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

Hello, everybody, and I appreciate all of you being on the line today for Alpine Income Property Trust's conference call covering operating results for the first quarter of 2022. Joining me is our President and CEO, John Albright — thanks, John. Prior to getting started, please be aware that a number of the remarks we make today fall under the category of forward-looking statements as defined by federal securities law. It's possible the company's actual future results could end up differing substantially from what these forward-looking statements describe, and we have no obligation to revise them. The factors and risks capable of making actual results diverge materially from our expectations get disclosed periodically in more detail within the company's Form 10-K, Form 10-Q, and other SEC filings. Our SEC reports, along with the earnings release containing reconciliations of the non-GAAP financial measures we utilize, can be located on our website at alpinereit.com; and now I'll hand the call back to John.

Thanks, Matt, and good morning to all of you. The year has gotten off to quite an active start, with 16 properties picked up in Q1 of 2022 for a bit more than $65 million, at a weighted average cap rate of 6.9%. And just recently, we sold off the final office asset we still held in Hillsboro, Oregon. That office disposition wraps up our planned transition into a portfolio that is entirely retail, and it now makes Walgreens our biggest tenant. The largest share of what we bought was tied up in a portfolio of nine pharmacies occupied by Walgreens and CVS, which we acquired through a reverse 1031 exchange ahead of the office sale. Through this portfolio, we kept the investment grade credit exposure that the Wells Fargo disposition had taken away from us, while at the same time broadening our geographic mix and extending the remaining lease term on the single property by more than double. All told, the 16 properties we just bought sit across 12 states, carried a weighted average lease term of nine years, and brought in seven distinct tenants active in the pharmacy, grocery, auto parts, dollar stores, specialty retail and convenience store segments. At a 6.9% initial cap rate, the first quarter brought our acquisition yields back to a more normal level, one that lines up better with what we anticipate acquiring over the course of the year. That said, given how interest rates have accelerated year to date, we're hopeful that we'll begin to observe incremental cap rate expansion as we carefully seek out ways to grow our pipeline. On the market side, we still lean toward infill spots that gain from population density and stronger barriers to entry; over two thirds of the rents we acquired in Q1 came from larger MSAs with populations above 1 million. Along those lines, we were able to pick up exposure to the New York, Philadelphia, Baltimore, and Washington DC markets at appealing per square foot valuations, in assets positioned at the hard corner of intersections with strong traffic. By quarter's end, our portfolio had returned to 100% occupancy, made up of 129 properties and 3.5 million square feet in total, with tenants spread across 26 sectors in 35 states. Since the pharmacy segment, and Walgreens in particular, accounted for the majority of our Q1 acquisition volume, I'm happy to report that our investment grade credit exposure hit 50% by the close of the quarter. Walgreens now stands as the biggest tenant exposure in our portfolio, and pharmacy is our largest sector. After the office property sale earlier this month, our top tenants as of today include Walgreens, At Home, Hobby Lobby, Academy Sports, Dollar General, Walmart and Lowe's. Clearly, the biggest shift to our top tenant list is the removal of Wells Fargo, which, together with our Hilton office property sales in Q4, produced over $16 million of gains from our office dispositions, which we reverse exchanged into our Houston ground lease portfolio and the Q1 Walgreens and CVS Pharmacy portfolio. We feel confident that these recent portfolio changes strengthen our overall profile for investors. Also, since our stock currently implies a cash cap rate of slightly above 6.9%, we believe they will help push a better valuation, because investors are now able to more simply benchmark our holdings against those of our biggest net lease competitors. On top of that, we have raised our 2022 disposition guidance, since we intend to sell assets in cases where we can achieve attractive net investment spreads and record gains, which will bring attention to the intrinsic worth of our portfolio. Through the strategy of disposing at low cap rates while acquiring at higher yields, we will be capable of gradually reducing leverage on our balance sheet. Moreover, since we expect to be able to put the proceeds back to work into similar properties with stronger credits, we are confident that our disposition program will further enhance our overall portfolio metrics and generate higher quality FFO per share. Having said that, I will hand the call over to Matt so he can discuss our first quarter results, balance sheet, capital markets activity, and updated guidance.

Thanks, John. Let's get straight into the Q1 numbers. For the first quarter of 2022, FFO came in at $0.49 per share, which is up $0.07 per share, or 16.7%, versus the first quarter of 2021. AFFO for Q1 2022 was $0.48 per share, an increase of $0.04 per share, or 9.1%, over Q1 2021. The biggest difference between how FFO and AFFO performed year over year is the $248,000 of net non-recurring COVID rent deferral repayments — that figure was $271,000 in the first quarter of 2021 and only $23,000 in the first quarter of 2022. I'm happy to report that next quarter will be the final quarter with scheduled COVID rent deferral repayments, which means we will have completed and fully recovered all of the rents we previously deferred. Turning to operations, our portfolio is still 100% occupied; and having watched our tenants' corporate performance through the first quarter of the year, we've mostly observed continued gains in corporate-level operating trends, or a proven capacity to sustain strong, consistent results across just about every tenant sector we have. G&A expenses for the quarter, which include $936,000 in management fees paid to our external manager, came to $1.4 million; that's a 39% increase year over year, mostly caused by higher management fees tied to our 2021 equity capital markets activity, and it was favorably offset by revenue growth of more than 83%. G&A as a share of revenues during the first quarter was 13.3%, a decline of nearly 425 basis points year over year, which, as we've pointed out in prior quarters, continues to show our improving organizational scale and efficiency. In the first quarter of 2022, the company paid a cash dividend of $0.27 per share, which represents a 12.5% increase year over year compared with the company's Q1 2021 cash dividend. Its current annualized yield is roughly 5.7%. FFO and AFFO payout ratios for the first quarter were quite healthy, at 55% and 56%, respectively; and we expect to announce our regular quarterly cash dividend for the second quarter near the end of May. On the capital markets side, we issued 315,000 shares of common stock under our ATM program in the first quarter, generating total net proceeds of $6.1 million, at an average issuance price of $19.65 per share. We finished the quarter with net debt and total enterprise value of 56%, net debt to pro forma EBITDA of 8.8 times, and a very healthy fixed charge coverage ratio of 5.6x. After the quarter closed, we exercised the accordion options on our 2026 and 2027 term loans, closing on an additional $60 million of proceeds. Those proceeds went toward paying down our unsecured revolving credit facility. Combined with the proceeds from the Wells Fargo asset sale, which also were used to pay down our unsecured revolving credit facility, we raised our potential liquidity to roughly $100 million through available cash and overall borrowing capacity on our revolver. Given how we performed in Q1 against the current capital markets environment, we raised our full year guidance to reflect a reduced weighted average share count for the year, higher acquisition and disposition guidance expectations tied to rising near term and long-term interest rates, plus adjustments to several other material assumptions. We entered the second quarter of 2022 with portfolio wide in place annualized straight line base rent of $41.6 million, or $40.5 million in place annualized cash base rent, and that figure excludes the Wells Fargo sale that took place in the second quarter. Our boosted full year 2022 FFO guidance range stands at $1.55 to $1.60 per share. And our full year 2022 AFFO guidance range was raised to $1.53 to $1.58 per share. Consistent with what we said last quarter about our 2022 per share guidance, we anticipate delevering the balance sheet relative to our current Q1 2022 credit metrics, achieved via our higher disposition guidance and through our updated projections for capital markets activities across the remainder of the year. Turning to transactions, we now expect to acquire between $215 million and $250 million of retail net leased properties in 2022, a 7.5% increase to the bottom end of our range, subject to other market conditions, and we believe these acquisitions will happen at blended yields similar to or better than our current 2021 full year acquisition cap rate. And lastly, as John mentioned earlier, we boost our disposition guidance so we can provide real time valuations of certain larger tenant exposures, produce accretive net investment spreads, and incrementally delever our balance sheet, all of which we expect will enhance our overall portfolio metrics and drive higher quality AFFO per share. Our updated disposition guidance projects between $75 million and $100 million of asset sales over the year, up by $35 million at the low end and $50 million at the high end; and our guidance incorporates the office building in Hillsboro, Oregon that has already been sold. With that, I'll now hand the call back to John for his closing remarks.

Matt, thank you. We're happy with the strong beginning we've made this year, which came from heavy investment activity and from finishing the move that made our portfolio entirely retail-focused. The market has seen plenty of ups and downs during this year, yet we plan to continue trimming our holdings in a selective way, showing off both the appealing and durable worth of what we own as we push toward better-quality earnings. A robust operational plan sits before us to assist in delivering superior results across the long term, and we're grateful that our shareholders keep backing us while we carry out that plan. To everyone on our team, I want to express thanks for each of their achievements. Right now, we'd like to take your questions. Operator?

Morning. John, regarding those Walgreens leases — do they follow the usual structure with no escalations? If that's the case, how does it affect the bumps across the whole portfolio, now that Walgreens is your biggest tenant? Also, what made this portfolio appealing to you right now, considering Pine is still in that hyper growth phase?

Yeah, thanks Rob. On your second point about why it's attractive — this was a portfolio deal. The sellers were motivated, not for tax reasons or anything like that; we simply wanted to get it closed. It was a somewhat smaller portfolio. As a result, they weren't overly focused on price. So we believe we secured a strong price for a quality portfolio. As for your question about the Walgreens lease, yes, it's the standard lease arrangement that Walgreens uses everywhere. And when it comes to rent bumps and their impact on the portfolio, I'll let Matt share his view on that.

Yeah. Hi, Rob. Once we closed on Walgreens and completed the sale of Wells Fargo, roughly 50% of the portfolio includes rent increases — either yearly or at intervals — within the current lease agreements.

So at this point, what does that average come to?

When you look at it as yearly growth?

Sure.

That figure varies annually, though on average it lands within a range of 75 to 125 basis points each year.

All right, that's great. So Matt, since I have you on the line, you folks have increased how much debt you can take on. That said, when you talk with your banking partners, if you needed to go out and obtain fresh debt right now, or swap out portions of your capital stack, how would the pricing compare with what it was at the start of the year? It appears that across the past 5 to 7 years, whenever rates climbed, spreads tightened within the REIT sector. My assumption is that a portion of that has occurred. However, some of that substantial surge in rates during the past 3 to 4 months would flow through into what you pay to borrow. How meaningful is that for you folks nowadays if you needed to obtain fresh debt instead of growing what you already have?

Yeah, I'd say spreads have mostly held steady on the unsecured side, and I believe they've widened somewhat on the secured side, which we don't do much of. Really, the place where they've widened out is on the forward swaps, the 5-year forward swaps. Last week, check roughly a couple of weeks ago, they had widened to above 2.5%. So from a spread standpoint, we're all in between 135 and 195, which has been appealing for us, but clearly, given where new swaps sit, you're looking at the 4% plus range to originate new fixed rate 5-year debt.

All right, and the final item from me, John — when you look at your own pipeline, or the talks you're currently having during the early phases on deals, is there any indication that something is shifting, whether in asset pricing or in how many properties are being listed nowadays? Any notable differences you'd point to compared with three or six months back?

Yeah. As I said during the previous earnings call, we've definitely broadened our acquisition focus when it comes to cap rates, and we've gone wider than the market. So obviously I can offer some genuine data points to illustrate that, since as you've observed, we've raised our disposition guidance because we continue to see extremely strong low cap rates on smaller type assets. That means we're pushing a greater number of our properties onto the sell market, since we can redeploy that capital into higher spreads and higher yields. So that's what we're going to do. At present, then, pricing for smaller assets looks very strong to us; and I believe the real reason is that what you're witnessing is people wanting to steer clear of the bond market. So as a fixed income investor, if bonds are going to be a bad deal, you'd basically prefer to swap into a strong real estate asset with a long lease at a higher yield, plus you get the inflation protection that real estate provides; so I think that sort of movement is what you're seeing, with capital shifting out of bonds and into real estate for better yield and asset protection; and so basically we're going to be patient on the acquisition side, and we're not seeing anything at the moment; no good deals are showing up right now, though they may arrive later in the year; so we're kind of waiting patiently on that; on the multi tenanted side, given that we're active there as CTO, buyer hesitancy is visible, so perhaps that will show up on the net lease side, but so far we haven't seen it. So that was a long winded answer from me.

Morning, everyone. I want to explore further the asset recycling planned for the latter half of this year. What kind of spread do you expect between the assets you're purchasing and those you're disposing of? And is this going to become a major component of your approach moving forward?

It will be a major component of our approach. Should we continue to find strong chances to divest properties at reduced cap rates, we'd act as purchasers, with the capacity to redeploy that capital into better spreads. So we'd pursue that consistently. Broadly speaking, though, I'd estimate roughly a 100 basis point gap separating what we offload and what we acquire—it might even be somewhat larger.

So, what kind of friction would transaction costs create for you? And how much of that would it consume?

It isn't — I mean, it isn't significant, considering — well, significant might depend on who's looking at it. It's not terrible. I wouldn't want to believe that would become a blocking problem.

All right; and after that, as we consider the leverage — perhaps near the close of the year, after the asset recycling is finished — where do you believe that could land?

Using the guidance we have now, our expectation is that it will come in at 7x net debt to EBITDA or lower.

All right, and that's my final question. Now that the office sales have closed, should we expect any additional assets for reimbursements showing up on the income statement?

No, beyond what was already there in the first quarter, we have no operating expenses. So there's a small amount of leakage in there. Not a lot of it will carry forward on certain assets we hold, but specifically regarding the Hilton property from Q4, that asset with the higher leakage is no longer part of the portfolio.

Morning, everyone. Appreciate you letting me ask. John, could you characterize the properties you intend to divest during this year, and how do they stack up on a quality basis relative to the rest of the portfolio?

My sense is that the investor community, and perhaps the analysts covering us, don't consider a number of the properties we want to offload as top-tier. Yet we're aware that the sites themselves are of such strong quality that premium pricing should follow. Our aim, then, is simply to wow our investors, given that Pine holds a really robust portfolio, and one day folks might be caught off guard by the values we achieve on the disposition front. So, without sidestepping your request for specific names, I'd say these likely won't be core-type names when it comes to credits. Really, it amounts to further trimming the portfolio, shedding sites that aren't being correctly or suitably valued by the public markets.

Understood. Is there any particular industry where you intend to lower your exposure because of the hyperinflation situation?

Well, we moved early when it came to exiting casual dining. We divested banks during the past 2 years. We didn't hold many, and we had 2, but really it was 1, and that happened somewhat before inflation went wild, though labor expenses were already rising. So our view was that casual dining would sit squarely in the crosshairs of labor costs. And if inflation accelerated, then we'd be dealing with both of those problems at once. So that's an area we've largely stepped back from, and beyond that we hold just 1 carwash. That asset could be a possible divestiture; in our judgment it's the sort of thing people spend on at their discretion, and it certainly isn't an ESG-friendly kind of asset, but we have only 1 of them.

Understood. Then, Matt, here's my final question: with the direction rates are moving, how do you intend to handle the variable debt exposure? Is it fair to expect that by the end of the year, 90% of the balance sheet will be fixed?