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

Good day, and welcome to the Alpine Income Property Trust Second Quarter 2023 Operating Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to hand the call over to Matt Partridge, Chief Financial Officer. You may begin.

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

Thanks, Matt, and good morning, everyone. Before I outline our investment activity for the quarter, I want to highlight the progress we've made with our asset recycling strategy and provide some insight into what we're seeing in the transactions market. For over a year now, we focus our attention on asset recycling as a way to take advantage of attractive pricing relative to the rapidly rising interest rate environment, improve the overall quality of our portfolio, bolster our balance sheet and drive attractive returns on investment. This has been accomplished in spite of the volatile capital markets environment that has been driven in part by an unprecedented rise in interest rates. From the first 25 basis point federal funds rate increase in March 2022, we've sold nearly $235 million of properties below a 6.4% cash cap rate, generating gains of $39 million. These asset sales have funded investments above a 7% cash cap rate, of which 78% of acquired rents have been from investment-grade-rated tenants. As a result, we've quickly transformed our portfolio by selling our remaining office investment, raising our investment-grade tenant exposure from 48% to 63% in just 12 months and shifting more of our portfolio into very stable industry-leading tenants such as Lowe's, Dick's Sporting Goods, Walmart, Dollar Tree, Family Dollar, Best Buy and Home Depot. Our accretive net investment spreads and robust gains on sales have allowed us to reduce our leverage from 8.3x at the end of Q2 2022 to a current 6.4x at the end of Q2 2023. And I'm pleased to say we have no floating rate -- interest rate exposure and no debt maturities until 2026. All of this progress, while not reflected in our stock price, had us well positioned to be opportunistic in the evolving transaction market, where we're starting to see more high-quality opportunities, especially from merchant developers. During the second quarter, we invested more than $60 million at a 6.8% cash cap rate with 85% of the annualized base rent coming from tenants with investment-grade credit ratings. These investments include household names such as Chick-fil-A, Home Depot, Lowe's, Best Buy, Dick's Sporting Goods, Verizon, HomeGoods, Starbucks and Marshalls. We prioritized investment-grade-rated tenants because of their well-capitalized balance sheets, forward-thinking operating strategies, an outsized financial and operational transparency while also emphasizing discount in nondiscretionary sectors that should outperform, even if there is a broader economic slowdown. Conversely, our disposition efforts have centered around selective tenant and sector concentrations within our portfolio as well as the sale of noninvestment-grade-rated tenants. During the quarter, we sold nearly $23 million of properties at a 6.4% cash cap rate. Our Q2 disposition consisted entirely of noninvestment-grade-rated tenants, including 2 properties leased to Academy Sports. While these Q2 asset sales -- we've now sold $79 million of assets year-to-date at a cash cap rate of 6.2%, generating gains on the sale of $5.2 million. While we're proud of our execution that has taken place over the past 12 months, our focus is adding long-term value for our shareholders. Today, we're evaluating 2 development loan agreements anchored by industry-leading tenants. These agreements will allow us to put capital to work at yields meaningfully above our year-to-date acquisition cap rates and with the potential opportunity to buy assets following the completion of construction. Additionally, in an effort to address the public to private disconnect in our stock price, our Board has approved an expanded share repurchase program up to $15 million. There are no guarantees we'll be active on the program. But as our stock price sits near an 8% cash cap rate, it's hard to justify the underlying discount, especially relative to our investment-grade-focused peers. With that, I'll now turn the call over to Matt to discuss our quarterly results, balance sheet and revised guidance.

Thanks, John. As of the end of the quarter, portfolio occupancy was 99.5%, and our portfolio consisted of 143 properties totaling 3.9 million square feet with tenants operating in 25 sectors within 34 states. Home Depot replaced Academy Sports in our top 10 tenant list, joining industry-leading operators such as Walgreens, Lowe's, Dick's Sporting Goods, Dollar Tree/Family Dollar, Dollar General, Walmart, Hobby Lobby and Best Buy. Second quarter 2023 FFO and AFFO were both $0.37 per share, a $0.10 per share or 21% decrease compared to the second quarter of 2022. Our quarterly results benefited from a 1.4% increase in total revenues, which was largely driven by a positive net investment spread from our asset recycling program. As was the case in the first quarter, the positive effects of our asset recycling were partially offset by the revenue drag from our first quarter and second quarter asset sales for which the proceeds were not immediately reinvested, as well as the year-over-year negative reinvestment spread that resulted from the sale of our sole remaining office property that occurred in the second quarter of 2022. General and administrative expenses for the quarter increased 12%, largely driven by the management fees paid to our external manager, which increased as a result of our equity issuance activity over the past 12 months. The current annual run rate for the management fee before any assumed new equity issuance or repurchases is $4.4 million. Additionally, higher interest expense resulting from higher interest rates contributed to the decrease in FFO and AFFO per share, but was partially offset by an overall lower outstanding debt balance. Year-to-date, FFO was $0.72 per share and AFFO was $0.73 per share, representing year-over-year per share decrease of 25.8% and 23.2%, respectively, when compared to the first 6 months of 2022. For the second 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 Q2 2022 cash dividend and the current annualized yield of nearly 7%. Second quarter FFO and AFFO payout ratios were both 74%. During the quarter, we repurchased nearly 24,000 shares of common stock on the open market under the previously authorized $5 million share repurchase program for a total cost of $400,000 at an average price of $15.22 per share. The previously instituted $5 million share repurchase program was replaced with the newly authorized $15 million share repurchase program John previously referenced. We ended the quarter with net debt to total enterprise value of 46%, net debt to pro forma EBITDA of 6.4x, and we continue to maintain a strong fixed charge coverage ratio of 3.3x. And as previously referenced, we have no floating interest rate exposure, no debt maturities until 2026 and total liquidity at quarter end is more than $225 million. We began 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. In consideration of the timing of dispositions and acquisitions in 2023 and higher-than-forecasted equity drag from increased asset sales, we've revised our 2023 guidance. We have reduced the top end of our full year FFO and AFFO guidance ranges by $0.02 per share, respectively, resulting in revised FFO and AFFO per share guidance range of $1.50 to $1.53 per share and $1.52 to $1.55 per share, respectively. The top end of our investment guidance has been revised down by $25 million to a new range of $100 million to $125 million of retail net lease investments, and we've increased the bottom end of our disposition guidance by $25 million to account for increased year-to-date asset sales and revised expectations for dispositions through the balance of the year. Overall, 2023 has been a year of positive transition for our portfolio and balance sheet, and we head into the back half of the year with more flexibility to drive long-term value and future earnings growth. With that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from Matthew Erdner with JonesTrading.

So if the purchase market doesn't develop like you anticipate given the lower guidance, do you think you could end up being net sellers in 2023?

No. We're seeing -- we're definitely seeing more opportunity now. A lot of it is being driven by the constraint in the debt market. So I think we're pretty optimistic we'll fund some good acquisitions here for the rest of the year.

Got you. And then how are you viewing new acquisitions or share repurchases at the moment?

Well, certainly, where our stock is trading, we're not seeing as good an opportunity as buying our own stock. So if you look at our book value per share, we're at -- now we're at $19.30 per share, trading at an 8% implied cap rate. So lots of reasons to be very interested in buying -- repurchasing shares versus just buying some regular way asset. That being said, we are being picky on what we're acquiring, and we're finding good opportunities.

Rob Stevenson with Janney Montgomery Scott.

So John, what does the cadence look like from an acquisition disposition standpoint in the back half of the year? Are these quarters -- remaining quarters going to be relatively equal in terms of acquisitions matched by dispositions? Or is it going to wind up being front or back-end loaded on one of those things?

Rob, it's Matt. I think in Q3, it will be relatively even, maybe a little bit more weighted towards the disposition side of things. And then in Q4, probably a little bit more on the acquisition relative to dispositions. That being said, part of the reason for the revised guidance is we are selling earlier, and we have more visibility into selling earlier. And so there's a little bit more drag on the earnings because of the timing related to the dispositions versus acquisitions.

Okay. And when you guys look at the portfolio today, how much of the portfolio is a strong recycle candidate today versus just -- obviously, everything is for sale at any point in time. Somebody wants to offer you a 1% cap rate, I'm sure you'll take it. But I mean in terms of just the way that you look at the portfolio today, how much of this today is a likely recycle candidate in the next 12 to 18 months versus not?

I mean, we're getting down to, obviously, a smaller amount of properties for recycling for sure since we've been so active. Having said that, we're being patient. We're just not going to sell to sell. We want -- we have particular price points and so forth. And as 1031 buyers are in the market and they can't find something to buy, we're out there trying to take advantage of that. So we're not an incredible amount but enough to keep us busy.

And the potential development plays that you talked about on the prepared comments, are those -- what is the sort of time frame? Is that a 2024 event? Or are these things going to finish up sometime in '23 where you would take possession of them? How is that from a -- how should we be thinking about that from a timing standpoint and the impact on 2023 investment numbers?

So the funding will be this year on these particular investment opportunities. Now whether we end up acquiring the properties depends on a function of their ability to execute a cap rate they think they'll be able to sell at versus where we're a buyer. So we kind of have a last look sort of position on high-quality credits and high-quality locations.

Okay. And then last one for me. Matt, is the dispositions enough to fund the acquisitions for the remainder of '23? Or are you going to need to finance anything? Is that going to be on the line if it is?

No. We -- in guidance, we assumed that we'll be sort of a match funder and that some small amount of share buybacks would be funded by available cash and disposition. So there'd be no incremental funding off the revolver through the end of the year.

Our next question comes from Wesley Golladay with Baird.

Just a quick question on the lowered acquisition volume for the year. Is that just clearly a function of the higher cost of capital that you have right now at the moment?

Yes. Wes, it's purely a function of limited access to equity. And so given the visibility we have on the dispositions front and what we think we can work through by the end of the year, we're sort of solving for acquisition volume related to that.

Okay. And then how do you balance a buyback? I mean, I understand the argument that your stock is clearly cheap versus where you could buy in the private market. But then you also, you need to scale the business and eventually go to internalization at some point, hopefully, in the next few years. So how do you balance those dynamics?