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

Hello, everybody, and thanks for being with us this morning for Alpine Income Property Trust's Second Quarter 2024 Operating Results Conference Call. It's a pleasure to have Phil Mays, who recently became our Chief Financial Officer, here alongside me today. To get things started, I'll hand things to Phil so he can give the usual disclosures about this call. Phil?

Thanks, John. I want to remind everybody that a lot of what we say today counts as forward-looking statements under federal securities law. What the company actually achieves down the road could vary substantially from the topics covered in those forward-looking statements, and we take on no obligation to revise them. The factors and risks that might make actual results diverge materially from what we expect get disclosed periodically, in more detail, in the company's Form 10-K, Form 10-Q and other SEC filings. Our SEC reports, earnings release and the latest investor presentation — which includes reconciliations of the non-GAAP financial measures we use — are available on our website at alpinereit.com; with that, I'll hand the call back to John.

Thank you, Phil. We're happy to report that our effective asset recycling efforts, together with investments in quality loans offering higher yields, produced a robust quarter and prompted us to raise our earnings guidance. Regarding asset recycling, in the quarter we bought a property worth $14.6 million leased to investment-grade tenants, Best Buy and Golf Galaxy, at an accretive yield compared with the sale of 2 properties leased to Festival Foods and Hobby Lobby, which had a disposition volume of $6.6 million and a blended exit cap rate of 7% on the sold properties. In addition, we're starting to observe investment opportunities in the market that we intend to capitalize on while continuing to recycle at accretive yields. Turning to loan investments, we originated a $6.1 million first mortgage investment, with $4.6 million funded during the quarter. This investment carried an initial yield of 11.5% and was meant to fund the 4 pad retail development, I believe by Wawa, in a growing submarket of Cincinnati, Ohio. Also during the quarter, we sold a $13.6 million A-1 participation interest in our $23.4 million portfolio loans secured by 39 properties that we originated in November of 2023. As part of that transaction, the loan was rated by an independent rating agency and received an A- rating. This sale releases capital for further quality high-yielding loan investments, covering both property and structured investments; year-to-date through June 30, 2024, the company has made total investments of $28.9 million at a weighted average initial investment yield of 9.8%, while our disposition activities totaled $20.2 million at a weighted average exit yield of 7.7%. At quarter end, our portfolio was 99% occupied and comprised 137 properties totaling 3.8 million square feet, with tenants operating in 23 sectors across 34 states. Our top tenants are the same as on our first quarter earnings call in April, with Best Buy joining our top 5 tenants following our recent acquisition. Furthermore, we are actively reducing our Walgreens exposure and currently have 2 Walgreens in the sales process. Every one of our top 5 tenants holds investment-grade credit ratings. And we closed the quarter with 67% of our total annualized base rents coming from tenants rated investment grade, up 400 basis points from the same time last year. On valuation, we are presently trading well above an implied 8% cap rate on our real estate portfolio and at a meaningful discount to our book value of approximately $18 per share. In addition, we have one of the highest dividend yields among our peers, alongside healthy free cash flow and strong AFFO per share growth projected for 2024. Put simply, Alpine shares are a great value today. Finally, because of our strong earnings during the first half of the year, we have raised our full FFO and AFFO guidance by $0.07 per share, or 4.6%, at the low end and $0.06 a share, or 3.8%, at the high end. Having said that, I'll now hand things to Phil so he can discuss the results for our second quarter, along with the balance sheet and guidance.

Thank you, John. First off, being part of the Alpine team is a real privilege. I've only been here a handful of weeks, but it's already clear that management and the Board won't settle for the status quo and constantly push to increase shareholder value. As the new CFO, I plan to carry on along that same road. Today I'll briefly walk through our earnings, balance sheet, and guidance, and after that we'll open it up for questions. Beginning with the financial results. For the quarter, FFO and AFFO both landed at $0.43 per share. Compared with the second quarter of 2023, that's an increase of $0.06 per share, or 16%. Interest income generated by our loan portfolio, along with accretive asset recycling, drove that earnings growth. Also, included in this quarter's other revenue is $100,000 of nonrecurring leasing commissions tied to the 39 properties that secure our $23.4 million portfolio loan. G&A for the quarter totaled $1.6 million. That number matches the G&A we recorded in the prior quarter and in the second quarter of last year. Remember that our external management fee, which was $1 million for the quarter, makes up the bulk of G&A. During the quarter, the company paid out a cash dividend of $27.5 per share. Coverage on our dividend remains strong, as this represents a 64% AFFO payout ratio. Every year, our intention is to distribute 100% of our taxable income. Just as we've done previously, we'll announce our third-quarter dividend near the end of August. Moving now to the balance sheet. At quarter end, net debt to enterprise value was 53%, net debt-to-EBITDA came in at 7.4x, and fixed charge coverage was 3.4x. We also finished the quarter with $185 million of liquidity, and no debt matures before 2026. One additional balance sheet item, which John mentioned: we sold a $13.6 million A-1 participation interest together with our $23.4 million portfolio loan. GAAP requires the full loan receivable amount to remain on our balance sheet, and we will report a separate liability line representing that $13.6 million participation interest. In addition, we'll keep recording interest income on the whole loan balance, while interest expense will carry a corresponding offset related to the participation interest that was sold. On guidance, we are raising our full-year 2024 outlook, establishing a new FFO range of $1.58 to $1.62 per share and a new AFFO range of $1.60 to $1.64 per share. At the midpoint of those ranges, that equals a 4.2% increase. Our guidance continues to assume the same acquisition and disposition amounts, each between $50 million and $80 million. Finally, a few quick modeling notes. As the third quarter got underway, in-place annualized straight-line base rent was $39.8 million, and in-place annualized cash base rent was $39.5 million. At this moment, taking our interest income on an annualized basis, the figure comes to $4.3 million, and, as previously discussed, that amount is currently being counterbalanced by approximately $1.1 million of additional interest expense connected to the loan participation sale, which works out to $0.275 per share. Having said that, operator, please go ahead and open the line so we can take questions.

I'd like to get a bit more detail from you regarding activity levels in the net lease property transaction space.

Sure. We continue to observe quite strong purchaser appetite on the smaller side — deals at $5 million or less remain a highly active segment, with few disruptions. Bigger assets aren't trading at the same pace. Compared with the prior quarter, there's definitely somewhat more deal flow. We're finding chances where owners require capital, are looking to divest assets, or want to obtain some financing. I wouldn't — even so, conditions right now are considerably improved versus where they stood three months ago.

All right. I'd like to follow up regarding that purchase you closed during Q2 — the lease company involved had a term shorter than your weighted average; could you give us more detail about that term? And do you intend to keep doing this kind of thing down the road?

Sure. In the presentation we give to investors, we've stated that from this point on, our aim is to raise that weighted average figure. The asset we acquired carries investment-grade credit, with rents sitting at or under market levels, in a place where nothing new is being built. Because of that, the occupants are performing nicely; they've got no real chance to relocate and locate different space that's on offer, and the upheaval involved probably wouldn't be worthwhile, so our confidence is quite strong that renewals will happen, based on our talks with them, plus solid store performance and the correct side. Thus, as you're aware, our approach has been acquiring top-tier assets at elevated yields with a robust mix, expecting those tenants to sign again and — while recognizing that given how the public markets work, we'll focus on lifting our weighted average lease line.

John, you brought up that you're aiming to — I believe there are 2 Walgreens you've got under contract to sell off. I'm just wondering, how does the lease expiration timeline look for the Walgreens you're exposed to? Is there any risk of near-term releasing?

Right; so the weighted average lease term for the Walgreens sits at roughly 8 years; therefore we've got a longer duration with those Walgreens, which clearly provides a stronger chance to sell those properties at sensible cap rates. And so, as noted, we have 2 in the sales process, and we'll begin working through several others that are truly strong locations, and we intend to actively reduce Walgreens from the #1 spot. So we will certainly make solid progress on that during the remainder of the year.

That's useful. And considering the rebound we've seen lately in certain net lease equities, I'm wondering how that alters the cost of capital calculation for you, plus what the rest of this year looks like — at present, according to guidance, I believe you're positioned for roughly net neutral on acquisitions versus dispositions. So where does Alpine stock need to trade before you'd become a net acquirer?

Yeah. Well, as I said, we're seeing solid opportunities, and since our intention remains to reduce our Walgreens exposure, that provides a nice capital source we can put back to work, meaning growth doesn't strictly require the public markets. Sure, we'd be happy if the public markets helped fuel expansion, but patience is the approach as we watch whether that materializes. So we'll continue forward and keep scoring wins; clearly, we're streaming some nice successes, and we believe that to the extent the broader markets stay supportive, that benefit will reach us — yet becoming a net acquirer doesn't hinge on it. That's basically our situation at this moment.

John, to continue on the Walgreens topic. Considering the challenges and the reality that many investors are eager to cut back their Walgreens holdings, who might step in as buyers for such properties currently? Is it simply neighborhood investors seeking that 8 to 10 years with an investment-grade renter? Might they have other plans should Walgreens decide not to extend? What's your take on the kind of buyers interested in Walgreens properties right now?

Correct, Rob. In essence, you've covered every angle. Once more, when we examine the makeup of our entire portfolio, it's fair to say our sites are excellent; thus, there are 1031 exchange investors essentially thinking, fine, I'm getting Walgreens, solid credit with a decent remaining lease term in a vibrant, expanding market. There's no new construction happening, plus you're acquiring at a price under what it would cost to rebuild. Additionally, we've encountered cases where renters are interested in the Walgreens space, and we'd respond that I might be able to work out perhaps an early exit with Walgreens, despite lacking any signs they're shutting the location, yet there's a bit of that dynamic where renters are after a prime corner. So it's every one of those.

Okay, and regarding what you said about extending Wal, the Best Buy and Golf Galaxy Dick's lease has a bit more than 4.5 years remaining. Do you have any idea where those properties sit in terms of overall profitability and the size of those retailers? And have conversations about an extension already happened with them?

Yes. I mean, when we acquired the property, we spoke with them, and their basic response was that those locations are performing very well for them. So we could certainly step in and negotiate something aimed at an early extension, but it's a bit soon for both them and us. At the right moment, we'll absolutely bring that up with them. Typically, you'd want to hold off until they're interested in refreshing a store and perhaps put in some capital so you can secure a longer lease term along with a return on that capital. But there's no — we don't sense any urgency to act, given that where they're situated has very strong demographics. So the market ought to be even stronger over the next couple of years.

Alright. So these properties are clearly large facilities. When you look ahead, how do you weigh the total portfolio blend between smaller facilities and larger ones? Or at this stage is it purely chance-based for you folks?

It's chance-based, though as I noted earlier we're finding more chances with the bigger facilities, since you aren't truly dealing with those smaller 1031 purchasers; therefore the spread is far wider, and for the smaller assets, we're observing cap rates with — despite interest rates declining, cap rates being very favorable for offloading those assets. So we'll capitalize on that cost of capital by selling at very low cap rates and acquiring where an opportunity exists. So that appeals to us. I mean generally we'll act opportunistically, but we're finding more chances with the bigger priced assets.

All right, and the final thing from me. In terms of the back half of the year, how are we meant to frame earnings? Is there a nonrecurring item between this quarter and the next, or any drags you're anticipating in the latter portion of the year, whether I focus on the $0.84 of FFO generated so far this year or the $0.43 posted in Q2? Each of those run rates sits far above the $1.59 to $1.62 guidance range, so what drag or what nonrecurring item has to be stripped out of those figures when we consider the back half of the year?

Yeah, Rob, this is Phil. When we discuss earnings per share, bear in mind that a mere 150,000 equates to $0.01 of FFO, meaning even a tiny amount or simply timing can shift the needle; that said, this quarter did include, as I noted in my remarks, 200,000 of nonrecurring leasing commissions in primary fees, management and leasing commissions tied to managing the 39 properties behind the portfolio loans. And leasing commissions from that source ran unusually high this quarter. So roughly 200,000 was nonrecurring in this quarter. Beyond that, you have to remember transaction timing, which breaks into a couple of categories, correct? One involving our property and one involving our loan portfolio with properties, acquisitions and dispositions. It's quite possible dispositions come ahead of acquisitions, which would dilute results. And keep in mind, we largely swapped out a line of credit; should that occur, we probably can't fully pay down that line since $50 million of it is swapped. So a temporary period could arise. In September, we're holding some cash, correct, prior to redeploying it. Regarding the loan portfolio specifically, the portfolio loan, correct, that borrower is selling those properties, wants to sell those properties and repay the loans, so some time could be involved there. So between the one-time item this quarter and mostly transaction timing, you have a fairly small amount that can shift the needle quickly.

Whenever you're considering putting money into loans down the road, do you plan to offload portions in a manner similar to what happened with the A-1 deal?