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

Good day, and thank you for standing by. Welcome to the Alpine Q1 2023 Earnings Conference Call. [Operator Instructions]. Please be advised today's conference being recorded. I would now like to hand the conference over to your speaker today, Matt Partridge. Please go ahead.

Good morning, everyone, and thank you for joining us today for the Alpine Income Property Trust First Quarter 2023 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 contains reconciliations of non-GAAP financial measures we use on our website at alpinereit.com. I'll now turn the call over to John for his prepared remarks.

Thanks, Matt, and good morning, everyone. We are pleased to report a positive start to the year as we continue to execute our asset recycling strategy. Relative to our initial expectations heading into the year, we've experienced a more active transaction environment with attractive pricing and demand. This has allowed us to increase liquidity for selective investment, improved financial flexibility as a result of deleveraging our balance sheet, and we're positioned to improve overall portfolio quality through targeted reinvestment into predominantly investment grade-rated tenants. In terms of our headline transaction activities during the quarter, we chose to be opportunistic with our asset sales and take advantage of the demand in the market. While there is plenty of uncertainty regarding where interest rates are headed and the underlying macroeconomic environment, we were able to find attractive opportunities to sell noninvestment-grade properties. During the quarter, we sold 10 properties for a total disposition volume of $56 million at a weighted average exit cap rate of 6.1%, generating total gains of $4.5 million. The disposition is largely focused on noninvestment grade-rated tenants, which included properties leased to LA Fitness, Conn's, Room To Go, Ethan Allen and some one-off restaurant concepts, just to name a few. The 6.1% cap rate on largely noninvestment-grade tenants is a testament to the quality of the underlying real estate, and we think this pricing is a great representation of the value of the properties in our portfolio. This is, of course, in addition to the high-quality assets that are occupied by investment-grade rated tenants that make up the majority of our portfolio's rents and are more appreciated by the investment in lending communities. As of the end of the quarter, our portfolio consisted of 138 properties totaling 3.5 million square feet with tenants operating in 24 sectors. Our top tenants remain unchanged from our year-end earnings call in mid-February, with Walgreens, Dick's Sporting Goods, Family Dollar/Dollar Tree, Lowe's and Dollar General as our top 5 tenants. All of them carry investment-grade credit ratings. We ended the quarter with 58% of our total annualized base rents coming from tenants with investment-grade credit rating, which is an increase of 400 basis points from year-end 2022 and up 800 basis points from this time last year. While we took a prudent approach to acquisitions during the first quarter, we've built a strong pipeline of opportunities that we'll 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. We generally prefer to discuss assets after we acquired them because the transaction is never guaranteed until it is closed. But we're looking forward to an active quarter of investing that will improve overall portfolio quality and drive our investment-grade tenancy into the 60%-plus range, which is a lower level to our peers who have considerably higher FFO multiples. More importantly, we're forecasting to execute the redeployment of our disposition proceeds into these high-quality assets and accretive net investment spreads. While we've guided our FFO and AFFO 2023 to below 2022, largely due to deleveraging and timing of our asset recycling, the stabilized effects of our positive net investment spreads that will fully materialize in 2024 will allow us to drive organic FFO and AFFO growth with better risk-adjusted tenancy and without the need for additional capital in what is currently a capital-constrained environment. Finally, it's important to highlight the valuation discount implied with our current stock price and stability of our balance sheet and capital structure. We're currently trading at an 8% implied cap rate, which is well above the cap rates achieved on our dispositions over the past 6 months and in significant contrast with the improving credit quality of our tenants and overall portfolio value. Furthermore, we have no floating interest rate exposure and no debt maturities until 2026. And this stability complements the strength of our high-quality portfolio, which together supports our well-covered dividend that's yielding nearly 7%. With that, I'll turn the call over to Matt to talk about our first quarter performance and revised guidance.

Thanks, John. Beginning with our financial results. First quarter 2023 FFO was $0.36 per share, a $0.13 per share or 26.5% decrease compared to the first quarter of 2022. First quarter 2023 AFFO was also $0.36 per share, a $0.12 per share or 25% decrease over the first quarter of 2022. Our results benefited from a 3.4% increase in total revenues, which was driven by the full year benefits of our 2022 asset recycling efforts and investment activity, but was partially offset by $165,000 of nonrepeating percentage rent received in the first quarter of 2022, revenue drag from our first quarter asset sales for which the proceeds have yet to be reinvested and the year-over-year negative investment spread that resulted from the sale of our sole remaining office property that occurred in Q2 2022. Offsetting our year-over-year revenue growth was a 5.9% increase to our general and administrative expenses which was predominantly due to increases in the management fee paid to our external manager as a result of our 2022 and 2023 equity capital markets activities and higher interest expense due to higher interest rates, partially offset by an overall lower outstanding debt balance. For the first quarter of 2023, the company paid a cash dividend of $0.275 per share, representing a 1.9% year-over-year increase over the company's Q1 2022 cash dividend and a current annualized yield of nearly 7%. FFO and AFFO first quarter payout ratios were both 76%, and we anticipate announcing our regular quarterly cash dividend for the second quarter towards the end of May. During the quarter, we issued 666,000 shares of common stock through our ATM program for total net proceeds of $12.4 million at an average gross issuance price of nearly $19 per share. As John mentioned, we've overhauled our balance sheet over the past 12 months to lock in our cost of debt and stabilize our overall capital structure. During that 12-month time frame, we reduced our net debt to pro forma EBITDA by nearly 2.5x, fixed any remaining outstanding floating rate debt, extended all of our debt maturities out to 2026 and beyond and meaningfully increased our potential liquidity to more than $260 million through a combination of undrawn revolving credit facility commitments, cash and restricted cash. We ended the year with net debt to total enterprise value of 41%, net debt to pro forma EBITDA of 6.4x, and our fixed charge coverage ratio remains very healthy at 3.4x. As we look forward to the balance of 2023, we began the second quarter with portfolio-wide in-place annualized straight-line base rent of $37 million or $36.6 million of in-place annualized cash base rent. We maintained our full year FFO and AFFO per share guidance of $1.50 to $1.55 per share and $1.52 to $1.57 per share, respectively, even after accounting for the near-term earnings drag associated with the timing of our increased asset recycling efforts. Our investment guidance also remains unchanged at a range of $100 million to $150 million of retail net lease investments and we've increased our disposition guidance by $50 million at the low end and $75 million at the high end to account for our elevated Q1 asset sales and revised expectations for asset sales through the balance of the year. Overall, we're confident our unique asset recycling strategy, increased liquidity, improved balance sheet and high-quality portfolio as is well positioned to drive value over the long run and we look forward to executing on our 2023 guidance and positioning the company for future earnings growth in 2024. With that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from Gaurav Mehta with EF Hutton.

I wanted to ask you on the dispositions. Can you provide some more color on the assets that you sold? Was this a fully marketed sales or what is like off-market transaction for you guys? And then in terms of deployment of the proceeds, are you expecting all of the proceeds to be redeployed in 2Q?

Yes. So thanks very much. Basically, the dispositions were a combination of off-market and broker-led sort of transactions. I think it really -- the dispositions really got kicked off when we started getting off-market interest at cap rates that we felt were opportunistic for us to sell and very accretive to the company and earnings and book value. And so -- and then on the repositioning of the sales, we feel like most of it will be done in the second quarter. There could be a little lag, but that's the goal, is to get most of it done in the second quarter.

Okay. And then on the leverage side, leverage was down to 6.4x. What's your expectation for the leverage going forward?

Yes. I think in general, we'll probably be in that mid-6's range unless we find something on the acquisition side of things that we can't live without, and we'll figure out the capital structure after the fact if it's a really unique transaction, but mid-6's or low 6's is probably where you can assume we'll operate for the go forward.

Our next question comes from Matthew Erdner with JonesTrading.

It's Matthew on for Jason. Could you talk about the profile of the buyer from the dispositions and kind of where the demand is coming from and the expectation for demand going forward?

It's kind of all over the board, but primarily, it's high net worth, but there are some franchisee purchasing their own property bank. So it's just a total mix, not as much institutional, mainly private capital.

Got you. And then are you guys going to continue to look to dispose of the noninvestment grade? Or is it just whenever you see an offer if it fits, then that's kind of what you'll take?

No, we're definitely going to explore further in noninvestment grade. We think, obviously, with the disconnect in our stock price, there's probably some credits where the Street thinks that those credits would trade at higher cap rates. But given the location of the properties or redevelopment potential, we know the cap rates to be lower. So we'll continue to print tickets and print profits and redeploy at higher yields.

Our next question comes from Barry Oxford with Colliers.

Guys, going back to the percentage rent that you mentioned in your comments of being lower. Is that a function of tenants not hitting the percentage rent? Or -- is it more of a function of the structure of the leases are more tied to fixed than they were previously.

Barry, it's a little bit of a unique situation. We bought an asset that was in percentage rent where we recasted the lease before we acquired it. But we -- as part of the acquisition, we had a right to the percentage rent in the year that we bought it. And so we had the benefit of the percentage rent from the lease structure prior to our recasting it, but the recasting of the lease going forward is just fixed rent with increases.

Okay. Great. Great. Then when we look to 2024 versus 2023 as far as a net acquisition disposition, do you see '24 being heavy on net acquisitions whereas this year won't be quite that heavy? Or do we see '24 being like '23, where the 2 numbers will be fairly close to each other?

I mean, I would say, on the conservative side, we're going to be kind of match funding, but we anticipate and the goal is obviously to be a net acquirer, and we think we'll get there. Given what we see in front of us as far as opportunities to buy and to keep on upgrading the portfolio, we fully want to be a net acquirer and will, but obviously, the conservative side is, we're recycling, organically growing, but I think we'll do better than that.

Yes. Barry, just to piggyback off John's comments. I think it's going to be stock price dependent. We're not going to [indiscernible] shareholders just to be a net acquirer. So the capital recycling lets us incrementally grow earnings without having to rely on the capital markets. But as we continue to upgrade the portfolio, hopefully, the stock responds and that will give us some runway for net acquisitions.

And last question. John, are you seeing assets being retraded or not necessarily?

Not necessarily. People -- I mean, with the volatility in the market, you would think there would be little bit more active retrading. But I think people are finding the stability of the net lease side to be comforting and they're kind of like get me out of bonds and stocks and CDs that might not be as safe as one might have thought and get me into sticks and bricks with a good credit.

Our next question comes from Wes Golladay with Baird.

Can you talk about the overall tenant health? Do you have any changes to a watch list if you have a watch list? And then maybe discuss how Party City, I guess, evolved in your portfolio? Was there any changes to the rent? Or is it just the firm?

Yes. So on the watch list, we definitely are keeping our eyes open on the obvious ones. And the credits have kind of even gotten better in some cases. I don't really want to go into too much detail. But yes, the watch list isn't very deep because that's what we've been kind of selling first, is sort of assets that may have issues in the future. But as far as on rents on the Party City, I'll let Matt kind of discuss what's going on there.

Yes. So we're -- we haven't finalized anything with Party City at West, but it looks like they're going to reaffirm their lease based on what we know today. And we might give them a month of free rent or something just to help out with the process, but that would be a -- we've held a pretty strong line on that lease, just given the strength of the underlying real estate.

And on that one, there is -- there are some back-up interest in that location, and I think Party City knows how strong -- they definitely know how strong the location is because we know their sales, but -- they probably know other people would like that space. So their negotiating position isn't all that great there.

Okay. That's good. And then more of a bigger picture question here. I mean, in the private market, the portfolio of assets appear to be in very high demand as evidenced by the cap rate you're achieving on the lower end of the portfolio, yet you're trading at an 8% cap rate. In the past, you mentioned potentially seeking strategic alternatives that there was a prolonged dislocation. Are you back to maybe revisiting the alternatives here? And I guess maybe on the last part, one of the things you wanted to do over the last year was get to the portfolio into an optimal position. Do you think you're there right now?

No, we're not. So not yet is really the short answer. We still have pruning to do where we think we can, again, take some noninvestment-grade properties, achieve almost investment-grade sort of cap rates and redeploy to improve the portfolio even further. And as we mentioned, drive our investment-grade exposure even higher, and I think the value disconnect -- look, we've seen our stock before where there's been this value disconnect. And finally, the market kind of figures it out. Our belief is you would be a better commentator on it. Our belief is that when the volatility really skyrocketed in the market, the small caps really got hammered, and we were definitely part of it. So if you look at our investor presentation on Page 4, I believe, shows kind of where PINE started trading way off of the other folks, even though our portfolio has gotten a lot better. And so we feel like we'll make up a lot of ground there or at least the long/short guys will figure it out. But we'll just keep on improving the portfolio, keep on organically growing the NOI, and I think we'll be in a better spot to revisit things later in the year if the disconnect hasn't really gone away as much.

Next question comes from Michael Gorman with BTIG.

John, sorry if I missed it. What was the average hold period for the assets that you sold in the quarter?

Good question.

Mike, it was, call it, about a year to 1.5 years.

Okay. Got it. Got it. And then...

Probably closer to 1.5 years.

Closer to 1.5 years, okay. Perfect. And then obviously, a lot of focus on the nature of the tenants in investment grade versus noninvestment grade, which makes sense. But also just kind of looking through the industry diversification, certainly, some of the industries, that's where the assets came out of consumer electronics went down, health and fitness, fast casual. Is that also a reflection of where you're thinking about the quality of the portfolio from an industry perspective? Or are those industries fine? And if with the right tenant, you would be willing to go back into some of those?

Yes, that's a very good question. So we will definitely go back into some of these tenants that we're disposing if we see kind of an arbitrage opportunity. As we are being on the sell side, selling where cap rates make a lot of sense. But if we can take advantage of some dislocation, no financing in the market where there may be some pruning from other sellers and be kind of a market clearing house on good locations and credits that in general, the Mom-and-Pops, either the properties are too big or people perceive the credit as being troubled, but we like the real estate and we think the credit is better than people think, we'll definitely take advantage of that. So you'll see a little bit of a barbell effect of definitely buying more IG but definitely take advantage of some dislocation having higher yield mixed in.

Okay. That's really helpful. And then one last one on the dispositions. How many of the buyers used leverage to clear the transactions or put leverage in place before they close.

Almost zero.

Almost -- okay. And then last one for me, Matt, on the guidance side, sorry if I missed it, but -- and I know you don't put it in the disclosures, but I noticed, I think the share count went down a little bit. Did you change anything with the interest expense assumptions in the FFO guidance for the year as well given a little bit more stability in interest rates so far?

We -- so for us, on the interest side, we entered into a swap for -- for the $50 million outstanding on the revolver. And so that certainly stabilized the interest expense going forward. So yes, we definitely benefited a little bit on that front in the back half of the guidance, although the yield curve was set to drop pretty steeply in the back half of the year. So it wasn't as big of a benefit as we would have liked relative to the assumptions. From a total share count perspective, it really just reflects the acknowledgment that we're probably not going to be active on the ATM in the coming months just given where the stock price is. And so that's why we reduced the guided share count.

Our next question comes from R.J. Milligan with Raymond James.

I just wanted to follow up on Mike's question in terms of guidance. So guidance is unchanged, but obviously, more front-end loaded disposition activity. And I'm just curious, Matt, what are the positive impacts that are now allowing you to maintain guidance for the year?

Yes. So a couple of things. Good question, R.J. Obviously, there's more timing drag related to the front end disposition activity that's being offset by that interest rate swap I referenced relative to our previous assumptions. The better spreads that we're getting on net investment activity, just given the elevated disposition activity and where we think we can sell assets at is helping offset -- it's helping drive similar leverage returns where we don't have to use more leverage in consideration of not being as active on the ATM. So it's the long way of saying the gains that we're putting on the dispositions are helping offset any need for additional leverage, which is how we're allowed to reduce the share count and we're picking up incremental benefit from not having as many shares out there.

Got it. That makes sense. And then the dispositions in the first quarter, a bulk of them were just happened to be larger boxes. And I'm curious if that is a more deliberate strategy or if that was just more coincidental.

Coincidental.

Our next question comes from Rob Stevenson with Janney.

Most of my questions have been answered. But John, what is it that you guys are assuming these days in terms of the cap rate spread between the dispositions and the acquisitions for the year?

I'll answer in a different way. I mean we're targeting anywhere from 6.5% to 7.5% and higher and kind of blending as much as possible to the 7% range though. It's a little bit of the bandwidth in what we're seeing.

Yes, that's Rob, that's on the acquisition side. And on the disposition side, obviously, we're being pretty opportunistic given the [indiscernible] in Q1.

And have you guys seen any difference in pricing between the beginning of the year and today?

So the investment grade is still hanging in there. So there hasn't been a lot of movement on basically weaker credits, shorter leases with weaker credits, definitely, you're seeing some cap rate expansion and opportunity. We're seeing -- now we're having a lot more discussions with regards to developers who may have a portfolio that they didn't really want to sell and their credit lines. Obviously, the rates are going up and up and we're seeing opportunities there to either buy or recapitalize. And so I think we're definitely optimistic that there's going to be some transaction opportunity this summer that will be fairly interesting just because the rates are now just really creeping into some of these debt maturities and so forth for merchant builders. So there should be some good [ honey ] coming down the road.

Okay. And then last one for me. Matt, do you have access to any debt through your various sources that would be more attractive to you today and over the next few months than the line of credit at this point given where pricing and fees and all are?

Yes. I mean with the inverted yield curve, it obviously benefits us to lock in rates for longer if we can capture that in a swap. So whether we're entering into a swap to fixed rates relative to the floating rate on the revolver or if we just potentially go out to the smaller bank, who maybe having different relationship profile approach than some of the larger institutions we deal with or on the private placement side. I think there's a few different areas that we could look at. Certainly, we have access to that today, but given where the balance sheet is and where we're trying to run it utilizing that debt is it front and center as much as just recycling assets as we did in the first quarter and have indicated through the balance of the year.

Okay. And then I lied, I guess the last one was following up on the question about the cadence of earnings. I mean other than acquisitions, there's no other sort of things in the back half of the year that vaults you into, say, a $0.40 FFO quarter or anything like that, that's abnormal that's coming through, right?

So I would say from a modeling perspective, to one of the questions earlier, I think everybody can assume that the majority of the dispositions get redeployed in the second quarter. We'll continue to sell assets during the second quarter that will probably be back-end weighted in terms of the timing of the dispositions. And I think that trend of acquiring maybe more towards the mid period of a quarter and selling towards the end of the quarter is probably the cadence will be on in the third and fourth quarter as well. . And so you can sort of back into what the implied acquisition activity is in the second quarter and what that means for the third and fourth? And then from a disposition perspective, I think the balance of our guidance will be pretty evenly distributed between the second, third and fourth quarter.

And I'm not showing any further questions at this time. I'd like to turn the call back over to John for any closing remarks.

Thank you very much for attending the call.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.