the rent due date. By comparison, rent collected in Q3 averaged roughly 5% lower each month than what would have been owed before we entered into COVID-19 related amendments. Looking ahead, we anticipate that all of the deferred rent will be paid back before 2021 wraps up. During the third quarter of 2020, funds from operations totaled $3 million, which works out to $0.35 per share, while adjusted funds from operations reached $2.9 million, or $0.34 per share. Back in Q2, we told everyone that AFFO had taken a $625,000 hit tied to the rent referral agreements we discussed earlier. Once those deferred rent payments start coming back to us in future periods, our AFFO will get a lift during the periods when that repayment happens. In Q3 2020, we collected a little more than $86,000 in scheduled repayments of deferred rent, and that provided a favorable bump to our AFFO for the quarter. During the third quarter, G&A costs, which take in the management fee for the company, totaled $1.1 million. Measured against revenue, that represented a decline of 271 basis points versus Q2 2020. Our expectation is that this pattern will continue as we gain additional economies of scale while carrying out our investment strategy. The company, as was previously disclosed, distributed a third quarter cash dividend of $0.20 on September 30 to stockholders of record on September 15. That amounted to a quarterly payout ratio of 57% of FFO per share, and 59% of AFFO per share. Under our dividend policy, we believe shareholders should receive a dependable and steady dividend. Considering where the company stands strategically and how its core business is expanding, our Board of Directors gave the green light, and as a result the company has announced a dividend of $0.22 per share. It will go out on December 31, 2020 to shareholders who are on the books when business closes on December 15, 2020. Compared with the prior quarterly payout, this fourth quarter cash dividend marks a 10% bump, working out to an annualized yield of roughly 6.1%. Let's move on to the balance sheet now. When September 30 rolled around, the amount of debt still owed came to $88.3 million, and we held $1.9 million in cash. At the close of the quarter, net debt relative to total enterprise value stood at about 39%, and our fixed charge coverage ratio for that period came in at around 9 times. Just days back, we made public that our revolving credit facility grew from $100 million up to $150 million, thanks to bringing in two additional banking partners. There are no debt maturities before 2023, and a one-year extension option exists that might push that maturity out to 2024, plus that 50% bump for the revolving credit facility. Our liquidity standing is quite strong for fueling earnings growth as we carry out our growth strategy. So with that, I'll hand the call back to John now so he can give a summary of the quarter along with his closing remarks.

Thanks, Matt. Before we get to Q&A, I want to walk through a few of the key points, especially given that we've taken some significant operational steps forward as our organization has grown. As we mentioned before, we've hit a 100% rent collection rate across the last four months, and that includes this first month of the fourth quarter. We keep building on that momentum as well as on activity in the transaction market, picking up only investment grade tenants in the third quarter, which will strengthen our expanding portfolio further and produce real economies of scale. Because we've executed consistently, we were able to raise our full year guidance and lift the fourth quarter cash dividend by 10% quarter-over-quarter, bringing the yield to roughly 6.1%. And now that our credit facility has been expanded, we have plenty of liquidity to carry out our disciplined investment strategy and generate outside per share earnings growth. To wrap up, I'd like to thank our shareholders for their ongoing support and congratulate our team on what they accomplished during the quarter. With that, we'll take your questions. Operator?

Great. Thanks guys. Could you provide me and everyone else listening in on the call with a bit more detail regarding your acquisition pipeline — perhaps regarding the dollar amount of what you've reviewed and where things stand in terms of possibly nearing a letter of intent, to whatever degree you're able?

Sure. Thanks, Barry. Well, the acquisition pipeline is quite strong. We have — we're involved in some form of negotiation for a mouth that exceeds our guidance. Figuring that a few may not entirely reach negotiation or something could occur during due diligence; so we're quite at ease with what's in front of us when it comes to high quality credits and good locations.

Looking at 2021, should we figure you'll land somewhere in the neighborhood of what you pulled off in 2020 on the acquisition front, keeping in mind that 2Q came in a bit soft?

Absolutely — with the track record we have and everything we've managed to get done through this year, our confidence is high that this year's success can be matched, or even exceeded, and clearly that holds despite the pandemic.

Okay, that's great. Thanks for that. Now let's look at the balance sheet. By any measure, you're in an outstanding spot; but where would the outer limit be for how much debt you'd be willing to take on, and you can address that using whichever metrics you prefer — fixed income, debt to EBITDA, or debt to market cap, any type of metric you'd like to examine.

Sure. I'll have Matt address that.

Great. Thanks, Matt.

I'm not going to set an upper limit on it, but on the road show, the company communicated to investors that their goal was a long-term average of roughly 6 times net debt to EBITDA. We're getting close to that point, though clearly we might be at ease exceeding it and definitely functioning beneath it — that figure is meant to serve as a longer-term average. So for us, I believe it will hinge on the opportunities we have ahead of us.

Excellent, excellent. Appreciate it, everyone. I've got nothing further.

Thanks.

Thank you.

Morning, everyone. John, apart from Outback, how much in the portfolio right now would you consider selling across the coming couple of years, and which of those do you figure look better to 1031 purchasers, who may be keener still to hand over more money and get transactions done before the calendar runs out, giving you stronger pricing?

Yeah — appreciate the question. I mean, listen, we deliberately brought that asset to the market, since I believe a gap exists between — and a gap persists when it comes to our share price versus the implied cap rate and the property base we hold. So my sense is shareholders likely didn't recognize that. Consider casual dining and, sure, we've faced difficulties throughout this pandemic, yet we understood on the ground that investor demand for such assets remains quite robust. So we essentially put that asset forward in order to show how strong the portfolio is and how strong the investor universe is. And so it proved highly accretive to divest a casual dining sector credit and essentially redeploy the proceeds into a higher credit, longer lease, kind of investment. So in an indirect manner, we could surely do far more of that were we so inclined, though we have no plans for it at this moment.

All right. And building on that, following up on what Barry asked. So the outlook suggests roughly $10 million worth of acquisitions during Q4. You just expanded the capacity on that line, which gives you extra room. But considering the leverage levels Matt mentioned, how do you plan to fund the next $50 million of acquisitions, particularly given the stock sits at $14 and change — would you consider preferred? Would you pursue more asset sales? Could you give us some insight into what you and the board are discussing regarding how the company's growth gets funded over the coming few quarters?

Yeah. Sure, there are various opportunities, so to speak, though we definitely won't be leveraging this thing up, nor do we intend to leverage this thing up given the capacity we've got. Having that capacity is simply a nice thing. Should a unique investment opportunity appear, we could definitely draw it down, then replicate what we just did with the casual dining sales — some very low cap rate investments — and continue working the portfolio, if the stock weren't performing. So various opportunities exist for us, or various flexible options. However, we have no intention of simply piling on all the leverage and then sitting back. So we'll examine the various opportunities when that time arrives.

Okay. Thanks guys. Appreciate it.

Thank you.

Morning, everyone. Matt, glad to have you with us.

Appreciate that, Craig.