Alpine Income Property Trust Inc (PINE) 2021 Q2 法說會逐字稿

Good day, and welcome to the Alpine Income Property Trust second-quarter 2021 earnings conference call. All participants will be in a listen-only mode. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to John Albright. Please go ahead.

Good morning, everyone, and thank you for joining us today for the Alpine Income Property Trust second-quarter 2021 operating results conference call. With me is Matt Partridge, our Chief Financial Officer. Before we begin, I'll turn it over to Matt to provide the customary disclosures regarding today's call. Matt?

Thanks, John. 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 and our earnings release, which contain reconciliations of non-GAAP financial measures we use on our website at alpinereit.com. With that, I will now turn the call back over to John.

Thanks, Matt. After starting the year with a solid first quarter, we experienced an acceleration across all aspects of our business during the second quarter, which represented our most active quarter since our IPO in late 2019. Most notably, we achieved record investment activity in the quarter with our acquisition of 18 high-quality retail net lease properties for $81 million at a weighted-average going-in cash cap rate of 7.3%.

We also completed our first follow-on equity offering, which provides clarity regarding the funding of our active pipeline. The offering was comprised of existing and new banking partners and was well supported by our existing shareholders and new institutional and retail investors. And finally, we closed on our inaugural operating partnership unit transaction, which provided us with an additional source of attractive equity. These achievements were a product of hard work and resourcefulness of our team and the support we received from our transaction and operating capital partners for which we are very appreciative.

On the transaction front, more so than any quarter to date, the second quarter demonstrated our ability to grow our high-quality portfolio by executing on a mix of opportunities sourced from multiple relationships. Of the 18 properties we acquired in the quarter, seven were related to our previously announced agreements to acquire a set of high-quality properties from our external manager CTO Realty Growth; nine properties were in the form of a diversified retail portfolio that we sourced on a direct basis from a private owner, which was partially funded by the previously mentioned OP unit transaction; and two assets were obtained through long-standing relationships within the investment sales community.

These sources are representative of the ingenuity and creativity of our team and platform, and I do anticipate future acquisition opportunities from each of these relationships going forward.

Our acquisitions in the quarter were spread across 13 states, including three new states and with tenants operating in 14 different sectors. We added exposure to well-performing sectors such as home improvement, grocery, quick-service restaurants, automotive parts, convenience stores, and automotive service. And we added the off-price retail and farm and rural supply industries as two new sectors in our growing portfolio.

In addition, to improving our geographic diversity, we meaningfully expanded our tenant base with the addition of 15 new tenants to our portfolio. Among the new additions, we added industry-leading operators such as Lowe's, Academy Sports, Circle K, Burlington, Burger King, Firestone, and Orscheln, which was acquired by Tractor Supply earlier this year. Year to date, we've acquired 23 properties for $103 million at a weighted average going-in cap rate of 7.5% and a weighted average remaining lease term at acquisition of just under nine years.

As of the end of the quarter, our growing portfolio consisted of 71 properties totaling 2.3 million square feet in 22 states. Our tenants operate in 23 distinct sectors, and I'm happy to say our tenants continue to be 100% paying, and the properties continue to be 100% occupied. Our top tenants include Wells Fargo, Hilton Grand Vacations, Hobby Lobby, Dollar General, Walgreens, At Home, and Walmart.

As we look forward into the second half of the year, I'm excited about our prospects of putting additional capital to work through accretive investments that will continue to improve our already high-quality portfolio. Part of our future investment activity will be funded by the anticipated dispositions of our office assets, which is an initiative we announced we would explore to position our portfolio as 100% retail.

I'm pleased to say we've received strong interest in the properties that we've gone through the marketing process, and we anticipate moving forward with sales of the Hilton and Wells Fargo office properties later this year. We're also evaluating a strategic disposition of one or two other properties where we believe we can achieve better risk-adjusted returns with the redeployment of capital into other prospects within our pipeline.

Speaking of our pipeline, I'm very pleased with the types of opportunities we're seeing in the market, the volume of the opportunities coming across our desks, and our pipeline's potential to further improve portfolio diversity and top-quality tenants. We've continued to invest in the platform with addition of a new acquisition team member, and our existing team has built great momentum to position us for continued success.

That's all I have for my prepared remarks today. So I'll turn the call over to Matt to talk about our performance in the quarter, capital markets activities, and updated guidance. Matt?

Thanks, John. Operationally, we had another terrific quarter, continuing to collect 100% of contractual base rents including collecting the last meaningful portions of our COVID-19 deferred rent repayments. Total revenues for the second quarter of 2021 were $6.6 million, a 44% increase over the second quarter of 2020. General and administrative expenses, which include the management fee to our external manager, CTO Realty Growth, decreased by more than 500 basis points to 19.5% when compared year over year to the second quarter of 2020, continuing our trend of improving organizational scale.

For the second quarter of 2021, funds from operations were $3.8 million or $0.38 per share, and adjusted funds from operations were $3.9 million or $0.39 per share. FFO and AFFO per share growth in the second quarter of 2021 were 31% and 144%, respectively, when compared to the second quarter of 2020. Our AFFO in the second quarter was positively impacted by approximately $114,000 from the repayment of deferrals related to the previously mentioned rent deferral agreements.

Going forward, we have one remaining tenant making prepayments under previously agreed to rent deferral agreements related to the COVID-19 pandemic. These scheduled payments are anticipated to be approximately $22,000 per quarter through the second quarter of 2022. Year to date, FFO was $0.79 per share, and AFFO was $0.82 per share, representing year-over-year per-share growth of 55% and 134%, respectively, when compared to the first six months of 2020.

For the second quarter of 2021, the company paid a cash dividend of $0.25 per share on June 30 to stockholders of record on March 21. This represents a quarterly payout ratio of 66% of FFO per share and 64% of AFFO per share and an annualized yield of approximately 5%.

Our second quarter dividend marks the fourth dividend increase by the company since its IPO in late 2019 and a more than 4% increase over our first-quarter 2021 quarterly dividend. Year to date, through the first two quarters of 2021, the company has paid $0.49 per share in cash dividends. These dividends represent a year-to-date cash payout ratio of 62% of FFO per share and 60% of AFFO per share.

As we noted in yesterday's press release, the company is revising its practice of declaring a quarterly cash common stock dividend concurrent with its quarterly earnings. We instead anticipate announcing our quarterly cash common stock dividend for the third quarter of 2021 and for future quarters in the second month of each respective quarter.

In addition to all of our acquisition activity, we had an equally active quarter on the capital markets. We completed our first term loan, allowing us to reduce the balance on our revolving unsecured credit facility, extend our debt maturity profile, bring in a new banking partner to broaden our access to capital, and lock in a longer-term debt capital at an attractive rate. The new $60 million unsecured term loan has a term of five years and initial fixed rate -- interest rate of 2.16%.

As part of the acquisitions from CTO Realty Growth, we assumed a $30 million mortgage secured by six properties that is subject to a fixed interest rate of 4.33%. While the mortgage maturity date is in October of 2034, the notice pre-payable without penalty is beginning in October 2024.

On the equity front, we were again active on our at-the-market or ATM equity program, issuing 176,000 shares of common stock for total net proceeds of $3.1 million, which were used to fund a portion of our acquisitions in the quarter.

As John mentioned earlier, we also completed our first follow-on underwritten public offering since the IPO and our operating partnership unit issuance within the quarter. The follow-on offering totaled 3.2 million shares of common stock, which included the underwriter's full exercise of their option to purchase additional shares, resulting in total net proceeds of $54.3 million. The OP unit transaction, which partially funded the acquisition of the nine property $13.8 million diversified portfolio, was completed at $18.85 per share through the issuance of 425,000 OP units for a total value of 8 million.

As we look forward into the third quarter, we have over $100 million of dry powder, and our balance sheet is in excellent shape. Total debt outstanding as of June 30 was $141.6 million, and total cash and restricted cash was $8.5 million. Net debt to total enterprise value at quarter end was approximately 35%, while our net debt to pro forma EBITDA was approximately 5.7 times.

As outlined in yesterday's press release, we did revise our 2021 full-year FFO and AFFO guidance. This revised guidance takes into account all of our transactions and capital markets activities to date, [transaction] yields, debt and equity utilization, stable or positive business trends related to each of our tenants, and the timing related to a number of these items. Most notably, our guidance assumes the sale of our office properties leased to Hilton Grand Vacations and Wells Fargo.

For the full year of 2021, our FFO guidance is now $1.35 to $1.45 per diluted share, and AFFO guidance is now $1.38 to $1.48 per diluted share. I'll now turn the call back over to John for his closing remarks.

Thanks, Matt. We have accomplished a number of key milestones in the second quarter with our follow-on offering, increasing acquisition activity, and other capital markets and transaction activities. Our high-quality portfolio continues to perform well, and we expect that to only continue as we maintain our focus on the disciplined execution of our investment strategy.

All of these are positive incremental steps in the company's evolution, and we look forward to taking more positive steps in the quarters to come. I want to thank our shareholders for their continued support and congratulate our team on all of their accomplishments. At this time, we'll open it up for questions. Operator?

(Operator Instructions) Rob Stevenson, Janney.

Hi. Good morning, guys. John, can you talk a little bit about timing and expectations for the office assets? Are those under contract currently? Are you still negotiating? Where are you in the process there? And what's the -- given your acquisition pipeline, what's your ability to backfill those in a relatively quickly fashion from the NOI with acquisitions?

Sure. Thanks, Rob. So we are trading paper on both of them with regards to whether it's contract or LOI at the company. One is negotiated contract; one, we're negotiating LOI. So good activity there. So our expectation is third quarter, perhaps early fourth quarter on closing. We're not in a rush, and so we want -- basically almost gearing it towards the buyer -- the best execution for us where the buyer shakes out with the best execution. So not trying to rush them.

And then with regards to pipeline to replace those assets, the pipeline is very strong. I mean as you can see in the quarter, we did a fair amount of activity, and that has just really built for the pipeline going forward.

And how should we be thinking about -- you, guys, have been doing reliably 7%-plus cap rate on the retail assets -- what it looks like from and from a dilution accretion standpoint for trading that dollar value of office assets for that dollar value of retail assets?

Yeah. So it will be a combination of IG and non-IG as far as where we acquire. And so obviously IG type of assets probably will be slightly dilutive. And then non-IG would be basically be on top or accretive. So we're -- hopefully we'll manage through that very well, and then the friction of that will be very much at all. But the pricing that we got -- hopefully get on the properties is we think very strong and allows us to make that transition to acquisitions that won't be too painful.

Okay. And then how are you thinking -- I mean, I don't know if you want to get into specifics about the OP unit deal that you just did, but how are you thinking about trading that paper, given where the stock prices is? Is that something where it's likely to -- if you do additional OP unit deal, that's going to be plus or minus a little bit from where the stock price is? Are you pricing that at a premium for the tax deferral nature of it or the lockups beyond the normal short-term stuff? How are you, guys, thinking about that currency?

Yeah. So the OP unit deal we did was higher than where we did the follow-on offering and obviously didn't have as much of the cost nature of it. And so that was very accretive versus the follow-on offering. And so as the stock price has built here, we expect any OP unit issuance going forward will be in line with stock price. And certainly, we're not looking to go down to where we did the last deal, which was a deal that we're very pleased with.

The seller really wanted to be a partner with us on PINE and intends to hold the stock forever. And actually, we're hoping to do more transactions with them going forward as they basically have a portfolio that they keep on working, if you will. And if there's something that works for us, and they want to do some OP unit deals with a higher stock price, we're open to that.

But yeah, I think this is a great transaction where we can go out and talk to other developers who have portfolios that we obviously offer a great solution for them if they're looking to sell it because partners want to sell. And instead of rolling into another property, they can take OP units with us and split it up that way as far as between the partnership. So it's a great tool to have, and we're excited that we got one done early in our life.

Okay. And then are there any assets in CT -- any additional assets in CTO that PINE is likely to acquire this year?

This year may not happen. There are some assets that could fit very well for Alpine, but there's some work to do as far as splitting them out of centers that CTO has. And so I wouldn't expect that to happen this year.

Okay. And then last one for me, Matt, any reason for the change in dividend timing other than to move it out of a crowded earnings period?

That's really the only reason. We just wanted to get more in line with industry standard, which is closer to the payment date. So absolutely no change in dividend policy. Obviously, we're not declaring one yet, so I can't speak to what the Q3 dividend will be, but it's purely just a timing issue.

Okay. Thanks, guys. Appreciate it.

Thanks, Rob.

Michael Gorman, BTIG.

Yeah. Thanks. Good morning. John, you talked about obviously a lot of positive traction on the acquisition side of the business and a strong pipeline. If I recall, I think the guidance previously assumed about $150 million, and you're certainly well on the way there. How are you thinking about full-year acquisition targets as you look at the back half? I mean, obviously plenty of capital to put to work. How are you thinking about that?

Yeah. So I mean, certainly, the pipeline has built especially with the transactions we've completed that's led to further discussions about additional assets. And if you think about it, we're only in -- we're in less than half the states, and so we got plenty of territory to do acquisitions. We're not even in California. So we got a large playing field in front of us.

And so we're very confident that what we've done in the first half can be replicated in the second half. And certainly, we have the capital now that we went into the pit stop and fueled up, and now we can basically take it through the end of the year.

And Matt, just to be clear, does the new guidance range include any changed acquisition assumptions, or is that -- are you still being conservative there?

Just that it's a pretty good assumption that we're going to -- the back half of the year should look similar from a volume perspective of the front half of the year. We didn't give formal guidance on acquisition volume, just FFO and AFFO per share, but that's how I would guide people.

Okay. Great. And then, John, on the dispositions going beyond the office assets, there's one or two non-strategic that you're looking at there. Can you just give a sense for maybe what you're looking at or seeing in those assets that makes you want to move them out of the portfolio and deploy capital elsewhere?

Are you talking about just the office? Or are you talking about any other particular properties?

No, the ones beyond the office beyond ones.

Beyond. Well, we certainly are open to selling assets if we get premium pricing. And so it's really about where we can sell a certain credit where the market would think that the cap rate associated with that credit is a lot higher. So it really shows the strength of our portfolio with regards to the real estate.

And so when we announce that, you'll see the rationale that we sold it at a price that we can reinvest those proceeds accretively. And you would think that obviously we're getting better credit as well. So not only accretively on a cap rate basis but drifting up in credit as well. So it's really taking advantage of the market where we're getting premium pricing for an asset that the stock market thinks is a higher cap rate.

Great. And then maybe just last one for me, John. It seems like there's -- you're seeing some opportunities and maybe some better pricing for assets where maybe there's a little bit less lease duration. Can you just talk about how you think about that strategically, how you underwrite that from a credit perspective? And you as you look at the portfolio, in total what's your comfort level with weighted average lease term?

Yeah. So as you indicated, we are very comfortable on certain assets with very short lease durations. If the store is doing strong numbers, the rent there is below market, those are situations that we like a lot because for a retailer to change locations would be probably detrimental to the store operations or the profitability. So we love those equations, and we're not afraid to keep burning down the lease term until it's a better time to go talk to the retailer with regards to extending the lease.

So it's all about the fundamentals having very strong real estate; knowing where obviously the lease comps are with regards to comparable-type properties; looking at the Placer data to find out where the sales are coming from with regards to the location; the traffic, how that compares with the portfolio of that retailer. So that all goes into it. But that's where we really find the best alpha, if you will, is finding those shorter lease durations with higher cap rates in good locations where we know it's a very sticky location with regards to the tenant.

Okay. Great. Thanks for your time, guys.

Wes Golladay, Baird.

Hey. Good morning, guys. Just had a question on the deals that have no escalator, no annual escalators. Everyone's talking about CPI these days, and it's going to be 2%, 3%, 4%. So I'm wondering if that's starting to make its way into the private market where people are shying away from these deals?

Yeah. Look, it's a function of a lot of these credits. The IG credits almost across the board have no lease escalations. So it's a little bit of a dance between the IG exposure, which will have less of a bump in escalations and then the non-IG, which you will pick up the lease escalations. So on a portfolio basis, it's basically 1% per year on the portfolio but not seeing too much dialogue right now on CPI and so forth. I think people are still going to do fixed lease escalations for new leases. But that's our reaction to it.

Yeah. Wes, just the other thing I would add is on the conversation around the lease duration of our portfolio. We do get bumps when the tenants exercise their option. So with our shorter lease duration, there's probably more implied growth near term than maybe some other portfolios out there as a result of that.

Yeah. No, I appreciate that. I guess I was looking at more the angle of maybe buyers that you're competing against to acquire these assets. Maybe few of them were showing up because they're a little concerned about the escalators. But it sounds like maybe people are just so focused on the IG credit this moment they're willing to look past the CPI. Is that is that the correct read?

Yeah, I think that's right. I think the market's pretty competitive right now especially for investment-grade credit. So I don't think the rent escalations are really having an impact on pricing for those types of assets.

Got it. And then we look at some of the shorter lease term deals that you're doing, looking at Advance Auto Parts this year, it looks like this quarter, less than four years remaining. How soon will you look to get after those leases for renewal?

Obviously, we know that the market concerned about lease duration. So we'd rather run it a little further closer to lease expiration to get a better deal for that negotiation rather than going too early. So the answer to your question is we're not in a rush, but if we feel like it's important for portfolio dynamics, we can start going through the portfolio and approaching some tenants.

Okay. Thanks a lot.

Thank you.

(Operator instructions) Craig Kucera, B. Riley Securities.

Hey. Good morning, guys. Most of mine have been answered, but I want to follow up on the OP unit transaction. Are you finding any other parties out there that are looking to take OP units in the pipeline? Or was that a unique one-off with that party?

I guess it's a little bit unique one-off. We plan on -- when we have some time to be more reaching out to groups, we want to explain that transaction to holders of large amount of portfolio of net lease properties because we think it will be attractive. But right now, we're so busy dealing with inbound with regards to our acquisition pipeline.

We really haven't had a chance to go out and market that transaction because I think it's a win-win, and certainly, our counterparty on that transaction is well-regarded family office and developer. And so I think they'd be great to help communicate that from how they saw the transaction. So it's definitely one that once we have some time to get out there, we plan on speaking to groups and trying to do more of those type transactions.

Got it. And as far as dispositions, I think you had about $3 million held for sale. Of course, we're looking for the office, but do you think there will be meaningful dispositions beyond what's currently held for sale as well as the office?

No, not meaningful. Again, only if the opportunity comes about, and we're happy to demonstrate to the market the strength of the portfolio in part with assets that we know that will be easy to do to accretively reinvest.

Okay. Thanks. That's it for me.

As we have no further questions, this concludes our question-and answer-session. I would now like to turn the conference back over to John Albright for any closing.

Thank you very much for attending the call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.