Alpine Income Property Trust Q2 2024 Earnings Call Transcript

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July 19, 2024

There are 10 speakers on the call.

Operator

Good day, and welcome to the Alpine Income Property Trust Second Quarter 2024 Operating Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, this call is being recorded. I would now like to turn the call over to John Albright, President and CEO.

Operator

Please go ahead.

Speaker 1

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? Thanks, John.

Speaker 2

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 ks, Form 10 Q and other SEC filings. You can find our SEC reports, earnings release and 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.

Speaker 1

Thanks, Bill. 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 $14,600,000 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 $6,600,000 and a blended exit cap rate of 7% for the sold properties. Further, we are 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 $6,100,000 first mortgage investment, of which $4,600,000 was funded during the quarter.

Speaker 1

The initial yield on this investment was 11.5% and was to provide funding towards the 4 pad retail development anchored by Wawa in a growing submarket of Cincinnati, Ohio. During the quarter, we also sold $13,600,000 A1 participation interest in our $23,400,000 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 $900,000 at a weighted average initial investment yield of 9.8%, while our disposition activities totaled $20,200,000 at a weighted average exit yield of 7.7%.

Speaker 1

As of quarter end, our portfolio was 99% occupied and consisted of 137 properties totaling 3,800,000 square feet with tenants operating in 23 secondtors within 34 states. Our top tenants remain unchanged from our Q1 earnings call in April with Best Buy making it into our top 5 tenants after our recent acquisition. Further, we are actively carrying 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 eight percent cap rate on our real estate portfolio and at a meaningful discount to our book value of approximately $18 per share.

Speaker 1

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 2024. Simply put, Alpine shares are 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 percent at the high end. With that, I'll turn the call over to Phil to talk about our 2nd quarter performance, balance sheet and guidance.

Speaker 2

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.

Speaker 2

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 Q2 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 non recurring leasing commissions related to the 39 properties securing our $23,400,000 portfolio loan.

Speaker 2

Our G and A for the quarter was $1,600,000 This is consistent with G and A for both the prior quarter and the Q2 of last year. As a reminder, G and A primarily consists of our external management fee, which was $1,000,000 for the quarter. During the quarter, the company paid a cash dividend of $0.275 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.

Speaker 2

And consistent with past practice, we will announce towards the end of August our quarterly dividend amount for the Q3. 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 30.4x. Additionally, we ended the quarter with $185,000,000 of liquidity, and we have no debt maturities until 2026. One final balance sheet note.

Speaker 2

As John discussed, we sold a $13,600,000 A1 participation interest in our $23,400,000 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 $13,600,000 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 with a 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.

Speaker 2

The acquisition and disposition assumption underlying our guidance remains unchanged at a range of $50,000,000 to $80,000,000 for each. Lastly, a couple of quick modeling notes. We begin the 3rd quarter with in place annualized straight line base rent of $39,800,000 $39,500,000 of in place annualized cash base rent. Our annualized interest income currently has a run rate of $4,300,000 which as previously discussed is now offset by approximately $1,100,000 of additional interest expense associated with the loan participation sale. With that, operator, please open the line

Operator

And our first question comes from Gaurav Mehta with Alliance Global Partners. Your line is open.

Speaker 3

Thank you. Good morning. I want to ask you some color on what you were seeing in the transaction market for net lease properties?

Speaker 1

Yes. So we're seeing still some very good buyer interest for smaller net lease property kind of $5,000,000 and below is still a very active market and not a lot of dislocation, larger properties 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 need some financing. But it's much better environment now than it was last quarter.

Speaker 3

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

Speaker 1

Yes. We 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 tenants, 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 site and the disruption would make no sense.

Speaker 1

So we have a very stores do

Speaker 3

well and the right size.

Speaker 1

So as you stores do well and it's the right size. So, as you know, that's been our strategy is to pick up high quality properties at higher yields with strong conviction 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 leaf line.

Speaker 3

Okay. Thank you. That's all I had.

Speaker 2

Thanks.

Operator

Thank you. Our next question comes from R. J. Milligan with Raymond James. Your line is open.

Speaker 4

J. Milligan:] Hey, good morning guys. 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?

Speaker 1

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 have 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 number one position. So feel like we'll definitely make some good headway for the rest of the year on doing that.

Speaker 4

Thanks. 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 if where do we need to see Alpine stock go to get to a net acquirer position?

Speaker 1

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 build public markets to be patient and see whether that basically happens for us. And so we'll keep on trying to put points on the board here and obviously stream 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.

Speaker 1

And so that's kind of where we are right now.

Speaker 4

Great. That's it for me. Thanks for the color.

Speaker 1

Thank you. Thank you.

Operator

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

Speaker 5

Good morning. John, just to follow-up on the Walgreens. Given the issues of the fact 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 investment grade tenant? Are these guys looking to do something else if Walgreens doesn't renew?

Speaker 5

How would you characterize the potential buyer pool of Walgreens assets today?

Speaker 1

Yes. Rob, you basically 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 10 31 buyers who are basically saying, okay, I got 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 will basically say I can probably negotiate maybe an early termination with Walgreens, even though we don't have any indications that are closing the store.

Speaker 1

But there's a little bit of that situation where tenants want to get a hold of a good corner. So it's all about.

Speaker 5

Okay. And then to your comments on extending Walt, 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?

Speaker 1

Yes. I mean, look, we talked to them when we bought the property and they basically decided the properties are doing or those locations are doing very good for them. And so certainly we can go in there and negotiate some sort of 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, we'd like to wait for them to want to refresh the store and maybe provide some capital to basically get a longer lease term and a return on that capital.

Speaker 1

But so there's no no we don't feel like there's a rush to do anything. Where they're located is very strong demographics. And so this market should even be better in the next couple of years.

Speaker 5

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?

Speaker 1

It is opportunity driven, but we're seeing more opportunity as I might have mentioned before on the larger boxes. Given that you're not really talking about the smaller 1031 buyers. So the arbitrage is much greater. In 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 value opportunity.

Speaker 1

So we kind of like that.

Speaker 3

But I

Speaker 1

mean, we'll be in general opportunistic, but we're seeing more opportunities on the larger ticket items.

Speaker 5

Okay. And then last one for me. How should we be thinking about the second half earnings? Is there anything that's non recurring this quarter to next or any drags that you expect in the back half of the year? If I look at either the 0.84 dollars 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.

Speaker 5

What's the drag or what's the non reoccurring that needs to come out of these numbers when we're thinking about the back half of the year?

Speaker 2

Yes, Rob, it's Bill. I think anytime you're talking about earnings per share, you got to keep in context that just $150,000 represents $0.01 So that's a small amount or just timing can move the needle here. But that said, the current quarter did have, as I mentioned in my remarks, dollars 200,000 non recurring leasing commissions in Pine City's management and leasing commissions for managing the 39 properties that underlie the portfolio loan. And there was an unusual large amount of leasing commissions from that this quarter. So there was about $200,000 non recurring in the current quarter.

Speaker 2

And then I think you got to keep in mind just transaction timing which falls into a couple of buckets, right? 1 with our properties and 1 with our loan portfolio. With properties acquisitions and dispositions, dispositions could very well lead the acquisition and that would be dilutive and look we've 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 got $50,000,000 of the swap. So there could be a temporary time, just temporary where we're sitting on some cash, right, before we redeploy it.

Speaker 2

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

Speaker 5

Okay. That's helpful. Thanks guys and have a great weekend.

Speaker 1

You too. Thanks.

Operator

Thank you. Our next question comes from Wes Golladay with Baird. Your line is open.

Speaker 6

Hey, good morning to everyone. When you look to make future loan investments, are you looking to sell parts of it like you did with the A1 deal?

Speaker 1

No. That selling the A1 deal it just freed up some capital because we are restricted from how much we can do with the loan investments. And so that allowed us to do another loan in the quarter. Again, we still have opportunity now to do roughly $20,000,000 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.

Speaker 6

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 were your stores originally a Family Dollars for the dual branded ones?

Speaker 1

I'll let Steven Greghausen join us, our Chief Investment Officer and let him speak to that.

Speaker 7

Hey, Russ. Yes, I mean, most of what we bought are new. So we have plenty of lease term on them. And really when we're looking at these and underwriting, it's more of a credit play. So right now our portfolio is set and fine and then we'll look to potentially reduce exposure, but that way you won't be buying any more of them.

Speaker 7

So we kind of like where we're sitting right now in the portfolio.

Speaker 6

Okay. Thanks to everyone.

Speaker 1

Thank you, Henry.

Operator

Thank you. Our next question comes from Matthew Erner with Jones Trading. Your line is open.

Speaker 7

Hey, good morning guys. 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?

Speaker 1

We're seeing some, as I mentioned, it's a good opportunity. Obviously, there are things that do due diligence and execution. So we feel very comfortable that we'll definitely meet expectations there. We obviously have a second half of the year to work. So we have plenty of opportunity.

Speaker 1

So we're happy with what we see and I think we'll be able to execute and deliver.

Speaker 7

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

Speaker 1

No. We're comfortable with where it is. As far as on the leverage side, that will again, we have 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.

Speaker 1

But as we mentioned, we have very in the money swap. So you wouldn't want to take it down beyond kind of where we have certain level of swaps.

Speaker 7

Yes, that's helpful. Thanks guys.

Speaker 1

Thank you.

Operator

Thank you. And our last question comes from John Massocca with B. Riley Securities. Your line is open.

Speaker 8

Good morning.

Speaker 2

Good morning.

Speaker 8

So with regards to the loan investments, 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 if we're in a more kind of normalized interest rate environment?

Speaker 1

Yes. I mean if we get into more of a normalized, I would call it rather than an interest rate environment, a normalized banking market, That's really what's causing the opportunity. If you don't the banks are tapped out, they're not looking to lend further in real estate as they work their books down. I mean they're stuck with a lot of loans that aren't paying off in department sector and industrial. Those are really, really hard to refinance now given where they were.

Speaker 1

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 fully a net lease kind of ownership interest. 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 weighted side of where we'd have an interest in Basel and being able to loan money at double digits on levered first mortgage positions at lower basis than we would be able to buy the properties is fantastic.

Speaker 1

And so we'll keep being selective and investing there. But eventually things will level out, but we don't see a defense soon.

Speaker 8

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

Speaker 1

They can prepay, but there's make holes. So we didn't do all those efforts to just get a loan to prepay in 6 months. On average duration is roughly 18 months. And so, yes, they can pay early, but we would have a make whole 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.

Speaker 1

They just have bigger fish to fry, if you will.

Speaker 9

Okay.

Speaker 8

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 with the whole Walgreens transaction market, into cap rate? I mean, where kind of the cap rate ranges for those types of assets?

Speaker 1

Yes. I mean, I'm not kind of going to give you cap rates that I mean once we start closing on some of these, you'll see. 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 the Walgreens brand, so here's my cap rate. It's more I will never be able to build basically be able to buy this corner for this basis.

Speaker 1

And they're willing to pay perhaps a higher cap rate than you might imagine. Now there'll be certain situations 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 you get 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.

Speaker 8

Okay. That's very helpful. And that's it for me. Thank you very much.

Speaker 1

Great. Thank you.

Operator

Thank you. We have a question from Barry Oxford with Colliers International. Your line is open.

Speaker 9

Great. Hey, John, how are you doing?

Speaker 2

Excellent.

Speaker 6

Good.

Speaker 9

My question was 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 than 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.

Speaker 1

Yes. I mean, you have a medical, it's a good box for urgent cares. You have restaurants that would scrape it, small fat casuals, which as you know are growing like crazy. The raging pains of the world that God knows how they're going to find the locations they need to find to grow. Even if you went to schools and dollar stores and that sort of thing.

Speaker 1

So is really quite a bit of that sort of demand because if you think about the Walgreens that's on the corner, it's out front, mostly drive through. So there's a fair amount of interest there.

Speaker 9

John, would you be a buyer of an asset where Walgreens is leaving just because you might have a tenant or 2 that you know would love that spot.

Speaker 7

Yes. I mean we're And you could get

Speaker 9

a good deal on it because they're moving out.

Speaker 1

Yes. We're opportunistic and very location real estate focused. So we absolutely would buy a dark Walgreens if we knew we had a tenant in hand and we were getting paid handsomely for that sort of transaction. We haven't been really searching 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.

Speaker 9

Right.

Speaker 1

So it could be on that side of the equation as well.

Speaker 9

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

Speaker 1

No, that's no, I wouldn't come to that conclusion.

Speaker 6

Yes. Okay.

Speaker 9

That's all I have for today. Thanks guys.

Speaker 1

All right. Thanks Barry.

Operator

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

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Key Takeaways

  • Raised guidance after a strong Q2: FFO and AFFO of $0.43 per share, up 16% year-over-year, prompted a 3.8–4.6% increase to full-year FFO/AFFO guidance.
  • Accretive asset recycling: acquired a $14.6 M Best Buy/Golf Galaxy property and sold $6.6 M of Festival Foods and Hobby Lobby assets at a blended 7% exit cap, with plans to continue redeploying capital at attractive yields.
  • High-yield loan originations: funded $4.6 M of a $6.1 M first mortgage at an 11.5% initial yield for a Wawa-anchored development, and sold a $13.6 M A1 participation in a $23.4 M loan rated A- to free up capital.
  • Portfolio strength: 99% occupancy across 137 properties (3.8 M sq. ft.), with 67% of base rents from investment-grade tenants and active efforts to reduce Walgreens exposure.
  • Robust balance sheet and valuation: 53% net debt/enterprise value, $185 M of liquidity, no debt maturities until 2026, trading above an 8% implied cap rate yet near $18 book value per share, and offering one of the highest dividend yields in its peer group.
A.I. generated. May contain errors.
Earnings Conference Call
Alpine Income Property Trust Q2 2024
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