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 covering operating results for the fourth quarter and the full year of 2021. Joining me is our Chief Financial Officer, Matt Partridge. To get started, I'll hand things over to Matt so he can give the usual disclosures about today's call. Matt?

Appreciate that, John. Before we go further, I want to point out that a number of the remarks we're making on this call fall under the definition of forward-looking statements per federal securities law. What the company ultimately achieves down the road could end up looking quite different from what these forward-looking statements describe, and we're not committing to any obligation to revise them later. Details about the factors and risks that might lead actual outcomes to diverge materially from what we expect get disclosed periodically, with more specificity, in the company's Form 10-K, Form 10-Q, and other SEC filings. Our SEC reports, along with our earnings release — which include reconciliations of the non-GAAP financial measures we rely on — are available on our website, alpinereit.com. So with that said, let me hand things back to John now.

Appreciate it, Matt. We wrapped up a record-breaking year for the business with the best quarter we've ever had in terms of acquisition volume—over $100 million in well-positioned, high-quality net lease assets purchased, at a weighted average going-in cap rate of 6.2%. Because we grew the organization so successfully in 2021, we delivered the top total shareholder return among all of our publicly traded peers; we beat guidance for both the fourth quarter and the full year by a meaningful margin, raised our quarterly cash dividend by almost 23% compared to the prior year, and made dramatic improvements to our cost of capital. In Q4, we bought 26 properties across 11 states and 17 markets, and Houston stood out as the biggest market where we put money to work that quarter. Over half of the rents we acquired in Q4 were located in MSAs with more than a million residents, and roughly 50% of those acquired rents fell within the Urban Land Institute's top 25 markets for 2022. Our newly added acquisitions brought in 19 tenants—nine of them brand new to the expanding portfolio—spanning 12 sectors. Most notably, we had a rare chance to buy a portfolio of ground lease properties located in Houston. That ground lease deal meant 34% of acquired rents in the fourth quarter derived from ground lease properties, where the tenant has put money into the improvements while we hold the land. This ground lease structure makes for a superior investment since it adds another layer of protection through the tenant's investment in the improvements, which makes that tenant far more likely to keep operating at the location over the long haul. Those improvements revert to us should the tenant ever depart or when the lease term ends, producing a greater overall residual value for our investment. As I said earlier, the ground lease portfolio we bought sits entirely in the Houston market and benefits from strong macro fundamentals. Although the ground lease portfolio pulled our average cap rate lower in Q4, this was a unique chance to invest in the asset with outstanding risk-adjusted returns. I want to emphasize that this quarter was unusual, and as a result we expect a higher average cap rate on our investments in Q1 2022, closer to what you observed from us across the first three quarters of 2021. For the entire year of 2021, we more than doubled our portfolio by acquiring 68 net-lease retail properties for slightly above $260 million, at a weighted average going-in cap rate of 6.8% and a weighted average remaining lease term at acquisition of 8.1 years. Over the course of the year, we brought a number of new tenants into our portfolio, among them our first Lowe's, Academy Sports, Burlington, Camping World, Tractor Supply, Harris Teeter, and O'Reilly Auto Parts—just to name a few. If we zoom out and consider the markets in which we bought properties over the course of the year, they featured several of America's best-performing areas, among them Houston, Dallas, Charlotte, Atlanta, Seattle, Washington, D.C., Phoenix, and Orlando; given how desirable our asset locations are, along with rents we think sit under market, our 2021 execution reflects well what our broader investment approach looks like, one in which we aim to pair strong real estate basics with retailers and sectors that perform well, thereby reducing short-term exposure while keeping long-term residual value upside intact. As the year closed, our portfolio stood at 100% occupied once more, made up of 113 properties covering 3.3 million sq ft in total, whose tenants do business across 26 sectors in 32 states. Wells Fargo, At Home, Hobby Lobby, Academy Sports, Dollar General, Walmart, Walgreens, and Lowe's are among our biggest tenants. The biggest shift in that list of largest tenants resulted from us selling our Hilton Grand Vacations properties. That transaction produced a true cash gain exceeding $7 million plus a book value gain above $9 million, which lifted our total book value by $0.70 per share. Now that the Hilton deal has closed, the only office asset left in the portfolio is the Wells Fargo property located in Hillsboro, Oregon. Talks with parties who have expressed interest are ongoing, and this asset's sale has been factored into our 2022 disposition guidance, which will assist in funding what we acquire during the year; as we move through 2022, our real estate-focused investment approach will keep guiding us, since our scale lets us stay nimble and secure top-quality acquisitions within a net lease transaction market that is competitive yet fragmented. So with that, let's now hand the call to Matt.

Thanks, John. As John said before, all of our portfolio is leased up, and our renters have done quite well — they paid every dollar of contractual base rent owed for Q4 and for the whole year, and that includes each of the deferral repayments tied to COVID that were on the schedule. In Q4 2021, FFO came to $0.42 per share, which is $0.05 per share above the third quarter, while AFFO landed at $0.41 per share, up $0.04 per share versus the third quarter. Across the full year, FFO reached $1.58 per share, a 28% gain relative to 2020, and AFFO came in at $1.59 per share, up 53% compared with 2020. A total of $0.43 million in rent that was paid back under COVID-19 deferral agreements we'd previously told you about gave our full-year AFFO a boost. As we said last quarter, a single remaining tenant is still repaying us under a deferral arrangement agreed to earlier, and those installments — $22,000 each quarter — are set to run through Q2 of 2022. For the year, G&A expenses, which take in the $3.2 million in management fees paid to our external manager, came to $5 million. That marks a 7.9% rise from the prior year, which our revenue growth of over 56% more than meaningfully offset. G&A equaled 16.7% of revenues in 2021, down by over 750 basis points from the year before, which stacks up very well against quite a few of our small-cap net lease peers and keeps showing how our organizational scale and efficiency are improving. That growth let us raise our cash dividend in Q4 by almost 6%, bringing it to $0.27 per share. Fourth-quarter payout ratios for FFO and AFFO were quite healthy, at 64% and 66%, respectively, and right now we have a solid annualized yield of roughly 5.6%. Our Q4 dividend was the sixth time the company has raised its dividend since its IPO in late 2019, our fifth straight quarterly increase, and it stands 23% above our Q4 2020 quarterly dividend. We expect to announce our regular quarterly cash dividend for Q1 of 2022 near the end of February. Now to our capital markets activity and the balance sheet — 2021 was an extremely busy stretch. We roughly doubled the company's size, bringing in $250 million of debt and equity via a mix of term loans, loan assumptions, ATM issuance, and our first follow-on offering along with OP unit issuance. In Q4, we sold 152,000 shares of common stock under our ATM program, generating total net proceeds of $2.8 million. So far in 2022, we've sold 0.213 million shares of common stock through that ATM program at an average price of $19.98 per share, for total net proceeds of $4.2 million. We closed out the year with net debt to total enterprise value at slightly below 50%, net debt to pro forma EBITDA at 8.1x, and a fixed charge coverage ratio of 6.2x, which is quite strong and ranks among the best in the net lease sector. Apart from our revolving credit facility, no debt comes due until 2026; with year-end liquidity of $60 million from revolver availability and cash on the balance sheet, plus expected future proceeds from disposition activities, we feel we have sufficient liquidity to support our planned acquisition activities in the near term. Turning to 2022, we gave initial guidance in last night's press release. That guidance rests on several significant assumptions, among them — though not limited to — our capacity to raise investment funds at a reasonable cost of capital, and our ability to buy and sell assets at reasonable valuations, supported by broader capital markets and a generally stable economy. We enter 2022 with portfolio-wide in-place annualized straight-line base rent of $36.9 million, equivalent to $35.7 million of in-place annualized cash base rent. For the full year 2022, our FFO guidance range is $1.53 per share-$1.58 per share, while our full year 2022 AFFO guidance range is $1.51 per share-$1.56 per share. As I noted earlier, our 2021 AFFO per share results benefited from $430,000 of COVID rent deferral repayments, and since those repayments have mostly concluded, we expect them to reach only $45,000 in 2022. The year-over-year shifts do introduce some noise when comparing AFFO per share from 2020 to 2021 and from 2021 to 2022, but they have no effect on year-over-year FFO comparisons, since we kept straight-lining contractual rents through the repayment period rather than adopting cash-based revenue recognition for the tenants affected. Our 2022 per share guidance does build in some delevering of the balance sheet relative to our year-end 2021 credit metrics, stemming both from forecast dispositions and from our projected capital markets activities. Although leverage's ebbs and flows affect period-to-period growth metrics for PINE, we have consistently held that a long-term emphasis on risk-adjusted returns generates the best long-term value for our shareholders. On the transaction side, we expect to acquire $200 million — $250 million of retail net lease properties in 2022, and assuming market conditions cooperate, we believe those acquisitions will close at a blended yield similar to our 2021 full-year acquisition cap rates. Our transaction volume guidance and anticipated cap rates exclude the potential grocery development site at our existing Jacksonville, Florida property, which we disclosed in the third quarter and which remains subject to finalizing customary due diligence and approvals. Lastly, our guidance assumes we sell $40 million-$50 million of assets over the course of the year, including, as John mentioned earlier, the single remaining office property leased to Wells Fargo in Hillsboro, Oregon. Since the Wells Fargo lease expires in under four years, once we divest this asset and put the money to work elsewhere, we anticipate a significant boost to our portfolio's weighted average lease term. On that note, I'd like to express appreciation to those who hold shares in our company and to our business partners for the tremendous backing they showed throughout 2021, and we're eager for further achievements in 2022. At this point, I'll hand the call back to John so he can offer his closing comments.

Matt, thank you. Pine enjoyed a robust 2021 marked by expansion, and we are thrilled to step into 2022 holding a portfolio of such fine quality, free of any significant lease expirations in the near term, alongside a strong pipeline for acquisitions. The momentum we built through the close of 2021 has carried forward, giving us a quick beginning to 2022, and that force will serve as a powerful tailwind as we carry out our strategy centered on real estate and work to generate additional value for our shareholders. I'd like to congratulate our team for a year that set records, and I appreciate our shareholders for their backing. Right now, we will take questions.

Hello there, good morning. I have a few things I'd like to ask. Let me begin with the guidance on acquisitions. In 2021 you delivered $260 million, and now you're projecting $225 million, which is a modest drop for 2022. What I'd like to understand is what's behind that, and how much visibility do you have for acquisition volume across the coming quarters? Also, what might we potentially see that would let you reach the upper end of that range before 2022 wraps up?

Yes. Thank you, RJ. Look, from a pipeline standpoint, the visibility appears quite strong. I'd say we're simply, well, you know, protecting ourselves somewhat here, since clearly the macro market is kind of choppy right now, along with capital markets, and honestly, who can predict how things will unfold. Perhaps there's a war in Europe and all that. I think what we're really doing is avoiding the claim that we're pushing the gas pedal all the way down and pursuing acquisitions, you know, purely for the sake of doing them; instead, we're exercising some caution. We feel optimistic that, you know, well, certainly we'd prefer to do more, though all of it clearly hinges on capital markets and similar factors. My worry isn't so much about pipeline and our capacity to locate high-quality assets at attractive yield. What concerns me slightly more is the overall backdrop.

Right, that's clear. Matt, during your opening remarks, you mentioned that leverage stood at just above 8 times when the quarter closed, and clearly it fluctuates based on capital markets activity, you know. I'm assuming the dispositions or planned dispositions are already included in that figure, but could you describe how you anticipate leverage will move as the year progresses and then more broadly over a longer horizon?

Thanks, RJ. What I’d call the favorable piece of news is that trading activity in our stock picked up over the last several months, and that allowed us to use the ATM pretty productively right as the year began. You should probably assume we’ll keep actively using the ATM to support funding transactions for the rest of this quarter and after that. On guidance — basically, our forecast assumes we’ll be near that 7x mark, plus or minus, as the year closes, so a certain amount of de-levering is included. We definitely gave a view of what issuance of shares could look like through the range we released. There’s certainly going to be some de-levering, and we’ll operate the ATM in an efficient way. And like John said, we’ll keep an eye on what happens in the capital markets. That includes the $42 million figure.

Appreciate it. So for my final question, I'd like to widen the scope a bit. John, you mentioned your expectations that cap rates would basically hold steady when comparing 2022 with 2021. Could you share what you're observing in the marketplace regarding cap rates? Have any of these macro headwinds that have appeared over the last couple of weeks had an effect on pricing, or on how much product is available?

From a buyer's perspective, we haven't witnessed any improvement where pricing is concerned; at present it has remained pretty stable. You know, we're exercising a bit more selectivity in that, you know, we aren't aiming to—we're placing bids somewhat broadly just to test whether any softening exists in the market. Up to this point, we haven't observed any. We remain hopeful that, you know, we'll manage to snap up a few assets at prices that are more appealing. What we're discovering, you know, are solid acquisition properties offering attractive yields for us. We're checking whether we might achieve slightly better results; we haven't observed any shift in market pricing. There remains simply an enormous amount of capital sitting out there. My sense is many folks view this as, you know, a way to hedge against inflation. You know, you're picking up chatter from the brokerage community that, you know, capital is flowing toward the safety of this kind of asset for reasons that are plain to see; that's what we're up against. You know, 1031 was last year's scramble; everybody was anxious about that. These days it's the inflation scramble. We'll continue watching it and continue chasing opportunities.

Thanks, guys. Appreciate it.

Thank you.

Yeah, thanks, good morning, guys. John, just sticking with the acquisition market for a bit, obviously, you know, still see some strength there. Can you just talk about are you seeing any kind of divergence in opportunities, whether it's amongst geographies or the different kind of retail property types that you're looking at?

You know, I think, as a backdrop, you know, as we're working on the sale of Wells Fargo, we want to make sure we curate a very strong, you know, top- ten tenant list; we're working hard to kind of, you know, keep on impressing you with the quality of our portfolio; I think you're gonna see us, you know, pursuing some really good credits that will make its way up to the higher- end of the leaderboard with regards to tenant concentration. We're very excited that we're seeing some good acquisition opportunities in good markets that will help us kind of formulate even a stronger tenant backdrop. It's really all across sectors and locations. I would say we're pleasantly surprised to get some of the locations we're getting. Like, you know, for instance, the Houston acquisition that happened in the fourth quarter. When we did that ground lease portfolio, we were really, you know, happy to get that portfolio at that type of pricing with that kind of quality. It just kind of reinforces the quality of our whole portfolio that we were able to source something like that. That was totally unexpected and a terrific acquisition for us and for the company. Hopefully we can do more of those going forward.

That's excellent. Perhaps moving away from that topic, regarding the standard you were just describing — your deck includes some fresh information regarding demographics. That subject rarely arises when discussing net lease. So I'm simply wondering, when you prioritize the standard of the property itself, does the market currently reflect that in pricing, or is it a case where most competing bidders aren't examining the demographics beneath the property, allowing you to acquire what we'd describe as superior real estate at an equivalent price to a different site?

Yes. I suppose we're attempting to steer the discussion since clearly our portfolio stands out as extremely robust relative to perhaps others. It definitely isn't reflected in our share price. I mean, we are. The multiple at which we trade sits toward the lower end. When you examine our holdings alongside the demographics and the markets, we clearly ought to command a higher valuation purely given the standard. We're aiming to highlight that reality so that individuals, when considering putting money into various net-lease REITs, will conclude, "Alright, I can acquire Alpine at a notably low multiple, a greater dividend yield, and a far superior property portfolio situated in robust markets." That's our central focus, and clearly Houston now ranks as our biggest market, with obviously tremendous macroeconomic momentum there thanks to oil and similar factors. It's very much an economy that's strong and expanding. We commissioned a John Burns study 2 years back, and essentially we told John Burns to apply various parameters — which cities possess major airports, large universities, the greatest employment growth, population gains — and Houston actually emerged at the top, even at a moment when oil sat around $20 per barrel, which surprised us somewhat. Upon exploring further with John Burns, a good portion of it related to the city's business-friendly nature. Everything revolves around expansion. Of course, Houston likely won't hold the number one spot indefinitely, yet it demonstrates how we approach things — starting with the broad economic context, then pursuing genuinely strong properties through our acquisitions.

Mike, one more point I'd make is that within net lease, folks often zero in on how creditworthy the tenant is, and that matters; however, whenever you notice us buying properties whose tenant might not be as strong as what you'd normally expect from us, it's generally due to the fact that we perceive substantial value in the underlying property, and that's where we're uncovering some distinctive chances in the market where perhaps the pricing reflects the sort of tenant occupying it, and the real estate's quality plus the capacity to bring those rents up to market levels creates an opening for us when it comes to residual value over the longer term.

Right. That's a separate opening, since others don't view it the same way. Makes sense. One last thing, about how much capital sits in this space. As you're evaluating deals, what sort of rivalry are you running into? Does a big chunk of that 1031 money remain, perhaps not non-economic? I'm simply attempting to gauge whether lots of capital exists, yet how economically sensitive is it? How sensitive is it to rates? For instance, will the market shift alongside rates here, or will there be stickiness, maybe a 6-month, 9-month lag should we see a bigger upward move in rates, while the capital simply doesn't mind since it has different motivations?

Yeah, good question; On these smaller acquisitions that are 1031-driven, we're observing less of that at present. Much of that, I believe, occurred late in the year. Now, I think you're seeing more of it on the individual side; with these smaller transactions, you know, folks are purchasing more as allocation of capital instead of being 1031-driven. I don't see, you know, cap rates just, you know, some kind of frenzy tightening, extremely tight due to a feeding frenzy regarding 1031 money. But, I mean, you do witness that in, you know, say a Chick-fil-A ground lease. I mean, that stuff trades at, you know, absurdly low cap rates. But, you know, we aren't seeing it sort of across the board. You know, with the larger institutions, you know, they clearly aren't focused on this type of product. On larger acquisitions, we are seeing there, you know, deep institutional capital that is chasing; we're sort of in the middle zone, which is ideal for us, where we're mostly competing against smaller players, and that's where we're capturing much better yield in high-quality. Were we going down to the McDonald's ground lease, that would be truly hard for us to transact on. Were we entering the $300 million type acquisition range, that would be truly tough to compete on. This middle zone is actually sort of the sweet spot.

All right, that's all I needed — appreciate you both making room for me.

You're welcome.

Morning, everyone. John P. Albright, how should we properly frame the acquisitions in Q4, excluding the ground leases? Did the cap rate there line up with the 6%-8% you closed in Q3, and the 6%-8% for the entire year? Was there anything regarding quality that pulled it lower, on top of the, you know, ±5% cap rate tied to the ground leases?

Yeah. Honestly, the ground leases were basically what moved the cap rate. Like we said during the intro, we anticipate cap rates coming in above our Q4 average. You know, that was somewhat of a, you know, one-off, so to speak, that caused it. Going forward we're being selective and pushing that higher.

Okay. Nothing beyond the ground leases, you know, really pushed those 2/3 of acquisitions that weren't ground leases off a cap rate in the high sixes to low seven range during the fourth quarter.

Correct.

Nothing inherent in the market is dragging that lower.

That's right — none existed.

All right. Outside of Wells Fargo, what do those dispositions look like? What is it about those assets that makes them ready to be sold in 2022, from your perspective?

You basically served me a fat pitch there, and I'm grateful for it. On assets we acquired fairly recently, we're actually seeing some reverse inquiry, where somebody simply believes they need to own it; we'll attach a price and tell them, "If you'd like to own it at that number, we're glad to sell it to you." I mean, the asset appeals to us, the credit appeals to us, but as you know, everything has a price. That's essentially what's behind this, and it's largely inbound interest on things we bought not long ago. Even with Alpine Valley Music Theatre reopening for summer concerts, I received a few calls about that recently. In any case, that's a bit of that guidance.

All right. That's my final question. Matt, how would you have us frame approximately when the deals closed during Q4? More or less the middle of the quarter? Did a sizable chunk land toward the end of December? Of that $0.42 of FFO, what portion came from the $1.6 million of NOI — how are we supposed to look at that?

Sure. Most of it landed in December. It wasn't concentrated entirely in the final week or anything like that, but it definitely skewed toward the latter portion of the quarter.

All right. So in terms of dispositions, would you say the runway right now sits above that 42?

That's right.

All right, thank you, everyone, for taking the time.

Thanks.

My line was muted earlier. Many thanks. Appreciate you all for fielding this. Returning to how we're capitalized, plus reducing a portion of our obligations during 2022 while making use of the ATM — your number of shares will rise, as you know, by a decent amount. Is it possible for you folks to reach that share total simply through the ATM? Do you believe sufficient liquidity exists there? Or perhaps, at some stage over the course of the year, a follow-on is something we'd likely pursue.

Well, I'd say that remains to be seen. As I mentioned, liquidity has gotten considerably better across the past few months. It's not my place to forecast what direction that takes from here, yet should it keep getting better, my view is it's achievable for us to handle that quantity through the ATM. I won't stand here and claim either way that this represents how we've modeled things playing out. When it comes to carrying out that plan, we intend to stay flexible.

inside those, you have a handful of models, each with its own set of scenarios. Matthew M.

Partridge, answering: that's right.

Understood. Fine. The bulk of the remaining inquiries have already been addressed. Many thanks, everyone.

Appreciate it, Barry.