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

Hello, all, and welcome. We appreciate your presence on this call for Alpine Income Property Trust's Q3 2024 earnings discussion. Prior to starting, I'll hand things to Phil so he can give the usual statements about this session. 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 what these forward-looking statements describe, and we take on no obligation to revise them. The factors and risks that might make actual results diverge materially from our expectations 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 latest investor presentation — which include reconciliations of the non-GAAP financial measures we use — are available on our website at www.alpinereit.com. So with that, I'll hand the call back to John.

Thank you, Phil. Across every element of our strategy, we're quite happy with what we delivered in the third quarter. We kept successfully recycling assets in an accretive way, originated a loan with a high yield, boosted our quarterly dividend, cut down our Walgreens exposure, and extended our weighted average lease term; together, those efforts produced yet another quarter of solid earnings growth and lower leverage, and they allowed us to once again lift our full-year earnings and investment guidance. Let's start with property acquisitions. In the quarter, we picked up four net lease properties, paying $37.5 million, with a weighted average initial cap rate of 8.8%. Three of those properties, each in the Greater Tampa Bay area, were bought for $31.4 million through a sale-leaseback deal with a subsidiary of Beachside Hospitality Group. These properties carry leases with a 30-year term that feature 2% annual escalations. Although Hurricane Helene and Milton did cause some damage to these properties, the operator anticipates having them reopened and running again near the end of the year or in the first part of next year. On top of that, our leases call for strong insurance requirements, and the insurance coverage on these properties is more than sufficient. As a result, we anticipate no material interruption in rent collection from these properties stemming from the recent hurricanes. Also, in September, we bought and amended a first mortgage construction loan secured by a Publix-anchored shopping center located in Charlotte, North Carolina. The loan commitment currently stands at $17.8 million, with $10 million funded at closing, and it carries an initial yield of 10.25%. Turning to dispositions, we sold eight properties in the quarter for $48.6 million, at a weighted average cash cap rate of 6.8%. Those sales produced aggregate gains of $3.4 million and included two Walgreens locations, plus properties leased to Hobby Lobby, Lowe's, Chick-fil-A, Tractor Supply, and Long John Silver’s. As we've said before, we're working actively to bring down our Walgreens exposure, and following the sale of the two Walgreens in the quarter, Walgreens has fallen from our biggest tenant concentration to the second biggest. Beyond that, because of the appealing locations of the Walgreens assets we still hold, we anticipate continuing to lower our exposure to them so they keep sliding down our tenant concentration list. For the quarter overall, our $55 million of investment activity, covering both acquisitions and structured investments, delivered a weighted average yield of 9.2%, which is a positive spread of 240 basis points over the 6.8% weighted average cap rate on the dispositions we completed. Thanks to our strategic asset recycling efforts, investment-grade rate at Dick's is now our top tenant at 11% of ABR, and Beachside Hospitality Group now ranks third largest. Notably, more than 52% of our ABR still comes from investment-grade tenants, and we've pushed our weighted average lease term up to 8.8 years. As for our investment strategy moving forward, we keep seeing appealing opportunities throughout the tenant landscape, including investments with higher yields. So even as we keep putting money into appealing investment-grade possibilities, we're likewise at ease sending extra capital toward opportunities that are more accretive, since the risk-adjusted yields look appealing. Our investing, we believe, will wind up taking a barbell shape, with longer-term investment-grade activity offset by putting money into assets that yield more and are more accretive. Now, on the subject of loan investments. When the quarter closed, the aggregate outstanding balance on our loan portfolio stood at $43.2 million, with a weighted average yield of 10.4%. Broadly speaking, we aim for our structured investment portfolio to represent roughly 10% of total asset value, though that figure will expand or contract somewhat based on how good the opportunities look. Since right now we're seeing plenty of chances to originate high-quality, high-yielding loans backed by real estate, this portfolio will probably grow a bit over the near-term future. One brief balance sheet item. In the quarter, we were also glad to take advantage of the equity capital markets in an opportunistic way through the company's common ATM program, bringing in net proceeds of $11.1 million. Phil is going to walk through our balance sheet and earnings in greater detail and give our raised outlook for the rest of the year; still, before I hand the call to Phil, I wanted to take a moment, on behalf of everyone here at the company, to extend our best wishes to the many people affected by the recent severe weather, along with our hope that they recover quickly. So with that, I'll pass the call to Phil.

Appreciate that, John. We'll begin by going over the numbers. During the quarter, FFO landed at $0.45 for each diluted share, representing a 22% increase over the $0.37 figure we posted in Q3 of 2023. AFFO during the quarter stood at $0.44 per diluted share, a 16% gain compared with the $0.38 recorded in the third quarter of 2023. Revenue on a total basis hit $13.5 million for the quarter, made up of $11.7 million in lease income along with $1.7 million in interest income generated by commercial loans. There are a couple of accounting items I want to call out that likely pushed loan interest income above what many of you had modeled while causing lease income to fall short of expectations. The first involves the three properties that we picked up during this quarter through a sale-leaseback deal. These assets meet the criteria for real estate under both legal and tax rules, which is why they show up in our property portfolio metrics. However, because the tenants possess options to buy, GAAP requires us to account for the arrangement as a financing. Separately, as we noted during the prior quarter's call, we divested an A-1 participation stake in our portfolio loan, and under GAAP that too must be reported as a financing. Removing both of those components from our commercial loan investment leaves $43.2 million in outstanding balance at the close of the quarter — consistent with the figure John cited earlier — whereas loan investments on our GAAP balance sheet total $86.6 million. While GAAP treatment of those items can lead to certain differences in how line items are classified, there is no material effect on FFO or AFFO. Moving on to the balance sheet. In the quarter, we issued approximately 620,000 shares through our common equity ATM program, at a weighted average price of $18.09 per share, which brought in total net proceeds of $11.1 million. This equity raise, together with increased earnings from accretive asset recycling and our expanding commercial loan portfolio, allowed us to make incremental progress on leverage, ending the quarter at 6.9 times net debt to EBITDA, compared with the 7.4 times we reported last quarter. In addition, we presently hold roughly $80 million in liquidity, and no debt comes due before 2026. Turning to the dividend we pay on common stock: because earnings came in higher and our forward view has improved, we lifted the quarterly amount from $0.275 to $0.28 for each share. Coverage for that dividend is still solid, with a healthy AFFO payout ratio of 64%. Last, guidance. For the full year 2024, our outlook is going up, now an FFO range of $1.67 to $1.69 per share and an AFFO range of $1.69 to $1.71 per share. To date we have closed $84 million in investments along with $69 million in dispositions, counting both property and structured investment activity. Because of that, investment guidance is rising to a range of $100 million to $110 million, while disposition guidance is being narrowed to a range of $70 million to $75 million. With that, operator, please open up the line for questions.

Morning, and I really appreciate you letting me ask a few things. Deal flow rose quite a bit compared with Q1 and Q2. Could you spend a moment on what the transaction landscape looks like? From your vantage point, does this higher level of activity simply reflect a generally more liquid market?

Yes, thank you Michael. The liquidity backdrop has indeed mattered a great deal. What we're observing is that additional parties who were interested in divesting assets are now stepping forward, bringing them to market, and pursuing that kind of approach, which means a greater number of possibilities exist; we're making bids on additional purchases and identifying properties we find appealing with favorable risk-reward characteristics. Consequently, we're quite happy to witness conditions that are significantly better when it comes to possibilities, encompassing both primary acquisitions and certain loan investments.

Understood. My follow-up concerns the Tampa assets being sold and leased back. Could you give us additional detail regarding how the insurance is set up? A lot of those dining locations are shut at the moment. So, more specifics on that would help. Plus, separately, although these deals have boosted the value of the portfolio, they've likewise brought down the investment grade percentage. So could you discuss your thinking on those two counterbalancing elements as you keep expanding the portfolio? Thanks.

Yeah. Regarding the restaurant, the greater damage really came from the first storm, Helene; the second one, Milton, didn't cause much additional harm. They're moving quickly to reopen those, and likely we'll have more favorable updates on that front, with it occurring over the coming 30 days, instead of late in the year. As for insurance, business interruption coverage runs for two years, plus there's full replacement coverage, so we're well positioned and we're staying in touch with the operator. The favorable aspect is that this operator runs a substantial number of restaurants across the state. Those they operate on the East Coast have stayed open. Those in Clearwater reopened very quickly following the storm. They're actively getting these locations back up and running and they'll end up in solid shape, since regrettably some other operators likely won't be reopening as quickly, meaning there will be reduced competition. That will create some pent-up demand for those restaurants; then regarding your question about weighted average life, essentially it's nearer to nine now than it was previously. We'll aim to keep raising the weighted average lease term across our portfolio, though we won't allow it to become the tail wagging the dog. We could approach many tenants at this moment if we chose to and swiftly arrange early lease extensions, yet they'll expect some kind of concession, such as a lower rate. And when you examine our portfolio, our basis is extremely low relative to our rivals and our lease rates are already very low, so we'd essentially be giving away the store for nothing, just to please Wall Street. So if we believed we truly had to do that and needed to, we could promptly approach tenants and arrange early extensions; however, that has formed part of our strategy, which is to capitalize on leases with perhaps six, seven years remaining, securing a higher cap rate, since they're excellent real estate and other tenants would step in to take those spaces. That has consistently been the approach, though we can — and certainly we will — attempt to add more and lengthen the term whenever it seems appropriate. Yet the real chance has been to secure some truly strong properties, truly strong yields, while carrying somewhat shorter lease duration, but recognizing that those rents sit under market and far under what it would cost to replace them — that has essentially been the approach.

That's really useful, and let me try to fit in one more. You mentioned that loans make up 10% of the total portfolio, yet in periods similar to this one, when there might be somewhat more activity in that area, you'd be willing to increase it. What level would you be comfortable reaching? And by nature, as with the loan portfolio, it introduces somewhat greater unevenness into earnings; so how do you plan to handle that as we move ahead? Thanks.

Yeah, so as Phil said during his comments, I believe our aim is to avoid exceeding 10% of total enterprise value for our loan book, though we could go beyond that if opportunities appeared, and as the loan book pays down on its own, that figure will decline. But since we enjoy strong ties with these developers, and we're beginning to complete second transactions and third transactions with them, now that they understand how the process works, and we possess the loan docs, perhaps we'll encounter cases like the deal we recently closed — a Publix-anchored shopping center in Charlotte featuring a Chase pad site and a Water Motor pad site. So truly excellent credits, long-duration leases, a 20-year lease on Publix, roughly 15 years on Chase; and so, the property is just nine months from completion and they faced a circumstance where construction costs rose, and there's a shortfall essentially between the first mortgage and what's required to finish it. We would be delighted to own it, and this developer has other Publix-style developments, and if that occurs we're in that same kind of position, we're here to assist. And we hold a right of first refusal to purchase the Publix and the Chase if cap rates exceed a certain level. So we'd welcome the chance. It's excellent risk-adjusted yields and a strong market; so we're going to pursue it whenever we spot the opportunities. We're examining one more, though it's a couple of months off; but yeah, we're fond of it, and it keeps us keeps us current with many of the merchant developers and it's terrific for the pipeline.

Thanks a lot. Best of luck during Q4.

Thanks.

Thank you.

Hello, good morning, everyone. Clearly during the quarter, John, you reduced your Walgreens exposure somewhat through certain dispositions, and it now sits below 10%. I'm simply wondering what your thoughts are regarding the Walgreens exposure you currently hold, and perhaps you could provide some specifics about the closest lease term expiration for the Walgreens as well as the average lease duration.

Okay, so RJ, the typical lease term runs 7.6 years. The first one maturing is at 6 years, and we've got quite a few of these listed, with active offers coming in. We're being picky. Should a bigger acquisition come along, we might move forward with another couple, but the bids we're receiving are solid thanks to where these properties are located and how long the leases run, and clearly you noticed Walgreens got a bit of a boost this week off strong earnings. So this portfolio is quite manageable. There are just 11, though with how small we are, it does stand out somewhat; but as you can see, since we disposed of 2 and have offers on 2 more, it wouldn't take much to drop this out of the top 10 if we truly chose to, though pairing it with an acquisition would be preferable.

Appreciate that, that's useful. Now, stepping back a bit, how should we be thinking about the macro backdrop right now and what it could mean for credit loss? And clearly, I realize you folks aren't in a position to give 2025 guidance, but as you look ahead toward 2025, what's your view on where credit loss might go, just considering the macro backdrop as it stands?

Okay, honestly, our portfolio is in fairly solid condition, and we acted early and proactively by selling assets that could be issued. I'd say the only real exception is At Home — clearly, At Home has a problem with its balance sheet, not with operations. So my suspicion is that the lenders will work out some kind of agreement with the company, since they won't want to hurt their own position. So I'd expect them to resolve it. That said, if there is any kind of credit concern, At Home would be the one I'd point to — but those are properties on a very low basis, and we're able to divide those large boxes and lease to smaller tenants to fill the space.

That's helpful. That's it for me. Thanks, guys.

Thank you.

Morning, everyone. Staying on the subject of tenants, do you have any intention of lowering how much you're exposed to the dollar store?

That's a really solid question. The thing is, those locations are simply tiny. Each one runs roughly $800,000, or perhaps $1 million; and honestly, our attention has been directed much more toward the Walgreen's side of things. That said, yes, we certainly do have a number of those listed for sale. It simply hasn't ranked as a priority, since the Walgreen's assets tend to sit around $3 million to $4 million. So that has genuinely been where we've concentrated our efforts, instead of the family dollar and dollar generals.

All right. Could you provide some context regarding the Tampa transaction? What led to it happening? How fast did you manage to get it done? Also, I believe you brought up a purchase option. Could you discuss when that would kick in and what the cap rate might be?

Absolutely. Regarding our connection with Crabby's, as you're aware, being CTO, we constructed 2 beach restaurants and we had — this dates back 7 years; we had an operator who proved unsuccessful, who underperformed; therefore we enlisted Crabby to assume a separate concept and their results have been outstanding. They truly understand operations and revenue has performed at a very high level. Consequently, we've maintained communication with them regarding additional ventures we might pursue jointly, and they encountered a rare chance to acquire several truly iconic dining establishments located on the West Coast. These represent substantial, high-value type assets in terms of the restaurant group being acquired, approximately $50 million in worth; we stepped in with a low $30 million figure to acquire the property and lease it back to them; they possessed considerable equity, and they can deliver significant operational advantages to those locations; after that we arranged it so that following a set number of years, after 6 years, they hold an option, not a requirement, to purchase the lease outright, which would occur at an IRR that's essentially double digits for us; thus we're enthusiastic about the property, enthusiastic about the return, enthusiastic about the yearly increases. So the most unfavorable outcome from our perspective involves 6 years until we exit at substantial figures for us, for the shareholders.

All right, that makes sense. In the press release presentation, period-end rent came in at $41.5 million. Could you confirm whether that figure represents cash rent, and whether the Tampa properties are included in it?

I'll hand that question over to Phil.

Right. Right, so that figure is a GAAP figure. The cash figure comes in slightly lower. There isn't much of a gap — it's around 39. Yet the figure you're mentioning is the GAAP figure, and it's a GAAP run rate.

Okay, great — and the final one from my side. As you consider the balance sheet and the capital markets, is there anything planned for Q4? You've got a small amount floating out there. Would you pay that off, or add more swaps?

I believe a bit of floating right there is fine with us. Clearly, it depends on conditions in the capital markets — we could choose to tap the ATM once more. Still, our debt stands at $280 million, with $200 million at a fixed rate. The remaining $80 million is floating. That rate won't be declining; therefore, some floating rate exposure is acceptable to us.

Okay, thanks everyone.

Thank you.

Morning. John, aside from Walgreens and possibly certain dollar stores, what portion of what we hold right now would you genuinely like to divest down the road?

At this stage, it's truly about selling when the opportunity arises. So if we've got an acquisition set up, and perhaps the capital markets continue valuing us at a steep markdown relative to our view of the company's value, then we might part with an asset we'd prefer to retain. But it's more about the recycling, Rob, the way you've watched us operate before. I'd say we're sort of — whatever I've kept is genuinely muscle rather than stuff we'd want to throw away, so there isn't much past Walgreens, the dollar stores, and that kind of thing.

Would you describe the quarter's low sale that way?

That low sale essentially involved a party with a 1031 requirement, unable to locate any market acquisition, and genuinely eager to get that property, since they possessed deep familiarity with it and felt quite at ease. Consequently, we managed to offload it at an elevated price purely because of their circumstances, rather than any wish on our part.

Alright. You mentioned the exposure to Walgreens. What's your take on the Dick's exposure, and how do you feel about the possibility of pushing it past the 11% it sits at today?

My expectation is that it stays at 11% — unless something unusual comes along, though in that case we'd probably consider divesting some property. So going above the present level isn't something I'd anticipate.