Earnings Call Transcript
Alpine Income Property Trust, Inc. (PINE)
Earnings Call Transcript - PINE Q3 2025
Operator, Operator
Good day, and thank you for standing by. Welcome to the Alpine Income Property Trust Q3 Earnings Call. After the speaker's presentation, there will be a question-and-answer session. Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jenna McKinney, please go ahead.
Jenna McKinney, Speaker
Thank you. Joining me in participating on the call this morning are John Albright, President and Chief Executive Officer; Philip Mays, Chief Financial Officer; and other members of the executive team that will be available to answer questions during the call. As a reminder, many of our comments today are considered forward-looking statements under federal securities laws. 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 the non-GAAP financial measures we use on our website at www.alpinereit.com. With that, I will turn the call over to John.
John Albright, CEO
Thank you, Jenna, and good morning, everyone. We are pleased to report another strong quarter highlighted by AFFO per share growth of 4.5% compared to the same quarter last year and meaningful investment activity, both during and shortly after the quarter end. We believe this investment activity has set a foundation for continued earnings growth through the remainder of 2025 and into 2026. Starting with our investment activity. During the quarter, we acquired 2 properties ground leased to Lowe's for $21.1 million at a weighted average initial cap rate of 6% and a weighted average lease term or WALT of 11.6 years. Investment-grade rated Lowe's is now our largest tenant by ABR, surpassing investment-grade rated DICK'S Sporting Goods, which now ranks #2. Year-to-date, through the third quarter, property acquisition volume totaled $60.8 million at a weighted average initial cap rate of 7.7% and a WALT of 13.6 years. Regarding the property dispositions during the quarter, we sold 3 assets for $6.2 million, including an Advance Auto Parts, our vacant theater arena, and a vacant property formerly leased to a convenience store. Year-to-date, disposition volumes through September 30 were $34.3 million, of which $29 million, excluding vacant properties, were sold at a weighted average exit cap rate of 8.4%. As of quarter end, our property portfolio consisted of 128 properties totaling 4.1 million square feet across 34 states with approximately 99.4% occupied, with 48% of ABR derived from investment-grade rated tenants and a WALT of 8.7 years. Additionally, after the quarter end, we acquired a four-property portfolio for $3.8 million with a weighted average initial cap rate of 8.4% and went nonrefundable on a sales contract for 1 of our 8 remaining Walgreens for $5.5 million. Now moving to our loan investments. As a result of our long-term reputation and deep relationships, we continue to see and capitalize on exciting opportunities to originate high-yielding quality loans with strong sponsors at compelling risk-adjusted returns. During the quarter, we originated 2 loans and 1 upsized loan totaling $28.6 million at a weighted average initial yield of 10.6%. This included a first mortgage loan for industrial redevelopment and a seller financing note related to the sale of our former theater in Reno. Year-to-date, through September 30, we originated $74.8 million of commitments for loan investments at a weighted average initial cash yield of 9.9%. Additionally, as disclosed in our earnings release, we have originated 3 loans since the quarter end. Most notably, a first mortgage loan secured by luxury residential development located in the Austin, Texas metropolitan area. Under this loan agreement, we have funded $14.1 million at closing related to a Phase 1 loan with a total commitment of $29.5 million. The loan agreement also provides for a Phase II loan with a commitment of up to $31.8 million, with all additional funding subject to the borrower satisfaction of certain conditions. Currently, we anticipate funding the balance of the Phase 1 loan by year-end and the Phase II loan in early 2026. The 36-month loan initially bears interest at 17% inclusive of 4% paid-in-kind interest for the full loan term, stepping down to 16% for months 7 to 12 and 14% thereafter. The loan will be repaid as collateralized home lots are sold, with such sales anticipated to begin as early as late 2025. We believe this loan, as do all of our loans, is secured by strong real estate backed by high-quality sponsors. As is often the case with our larger loans, there is institutional interest in pursuing a purchase of a senior tranche of this loan, and we currently anticipate participating in a portion of it out to reduce our net hold and further enhance our yield. In summary, we believe that our recent investment activity across both property and loan investment positions us for continued growth through the remainder of 2025 and into 2026. With that, I'll turn the call over to Phil.
Philip Mays, CFO
Thanks, John. Beginning with financial results. For the third quarter, total revenue was $14.6 million, including lease income of $12.1 million and interest income from loan investments of $2.3 million. FFO and AFFO for the quarter were both $0.46 per diluted share, representing 2.2% and 4.5% growth, respectively, over the comparable quarter of the prior year. Year-to-date through September 30, total revenue was $43.6 million, including lease income of $36 million and interest income from loan investments of $7.4 million. FFO and AFFO were both $1.34 per share, representing 3.9% and 3.1% growth, respectively, over the comparable period of the prior year. Regarding our common dividend, as previously announced, during the quarter, we declared and paid a quarterly cash dividend of $0.285. Our dividend represents an annualized yield of approximately 8.25% and remains well covered with an approximate AFFO payout ratio of 62% for the third quarter. Moving to the balance sheet, we ended the quarter with net debt to pro forma adjusted EBITDA at 7.7x and $61 million of liquidity, consisting of approximately $1.2 million of cash available for use and $60.2 million available under our revolving credit facility. However, with in-place bank commitments, the available capacity on our revolving credit facility can expand an additional $31.3 million as we acquire properties, providing total potential liquidity of more than $90 million. Regarding our property portfolio, we ended the quarter with an annualized base rent of $46.3 million on a straight-line basis. As noted before, this amount includes approximately $3.8 million of ABR related to 3 single-tenant restaurant properties acquired in 2024 through a sales leaseback transaction. Under GAAP, we are accounting for these specific sales leaseback transactions as financings. Accordingly, the current annual cash payments of approximately $2.9 million are reflected as interest income in our statement of operations as opposed to lease income. Given the level of loan activity after quarter end, let me provide a current update. Our loan portfolio as of today, reflecting the activity John discussed and some other recent activity, is now approximately $94 million at a weighted average interest rate of 11.5%. Notably, of this amount, approximately $21 million at a weighted average rate of 10.4% is scheduled to mature in 2026. We currently expect to utilize proceeds from these 2026 maturities, selling a senior tranche of 1 or more loan investments, property dispositions, and existing capacity on our revolving credit facility to fund loan commitments. One quick note, the $1.9 million impairment charge recorded this quarter related to Walgreens that is currently under contract to be sold. Now turning to guidance. As a result of our recent elevated investment activity, we are increasing both our FFO and AFFO outlook for the full year of 2025 to a new range of $1.82 to $1.85 per diluted share from the previous range of $1.74 to $1.77 per diluted share. With that, operator, please open the call to questions.
Operator, Operator
Our first question comes from Michael Goldsmith with UBS.
Michael Goldsmith, Analyst
A lot of investment activity, both during the quarter and subsequent to quarter end. So can you just provide a little color on how you're thinking about funding all of this activity?
John Albright, CEO
Michael, it's John. Thanks. Look, we've been very busy on the recycling side. So some of that's going to come from asset sales as we keep on continuing to increase the credit quality of our portfolio. And then a little bit of this is our loans maturing. And then basically a little bit going to be net growth in anticipation of additional sales, so a little bit of balance on both sides.
Michael Goldsmith, Analyst
Got it. And then all this loan activity, you're seeing really nice yields on that. I guess the way it cut the other way is it can generate lumpiness in the quarters as they come due. So can you talk a little bit about how you're thinking about managing that and these loan expirations just to ensure the AFFO doesn't move around too much?
John Albright, CEO
Yes. So obviously a good question. When we started this kind of loan program about 3 years ago, that was a little bit of the pushback was, well, you can't replace these loans at these rates. But here we are. We are doing it with existing relationships without even trying. Certainly, as we see more opportunities, part of that funding mechanism that Phil mentioned is selling off senior pieces of these loans. These loans are very bite-sized, and there's a lot of capital out there. So there are a lot of opportunities. I'm not worried about replacing these and having kind of earnings coming down because these are one-time sort of opportunities. We're seeing a strong pipeline of super high-quality kind of assets and sponsorships.
Michael Goldsmith, Analyst
Got it. Well, if you're achieving this with minimal effort, I’m eager to see what you can accomplish when you really dive in. I’m just joking. Thank you very much, and I wish you good luck in the fourth quarter.
Operator, Operator
Our next question comes from R.J. Milligan with Raymond James.
R.J. Milligan, Analyst
John, with the recent activity now in residential development, I think you guys have a loan in Industrial. Just can you tell us how you're thinking about other property types and if you're going to continue to pursue things outside of retail?
John Albright, CEO
Yes. It's not by design, kind of going out here; just these unique opportunities with very strong sponsors and very strong assets. The industrial property that we did in Fremont outside of San Francisco was actually a retail property that the sponsor is basically converting to industrial for a higher and best use. Part of our underwriting on that is if we ever had to foreclose, it's roughly 50% of the acquisition, it could still be retail and work on our basis. So to answer your question, we're going to stay more focused on the retail side for sure. But if we see unique opportunities in that short duration, we're not opposed to taking on those opportunities.
R.J. Milligan, Analyst
Okay. That's helpful. And then, Phil, you talked about some of the sources of capital next year, some of the loan maturities, potential asset sales. Should we expect that to get reinvested? Or will those proceeds be used to pay down debt, lower leverage?
Philip Mays, CFO
A little bit of both, but I think first, they will be reinvested into many of the recently completed loans. The maturity coming back from the 2026 loans will allow us to proactively redeploy that capital early with the new loans. Much of that will recycle into the same area. However, you might notice a slight decrease in leverage.
Operator, Operator
Our next question comes from Alec Feygin with Baird.
Alec Feygin, Analyst
So on the luxury residential development in Austin, can you talk about how you got comfortable with the loan and what stage of development it currently is at?
John Albright, CEO
Yes. So we're familiar, if you think back at our origins of CTO when I got here 14 years ago, we had 14,000 acres of land in the Daytona Beach to sell. So we are very familiar with residential lot development through that experience. So with regards to kind of where this project is, it's really at the finish line of delivering lots and actually, there will be some lot sales starting next week, in fact. So it's really kind of coming in at the late stage and not on the early stage.
Alec Feygin, Analyst
Nice. And kind of on that loan, how much of the loan are you looking to sell?
John Albright, CEO
We'll probably look to sell potentially 50% of it. It really depends on how fast the proceeds come back. So it could be less, but potentially up to 50%.
Alec Feygin, Analyst
And then switching gears a bit with the vacant assets that were sold in the quarter, how much do we need to remove from operating expenses that you're carrying?
Philip Mays, CFO
Yes, this is Phil. The two largest vacant properties we have are the theater in Reno, which was sold and had an annual expense run rate of about $400,000. The remaining significant property is the former Party City, which also has a run rate close to $400,000 annually. Therefore, if you consider the current quarter, expenses will decrease by approximately $400,000 on an annual basis once Party City is sold.
Alec Feygin, Analyst
And Party City wasn't sold this quarter that...
Philip Mays, CFO
It was not. Reno was sold in the quarter. It was sold early in the quarter. So pretty much the full impact of that is reflected. But Party City is not sold yet.
Alec Feygin, Analyst
Okay. There were 2 vacant assets sold in the quarter. So is the other one just minor?
Philip Mays, CFO
Yes, we have two main locations, Reno and Party City. There are a few smaller former convenience stores; we sold one during the quarter and there are two remaining. Overall, these do not even total $100,000 on an annual run rate. They are quite small and have a minimal impact.
Operator, Operator
Our next question comes from Rob Stevenson with Janney Montgomery Scott.
Robert Stevenson, Analyst
Is the sale large loan interest that you may do, is that in the disposition guidance or dispositions just properties in terms of the guidance?
Philip Mays, CFO
If it happens before the end of the year, it would be at the high end or possibly exceed our guidance on the disposing side. The timing is uncertain; it could occur right before the year ends or slightly afterward. If it does happen before the year is over, it would place us at or above the high end of our guidance.
Robert Stevenson, Analyst
Okay. But you would classify that as a disposition? Okay.
Philip Mays, CFO
We historically put dispositions of loans with properties there. If you look at the guidance, we kind of added a line for that little bucket when we put year-to-date actuals, and there was a line that had loan sales and it showed 0 just to kind of help clarify that we do look at that as a disposition, but if the loan sell were to happen, we would probably be just over our high end.
Robert Stevenson, Analyst
Okay. Because the reason why I ask is, if I look at the year-to-date investment in disposition volumes versus the guidance, they are sort of implying between $50 million and $65 million of net investments in the fourth quarter. You got $27.5 million in terms of rough numbers from the proceeds from the repayment of Publix and Verizon. Just trying to figure out how you’re going to finance that especially given where the stock price is. I don't know, John, if you’re comfortable issuing equity here, or whether or not you guys just use the line, but I was sort of curious as to like how you guys are thinking about the sort of incremental there and where does sort of leverage peak out at here in the fourth quarter if you do decide to fund any of those net investments on the line?
Philip Mays, CFO
Yes. Before I allow John to respond, regarding the investments, we account for the full amount for the properties and for the loans we record the origination or initial amount committed. Currently, we have almost $200 million considering all subsequent activity on investments. Out of that, $130 million to $135 million is in loans, but only $72 million have been funded so far. In our guidance, we included details to clarify how much of the loans have been funded year-to-date, and it's important to note that the full amount of those loans will not fund by the end of the year.
Robert Stevenson, Analyst
Okay. So the net would wind up being lower than that sort of $50 million to $65 million that you're implying because that's including the full value.
Philip Mays, CFO
Yes. I mean there could be $50 million, $60 million of that, that's loans that are not funded by year-end.
Robert Stevenson, Analyst
Okay. That's helpful because it was looking like that leverage was going to peak out at something more substantial here if you guys did it all on the line?
Philip Mays, CFO
Yes, yes. So there could be $50 million to $60 million of that number that's loan-related, that's unfunded by year-end. And then on top of that, you could also see like an A note sale prior to the end of the year that would further help lighten that load for the funding.
John Albright, CEO
Yes, as we mentioned earlier, we are continuing to work through some Walgreens locations and will be scaling back on dollar stores. Additionally, we have sold assets like Advance Auto Parts and Tractor Supply, and these sales will persist as we find favorable pricing. Our strategy is to reinvest in some of the high-quality credits we have added this quarter, like Lowe's. We will remain active at the year's end, focusing on acquiring high-quality credits, and we are eager to see the company's progress starting next year.
Robert Stevenson, Analyst
And then I guess, given the acquisition of the Lowe's, was that opportunistic? Or just from your standpoint, is the property acquisitions going forward going to be more targeted towards the higher credit quality and basically investment-grade and above quality tenants? Or are you still looking to acquire stuff across the spectrum on a property-specific basis?
John Albright, CEO
Yes. The acquisition of Lowe's was off-market and driven by relationships. We had encountered these assets a couple of years ago when they were taken off the market. We are very excited to include them in our portfolio. Moving forward, you will see more high-quality credit, big-box assets coming in. However, we probably won't pursue generic Tractor Supply properties, and we do not have car washes in our portfolio. We believe this distinction positions us strongly to offer investors something unique. Having Lowe's and DICK'S in our top five gives investors exposure they can't find at other locations.
Robert Stevenson, Analyst
Okay. Then last one for me. Is all of beachside open and producing at this point? Or is there still some of that stuff that's down and that you're getting insurance payments on?
John Albright, CEO
No, it's all been open for a while. I mean they opened those up less than 4 months after the hurricane last year. Interestingly enough, when they opened, they weren't obviously as polished looking as they were prior to the hurricane, but they did better sales than they did pre-hurricane. So there's a lot of pent-up demand from customers, and unfortunately, some of their competition did not reopen. So it just kind of drove more traffic to those restaurants.
Robert Stevenson, Analyst
Okay. So rent coverage today is actually higher than where it was pre-hurricane?
John Albright, CEO
Yes.
Robert Stevenson, Analyst
Appreciate the time, and have a great weekend.
John Albright, CEO
You too.
Operator, Operator
Our next question comes from Gaurav Mehta with Alliance Global Partners.
Gaurav Mehta, Analyst
I wanted to ask if you had any update on your properties that are leased to At Home.
John Albright, CEO
Yes. One of the properties is in Concord, North Carolina, and could be sold in the near future. The others are in a similar situation where we are monitoring At Home's activities. If At Home vacates one of the properties, we are working on securing replacement tenants. The goal would be to have a new tenant in place and then sell the property at a better cap rate than with At Home. This presents a manageable level of exposure and potential for upside.
Gaurav Mehta, Analyst
Okay. Second question, I want to go back to the 2 loans that you did after September, the interest rates on both of them are higher than the year-to-date loan activity, can you provide some color on why the rates were higher at 17% and 16%.
John Albright, CEO
Phil, do you want to handle that?
Philip Mays, CFO
Yes. So he was just asking about why the interest rates on the residential and the mixed-use are significantly higher than the blended rate for the portfolio.
John Albright, CEO
Yes. So on that, basically because it's such a short duration loan that so kind of give you more background than maybe you want. The competition for a loan for that sort of product would be mainly from an opportunity fund or a credit fund, and those funds really aren't looking to invest where the duration is less than 2 years in order to kind of get a multiple. So we're able to give a highly flexible loan, but for that we charge a much higher rate. The flexibility of our loan in the short duration gives us that higher interest rate investment.
Operator, Operator
Our next question comes from John Massocca with B. Riley Securities.
John Massocca, Analyst
So given all the recent investment activity related to loans, especially after the end of the quarter, do you see that as the maximum loan balance you want to maintain if things settle down? Or could you potentially seek to take on more and possibly become a more diversified loan net lease entity? It seems like the volume of loan investments is starting to significantly exceed the net lease transactions.
John Albright, CEO
I would say that everything really came together in the last quarter. The loan activity could definitely increase from here, especially as we anticipate certain things being resolved or paid off. We are very active in the core net lease space with larger assets. You'll notice a similar balance, but we believe we are delivering strong free cash flow and high earnings. There are other net lease REITs that have loan programs as well, and then companies like VICI maintain a mix of net lease and loans. So, this isn't entirely uncharted territory for us.
John Massocca, Analyst
I just remember thinking and maybe I'm misremembering, the loans are kind of an opportunistic thing a couple of years ago, and now it feels like they've become a bigger part of the investment strategy. I'm wondering if that's something you view as like permanent on a go-forward basis? Or if it's still something that's temporary where you found this kind of opportunistic way to kind of accretively deploy your capital even in a challenged equity market?
John Albright, CEO
No, it's definitely a good point. So when we were opportunistically thinking that it was like a one-time opportunity. It's become repeat, customers are coming back to us because of the flexibility and the speed that we can transact on. They're willing to pay a higher rate. We get the right of first refusal on acquiring these assets. So if the market stalls and cap rates tick up, we have an opportunity to bring these into our portfolio. We're getting paid a much higher yield than going out and buying some sort of generic net lease property in the middle of nowhere. We're basically in Austin with very opportunistic type yields with very high-quality sponsors and high-quality assets. The Publix that we had payoff in Charlotte, Publix in Charlotte, I think that paid off because they sold it at a 5.25% cap. So we're seeing it's great to have these opportunities. It's become more of a permanent fixture as the sponsors are still very active in the development side on these credit tenants and the banking system is just really slower, less proceeds, and we're just basically providing an answer to their capital needs in a much more efficient fashion.
John Massocca, Analyst
Understood. On a more detailed level, with Cornerstone Exchange, there has been a significant increase in the amount being lent on that project. Can you explain why it increased by so much?
John Albright, CEO
It's basically they ended up signing some additional leases. As they've proven out their development with leases, we weren't alone on it until they had a signed lease and so that's what happened. The development has gotten larger as they've signed leases.
Operator, Operator
Our next question comes from Craig Kucera with Lucid Capital Markets.
Craig Kucera, Analyst
John, I want to circle back with a few questions on the Austin loans. It sounds like you're not taking any entitlement or approval risk at least on Phase 1. Is that a fair assessment as Phase 2 needs to be approved?
John Albright, CEO
It's a fair assessment on both. The entitlements are there for both phases and everything needed to basically deliver.
Craig Kucera, Analyst
Okay. Great. And what is the current LTV at those loans?
John Albright, CEO
I would consider that on a discounted NPV basis, we're in the 70s.
Craig Kucera, Analyst
Okay. And if you were to sell the senior tranche or a portion of those loans, and I think Phil mentioned it might be upwards of 50%, what would your yield be if you're holding the junior piece?
John Albright, CEO
I don't want to give you specific numbers, but I can say that it will be higher.
Craig Kucera, Analyst
Fair enough. All right. Changing gears to Lake Toxaway mixed-use development. Is that just raw land now? Or has the developer started or kind of where in the process of that development?
John Albright, CEO
Yes. The developer has started. So kind of we're coming in when they really need to start doing some additional work and delivering pads and that sort of thing.
Operator, Operator
Our next question comes from Barry Oxford with Colliers International.
Barry Oxford, Analyst
John, real quick, a couple of questions on the dividend. Given what I'm hearing on the conference call, you want to retain as much capital as possible. Is it fair to say that even though you could raise the dividend for lack of a better word, substantially, any dividend increase will probably be minimal because you want to retain as much capital from an asset allocation?
John Albright, CEO
That's right. As we progress here and earnings grow, there will be pressure to freeze the dividend just based on what we need to pay out as a REIT.
Barry Oxford, Analyst
Right. So you don't run afoul of the REIT rules.
John Albright, CEO
Well, we don't want to pay a check to the IRS. We'd rather give it to our shareholders.
Barry Oxford, Analyst
Right, right, right. And then one thing that I noticed in the press release was the credit rate at tenants. Now your investment-grade tenants, the percent of the portfolio was still roughly the same, but you had a fairly good drop with the credit-rated tenants. What was going on there?
Philip Mays, CFO
Credit rated as a percent of the total portfolio. So at the end of the last quarter, it was 51%.
Barry Oxford, Analyst
Yes, it went from 81% to 66% and the credit. Yes, the credit is fine, but...
Philip Mays, CFO
Yes, that relates more to tenants like Walgreens whose credit ratings have dropped significantly, moving from investment grade to below investment grade, although we still maintain a rating. The decrease was primarily due to a couple of tenants like At Home and Walgreens losing their credit ratings entirely.
Operator, Operator
And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.