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 the fourth quarter and the complete 2023 fiscal year; our Chief Executive Officer and President, John Albright, is here alongside me. . Prior to getting started, I want to point out 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 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, which include reconciliations of the non-GAAP financial measures we utilize, are available on our website at alpinereit.com. At this point I'll hand things over to John for his prepared remarks. .

Matt, thank you, and good morning everyone. When we look back at how we carried out our plan in 2023, we keep shining a light on the value-focused asset recycling effort we kicked off roughly two years ago. Thanks to that effort, we've been able to move our portfolio into higher-quality credits, cutting the risk attached to our cash flows and creating the liquidity required for chance-taking share repurchases along with high-yield first mortgage investments. In the fourth quarter, most of what we invested went toward first mortgages and buying back stock, and we believe these chances offer attractive returns for the risk taken when measured against other choices available in the market. Over that quarter, we assembled roughly $31 million of first mortgage loan investments, and we picked up two single-tenant net lease properties as well, laying out $3 million for them. An initial yield of 9.2% came from our loan investments, and the properties we acquired produced a cash cap rate of 7.3%. Our biggest single investment was a $24 million first mortgage carrying low leverage, secured by 41 retail properties. Tied to that loan, we signed a fee sharing agreement with CTO Realty Growth, our external manager. Under this fee sharing setup, we get a share of the asset management, disposition, and leasing fees tied to CTO's management. The other loan deal we closed during the quarter was the senior mortgage, which directed $6.8 million toward acquiring and fitting out a 5-acre development in a strong Nashville, Tennessee submarket, anchored by Wawa and McDonald's. Although we expect the loans we make will stay a relatively small share of both our total assets and our overall strategy, they give us future purchasing rights inside our acquisition pipeline and act as catalysts for forthcoming partnership opportunities with sponsors. We also believe these loans deliver appealing returns for the risk involved, underpinned by solid tenant credit and sponsors holding strong capital. Shifting to acquisitions, we bought two recently built properties leased to Dollar Tree and Family Dollar, because we came across fewer attractive core investment options given that sellers were reluctant. Finally, on the topic of common stock repurchases, we repurchased $9.5 million of shares during the fourth quarter at an average price a bit above $16 apiece. The cap rate we effectively achieved on those repurchases exceeded 8%. That sits well above what similar fee simple properties in that market would show. And bear in mind, tenants with investment-grade credit ratings account for 65% of our annualized base rent, and at $16 per share our stock delivers nearly 6.9% in dividends. Across the full year 2023, we acquired 14 net lease properties for $83 million, at a cash cap rate of 7.4%, and we originated three 1st mortgage investments, committing just under $39 million in funding at a 9.1% initial yield. Of the base rents brought in through property acquisitions during 2023, over 66% comes from tenants carrying investment-grade credit ratings. On the dispositions side, we completed sales of 24 properties during 2023. The proceeds from those closings came to $108 million, with a weighted average exit cap rate of 6.3%. The gains realized on those sales amounted to $9.3 million. Across the entire year, the spread on our net investments — meaning the gap between what we earn on investments and what we get from dispositions — came out to an average of 159 basis points. So despite having only limited access to the capital markets, and despite rates climbing throughout the prior 18 months, continuing to recycle assets under our strategy keeps pushing cash flow upward. Regarding portfolio composition, Matt will provide more specifics when he delivers his prepared remarks; that said, because our 5-year anniversary comes up later this year, I thought it was worth taking a moment to highlight the progress we've made in reshaping the portfolio through that very same recycling approach. Since the company's inception, we've recycled roughly $600 million of capital, accretively selling off primarily office holdings and properties leased to tenants lacking credit, then redeploying those proceeds at positive net investment spreads. That has enabled us to cut OpEx exposure from 43% down to 0%, increase our share of tenants carrying investment-grade ratings from 36% to 65%, and boost the quarterly dividend per share by more than 37%. At the same time, our list of top tenants — including names such as Walgreens, Lowe's, Dicks Sporting Goods, Dollar Tree, Family Dollar, Dollar General, Walmart, Best Buy, Hobby Lobby and Home Depot — now compares favorably to numerous peers trading at far richer valuations. Turning to valuation, we currently trade well above an implied 8% cap rate on the real estate portfolio and at a significant discount to book value of $18.36 per share. Beyond that, we expect solid growth in AFFO per share for 2024, and the loans we've made carry a built-in chance to reduce leverage across the coming two years. Put plainly, we offer exceptional value right now, and we're eager to secure as much of that value as we can for shareholders — including the $83 million in value we see embedded here. With that, I'll hand things over to Matt, who will cover our portfolio composition, quarterly results, balance sheet, and 2024 guidance.

Thank you, John. At year-end, our holdings were made up of 138 properties spanning 3.8 million square feet, with renters active across 23 industries in 35 states — and, as John noted, 65% of our annualized base rent, or ABR, is now derived from tenants, or the parents of tenants, that carry an investment-grade credit rating. Occupancy across the portfolio remains at 99%, and the makeup of our largest tenants is mostly the same. That said, we do expect occupancy to rise in the months ahead, since we have executed or are working toward executing several leases tied to the properties that are currently vacant. FFO for the fourth quarter of 2023 came in at $0.37 per share, flat versus the fourth quarter of 2022, while AFFO for the fourth quarter of 2023 reached $0.38 per share, a decline of 7.3% compared with the fourth quarter of 2022. The biggest factors affecting our quarterly results were one-time costs tied to tenant credit loss and bankruptcy — mainly stemming from the 7 Valero branded Mountain Express properties we talked about on our third quarter conference call — along with the timing of investments and dispositions. Those drags were partly counterbalanced by scheduled rent escalations across the portfolio we own, appealing net investment spreads generated by our asset recycling program, greater interest income from cash and restricted cash held on the balance sheet, and reduced interest expense stemming from the year-over-year impact of interest rate hedges we had previously put in place. G&A expenses for the quarter came to $1.5 million, which includes the $1.1 million management fee paid to our external manager. Our G&A rose 4.5% year-over-year, driven mostly by higher state and local taxes and by increases to the management fee resulting from our net equity capital markets activity over the last 12 months. The present annual run rate for the management fee, before accounting for any assumed new equity issuances or repurchases, stands at $4.2 million. Looking at the full year, FFO was $1.47 per share and AFFO was $1.49 per share, which amounts to year-over-year per share declines of 15% and 16%, respectively, relative to the full year of 2022. As we previously announced, the company distributed a fourth quarter cash dividend of $0.275 per share, equal to a current annualized yield above 7%, and our fourth quarter payout ratios for FFO and AFFO stayed relatively steady at 74% and 72%, respectively. We expect to declare our regular quarterly cash common stock dividend for the first quarter of 2024 near the end of February. On the equity capital markets side, we stayed busy during the quarter under our Board approved $15 million share repurchase program, buying close to 595,000 shares of our common stock for a total of $9.5 million, at an average price of $16.1 per share. During 2023, we bought back almost 900,000 shares of our common stock for a total of $14.6 million, at an average price of $16.23 per share. And in January, we finished off what remained of the $15 million share repurchase program. At the close of the quarter, our net debt relative to total enterprise value stood at 51%, while net debt compared to pro forma EBITDA came in at 7.7x, and the fixed charge coverage ratio was a solid 3.5x. With no debt maturities coming due before 2026, the balance sheet has stabilized nicely, and total liquidity at quarter end — comprising cash, restricted cash, and undrawn revolver commitments — exceeded $187 million; last night's press release included initial 2024 guidance that mirrors how confident we are in the portfolio's quality, the year-over-year gains tied to the asset recycling John mentioned, higher fee revenue stemming from our fee sharing agreement with CTO, and what we view as a reasonably cautious posture concerning our present access to capital, anticipated activity in the transactions market, and the broader economic environment; entering 2024, portfolio-wide in-place annualized straight-line base rent and in-place annualized cash base rent totaled $38.8 million, alongside a run rate annualized interest income from loan investments of $3.2 million. For the full year 2024, our FFO guidance range is $1.51 to $1.56 per share. Meanwhile, our full year 2024 AFFO guidance range is $1.53 to $1.58 per share. When it comes to investment activity, our 2024 guidance is $50 million to $80 million of investments, subject to reasonable market conditions, and that investment guidance does factor in the possibility of additional loan investments. For dispositions in 2024, our guidance is to sell between $50 million and $80 million of properties, and right now we're assuming a net investment spread of roughly 75 to 100 basis points between our investment yields and our disposition yield. Last, we project our weighted average share count for 2024 will be about 14.9 million shares, and this accounts for the impact of finishing the remaining portion of the $15 million share repurchase program I mentioned earlier; we thank everyone for joining the call today, and now we'll open it up for questions.

Matt, I wanted to ask a bit more about something you mentioned near the end of your remarks. That $0.05 range in the guidance — does it simply reflect acquisitions and dispositions shifting within it? Are there other factors worth noting that could take you down to $151 million, up to $156 million, or on the other side, affect the AFO range?

Sure. Acquisition and disposition timing accounts for part of it. Another piece that can shift things somewhat is whether we receive loan repayments. That applies especially to the $24 million loan, which is meant to be a liquidated portfolio, so interest income could be lowered across the year.

All right. What's the newest update on the Mountain Express situation? Will some of that end up among this year's sales? Is the whole thing going to be leased back up — or just portions of it? What's your current read on it?

Sure. Right now we're talking actively with multiple operators. On 2 of the sites, we have 2 leases executed. Another 3 are in progress, and for the remaining 2, talks are at an early stage. Because our emphasis stays on tenants that are publicly traded or publicly rated, our expectation is still to sell them, though we're actively negotiating to get the entire portfolio leased within the near to medium term.

All right. So when you evaluate the portfolio, what portion would you say are probable sale candidates right now, as opposed to assets you'd only part with if an exceptionally attractive acquisition opportunity appeared? In other words, are you essentially finished recycling most of the holdings, unless someone steps forward with a really compelling bid? Does the lowest 25% of the portfolio still figure as likely to be divested down the road? How do you assess the current portfolio relative to the portfolio you'd construct if you were beginning fresh with a blank page?

Yes. I'd describe it as somewhat barbell-shaped; we continue to hold certain properties with very low cap rates that we might choose to convert into cash and redeploy into assets with higher cap rates, while also always seeking to improve the overall portfolio by divesting its weakest portion, such as Mountain Express. So we will aim to keep making the portfolio stronger still. But — that gives us two levers, one at the bottom and one involving some of the very highest-quality .

Alright. So considering the scale you operate at, bringing in just a single additional tenant or entering one new sector still shifts the dial for you folks; how are you approaching the mix of tenants and industries from here on out? Many folks seem to inquire about Walgreens sitting at 12% and Dollar stores, which you recently brought on a couple of this quarter at 14. Will you keep buying Dollar stores? Would you — is it possible — would you allow that to reach 20%? And regarding Walgreens, might that be something you'd consider selling off down the line to bring that exposure under 12% — what's your thinking on that kind of concentration.

Yes. Good question. So over time, we will certainly aim to reduce our Walgreens exposure. We aren't rushing it, but we're also on the lookout for additional Walmart, Lowe's, not at home, but Home Depots and improving what we hold there and moving those credits up the rankings; however, locating the right ones is tough, yet we'll keep chasing them and enhancing the portfolio in that manner.

So then, how about Dollar stores? How interested are you in pushing that higher?

Right, we won't be — my guess is you won't find us pursuing acquisitions in the Dollar store space.

All right. Then I have a few questions about the numbers. Which two properties did you dispose of in the quarter?

Sure. The first was a convenience store operating under the BP brand, and the second was a building with 2 tenants. It was a Bomgaar — actually, my mistake, a Bomgaars, a chain comparable to Tractor Supply, plus — the name of the other tenant escapes me right now, Rob, apologies; nonetheless it represented 17.10 of the whole picture, a negligible sliver.

Alright, and the final thing I have, on the data side. Has the Board approved a fresh buyback program? If it did, how big would it be?

Had that happened, we'd have put it in our announcement. So we'll keep watching how matters develop and adjust if the situation shifts.

Thanks for making room in the schedule. Enjoy your weekend.

I wanted to ask about the investment guidance. Is the buyback factored into that number, and if shares are at $15, would repurchasing stock be the number one use of Visa's capital.

That's a solid question, Wes. No repurchase activity is baked into it. It would come on top of what the investment guidance covers — and look, with a share price of $15, the implied cap rate is clearly above 8%; so in my view that's definitely a topic we'll bring to the Board to talk over regarding a possible new program.

Alright. And then, Matt, you mentioned signing a few leases, and I'm just sort of wondering, what's included in guidance for expected rent from leasing those properties?

We've got the 2 that are already signed, and that's all.

All right. I think what we're doing is attempting to construct the model, and then to construct dispositions within our model — I suppose, what's the overall rent upside? Clearly, you plan to sell them, but we need to place a — get it into the model, and then exit the — and then monetize those assets. So how much, I suppose, relative to the present run rate, how much upside do you have on rent from re-leasing those assets?