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 fourth quarter and full year 2022. Joining me is John Albright, our CEO and President. Prior to getting started, please 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 end up differing substantially from what these forward-looking statements describe, and we take on no obligation to revise them. Details about the factors and risks that might lead actual results to diverge materially from what we expect appear periodically in the company's Form 10-K, Form 10-Q and other SEC filings. Our SEC reports, earnings release and most recent 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 things over now to John.

Thank you, Matt. We wrapped up the year on a solid note, continuing to make progress with our accretive asset recycling initiative, bringing down leverage, and enhancing the quality across our retail net lease portfolio. The properties we picked up this quarter highlight tenants of high quality with investment-grade ratings, which shows robust operating momentum in sectors that are doing well, including grocery, home improvement, supporting goods, and dollar stores. Altogether, in Q4, we bought 7 properties for slightly less than $42 million, with a weighted average cap rate of 7.4% and a weighted average remaining lease term of 8.2 years. Impressively, all of the acquired rents—100%—stem from tenants holding investment-grade ratings, among them the first Home Depot in our portfolio, plus Family Dollar, Dollar Tree, Dick's Sporting Goods, and Walmart. Across the entirety of 2022, we purchased 51 retail net lease properties for a bit more than $187 million, at a weighted average going-in cap rate of 7.1%, along with a weighted average remaining lease term and acquisition of 8.7 years. Rents we brought in over the year were 77% from tenants carrying investment-grade credit ratings, and over half of those acquired rents are located in MSAs exceeding 1 million in population. Although cap rates did climb as 2022 progressed, we've observed fewer assets being listed for sale in the market as 2023 gets underway, which is pushing the bid-ask spread wider or tighter. Sellers holding top-quality properties in robust markets with sought-after tenants and sectors have stayed firm in their pricing expectations, and we're beginning to notice buyers acting more aggressively as they aim to deploy capital early in the year. This is leading cap rates to either remain steady compared to a few months back—despite interest rates being higher—or, when it comes to investment-grade rated tenants and lower-priced assets, we're starting to witness cap rates tightening, since those assets can be financed more readily on better terms, act as a hedge against ongoing inflation, and deliver dependable risk-adjusted returns amid a fairly volatile macroeconomic backdrop. Turning to dispositions, we offloaded 5 properties, achieving a total disposition volume of $31 million at a weighted average exit cap rate of 6.5%, which produced total gains of $6.6 million. Among the disposed properties are ones leased to Freddy's Frozen Custard, Big Lots, Rite Aid, and Harris Teeter. These sales, combined with the subsequent redeployment and a net investment spread of nearly 100 basis points during the quarter, enabled us to achieve a stronger return on equity while exiting certain assets where we perceived incremental risk. The proceeds additionally gave us favorably priced capital to deploy into the acquisition market, leading to a higher yield and greater exposure to investment grade-rated tenants. So far this year, 16 properties have been sold by us, bringing in roughly $155 million, with a weighted average exit cap rate of 6.5%, or 5.9% if you take out the effect of the one remaining office property that was sold in Q2; gains of $34 million came from those sales during the year. And since this asset recycling effort began in April, we've managed to get the most value possible out of the properties we sold, even while interest rates were moving in the wrong direction. At year's end, 148 properties made up our portfolio, covering 3.7 million square feet, with tenants in 26 sectors across 34 states. Occupancy did dip and fell under 100% for the first time, which happened because of a vacant outparcel that came with a property acquisition in Q4. At acquisition, we assigned no value to that vacant property, but we're cautiously optimistic about leasing the asset to generate organic rent growth inside the existing portfolio. Since our prior earnings call in mid-October, Dick's Sporting Goods has become our #2 tenant, joining Walgreens, Family Dollar, Dollar Tree, Lowe's and Dollar General among our top 5 tenants, and all of them hold investment-grade ratings; entering 2023, 54% of our total annualized base rents came from tenants, or the parent of a tenant, with an investment-grade credit rating, and we expect that figure to rise over the course of the year as we keep recycling out of non-investment-grade-rated tenants and into high-quality, industry-leading retailers whose balance sheets are positioned to outperform in just about any economic climate. Our hope is that as our portfolio metrics begin to more closely match, or exceed, those of higher valuation multiple peers, we'll see our own stock valuation improve, which would reflect the ongoing refinement of our portfolio, greater liquidity in our stock, a derisked balance sheet and consistent execution, given that we have kept delivering attractive returns on equity for the good of all our shareholders. Matt will lay out the specifics of our 2023 guidance shortly, but it's worth noting that we do intend to keep up our opportunistic approach to asset recycling. We've pinpointed a number of properties that we believe will command strong pricing in the market because of the quality of the underlying real estate, which will let us keep producing attractive net investment spreads when we redeploy the proceeds. I'll now hand the call to Matt to discuss our performance in the quarter and the year, along with our capital markets activities, the improved balance sheet and 2023 guidance.

Thanks, John. I'll begin with how our top line performed. Compared with the matching periods in 2021, total revenues were up 22% during the fourth quarter and up 50% across the year, which shows the gain from accretive asset recycling as well as wider net investment spreads. For the year, general and administrative expenses came to $5.8 million, and that figure includes $3.8 million of management fees paid to our external manager. G&A represented 12.8% of total revenues in 2022, a decline of almost 400 basis points from the prior year. Looking ahead to 2023, we expect general and administrative expenses, before the management fee, to come in at roughly $2.1 million. Before assuming any new equity issuance in 2023, the present annual run rate for the management fee sits at slightly less than $4.3 million. FFO for the quarter came to $0.37 per share, a drop of 11.9% versus the fourth quarter of 2021. Meanwhile, Q4 2022 AFFO reached $0.41 per share, which was the same as in the fourth quarter of 2021. The lower FFO and the gap between FFO and AFFO stemmed from a $443,000 charge for extinguishment of debt tied to the defeasance and corresponding write-off of unamortized loan costs on our $30 million fixed property secured mortgage; across the full year, FFO equaled $1.73 per share while AFFO equaled $1.77 per share, which amounts to year-over-year per share growth of 9.5% and 11.3%, respectively, against the full year of 2021. As in the fourth quarter, the lower FFO and the gap between FFO and AFFO came from $727,000 of extinguishment of debt charges tied to the defeasance and corresponding write-off of unamortized loan costs on the $30 million fixed property secured mortgage, along with the termination and recast of our unsecured revolving credit facility that took place in the third quarter. As we previously announced, on December 30 the company paid a fourth quarter cash dividend of $0.275 per share, which is a 1.9% increase year-over-year relative to the company's Q4 2021 cash dividend, and reflects a current annualized yield of roughly 5.4%. All told, during 2022 we raised our regular common stock cash dividend by 7.4%, while continuing to keep a conservative FFO and AFFO payout ratio. Our fourth quarter FFO and AFFO payout ratios stay highly efficient, at 74% and 67%, respectively, and we expect to announce the regular quarterly common stock cash dividend for the first quarter of 2023 near the end of February. Moving to the balance sheet. We achieved solid progress in bringing leverage down nearer to our long-term target. We closed the year at 47% net debt to total enterprise value and 7.1x net debt to pro forma EBITDA, and we still hold a very healthy fixed charge coverage ratio of 3.7x. In the fourth quarter, we sold just about 1.5 million shares under our ATM program, generating total net proceeds of $27.4 million. Over the full year 2022, we sold 1.9 million shares under our ATM program, generating total net proceeds of $36 million. As I noted earlier, in December we did defuse the loan secured mortgage on our balance sheet. The defuse let us free up the assets that had been pledged as collateral for the mortgage, and we sold 4 of those 6 properties not long after. Once that secured mortgage was paid off, our balance sheet became entirely unsecured. After the year ended, we put in place a $50 million forward-starting interest rate swap beginning in March, which locks in SOFR on the balance of our outstanding revolving credit facility, essentially removing what was left of our go-forward exposure to floating interest rates. As things stand today, we face no debt maturities before 2026, have no floating interest rate exposure, and hold substantial available capacity under our revolving credit facility to support our accretive asset recycling program. When it comes to 2023, the initial guidance included in last night's press release shows how confident we are in the quality of our portfolio, while still taking a fairly cautious stance toward the broader macroeconomic backdrop and the volatility underlying the capital markets. That guidance rests on several important assumptions, among them — though not limited to — our capacity to raise investment funds at a sensible cost of capital, our capacity to buy and dispose of assets at sensible valuations, and the ongoing operational and financial strength of our tenants. We kicked off 2023 with portfolio-wide in-place annualized straight-line base rent of $40,400,000, alongside 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, while our full year 2023 AFFO guidance range is $1.52 to $1.57 per share. For 2023, our guidance on acquisition activity is $100 million to $150 million of retail net lease properties, contingent on reasonable market conditions, and we expect those acquisitions to be made at a blended yield comparable to or better than our 2022 full year acquisition cap rates. On the disposition side, we anticipate selling somewhere between $25 million and $50 million of properties at a blended yield comparable to or better than our 2022 full year disposition cap rate. With that said, I'll hand things back over to John for his closing remarks.

Appreciate that, Matt. Across 2022, the total shareholder return we posted ranked second among everyone in our peer group. Now that we've completely shifted into 2023, I feel genuinely enthusiastic about what lies ahead for us and about the backing our shareholders have given. Our agility as a smaller company, a portfolio that keeps changing, a balance sheet with reduced risk, and a willingness to seize investment chances when they appear — each of these fuels the momentum that will help us get things done in 2023 and afterward. I'd like to express gratitude to our team for their dedication, and at this point, we're ready to take your questions. Operator?

I'd like to follow up on what you said regarding cap rate compression that you all referenced for investment-grade properties during the past few months. Could you perhaps give us additional detail about what you're observing and what you anticipate for cap rates on investment-grade assets?

Sure. There isn't an abundance of product available right now. As a result, those who own high-quality assets with strong credits are sticking to their pricing. They aren't cutting their price. And since there isn't much product on the market, your high net worth individuals, your 1031 buyers, are essentially transacting at the price levels where sellers are prepared to let go of the assets. So what you're witnessing is that cap rates clearly aren't widening. And I'd simply say they seem to be declining again — it almost feels as though they've tightened in a manner that tracks the 10-year or something along those lines. We remain hopeful and optimistic that we'll find some truly attractive acquisition opportunities. But up to this point, it's a fairly robust market provided you have the right credits.

Alright, my second question relates to leverage. On a pro forma basis, debt-to-EBITDA sits at 6.6x. Should we assume that multiple stays where it is now? Or do you think it rises as you arrange funding for the 2023 acquisitions?

Yeah. Our preference would be to hold it within roughly that band, though it will fluctuate simply because of how large the company is, correct? Moving it either direction doesn't require much; therefore we'll watch how the stock trades, after that we'll determine where buying opportunities exist and what the cost of debt looks like, and we'll react by allocating capital appropriately.

John, with the Dick's acquisition in play, what's your outlook on sporting goods? Does it come down purely to the credit tied to Dick's? Or are you seeing something within that vertical that makes you optimistic about growth across the coming few years?

Yeah. The way Dick's performs in the stores we own, plus those we've evaluated for purchase, has always left us quite impressed. They're simply such a formidable operator that they come across as the category killer, so to speak; their strong company performance appears to radiate outward from those locations. That particular operator is one we're just really at ease with.

All right. And at this point, what else sits in the portfolio that you would be looking to divest, unless some unexpected bid comes in that falls short of whatever cap rate you'd anticipate for that specific property?

Yeah. What I'd say is, we are basically receiving interest in assets that hadn't been listed for sale; and clearly, we have a threshold price at which we'd be willing to part with just about anything, provided there isn't a 1031 complication. So essentially, we're coming across some quite appealing recycling opportunities that we hadn't truly anticipated for this year. Our thinking is that we would sell them. That said, it appears pricing in the market is stronger than we'd have imagined on the disposition side; therefore, I'd expect us to be fairly active once more, let's say, more toward the second quarter.

All right, and then Matt, when it comes to your guidance, what kind of spread are you factoring in on cap rates between what you're buying and what you're selling for the year?

Yeah. My guess is it'll likely line up with 2022. So let's say 10 basis points, give or take.

John, I'd like to go back to what you said about cap rate compression in investment grade. I'm curious about the terms lenders are offering right now for that kind of investment.

Sure. These are truly high net worth buyers paying all cash. Lenders aren't involved at all in the deals we're currently seeing activity in. So whether it's a smaller asset that's really a 1031 with no financing required, or it's a high net worth individual who's simply very comfortable with net lease stability — pricing isn't an issue. They just want to put their capital into specific credits and locations.

Based on what you've said, then, this seems tied mostly to product simply not being available, and that factor is holding cap rates at fairly low levels. What I want to ask is whether, assuming we saw transaction volume rise, you'd anticipate some modest widening in cap rates?

Absolutely, I certainly would. You've got that exactly right. The reason is that no inventory exists in the market. If a forced seller appeared with assets or a portfolio, or a motivated seller, my expectation is that cap rates would widen somewhat, since what everyone is waiting on is the chance to put capital to work at better yields. So when sellers know they must transact, you won't be especially aggressive. That's essentially the situation we're all anticipating. So yes, if activity suddenly picked up substantially, I believe cap rates would widen somewhat.

That's useful. Then, Matt, regarding the outlook for shares outstanding, it clearly suggests somewhat more equity across the year. What should we expect about how that unfolds?

Yeah. So given the pro forma leverage Gaurav brought up earlier in the center investor presentation, you can see we engaged in some ATM activity at the start of the year before blackout began; therefore, a significant portion of that equity implied in the guidance has already been issued. As for the remainder of that amount, my expectation is it will be weighted more toward the back end, and I believe that would also align with transaction activity reflected in the guidance.

So regarding that deal activity, are you anticipating a gap between what you sell off and what you buy? Or do you figure the two will stay roughly in lockstep across the year?