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

Hello, everybody, and thanks for being with us on this call covering Alpine Income Property Trust's operating results for the third quarter of 2022; our Chief Executive Officer and President, John Albright, is here alongside me. Prior to starting, 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 is possible that the company's actual future results will end up differing substantially from what these forward-looking statements describe, and we assume no obligation to revise them. Details on the factors and risks that might lead actual results to diverge materially from expectations appear periodically in 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, alpinereit.com. Having said that, I'll hand things over to John now.

Thanks, Matt, and good morning to everybody. We turned in a strong third quarter, since we keep enhancing the quality of what we earn through carrying out our strategy of accretive capital recycling and by taking meaningful risk out of our balance sheet. Over that quarter, we disposed of 6 net lease properties, with total disposition volume reaching $50.5 million, which produced total gains of $11.6 million at a weighted average exit cap of 5.5%. Among the properties sold were ones leased to Scrubbles Car Wash, Container Store, 7-Eleven, Kohl's and JOANN Fabric. Through those sales, we trimmed our exposure to low-quality tenant credits and, in turn, put the proceeds back to work into tenants that are predominantly investment-grade. So far this year, we've sold 11 properties for a bit more than $123 million at a weighted average exit cap rate of 6.5%, or 5.6% once you take out the effect of the only remaining office property that we sold during the second quarter. Demand for net lease assets stayed robust all through the third quarter, and the pool of buyers we drew from was diverse; we sold properties to family offices as well as other public and private REITs and high-net-worth individuals, and we keep assessing appealing chances to dispose of assets as we move deeper into the fourth quarter. Our intention is to stick with our opportunistic method of recycling capital as we aim to produce appealing net investment spreads and bring down debt. The acquisitions we made during the quarter leaned toward high-quality national tenants showing strong operating trends, while we also opportunistically added well-located assets at values below replacement costs. All told, over the quarter, we bought 9 properties situated in 8 states, carrying a weighted average lease term of 7.5 years at a weighted average cash cap rate of 7.1%. Over 75% of the acquired rents derive from tenants holding an investment-grade credit rating, among them Lowe's, Family Dollar, Dollar Tree and DICK'S Sporting Goods. So far this year, we've acquired 44 net lease properties for a bit more than $145 million at a weighted average going-in cash cap rate of 7% and a weighted average remaining lease term at acquisition of 8.9 years. As we entered the fourth quarter, we owned 146 properties amounting to 3.4 million square feet, with tenants operating across 26 sectors within 35 states. Notably, Lowe's now ranks as our #3 tenant, joining Walgreens, Family Dollar, Dollar Tree, Dollar General, Walmart and Best Buy as investment-grade tenants among our top 10 tenant list. Although our disposition activity inevitably calls for some reinvestment, we're being judicious about acquisitions, in light of market volatility and the deterioration in our cost of capital caused by higher interest rates and a lower stock price. While this clearly isn't unique to our company, our approach has been, and will remain, centered on maximizing value for our shareholders while actively managing risk. As we said back in April on our first quarter earnings call, we expected upward pressure on cap rates, since rising interest rates have affected not only investment turns but also liquidity in the market. Once the Labor Day break passed, September brought a clear change in mood, with cap rates starting to move higher. In our view, that creates a chance, since we can stay patient and put ourselves in position to generate appealing spreads separating what we buy from what we sell, thanks to hands-on portfolio management. At this point I'll hand things over to Matt, who will cover how we performed in the third quarter, our balance sheet, what we did in the capital markets, and our updated guidance.

Thanks, John. Our portfolio is still doing extremely well. At the close of the quarter, occupancy stood at 100%, and during that same quarter we brought in 100% of the contractual base rents we were owed. For Q3 2022, total revenues rose by over 40% relative to the equivalent period a year earlier, and although general and administrative expenses climbed 6.5% for the quarter, G&A measured as a share of revenue fell by over 400 basis points, which shows how efficiently we are growing. As John said earlier, our disposition work produced sizable gains on sale amounting to $11.6 million; those gains, together with our team's capacity to close transactions in a market that is changing rapidly, demonstrate how appealing the real estate they have managed to aggregate is, as well as the value our current portfolio implies. FFO for the third quarter of 2022 came to $0.40 per share, an 8.1% rise versus the third quarter of 2021, while AFFO for the third quarter of 2022 reached $0.42 per share, a 13.5% rise versus the third quarter of 2021. On a year-to-date basis, FFO reached $1.36 per share and AFFO reached $1.37 per share, which works out to year-over-year per share growth of 18.3% and 16.1%, respectively, measured against the first 9 months of 2021. A write-off of $284,000 in unamortized financing costs tied to our previous revolving credit facility weighed on our FFO. That earlier facility, which had been scheduled to mature in 2023, was ended alongside the origination of a new $250 million revolving credit facility, which represented a $100 million increase relative to our earlier revolver. Our new revolving credit facility also carries certain modifications to terms and covenants, plus better pricing at the lower end of our leverage-based pricing grid, the sustainability-linked pricing component that lowers the applicable interest rate margin when the company hits certain sustainability performance targets, and a new maturity date of January 2027. I want to recognize and thank all of our banking partners for standing behind us and executing so efficiently in what has been an extremely busy financing market. In addition, as we announced recently in our corporate update, we executed interest rate swaps covering the previously unhedged portions of our 2026 and 2027 term loans, which fixes SOFR across the remaining life of those term loans. Because of the extended maturity date on our new revolving credit facility and our new interest rate swaps, no debt of ours matures before 2026, and the sole floating rate exposure on our balance sheet relates to the balance on our revolving credit facility; we closed the quarter with net debt to total enterprise value of 55%, net debt to pro forma EBITDA of 8.3x, and we keep a very healthy fixed charge coverage ratio of 4.4x. All in all, we hold ample liquidity to act opportunistically in this volatile market, and we keep making positive strides toward strengthening our balance sheet while sustaining strong earnings growth and generating efficient free cash flow. Like we said before, on September 30 the company distributed a Q3 cash dividend of $0.275 per share. That's a 7.8% rise compared with the company's Q3 2021 cash dividend, and it works out to an annualized yield right now of roughly 6.5%. For the third quarter, our FFO and AFFO payout ratios are still quite robust, at 69% and 65%, respectively. We expect to declare our regular quarterly cash common stock dividend for Q4 near the finish of November. Turning to the rest of the year, we've updated our full year 2022 guidance to reflect our Q3 2022 results along with revised expectations for acquisition and disposition activity, capital markets transactions, the steepening yield curve, and other assumptions that matter. We entered the fourth quarter of 2022 with in-place annualized straight-line base rent across the portfolio of $39.2 million and in-place annualized cash base rent of $38.6 million. Our full year 2022 FFO guidance range went up by $0.13 at the low end and $0.10 at the high end. And our FFO guidance range went up by $0.16 at the low end and $0.13 at the high end. 2022 FFO is now expected to land between $1.73 and $1.75 per share, and our full year 2022 AFFO guidance range was raised to $1.74 to $1.76 per share. The weighted average share count for the year came down by 0.5 million shares at the low end and 1 million shares at the high end, which takes out the assumption of a meaningful equity issuance in 2022. We've lowered the top end of our acquisitions guidance to reflect our third quarter results and the patience John mentioned earlier, and we're narrowing the range of our disposition guidance, including lifting the midpoint to capture our updated expectations for asset sales through the end of the year. I'll hand it back to John now for his closing remarks.

Appreciate that, Matt. With our third year as a listed company coming up, I feel great about the solid dividend increases we've provided to investors, and about how we've managed to assemble and steadily enhance our holdings — one of the finest groupings of net lease properties anywhere in the sector. I have no doubt that our robust operating plan will let us deliver superior results over the long term as we keep establishing a history of achievement; we're grateful for the dedication of everyone on our team and their ongoing backing of our shareholders. With that, let's take your questions.

John, what's your thinking here — you mentioned you'll keep hunting for dispositions. But when it comes to acquisitions, how do you view them with pricing where it is today and with the cash you currently have on hand? Will you sit tight and wait for only the very best deals? Or, if opportunities fit your criteria, will you keep buying in Q4 as well?

Yes. Thanks, Rob. We are certainly still out there working on deals, though we are casting a very wide net on bids. In a way, we're waiting for that pitch moment to arrive on certain opportunities; our view is that pressure across the system is going to become more pronounced as we move toward the end of the year. So I believe solid opportunities will be there; we're engaged, but one thing is certain — we won't stretch just to get a deal done.

All right. And regarding the assets we already hold, are any capital improvements planned for the latter portion of this year going into 2023 that would be significant?

Only concerning Old Time Pottery, there's a different retailer that appears to represent a far better transaction for us, which we are currently pursuing. So that — although that would likely begin in the following year.

All right. Could you also discuss the cinema operations and whether any margin shifts are showing up there?

As you're aware, just 2 cinemas are in our portfolio. At the moment, our main focus is the Reno location and its redevelopment; as I've noted on numerous calls whenever theaters come up, it's a great site. A hotel developer appears quite keen on that location. Rather than keeping a cinema, we're concentrating on other potential uses, which ought to give us stronger economics. That property is where our efforts are going. Regarding the AMC site, there is some purchaser interest, and should it come together, we intend to move forward on it. That should essentially wrap up our theater strategy.

When it comes to that single theater, if you decide to go with a hotel there, would you plan to hold onto it? Or once that's finished, do you think it would probably be sold off?

Probably sold off. It might take the shape of a ground lease, though we wouldn't be — a hotel development isn't something you'd find among our holdings.

All right, and that brings me to my final question. Matt, based on what you said regarding the dividend, what level of taxable earnings payout should we anticipate at the present run rate?

For 2022, we ought to reach 100%, and that is genuinely the approach we intend to take with managing the dividend moving forward.

All right, so essentially, if earnings keep growing, you don't have much flexibility to avoid raising the dividend down the line...

Correct. Our aim is to run things at 100% of taxable income while getting free cash flow as high as possible.