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

Hello, all, and thanks for being with us this morning for Alpine Income Property Trust's conference call on our operating results for the first quarter of 2021; joining me is our Chief Financial Officer, Matt Partridge. Prior to starting, I'll hand things to Matt so he can give the usual disclosures about today's call. Matt?

Thank you, John. I want to point out to everybody 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 vary substantially from what these forward-looking statements describe, and we have no obligation to revise them later. The elements and hazards that might lead real outcomes to diverge materially from what we expect get spelled out periodically in more detail within the Company's Form 10-K, Form 10-Q and other SEC filings. Our SEC reports are available in our earnings release, and that release includes reconciliations of the non-GAAP financial measures we rely on, all posted on our website at alpinereit.com.

Appreciate that, Matt. It's a pleasure to share that we're off to a robust beginning this year, with significant investment momentum during Q1 — we picked up 5 assets for close to $22 million and moved into our inaugural transaction agreements alongside CTO following our IPO, set to purchase 7 single tenant net lease assets totaling $56 million. That strong launch also included keeping up our pattern of gathering 100% of our contractual base rents, plus ongoing expansion of our quarterly dividend, which we raised for a third consecutive quarter when we announced our Q2 dividend earlier this week. To get more granular about acquisition activity: we put money into 5 properties across Texas, Ohio and Mexico, spending $21.9 million at a weighted average cap rate of 8.2%, with a weighted average remaining lease term of 9.2 years when we acquired them. These purchases mixed greater exposure to already strong-performing credits like At Home and Dollar General with the addition of several fresh names to our tenant lineup, including sports and warehouse. While conducting underwriting on every property, our due diligence pointed to quite robust tenant operations relative to the wider market and among existing chains nationally at The Ohio New Mexico properties. We think this suggested tenant strength, paired with their locations along busy retail corridors, healthy demographics, and our capacity to buy at sensible cost and rent bases, offers highly appealing risk-adjusted chances for us to grow our portfolio strategically. At quarter's end, our expanding portfolio stood 100% occupied, made up of 53 properties across 19 states, amounting to 1.8 million square feet, with leading tenants including Wells Fargo, Hilton, Grand Vacations, Hobby Lobby, Dollar General, At Home, Walmart and Walgreens. We hold great confidence in the caliber of our assets — our two biggest tenants, Wells Fargo and Hilton Grand Vacations, lease them — but as yesterday's press release noted, we intend to look into selling these office properties as we shift toward a portfolio that is 100% retail focused; we have a strong pipeline, and money from these possible sales would go back into retail acquisitions, further expanding our top-tier retail portfolio and streamlining the overall investment approach. We're eager to share updates on this effort as summer arrives and we begin getting feedback from the market.

Thanks, John. To kick things off, I want to point out how well our portfolio did in Q1 and on into Q2 — during each of the year's first 4 months, we brought in 100% of contractual base rents. Deferred rent effects are behind us now, since every rent deferral we'd arranged previously has reached its end. The contractual base rents and related collection figures do factor in repayments of rents deferred earlier; and even though we posted 100% collected across all 4 months, I'm happy to report there were situations where tenants paid deferred rents sooner than scheduled or required. Q1 2021 total revenues came to $5.9 million, up 41% versus Q1 2020, while our G&A expenses, management fee included, the CTO, dropped 300 basis points against Q4 2020, and by over 1300 basis points year-over-year against Q1 2020, which speaks to how fast our scale is improving. Funds from operations for Q1 2021 stood at $3.7 million, or $0.42 per share, with adjusted funds from operations at $3.9 million, or $0.44 per share. Compared with Q1 2020, FFO and AFFO per share rose 91% and 120%, respectively, in Q1 2021 — again a sign of the platform's growing scale. Roughly $271,000 tied to repayment of deferrals under those previously mentioned rent deferral agreements gave our Q1 AFFO a boost. Looking ahead in 2021, we anticipate further favorable effects on AFFO from scheduled repayments and rent deferred earlier, though Q1 2021 will be the biggest quarter for repayments. During Q1 2021, the company distributed a cash dividend of $0.24 per share on March 31 to stockholders of record as of March 22.

Appreciate that, Matt. We're genuinely thrilled by the momentum carrying us out of Q1, in which we posted AFFO growth in the triple digits, raised our quarterly dividend for a third time in a row, showed broader access to capital markets, and built a robust pipeline that will keep diversifying our high-quality portfolio. To our shareholders, I want to express gratitude for the backing you keep giving us, and to our team, congratulations on everything you've achieved. With that, let's take questions. Operator?

Yes, thank you. Morning, everyone. John, could we take one more minute to discuss the office portfolio and what drove the shift there when you consider the assets — is it simply that you're spotting stronger opportunities in retail, did you receive incoming interest for those properties, or what exactly prompted this conversation regarding the office portfolio?

Certainly. As I believe you're aware, throughout the pandemic, the office properties performed extremely well and contributed strongly to the portfolio. Yet it has grown quite clear that investors see office as somewhat of a distraction. Frequently, we receive many inquiries concerning the office, and despite our comfort with them, we believe that divesting them and deploying that capital to, to grow within retail and turn into 100% retail ought to deliver a very solid benefit to the company, and we ought to kind of assist ourselves in narrowing that multiple discount relative to the 100% retail counterparts in the net lease sector. So, even though we're at ease with them, and they have performed quite strongly, we truly want to kind of transform into a pure retail platform, and that turns into less of a distraction for investors.

Alright, that's clear and logical. Also, everyone has shown a lot of restraint when it comes to raising capital. I saw that the way you talked about the selling process possibly during the summer roughly coincides with a CTO deal. Is it fair to think you'll carry out both of these simultaneously? Meaning you'll aim to pair the money from office disposals with the acquisitions you're pursuing? Or is there a chance we could see some near-term dilution stemming from the selling process?

Well, I'd say, sure, ideally everything would fall into place flawlessly, but we won't attempt to force every piece to align perfectly. As a result, a gap could exist between when we sell something and when we buy something. Still, because the pipeline is so robust, my expectation is that it will move along quite smoothly — we dispose of an asset and then make purchases soon after.

Great. Then my final question concerns the retail side. Given that we're now over 12 months in, clearly the portfolio looks excellent — as you evaluate possible acquisitions, or simply industries overall, are any discussions coming up regarding longer-term consequences? Within certain tenant categories affected by the pandemic, might that alter how you view those retail categories as a future target?

Yes, so it's certainly been quite intriguing to observe what the pandemic has caused everywhere, but the majority of our credits have in fact improved. Take our most recent acquisition involving At Home or Dollar Generals — I wish we'd purchased At Home stock rather than the real estate. At Home is simply booming as a category, and with Dollar Generals we got lucky, since we could acquire whatever was available, because cap rates have tightened very sharply over the past couple of months. So, basically, for the most part, every one of our categories has grown stronger throughout the pandemic, and balance sheets are improved, and so on.

Great, thanks, guys. Appreciate it.

Thank you.

Morning, everyone. John, could you give us an approximate figure for the book value of those office properties at the time of the IPO?

I think I'll pass that question over to Matt.

Yeah. Rob, the book value looks quite appealing — somewhere around $60 million. I don't have the precise figures right here with me. Still, it's fairly appealing when you compare where the market stands, or where we believe it stands today, against book value.

All right, I'm just attempting to determine how the market would play out, obviously, and if a sale happened, that would become a means of getting at it. So I'm simply trying to work out where the money would come from. And after that, if you dispose of the office space inside Pine, does that create further chances for CTO to buy triple net office? Or does that sit within that company? Is it still an asset class you won't pursue?

Yes, we would not — as CTO, we wouldn't really be going after net lease office, just to keep the lines clear and defined.

All right. So once the deal you've made public goes through, what number of properties remain at CTO that Pine would be a logical buyer for, with serious appetite to purchase?

The properties we've already disclosed are certainly the easiest pickings. As far as Alpine is concerned, a handful of additional ones exist within CTO. However, relative to cap rates, those might sit under what Alpine considers its investment threshold. So I'd say, when I look at it, CTO holds quite a bit of shadow pipeline, though only a handful qualify.

All right, and so what's your outlook on cinemas as, I assume, the major releases begin arriving? As shots keep going into arms, would theater companies return nearer to standard levels of operation? During the coming half-year, leading into that, do you purchase properties in strong spots at prices below what they fetched before the outbreak? Once values have bounced back, do you try to offload your holdings? Or do you sit tight and perhaps choose in roughly 12 months, when conditions truly normalize? What's your thinking regarding not just the cinemas you currently hold, but likewise whether you'd want to buy or divest them down the road?

Sure, we aren't seeking fresh purchases within the cinema sector. The sole item I might envision us pursuing would perhaps be a chance to acquire a ground lease beneath a strong location, the sort of site you're describing at about 15 acres, which could be redeveloped — that might be one possibility we'd consider. However, nothing of that kind has turned up recently. As for our existing portfolio, clearly we're at ease with it, yet we'd likely depart once a chance presents itself. So that's roughly how we see things.