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

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Alpine Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Joining us today are Mr. Matt Partridge, Chief Financial Officer; and Mr. John Albright, Chief Executive Officer. At this time, I would like to turn the conference over to Mr. Matt Partridge. Sir, please begin.

Good morning, everyone, and thank you for joining us today for the Alpine Income Property Trust Fourth Quarter and Year-end 2022 Operating Results Conference Call. With me today is our CEO and President, John Albright. Before we begin, 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. You can find our SEC reports, earnings release and most recent investor presentation, which contain reconciliations of non-GAAP financial measures we use on our website at alpinereit.com. With that, I'll now turn the call over to John.

Thanks, Matt. We had a nice finish to the year as we continue to execute on our accretive asset recycling program, reduce leverage and improve the overall quality of our retail net lease portfolio. Our acquisitions during the quarter emphasize high-quality investment-grade rated tenants, demonstrating strong operating trends in well-performing sectors, such as grocery, home improvement, supporting goods and dollar stores. In total, during the fourth quarter, we acquired 7 properties for just under $42 million at a weighted average cap rate of 7.4% and a weighted average remaining lease term of 8.2 years. Notably, 100% of the acquired rents come from tenants with an investment-grade rating, including the First Home Depot in our portfolio as well as Family Dollar, Dollar Tree, Dick's Sporting Goods and Walmart. For the full year of 2022, we acquired 51 retail net lease properties for just over $187 million at a weighted average going-in cap rate of 7.1%, and a weighted average remaining lease term and acquisition of 8.7 years. 77% of the rents we acquired during the year were from tenants with an investment-grade credit rating and more than half of the rents acquired are in MSAs with over 1 million people. While we did see cap rates move higher as we made our way through 2022, we've seen a decrease in the number of assets listed for sale in the market to start 2023, which is contributing to a higher or tighter bid-ask spread. Sellers with high-quality properties in strong markets with in-demand tenants and sectors have maintained conviction in their pricing expectations, and we're starting to see buyers be more aggressive as they look to put capital to work to start the year. This is resulting in cap rates either holding from where they were a few months ago, which is in spite of higher interest rates or in the case of investment-grade rated tenants and smaller price point assets, we're starting to see cap rates compress because those assets are more easily financed at better terms, offer a hedge against continued inflation and provide solid risk-adjusted returns in a relatively volatile macroeconomic environment. On the disposition front, we sold 5 properties for a total disposition volume of $31 million at a weighted average exit cap rate of 6.5%, generating total gains of $6.6 million. The dispositions include properties leased to Freddy's Frozen Custard, Big Lots, Rite Aid and Harris Teeter. These sales and the subsequent redeployment and nearly 100 basis point net investment spread during the quarter allowed us to drive a better return on equity while moving out of some of the assets where we felt we had incremental risk. The proceeds also provided us with attractively priced capital to put to work in the acquisition market that resulted in a higher yield and increased investment grade-rated tenant exposure. Year-to-date, we've sold 16 properties for approximately $155 million, and a weighted average exit cap rate of 6.5% or 5.9% when removing the impact of our last remaining office property we sold during the second quarter. These sales during the year generated gains of $34 million. And because we started this asset recycling process back in April, we've been able to maximize the value of the sold properties even as interest rates moved against us. As of the end of the year, our portfolio consisted of 148 properties, totaling 3.7 million square feet with tenants operating in 26 sectors within 34 states. Occupancy did tick lower and below 100% for the first time as a result of a vacant outparcel we acquired as part of a property acquisition in the fourth quarter. We described no value to this vacant property at acquisition, but we're cautiously optimistic we can lease the asset to drive organic rent growth within the existing portfolio. Since our last earnings call in mid-October, Dick's Sporting Goods is now our #2 tenant joining Walgreens, Family Dollar, Dollar Tree, Lowe's and Dollar General as our top 5 tenants, all of whom carry investment-grade ratings. We entered 2023 with 54% of our total annualized base rents coming from tenants or the parent of a tenant with investment-grade credit rating, which we anticipate will grow throughout the year as we continue to recycle out of non-investment-grade-rated tenants and into high-quality industry-leading retailers with balance sheet positioned to outperform in nearly any economic environment. We're hopeful that as our portfolio metrics start to better parallel or higher valuation multiple peers, we'll see an uptick in our own stock valuation, reflecting the continuous refinement of our portfolio, our stocks increased liquidity, a derisked balance sheet and consistency of execution as we have continued to drive attractive returns on equity for the benefit of all of our shareholders. Matt will outline the details of our 2023 guidance in a moment, but it's important to note that we do plan to continue our opportunistic approach to asset recycling. We've identified a number of properties that we think will garner strong pricing in the market as a result of the quality of the underlying real estate, allowing us to continue to generate attractive net investment spreads on the redeployment of the proceeds. I'll now turn the call over to Matt to talk about our performance in the quarter and the year as well as our capital markets activities' improved balance sheet and 2023 guidance.

Thanks, John. Starting with our top line performance. Total revenues grew 22% in the fourth quarter and 50% for the year when compared to the equivalent periods in 2021, reflecting the benefit of accretive asset recycling and higher net investment spreads. General and administrative expenses for the year, which includes $3.8 million of management fees to our external manager totaled $5.8 million. G&A as a percentage of total revenues in 2022 was 12.8%, the year-over-year decrease of nearly 400 basis points. We anticipate 2023 general and administrative expenses before the management fee to be approximately $2.1 million. The current annual run rate for the management fee before any assumed new equity issuance in 2023 is just under $4.3 million. FFO in the quarter was $0.37 per share, representing an 11.9% decrease compared to the fourth quarter of 2021. And Q4 2022 AFFO was $0.41 per share, which remained unchanged from the fourth quarter of 2021. The decrease in FFO and differential to AFFO was driven by a $443,000 extinguishment of debt charge relating to the defeasance and associated write-off of unamortized loan costs of our $30 million fixed property secured mortgage. For the full year, FFO was $1.73 per share and AFFO was $1.77 per share, representing a year-over-year per share growth of 9.5% and 11.3%, respectively, when compared to the full year of 2021. Similar to the fourth quarter, the decrease in FFO and differential to AFFO was driven by $727,000 of extinguishment of debt charges relating to the defeasance and associated write-off of unamortized loan costs for the $30 million fixed property secured mortgage and for the termination and recast of our unsecured revolving credit facility that occurred in the third quarter. As previously announced, the company paid a fourth quarter cash dividend on December 30, of $0.275 per share, representing 1.9% year-over-year increase when compared to the company's Q4 2021 cash dividend and the current annualized yield of approximately 5.4%. Overall, we increased our regular common stock cash dividend by 7.4% in 2022, while still maintaining a conservative FFO and AFFO payout ratio. Our fourth quarter FFO and AFFO payout ratios remain very efficient at 74% and 67%, respectively, and we anticipate to announce regular quarterly common stock cash dividend for the first quarter of 2023 towards the end of February. Turning to the balance sheet. We made good progress reducing leverage closer to our long-term target. We ended the year with net debt to total enterprise value of 47%, net debt to pro forma EBITDA of 7.1x, and we continue to maintain a very healthy fixed charge coverage ratio of 3.7x. During the fourth quarter, we sold nearly 1.5 million shares through our ATM program for total net proceeds of $27.4 million. And during the full year 2022, we sold 1.9 million shares through our ATM program for total net proceeds of $36 million. As I mentioned earlier, in December, we did defuse the loan secured mortgage on our balance sheet. The defuse has allowed us to unencumber the properties that secured the mortgage of which we sold 4 of the 6 properties shortly thereafter. Following the secured mortgage payoff, our balance sheet is now completely unsecured. Subsequent to year-end, we entered into a $50 million forward-starting interest rate swap that commences in March to fix SOFR for our outstanding revolving credit facility balance, effectively eliminating our remaining go-forward floating interest rate exposure. As of today, we have no debt maturities until 2026, no floating interest rate exposure and ample capacity on our revolving credit facility to complement our accretive asset recycling program. For 2023, the initial guidance in our press release last night reflects the confidence we have in the quality of our portfolio while taking a reasonably cautious approach to the broader macroeconomic environment and underlying volatility in the capital markets. Our guidance relies on a number of significant assumptions, including, but not limited to, our ability to raise funds for investment at a reasonable cost of capital, our ability to acquire and sell assets at reasonable valuations, and continued operational and financial strength of our tenants. We began 2023 with portfolio-wide in-place annualized straight-line base rent of $40,400,000, and in-place annualized cash base rent of $39,900,000. Our full year 2023 FFO guidance range is $1.50 to $1.55 per share, and our full year 2023 AFFO guidance range is $1.52 to $1.57 per share. Our 2023 guidance for acquisition activity is $100 million to $150 million of retail net lease properties which is subject to reasonable market conditions, and we believe these acquisitions will occur at a similar or better blended yield to our 2022 full year acquisition cap rates. For dispositions, we're projecting to sell between $25 million and $50 million of properties at a similar blended yield or better to our 2022 full year disposition cap rate. And with that, I'll now pass it back to John for his closing remarks.

Thanks, Matt. During 2022, we delivered the second highest total shareholder return in our peer group. So as we now fully transition to 2023, I'm excited about the opportunities we have in front of us and the support we've received from our shareholders. Our nimble size, evolving portfolio, derisked balance sheet and opportunistic approach to investing are all drivers of momentum to help us execute in 2023 and beyond. I want to thank our team for all their hard work and at this time, we'll open it up for questions. Operator?

[Operator Instructions] Our first question comment comes from the line of Gaurav Mehta from E.F. Hutton Group.

I wanted to ask you on your comments about cap rate compression that you guys mentioned for investment-grade properties over the last few months. Can you maybe provide some more color on what you're seeing and what you're expecting for investment-grade asset cap rates?

Yes. So there's not a plethora of inventory out there. So people that have good quality assets with good credits, they're holding on to their price. They're not breaking price. And so because there's not a lot of inventory out there, your high net worth, your 1031 people are basically engaging at the price points that the sellers are willing to part with the assets. So you are seeing that cap rates are definitely not expanding. And I would just say they are kind of coming back down, almost it feels like a following the 10-year or something that cap rates have come back in. We are hopeful and optimistic that we'll get some really good buying opportunities. But so far, it's a pretty strong market if you have the right credits.

Okay. A second question on leverage. Your pro forma debt-to-EBITDA at 6.6x. Do you expect that ratio to remain at current levels? Or do you expect that to go up as you look to finance our acquisitions for 2023?

Yes. I think we'd like to keep it in that general range, but it's going to move around just as a function of the size of the company, right? It doesn't take a lot to move it up and down. So we'll see how the stock performs, then we'll see where the buying opportunities are and where the cost of debt is and we'll respond and allocate capital accordingly.

Our next question comment comes from the line of Rob Stevenson from Janney Corporation.

John, how are you thinking about sporting goods given the Dick's acquisition? Is it just the credit on Dick's? Or is there something that you guys are seeing in the sporting goods vertical that has you excited about growth over the next few years?

Yes. We've always been very impressed with how well Dick's performs in the stores that we own and the ones that we've looked at, at acquiring. And they're just like such a strong operator that it seems like they're kind of the category killer. And so it seems like their strong company performance really radiates from these locations. So we're just really comfortable with that particular operator.

Okay. And how much more is there in the portfolio today that you'd want to sell barring some out of the blue offer that's below what your cap rate expectation would wind up being for that particular asset?

Yes. I mean we're seeing -- basically, we're getting inquiries on properties that were not in the market to sell. And obviously, we have our price point where we'll sell anything as long as we can -- there's not a 1031 issue. And so basically, we are seeing some really good attractive recycling candidates that we didn't really expect for this year. We think we would sell them. But it looks like the pricing out there is better than we would have thought on the sell side. So I expect to be somewhat active again here in the, call it, more in the second quarter.

Okay. And then, Matt, in your guidance, what type of spread are you assuming on cap rates between the acquisitions and the dispositions for the year?

Yes. I think it will probably be consistent with what we did in 2022. So call it, 10 basis points, plus or minus.

Our next question comment comes from the line of R.J. Milligan from Raymond James.

John, I just wanted to revisit your comments on sort of the cap rate compression for investment grade. And I'm just curious what terms you're seeing out there from the lenders to lend on that type of investment?

Yes. It's really high net worth, all cash. There's no lender involvement in where we're seeing the activity taking place right now. So whether it's a smaller asset, that it's really a 1031 and there's no lender need or it's high net worth, just very comfortable with the stability of net lease. And it's -- there's no problem on pricing, they just want to place the capital in with particular credits and locations.

So I guess per your comments, it's more a function of the lack of available product and that's sort of keeping cap rates relatively low. I guess the question is, if we were to see volume increase, would you expect cap rates to maybe expand a little bit?

Yes, I would definitely. You're absolutely right. It's because there's not inventory out there. If you had a forced seller out there of assets or portfolio or motivated seller. I think you would see cap rates expand a bit because that's what we're all waiting for is opportunities to deploy at higher yields. And so if people know that they have to sell, you're not going to basically be very aggressive. That's kind of what we're all waiting for. So yes, if you all of a sudden saw a lot more activity happen, I think cap rates would expand a bit.

That's helpful. And then, Matt, a question on the guidance for the outstanding share count, obviously, implies a little bit more equity through the year. How should we think about the cadence of that?

Yes. So with the pro forma leverage that Gaurav mentioned earlier in the center investor presentation, you can see we did a little bit of activity on the ATM to start the year before we went into blackout. So a good chunk of that implied equity in the guidance has already been issued. The balance of that amount, I would expect to be more back-end weighted and I think that would track transaction activity within the guidance as well.

And then do you expect for that transaction activity, is there -- do you expect a mismatch in terms of dispositions versus acquisitions? Or do you think they'll be pretty equally tied throughout the year?