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

Hello, everyone, and thanks for being here this morning for Alpine Income Property Trust's call about how operations performed in the fourth quarter and throughout 2020. Joining me today is Matt Partridge, who has just become our Chief Financial Officer. Prior to getting started, I'll hand things over to Matt so he can give the usual statements about this call. Matt?

Appreciate that, John. Before we go further, please note that a number of the remarks we're making on this call qualify as forward-looking statements under Federal Securities Law. What actually happens for the Company down the road could wind up materially different from what these forward-looking statements describe, and we're not taking on any obligation to revise them later. The factors and risks capable of making actual results diverge materially from what we expect get spelled out periodically and in more depth 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 use, and those can be found on our website at alpinereit.com; with that said, I'll hand the call back to John now.

Appreciate that, Matt. For us at PINE, 2020 marked our first complete year of operations, and it came with challenges unlike anything we'd seen before, along with quite a few accomplishments worth noting. Our fourth quarter was a big one, closing out an exceptionally solid inaugural year even with the tough macro backdrop, and the highlights there were excellent rent collections, meaningful dividend increases, and surpassing our acquisition guidance for the whole year. During Q4, we put money into 3 properties located in Texas, Arizona, and Washington State, spending $17.4 million, which came in at a weighted average cap rate of 7%. That made 2 quarters straight where 100% of the rent we needed from investment-grade tenants came in, and we keep growing our exposure to Dollar General and Walgreens, plus we brought Kohl's into our roster of top-quality tenants. At the point of acquisition, the weighted average lease term on what we bought in Q4 was just about 10 years. Across all of 2020, we picked up 29 properties totaling $116.6 million, at a weighted average cap rate of 6.9%, which landed near the upper end of our cap rate guidance and came in above our guidance for acquisition volume. If you pull back and review the deals we completed over the course of the year, we managed to invest across a blend of sector-leading tenants, strong credits, and premium real estate. How we performed through the pandemic showed just how appealing and durable these operations are at the individual locations; during 2020 we gained exposure to 10 sectors, among them grocery, convenience stores, dollar stores, auto parts, consumer electronics, home furnishings, entertainment, pharmacy, general merchandise, and QSR, with 76% of the annualized base rent we acquired tied to the stronger-performing grocery, general merchandise, and dollar store categories. More than 60% of the rents we brought in during 2020 came from investment-grade rated tenants, and that includes best-in-class operators like Dollar General, Walmart, 711, Kohl's, and Walgreens. As for the 28% of acquired rents tied to non-rated tenants, 61% of that was Hobby Lobby, which has kept up a solid credit profile and sector-leading operations even with the difficulties so many tenants dealt with during the pandemic.

Thanks, John. As he mentioned, the strength of our portfolio and the reliability of our tenant base led to outstanding collections in Q4 2020 and across the first 2 months of 2021, with 100% of contractual base rents gathered in each of those months. Revenue for the fourth quarter of 2020 came to $5.4 million, while total revenues for all of 2020 reached $19.2 million. When we figure that percentage of contractual base rent, we include the repayments of rent that had been deferred earlier, and I want to remind everyone that a 100% collection rate reflects rents contractually owed in each given month and accounts for both the favorable and unfavorable impact of deferrals or abatements that were agreed upon before the rent due date.

Thanks, Matt. You can see how we've carried out our investment strategy from the time of the IPO onward, and with the solid results our portfolio has delivered along with the 2021 guidance, we're feeling enthusiastic about what we've achieved and eager for what lies ahead for Alpine. Our shareholders have my gratitude for sticking with us, and I want to congratulate everyone on our team for a fantastic year. With that, let's take some questions. Operator?

John, could you share some detail on the acquisition pipeline regarding what kinds of tenants you're evaluating at the moment? I realize you'd rather not name a particular tenant, but could you describe the sorts of tenants that are in that pipeline right now?

The pipeline contains a range of tenants that aren't currently part of our ownership. So from a diversity standpoint, it would be excellent to have well-known tenants with really sizable operations. I'd prefer not to dig too deeply into categories, but whether these companies lead their sector, or the properties under consideration are extremely strong and the stores are performing well operationally for those tenants, we're quite confident that should operations falter down the road, the real estate would remain very strong for a different operator. So it's somewhat of a blend, though the positive thing is that it's a blend of tenants we don't currently have in the ownership.

Also, at times when you aren't in the running for those acquisitions, would you say the current landscape is more competitive than it used to be? What's your take, and are there any new categories of purchasers appearing in the process compared with those you normally encountered?

Sure, I would say that with respect to the highly sought-after kind of 1031 tenant property, competition is really heavy and cap rates are being pushed down — be it a grocery store with 20 years remaining or a similar asset, you'll observe cap rates that are unusually low relative to the traditional level; so a flight to quality, strength, and durability is happening, yet as far as what we target, we are locating our niches and we are encountering genuinely strong appeal through various opportunities we are reviewing as possible deals where the real estate is quite solid, the tenant might have renewed, but the asset is simply too large for the mom-and-pop 1031 capital. And many of these are one-off style transactions where we can sort of — we can zero in on them very fast and close very fast. So that happens before it drifts too deep into the competitive fray.

And then John, one final thing — you brought up the ground lease and mentioned you'd like to do a bit more in that area. Could you give me a feel for just how deep that market runs and perhaps what sort of volume you're currently considering? Clearly the ground lease category is a really favored sector; so we wanted to — we hadn't previously emphasized that we hold these ground leases, but since people are eyeing companies trading at unbelievable multiples, we figured we definitely ought to make clear that ground leases sit in our portfolio and that we're evaluating purchases involving ground leases, though it isn't an unusual structure for us to complete, whether through an origination or an acquisition, so you'll be seeing us emphasize it more going forward.

Matt, regarding the guidance, what amount of acquisitions beyond the $4.5 million you've already completed in the first quarter does it rest on?

Yeah Rob, clearly there are plenty of assumptions baked into the guidance and considering the company's size and how fluid many of those assumptions are — timing probably being the most impactful — we're going to disclose specifics. So I won't lay out what the volume assumptions are very much because it's based on the low-end and the high end, but you can expect us to be pretty active this year on the acquisition front.

All right; and so I suppose the other thing I'd ask about that would end up being, how are you folks considering raising capital right now, given where your cash stands, you've still got debt capacity and so on, but the share price has climbed. Clearly it's a robust market for preferred too, so how are you folks weighing the equity portion of the capital picture, at least this early in 2021?

Yeah, clearly it has performed quite well across the last 30 days, and yesterday was probably the strongest day for the company in terms of how the stock price did. Our attention is on generating risk adjusted returns. Regarding what John said about the acquisitions pipeline, there are plenty of solid opportunities we're reviewing. So we're looking for high-quality opportunities that add to the portfolio, and afterward we'll assess the appropriate capital to fund those deals when they come together.

Alright, what level of Dollar General exposure sits well with you? You folks have completed quite a few of those across the past several quarters. Obviously the Wells and Helton properties came to you when the company started, but when it comes to layering in more Dollar Generals, does an upper threshold exist that you and the board are at ease with, before you'd say hey, I need to diversify even if it stays among other dollar store operators or inside that merchandise category?

Yeah, so I believe it's fair to state that, as you pointed out, we've closed a lot of Dollar General deals recently, but I'd call that the investment level for the time being. So as the company expands, we certainly — that operator is one we certainly favor. They're quite strong, as you can get nearly as part of credit, along with their performance, and our leases run long, so we definitely like having that exposure, but you can probably see from the yield going forward this year that this exposure will shrink as we build out the portfolio using other credits.

All right, and my final question is for you, John. Considering the market conditions and COVID, how much restraint have you and the board applied to raising the dividend out of caution, compared with a scenario where none of that had occurred? In other words, how much larger would the dividend increases have been during the past year?

Well, clearly the payout ratio shows there's capacity for additional growth, but you're simply taking a cautious approach as we raise it. So as things develop, it will certainly go up, because of what a REIT is required to distribute, no question. We aren't aiming to boost it sharply or accelerate it; we'll just stay disciplined about it.

And Matt, where do you stand with the new dividend level compared to the payout of taxable net earnings?

Yeah, so when the year wrapped up, we were slightly above 100% of taxable income. Clearly, we weren't fully invested during 2020. As a result, we needed to grow and bump up the dividend a bit. I believe you should anticipate that we'll aim for roughly 100% of taxable income. Free cash flow represents our most efficient source of equity, though given the current guidance that John mentioned, the payout ratio looks quite appealing at this point.

Thank you. Morning. If I could pick up where we left off regarding the dividend, you mentioned free cash flow as a source of equity. When you consider the payout ratio, there's certainly ample capacity there, but in what way do you weigh that, or how do you approach weighing returning that cash flow to shareholders against keeping that equity source available to keep financing your growth in 2021? What's the way to achieve that balance?

Yes, that's a fair question Michael. The board reviews it every quarter. Clearly, we've got our own internal projections covering this year and past it, and we aim to strike a balance between growth and the payout ratios we discussed. In my view, for us, delivering a steady and foreseeable dividend matters most for the shareholders, yet debt and dividend that are well covered, given our size and growth profiles, is probably a fairly significant factor right now for the board.

So John, you mentioned certain market activity during 2020, along with some concentration and demographic patterns you've been observing. I'm curious whether any cap rate shifts or cap rate arbitrage across markets have appeared due to what took place in 2020. In some of your target markets, have cap rates declined relative to the more traditional coastal-type markets? Has any cap rate movement shown up yet as a result of the pandemic?

Yeah, I'd say the cap rate improvement isn't really what you're seeing much of — only a little — but you're definitely seeing far more buyers. Investors have clearly moved their attention away from the Northeast, or places like that, or even though California remains a strong market for capital, those California investors are now definitely looking at turning up in Arizona and Texas and so on. So more buyers are appearing, but when it comes to cap rates, there isn't as much compression.