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

Hello, everybody, and thanks for being with us this morning as we discuss Alpine Income Property Trust's operating results for the first quarter of 2024. Joining me is John Albright, our CEO and President. Prior to starting, I want to point out that numerous remarks we make today fall under the category of forward-looking statements per federal securities law. The company's actual future results could vary substantially from what is covered in those forward-looking statements, and we have no obligation to revise them. Factors and risks that might lead actual results to deviate materially from expectations appear 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. Now I'd like to hand the call over to John for his prepared remarks.

Thank you, Lisa, and good morning to all of you. To begin, I want to express our appreciation to Matt Partridge, who served previously as our CFO, for everything he has contributed to this company; we wish him the best in his new role; a national firm has been brought on board to conduct the search for a replacement CFO, and interviews with candidates are already underway. Turning to what we did on the investment side in the first quarter, while the traditional acquisition market gave us few opportunities during that period, we did originate a first mortgage loan investment totaling $7.2 million, with $3.6 million of that funded over the quarter. In addition, we purchased the land beneath our CVS in Baton Rouge for $1 million. Our loan investment carried an initial yield of 11.3%, while the cash cap rate on the land we acquired came in at 7.3%. The loan made this quarter is meant to supply $7.2 million of funding over a two-year term for a six pad retail development anchored by Chick-fil-A, located in a growing sub-market of Atlanta, Georgia; when it comes to property acquisitions, we encountered fewer attractive core investment opportunities because sellers have been reluctant; even so, we expect that as the market continues adjusting to higher for longer rates, the transaction market could become more productive for us; we are identifying additional high-yielding and better risk-adjusted loan opportunities that we plan to pursue in the second quarter. At quarter's end, occupancy across our portfolio stood at 99%, comprising 138 properties and 3.8 million square feet in total, with tenants operating across 23 sectors in 35 states. Our leading tenants are the same as those we discussed on our year-end earnings call in mid-February, with Walgreens, Lowe's, Dick's Sporting Goods, Family Dollar, Dollar Tree, and Dollar General making up our top five tenants, and every one of them holds an investment-grade credit rating. We closed the quarter with 65% of total annualized base rents attributable to tenants carrying an investment-grade credit rating, which represents a rise of 700 basis points compared with the same point last year. Our balance sheet is strong, with no debt maturity before 2026, and that stability pairs well with the strength of our high-quality portfolio. I'd also like to call attention to the valuation discount at which our stock currently trades, around $15 a share, which works out to an implied cap rate above 8.5% and a current dividend yield above 7.25%. Given that our book value exceeds $18 per share, and that over the past year we bought back nearly a million shares, or more than 6% of our company's capitalization, at an average price of roughly $16.25 per share, we see Alpine stock as an attractive value and yield investment, and we will focus on communicating that more effectively to the investment community soon; as for dispositions, activity is picking up on some of the assets we want to sell and recycle into higher yielding opportunities; this kind of capital recycling to grow earnings organically ought to be an active area for us this year. Having said that, I'll pass things along to Lisa, who will discuss how we performed in the first quarter, our balance sheet, capital markets, and guidance.

Appreciate it, John. Let's start with the numbers. For the first quarter of 2024, FFO came in at $0.41 per share, which is up $0.05 per share, or 13.9%, compared with the first quarter of 2023. AFFO for the first quarter of 2024 was $0.42 per share, an increase of $0.06 per share, or 16.7%, versus the first quarter of 2023. Total revenues rose 11.7%, and that mainly came from interest income produced by our loan portfolio, which helped our results. Our seven former Mountain Express properties continued to weigh on lease income revenues relative to the first quarter of 2023, but rent began during the quarter on three leases with new operators, and we expect a fourth lease to start in the second half of 2024. For the other three properties, we're actively negotiating a possible lease or sale. G&A came to 12.4% of revenues in the first quarter, down almost 121 basis points from a year earlier. Our G&A got a lift from the lower external management fee tied to our recent share repurchases; during the first quarter of 2024, the company paid a cash dividend of $0.275 per share, which works out to a current annualized yield above 7.25%. First quarter payout ratios for FFO and AFFO were 67% and 65%, respectively, versus 76% in the first quarter of last year. We expect to announce our regular quarterly cash dividend for the second quarter near the end of May; we bought back more than 45,000 shares of common stock on the open market, spending $800,000 in total at an average price of $16.90 per share, which wrapped up the previously authorized $15 million share repurchase program. As we've said before, our balance sheet is well-stabilized, with no debt maturities before 2026, and total liquidity at quarter end stood at $185 million. We closed the quarter with net debt to total enterprise value of 54%, net debt to pro forma EBITDA of 7.4 times, and our fixed charge coverage ratio is still very healthy at 3.4 times. Looking ahead to the rest of 2024, we enter the second quarter with portfolio-wide, in-place, annualized straight-line base rent of $38.9 million, or $38.5 million of in-place, annualized cash base rent, plus annualized interest income from loan investments of $3.6 million. We kept our full-year FFO and AFFO guidance at $1.51 to $1.56 per share and $1.53 to $1.58 per share, respectively. Our investment guidance is still unchanged, at a range of $50 million to $80 million of investments, subject to reasonable market conditions, and it includes the possibility of additional loan investments. Our disposition's guidance also stays unchanged, at a range of between $50 million and $80 million. With that, I'll hand the call back to John for his closing remarks.

Appreciate that, Lisa. On the whole, we have strong conviction that our distinctive approach to recycling assets, our plentiful liquidity, a balance sheet with reduced risk, and a portfolio of high quality leave us in a strong spot to generate value across the long term, and we're eager to deliver on what we've guided for 2024 while setting ourselves up for earnings growth ahead in 2025. My thanks go out to the team for all their effort, as well as to our shareholders and business partners for sticking with us. On that note, operator, could you please open up the line so we can take questions.

Thanks, good morning.

Good morning.

I'd like to follow up about the guidance you've given on acquisitions, plus what you said regarding the traditional buying chances you're currently observing out there. What I'm curious about is this: if appealing traditional acquisition possibilities don't materialize, how far would you be prepared to expand your loan portfolio?

Sure, that's a fair question. There's a bit more activity showing up in the market right now, so we feel good about our ability to certainly reach the acquisition targets we've set. We're also noticing somewhat more movement when it comes to certain properties we're interested in selling, so we're hopeful about offloading some non-IG credits and redeploying that capital into IG credits. Given that rates are holding at what amounts to an elevated path, we feel fairly at ease with current market conditions. My sense is that people whose business plans depended on, perhaps, a somewhat friendlier rate backdrop will simply decide to push forward and get their business plans underway.

All right, my next question concerns the guidance, perhaps regarding the $0.41 in 1Q, that FFO figure you disclosed. I'm simply curious about which assumptions for the rest of the year bridge the gap from that $0.41 run rate up to the $1.51 to $1.56 guidance range?

Yes, so, clearly, we received plenty of inquiries on this, and rightly so. Part of what the earnings model reflects is our expectation that we'll divest assets while acquisitions lag behind; consequently, some revenue will be absent during the period when properties are in escrow awaiting our purchase of new ones. Another portion relates specifically to lending, namely the Micromont loan, which is structured more like a short-term facility since the borrower intends to sell the underlying assets, and with each sale, our loan undergoes hyper-amortization. Thus, should they accelerate their asset sales, the income from that loan investment disappears unless we substitute it with something else. There's also a bit on the G&A line, stemming from elevated audit and tax fees occurring later in the year; overall, though, we're adopting a somewhat cautious stance. Naturally, Matt departed at the close of March, and we had no intention of undertaking extensive remodeling or similar work, so we're still early in the year. Should circumstances warrant it, we will of course take another look next quarter.

Okay, thank you.

Thank you.

Good morning. Could you share any details on the rental rate hikes expected for the rest of the year, and whether you anticipate any lease turnovers during that period?

Sure. This year, lease turnover is quite minimal for us. There's a theater in Reno at the end of November, so we'll see just one month of lag there. Aside from that, there isn't much lease turnover, so to speak, for this year. Regarding the rent increase, clearly, across the entire portfolio for the remaining period, rent escalations run at roughly about a point annually. When you consider it, many of our — we do have some flat leases, plus some leases that step up every five years, and on an aggregate basis, it's typically a percent.

Understood, I appreciate that explanation. Moving on, the following question is hypothetical in nature. Should this sluggish deal-making climate persist well beyond the current period, how would you weigh the allocation of capital as between the purchase of additional retail loans and buying back stock?

Sure. Clearly, we were quite busy repurchasing shares during the prior year and did a modest amount of that during the quarter. Fundamentally, our board reviews this topic each quarter, and we will observe how this quarter unfolds and monitor the trajectory of things. That said, we are encountering what I would describe as highly attractive lending possibilities that we are eager to act on, ones that carry exceptionally strong returns after adjusting for risk; accordingly, that represents a solid avenue for putting money to work, generating robust free cash flow while we await potential openings on the core acquisition front. So our aim is to strike a balance there. We have no desire to lean excessively toward repurchasing stock, yet should the equity create additional chances, roughly comparable to its current level, we would certainly consider returning to that.

Okay, I appreciate you taking the time to answer.

Of course.

Morning. John, regarding those loans, do you and the board currently have some kind of ceiling, or does it just depend on each situation? How are you all viewing the size of loan exposure you'd be comfortable holding over the coming 1 or 2 years?

Yes, we're pretty much at that point. Because our credit facilities essentially cap how much lending we're able to undertake; so the top end of that exposure sits at about $10 million above where we stand today. Now, we might recycle certain loans when opportunities arise, but the total amount is, let's say, in the mid-50s.

Alright, that's useful. So at this stage, with what you've said about sellers being hesitant, how do you feel about whether buyers of the assets you're looking to dispose of can actually get financing, given where rates are now and banks being more tight-fisted, and so on? How strong is that market, and will it slow you down when it comes to offloading some assets this year?

Yeah, I mean, what we're actually seeing is folks with a decent amount of capital getting more active on the buy side. My sense is they've got money sitting there. There isn't much happening in the market, and they'd rather put it to work now than wait and see if another quarter passes and conditions shift. So I think you're beginning to see people come off the sidelines and engage more. On the 1031 front, which surprised me, if you've got something under $5 million, the 1031 market is still quite active. I spoke with a developer yesterday who said that if you're below $3 million, they've got some restaurant pad sites they're selling at caps under 5% with a non-IG; so for properties under $3 million, you're still looking at a really efficient 1031 market. And then if you're basically working with the < > that are somewhat bigger, those are still around a 5% cap, give or take. So it's remarkable how sticky that sector has remained.

Okay, and that brings me to my final question — what’s behind the 1% vacancy? Which asset is sitting empty on your side?