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

Hello, everyone, and thanks for being with us on this call covering Alpine Income Property Trust's operating results for the second quarter of 2022. Joining me is John Albright, our CEO and President. Prior to getting started, I want to note 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 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 what we expect appear periodically, in more detail, within the company's Form 10-K, Form 10-Q, and other SEC filings. Our SEC reports, earnings release, and latest investor presentation, which include reconciliations of the non-GAAP financial measures we utilize, are available on our website at alpinereit.com. Having said that, I'll hand the call back to John.

Thank you, Matt, and good morning to all of you. During our Q1 earnings call, we mentioned our belief that an opportunity would arise to pick up high-quality properties at better pricing during the back half of this year, since climbing interest rates, a difficult debt market, and an unpredictable macroeconomic backdrop are all pushing cap rates higher. Because of that, we prioritized capital recycling in Q2, locking in appealing pricing on asset sales and then putting those proceeds to work in opportunities with improved risk-adjusted returns, stronger tenant credits, and more attractive cap rates. In Q2, we disposed of $73 million in properties at a blended cap rate of 7.1%, which produced gains on sale of $15.6 million, or $1.15 per share; included in that figure is the previously announced disposition of our remaining office property, which delivered a gain of $7 million. Excluding that office property from our disposition figures, we sold $34 million of retail assets at a blended cap rate of 5.8%, producing gains of more than $8.5 million. Since office investments are no longer held in our portfolio, we view retail-only execution as a more meaningful mark-to-market for our portfolio and as evidence of the outstanding quality of the real estate we've assembled over two and a half years. Our retail dispositions mainly targeted non-rated or below investment grade tenants, where our exposure to both those tenants and the sectors they operate in had grown elevated. The properties we sold were leased to Sportsman's Warehouse, At Home, Hobby Lobby, and Cheddar's Scratch Kitchen, which let us lower our concentrations in the sporting goods, home furnishing general merchandise, and casual dining sectors; when it comes to acquisitions, we've concentrated on discount and value oriented retailers that ought to gain as consumers grow more price conscious and seek to stretch their buying power while dealing with substantial inflation pressures and a higher cost of capital. In Q2, we acquired 19 properties across nine states, leased to industry leading operators including Best Buy, Little Caesars, LA Fitness, Dollar General Dollar freight, Dollar Tree, and Family Dollar. Our Q2 acquisitions came at a weighted average cap rate of just over 7%, creating a highly attractive net investment spread compared with the 5.8% cap rate on our retail dispositions. So far this year, we've purchased 35 net lease properties totaling $109 million, at a weighted average going in cash cap rate of 6.9% and a weighted average remaining lease term at acquisition of 9.4 years. After the quarter closed, we sold our scrobbles carwash in Jacksonville, Florida at a 4.8% cap rate, and we've placed the remaining disposition proceeds that sat on our balance sheet as 1031 restricted cash into a property leased to Lowe's.

Given everything that has happened with our transaction activity so far this year, our retail portfolio, which stands at 100%, now lines up far better with those competitors of ours carrying valuation multiples that are considerably higher. Since we keep selling at cap rates that are low and putting that money back to work at yields that are higher, we have confidence in our ability to bring down leverage on the balance sheet step by step, make our overall property metrics better and generate FFO and AFFO per share of a higher quality. At this point I'll hand things over to Matt, who will cover how we performed during the quarter, what went on in the capital markets and our raised guidance.

Thanks, John. From an operations standpoint, our portfolio is still fully leased at 100%, and since close to 85% of rental income originates from either publicly traded or publicly traded companies, we enjoy strong visibility into how our tenants are performing at the corporate level, along with their credit metrics, both of which have stayed robust all year long. For the second quarter of 2022, FFO came in at $0.47 per share, which is a $0.09 per share, or 23.7%, improvement versus the same period in 2021. AFFO for the second quarter of 2022 also landed at $0.47 per share, an $0.08 per share, or 20.5%, gain relative to the second quarter of 2021. On a year-to-date basis, FFO reached $0.97 per share while AFFO hit $0.95 per share, which works out to per-share growth of 23% and 16%, respectively, year over year against the first six months of 2021. G&A costs during the quarter — including the $948,000 management fee paid to our external manager — came to $1.5 million. That marks a 15% rise year over year, mostly attributable to higher management fees stemming from our equity capital markets activity in the second half of 2021 and year-to-date 2022, and it was favorably offset by second quarter revenue growth of 71% year over year. G&A, when measured as a share of revenues, fell to 13.1% in the second quarter, down from 13.3% in the first quarter, and represents a year-over-year decline of roughly 640 basis points. During the second quarter of 2022, the company distributed a cash dividend of $0.27 per share, which is an 8% increase year over year compared with the company's Q2 2021 cash dividend, and gives a current annualized yield of about 6%. Payout ratios for FFO and AFFO in the second quarter were quite healthy at 57%, and we expect to declare our regular quarterly cash dividend for the third quarter near the end of August. In the second quarter, we sold 87,000 shares of common stock via our ATM program, generating total net proceeds of $1.6 million at an average issuance price of $19.09 per share; we closed the quarter with net debt to total enterprise value at 54%, net debt to pro forma and EBITDA at 8.3 times — a half a turn lower than where we finished the first quarter — and we still hold a very healthy fixed charge coverage ratio of almost five times. Although we do expect a broader economic slowdown in the markets during the back half of the year, we raised our full year FFO and AFFO per share guidance. Our earlier guidance had assumed more deleveraging in the second quarter than actually occurred, which is pushing down the projected weighted average share count for the year, offset by additional hikes to our interest rate assumptions to reflect the steepening yield curve. We lowered the top end of our acquisition guidance to reflect the second quarter results. And we are meaningfully raising our disposition guidance to reflect sustained confidence in our capacity to sell assets at appealing valuations, which lets us achieve positive net investment spreads when redeploying the proceeds. We're kicking off 2022's third quarter with annualized straight line base rent across the portfolio of $39.6 million that's in place, plus in place annualized cash base rent of $38.7 million; those figures come ahead of the July sale of the scrubbles and carwash, along with the acquisition of the lows, both of which John mentioned before. Our expectation now is to pick up somewhere between $215 million and $235 million in retail net leased properties over the course of 2022, dependent on market conditions, and we continue to think acquisitions will land at a blended yield that's comparable to or stronger than the acquisition cap rates we saw for the full year 2021. Turning to match funder acquisition activity via Creative Capital recycling, we've raised disposition guidance by $50 million on the low end, taking it to $125 million, and by $75 million on the high end, taking it to $175 million. For the full year 2022, both our FFO and AFFO guidance ranges moved up by $0.05 at the low end and at the high end, while the weighted average share count for the year dropped by 1 million shares at the low end and 2 million shares at the high end. Projected 2022 FFO now sits between $1.50 and $1.65 per share. Meanwhile, our full year 2022 AFFO guidance range climbed to $1.58 to $1.63 per share. I'll hand things back over to John now for his closing remarks.

Appreciate it, Matt. The way our assets convert to cash, how desirable our properties are, how open and effective our renters are, plus the steadiness of the money coming in — all of that leaves us in a strong spot. What we assembled, in our view, stands as the top-tier real estate-centric portfolio within the publicly traded net lease space. The caliber of these holdings becomes obvious through the pricing we managed to get on our dispositions; and we have confidence that our holdings will keep delivering solid results, even amid a turbulent, wider economic backdrop. We're grateful for the dedication shown by everyone on our team and for the ongoing backing of our investors. With that, we're ready to take your questions.

Hi everyone, nice work on the quarter. I'm covering for Jason Stewart today. Regarding rent escalation, how much visibility do we have? You mentioned on the prior call that roughly half the portfolio could see an increase of 75 to 125 basis points. Does that still hold, or with the macro backdrop, are we leaning toward the smaller end?

Hello Matt, Matt here. Thanks for reaching out. Broadly speaking, 75 to 125 strikes me as a solid range. Which lease happens to roll over will determine things annually. That band, in my view, hasn't shifted because of deal activity. So going forward, I'd treat it as a solid run rate.

Great. Then one more about dispositions. Do you all still plan to move away from tenants with weaker credit and put that capital into stronger opportunities down the road?

Yeah, I'd say you should probably anticipate that we'll keep doing similar things as we go forward; there's still a fair amount of room for us to continue producing pretty solid gains from certain properties at low cap rates, then redeploy that into higher cap rates and tenants of better quality.

Understood. So would you say you're still observing cap rates that aren't in the 5.5% to 6% range when it comes to dispositions?

Yeah. Honestly, it has been remarkable. We figured perhaps we would witness somewhat greater widening in those cap rates, yet when it comes to sales of smaller properties, you're truly seeing plenty of high net worth individuals along with certain institutional investors purchasing such properties at cap rates that honestly have not shifted much at all since six months back. So we continue to see a solid chance to recycle here.

Understood. So do those sit in particular markets? Or does it simply vary?

No, it isn't tied to any geography at all. What actually drives it is where we can find the chance to achieve a truly outstanding cap rate, or an extremely low one. Alternatively, there may be chances to achieve a respectable cap rate while offloading a tenant with weaker credit, which only makes the portfolio better as we move ahead. So we'll pursue something like a barbell approach: we'll dispose of assets at very low cap rates, and at the same time we'll dispose of some of those weaker credits and thereby strengthen the portfolio. Through that combination, we'll still end up with a highly appealing disposition cap rate, plus a chance to recycle capital into stronger credit.

Great, thanks everyone.

Hey everyone. Morning, everyone. Hi, John. So the upper end of the disposition guidance equals one-third of what's in the portfolio right now. If bringing that portfolio to the pristine condition you want doesn't shut the valuation gap you were expecting, whether that's by the end of the year or early the following year — what comes after that for Pine? Is a strategic alternative something the board has to look into?

Well, as I said, there's still more left to do. So yeah, if we bring this to an extremely pristine state and our trading is still roughly at the level it's at now, naturally, we'd look into those alternatives, since it just doesn't make sense to keep pushing forward if we aren't truly connecting with investors and investors. We've got plenty of wonderful value investors, but the people who need larger companies are demonstrating quite a bit of appreciation for what the portfolio is worth, so to speak; so we're trading below NAV, and if we continue building a better and better portfolio, naturally, we'd consider those sorts of scenarios.

Also, is there any timeframe you would set for yourselves?

Not really — I believe it will be obvious once we've had two or three quarters with additional recycling and an upgraded portfolio. When you check our slide deck, the investor presentation, we trade at the smallest multiple. And looking at our credit composition, it matches that of the companies with the highest multiples, plus our locations are superior — since we're a small firm, that's achievable. So if we fail to connect with people who can purchase this portfolio at 159 per foot while the pure average sits at 250 per foot, and our implied cap rate is 7 versus whatever figure appears in your model, then it's evident we must consider other alternatives.

And what additional dispositions are possible once this year wraps up? Since 175 at the top end equals one-third of the portfolio?

Yeah, I doubt there will be significantly more past that point. My sense is we're targeting the easiest opportunities, and it definitely won't affect the core. So really, this amounts to minor adjustments, despite being a third of the portfolio, merely minor adjustments while demonstrating all the embedded profit within these properties; and so, look, it connects with the value, everyone, and clearly, we delivered fantastic results last year, plus reasonably good results this year; so it's not as if we have zero dissatisfied investors, folks want to see it reach a higher multiple, a view we hold too, but we believe we can achieve that by continuing to demonstrate, take a look at our three biggest tenants. Now, following the Lowe's acquisition, I mean, you simply make the comparison, and it sort of, sort of strikes you right, right on the forehead.

Thanks, guys.

Thanks.

Morning, everyone. Regarding the sale, have at home and Hobby Lobby fallen out of the top 10 tenants? Or did you hold several of their sites?

Both remain within the top 10. They've shifted closer to the lower portion of that group. And we hold several sites.

All right. Then regarding those low properties, was it a ground lease, or was it something like the building plus the land? How much time was left on that lease? And at what kind of cap rate are you purchasing that?

No, correct — it wasn't a ground lease, Rob. It was the building and the land. Roughly 10 years were left on that lease, and the cap rate was described as low to mid sixes. Right, so Rob, I believe it's — once again — somewhat of a barbell approach. We will certainly pursue additional transactions of the Lowe's variety whenever we spot that kind of opportunity, yet we aren't hesitant to acquire something with a truly junky credit if the property itself is excellent when it comes to alternatives, and the lease rate sits below market. Those deals have worked out very well for us. For example, with the At Home location we disposed of, we purchased it back when At Home wasn't even — the credit is now — and there were simply so many alternative kinds of uses for that property. So it's going to be a mix.

All right. Then, Matt, around when did most of the second-quarter dispositions happen — did those sales land right at the quarter’s close?