Alpine Income Property Trust Inc

NYSE:PINE

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the Alpine Income Property Trust Second Quarter 2024 Operating Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to turn the call over to John Albright, President and CEO. Please go ahead.

[John Albright, executive]

Good morning, everyone, and thank you for joining us today for the Alpine Income Property Trust Second Quarter 2024 Operating Results Conference Call. I'm pleased to have Phil Mays, our new Chief Financial Officer, joining me this morning.

Before we begin, I will turn it over to Phil to provide customary disclosures regarding today's call. Phil?

[Philip Mays, executive]

Thanks, John. I would 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 the most recent investor presentation, which contains reconciliations of the non-GAAP financial measures we use on our website at alpinereit.com.

With that, I will turn the call back over to John.

[John Albright, executive]

Thanks, Phil. We are pleased that our successful asset recycling and investments in higher-yielding quality loans have delivered a strong quarter and led to an increase in our earnings guidance. On the asset recycling front, during the quarter, we acquired a $14.6 million property leased to investment-grade tenants, Best Buy and Golf Galaxy and accretive yield to the disposition of 2 properties leased to Festival Foods and Hobby Lobby for a disposition volume of $6.6 million and a blended exit cap rate of 7% for the sold properties.

Further, we're beginning to see investment opportunities in the market that we plan to take advantage of and continue recycling at accretive yields. On the loan investment front, we originated a $6.1 million first mortgage investment of which $4.6 million was funded during the quarter. The initial yield on this investment was 11.5% and was to provide funding towards the 4 pad retail development, I think by Wawa in a growing submarket of Cincinnati, Ohio.

During the quarter, we also sold $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 a part of the transaction, the loan was rated by independent rating agency, whereby it received an A- rating. This sale frees up capital for additional quality high-yielding loan investments, including 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%.

As of quarter end, our portfolio was 99% occupied and consisted of 137 properties totaling 3.8 million square feet with tenants operating in 23 sectors within 34 states. Our top tenants remain unchanged from our first quarter earnings call in April, with Best Buy making it into our top 5 tenants after our recent acquisition. Further, we are actively paring down our Walgreens exposure and currently have 2 Walgreens in the sales process. All of our top 5 tenants carry investment-grade credit ratings. And we ended the quarter with 67% of our total annualized base rents coming from tenants with an investment-grade credit rating, an increase of 400 basis points from this time last year.

From a valuation perspective, we are currently 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. Additionally, we have one of the highest dividend yields in our peer group, along with a healthy free cash flow and strong AFFO per share growth projected for 2024. Simply put, Alpine shares are a great value today. Lastly, given our strong earnings during the first half of the year, we have increased 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.

With that, I'll turn the call over to Phil to talk about our second quarter performance, balance sheet and guidance.

[Philip Mays, executive]

Thanks, John. First, it's a privilege to join the team here at Alpine. I've only been here a few weeks, but it is clear that management and the Board do not sit still and are constantly working to increase shareholder value. As the new CFO, I will endeavor to do the same.

Today, I will briefly highlight our earnings, balance sheet and guidance and then open the call to questions. Beginning with financial results. FFO and AFFO were both $0.43 per share for the quarter. This represents an increase of $0.06 per share or 16% over the second quarter of 2023. The growth in our earnings was driven by interest income from our loan portfolio, along with accretive asset recycling. Additionally, other revenue for this quarter includes $100,000 of nonrecurring leasing commissions related to the 39 properties securing our $23.4 million portfolio loan.

Our G&A for the quarter was $1.6 million. This is consistent with G&A for both the prior quarter and the second quarter of last year. As a reminder, G&A primarily consists of our external management fee, which was $1 million for the quarter. During the quarter, the company paid a cash dividend of $27.5 per share. Our dividend is well covered as this represents an AFFO payout ratio of 64%. We do aim to pay out 100% of our taxable income each year. And consistent with past practice, we will announce towards the end of August, our quarterly dividend amount for the third quarter.

Moving to the balance sheet. We ended the quarter with net debt to enterprise value of 53%, net debt-to-EBITDA of 7.4x and a fixed charge coverage ratio of 3.4x. Additionally, we ended the quarter with $185 million of liquidity, and we have no debt maturity until 2026. One final balance sheet note, as John discussed, we sold a $13.6 million A-1 participation interest and our $23.4 million portfolio loan. As required by GAAP, we will continue to report the full amount of this loan receivable on our balance sheet with a separate liability line item for the $13.6 million participation interest.

Further, interest income will continue to be recorded on the full loan amount with interest expense, including an offsetting amount for the participation interest sold. With regards to guidance, we are increasing our full year 2024 outlook the new FFO guidance range of $1.58 to $1.62 per share and a new AFFO guidance range of $1.60 to $1.64 per share. This represents a 4.2% increase at the midpoint of these ranges. The acquisition and disposition assumption underlying our guidance remains unchanged at a range of $50 million to $80 million for each.

Lastly, a couple of quick modeling notes. We began the third quarter with in-place annualized straight-line base rent of $39.8 million and $39.5 million of in-place annualized cash base rent. Our annualized interest income currently has a run rate of $4.3 million, which as previously discussed, is now offset by approximately $1.1 million of additional interest expense associated with the loan participation sale.

With that, operator, please open the line for questions.

[Operator]

[Operator Instructions] And our first question comes from Gaurav Mehta with Alliance Global Partners.

[Gaurav Mehta, analyst]

I wanted to ask you some color on what you were seeing in the transaction market for net lease properties?

[John Albright, executive]

Yes. So we're seeing still some very good buyer interest for smaller net lease property kind of $5 million and below is still very active market and not a lot of dislocations, larger properties that are moving as much. There's a little bit more activity than last quarter for sure. We are seeing our opportunities where people need capital, want to sell properties or lease some financing. I wouldn't -- but it's a much better environment now than it was last quarter.

[Gaurav Mehta, analyst]

Okay. I also wanted to ask you on the acquisition that was completed in the second quarter, the lease firm on the acquisition was lower than your weighted average lease term. And I wanted to get some color on the lease term? And is that something you plan to pursue going forward?

[John Albright, executive]

Yes. We've mentioned in our investor presentation that we're going to look to increase our weighted average lease term as we move from here. That property that we bought in investment-grade credit as lease rates at or below market in a location where there's no supply. So the tenants are doing well. They don't have opportunity to move and find another available side and the disruption which might make no sense. So we have a very high confidence that they're going to renew and discussions with them and the stores do well and the right side. So as you know, that has been our strategy to pick up high-quality properties at higher yields with strong mix that they're going to renew and -- but knowing that in the context of the public markets, we will work on increasing our weighted average lease line.

[Operator]

Our next question comes from R.J. Milligan with Raymond James.

[R.J. Milligan, analyst]

John, you mentioned that you're looking to -- I think you have 2 Walgreens under contract to dispose. Just curious what the lease expiration schedule looks for your Walgreens exposure? If there's any short-term releasing risk?

[John Albright, executive]

Yes. So our average -- weighted average lease length of the Walgreens is about 8 years. So we have a longer duration there with the Walgreens and that obviously gives us a better opportunity to sell the properties at reasonable cap rates. And so obviously, mentioning that we got 2 in the sales process and we'll start working through some others that are really good locations and look to actively bring down Walgreens from the #1 position. So like will definitely make some good headway for the rest of the year on doing that.

[R.J. Milligan, analyst]

That's helpful. And just given the recent recovery in some of the net lease stocks. Curious how that changes your cost of capital equation and the outlook for the rest of the year in terms of -- right now, I think you're set to be per guidance sort of a net neutral in terms of acquisitions and dispositions. And I'm curious where do we need to see Alpine stock go to give you a net acquirer position?

[John Albright, executive]

Yes. I mean, look, we're finding, as I mentioned, good opportunities, and we still -- given that we do want to sell Walgreens down, that's a good source of capital to redeploy and so we don't necessarily need the public markets to grow. Obviously, we'd love to do public markets to be supported for growth but we're going to be patient and see whether that basically happens for us. And so we'll keep on and put points on the board here. And obviously, streaming some good successes here and we feel like as much as the broad markets are supportive, that will come for us, but we don't need to depend on it to be somewhat of a net acquirer. And so that's kind of where we are right now.

[Operator]

Our next question comes from Rob Stevenson with Janney Montgomery Scott LLC.

[Robert Stevenson, analyst]

John, just to follow up on the Walgreens. Given the issues and the fact that a lot of people want to reduce their Walgreens exposure, who are the prospective buyers of these properties these days? Are these just local guys that want the 8 to 10 years of an investment-grade tenant? Are these guys looking to do something else if Walgreens doesn't renew? How would you characterize the potential buyer pool of Walgreens assets today?

[John Albright, executive]

Yes, Rob. Basically, you've answered it all the above. We have -- again, looking at our demographics of our total portfolio, you can basically summarize that we have really good locations. And so you have 1031 buyers who are basically saying, okay, I get Walgreens, good credit for a good lease length in a market that's dynamic growing. No one's building anything, and you're buying it below replacement costs. And then we've had situations where tenants want the Walgreens box, and we'll basically say I can probably negotiate maybe in early termination with Walgreens, even though we don't have any indications that closing the store, but there's a little bit of that situation where tenants want to get a hold of a good corner. So it's all the above.

[Robert Stevenson, analyst]

Okay. And then to your comments on extending Wal, there's 4 -- a little over 4.5 years left on the Best Buy and Golf Galaxy Dick's lease. Any sense where these properties rank within the overall profitability, scale of these retailers? And have you guys already had conversations with them about extension?

[John Albright, executive]

Yes. I mean, look, we talked to them when we bought the property, and they basically say that the properties are doing are those locations are doing very good for them. And so certainly, we can go in there and negotiate some towards an early extension, but it's a little early for them and for us. And so at the appropriate time, we'll definitely discuss that with them. Usually, you would like to wait for them to want to refresh a store and maybe provide some capital to basically get longer lease term and a return on that capital. But -- so there's no -- we don't feel like the rush to do anything where they're located in very strong demographics. And so the market should even be better in the next couple of years.

[Robert Stevenson, analyst]

Okay. And then these assets are obviously big boxes. How are you thinking about the overall portfolio mix going forward in terms of smaller boxes versus bigger boxes? Or is it just all opportunity driven at this point for you guys?

[John Albright, executive]

It is opportunity driven, but we're seeing more opportunity as I mentioned before on the larger boxes, given that you're not really talking about the smaller 1031 buyers. So the arbitrage is much greater and the smaller properties, we're seeing cap rates with -- even though the interest rate is coming down cap rates being extremely supportive of selling the properties. And so we'll take advantage of that cost of capital selling at very low cap rates and buying where there's a opportunity. So we kind of like that. I mean we'll be, in general, opportunistic, but we're seeing more opportunities on the larger ticket items.

[Robert Stevenson, analyst]

Okay. And then last one for me. How should we be thinking about the second half earnings? Is there anything that's nonrecurring this quarter to next or any drags that you expect in the back half of the year, if I look at either $0.84 of FFO that you guys have done year-to-date or the $0.43 in the second quarter. Both of those run rates are well above where the $1.59 to $1.62 guidance range is, what's the drag or what's the nonreoccurring that needs to come out of these numbers when we're thinking about the back half of the year?

[Philip Mays, executive]

Yes, Rob, it's Phil. I think in kind of talking about earnings per share, you guys keep in context that just 150,000 represents $0.01 of FFO, so a small amount or just timing can move the needle here. But that is the current quarter did have, as I mentioned in my remarks, a 200,000 nonrecurring leasing commissions in primary fees, management and leasing commissions for managing the 39 properties that underlie the portfolio loans. And there was an unusual large amount of leasing commissions from that this quarter. So there was about 200,000 nonrecurring in the current quarter.

And then I think you've got to keep in mind just transaction timing, which fall into a couple of buckets, right? One with our property and one with our loan portfolio with properties, acquisitions and dispositions. Dispositions could very well lead the acquisitions, and that would be dilutive. And look, we got a line of credit largely swapped out. So if that were to happen, we may not, we can't really pay down the line all the way because we've got $50 million of it swap. So there could be a temporary time. September, we're sitting on some cash, right, before we redeploy it.

With the loan portfolio in particular, the portfolio loan, right, that borrower is selling those properties, want to sell those properties and repay the loans, you could have some time there. So I think between the onetime item this quarter and then just largely transaction timing and you have a relatively small amount that can quickly move the needle.

[Operator]

Our next question comes from Wes Golladay with Baird.

[Wesley Golladay, analyst]

When you look to make future loan investments, are you looking to sell parts sort of like you did with the A-1 deal?

[John Albright, executive]

Now, selling the A-1 deal just freed up some capital because we are restricted from how much we can do on the loan investments. And so that's allowed us to do another loan in the quarter. Again, we still have opportunity now to do roughly $20 million additional loan investments. And so we're being patient and picky, but that was really -- I don't see us doing that unless we had some sort of larger loan opportunity, but I don't expect that.

[Wesley Golladay, analyst]

Okay. And how are you thinking about your exposure to Family Dollar? What happens to the dual-branded stores if the brand is sold? And where your stores originally a Family Dollars or the dual branded ones?

[John Albright, executive]

So I'll let Steven Greathouse who is our Chief Investment Officer, and I'll let him speak to that.

[Steven Greathouse, executive]

Yes, I mean, look, most of us are new. So we have plenty of lease term on them. And really, when we're looking at these and underwriting is more of a credit play. So right now, our portfolio is sitting tight and then we'll look to potentially produce exposure, but that won't be buying any more of them. So we kind of like where we're sitting right now in the portfolio.

[Operator]

Our next question comes from Matthew Erdner with JonesTrading.

[Matthew Erdner, analyst]

Phil, welcome to the team. So what kind of drives the acquisition activity towards the higher end of your guidance? Because right now, you're a little over half, but what kind of takes those numbers towards that higher range?

[John Albright, executive]

We're seeing some -- as I mentioned, it's a good opportunity, obviously, the subject to due diligence and execution. So we feel very comfortable that we'll definitely meet expectations there. We obviously have second half of the year to work. So we have plenty of opportunities. So we're happy with what we see. And how I think we'll be able next year to deliver.

[Matthew Erdner, analyst]

That's good to know. And then I guess, how comfortable are you taking the credit facility up? Or are you guys comfortable where it is and kind of want to start taking it down?

[John Albright, executive]

No, we're comfortable with where it is. As far as on the leverage side, that will -- again, we had a nice strong free cash flow. And given the small company, it doesn't take much to bring it down. And so we're comfortable with where it is. But as I mentioned, we have very -- if the money is lost. So you want to take it down beyond kind of where we have a certain level of swaps.

[Operator]

And our last question comes from John Massocca with B. Riley Securities.

[John Massocca, analyst]

With regards to the loan investment, what is the long-term outlook for that portion of the portfolio? Is the thought to replace exposure here as loans are repaid? Or should that kind of wind down over time, especially for in a more kind of normalized interest rate environment?

[John Albright, executive]

Yes. I mean, if we get into more of a normalized, I would call a rather than interest environment, a normalized banking market. That's really what's causing the opportunity if the banks are capped down. They're not looking to lend further in real estate that they work their books down. I mean they're stuck with a lot of loan that are paying off, in the apartment sector, in industrial. Those are really, really hard to refinance now given where they were. And so that's where the real opportunity is.

So -- but we expect it at some point, to burn down and be with more of a -- obviously, totally a net lease kind of ownership interest. But we're taking advantage of the market as we see it right now. We don't see it getting better on the credit availability side. And so again finding really high-quality properties that we would not be able to purchase because the cap rates would be way inside of where we have an interest and basically being able to loan money at double digits unlevered those mortgage positions at a lower basis than we'd be able to buy the properties. It's fantastic. And so we'll keep being selective and investing there. But eventually, things will level out, but we don't see any concern.

[John Massocca, analyst]

Okay. And I know most of those loans are kind of shorter duration in nature. But as interest rates shift here, are there any kind of prepayment options for those counterparties?

[John Albright, executive]

They can prepay, but there's many holes. So we didn't knew all this effort to just get a loan of prepaid in 6 months on average duration is roughly 18 months. And so yes, they can pay early, but we would have to make all provision, most likely the borrowers aren't going to go through the efforts of refinancing, just to save a certain amount for such a short duration, they just have a bigger fish to fry in oil.

[John Massocca, analyst]

Okay. And then you talked a bit about the Walgreens and where the demand for potential sales is coming. I mean, how is that translating maybe broad strokes for the whole Walgreens transaction market into cap rate. I mean where are kind of the cap rate ranges for those types of assets?

[John Albright, executive]

Yes. I think, I am not kind of going to give you cap rates that mean once we start closing on some of the HLC. But I will say that what we're seeing is really -- it's more localized about the location and not as much about the credit. And so it's not someone just saying, I don't need to go see the property because I'm buying the property for this duration of Walgreens spread and so here's my cap rate.

It's more, I will never be able to build to basically be able to buy this corner for this basis, and they're willing to pay perhaps a higher cap rate than you might imagine. Now they'll be sort situated where it will lean on the Walgreens credit and the cap rate will be higher. So it's a little bit of a barbell effect where we have really good strong locations where there's a lot of tenants who want to be at that location and that cap rate would be lower and would basically be based on the strength of the location.

[Operator]

We have a question from Barry Oxford with Colliers International.

[Barry Oxford, analyst]

Good. My question were also around the Walgreens and if they're getting out of a lease early who are the tenants that are kind of growing and that are the kind of the natural tenants to replace a Walgreens because if people are more concerned about the location and they are kind of about the duration, that's telling me that they want to have some certainty that if Walgreens walks away and does a lease termination that they've got somebody that can backfill.

[John Albright, executive]

Yes. I mean we have a medical. It's a good bond for urgent payers. You have restaurants that would scrape it, small fast casuals, which, as you know, are growing like crazy. Rating gains of the world that God knows how they're going to find the locations, but they need to find a grow. Even if you went to schools and dollar stores and that sort of thing. So there's really quite a bit of that sort of demand because if you think about the Walgreens that's on the corner, it's upfront, mostly drive through. So there's a fair amount of interest there.

[Barry Oxford, analyst]

John, would you be a buyer of an asset where Walgreens is leaving just because you might have a tenant or two that you know would love that spot? And you could get a good deal on it because they're moving out?

[John Albright, executive]

Yes. We're in a very low case and real estate focus. So we absolutely would buy a dark Walgreens, if we knew we had a tenant in hand and we are being paid handsomely for that sort of transaction. We haven't been really certain for that. But yes, I mean, we're all about location. I mean, you could see us perhaps even helping someone bridge that capital for that transaction. So it could be on that side of the equation as well.

[Barry Oxford, analyst]

Okay. Because it seems to me like the 1031 buyers would not be interested in that kind of deal.

[John Albright, executive]

No. That's -- I wouldn't come to that conclusion.

[Operator]

Thank you. This concludes the question-and-answer session. Thank you for your participation. You may now disconnect. Everyone, have a great day.