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 conference call about our operating results for the third quarter of 2021. Matt Partridge, who serves as our Chief Financial Officer, is here alongside me. Ahead of getting started, I'll hand things to Matt so he can give the usual disclosures about today's call. Matt?

Thank you, John. I want to remind everybody that a number of the remarks we’re making today fall under the category of forward-looking statements as defined by federal securities law. What the company actually achieves down the road could vary substantially from what these forward-looking statements describe, and we assume no obligation to revise them. The factors and risks capable of making actual results diverge materially from our expectations get disclosed periodically, with more specifics, in the company’s Form 10-K, Form 10-Q, and other SEC filings, and our SEC reports, which include reconciliations of the non-GAAP financial measures we utilize, are available in our earnings release on our website at alpinereit.com; having said that, I’ll hand the call back to John now.

Thanks, Matt. It was yet another strong quarter in terms of execution, since we identified quite a few appealing acquisition possibilities in the market and moved forward on a number of significant initiatives; throughout the quarter we maintained our steady acquisition cadence, purchasing $55.4 million in high-quality net lease properties at a weighted average going in cap rate of 6.8%; we finalized a new $80 million term loan carrying an initial fixed rate of 1.83%, alongside both existing and new banking relationships, which provides us with extra liquidity to fund our investment activities for the remainder of 2021 and 2022. Also, I'm pleased to share that we signed a new store development lease with a well-known national grocer to build a store on an undeveloped parcel at one of our current properties in Jacksonville, Florida. Once again, our acquisition activity this quarter centered on well-located properties that display strong real estate fundamentals and are occupied by high-quality national brands operating in well-performing retail sectors. Over the quarter, we picked up 19 properties across 12 different states, 6 of which are new to our portfolio. Our recent acquisitions involve 14 tenants operating in 12 sectors, and we made a deliberate push to boost our exposure to existing high-performing tenants already in our portfolio, including 7-Eleven, Walmart, At Home, Hobby Lobby, Advanced Auto Parts, Dollar Tree and Family Dollar; we likewise brought in a number of high quality tenants that we believe add outstanding tenant diversity and credit quality, among them notable brands like O’Reilly Auto Parts, Harbor Freight, Valero, Tractor Supply and Camping World. So far this year, we have acquired 42 net leased properties for close to $159 million at a weighted average going in cap rate of 7.2% and a weighted average remaining lease term at acquisition of 8 years. Our portfolio remains 100% tame, the properties remain 100% occupied, and at quarter's end it was made up of 89 properties totaling 2.7 million square feet, with tenants operating in 25 sectors across 28 states. Among our top tenants are Wells Fargo, Hilton Grand Vacations, At Home, Hobby Lobby, Dollar General, Walmart and Walgreens. As we have drawn the portfolio, we've been able to substantially boost the diversity of our tenants, geographic exposures and sector exposures. And since the year began, we have almost doubled both the number of properties and the number of tenants in the portfolio. We have now diversified to the point where no tenant exposure exceeds 10% and our largest sector exposure sits below 13%. Both are trends we anticipate will continue as we carry out our disposition plans and expand the overall portfolio. Turning to our disposition efforts, we keep working toward selling our office properties in order to position the company as 100% retail focused. We are presently under contract to sell the Hilton Grand Vacations properties, and we are in the midst of discussions with interested parties to sell the Wells Fargo property in Hillsboro, Oregon. Even though we expect selling these properties will dilute earnings somewhat, we think that after completing the sale and putting the proceeds back to work, our metrics for investment grade tenants and credit rated retail exposure will look comparable. By swapping these assets for a set of new tenants, sector exposures, and geographic locations with a stronger weighted average lease term, we improve portfolio diversity, especially since the office properties that remain carry a combined weighted average lease term of roughly 4.5 years. I should also mention that in the third quarter we sold our Outback Steakhouse in Huntersville, North Carolina at a 5.5 exit cap rate, which we view as a benchmark for the quality of our portfolio; with that, I'll hand the call to Matt, who will discuss our quarterly performance, capital markets activities, and raised guidance.

Thank you, John. Revenue across the board for Q3 2021 rose 60% compared with Q3 2020, reaching $8.2 million. When looking at general and administrative costs measured against revenues — and that figure includes the management fee charged by our outside managers at CTO Realty Growth — there was a drop of over 270 basis points relative to Q2 2021, plus a decline exceeding 500 basis points on a year-over-year basis against Q3 2020, which reflects the ongoing improvement in our organizational scale; during Q3 2021, funds from operations and adjusted funds from operations came in at $4.8 million, equal to $0.37 per share. Per-share FFO and AFFO growth for Q3 2021 stood at 5.7% and 8.8%, respectively, measured against Q3 2020. Roughly $23,000 gave a positive boost to our AFFO in Q2, stemming from deferred rent being repaid under the rent deferral agreements we previously disclosed. Just a single tenant is currently repaying us under a rent deferral agreement arranged earlier in connection with the COVID-19 pandemic, and those installments are set to run through Q2 2022. On a year-to-date basis, FFO reached $1.15 per share while AFFO hit $1.18 per share, which works out to year-over-year per-share growth of 34% and 71%, respectively, versus the first 9 months of 2020. During Q3 2021, the company distributed a cash dividend of $0.255 per share on September 30 to stockholders of record as of September 9. That equates to a quarterly payout ratio of 69% of FFO per share and AFFO per share, alongside an annualized yield of roughly 5.4%. Our Q3 dividend represents the fifth time the company has raised its dividend since its IPO in late 2019, and it is our fourth consecutive increase, coming in more than 2% above our Q2 2021 quarterly dividend. Year-to-date through the first three quarters of 2021, the company has distributed $0.745 per share in cash dividends. Those dividends amount to a year-to-date cash payout ratio of 65% of FFO per share and 63% of AFFO per share. We expect to announce our quarterly cash common stock dividend for Q4 near the end of November. As John mentioned when he began his prepared remarks, we closed a new $80 million term loan on September 30 carrying an initial interest rate of 1.83%, which we used to pay down the outstanding balance on our revolving unsecured credit facility, extend our debt maturity profile, and add three new banking partners. Just like our first term loan earlier in the year, this new term loan helps widen our access to capital and secures longer-term debt at an appealing rate. The new $80 million unsecured term loan carries a term exceeding 5 years, with a maturity date in January 2027. We now hold more than $130 million of liquidity from cash and undrawn revolver capacity for some future acquisitions, which comes on top of the proceeds anticipated from the office property sales discussed earlier. Because of where the company's liquidity stands right now and what we expect going forward, we didn't use our ATM equity program at all in the third quarter. That said, as we'd already told everyone, we did hand over an extra 55,000 OP units, which let us wrap up our first-ever OP unit deal and pick up one last asset from a diversified portfolio of 10 properties. Those OP units went out at $18.85 per share, matching the per-share price of the 425,000 OP units issued before. As of September 30, debt came to $191.5 million, and cash plus restricted cash totaled $7.3 million. At the close of the quarter, net debt relative to total enterprise value stood at roughly 44%, and our ratio of net debt to pro forma EBITDA was about 6.9x. As 2021 winds down and we get ready for 2022, our balance sheet remains in a strong spot to carry out our acquisition pipeline and back our upcoming operating activities. Taking into account what we did in the capital markets, how the third quarter performed, and other assumptions tied specifically to the fourth quarter, we raised our 2021 full year FFO and AFFO guidance; for all of 2021, FFO guidance now sits at $1.47 to $1.50 per diluted share, and AFFO guidance now sits at $1.48 to $1.51 per diluted share. With that, I'd like to express my thanks to our shareholders, our banking relationships, and our other business partners for their ongoing support. And now I'll hand the call back to John for his closing remarks.

Appreciate that, Matt. In roughly 30 days, we will mark 2 years since becoming a publicly traded company, and the strides achieved across that fairly brief stretch have me feeling enthusiastic. We assembled a strong portfolio, showed steady operational delivery, and substantially increased our dividend over those initial 2 years. There is still plenty on our plate, yet I have every confidence that we can keep carrying out our rigorous approach to investing and generate additional worth for those who hold our shares. I'm grateful to everyone for the time and backing. Right now, we'll take any questions. Operator?

Morning, everyone. John, since the Hilton is already under contract, how are we supposed to think about when the office assets will sell? Does that one probably land at the close of Q4, or do both of them likely slip into Q1?

Thanks, Rob. Under the terms of that contract, the Hilton is certainly set to close before this year wraps up. Wells Fargo is the one that might push into next year, though it could also happen in the early portion of next year. Wells is somewhat more involved, since there's redevelopment upside across various sectors. As a result, folks are really focusing hard on the redevelopment angle. So, the property and the lease are all pretty straightforward, yet everybody keeps examining that redevelopment upside.

All right. Then, on that same topic, Matt, I suppose, since some dilution is going to end up occurring here in your guidance? What are you presuming about whether Hilton closes? Is it essentially the very end of Q4? So it doesn't truly have any significant effect on the fourth quarter, or like the beginning of December, how is that kind of incorporated into your guidance?

Yes. The close in late November or early December is what our guidance takes into account.

all right.

therefore, from it we’re going to receive cash flow for approximately 2 of those 3 months.

So then, in essence, if we take it as a given that nearly the entire cash flow from Wells will come your way?

That's right.

All right. Regarding the deals you're currently evaluating, what's the scale of that? And are there any notable tenant exposures within it, anybody who would instantly become one of your top 10, or would exposure move from something minimal like 1% or 2% all the way to 10% or similar?

No. Nothing about the pipeline is lumpy. It's a pretty solid pipeline. And we want to be — since across the entire industry, real estate, as you're aware, there's a rush for closings at yearend driven by worries out there surrounding 1031 federal government taxes. That's pushing a tremendous amount of transaction volume to pile up at the end of the year. So we're attempting to stay ahead of that wave to the greatest extent we can. But when it comes to the composition, there's no — nothing particularly unusual compared with what you've already been seeing as we bring in new credits and diversify further; it will simply be more of the same.

All right. So if we take it that Wells and Hilton have departed by the time the year closes, that would put At Home and Hobby Lobby in that position, and they'd leap up to become your two biggest tenants, at approximately 8% or 8.5% of annualized base rent — is that the right way to look at it?

Well, that's how it looks at this moment, though I wouldn't be shocked if a different name rose up, say if we brought another credit into the mix, since given how tiny we are, those sorts of shifts happen pretty readily.

All right. Then the final thing from my side, John — you folks raised the dividend by $0.005, which works out to 2%. How much of an effect did the upcoming office asset sale and the dilution from it have on that bump? Put another way, if you weren't about to absorb dilution from the office dispositions on a temporary basis, would this dividend hike probably have come in larger, or does the Board essentially believe that, considering where you stand right now and the payout ratios, a 2 percentage increase is the way we ought to be viewing the dividend going forward?

Yes. I believe it's evident that it's being nudged upward step by step. And with our payout ratio being low, naturally there will be that built-in pressure pushing it higher. But that's how I'd frame it — nothing of a dramatic nature coming from the office buildings side.

Okay. Thank you, guys.

Thank you.

Hello, good morning everyone. Could you discuss whether the portfolio holds any further possibilities for personal development, and is this specific one you're pursuing this quarter tied to Old Time Pottery?

Correct, it does involve Old Time Pottery. And listen, I'm certain other chances exist within the portfolio, but that one in particular — because of what happened around COVID and when Old Time Pottery filed for bankruptcy, we became somewhat more proactive regarding that asset and brought in brokers, which produced this result. So, since everything else we hold is clearly struggling at present, there isn't any redevelopment analysis underway at the moment. Therefore, I'm confident additional opportunities are out there. What I mean is, that's precisely why our emphasis has been on truly strong real estate, and we're delighted when — we purchase big parcels containing a single store, where that future optionality exists, though not currently.

Understood. Then regarding that possible redevelopment involving Wells Fargo, could it be an out parcel project? Would it involve rebuilding what's already there?

No — the whole property would be involved. It's a big site located in Hillsborough. Hillsborough is a really robust market, particularly given COVID, with so many people departing Portland and arriving here. Intel is here with its Fab 5 facility. Nike's headquarters is here too; so beyond the residential angle, beyond the heavy multifamily angle, you're also seeing data centers. I mean, among data center markets globally, Hillsborough is one where power supply exists at present. In other data center markets, power supply is quite constrained. So you're witnessing every sort of possible use.

Understood. We're attempting to tune our models for the coming year, so is there any way you could assist us regarding the anticipated cap rate across the office assets in total? Perhaps you're in contract with one that you're unable to reveal. Still, if we blended the pair, what approach should we take when modeling the cap rate for office dispositions?

This aligns fairly well with what we discussed back when we were sort of kicking off this process — namely, that cap rates sit somewhere in the 7s, be that on the low end, the middle, or even the mid-to-high side, whatever the case may be. It varies, but here's the key consideration: we're holding onto the property for a somewhat longer stretch and generating substantial cash flow from it, so essentially, I'd say the mid-7s would serve as a decent benchmark when you're thinking about these properties.

Understood. Many thanks, everyone.