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

Hello, everyone, and thanks for being with us on this call to discuss Alpine Income Property Trust's operating results for the second quarter of 2023. Joining me is John Albright, our CEO and President. Prior to starting, I want to remind all of you that a number of the remarks we make today fall under the category of forward-looking statements according to federal securities law. It's possible the company's actual future results could vary substantially from what gets discussed in those forward-looking statements, and we assume no obligation to revise them. Risks and factors that might lead actual results to deviate materially from what we expect get disclosed periodically in more detail within 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 at alpinereit.com. I'll now turn things over to John for his prepared remarks.

Matt, thank you, and good morning to all of you. Before I walk through what we invested during the quarter, I'd like to call attention to how far we've come on our asset recycling strategy, and to share a few observations about conditions in the transactions market. For more than twelve months, asset recycling has been our central focus, since it lets us capitalize on appealing prices at a time when interest rates have climbed quickly, upgrade the quality of our portfolio as a whole, strengthen our balance sheet, and generate appealing returns on investment. We achieved this even as capital markets remained volatile, a volatility driven in part by interest rates rising to a degree never seen before. Starting with the initial 25 basis point hike to the federal funds rate back in March 2022, we've disposed of close to $235 million in properties at cash cap rates under 6.4%, which brought in $39 million in gains. The proceeds from those sales have gone toward acquisitions yielding over a 7% cash cap rate, and 78% of the rents from what we bought come from tenants with investment grade ratings. Because of this, our portfolio has been reshaped quickly: we exited our last remaining office investment, lifted our exposure to investment grade tenants from 48% to 63% in only a year, and moved a larger share of our holdings toward highly stable, industry-leading names like Lowe's, DICK'S Sporting Goods, Walmart, Dollar Tree, Family Dollar, Best Buy, and Home Depot. Thanks to the strong spreads we're earning on our net investments, along with solid profits from sales, we've brought our leverage down. At the close of Q2 2022 it stood at 8.3x, and as of the end of Q2 2023 it's now at 6.4x. I'm happy to report that we carry no exposure to floating rate interest and face no debt maturities before 2026. Even though our share price doesn't yet reflect all of this, these improvements leave us in a strong position to seize opportunities as the transaction market shifts, and we're beginning to spot more attractive, high-quality deals — particularly from merchant developers. In Q2, we put over $60 million to work at a 6.8% cash cap rate, and tenants holding investment-grade credit ratings account for 85% of the annualized base rent. On this list you'll find well-known companies like Chick-fil-A, Home Depot, Lowe's, Best Buy, DICK'S Sporting Goods, Verizon, HomeGoods, Starbucks, and Marshalls. Our preference is for tenants carrying investment grade ratings, since they bring strong balance sheets, smart approaches to running their businesses, and unusually high levels of clarity around their finances and operations. At the same time, we lean toward discount and non-discretionary categories, which ought to hold up better even when the economy at large loses momentum. On the other side, when we sell assets, we've focused on trimming specific tenant and sector overlaps inside our holdings, along with disposing of tenants that lack investment grade ratings. This quarter, we disposed of close to $23 million in properties, achieving a 6.4% cash cap rate. Every property we sold in Q2 was leased to a non-investment grade-rated tenant, among them two locations leased to Academy Sports. Turning to the asset sales we completed in Q2, we've disposed of $79 million in assets since the start of the year at a cash cap rate of 6.2%, which produced $5.2 million in gains. We're pleased with the results we've delivered over the past 12 months, and our goal is to create long-term value for our shareholders. Right now, we're evaluating 2 development loan agreements anchored by industry-leading tenants. These agreements would let us put capital to work at yields well above the cap rates on the acquisitions we've closed this year, and they may also give us the opportunity to pick up the assets after construction is finished. To tackle the gap between public and private valuations in our share price, our board has given the green light to a bigger share repurchase program of as much as $15 million. We can't promise we'll actually use the program, but given that our share price is sitting at roughly an 8% cash cap rate, the discount underneath is tough to rationalize, particularly when compared with peers focused on investment grade. Having said that, I'll hand things over to Matt, who will go through our quarterly results, balance sheet, and updated guidance.

Thanks, John. At the close of the quarter, our occupancy across the portfolio stood at 99.5%. We held 143 properties, which amount to 3.9 million sq ft in total, and our tenants operate across 25 sectors in 34 states. On our top 10 tenant roster, Home Depot took the place of Academy Sports, and it now sits alongside industry-leading operators including Walgreens, Lowe's, DICK'S Sporting Goods, Dollar Tree, Family Dollar, Dollar General, Walmart, Hobby Lobby, and Best Buy. For the second quarter of 2023, FFO and AFFO each came in at $0.37 per share, which is a decline of $0.10 per share, or 21%, versus the second quarter of 2022. A 1.4% rise in total revenues gave our quarterly results a boost, mainly because of a positive net investment spread generated by our asset recycling program. Just like what happened in the first quarter, the favorable impact of our asset recycling was partly offset by the revenue drag caused by asset sales in the first and second quarters, since the proceeds from those sales were not reinvested right away, and also by the negative year-over-year reinvestment spread tied to the disposition of our sole remaining office property, which took place in the second quarter of 2022. G&A expenses rose 12% for the quarter, mostly because of management fees paid to our external manager, which grew due to our equity issuance activity over the past 12 months. Before assuming any new equity issuance or repurchases, the management fee's current annual run rate is $4.4 million. Higher interest rates pushed interest expense up, which contributed to the drop in FFO and AFFO per share, though a lower overall outstanding debt balance partly offset that. On a year-to-date basis, FFO was $0.72 per share and AFFO was $0.73 per share, which amounts to year-over-year per share decreases of 25.8% and 23.2%, respectively, compared with the first six months of 2022. In the second quarter of 2023, the company distributed a cash dividend of $0.275 per share, which is a 1.9% year-over-year increase above the company's Q2 2022 cash dividend and reflects a current annualized yield of nearly 7%. Payout ratios for second quarter FFO and AFFO were each 74%. During the quarter, we bought back nearly 24,000 shares of common stock on the open market under the previously authorized $5 million share repurchase program, spending a total of $400,000 at an average price of $15.22 per share. The newly authorized $15 million share repurchase program John previously referenced took the place of the previously instituted $5 million share repurchase program. We finished the quarter with net debt to total enterprise value of 46% and net debt to pro forma EBITDA of 6.4 x, and we continue to maintain a strong fixed charge coverage ratio of 3.3 x. As mentioned earlier, we have no floating interest rate exposure, no debt maturities until 2026, and total liquidity at quarter end is more than $225 million. We enter the third quarter with portfolio-wide in-place annualized straight-line base rent of $39.7 million, or $39.3 million of in-place annualized cash base rent. Taking into account when dispositions and acquisitions occurred during 2023, along with greater equity drag than we had projected because of more asset sales, our 2023 guidance has been updated. For both our full year FFO and AFFO guidance ranges, the upper end has been cut by $0.02 per share, which gives us revised per-share guidance ranges of $1.50-$1.53 for FFO and $1.52-$1.55 for AFFO. On investments, the high end now sits $25 million lower, producing a new range of $100 million-$125 million for retail net lease investments. Meanwhile, the low end of our disposition guidance has been raised by $25 million, reflecting stronger asset sales so far this year and updated expectations for dispositions over the rest of 2023. All told, 2023 has represented a year of favorable transition for both our portfolio and our balance sheet. As we move into the second half, we carry greater flexibility to generate long-term value and grow future earnings; with that, operator, please open the line for questions.

Hi, everyone. Good morning. I appreciate you fielding this. Should the purchase market fail to evolve the way you're expecting, especially considering that reduced guidance, would you wind up as net sellers during 2023?

You know, we are certainly spotting additional opportunities at this point. Much of that is coming from the tightness in the debt market. I'd say we feel fairly confident that we can locate some solid acquisitions over the remainder of the year.

Understood. At this point, how do you think about fresh acquisitions versus buying back shares?

Sure — given the level our stock trades at, we just aren't seeing the same quality of opportunity that repurchasing our own shares offers. Take our book value per share: it currently sits at $19.30 per share, and the stock trades at an 8% implied cap rate. There are plenty of reasons to be quite drawn to repurchasing shares rather than simply picking up a standard asset; even so, we remain selective about what we buy, and we are turning up solid opportunities.

Awesome. Thank you.

Thank you.

Seems that way.

Can you hear me? Hi there.

Hi, Rob.

Hey-

We can hear you. Yep, go ahead.

My apologies. John, how is the pace expected to shape up regarding buying and selling assets during the second half? Will the quarters we have left be roughly balanced, with purchases offset by sales? Or might things end up heavier at the start or the finish for either one?

Hi Rob, Matt here. I'd say during Q3, things should be fairly level, perhaps tilted somewhat toward the selling side. When it comes to Q4, likely somewhat heavier on buying compared with selling; having said that, one factor behind the updated outlook is that we're divesting sooner, and we can see those earlier sales more clearly. Earnings face somewhat greater pressure owing to how the timing works out between sales and purchases.

All right. If you take a look at what we own right now, what portion would you say is a really solid candidate for recycling at this point, as opposed to — well, clearly, anything can be sold whenever. If someone comes along and offers a 1% cap rate, I'm certain you'd accept that. What I'm asking is, based on how you're evaluating the holdings right now, what share of it would probably be a recycle candidate over the coming 12 to 18 months, and what share wouldn't?

Well, clearly, the number of assets available for recycling keeps shrinking, no question, given how much we've been doing. That said, we're staying, you know, patient. We simply won't sell just for the sake of selling. You know, we've got specific price points and so on, and since 1031 buyers are out there in the market and can't locate anything to purchase, you know, we're working to capitalize on that; it's, you know, not a huge volume, but sufficient to keep us occupied.

Regarding those possible development opportunities you mentioned during your prepared remarks, what kind of timeline are we looking at? Is this something that happens in 2024, or will these wrap up at some point during 2023, at which point you'd take ownership? From a timing perspective, how should we frame that, along with how it affects the 2023 investment figures?

The money will go out during this year for these specific opportunities. Whether we ultimately close on the properties comes down to how well they can execute at the cash cap rates they believe they can achieve on a sale, compared with the level at which we'd be willing to buy. We essentially hold a last-look position when it comes to high quality credits and high-quality locations.

Alright, Matt, my final question: will the asset sales generate sufficient proceeds to cover the purchases for the rest of 2023, or will you have to arrange financing? If so, would that draw on the credit facility?

No. In our guidance, we anticipated acting as something of a match funder, and that a modest level of share repurchases would be covered through cash on hand and divestitures, meaning no additional borrowing against the revolver would occur before the year ends.

All right, that's useful. Thanks, everyone. Enjoy your weekend.

Thanks. Same to you.

Hi there, morning, all. I've got one brief thing about the reduced purchase activity you mentioned for this year. Is it simply — obviously — because of the steeper financing costs you're facing at present?

Yes, Wes, the sole reason is really restricted availability of equity. With the clarity we've got regarding asset sales and what we believe we can complete before this year closes, we're essentially determining buying activity based on that.

All right. So how do you strike a balance with a buyback? I get the point that your shares are obviously undervalued compared to what you'd pay on the private market. And you also have to grow the business and ultimately, you know, move toward internalization at some point, ideally within the next few years. How do you weigh those forces?

Well, look, it is, you know, it's a buyback program, clearly, meant to capitalize on sort of, hopefully, a window in time when our trading is against sort of what the company is worth and against where peers are trading. Clearly, we have been busy, you know, over the past 12 months raising equity in situations where growing the platform makes sense for us. We're hopeful that since we've enhanced the value and the portfolio mix of the company, we'll receive a bit of affection from the markets in the back half of the year. You know, we continue to anticipate being able to grow the platform, because of, you know, sort of what we've accomplished with the portfolio and where we stand relative to other folks.