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

Alpine Income Property Trust, Inc. (NYSE:PINE) Q4 2023 Earnings Call Transcript February 9, 2024

Alpine Income Property Trust, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Alpine Income Property Trust Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Partridge, Chief Financial Officer. Please go ahead.

Matthew Partridge: Good morning, everyone, and thank you for joining us today for the Alpine Income Property Trust’s fourth quarter and full year 2023 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 law. 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 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 our non-GAAP financial measures we use on our website at alpinereit.com. I’ll now turn the call over to John for his prepared remarks.

John Albright: Thanks, Matt, and good morning, everyone. As we look back at our execution in 2023, we continue to emphasize the value-focused asset recycling program, we implemented nearly two years ago. This program has allowed us to reposition our portfolio into higher quality credits that de-risk our cash flows, and provide the liquidity needed for our opportunistic share repurchases, and strong yielding first mortgage investments. Within the fourth quarter, the majority of our investment activity was concentrated in the first mortgage investments and share repurchases, and we believe these investment opportunities provide attractive risk-adjusted returns, compared to other opportunities available in the market. During the quarter, we originated nearly $31 million of first mortgage loan investments and acquired two single-tenant net lease properties for $3 million.

The initial yield on our loan investments was 9.2% and the cash cap rate of our property acquisitions was 7.3%. Our largest investment was a low leverage $24 million first mortgage secured, by 41 retail properties. In conjunction with the loan, we entered into a fee sharing agreement with CTO Realty Growth, our external manager. This fee sharing agreement allows us, to receive a share of the asset management disposition and leasing fees related to CTO’s management. The other loan investments we made during the quarter, were the first mortgage, to provide $6.8 million funding towards the purchase and development, of a five-acre project anchored by Wawa and McDonald’s in a growing submarket of Nashville, Tennessee. While we intend for our loan investments, to remain a relatively small component of our overall asset base and strategy.

They do provide future purchase options for our acquisition pipeline and serve as catalysts for our future partnership opportunities with sponsors, and we believe they offer compelling risk-adjusted yield supported by strong tenant credits and well-capitalized sponsors. On the acquisition front, we acquired two newly built properties leased to Dollar Tree, Family Dollar, as we saw fewer attractive core investment opportunities, due to reluctant sellers. And finally, as it relates to our common stock buybacks, we repurchased $9.5 million of our common stock, at an average price of just over $16 per share, during the fourth quarter. The implied cap rate of these repurchase was above 8%, which is significantly above the cap rates, for comparable fee simple property investments available in the market.

Especially considering 65% of our annualized base rent, comes from tenants with an investment-grade credit rating, and our stock pays nearly a 6.9% dividend yield at $16 per share. For the full year of 2023, we acquired 14 net lease properties for $83 million at a 7.4% cash cap rate and originated three first mortgage investments totaling just under $39 million of funding commitments at the initial yield of 9.1%. Over 66% of acquired base rents from the property acquisitions in 2023 come from tenants with investment-grade credit rating. On the disposition side of things, during the full year 2023, we sold 24 properties for $108 million at a weighted average exit cap rate of 6.3%, generating gains of $9.3 million. Overall, for the year, our net investment spread, which is a difference between our investment yields and disposition yields, averaged 159 basis points.

So even with limited access to the capital markets and the increase in interest rates over the past 18 months, we’re still driving positive increases in cash flow, through our asset recycling strategy. From a portfolio makeup perspective, Matt will outline more of the specifics with his prepared remarks. But given we are coming up on our five-year anniversary later this year, I wanted to take a moment to highlight the progress, we’ve made in transitioning our portfolio through our asset recycling strategy. Since inception of the company, we’ve recycled nearly $600 million of capital, as we’ve accretively sold off primarily office assets and properties occupied, by noncredit tenants and reinvested the proceeds, at positive net investment spreads.

As a result, we’ve taken our OpEx exposure from 43% to 0%, increased our exposure to investment-grade rated tenants from 36% to 65% increased per share quarterly dividend, by more than 37%, and our top tenant list, which includes the likes of industry leaders such as Walgreens, Lowe’s, Dick’s Sporting Goods, Dollar Tree, Family Dollar, Dollar General, Walmart, Best Buy, Hobby Lobby and Home Depot now, compares favorably to many of our peers that trade at significantly better valuations. From a valuation perspective, we’re currently trading well above an implied 8% cap rate on our real estate portfolio and a significant discount, to our book value of $18.36 per share. Additionally, we have strong AFFO per share growth projected for 2024, and our loan investments provide a natural deleveraging opportunity over the next 24 months.

To put it bluntly, we’re a great value today, and we look forward to maximizing that value for our shareholders. Now, I’ll turn the call over to Matt to discuss our portfolio makeup quarterly results, balance sheet and 2024 guidance.

Matthew Partridge: Thanks, John. As of the end of the year, our portfolio consisted of 138 properties totaling 3.8 million square feet, with tenants operating in 23 sectors, within 35 states. And as John mentioned, 65% of our annualized base rent or ABR, now comes from tenants, or the parent of tenants, who have an investment-grade credit rating. The portfolio continues to be 99% occupied, and our top tenants remain largely unchanged. However, we do anticipate occupancy increasing over the coming months as we have signed, or in the process of signing multiple leases related to the vacant properties. Fourth quarter 2023 FFO was $0.37 per share unchanged when, compared to the fourth quarter of 2022, and fourth quarter 2023 AFFO was $0.38 per share, representing a 7.3% decrease over the fourth quarter of 2022.

Our quarterly results, were most notably impacted by one-time expenses related to tenant credit loss and bankruptcy, primarily attributable to the seven Valero branded Mountain Express properties that we discussed during our third quarter conference call as well as the timing of investments and dispositions. These items were partially offset by regular rent increases within the owned portfolio, attractive net investment spreads from asset recycling program, increased interest income from cash and restricted cash on balance sheet, and lower interest expense driven, by year-over-year effects of previously completed interest rate hedges. Our general and administrative expenses, for the quarter totaled $1.5 million, which includes the $1.1 million management fee, to our external manager.

Our G&A increased 4.5% year-over-year, largely a result of higher state and local taxes and increases, to the management fee driven, by our net equity capital markets activities, over the past 12 months. The current annual run rate for our management fee before any assumed new equity issuances, or repurchases is $4.2 million. For the full year, FFO was $1.47 per share and AFFO was $1.49 per share, representing year-over-year per share decreases of 15% and 16%, respectively, when compared to the full year of 2022. As previously announced, the company paid a fourth quarter cash dividend of $0.275 per share, representing a current annualized yield, of more than 7% and our fourth quarter FFO and AFFO payout ratios, remained fairly consistent at 74% and 72%, respectively.

We anticipate announcing our regular quarterly cash common stock dividend for the first quarter of 2024 towards the end of February. From an equity capital markets perspective, we continue to be active during the quarter on our Board approved $15 million share repurchase program. We’re purchasing nearly 595,000 shares of our common stock for a total cost of $9.5 million, at an average price of $16.1 per share. In 2023, we repurchased nearly 900,000 shares of our common stock for total cost of $14.6 million at an average price of $16.23 per share. And in January, we did complete the remainder of the $15 million share repurchase program. We ended the quarter with net debt, to total enterprise value of 51%, net debt to pro forma EBITDA of 7.7 times and our fixed charge coverage ratio was a healthy 3.5 times.

The balance sheet is well stabilized with no debt maturities until 2026 and total liquidity at quarter end through cash, restricted cash, and undrawn revolver commitments, was more than $187 million. In our press release last night, initial guidance for 2024, reflects our confidence in the portfolio’s quality, the year-over-year benefits from the asset recycling John referenced, increased fee revenue from our fee sharing agreement with CTO and what we believe is a reasonably cautious stance regarding our current access to capital, expected activity in the transactions market, and broader economic environment. We began 2024 with portfolio-wide in-place annualized straight-line base rent and in-place annualized cash base rent of $38.8 million and a run rate annualized interest income from loan investments of $3.2 million.

Our full year 2024, FFO guidance range is $1.51 to $1.56 per share. And our full year 2024 AFFO guidance range is $1.53 to $1.58 per share. Our 2024 guidance for investment activity is $50 million to $80 million of investments, contingent on reasonable market conditions, and our investment guidance, does include the potential for additional loan investments. Our 2024 dispositions guidance is to sell between $50 million and $80 million of properties, and we are currently assuming approximately 75 to 100 basis points net investment spread, between our investment yields and our disposition yield. And finally, we are forecasting our weighted average share count for 2024 to be approximately 14.9 million shares, and this does incorporate the effects of completing, the remaining portion of the $15 million share repurchase program I referenced earlier.

We appreciate everyone joining the call today, and we’ll now open it up for questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question is going to come from the line of Rob Stevenson with Janney Montgomery Scott. Your line is open. Please go ahead.

Robert Stevenson: Good morning, guys. Matt, just to follow-up on one of your latter comments. Is the $0.05 guidance range? Is that just acquisition and dispositions that slide between there? Is there something else notable that, would push you down to the $151 million, or up to the $156 million or conversely the AFFO range?

Matthew Partridge: Yes. Good morning, Rob. Part of it is the acquisition and disposition timing. And then the other component that could move that around a little bit, is whether, or not we get loan repayments. Most specifically for the $24 million loan, where that is intended to be a liquidated portfolio. And so, that could cause interest income, to be reduced over the period of the year.

Robert Stevenson: Okay. And what is the latest in terms of the Mountain Express stuff? Is that going to wind up being some of the sales this year? Is that all going to be re-tenanted some of it? How are you guys looking at that at this point?

Matthew Partridge: Yes. So we’re in active discussions with a number of operators. We’ve got two leases signed on two of the locations. We’re working on three more, and then we’re in preliminary discussions on the other two. We’re still anticipating selling them just given our focus on publicly traded, or publicly rated tenants, but we’re in active discussions to have all of that leased in the near to medium term.

Robert Stevenson: Okay. And how – when you guys take a look at the portfolio, how much of it is likely disposition candidates at this point, versus only if you found something that was an extremely compelling buy. I mean, are you pretty much done, with the recycling of the majority of the assets, unless somebody comes in and makes a very strong offer. Is there still the bottom 25%, of the portfolio is likely to be sold going forward? How are you guys thinking about, where this portfolio is versus, where you’d want it if you started with a clean sheet of paper?

John Albright: Yes. I think it’s a little bit of a barbell. We still have some really low cap rate properties that we may decide to monetize, and recycle into higher cap rates. And then, always continuing to upgrade the portfolio, as a whole by selling off the bottom part of the portfolio, like the Mountain Express. So, we’ll will work to basically continue to upgrade the portfolio even stronger. But – so, we have two levers there on the bottom and some of the super high quality.

Robert Stevenson: Okay. And then how are you guys thinking, obviously, given your size, adding even one new tenant, or one new industry moves the needle for you guys still. But how are you guys thinking about tenant and industry concentrations going forward? I think a lot of people ask questions about Walgreens at 12% and Dollar stores, which you just added a couple this quarter at 14. Do you keep acquiring Dollar stores? Is that not – can you – would you take that up to 20%? And Walgreens, is that a disposition candidate at some point, to lower that down below 12% exposure. How are you guys thinking about that sort of concentration?

John Albright: Yes. So good question. So, we’re definitely going to look to lower the Walgreens exposure over time. We’re not in a mad rush, but also hunting for more Walmart, Lowe’s, not at home, but Home Depots and upgrading the portfolio there, and getting those credits higher up on the list. But it’s just like, it’s difficult to find the right ones, but we’ll continue to pursue them and upgrading the portfolio that way.

Robert Stevenson: And then what about Dollar stores? What’s your appetite to continue taking that up?

John Albright: Yes, we’re not going to – I don’t think you’ll see us active on the Dollar store acquisition side.

Robert Stevenson: Okay. And then just a couple of data ones. What were the two assets that you guys sold during the quarter?

Matthew Partridge: Yes. One was a convenience store branded as a BP and the other one was a two-tenant property. It was a Bomgaars 17.10, which used to be I’m sorry, it’s a Bomgaars, which is similar to a tractor supply and then – I’m drawing a blank on the other one, Rob, sorry. But it was a de minimis piece of the overall puzzle.

Robert Stevenson: Okay. And then last one from me, data-wise. Did the Board reauthorized a new share repurchase plan? And if so, what was the size of that?

John Albright: We would basically had that in our announcement if they had. So, we’ll monitor kind of what goes on there and kind of reflect if things change.

Robert Stevenson: Okay. Thanks guys. Appreciate the time. Have a good weekend.

Matthew Partridge: Thanks, Rob.

John Albright: Thank you. You too.

Operator: Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Wesley Golladay with Baird. Your line is open. Please go ahead.

Wesley Golladay: Hi, good morning guys. Just a question on the investment guidance. Does that include the buyback and at $15 a share, would buybacks be the top priority for the use of capital?