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

Hello, everybody, and thanks for being with us this morning for Alpine Income Property Trust's Second Quarter 2021 Operating Results Conference Call. Joining me is our Chief Financial Officer, Matt Partridge. Prior to getting started, I'll hand things over to Matt so he can give the usual disclosures about today's call. Matt?

Thank you, John. I want to remind all of you that a number of the remarks we're making today fall under the category of forward-looking statements as defined by federal securities law. It's possible that the company's actual results in the future will vary substantially from what these forward-looking statements describe, and we take on no obligation to revise or refresh any of them. The factors and risks that might lead actual outcomes to diverge materially from what we expect get disclosed periodically, with more specifics, in the company's Form 10-K, Form 10-Q, and other filings with the SEC. Our SEC reports, along with our earnings release — both of which include reconciliations of the non-GAAP financial measures we rely on — are available on our website, alpinereit.com. Having said that, I'll hand the call back to John now.

Thanks, Matt. Following a strong opening quarter to kick off the year, during Q2 we saw momentum build throughout every part of our operations, making it the busiest three-month stretch we have had since going public in late 2019. The standout item was a record level of investment volume, as we picked up 18 top-tier retail net lease assets for $81 million, reflecting a weighted average going-in cash cap rate of 7.3%. On top of that, we wrapped up our very first follow-on equity offering, giving us clarity on how our active pipeline will be funded. That offering drew participation from both longstanding and newly added banking partners, and it received strong backing from shareholders already on board along with fresh institutional and retail investors; and lastly, we finalized our debut operating partnership unit deal, handing us one more channel for appealing equity. These results came from the dedication and ingenuity of our people, plus the backing we got from our transaction and operating capital partners, and we are deeply grateful for it. Turning to transactions, Q2 showcased — more than any other period so far this year — how we can expand our top-quality portfolio by acting on a range of opportunities generated through numerous relationships. Out of the 18 assets bought during the quarter, 7 tied back to deals we had already disclosed to purchase a collection of top-quality properties from CTO Realty Growth, our external manager. Another 9 came as a diversified retail portfolio that we sourced directly from a private owner, with that purchase partly financed through the OP Unit transaction mentioned earlier. And 2 of the assets came about thanks to long-standing ties within the investment sales community. These channels reflect the cleverness and creative capacity of our team and platform, and I do expect more acquisition chances to arise from every one of these relationships down the road. Our Q2 purchases spanned 13 states, among them 3 that were new to us, with tenants active across 14 separate sectors; we gained exposure to strong-performing areas like home improvement, grocery, quick service restaurants, automotive parts, convenience stores and automotive service, and we brought the off-price retail and farm and rural supply industries into our expanding portfolio as 2 brand-new sectors. Beyond making our geography more diverse, we substantially broadened our tenant roster by bringing in 15 new tenants. Within that group, we picked up industry-leading operators including Lowe's, Academy Sports, Circle K, Burlington, Burger King, Firestone and Orscheln, the last of which Tractor Supply acquired earlier this year. So far this year, we have bought 23 properties for $103 million, at a weighted average going-in cap rate of 7.5%, with a weighted average remaining lease term at acquisition of just under 9 years. By quarter's end, our expanding portfolio stood at 71 properties covering 2.3 million square feet across 22 states. Our tenants are active in 23 separate sectors, and I am pleased to report that they remain 100% paying, while the properties remain 100% occupied. Wells Fargo, Hilton Grand Vacations, Hobby Lobby, Dollar General, Walgreens At Home, and Walmart are among our leading tenants. Looking ahead to the back half of the year, I feel enthusiastic about what we can accomplish by deploying more capital into accretive investments, which will keep enhancing a portfolio that is already of high quality. A portion of the investing we do going forward will be financed through the office asset sales we expect to complete — an effort we said we would pursue in order to make our portfolio entirely retail. I'm happy to report that the properties taken through marketing have drawn robust interest, and we expect to proceed with selling the Hilton and Wells Fargo office properties before this year is out. In addition, we are assessing the strategic sale of 1 or 2 other properties where redeploying that capital into other opportunities in our pipeline should, in our view, deliver stronger risk-adjusted returns. On the subject of that pipeline, I'm quite encouraged by the kinds of opportunities showing up in the market, the number of them crossing our desk, and what the pipeline could do to further strengthen portfolio diversity along with the caliber of tenants. We have kept investing in the platform by bringing on a new member of the acquisitions team, and the team already in place has generated excellent momentum, setting us up for ongoing success. That covers everything in my prepared remarks. I'll now hand the call to Matt, who will discuss how we performed during the quarter, our capital markets activity, and the updated guidance. Matt?

Appreciate that, John. Operationally speaking, we turned in another outstanding quarter, since contractual base rents came in at a full 100% once again — and that figure includes collecting the last major portions of the repayment connected to rent we had deferred because of COVID-19. Total revenues for the second quarter of 2021 reached $6.6 million, representing a 44% increase over the same period in 2020. Our general and administrative expenses — a category that includes the management fee we pay CTO Realty Growth, our external manager — dropped by more than 500 basis points year over year versus the second quarter of 2020, landing at 19.5%, which continues our trend of improving organizational scale. During Q2 2021, our FFO was $3.8 million, equal to $0.38 per share, and AFFO totaled $3.9 million, or $0.39 per share. On a per-share basis, FFO rose 31% versus the same period in 2020, while AFFO climbed 144%. Repayment of amounts deferred under the rent deferral agreement we discussed earlier contributed approximately $114,000, which benefited AFFO in the quarter. Going forward, one tenant remains and is prepaying under a COVID-19-related rent deferral arrangement reached previously. Through Q2 2022, those payments should amount to roughly $22,000 per quarter. Looking at the first six months of the year, FFO came in at $0.79 per share while AFFO reached $0.82 per share. Compared with the same period in 2020, that works out to per-share growth of 55% for FFO and 134% for AFFO. In the second quarter of 2021, a cash dividend of $0.25 per share was paid by the company on June 30 to stockholders of record as of March 21. On a quarterly basis, that represents a payout ratio of 66% of FFO per share and 64% of AFFO per share, with an annualized yield of roughly 5%. Since the company's IPO in late 2019, this second quarter dividend marks the fourth increase, and it is more than 4% higher than the quarterly dividend paid in the first quarter of 2021. Looking at the first half of 2021, we've distributed $0.49 per share in cash dividends. On a year-to-date basis, that works out to a payout ratio of 62% against FFO per share and 60% against AFFO per share. During yesterday's press release, we noted a shift in how we handle the quarterly cash common stock dividend — previously we declared it alongside quarterly earnings, but that's changing. Going forward, our plan is to make that announcement for Q3 2021, and for quarters after that, in the second month of whichever quarter it applies to. On top of everything we did on the acquisition side, the capital markets kept us just as busy this quarter. We completed our inaugural term loan. That allowed us to bring down what we owe on the revolving unsecured credit facility, push out when our debt comes due, bring in an additional banking partner so we have broader capital access, and lock in longer-term debt capital at an attractive rate. This new unsecured term loan is $60 million, runs 5 years, and starts at a fixed interest rate of 2.16%. On the CTO Realty Growth acquisitions side, we assumed a $30 million mortgage secured by 6 properties, with a fixed interest rate of 4.33%. That mortgage matures in October of 2034, but beginning in October of 2024, it can be paid off early with notice and without penalty. Turning to equity, we stayed busy once more with our at-the-market, or ATM, equity program, where we issued 176,000 shares of common stock, generating total net proceeds of $3.1 million, which helped finance part of the acquisitions we made during the quarter. As John noted earlier, during the quarter we also wrapped up our first follow-on underwritten public offering since the IPO, along with our inaugural operating partnership unit issuance. That follow-on offering came to 3.2 million shares of common stock, including the underwriters' full exercise of their option for additional shares, producing total net proceeds of $54.3 million. We funded a portion of the acquisition of a diversified portfolio consisting of 9 properties priced at $13.8 million through the OP Unit transaction. That deal involved issuing 425,000 OP Units at $18.85 per share, amounting to $8 million in total value. Turning to the third quarter, we have more than $100 million in dry powder available, and the strength of our balance sheet is excellent. Total debt outstanding as of June 30 was $141.6 million, while total cash and restricted cash came to $8.5 million. Net debt to total enterprise value was approximately 35% at quarter end, and net debt to pro forma EBITDA was about 5.7x. During yesterday's press release, we shared that our projections for FFO and AFFO for the entire 2021 year have been adjusted. This updated outlook reflects every deal and capital markets action we've completed to date. It also bakes in several key estimates for the latter half of the year — things like how much we'll buy and sell, the yields those transactions generate, how we'll use debt and equity, whether our tenants' business trends hold steady or improve, and when these various items will occur. The biggest one: our guidance factors in selling the office buildings leased to Hilton Grand Vacations and Wells Fargo. Looking at the entire 2021 fiscal year, we now expect FFO to land between $1.35 and $1.45 for each diluted share, while our AFFO projection sits at $1.38 to $1.48 per diluted share. At this point, I'll hand things back to John so he can wrap us up.

Appreciate that, Matt. During Q2, we hit several important milestones, including our follow-on offering, which drove more acquisition activity along with additional capital markets and transaction work. The strong quality of our portfolio keeps delivering solid results, and we anticipate that will remain the case as we stay committed to executing our investment strategy with discipline. Each of these represents a favorable incremental move in the company's progression, and we're eager to make further positive strides over the upcoming quarters. I'd like to express gratitude to our shareholders for their ongoing backing and offer congratulations to our team for everything they've achieved. With that, let's take some questions. Operator?

John, could you give us some color on the schedule and what you're expecting for the office properties? Are those currently under contract? Are talks still ongoing? Where do things stand right now? And considering the deals you have lined up, how quickly could you replace the NOI from those with new acquisitions?

Absolutely. Thanks, Rob. We're exchanging paper on both of them. As for whether it's a contract or an LOI — one is a negotiated contract, and on the other, we're working through an LOI. So there's good momentum there. Our expectation is Q3, maybe early Q4 for closing. We're not hurrying, and we want to essentially tailor it toward the buyer, getting the best execution for us as the buyer situation resolves with the best outcome, so we're not pushing them. Then, as far as the pipeline goes to substitute those assets, it's extremely robust. As you saw this quarter, we completed quite a bit, and that has really set things up for what's ahead.

And what's the right way for us to think about this — you folks have consistently been achieving a cap rate above 7% on the retail properties. From a dilution versus accretion perspective, how does it look when we swap that amount in dollars of office assets for the same dollar amount of retail assets?

Right. So where we buy will be a mix of IG and non-IG; and clearly, the IG kind of assets would likely be a bit dilutive. And then the non-IG ones would be — essentially either right at the line or accretive. So we're — with luck, we'll handle that quite effectively. And then the drag from that will be minimal at most. But we're — the pricing we received — hopefully, will receive on the properties is, in our view, quite strong and lets us sort of make that shift into the acquisitions without it being too painful.

All right. So then what's your thinking — I'm not sure whether you're willing to discuss details of that OP Unit transaction you recently completed, but how do you plan to trade that paper, considering the current stock price? Would it be the case that — should you pursue further OP Unit deals, they'd land slightly above or below the present share price? Are you setting the price at a premium to account for the tax deferral advantage? Do lockups exist past what's typical in the short term? What's your approach to that currency?

Yes. The OP Unit deal we completed came in above the level of our follow-on offering and clearly carried less of that cost element; therefore it was highly accretive relative to the follow-on offering. And so, with the share price having risen to this point, we anticipate that any future OP Unit issuance will align with the share price. And definitely, we have no intention of dropping back to the level of that last deal, which was one we're extremely happy with — the seller truly desired to become a partner with us on Pine and plans to retain the stock indefinitely; in fact, we hope to complete additional transactions with them down the road. They essentially possess a portfolio that they continue to keep working, so to speak, and we will — should something suit us and they wish to engage in some OP Unit deals at a higher share price, we're receptive to that. But yes, I believe this is an excellent transaction where we can approach other developers whose portfolios we clearly provide a strong solution for. If they want to sell because partners wish to exit and rather than rolling into a different property, they might accept OP Units from — with us and divide it that way between the partnership; so it's a wonderful instrument to possess, and we're thrilled that we completed 1 early in our existence.

All right; and beyond that, is there anything else within CTO — any further assets — that Pine will probably pick up during this year?

It might not occur within this year. A few assets exist that would suit Alpine quite nicely, though there's work required when it comes to separating them from centers, the way CTO holds them. So my expectation is that this won't take place this year.

All right, and that's my final question. Matt, is there any cause for the dividend schedule shift besides getting it away from a busy earnings window?

No, that's truly the sole cause; we simply aimed to align better with what the industry typically does, which puts it nearer the payment date. So there's definitely no shift in dividend policy. Clearly, we haven't declared one at this point, so I'm unable to say what the Q3 dividend is going to be, but this is only a matter of timing.

John, you mentioned there's clearly been a lot of favorable momentum when it comes to acquisitions, plus a robust pipeline. As I remember it, the earlier guidance figured on roughly $150 million, and you're definitely making solid progress toward that. With the second half ahead, how are you viewing your acquisition goals for the entire year — I mean, you clearly have ample capital available to deploy? What's your thinking on that?

Right. So certainly, the pipeline has grown, particularly thanks to the deals we've closed, which has generated more conversations regarding other assets. And when you consider it, we're only in — we're in fewer than half the states. That leaves us a great deal of territory for acquisitions. We aren't even in California yet. So a big field lies ahead of us. That makes us quite confident that what we achieved in the first half can be repeated in the second half. And of course, we now have the capital, having gone into the pit stop and filled up, and at this point we're — we can essentially carry it through the year's end.

And Matt, so there's no confusion, does that updated guidance range factor in any adjustments on the acquisition side? Or are you still taking a cautious stance on that front?

As John mentioned, this seems like a solid projection — we expect the latter half of the year to be comparable in volume terms to the first half. We didn't provide official guidance regarding acquisition volume, only FFO and AFFO per share, but that's the way I'd steer people.