Alpine Income Property Trust, Inc. (NYSE:PINE) Q4 2022 Earnings Call Transcript

Alpine Income Property Trust, Inc. (NYSE:PINE) Q4 2022 Earnings Call Transcript February 10, 2023

Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Alpine fourth quarter 2022 earnings conference call. . Joining us today are Mr. Matt Partridge, Chief Financial Officer, and Mr. John Albright, Chief Executive Officer. At this time, I would like to turn the conference over to Mr. Matt Partridge. Sir, please begin.

Matt Partridge: Good morning, everyone and thank you for joining us today for the Alpine Income Property Trust fourth quarter and year end 2022 operating results conference call. With me today is our CEO and President, John Albright. Before we begin, I’d like to remind everyone that many of our comments today are considered forward-looking statements under federal securities laws. The company’s actual future results may differ significantly from the matters discussed in these forward-looking statements, and we undertake no duty to update these statements. Factors and risks that could cause the actual results to differ materially from expectations are disclosed from time-to-time in greater detail in the company’s Form 10-K, Form 10-Q, and other SEC filings.

You can find our SEC reports, earnings release, and most recent investor presentation, which contain reconciliations of non-GAAP financial measures we use, on our website at alpinereit.com. With that, I’ll now turn the call over to John.

John Albright: Thanks, Matt. We had a nice finish to the year, as we continue to execute on our accretive asset recycling program, reduce leverage, and improve the overall quality of our retail net lease portfolio. Our acquisitions during the quarter emphasize high quality investment grade-rated tenants, demonstrating strong operating trends in well-performing sectors such as grocery, home improvement, sporting goods, and dollar stores. In total, during the fourth quarter, we acquired seven properties for just under$ 42 million at a weighted average cap rate of 7.4%, and a weighted average remaining lease term of 8.2 years. Notably, 100% of the acquired rents come from tenants with an investment grade rating, including the first Home Depot in our portfolio, as well as Family Dollar, Dollar Tree, DICK’S Sporting Goods, and Walmart.

For the full year 2022, we acquired 51 retail net lease properties for just over $187 million at a weighted average going in cap rate of 7.1%, and a weighted average remaining lease term at acquisition of 8.7 years. 77% of the rents we acquired during the year were from tenants with an investment grade credit rating, and more than half of the rents acquired are in MSAs with over a million people. While we did see cap rates move higher as we made our way through 2022, we’ve seen a decrease in the number of assets listed for sale in the market to start 2023, which is contributing to a higher or tighter bid ask spread. Sellers with high quality properties in strong markets within in-demand tenants and sectors, have maintained conviction in their pricing expectations, and we’re starting to see buyers be more aggressive as they look to put capital to work to start the year.

This is resulting in cap rates either holding from where they were a few months ago, which is in spite of the higher interest rates, or in the case of investment grade-rated tenants and smaller price point assets, we’re starting to see cap rates compress because those assets are more easily financed at better terms, offer a hedge against continued inflation, and provide solid risk adjusted returns in a relatively volatile macroeconomic environment. On the disposition front, we sold five properties for a total disposition volume of $31 million at a weighted average exit cap rate of 6.5%, generating total gains of $6.6 million. The dispositions include properties leased to Freddy’s Frozen Custard, Big Lots, Rite Aid, and Harris Teeter. These sales, and the subsequent redeployment and nearly 100 basis-point net investment spread during the quarter, allowed us to drive a better return on equity, while moving out of some of the assets where we felt we had incremental risk.

The proceeds also provided us with at attractively priced capital to put to work in the acquisition market that resulted in a higher yield and increased investment grade-rated tenant exposure. Year-to-date, we’ve sold 16 properties for approximately $155 million at a weighted average exit cap rate of 6.5%, or 5.9% when removing the impact of our last remaining office property we sold during the second quarter. These sales during the year generated gains of $34 million, and because we started this asset recycling process back in April, we’ve been able to maximize the value of the sold properties even as interest rates moved against us. As of the end of the year, our portfolio consisted of 148 properties totaling $3.7 million square feet, with tenants operating in 26 sectors within 34 States.

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Occupancy did tick lower and below 100% for the first time as a result of a vacant out parcel we acquired as part of a property acquisition in the fourth quarter. We ascribed no value to this vacant property at acquisition, but we’re cautiously optimistic we can lease the asset to drive organic rent growth within the existing portfolio. Since our last earnings call in mid-October, DICK’S Sporting Goods is now our number two tenant, joining Walgreens, Family Dollar, Dollar Tree, Lowe’s, and Dollar General, as our top five tenants, all of whom carry investment grade ratings. We enter 2023 with 54% of our total annualized base rents coming from tenants or the parent of a tenant with investment grade credit rating, which we anticipate will grow throughout the year as we continue to recycle out of non-investment grade-rated tenants and into high quality industry-leading retailers with balance sheets positioned to outperform in nearly any economic environment.

We’re hopeful that as our portfolio metrics start to better parallel our higher valuation multiple peers, we’ll see an uptick in our own stocks valuation, reflecting the continuous refinement of our portfolio, our stocks increase liquidity, a de-risked balance sheet, and consistency of execution, as we’ve continued to drive attractive returns on equity for the benefit of all of our shareholders. Matt will outline the details of our 2023 guidance in a moment, but it’s important to note that we do plan to continue our opportunistic approach to asset recycling. We’ve identified a number of properties that we think will garner strong pricing in the market as a result of the quality of the underlying real estate, allowing us to continue to generate attractive net investment spreads on the redeployment of the proceeds.

I’ll now turn the call over to Matt to talk about our performance in the quarter and the year, as well as our capital markets activities’ improved balance sheet and 2023 guidance.

Matt Partridge: Thanks, John. Starting with our topline performance, total revenues grew 22% in the fourth quarter and 50% for the year when compared to the equivalent period in 2021, reflecting the benefit of accretive asset recycling and higher net investment spreads. General and administrative expenses for the year, which includes $3.8 million of management fees to our external manager, totaled $5.8 million. G&A as a percentage of total revenues in 2022 was 12.8%, a year-over-year decrease of nearly 400 basis points. We anticipate 2023 general and administrative expenses before the management fee, to be approximately $2.1 million. The current annual run rate for the management fee before any assumed new equity issuance in 2023, is just under $4.3 million.

FFO in the quarter was $0.37 per share, representing an 11.9% decrease compared to the fourth quarter of 2021. In Q4 2022, AFFO was $0.41 per share, which remained unchanged from the fourth quarter of 2021. The decrease in FFO and differential to AFFO, was driven by a $443,000 extinguishment of debt charge relating to the defeasance and associated write-off of unamortized loan costs of our $30 million fixed property secured mortgage. For the full year, FFO was $1.73 per share, and AFFO was $1.77 per share, representing a year-over-year per share growth of 9.5% and 11.3%, respectively, when compared to the full year of 2021. Similar to the fourth quarter, the decrease in FFO in differential to AFFO, was driven by $727,000 of extinguishment of debt charges relating to the defeasance and associated write-off of unamortized loan costs for the $30 million fixed property secured mortgage, and for the termination and recast of our unsecured revolving credit facility that occurred in the third quarter.

As previously announced, the company paid a fourth quarter cash dividend on December 30th of $0.275 per share, representing 1.9% year-over-year increase when compared to the company’s Q4 2021 cash dividend, and the current annualized yield of approximately 5.4%. Overall, we increased our regular common stock cash dividend by 7.4% in 2022, while still maintaining a conservative FFO and AFFO payout ratio. Our fourth quarter FFO and AFFO payout ratios remain very efficient at 74% and 67%, respectively, and we anticipate announcing our regular quarterly common stock cash dividend for the first quarter of 2023 towards the end of February. Turning to the balance sheet, we made good progress reducing leverage closer to our long-term target. We ended the year with net debt to total enterprise value of 47%, net debt to pro forma EBITDA of 7.1 times, and we continue to maintain a very healthy fixed charge coverage ratio of 3.7 times.

During the fourth quarter, we sold nearly 1.5 million shares through our ATM program for total net proceeds of $27.4 million. And during the full year of 2022, we sold 1.9 million shares through our ATM program for total net proceeds of $36 million. As I mentioned earlier, in December, we did defease the loan-secured mortgage on our balance sheet. The defeasance allowed us to unencumber the properties that secured the mortgage, of which we sold four of the six properties shortly thereafter. Following the secured mortgage payoff, our balance sheet is now completely unsecured. Subsequent to year end, we entered into a $50 million forward starting interest rate swap that commences in March to fix SOFR for our outstanding revolving credit facility balance, effectively eliminating our remaining go-forward floating interest rate exposure.

As of today, we have no debt maturities until 2026, no floating interest rate exposure, and ample capacity on our revolving credit facility to complement our accretive asset recycling program. For 2023, the initial guidance in our press release last night reflects the confidence we have in the quality of our portfolio, while taking a reasonably cautious approach to the broader macroeconomic environment and underlying volatility in the capital markets. Our guidance relies on a number of significant assumptions, including, but not limited to, our ability to raise funds for investment at a reasonable cost of capital, our ability to acquire and sell assets at reasonable valuations, and continued operational and financial strength of our tenants.

We begin 2023 with portfolio-wide in-place annualized straight line base rent of $40.4 million, an in-place annualized cash base rent of $39.9 million. Our full year 2023 FFO guidance range is $1.50 to $1.55 per share, and our full year 2023 AFFO guidance range is $1.52 to $1.57 per share. Our 2023 guidance for acquisition activity is $100 million to $150 million of retail net lease properties, which is subject to reasonable market conditions, and we believe these acquisitions will occur at a similar or better blended yield to our 2022 full year acquisition cap rate. For dispositions, we’re projecting to sell between $25 million and $50 million of properties at a similar blended yield or better to our 2022 full year disposition cap rate. And with that, I’ll now pass it back to John for his closing remarks.

John Albright: Thanks, Matt. During 2022, we delivered the second highest total shareholder return in our peer group. So, as we now fully transition into 2023, I’m excited about the opportunities we have in front of us and the support we’ve received from our shareholders. Our nimble size, evolving portfolio, de-risked balance sheet, and opportunistic approach to investing, are all drivers of momentum to help us execute in 2023 and beyond. I want to thank our team for all their hard work, and at this time, we’ll open it up for questions. Operator?

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Q&A Session

Operator: Our first question or comment comes from the line of Gaurav Mehta from EF Hutton Group. Mr. Mehta, your line is open. Mr. Mehta, you may need to unmute your phone.

Gaurav Mehta: Yes, thanks. Good morning. I wanted to ask you on your comments about cap rate compression that you guys mentioned for investment grade properties over the last few months. Can you maybe provide some more color on what you’re seeing and what you’re expecting for investment grade asset cap rates?

John Albright: Yes, so there’s not a plethora of inventory out there. So, people that have good quality assets with good credits, they’re holding onto their price. They’re not breaking price. And so, because there’s not a lot of inventory out there, your high net worth, your 1031 people are basically engaging at the price points that the sellers are willing to part with the assets. So, you are seeing that cap rates are definitely not expanding, and we just say they are kind of coming back down. Almost, it feels like a following the tenure or something that cap rates have come back in. We are hopeful and optimistic that we’ll get some really good buying opportunities, but so far, it’s a pretty strong market if you have the right credits.

Gaurav Mehta: Okay. Second question on leverage. Your pro forma debt to EBITDA at 6.6 times, do you expect that ratio to remain at current levels, or do you expect that to go up as you look to finance your acquisitions for 2023?

Matt Partridge: Yes, I think we’d like to keep it in that general range, but it’s going to move around just as a function of the size of the company, right? It doesn’t take a lot to move it up and down. So, we’ll see how the stock performs, and we’ll see where the buying opportunities are and where the cost of debt is, and we will respond and allocate capital accordingly.

Gaurav Mehta: Okay, thank you.

Operator: Thank you. Our next question or comment comes from the line of Rob Stevenson from Janney Corporation. Mr. Stevenson, your line is now open.

Rob Stevenson: John, how are you thinking about sporting goods given the DICK’s acquisition? Is it just the credit on DICK’s, or is there something that you guys are seeing in the sporting goods vertical that has you excited about growth over the next few years?

John Albright: Yes, we’ve always been very impressed with how well DICK’s performs in the stores that we own and the ones that we’ve looked at acquiring, and they’re just like such a strong operator that it seems like they’re kind of the category killer. And so, it seems like their strong company performance really radiates from these locations. So, we’re just really comfortable with that particular operator.

Rob Stevenson: Okay. And how much more is there in the portfolio today that you’d want to sell, barring some out of the blue offer that’s below what your cap rate expectation would wind up being for that particular asset?

John Albright: Yes. I mean, we’re seeing – basically we’re getting inquiries on properties that we’re not even in the market to sell. And obviously, we have our price point where we’ll sell anything as long as we can – there’s not a 1031 issue. And so, basically, we’re seeing some really good attractive recycling candidates that we didn’t really expect for this year. We didn’t think we would sell them, but it looks like the pricing out there is better than we would’ve thought on the sell side. So, I expect to be somewhat active again here in the, call it more of the second quarter.

Rob Stevenson: Okay. And then Matt, in your guidance, what type of spread are you assuming on cap rates between the acquisitions and the dispositions for the year?

Matt Partridge: Yes, I think it’ll probably be consistent with what we did in 2022, so call it 100 basis points, plus or minus.

Rob Stevenson: Okay. All right, guys, thanks. Appreciate the time.