Alpine Income Property Trust Inc (PINE) 2022 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Alpine Income Property Trust second-quarter 2022 earnings call. (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, Senior Vice President, Chief Financial Officer, and Treasurer. Please go ahead.

Good morning, everyone, and thank you for joining us today for the Alpine Income Property Trust second-quarter 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 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 non-GAAP financial measures we use, on our website at alpinereit.com.

With that, I'll now turn the call over to John.

Thanks, Matt, and good morning, everyone. As we discussed during our first-quarter earnings call, we believe we will have an opportunity to acquire high-quality properties at more favorable pricing in the back half of the year as the rising interest rate environment, challenged debt markets, and volatile macroeconomics backdrop puts upward pressure on cap rates.

As a result, we emphasized capital recycling in the second quarter where we locked in attractive pricing on our asset dispositions and then redeployed the proceeds into better risk-adjusted opportunities with stronger tenant credits at more favorable cap rates. During the quarter, we sold $73 million of properties at a blended cap rate of 7.1%, generating gains on sale of $15.6 million, or $1.15 per share. This includes the previously announced sale of our [lone] remaining office property that generated a gain of $7 million.

If we remove the office property from our disposition statistics, we sold $34 million of retail assets at a blended cap rate of 5.8%, generating more than $8.5 million of gains. Given that office investments are no longer part of our portfolio, we think the retail-only execution is a more relevant mark to market of our portfolio and highlights the excellent quality of our real estate we've been able to acquire over 2.5 years.

The retail property dispositions were largely focused on non-rated or below-investment-grade tenants, where we had elevated exposure to both the tenant and the sectors in which they operate. The sold properties were leased to Sportsman's Warehouse, At Home, Hobby Lobby, and Cheddar's Scratch Kitchen, allowing us to reduce concentrations in the sporting goods, home furnishing, general merchandise, and casual dining sectors.

On the acquisition front, we've emphasized discount and value-oriented retailers that should benefit from consumers becoming more price conscious as they look to maximize their buying power as they grapple with significant inflation pressures and rising cost of capital.

During the quarter, we acquired 19 properties located in nine states leased to industry-leading operators such as Best Buy, Little Caesars, LA Fitness, Dollar General, Harbor Freight, Dollar Tree, and Family Dollar. Our second-quarter acquisitions were purchased at a weighted average cap rate of just over 7%, resulting in a very attractive net investment spread relative to the 5.8% cap rate on our retail property dispositions.

Year to date, we've acquired 35 net lease properties for $109 million at a weighted average going-in cash cap rate of 6.9% and a weighted average remaining lease term at acquisition of 9.4 years. Subsequent to the end of the quarter, we sold our Scrubbles Car Wash in Jacksonville, Florida for a 4.8% cap rate. And we have invested the remaining disposition proceeds that were on our balance sheet in the form of 1031 restricted cash into a property leased to Lowe's.

Today, our portfolio consists of 143 properties totaling 3.4 million square feet, with tenants operating in 26 sectors in 35 states. Taking into account these third-quarter transactions, our top-three tenants are now Walgreens, Lowe's, and Dollar General, which all have investment-grade credit ratings. With all of the ins and outs related to our year-to-date transaction activity, our 100% retail portfolio is now much more comparable to our peers who currently have much higher valuation multiples.

As we continue to sell at low cap rates and reinvest at higher yields, we're confident we'll be able to incrementally de-lever our balance sheet, improve our overall property metrics, and drive higher-quality FFO and AFFO per share.

I'll now let Matt talk about our performance in the quarter, capital market activities, and increased guidance.

Thanks, John. Operationally, our portfolio remains 100% occupied, and, with nearly 85% of our rents coming from publicly rated or publicly traded companies, we have excellent visibility into our tenants' corporate-level operating trends and credit metrics, which have remained strong throughout the year. Second-quarter 2022 FFO was $0.47 per share, a $0.09 per share or 23.7% increase compared to the second quarter of 2021.

Second-quarter 2022 AFFO was also $0.47 per share, an $0.08 per share or 20.5% increase over the second quarter of 2021. Year to date, FFO was $0.97 per share, and AFFO was $0.95 per share, representing a year-over-year per-share growth of 23% and 16% respectively, when compared to the first six months of 2021.

Our general and administrative expenses for the quarter, which includes the $948,000 management fee to our external manager, totaled $1.5 million. This was a year-over-year increase of 15%, largely driven by increases to our management fee from our second half of 2021 and year-to-date 2022 equity capital markets activities and was positively offset by second-quarter year-over-year revenue growth of 71%. G&A as a percentage of revenues in the second quarter was down to 13.1%, down from 13.3% in the first quarter and a year-over-year decrease of approximately 640 basis points.

In the second quarter of 2022, the company paid a cash dividend of $27 per share, representing an 8% year-over-year increase over the company's Q2 2021 cash dividend and a current annualized yield of approximately 6%. Second-quarter FFO and AFFO payout ratios were very healthy at 57%, and we anticipate announcing our regular quarterly cash dividend for the third quarter towards the end of August.

During the second quarter, we issued 87,000 shares of common stock through our ATM program for total net proceeds of $1.6 million at an average issuance price of $19.09 per share. We ended the quarter with net debt to total enterprise value of 54%, net debt to pro forma EBITDA of 8.3 times, which was down 0.5 turn from the end of the first quarter, and we continue to maintain a very healthy fixed-charge coverage ratio of nearly 5 times.

While we do anticipate a broader market economic slowdown in the back half of the year, we did increase our full-year FFO and AFFO per-share guidance. Our prior guidance assumed more de-leveraging in the second quarter than materialized, which is driving a lower projected weighted average share count for the year, offset by further increases to our interest-rate assumptions to account for a steepening of the yield curve.

We've brought down the top end of our acquisition guidance to account for the second-quarter results. And we are meaningfully increasing our disposition guidance to reflect continued confidence in our ability to sell assets at attractive valuations, allowing us to generate positive net investment spreads on the redeployment of proceeds.

We begin the third quarter of 2022 with portfolio-wide, in-place, annualized straight-line base rent of $39.6 million and in-place annualized cash base rent of $38.7 million. These values are before the sale of the Scrubbles Car Wash and acquisition of the Lowe's that occurred in July that John referenced earlier. We now expect to acquire between $215 million and $235 million of retail net lease properties during 2022, which is subject to market conditions and for which we still believe acquisitions will occur at a similar or better blended yield than our 2021 full-year acquisition cap rates.

As we look to match fund our acquisition activity through accretive capital recycling, our disposition guidance has been increased by $50 million at the low end to $125 million, and $75 million at the high end to $175 million. Our full-year 2022 FFO and AFFO guidance ranges were increased by 5% at the low and high end, with the weighted average share count for the year being lowered by 1 million shares at the low end and 2 million shares at the high end.

2022 FFO is now projected to be between $1.60 and $1.65 per share. And our full-year 2022 AFFO guidance range was increased to $1.58 to $1.63 per share.

I'll now pass it back to John for his closing remarks.

Thanks, Matt. The liquidity of our assets, attractiveness of our real estate, transparency and performance of our tenants, and the stability of our cash flows have us well positioned. We've built what we believe is the highest-quality, real estate-focused portfolio in the public net lease sector.

The quality of these assets is bearing itself out in the valuation we've been able to achieve with our property sales, and we're confident our portfolio will continue to perform well even in the volatile, broader economic environment. We appreciate all of our team's hard work and continued support of our shareholders.

At this time, we'll open it up for questions.

(Operator Instructions) Matthew Erdner, JonesTrading.

Hey, guys. Congrats on a good quarter. Filling in for Jason Stewart this morning. So in terms of rent escalation, what's the visibility? I know last quarter you guys said about 50% of the portfolio can be increased 75 to 125 basis points. Is it still in that range, or is it trending towards the lower side given the macro environment?

Hey, Matt. It's Matt. Good to hear from you. In general, I think the 75 to 125 is a good range. It's going to depend year to year on what lease is rolling over. I don't think that range has changed with the transaction activity, so I think that's a good run rate going forward.

Awesome. And then another one on dispositions. Are you guys still looking to rotate out of the low-credit tenants and then roll those into better opportunities going forward?

Yeah. I think, maybe, you can expect us to do more of the same here moving forward. So we have quite a bit more opportunity to keep on generating some really healthy gains on some properties at low-cap rates and then recycle that into higher-cap rates and higher-quality tenants.

Got you. So you are still kind of saying that cap rate is in that 5.5%, 6% range on dispositions?

Yeah. I mean, there -- it's been amazing. We thought maybe we'd see a little bit more expansion on the cap rate on these smaller property sales. You're really seeing a lot of high-net-worth and some institutional investors buying these properties at cap rates that really haven't changed too much from six months ago. So we're still seeing a good opportunity to recycle here.

Got you. And then, are those in specific locations, or is it just kind of depends?

No, not anything locational. It's really, where do we see ability to get, really, some incredible low-cap rate execution. Or are there opportunities to get a decent cap rate execution but selling off a lower-credit tenant which is just improving the portfolio going forward.

So we'll do that barbell effect. We'll sell properties with really low-cap rates, but then we'll sell some of the lower credits and improve the portfolio. In that mixture, we'll still have a very attractive disposition cap rate and then a recycling opportunity into higher credit.

Awesome. Thank you, guys.

Anthony Hau, Truist.

Good morning, guys. Hey, John, so the high end of the disposition guidance represents a third of the current portfolio. If getting the portfolio to your pristine state doesn't close the valuation gap that you hope for by year end or early next year, what is the next step for Alpine? Is strategic alternative something that the Board needs to explore?

Look, we have, as mentioned, more to go. So yeah, if we get this into an extremely pristine condition and we're still trading where we're trading, of course. I mean, we'll explore those alternatives because it makes no sense to just try to keep going if we're not really connecting with investors or investors -- we have a lot of great-value investors. But the folks that need bigger companies are showing a lot of appreciation for the portfolio value, if you will, so we trade at a discount NAV. And if we keep on creating a better and better portfolio, of course, we would look at those scenarios.

And is there a time line that you guys would give yourself before -- ?

No. I think it will be self-evident after a couple of quarters of more recycling and improving the portfolio. If you look at our slide deck and investor presentation, we're the lowest multiple. And if you look at our credit composition, we have the same credit composition as the highest multiple companies out there, and we have better locations. Given a small company, you can do that.

So if we don't resonate with people that you're able to buy this portfolio at $159 a foot and the peer average is $250 a foot, and our implied cap rate is 7% and the others are whatever is in your model, then it's clear we need to look at other alternatives.

And how much more disposition can you guys do after this year? Because $175 million at the high end represents a third of the portfolio.

Yeah, I don't think there would be a ton more than beyond that. I think that we're going for the low-hanging fruit, and it won't cut into the core for sure. So this is really trimming around the edges. Even though it's a third of the portfolio, just trimming around the edges and showing all the embedded profit in these properties. And so yeah, look, it resonates with the value folks. And obviously, we had an awesome performance last year and fairly decent performance this year.

So it's not like we don't have any unhappy investors. People would like to see it move to a better multiple, which we share that. But we think we can get there by keep on showing -- look at our top three tenants now after buying the Lowe's. I mean, you just do the comparison, and it hits you right on the forehead.

Yeah. Thanks, guys.

Thanks.

Rob Stevenson, Janney.

Good morning, guys. Is At Home and Hobby Lobby down off the top 10 tenants with the sale, or did you have multiple locations of those?

They're still in the top 10. They've moved towards the bottom end of the top 10, but we own multiple locations.

Okay. And then the Lowe's, was that a ground lease or a building and land? What was the remaining lease term there? And what type of cap rate do you guys buy that at?

No, yeah. So it was not a ground lease, Rob, it was building and land. There is approximately 10 years remaining on the lease, and it was, call it, a low to mid 6s cap rate.

Okay. And I guess the question winds up being, is it -- I mean, is that indicative of where you want to be putting your money today? I mean, low to mid 6s for somebody like Lowe's versus -- what's your alternative if you go and deploy a similar dollar amount or similar-sized asset with somebody that's non-investment grade? I mean, what are you getting if you were to buy an At Home or something like that today versus that type of a return on Lowe's?

Yeah. So, Rob, I think it's, again, a little bit of a barbell. We'll definitely do more of the Lowe's-type transactions where we see that opportunity. But we're not bashful about buying something that's a really junky credit if the property is a terrific property, as far as alternatives, and it is below market lease rate. Those have been really successful for us. For instance, the At Home that we sold, we bought that when At Home was not even the credit it is now. And we've just had so many alternative types of uses for the property. So it'll be a mixture.

Okay. And then, Matt, what was the rough timing of the bulk of the second-quarter dispositions? Did those -- did the dispositions come at the very end of the quarter?

Let's see here. No, I think they were spread out throughout the quarter. I would say a couple hit towards the end, but you have the office sale that occurred in April even before the Q1 earnings release. So it was pretty well spread out on average.

Okay. What is the annualized base rent in the portfolio today?

After the acquisition of the Lowe's, the annualized base rent is $40.2 million.

Okay. Because, I guess, the question winds up being -- that I'm leading to is if the dispositions weren't at the very end and you did have some sales, et cetera. But how do you go from -- is there anything abnormal about the back half of the year to take you from, call it, a $0.47 in the second quarter?

Obviously, there's some impact of dispositions, but the high end of the guidance essentially implies something around $0.34, $0.35 for each of the last two quarters of the year. Is that the acceleration of dispositions? How do you get there just with what you've done year to date?

Yeah. So I think it's fair to assume that there's an acceleration of dispositions, and we want to maximize cap rates that we can achieve in the market. And if we're assuming, which we've said, that there's going to be a slowdown in the back half of the year and an expansion of cap rates, we want to get those dispositions done sooner. And then on top of that, there is assumed equity raises in the guidance sort of end of Q3, beginning of Q4, to further de-lever.

So the disposition guidance is a pretty wide range, and the share count does assume a decent amount of shares on average coming in towards the end of the year. So that's what's driving the lower sequential earnings per share.

Okay. And are we not likely to see any material level -- certainly not as much as you did in the second quarter -- of acquisitions in the third quarter, that the acquisitions, when they happen, are more likely to be fourth quarter weighted then? So you're going to be at high disposition -- net disposition third quarter, and then a net acquire in the fourth quarter?

Other than the Lowe's, I would say that most of the acquisitions will probably occur towards the end of Q3. And then obviously, we're firming up the pipeline for Q4, but we're assuming that they're going to be back-end weighted, which is usually how the transaction market works.

Okay. And then just finally, given that comment, what was the rough dollar amount or the dollar amount of the Lowe's transaction? How material -- was that $10 million, $20 million? What are we looking at?

It was $14 million.

$14 million?

It was $14 million. Yeah.

All right. Perfect. Thanks, guys. Appreciate the time.

Thanks.

Thanks, Rob.

RJ Milligan, Raymond James.

Hey, good morning, guys. Just one question. Most of my questions have been answered. But, Matt, in your comments, you talked about that -- incorporated in the guidance is sort of the expectation of a broader economic slowdown, which we've already started to see.

But just curious, I mean, clearly, you guys have been upgrading the portfolio, improving diversification, preparing for this potential slowdown. And just curious if there are any categories you'd like to further reduce or any categories you've got on the watch list?

I'll take that, RJ. So I mean, we'll certainly reduce where it makes sense as far as whether it's casual dining, that sort of sector. But the ones that we have are really terrific locations, and the lease rates are very below market. And so -- and actually, we've had tenants come to us for early renewals, and we decline them. So it's really about the portfolio, kind of where they're located, and case by case.

So where there's a situation where it's maybe a little bit more tertiary location and a tenant that would be something that would be challenged during the recession, we'll certainly look to move through that sooner rather than later. But really, we go through this quite often, and we're in pretty good shape. So there's nothing that really stands out at us that we're not already contemplating and working on. So you'll probably see more of this next quarter as far as what we've addressed at pretty good cap rates, we think. So we're working on those.

Yeah, and, RJ, just from a (multiple speakers) Sorry. I was going to say, from a targeted sectors perspective, I mean, we do like the off price. We like the discount. Retailers like the dollar stores. And obviously, we like the home improvement space, which has seen multiple years of tailwind. So I would say those are a few of the sectors where we're putting dollars to work.

Thanks. And then just as a follow-up, can you talk about what you're seeing out there in terms of competition? Obviously, you commented that the disposition market is still pretty attractive in terms of finding some high-net-worth individuals. But obviously, we've heard that a lot of the levered buyers have left the market, just given the increased debt costs. And I'm just curious what you guys are seeing out there in terms of competition, and where do you think the market shakes out as we move into 2023 about the competitive landscape?

Yeah. We hope that it would be better hunting, where there'd be less competition, but actually, the market is pretty strong. I mean, very strong if you consider the macro backdrop. So where we're focusing a lot of attention is developers who may have debt that's going to be harder for them to roll over, or they're acquiring properties and they want to sell off some pad sites because it's very challenging for them to get acquisition financing on the secured side.

So that's where we're going to see more opportunity to bring in great properties versus -- as far as the just general market is still very strong. So you're seeing a very efficient market. We're a little surprised; we thought there'd be a little bit more disconnect.

Thank you, guys.

Thank you. (Operator Instructions) Craig Kucera, B. Riley Securities.

Yeah. Hey, good morning, guys. Looking at your top tenants list, there was some movement. Did you entirely exit the exposure to any tenants in the second quarter from sales such as Sportsman's Warehouse?

No, we still have one more Sportsman's Warehouse, and we still continue to have exposure to Darden, At Home, and Hobby Lobby.

Got it. And I guess, was this the last quarter, Matt, that you're expecting to receive any form of COVID repayment?

Yes. We have received all of the deferred rent repayment agreements that were put in place.

Great. And I'm just curious, you've had this outparcel you've got, I believe, in Jacksonville that you were looking to potentially develop. Has the change in the economy changed any of the timing or underwriting or considerations for that potential development?

Yeah. So that one, the tenant definitely still wants to be there, and we're still in conversations. Where we're not seeing any help is on construction costs. Construction costs are still elevated. And so it's really a conversation with the tenant, that they need to pay more rent for us to get the yield we would want.

And so that's an ongoing conversation, a very constructive conversation. They're trying to figure out whether how to value engineer it or just having slightly higher rents and make it all work. So that's an ongoing conversation. But hopefully, construction costs come down and help us on that side as well.

Okay, great. Thanks, guys.

Thank you.

Thanks, Craig.

Maricris Goco, Factset. Maricris, your line is now open. [Please press the unmute button.]

And I'm currently showing no further questions at this time. I'd like to turn call back to John Albright for closing remarks.

Thank you, operator. And thank you, everyone, for attending today's call, and we look forward to following up with you post call. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.