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

Hello, everybody, and thanks for being here this morning as we go over Alpine Income Property Trust's First Quarter 2023 Operating Results Conference Call. Joining me is John Albright, our CEO and President. Prior to getting started, please note that numerous remarks we make today fall under the category of forward-looking statements according to federal securities law. The company's true future outcomes might vary considerably from what these forward-looking statements describe, and we hold no obligation to revise them. Details about factors and risks that might lead actual outcomes 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 latest investor presentation, featuring reconciliations of the non-GAAP financial measures we utilize, are available on our site at alpinereit.com. I will now hand things over to John for his prepared remarks.

Thank you, Matt, and good morning to all of you. We're happy to share that the year has gotten off to a solid start, as our asset recycling strategy continues to be put into action. Compared with what we originally anticipated as we entered the year, the transaction market has been more active, with appealing pricing and demand. Because of that, we've been able to boost liquidity for selective investment, enhance financial flexibility through reducing leverage on our balance sheet, and we are now positioned to raise overall portfolio quality by reinvesting in a targeted way into tenants that are predominantly investment grade-rated. Turning to our headline transaction activities for the quarter, we opted to act opportunistically with our asset sales and capitalize on market demand. Although there's considerable uncertainty about the direction of interest rates and the broader macroeconomic backdrop, we managed to locate appealing opportunities to divest noninvestment-grade properties. Over the quarter, we disposed of 10 properties, with total disposition volume of $56 million, at a weighted average exit cap rate of 6.1%, which produced total gains of $4.5 million. The disposition was mostly centered on noninvestment grade-rated tenants, including properties leased to LA Fitness, Conn's, Room To Go, Ethan Allen and certain one-off restaurant concepts, to name just a few. That 6.1% cap rate on largely noninvestment-grade tenants speaks to the quality of the underlying real estate, and we believe this pricing represents the value of the properties in our portfolio very well; this is, naturally, on top of the high-quality assets occupied by investment-grade rated tenants, which account for the majority of our portfolio's rents and are more appreciated by the investment and lending communities. At quarter's end, our portfolio was made up of 138 properties totaling 3.5 million square feet, with tenants operating across 24 sectors. Our top tenants are the same as they were on our year-end earnings call in mid-February, with Walgreens, Dick's Sporting Goods, Family Dollar/Dollar Tree, Lowe's and Dollar General forming our top 5 tenants. Each of them holds investment-grade credit ratings. We closed the quarter with 58% of our total annualized base rents derived from tenants carrying an investment-grade credit rating, which marks an increase of 400 basis points from year-end 2022 and a rise of 800 basis points versus this time last year. Although we took a cautious approach to acquisitions in the first quarter, we have assembled a strong pipeline of opportunities that we will be redeploying into the second quarter. The assets we have under contract in LOI are occupied by industry leading retailers such as Home Depot, Verizon, HomeGoods, Best Buy, Dick's Sporting Goods, Lowe's, Starbucks, Marshalls and Chick-fil-A. Typically we prefer to talk about assets once we've acquired them, since a transaction is never assured until it closes. But we're anticipating an active quarter of investing that will enhance overall portfolio quality and push our investment-grade tenancy into the 60%-plus range, which is a lower level relative to our peers who have considerably higher FFO multiples. Even more significantly, we expect to take the money from our dispositions and put it to work in these strong assets and net investment spreads that add value. Although our 2023 guidance for FFO and AFFO sits under 2022, mostly because of reducing leverage and the schedule of recycling assets, the steady-state impact of our favorable net investment spreads, which won't be fully felt until 2024, will let us generate organic FFO and AFFO growth with improved risk-adjusted tenancy, and we won't need to raise extra capital in today's environment where capital is tight. Last, I want to emphasize the discount in valuation that our present share price suggests, along with how steady our balance sheet and capital structure are. Right now we trade at an 8% implied cap rate, which sits well above what we got on dispositions during the last 6 months and stands in sharp contrast to the strengthening credit quality of our tenants and the value of our portfolio overall. On top of that, we carry no floating interest rate exposure and face no debt maturities before 2026. This steadiness pairs with the quality of our portfolio, and together they back our well-covered dividend yielding almost 7%; with that, I'll hand the call to Matt so he can discuss our first quarter results and updated guidance.

Appreciate that, John. I'll begin with our results. During Q1 of 2023, FFO equaled $0.36 for each share, a drop of $0.13 per share — that's 26.5% — compared with Q1 of 2022. AFFO in the first quarter of 2023 likewise landed at $0.36 per share, falling $0.12 per share, or 25%, relative to the first quarter of 2022. Revenues overall rose 3.4%, and that provided a lift to what we delivered. This improvement stemmed from having a full year of advantages tied to the asset recycling work and investment activity we undertook in 2022. However, several factors worked in the opposite direction: we had $165,000 in percentage rent during the first quarter of 2022 that didn't repeat, we lost revenue from asset sales in that same first quarter whose proceeds are still waiting to be reinvested, and our investment spread shrank year over year because we sold our last remaining office property in Q2 2022. Also dragging down our year-over-year revenue growth was a 5.9% increase in general and administrative expenses. The main drivers there were higher management fees owed to our external manager tied to our equity capital markets activity in 2022 and 2023, along with greater interest expense resulting from higher interest rates — though a smaller total outstanding debt balance provided some partial offset. For Q1 2023, we distributed a cash dividend amounting to $0.275 for each share. Compared with what we paid out in the first quarter of 2022, that represents a 1.9% rise year over year, and it puts the annualized yield right now at just about 7%. Payout ratios based on FFO and AFFO for the quarter each came in at 76%, and our plan is to share news of the standard quarterly cash dividend for Q2 near the close of May. Through our ATM program, we sold 666,000 common shares during this period, which brought in net proceeds totaling $12.4 million, with the average gross issuance price sitting at close to $19 per share. Like John said, over the last year we made big changes to our balance sheet. We wanted to secure the interest rates we pay on our debt and make our whole capital structure more stable. In those 12 months, we brought our net debt down to pro forma EBITDA by close to 2.5x, we set any floating rate debt that was still outstanding, we pushed every debt maturity out to 2026 and later, and we grew our available liquidity substantially, to over $260 million, by drawing on a mix of undrawn revolving credit facility commitments, cash and restricted cash. At year-end, net debt to total enterprise value stood at 41%, net debt to pro forma EBITDA was 6.4x, and our fixed charge coverage ratio is still quite strong at 3.4x. Looking ahead to the rest of 2023: when we kicked off Q2, across the portfolio our in-place annualized straight-line base rent stood at $37 million, while in-place annualized cash base rent came to $36.6 million. Our per-share guidance for the full year stayed unchanged — FFO at $1.50 to $1.55 per share and AFFO at $1.52 to $1.57 per share — even though we factored in the near-term hit to earnings caused by the timing of our stepped-up asset recycling activity. Investment guidance also remains identical: $100 million to $150 million allocated to retail net lease investments. And on dispositions, we've raised the low end by $50 million and the high end by $75 million, which reflects the elevated asset sales we saw in Q1 along with our updated expectations for sales for the rest of the year. On the whole, we have confidence that our distinctive approach to recycling assets, our greater liquidity, our stronger balance sheet, and our high-quality portfolio leave us well positioned to create value over the long term, and we're eager to deliver on our 2023 guidance and to set the company up for earnings growth in 2024. With that, operator, please open the line for questions.

About those dispositions, I was hoping for more detail regarding which assets you offloaded. Did you take those to the whole market, or were these deals done privately for you folks? Then regarding putting the money to work, do you anticipate the entire amount being reinvested during 2Q?

Yes. Thanks so much. Essentially, the sales came about through some private deals plus some that brokers brought to us. I think the real trigger — these sales truly began once private interest started coming our way at cap rates we saw as a chance to capitalize on, since they were quite favorable for the business along with its earnings and book value. And then, as far as where the sales proceeds will be repositioned, we believe the bulk of that will wrap up during the second quarter. A slight delay is possible, yet that remains the aim — completing the majority of it in the second quarter.

All right. Now regarding leverage, it dropped to 6.4x. How do you see leverage trending from here?

Yeah. Broadly speaking, I'd say we'll likely stay around the mid-6's, unless an acquisition opportunity comes along that we simply can't pass up, and if it's a truly one-of-a-kind deal, we'd sort out the capital structure afterward, but mid-6's or low 6's is probably the level you should expect us to run at going forward.

Matthew Erdner here, filling in for Jason. Would you be able to discuss what the buyer profile looks like on those dispositions, plus where that demand originates and how you expect it to trend ahead?

Honestly, it varies quite a bit, yet mostly these are high net worth individuals, though a handful of franchisees are buying their own property bank. So you get a real blend, with less institutional involvement and chiefly private capital.

Understood. So will you folks keep pursuing sales of the noninvestment grade? Or do you simply act whenever an offer comes along and it works, and that's basically what you accept?

No, we are certainly going to keep exploring in noninvestment grade; we believe, clearly, that because of the gap between our share price and where it should be, there are likely some credits the Street assumes would trade at higher cap rates. Yet because of where the properties sit or their redevelopment potential, we know the cap rates are lower. So we will keep printing tickets and printing profits and redeploying at higher yields.

Fellas, returning to the percentage rent you brought up in your remarks, which came in lower — does that stem from tenants failing to reach the percentage rent threshold? Or does it have more to do with how the leases are structured now, leaning toward fixed rent rather than what was the case before?

Barry, this is somewhat of an unusual case. We acquired an asset that was sitting in percentage rent, and prior to buying it we recast that lease. However — during the acquisition process, we held a right to the percentage rent for the year of purchase; therefore we enjoyed the advantage of that percentage rent under the lease structure as it existed before our recast, while the lease as recast moving forward consists purely of fixed rent plus escalations.

All right, wonderful. So, turning to 2024 compared with 2023 on the net acquisition versus disposition front, is your expectation that '24 will lean heavily toward net acquisitions, while this year won't be nearly as heavy? Or should we expect '24 to resemble '23, with those 2 figures ending up pretty close together?

Well, I'd put it this way — on the cautious end, we'll essentially be match funding, though our aim and what we're anticipating is clearly to be a net acquirer, and we believe we'll achieve that. Considering the opportunities we're seeing to purchase assets and continue enhancing the portfolio, we absolutely intend to be a net acquirer and we will be, but on the cautious end, it's recycling and growing organically — still, I expect we'll outperform that.

Sure, Barry — I’ll add a bit to what John said. My view is that this will hinge on where the stock is trading. We won’t put shareholders in a bad spot merely to become a net acquirer. Because we recycle capital, we can add to earnings step by step without needing to depend on the capital markets. Still, if we keep improving the portfolio, ideally the share price will react, and that should give us room to pursue net acquisitions.

And one final thing. John, are assets getting retraded, or is that not really happening?

Not really. Given how much the market's been swinging, you'd expect a bit more retrading activity. Still, I believe folks find the steadiness on the net lease side reassuring, and they're basically saying pull me out of bonds, stocks, and CDs that may not be as secure as people assumed, and put me into sticks and bricks backed by a solid credit.

Could you discuss how tenants are doing overall? If you keep a watch list, have there been any updates to it? Then perhaps you could explain how Party City, I suppose, developed within your portfolio? Did the rent change at all? Or is it only the company?

Yes. Regarding the watch list, we're certainly staying alert to the clear ones; and in certain instances the credits have actually improved. I'd rather not get into excessive detail. But yes, the watch list isn't all that extensive, since that's what we've tended to sell first — assets that might face problems down the road. As for rents at Party City, I'll let Matt explain what's happening there.

Right, so nothing has been locked in yet with Party City at West, though from what we understand at this point, it appears they will reaffirm that lease. We may offer them something like a month of free rent simply to ease things along, but that would be a — we've maintained a fairly firm position on that lease, because of how strong the real estate underneath it is.

Regarding that particular spot, we do have a few other parties expressing interest, and my sense is Party City is aware of just how strong that location is — they certainly are, since we can see their sales figures — yet they likely also realize that others would want that space; as a result, their leverage in negotiations there really isn't very strong.

All right, that's positive. Now, shifting to a broader question. I mean, when it comes to the private market, the collection of properties seems to be in extremely strong demand, which the cap rate you're getting on the lower end of the portfolio shows, and yet shares are trading at an 8% cap rate. Previously, you brought up possibly exploring strategic alternatives when there was an extended dislocation. Are you perhaps returning to considering those alternatives now? And maybe for the final part, one thing you aimed to accomplish over the last 12 months was to position the portfolio optimally. Do you believe that's where you are at this moment?

No, we aren't. So the brief response is not at this time. We still need to do some pruning where we believe we can, once more, take certain noninvestment-grade properties, obtain nearly investment-grade type cap rates, and redeploy in order to enhance the portfolio even more. And as we said, push our investment-grade exposure up even higher, and I think the value disconnect — look, we've witnessed our stock previously when this value disconnect has existed. And eventually, the market sort of resolves it. Our view is you would be a superior commentator on that. Our view is that when volatility truly surged in the market, small caps took a real beating, and we were certainly among them; so if you check our investor presentation on Page 4, I think, it shows sort of where PINE began trading far below the other companies, even though our portfolio has improved considerably. And so we believe we'll recover a lot of ground there, or at minimum the long/short folks will resolve it. But we'll simply continue enhancing the portfolio, continue growing the NOI organically, and I think we'll be in a stronger position to revisit things later in the year if the disconnect hasn't truly disappeared that much.

John, my apologies if this was already covered. For the assets you disposed of during the quarter, what was the average hold period?