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

Good morning, everyone, and welcome to the Alpine Income Property Trust Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to John Albright, President and CEO. Sir, please go ahead.

Good morning, everyone, and thank you for joining us today for the Alpine Income Property Trust Third Quarter 2021 Operating Results Conference Call. With me is Matt Partridge, our Chief Financial Officer. Before we begin, I'll turn it over to Matt to provide the customary disclosures regarding today's call. Matt?

Thanks, John. I'd like to remind everyone that many of our comments today are considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we undertake no duty to update these statements. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's Form 10-K, Form 10-Q and other SEC filings. And you can find our SEC reports and our earnings release, which contain reconciliations of non-GAAP financial measures we use on our website at alpinereit.com. With that, I'll now turn the call back over to John.

Thanks, Matt. This was another solid quarter of execution as we found a number of attractive acquisition opportunities in the market and made progress on several notable initiatives. We continued our consistent acquisition pace during the quarter, acquiring $55.4 million of high-quality net lease properties at a weighted average going-in cap rate of 6.8%. We closed on a new $80 million term loan with an initial fixed rate of 1.83% with existing and new banking relationships to give us additional liquidity to fund our investment activities through the balance of 2021 and 2022. And I'm excited to announce that we entered into a new store development lease with a well-known national grocer to develop a store on an undeveloped parcel at one of our existing properties in Jacksonville, Florida. Our acquisition activities in the quarter were once again focused on well-located properties that exhibit strong real estate fundamentals that are occupied by high-quality national brands operating in well-performing retail sectors. During the quarter, we acquired 19 properties spread across 12 different states, 6 of which are new to our portfolio. Our new acquisitions included 14 tenants operating in 12 sectors, and we made a concerted effort to increase our exposure to existing high-performing tenants in our portfolio, such as 7-Eleven, Walmart, At Home, Hobby Lobby, Advanced Auto Parts, Dollar Tree and Family Dollar. We also added a number of high-quality tenants, which we think have excellent tenant diversity and credit quality and include notable brands such as O'Reilly Auto Parts, Harbor Freight, Valero, Tractor Supply and Camping World. Year-to-date, we've acquired 42 net lease properties for nearly $159 million at a weighted average going-in cap rate of 7.2% and a weighted average remaining lease term and acquisition of 8 years. Our portfolio continues to be 100% paying, and the properties continue to be 100% occupied. And as of the end of the quarter, it consisted of 89 properties totaling 2.7 million square feet, with tenants operating in 25 sectors within 28 states. Our top tenants include Wells Fargo, Hilton Grand Vacations, At Home, Hobby Lobby, Dollar General, Walmart and Walgreens. As we've grown this portfolio, we've been able to meaningfully increase the diversity of our tenant, geographic and sector exposures. And since the beginning of the year, we've nearly doubled the number of properties and a number of tenants in the portfolio. We've now diversified to the point that we no longer have tenants exposure above 10%. And our largest sector exposure is below 13%, both of which are trends we expect to continue as we execute on our disposition plans and grow the overall portfolio. Speaking of our disposition efforts, we continue to work towards the sale of our office properties to position the company as a 100% retail focused. We are currently under contract to sell the Hilton Grand Vacation properties, and we are in the process of discussions with interested parties to sell the Wells Fargo property in Hillsboro, Oregon. While we do expect to disposition these properties to be partially dilutive to our earnings, we anticipate we'll have similar metrics regarding our investment-grades tenant and credit rated retail exposures following the sale and redeployment of the disposition proceeds; increase portfolio diversity by replacing these properties with a number of new tenants, sector exposures in geographic locations in a better weighted average lease term, given that the office properties have a combined remaining weighted average lease term of approximately 4.5 years. I'll also highlight that we did sell our Outback Steakhouse in Huntersville, North Carolina during the third quarter for a 5.5 exit cap rate, which we believe is a reference point as to the quality of our portfolio. With that, I'll now turn the call over to Matt to talk about our performance in the quarter, capital markets activities and increased guidance.

Thanks, John. Total revenues for the third quarter of 2021 increased 60% over the third quarter of 2020 to $8.2 million. General and administrative expenses as a percentage of revenues, which includes the management fee of our external manager, CTO Realty Growth, decreased by more than 270 basis points when compared to the second quarter of 2021, and by more than 500 basis points when compared year-over-year to the third quarter of 2020, continuing our improving organizational scale. For the third quarter of 2021, both funds from operations and adjusted funds from operations were $4.8 million or $0.37 per share. FFO and AFFO per share growth in the third quarter of 2021 were 5.7% and 8.8%, respectively, when compared to the third quarter of 2020. Our AFFO in the second quarter was positively impacted by approximately $23,000 from the repayment of deferred rent related to the previously disclosed rent deferral agreements. We only have 1 tenant making repayments under a previously agreed to rent deferral agreement related to the COVID-19 pandemic. And these payments are scheduled to occur through the second quarter of 2022. Year-to-date, FFO was $1.15 per share, and AFFO was $1.18 per share, representing year-over-year per share growth of 34% and 71%, respectively, when compared to the first 9 months of 2020. For the third quarter of 2021, the company paid a cash dividend of $0.255 per share on September 30 to stockholders of record on September 9. This represents a quarterly payout ratio of 69% of FFO per share and AFFO per share and an annualized yield of approximately 5.4%. Our third quarter dividend marks the fifth dividend increase by the company since its IPO in late 2019, our fourth consecutive increase and a more than 2% increase over our second quarter 2021 quarterly dividend. Year-to-date, through the first 3 quarters of 2021, the company has paid $0.745 per share in cash dividends. These dividends represent a year-to-date cash payout ratio of 65% of FFO per share and 53% of AFFO per share. We anticipate announcing our quarterly cash common stock dividend for the fourth quarter towards the end of November. As John referenced at the beginning of his prepared remarks, we completed a new $80 million term loan on September 30, at an initial interest rate of 1.83%, which we used to reduce the outstanding balance of our revolving unsecured credit facility, extend our debt maturity profile and bring in 3 new banking partners. As with our first term loan earlier in the year, this new term loan helps broaden our access to capital and lock in longer-term debt at an attractive rate. The new $80 million unsecured term loan has a term of more than 5 years with a maturity date in January 2027. We now have more than $130 million of liquidity from cash and undrawn revolver capacity to fund future acquisitions, which is in addition to the proceeds expected from the office property sales discussed earlier. Given the current and prospective liquidity of the company, we were not active on our ATM equity program during the third quarter. However, as we previously announced, we did issue an additional 55,000 OP units to close out our inaugural OP unit transaction and acquire 1 remaining property that was part of a 10-property diversified portfolio. The OP unit issuance was completed at $18.85 per share, the same per share value as the previously issued 425,000 OP units. Total debt as of September 30 was $191.5 million, and total cash and restricted cash was $7.3 million. Net debt to total enterprise value at quarter end was approximately 44%, while our net debt to pro forma EBITDA was approximately 6.9x. Heading towards the end of 2021 and as we prepare for 2022, our balance sheet continues to be well positioned to execute on our acquisition pipeline and support our future operating activities. In consideration of our capital markets activities, third quarter performance and other assumptions specific to the fourth quarter, we did increase our 2021 full year FFO and AFFO guidance. For the full year of 2021, our FFO guidance is now $1.47 to $1.50 per diluted share. And AFFO guidance is now $1.48 to $1.51 per diluted share. With that, I want to thank our shareholders, banking relationships and other business partners for the continued support. And I'll turn the call back over to John for his closing remarks.

Thanks, Matt. We are about a month away from our 2-year anniversary as a public company, and I'm excited about the progress we've made in that relatively short period of time. We build a high-quality portfolio, delivered consistent execution, meaningfully grown our dividend during these first 2 years. While we have a lot of work ahead of us, I'm confident we will be able to continue to execute our disciplined investment strategy and drive further value for our shareholders. Thank you all for your time and support. At this time, we'll open it up for questions. Operator?

[Operator Instructions] Our first question today comes from Rob Stevenson from Janney.

John, how should we be thinking about the timing of the sale of the office assets. Is the Hilton, given that it's under contract, is that likely to be end of fourth quarter or these both likely to sort of drift into the first quarter?

Yes. So thanks, Rob. So Hilton definitely would be scheduled to close before the end of the year on the contract terms. Wells Fargo would be one that could be into the year but could be kind of first part of next year. Wells is a little bit more complicated because there's redevelopment potential in different sectors. And so people are really digging in on the redevelopment side. So it's -- everything is fairly easy about the property and the lease, but everyone is looking at the redevelopment potential.

Okay. And then I guess on that same thing, Matt, I mean given that there's going to wind up being some dilution here, I mean, in your guidance, when are you assuming that Hilton closes? Is that like basically the tail end of the fourth quarter so that really have any material impact on the fourth quarter or like early December? How is that sort of factored into your guidance?

Yes. Our guidance contemplates to late November, early December close. So we'll get about 2 out of the 3 months of cash flow off of it.

And then basically assuming that you're going to get almost all of the cash flow off of Wells?

Correct.

Okay. In terms of the acquisition pipeline that you're looking at today, how big is that? And then is there any meaningful tenant exposures in that pipeline, anyone that would immediately jump into your top 10 or where the exposure goes from de minimis at 1% or 2% up to 10% or anything like that?

No. There's nothing lumpy about the pipeline. The pipeline is fairly strong, and we want to be -- because of -- in the whole industry, the real estate industry, as you know, there's a crunch for year-end closings because of the fear out there on 1031 federal government taxes. And so that's causing an incredible amount of transaction volume cramming into the end of the year. So we're trying to get in front of that wave as much as we can. But as far as the composition, there's no -- nothing kind of abnormal about kind of what you've been seeing as we add new credits and diversify more. It will just be more of the same.

Okay. So assuming that Wells and Hilton are gone at year-end, then that would mean that at home and Hobby Lobby would jump up to be your top 2 tenants at probably roughly somewhere around 8%, 8.5% of annualized base rent. Am I thinking about that correctly?

I mean as we stand right now, but I wouldn't be surprised if something else jumped up if we added on to another credit that just -- because we're so small, those things kind of move around fairly easy.

Okay. And then last 1 for me, John. So you guys increased the dividend by $0.005 or 2%. How much did the pending sale of the office assets and the dilution there influence increase? In other words, if you weren't going to have the dilution from the office sales on a temporary basis, would this dividend increase likely been higher? Or is the Board sort of thinking that given where you are today, in the payout ratios at a 2%-ish increase is how we should be thinking about things going forward on the dividend?

Yes. I think you can see that incrementally moving it up and given our low payout ratio, of course, it will be -- have that natural pressure to go up. But that's the way I would think about it, not anything dramatic change from the office building side.

Our next question comes from Wes Golladay from Baird.

Can you talk about if there's any other out partial development opportunities in the portfolio? And is this particular one you do in this quarter related to the Old Time Pottery?

Yes. It is related to Old Time Pottery. And look, I'm sure there's other opportunities in the portfolio. That one really, because of kind of during COVID and when Old Time Pottery went to bankruptcy, we kind of went into -- became a little bit more forward thinking on that particular asset and engaged brokers, and that's the outcome. So given that everything else in our portfolio is obviously paying now, there's any kind of redevelopment analysis we're doing right now. So I'm sure there are other opportunities. I mean that's how come -- our focus has been on really good real estate, and we love it when there's -- we're buying large parcels that have one store where there is that optionality in the future, but not right now.

Got it. And then when you look at that Wells Fargo potential redevelopment, is that maybe an outparcel development? Or is that redeveloping the existing asset?

No. It would be the entire site. So it's a large site in Hillsboro. Hillsboro is a very strong market, especially with COVID, everyone leaving Portland and coming into this market. You have intel with a Fab 5 plant. You have Nike's headquarters. So not only from the residential side from intensive multifamily side, but you're seeing data centers. I mean, Hillsboro is one of the markets in the data center world that there's power supply right now. Other data center markets, power supply is very limited. So you're seeing all kinds of different uses potential.

Got it. And we're trying to calibrate our models for next year. So I mean, can you help us in any way on the, I guess, expected cap rate for the office assets total? And you may be under contract with one you can't disclose of it -- that. But if we were to blend the 2, how should we think about modeling the cap rate for dispositions of the office?

It's somewhat consistent with how we talked about this when we kind of started the process that the cap rates are kind of in the 7s. Whether it's kind of low mid or even mid high or whatever, it depends. But the one thing you have to think about is we -- we're retaining the property a little longer and have a lot of cash flow coming from it. So that would basically be, I would say, in the mid-7s would be kind of a good measure to kind of think about the properties.

Our next question comes from R.J. Milligan from Raymond James.

So cap rates ticked down a little bit in the quarter. Obviously, we've been hearing that there's just been compression across the sector. And John, I was just wondering if you could give us sort of an update as to what you're seeing in the market more broadly and then expectations for activity in the fourth quarter as we look into '22. And then in the fourth quarter, what you expect the normal rush that we've seen historically as sellers look to get transactions done before the end of the year.

Yes. So I mean, definitely, there's a lot of capital pursuing these acquisitions. So you can assume that that's being borne out by the lower cap rates somewhat. That would honestly mean the portfolio that we have here as demonstrated by selling an Outback in North Carolina at a 5.5 cap, we would never have been a buyer of that at a 5.5 cap. So we're also seeing the opportunity to sell a certain property like that. But I would say that as we focus, we're pleasantly surprised that we're able to find opportunities, good quality tenants, good quality locations without giving up too much on the cap rate side. So you're not -- I wouldn't say -- after this last quarter, I wouldn't say that the cap rates are going to move down from what we just blend into. I think we're seeing something, somewhat consistent. And I think really to your question of the amount of volume on acquisition side, I think if you're a seller of assets, it's almost getting too late to have a closing by the end of the year, given just the infrastructure on title companies, survey, environmental property condition reports. So I think you're going to see that a lot of things are going to move into the first quarter just as an industry observation.

And then -- so already for the year, I think close to $160 million of acquisitions, which should put you over $200 million for the year. Is -- and obviously, there was a big second quarter of this year. Is there anything or any reason why that can't be replicated next year? Is there -- are there concerns about cap rate compression? Or just -- and I know you can't give guidance, but I'm just trying to think of what were the components this year that may not -- that may prevent you from doing the same volumes in '22?

No. I think we're pretty bullish about next year. I think the pressure on the competition will probably relax a bit after the new year. And I'm pretty confident we'll be able to do the same or not more on volume for next year.

Okay. My last question is for Matt. On the leverage levels ending the quarter at 6.9%, can you just talk about how you expect that to trend fourth quarter and as we get into '22?

Yes. I mean, obviously, we've been pretty consistent in saying over the long run, we want to be closer to that 6x net debt-to-EBITDA level from a leverage perspective. We ended at 6.9, as you noted, which we're comfortable at. The fixed charge coverage ratio 7x. On a run rate, it's about 6x. So there's really no pressure from a cash flow perspective. And as we've talked about it, the leverage will move around as we lever up and raise capital and bring it back down.

And our next question comes from Michael Gorman from BTIG.

Lot of my questions have been answered. But John, I was wondering if you could just talk about -- I think you've mentioned in the past, seeing some opportunities in the acquisition markets taking some shorter lease duration and being comfortable with that. I'm just wondering if you're seeing any shifts with some of the inflation talk, if there's more competition at that shorter end of the lease where there may be some resets coming sooner rather than later. Is there more competition in that property type -- on that product type than in the past?

Yes. There definitely is more competition there. I mean that definitely is, to me, the sweet spot where you want to be with the inflation and all those kind of pressures. You don't want to -- you want to have an opportunity to have the tenants kind of come up for renewal. We've been seeing this all across the real estate industry. As you guys know very well that you can't build these properties for the basis we've been buying them. And the tenants, over the years, have basically been able to get a fairly good deal on the rental rate that can't be replicated. So the stickiness of the tenants to the properties, I think, with the inflation factors and construction costs and labor is just more enhanced. So that is, to us, definitely the sweet spot. And because a lot of the buyers are still maybe mom-and-pop with leverage, they still really can't compete with the shorter duration because they need efficient leverage. So we're not -- so yes, there is a little bit more competition, but it's not like -- it's still not a good opportunity.

Okay. Great. And then maybe sort of a similar vein. When we think about inflation pressures and maybe some of the shortages that we've heard about, how did you approach the build-to-suit opportunity in Jacksonville in terms of underwriting it, in terms of laying out the contracts with the tenants. How is that structured to when you think about building in this type of environment?

Yes. So the structure is such that if we don't get the building cost in line, guaranteed max and so forth, we can get out of the deal. So there's protection there. So we certainly weren't bind ourselves to some sort of lease and delivery without making sure that the cost equation isn't nailed down.

Okay. Great. And then just last one for me. Matt, on the capital structure side, obviously, you mentioned with the asset sales, a lot of equity coming into the balance sheet over the next couple of quarters. How do you balance the funds coming in, and obviously, the need to redeploy that with also the -- tapping the equity markets and the ancillary benefits that come in from just increasing the market cap and increasing the average daily volume. How should we think about your approach to the equity markets as you go through these asset sales?

Yes. I mean, in general, obviously, we want to grow the equity market cap and create more liquidity for the shareholders and more float. I think everybody would like to see that. We want to be opportunistic with the stock. We're very sensitive to making sure that we are a good steward to capital for our existing shareholders, while still trying to balance out bringing in new shareholders and increasing the demand for the stock. So we try to strike a balance there. Obviously, we have the ATM, which helps us be pretty efficient in terms of accessing those equity capital markets on a match funding basis. So I'd say that's how we generally think about it. But we're going to try to be opportunistic and try to balance both constituencies in the equity -- on the equity side.

Our next question comes from Craig Kucera from B. Riley Securities.

I want to talk about the next 6 months or so. Can you talk about the pipeline that you're evaluating and sort of where you're seeing the best risk-adjusted returns from a category perspective?

That's a good question. I mean I think we're seeing really -- it's really a good risk-adjusted returns based on a little bit of that shorter duration where we're picking out a very strong real estate locations. I would say that we've bought even an unfavored category that we wouldn't mind that category, that tenant kind of not renewing, that sort of situation. So I'd say it's a little bit harder to kind of just say one category. We're seeing better return opportunities in risk-adjusted returns. I think it's just really seeing -- making sure you're getting good real estate and whether the shorter lease duration is really driving that opportunity for us. But look, all the tenants seem to be doing very, very well. And so it's -- certainly, if there was a category that isn't doing well, we'd only be involved if it is really to get at the real estate kind of like the Old Time Pottery scenario.

Got it. I guess then, does the concept of buying investment grade and maybe paying up for that a little bit more versus the noninvestment maybe become less important when the economy is strengthening and you're looking a little bit more to core real estate and maybe happy of the tenant leaves after a couple of years?

We'll still be involved in the investment grade side of it to keep that ratio fairly decent because it's important for portfolio composition.

Okay. Fair enough. And one more for me. Just going back to the development in Jacksonville. Can you give us some metrics or some thoughts around maybe how meaningful that might be from an investment or cash flow perspective to Pine once that property is constructed?

Craig, it's Matt. I mean we've disclosed that it's about a 23,000 square foot building. And so it's a grocer. So you can throw a per square foot number on there and kind of triangulate to an overall value. And then I would say that you should expect us to be targeting some sort of spread above and beyond where it would trade in the market, obviously, because we're taking the development risk. So it should be pretty accretive to overall earnings on a run rate basis once we get it built.

[Operator Instructions] Ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the floor back over to the management team for any closing remarks.

Thank you for joining us. I look forward to talking to you during the quarter.

And ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for joining. You may now disconnect your lines.