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

Hello, everyone, and thanks for being with us this morning as we discuss Alpine Income Property Trust's operating results for Q3 2023; joining me is John Albright, our CEO and President. Prior to getting started, I want to 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 vary substantially from what these forward-looking statements describe, and we have no obligation to revise them. Details about the factors and risks that might lead actual results to diverge materially from our expectations 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 — which include reconciliations of the non-GAAP financial measures we utilize — are available on our website at alpinereit.com. At this point, I'll turn things over to John for his prepared remarks.

Appreciate that, Matt, and good morning to all of you. Let me dive straight in. Our investments for the quarter came to $27.2 million, which breaks down into $19.4 million of net lease acquisitions plus a loan investment of $7.8 million. On the disposition side, we closed $20.6 million during the quarter. For the quarter, acquisitions carried a cash cap rate of 9%, the loan investment had an initial yield of 8.5%, and dispositions had an exit cap rate of 6.3%. One thing boosting our unusually high acquisition yield is the Kohl's property we bought in Chandler, Arizona. That asset is scheduled for a rent rolldown of 25% in the Q1 of 2024. We negotiated that rolldown before buying the property so that we could meaningfully extend its term. Once the rent reset is factored in, the acquisition cap rate on our Q3 activity works out to 7.5%, which ranks as the second highest cap rate for quarterly acquisition volume in our company's history and sits more than 50 basis points above our historical average. The mortgage we originated this quarter is our first loan investment at Alpine. This project is a 33-acre development outside of Indianapolis that includes five net-leased parcels, with Wawa as the anchor tenant, plus a multifamily development parcel. Our loan is secured by the whole land assemblage, though the proceeds from it go toward developing the single tenant parcels. The loan carries a term of two years, an initial yield of 8.5% in year one, a bumped-up rate of 9.25% in year two, and we get origination fees as part of the financing. At the close of the quarter, the outstanding balance stood at $6.9 million. As we mentioned on our previous call, we see these first mortgage investments as a way to put money into properties with high-quality tenants and strong sponsorship at an outsized risk-adjusted return. Such investments will remain a minority piece of our strategy, but they do deliver attractive short-term yields while we hunt for longer-term core investment opportunities; beyond our investment activity, we also kept up our strategic asset recycling program this quarter, selling eight properties leased to non-investment-grade tenants, most of which were franchise restaurant operators; those asset sales produced total gains of $2.6 million. Our net investment spread for the quarter, meaning the gap between the yield on what we invested in and the yield on what we sold, was 266 basis points, or 118 basis points once you adjust for the Kohl's rolldown. That 118 basis points is more than double our long-term average and marks our highest quarterly spread since the Q3 of 2022. All in all, we're happy with the transaction activity this quarter, since we believe we've upgraded portfolio quality while generating attractive risk-adjusted returns. So far this year, we've invested $87 million at a 7.5% initial yield. Tenants with investment-grade credit ratings account for 61% of the acquired base rents, and tenants that are publicly traded, or whose debt is publicly traded, account for 87% of the acquired base rents. Also, across the year's first nine months, 22 properties were disposed of for $100 million, which produced gains on sale of $7.8 million. Of those 22 properties sold, 14 had tenants that are either privately held or lack a public debt rating. As of today, investment-grade rated tenants account for 64% of the base rent in our portfolio, while 93% of our tenants are publicly traded or carry publicly rated debt. Our largest tenants are the same as they were in Q2, and they include well-known industry leaders like Walgreens, Lowe's, Dollar General, Dollar Tree, Family Dollar, Walmart, Best Buy, Hobby Lobby, and Home Depot. On the portfolio management side, seven Valero-branded convenience store properties went vacant this quarter because of a bankruptcy and the later liquidation of the operator, Mountain Express; these assets are fairly small, and their rents are modest relative to our whole portfolio, yet even so, the rent we lost along with the slight rise in borrowing costs stemming from that bankruptcy, plus the expected timing of transaction activity, all factor into our updated guidance. The bankruptcy's effect ought to be mostly limited to our Q3 and Q4 operating results, since we expect to resolve this matter by disposing of the properties over the next few months and redeploying the proceeds. Lastly, we repurchased close to $5 million of common stock in Q3 at pricing we view as accretive, given that our stock is trading near an implied 8% cap rate and considerably under our book value. We will stay active under our $15 million buyback program so long as our shares trade at what we consider a significant discount to the underlying worth of our portfolio and operating platform. I'll now hand the call to Matt, who will go over our quarterly results, balance sheet, and updated guidance.

Thanks, John. By the time the quarter closed, 138 properties made up our portfolio, which stood at 99% occupied, covering 3.9 million sq ft, while tenants were active across 23 sectors in 35 states. The Mountain Express bankruptcy caused occupancy to slip a bit, yet as John noted, our leading tenants are largely the same and keep reflecting a nicely diversified blend of top-tier operators, most of which carry investment-grade credit ratings and are either publicly rated or publicly traded. FFO for Q3 2023 came to $0.37 per share, a 7.5% decline versus Q3 of 2022, while AFFO for Q3 2023 was $0.38 per share, a 9.5% drop against Q3 of 2022. Non-performing tenants created problems, and the schedule of when we made investments and sold assets also hurt us, as did higher interest costs caused by rates climbing compared with a year earlier — all of that dragged down what we earned this quarter. Working in the other direction were several factors: scheduled rent increases across the portfolio we own, attractive spreads on debt investments generated through our recycling of assets, additional interest income tied to cash and restricted cash we keep on the balance sheet, and benefits from a slightly reduced share count resulting from our buyback program. On the G&A side, we spent $1.7 million during the quarter, which includes the $1.1 million management fee owed to our outside manager. Compared with the same period last year, G&A was up 13%, driven largely by a higher management fee, which itself reflected our net equity capital markets activity over the preceding 12 months. Right now, before we factor in any fresh equity sales or buybacks, the management fee's yearly run rate comes to $4.3 million. In Q3, G&A accounted for 14.3% of total revenues, which is below the 14.6% we saw in Q2 of 2023. When Mountain Express went bankrupt, that led us to book a $2.9 million impairment this quarter, after which we moved those seven properties into held for sale. A $2.6 million gain from selling assets during the quarter largely canceled out that impairment. Both of those items are adjusted for when we figure FFO and AFFO. So far this year, FFO is $1.10 per share and AFFO is $1.11 per share — declines of about 19% on a per-share basis versus the first nine months of 2022. We've already shared that during the third quarter, the company distributed a cash dividend of $0.275 for each share, which works out to roughly a 6.6% annualized yield at present. Payout ratios for Q3 FFO and AFFO remained comfortably covered, coming in at 74% and 72%, respectively. When we get close to the end of November, we plan to declare the regular quarterly cash common stock dividend for Q4. John noted earlier that we were busy this quarter under the share repurchase program our board approved at fifteen million dollars — we bought back more than 280,000 shares of common stock, spending $4.7 million in total, which comes to an average price of $16.78 per share. So far this year, we've bought back more than 300,000 shares of common stock. The total cost was $5.1 million, which works out to an average of $16.66 per share. At the end of the quarter, net debt to total enterprise value stood at 48%, net debt to pro forma EBITDA was 6.9x, and our fixed charge coverage ratio remained a healthy 3.4x. Our balance sheet carries no floating interest rate exposure, and no debt comes due before 2026. Total liquidity at quarter end — including cash, restricted cash, and undrawn revolver commitments — exceeded $217 million. Now, as we head into Q4 of 2023, we're entering that quarter with portfolio-wide, in-place, annualized straight-line and cash-based rents of approximately $39.2 million. Our updated outlook for the entire 2023 year takes into account what we achieved in Q3, the rent income we won't receive because of Mountain Express's bankruptcy, when we now expect to complete dispositions and make investments, what we anticipate happening in the capital markets, plus a number of additional assumptions. As a result, we've brought down our projected ranges for both FFO and AFFO across the full year — the FFO range is now $1.45-$1.47 per share, while AFFO is expected to land between $1.46 and $1.48 per share. For the anticipated weighted average share count across the year, we raised the bottom end by 100,000 shares and reduced the top end by 400,000 shares, which mirrors the net equity capital markets activity we saw in Q3 and expect to see in Q4. Our guidance for total dispositions and investments remains unchanged, and that investments figure does account for the activity on our loan investments. We do have a tenant credit problem to address during the fourth quarter, yet we believe our portfolio will continue to deliver solid results regardless of economic conditions, given that close to two-thirds of rental income is generated by tenants with investment-grade ratings and we maintain robust financial transparency, as almost 93% of rents derive from tenants that are either publicly traded or publicly rated. Alongside our value-enhancing approach to recycling assets, a balance sheet with reduced risk, and a share buyback program that takes advantage of opportunities, we feel we are in a very strong position going into 2024; with that said, we will now take questions. Operator?

Hi there, good morning, everyone. I appreciate you taking my question. For the rest of this year, it looks like the disposition activity will stem from Mountain Express, and then perhaps an acquisition on an opportunistic basis somewhere, should you come across something suitable. Looking ahead to 2024, do you anticipate being net buyers or net sellers?

Well, obviously, our hope is to be net buyers, for sure. That's clearly dependent on the capital markets and on recycling, but, you know, it's clear we're beginning to see more interesting opportunities. We're, you know, clearly capitalizing on wherever we can keep selling down properties and credits at good prices and sort of be in a position to purchase. We're patiently evaluating opportunities. So obviously, we would love to be a net acquirer next year.

Following up on that point, right now 93% carries a public rating or is publicly traded. Is reaching 100% the eventual aim?

That isn't necessarily the case, though we view it as a strong signal that a publicly traded company clearly has greater access to capital than one that's private. So I'd call it a solid data point, in my view, for investors.

Got it. Thank you.

Thanks.

Morning, everyone. Matt, how much does that bankrupt tenant hit your revenue by each month or quarter?

Just shy of $150 thousand per quarter.

All right.

That's base rent, and then clearly there are carry costs tied to those properties—things like real estate taxes, maintenance, and that sort of thing. What I'd say you should anticipate, though, is that ideally we'll be out of them prior to when this year wraps up.

Alright, John — what drew you to Kohl's? They're not investment grade right now; they've either got or at least have had operational problems, and the stock sits at one-third of its value from 18 months back. Where's the appeal, even with a longer-term lease from them, considering, you know, the other opportunities available to you that quarter?

Chandler, Arizona — a fantastic infill spot, you know, rent priced very suitably, with a rent roll down. Demographics there are really strong. It's a market where, as you can see, every one of those chip makers is wildly constructing fabrication plants. Such an infill location. Building at this cost basis isn't possible. Should something befall them, I figure there will be no shortage of interested parties for the box, or to subdivide that box.

All right, that helps. One final question from me. What's your approach to putting capital to work during the fourth quarter? Will you repurchase additional shares, pay down borrowings, are additional asset sales lined up, and what about buying other companies? Considering where things stand versus your guidance, what's the chance those things get done in Q4 rather than slipping further out into 2024?

A bit of each of those. Clearly, we are repurchasing shares. We view it opportunistically, we're evaluating a few appealing possibilities for investment, and we've got properties listed and in the midst of being sold so we can redeploy capital. Across every one of these areas, we're extremely busy.

All right, appreciate it, everyone, and enjoy the weekend.

John Albright with the answer: Thank you, same to you.

Morning, everyone. About that 118 basis point spread — thinking ahead, do you have any idea what sort of spreads might be available down the road? And could you perhaps speak to how fast the assets you purchase are growing compared with those you sell?

I'd say there are certainly some intriguing spread possibilities between what we can offload and what we can acquire. Whether they actually pan out, though, I'm not sure. There's also potentially a flatter trade — selling certain non-investment-grade properties while purchasing investment-grade ones — where the spread isn't as wide, but you're improving the portfolio. It's somewhat of a mix, with some genuine spread opportunity and then some that are roughly neutral.