Alpine Income Property Trust Q3 2024 Earnings Call Transcript

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October 18, 2024

There are 9 speakers on the call.

Operator

Good day, and welcome to Alpine Income Properties Trust Q3 2024 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded.

Operator

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

Speaker 1

Good morning, everyone, and thank you for joining us today for Alpine Income Property Trust Q3 2024 conference call. Before we begin, I'll turn it over to Phil to provide customary disclosures regarding today's call. Phil? Thanks, John.

Speaker 2

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 contain reconciliations of the non GAAP financial measures we use on our website at www.alpinereit.com. With that, I will turn the call back to John.

Speaker 1

Thanks, Phil. We are very pleased with our Q3 results across all aspects of our strategy as we successfully continued accretive asset recycling, originated a high yielding loan, raised our quarterly dividend, reduced our Walgreens exposure and lengthened our weighted average lease term. These combined efforts resulted in another quarter of strong earnings growth, reduced leverage and enabled us to again raise full year earnings and investment guidance. Beginning with property acquisitions, during the quarter we acquired 4 net lease properties for $37,500,000 at a weighted average initial cap rate of 8.8%. 3 of these properties, all located in the Greater Tampa Bay area, were purchased for $31,400,000 as a sale leaseback transaction with a subsidiary of Beachside Hospitality Group.

Speaker 1

The leases for these properties have a lease term of 30 years and include 2% annual escalations. While these properties did sustain some damage during Hurricane Helene and Milton, the operator expects to have them open and operating again toward the end of the year or the 1st part of next year. Further, our leases require robust insurance requirements and these properties have more than adequate insurance coverage. Accordingly, we do not expect to have any material interruption in collecting rent from these properties due to the recent hurricanes. Additionally, in September, we purchased and amended a 1st mortgage construction loan secured by a Publix anchored shopping center in Charlotte, North Carolina.

Speaker 1

The current loan commitment is for $17,800,000 of which $10,000,000 was funded at closing and had an initial yield of 10.25 percent. On the disposition front, we sold 8 properties during the quarter for $48,600,000 at a weighted average cash cap rate of 6.8%. These sales generated aggregate gains of $3,400,000 and included 2 Walgreens locations as well as properties leased to Hobby Lobby, Lowe's, Chick Fil A, Tractor Supply and Long John Silvers. As previously disclosed, we are actively reducing our exposure to Walgreens and with the sale of the 2 Walgreens during the quarter, Walgreens has dropped from our largest tenant concentration to the 2nd largest. Additionally, given the attractive locations of our remaining Walgreens assets, we expect to continue reducing our exposure for them to continue moving down our tenant concentration list.

Speaker 1

Overall for the quarter, our $55,000,000 of investment activity, including both acquisitions and structured investments, generated a weighted average yield of 9.2%, a positive spread of 2 40 basis points to the 6.8% weighted average cap rate on dispositions completed. As a result of our strategic asset recycling efforts, investment grade at Dick's is now our largest tenant at 11% of ABR and the Beachside Hospitality Group is now our 3rd largest. Notably, over 52% of our ABR is still derived from investment grade tenants and we have increased our weighted average lease term to 8.8 years. Regarding our investment strategy going forward, we continue to see attractive opportunities across the tenant landscape, including higher yielding investments. Accordingly, while we continue to invest in attractive investment grade opportunities, we are also comfortable allocating additional capital to more accretive opportunities given the attractive risk adjusted yields.

Speaker 1

We expect our investment activity will result in a barbell approach with longer term investment grade activity balanced by investments in higher yielding and more accretive assets. Now turning to the loan investment front. At the end of the quarter, our loan portfolio had an aggregate outstanding balance of $43,200,000 at a weighted average yield of 10.4%. Generally, we target our structured investment portfolio to be about 10% of the total asset value, but this will scale up or down to some extent depending on the quality of the opportunities we see. As we are currently seeing a lot of opportunities to originate high quality, high yielding loans secured by real estate, this portfolio is likely to scale up a bit in the near term future.

Speaker 1

One quick balance sheet note, during the quarter we were also pleased to opportunistically access the equity capital markets utilizing the company's common ATM program, raising the net proceeds of $11,100,000 Phil will discuss our balance sheet and earnings in more detail and provide our increased outlook for the remainder of the year. However, before turning the call over to Phil, I wanted to take a moment on behalf of all here at the company to send our best wishes to the many impacted by the recent severe weather and our hope for them to have a speedy recovery. And with that, I'll turn the call over

Speaker 2

to Phil. Thanks, John. Beginning with financial results, FFO was $0.45 per diluted share for the quarter, an increase of 22% compared to the $0.37 reported in the Q3 of 2023. AFFO was $0.44 per diluted share for the quarter, an increase of 16% compared to the $0.38 reported in the Q3 of 2023. Total revenue was $13,500,000 for the quarter, including lease income of $11,700,000 and interest income from commercial loans of $1,700,000 There are 2 notable accounting matters that may have caused loan interest income to be higher than some of you anticipated and lease income to be lower than anticipated.

Speaker 2

First, the 3 properties acquired this quarter through a sales leaseback transaction. These properties constitute real estate for both legal and tax purposes and consequently we include them in our property portfolio statistics. However, because the tenants have purchase options, GAAP requires this transaction to be treated as a financing. 2nd, as discussed last quarter, we sold an A1 participation interest in our portfolio loan and GAAP also requires this transaction to be reported as a financing. If you exclude these two items from our commercial loan investment, they totaled $43,200,000 outstanding at quarter end consistent with the amount John discussed earlier, whereas our GAAP balance sheet reflects loan investments of $86,600,000 While the GAAP reporting for these matters may cause some line item classification differences, it does not have any significant impact on FFO or AFFO.

Speaker 2

Now moving to the balance sheet. During the quarter, we utilized our common equity ATM program to issue approximately 620,000 shares at a weighted average share price of $18.09 per share, resulting in total net proceeds of $11,100,000 As a result of this equity raise, along with the increase in our earnings from accretive asset recycling and growing commercial loan portfolio, we were able to incrementally improve leverage ending the quarter with net debt to EBITDA of 6.9 times compared to the 7.4 times reported last quarter. Further, we currently have approximately $80,000,000 of liquidity and no debt maturing until 2026. With regard to our common dividend, given our increased earnings and forward outlook, we raised our quarterly common dividend from $0.275 per share to $0.28 per share. Our dividend remains well covered as this represents a healthy AFFO payout ratio of 64%.

Speaker 2

Lastly, with regard to the guidance, we are raising our full year 2024 outlook to an FFO range of $1.67 to $1.69 per share and an AFFO range of $1.69 to $1.71 per share. We have now closed $84,000,000 of investments and $69,000,000 of dispositions inclusive of both property and structured investment activity. Accordingly, we are increasing our investment guidance to a range of $100,000,000 to $110,000,000 and nearing our disposition to a range of $70,000,000 to $75,000,000 With that operator, open the line for questions.

Operator

Thank you. Our first question comes from Michael Goldsmith with UBS. Your line is open.

Speaker 3

Good morning. Thanks a lot for taking my questions. Transaction activity picked up pretty materially from the Q1 and the Q2. Can you just talk a little bit about the transaction environment? What you're seeing out there?

Speaker 3

Is the increased activity reflective of just a more liquid environment overall?

Speaker 1

Yes. Thanks, Michael. Yes, definitely liquidity environment has improved. So you are seeing more folks that have wanted to sell assets go ahead and come to market and move through that sort of strategy. And so there are more opportunities out there.

Speaker 1

We're bidding on more acquisitions and finding assets that we like and like the risk reward. And so we're very pleased to see the environment being much more improved as far as opportunities, both on core acquisitions and on some loan investments.

Speaker 3

Got it. And then my second question is related to the sale leaseback of the properties in Tampa. Can you provide a little bit more color on the insurance arrangement? Many of these restaurants are closed right now. So is this providing some more detail there?

Speaker 3

And then separately, while these have increased the wealth of the portfolio, it's also reduced the investment grade percentage. So can you just talk about how you're thinking about kind of those two offsetting factors as you continue to build out the portfolio? Thanks.

Speaker 1

Yes. So on the restaurants, so they really had more impact from the first storm, Helene. And then the 2nd storm, Milton really didn't do much more damage. And so they're rapidly working to get those back open and there'll probably be better news on that as far as happening next 30 days rather than at the end of the year. And as far as on insurance, there are 2 years of business interruption and then there's full replacement insurance.

Speaker 1

And so we're in good shape and we're in contact with the operator. And the good thing is the operator has a significant amount of restaurants throughout the state. The ones that they have on the East Coast have been open. The ones that have in Clearwater are open really fast after the storm. And so they're busy getting these reopened and they're going to be in a pretty good shape because unfortunately, there are some other people that probably won't be reopening as fast.

Speaker 1

And so there's going to be less competition. So there's going to be some pent up demand for those restaurants. And then as far as on your question on weighted average life, basically, it is closer to 9 now than before. Really be the tail wag's dog. We can go to, really be the tail of wag the dog.

Speaker 1

We can go to a lot of the tenants right now if we want to and quickly do lease extensions early, but they're going to want some sort of benefit as far as a reduced rate. And if you look at our portfolio, our basis is so low compared to our competitors and our lease rates are already so low that we would just really be giving away the store for no reason but to satisfy Wall Street.

Speaker 4

So if we thought that we really had to

Speaker 1

do that, Wall Street. So if we thought that we really had to do that and need to do that, we could quickly go to tenants and do early extensions. But that's been part of our strategy is to take advantage of leases with maybe 6, 7 years, get a higher cap rate because they're great real estate and there's other tenants that would take over those spots. And so that's always been the strategy. And but we can definitely we'll try to load up some more and extend the term when we see fit, but it's really been the opportunity to grab some really good real estate, really good yields and having a little bit lower lease duration, but knowing that the rents below market and way below replacement cost basis, that's been kind of strategy.

Speaker 3

Very helpful. And if I can squeeze one more in, you talked about the loan portfolio being kind of 10% of the overall portfolio, but at times like now when there could be a little bit more activity there, you would take it higher. How high would you take it? And then inherently like with the loan portfolio, it adds a little bit more lumpiness to the earnings. So how do you go about kind of managing that going forward?

Speaker 3

Thanks.

Speaker 1

Yes. So I think as Phil mentioned in his remarks that we're looking to kind of not go above 10% of total enterprise value as far as our loan book. But we could, if we saw some opportunities and as the loan book naturally pays off, that will come down. But given that we have some great relationships with these developers and we're starting to do second transactions with them and third transactions with them now that they know the process and we have the loan docs. Maybe we're seeing situations where the deal we just did was a Publix Anchored Shopping Center in Charlotte with Chase pad site, Whataburger pad site.

Speaker 1

So incredibly great credits, long duration leases, 20 year lease on public, 15 years or so on Chase. And so the property is only 9 months away from being finished. And they had a situation where construction costs have increased, and there's a gap in basically between the 1st mortgage and what it needs to be to complete it. We would love to own it. And this developer has other public sort of developments.

Speaker 1

And if that happens, we're same sort of situation. We're here to help. And we have first refusal to buy the Publix and the Chase if the cap rates go above certain level. So we love the opportunity. It's great risk adjusted yields and great markets.

Speaker 1

So we're going to wave it in if we see the opportunities. We're looking at one additional one, but it's a couple of months away. But yes, we like it and it keeps us abreast with a lot of the merchant developers and it's great for the pipeline.

Speaker 3

Thank you very much. Good luck in the Q4.

Speaker 5

Thank you. Thanks.

Operator

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

Speaker 4

Hey, good morning guys. Obviously in the quarter, John, you took down your Walgreens exposure a little bit with some of the dispositions and now under 10%. I'm just curious how you feel about your current exposure to Walgreens and maybe you could give us some detail on the nearest lease term expiration for the Walgreens and average lease duration?

Speaker 1

Sure. So the average lease duration, RJ, is 7.6 years. The nearest coming up is 6 years. And we have a lot of these on the market and we're getting active bids. We're being selective.

Speaker 1

If we have a larger acquisition to do, we may push through a couple more. But we're getting good bids because of the locations we have and the lease duration. And obviously, you saw Walgreens had a bit of a lift this week from good earnings. So it's a very manageable portfolio. It's only 11%.

Speaker 1

But obviously, given our small size, it kind of sticks out a bit. But as you can tell, given that we sold 2 and we have bids on additional 2, it doesn't take much to get this off the top 10 if we really wanted to, but it would be nice to match it up with an acquisition.

Speaker 4

Thanks. That's helpful. And so more broadly, how do we think about the current macro environment and the potential impact on credit loss? And obviously, I know that you guys can't provide 2025 guidance, but as you're looking into 2025, what's your outlook for potential credit

Speaker 2

loss and just given the

Speaker 4

current macro environment? Yes.

Speaker 1

Could be issues. I would say the only one really is that could be issues. I would say the only one really is At Home that clearly At Home has a balance sheet issue, not an operations issue. And so I suspect that the lenders will negotiate something with the company that they're not going to harm their position. So I assume they'll work that out.

Speaker 1

But I would say if there's any sort of credit issue, I'd say At Home would be the one, but those very low basis type properties and we can split up these big boxes and do leasing smaller tenants to fill it up.

Speaker 4

That's helpful. That's it for me. Thanks guys.

Speaker 1

Thanks.

Operator

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

Speaker 6

Hey, good morning guys. Just sticking with the tenant front. Any plans to reduce exposure to the dollar stores?

Speaker 1

Very good question. They're just so small. They're like $800,000 a piece or $1,000,000 a piece. And this really we're just been focused more on the Walgreens side. But yes, the answer is we do have some of them on the market for sure.

Speaker 1

It just hasn't been a priority given that the Walgreens properties are more kind of $3,000,000 to $4,000,000 So that's really been the real push rather than the Family Dollar and Dollar Generals.

Speaker 6

Okay. And can you give some background on the Tampa deal? How did that come about? How quickly were you able to close? And then I think you mentioned there was a purchase option.

Speaker 6

Can you talk about the timing on that, what the cap rate would be?

Speaker 1

Sure. So the relationship with Crabby's, as you know, as CTO, we built 2 restaurants on the beach and we had this goes back 7 years ago. We had an operator that didn't work out, that didn't perform. So we brought in Crabby to take over a different concept and they've done fabulous. They really know how to operate and the sales have been very high performing.

Speaker 1

And so we've stayed in touch with them about other things we can do together and they had a unique opportunity to purchase some real iconic restaurants over on the West Coast. They are very big ticket sort of items as far as this restaurant group that they are purchasing roughly $50,000,000 in value. We came in at the low $30,000,000 to buy the real estate, sell lease back to them. They have a lot of equity in. They can bring a lot of operating synergies to the properties.

Speaker 1

And then we've structured it where after a certain amount of years, after 6 years, they have an option, not the obligation to buy out the lease. And that would be at an IRR that's basically double digits to us. So we love the real estate, love the yield, love the annual escalation. So worst case scenario in our minds is 6 years gets sold out at big numbers for us, for the shareholders.

Speaker 6

Okay, that sounds good. The presentation of the press release indicated the end of period rent was 41,500,000 dollars Can you clarify if that is a cash rent number and does that include the Tampa properties?

Speaker 1

I'll let Phil answer that one.

Speaker 2

Yes. So that number is a GAAP number. The cash number is just a little lighter than that. It's not that different, it's like 39, but the number you're referring to is the GAAP number and the GAAP run rate.

Speaker 6

Okay, fantastic. And then one last one for me. When you look at the balance sheet in capital markets, any plans for the Q4? You do have a little bit floating on the line. Would you clear that out or get more swaps?

Speaker 2

I think we're okay with a little floating rate there. Obviously, depending on the capital markets, we might look to utilize the ATM again. But we have $280,000,000 of debt, dollars 200,000,000 fixed rate. We got $80,000,000 floating. That rate is coming down.

Speaker 2

So we're okay with a little floating rate exposure there.

Speaker 6

Okay. Thanks, everyone.

Speaker 1

Thank you.

Operator

Thank you. Our next question comes from Rob Stevenson with Janney Montgomery Scott. Your line is open.

Speaker 7

Good morning. John, beyond the Walgreens and maybe some of the Dollar Stores, how much of the portfolio today is stuff that you really want to sell over time?

Speaker 1

It's really opportunistically selling at this point. So where we have an acquisition lined up, maybe the capital markets still are trading us at a big discount to what we think the company is worth. And so we may sell something that we would like to keep, but more of the recycling, Rob, as you've seen us in the past. So I would say we're kind of everything left is really muscle versus things that we'd like to discard. So not a lot beyond the Walgreens and Dollar stores and that sort of thing.

Speaker 7

Is that how you would characterize the Lowe's sale in the quarter?

Speaker 1

The Lowe's sale was basically a group that was ahead of 1031 need, could not find anything to buy in the market and were really desperate to acquire the property because they knew the property very well and they're very comfortable. So we were able to buy and sell that at a premium price, just given their situation, not our desire.

Speaker 7

Okay. And you've talked about the Walgreens exposure. How are you guys feeling about the Dick's exposure and the prospect of potentially taking it above the current 11%?

Speaker 1

I don't think it's going to grow beyond 11% unless there is some sort of unique opportunity, but then we might look to sell down property. So I wouldn't expect it to go above where it is right now.

Speaker 7

Okay. And then 4th quarter is typically big transaction volume in the triple net space in a normal year. Can you talk about the size of your funnel today and how that's looking today given the interest rate cuts, the sort of buyers and sellers and how we should be thinking about the next couple of quarters in terms of volume of transactions, etcetera?

Speaker 1

Yes. I mean, really the funnel right now is kind of a plus or minus $200,000,000 They're rather chunky. So it's not a bunch of $5,000,000 deals, it's maybe a portfolio here and there. And so we're being picky as always, but it seems like as we do a transaction, there's always something else behind it coming to us. So we feel very good about the ability to take advantage of the market right now, given that there are there is more capital out there, a lot more buyers, but the lending market is still constrained.

Speaker 1

And so we're trying to be aggressive here as it still feel like it's good opportunity set for us.

Speaker 7

Okay. And then Phil, when you look at the roughly $1,700,000 of interest income from commercial loans and investments, you still got, I think, almost $8,000,000 to fund on the public stuff. How much else is in the portfolio today that's committed but not yet funded that we should be expecting to flow through there over the next couple of quarters?

Speaker 2

The loan portfolio is a little grossed up because the sales leaseback transaction is treated as a financing. And then we have the participation sale that I talked about in my comments of about $13,000,000 that's kind of grosses up the portfolio also. And when you net all that out, it's about $43,000,000 currently outstanding. The commitments are for about 55, so a little over $10,000,000 spread there between outstanding and the commitments.

Speaker 7

Okay. But the neither the 3 restaurants that are being treated as a financing transaction nor the sale that should continue to impact on a quarter that line item on a quarterly basis similarly going forward, right? Is it there isn't any falloff or step ups with that. It's just the incremental $10,000,000 of deployment and timing from the $10,000,000 that you did deploy in the Q3, right?

Speaker 2

Yes, that's generally correct. Just keep in mind that the sale of leaseback, there's not a full quarter in there. So it will be a little higher next time. So the amount kind of coming through interest income, if you will, related to that is close to $700,000 on a full run rate going forward.

Speaker 7

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

Speaker 1

Thanks. You too.

Operator

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

Speaker 8

Hey, good morning guys. Thanks for taking the question. I noticed that quarter over quarter the Florida exposure went up and Texas kind of went down. Can you talk about where you're seeing the most transaction activity and kind of where the sellers are popping up in the market?

Speaker 1

Yes, I wouldn't say it's any kind of geographic. It really just goes to the big states. There's a lot of stuff in California that's still priced pretty tight. We are seeing a fair amount in Texas and Florida. Those are favored sort of acquisitions for 10/31 markets.

Speaker 1

So the pricing is sometimes challenging. So I wouldn't say there's any kind of theme to one jurisdiction over the other, but you're just seeing it from more of the major states is where the predominance of the volume is coming from.

Speaker 8

Yes, that's good to know. And then I'm glad you guys made it out mostly unscathed in Florida down there. But do you think that kind of presents an opportunity going forward with sellers kind of wanting to get out of those markets? Are you seeing anything like that starting to happen?

Speaker 1

Yes. I mean, we're not seeing it starting to happen, but we're certainly keeping our eyes out for those opportunities where maybe someone suffered some damage and really don't want to go through a restoration work or they're just kind of done with it and we're I don't we don't see anything right now, but certainly keeping our eyes out for it and if there are some unique circumstances. Great. Thank you, guys. Thank you.

Operator

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

Speaker 5

Good morning.

Speaker 1

Good morning.

Speaker 5

Sorry if I missed this earlier in the call, but as we think of the kind of remaining investments kind of implied in guidance for the rest of the year, What's kind of the split between mortgages and net lease acquisitions?

Speaker 1

There's kind of, I would say, a mix of a third on the loan investment side and the balance being core properties.

Speaker 5

Okay. That's very helpful. And then in terms of kind of cap rate, I mean, the beachhead hospitality portfolio was kind of its own thing. So maybe backing that out, it seems like the cap rate on the Golf Galaxy was like in the high 7s. I mean, is that typical of what you're seeing in the market today?

Speaker 1

Well, I mean, for what we're looking at, we're targeting predominantly 7.5 caps and above. But we may see an opportunity to bring in investment grade exposure or maybe find a Lowe's to replace the Lowe's we had. So we wouldn't mind, we wouldn't be opposed to dipping down the 6s to bring our Lowe's exposure back up. So it's a little bit of kind of as Phil mentioned earlier, barbell, but that's roughly what we're seeing is on the straight up acquisition side, non investment grade kind of in the 7.5% and above.

Speaker 5

Okay. Is that specific to Loews or given the non investment grade exposure increased in the quarter due to the big portfolio transaction, are you looking systematically to kind of increase investment grade exposure again or are you kind of agnostic?

Speaker 1

Agnostic a little bit. I mean, we'd like to have the exposure, but it doesn't seem like the market really appreciates it. So we're not going to get really wedded to it. But if opportunistically, we can kind of put, as I mentioned, like a Lowe's back end higher up in our credit stats, I think that would be helpful. So we'll look to do that, but not kind of married to it.

Speaker 1

Okay.

Speaker 5

And then last one for me. In terms of the three assets in Florida you bought in the quarter or in the restaurant assets in Florida you bought in the quarter, how big a percentage of Crabby's business are those? And I guess what was kind of the hurricane creates some disruption in terms of metrics, but what was kind of the trailing coverage on those assets, rent coverage?

Speaker 1

Roughly where we were basically buying the real estate, it was like a 15% kind of yield to our basically valuation on their NOI.

Speaker 5

Okay. And in terms of the size of the overall portfolio for them as an operator?

Speaker 1

Well, they're 11%, Phil, as far as their in our credit stats, they're 11%.

Speaker 5

I mean, those 3 assets is the credit business.

Speaker 1

Oh, sorry. I would say there is about 25%, maybe 20%.

Speaker 5

Okay. Really appreciate the color. That's it for me. Thank you.

Speaker 1

Great. Thanks.

Operator

Thank you. We have a question from Craig Kucera with Lucid Capital Markets. Your line is open.

Speaker 8

Yes. Hey, good morning, guys. I noticed your

Speaker 4

G and A had picked up a bit this quarter due to legal expenses. Was that just a function of the higher transactional volume during the quarter? Or should we expect somewhat higher G and A going forward?

Speaker 1

No, that was one time. It didn't have to do with the certain amount of acquisitions, but I mean that was a little bit of it, but that was really more one time legal.

Speaker 4

Okay, great. Thanks.

Speaker 1

Thank you.

Operator

Thank you. There are no further questions at this time. This does conclude the question and answer session. You may now disconnect. Everyone, have a great day.

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