Earnings Call Transcript - PINE Q2 2021

Operator, Operator

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. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to John Albright. Please go ahead.

John Albright, CEO

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 began, I'll turn it over to Matt to provide the customary disclosures regarding today's call. Matt?

Matt Partridge, CFO

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.

John Albright, CEO

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 provided clarity regarding the funding of our active pipeline. The offering was comprised of existing and new banking partners, and it 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 a 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, 7 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 2 assets were obtained through longstanding 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.

Matt Partridge, CFO

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 fees to our external manager, CTO Realty Growth, decreased by more than 500 basis points to 19.5% and 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 a previously agreed rent deferral agreement 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.

John Albright, CEO

Thanks, Matt. We've accomplished a number of key milestones in the second quarter with our follow-on offering, increasing the 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 the continued support and congratulate our team on all of their accomplishments. At this time, we'll open it up for questions. Operator?

Operator, Operator

And the first question comes from Rob Stevenson with Janney.

Rob Stevenson, Analyst

John, could you provide an update on the timing and expectations for the office assets? Are they currently under contract, or are negotiations still ongoing? What is the current status, and considering your acquisition pipeline, how quickly can you replenish those properties from the net operating income with acquisitions?

John Albright, CEO

Sure. Thanks, Rob. We are currently handling both a negotiated contract and a letter of intent for the company. There is good activity on both fronts. Our expectation is to close these in the third or possibly early fourth quarter, but we are not in a rush. We are focused on achieving the best outcome for both us and the buyers. Regarding the pipeline to replace those assets, it remains very strong. As demonstrated this quarter, we have been quite active, which has greatly strengthened our future pipeline.

Rob Stevenson, Analyst

How should we consider the consistent 7% plus cap rate on the retail assets? What does it look like in terms of dilution accretion when trading the dollar value of office assets for the dollar value of retail assets?

John Albright, CEO

Yes, we will be acquiring both IGE and non-IGE assets. IGE assets may be somewhat dilutive, while non-IGE assets would generally be accretive. We aim to manage this effectively. We believe the pricing we are expecting for the properties is strong and will facilitate a smooth transition to acquisitions without significant difficulties.

Rob Stevenson, Analyst

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 price is? Is that something where, it's likely to, if you do additional OP Unit deals, there'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, for the lockups beyond the sort of normal short-term stuff? How are you guys thinking about that currency?

John Albright, CEO

The OP Unit deal we executed was priced higher than our follow-on offering and had fewer associated costs, making it very beneficial compared to a follow-on offering. As the stock price has increased, we anticipate that any future OP Unit issuances will align with this stock price. We also aim to avoid dropping to the pricing of our last deal, which we were very satisfied with. The seller expressed a strong desire to partner with us on PINE and hold the stock long-term. We hope to engage in more transactions with them since they manage an ongoing portfolio, and if an opportunity arises that suits us, we would be open to additional OP Unit deals at higher stock prices. This recent transaction allows us to reach out to other developers with portfolios, providing them a strong option if they are looking to sell. Rather than reinvesting into another property, they can exchange their holdings for OP Units with us and structure it within the partnership. This is a valuable tool for us, and we're thrilled to have completed a deal early in our journey.

Rob Stevenson, Analyst

Okay. Are there any additional assets in CTO that PINE is likely to acquire this year?

John Albright, CEO

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.

Rob Stevenson, Analyst

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?

Matt Partridge, CFO

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 a timing issue.

Operator, Operator

The next question comes from Michael Gorman from BTIG. Please go ahead.

Michael Gorman, Analyst

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?

John Albright, CEO

Yes, the pipeline has been strengthened, especially with the transactions we've completed, which has led to further discussions about additional assets. We're currently operating in less than half the states, leaving us with plenty of opportunities for acquisitions. We're not even in California, so there's a large playing field ahead of us. We are very confident that the progress made in the first half can be mirrored in the second half. Additionally, we have the capital now that we used to regroup, and we are prepared to sustain our efforts through the end of the year.

Michael Gorman, Analyst

Matt, just to clarify, does the new guidance range reflect any changes to your assumptions regarding acquisitions, or are you maintaining a conservative approach in that area?

Matt Partridge, CFO

It is a fair assumption that the second half of the year will mirror the first half in terms of volume. Although we haven't provided formal guidance on acquisition volume, only on FFO and AFFO per share, this is how I would advise everyone to think about it.

Michael Gorman, Analyst

And then John, on the disposition going beyond the office assets, there's kind of 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?

John Albright, CEO

Maybe you're talking about just the office or are you talking about any other particular properties?

Michael Gorman, Analyst

No, the ones beyond the office ones.

John Albright, CEO

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 announced it, you'll see kind of 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.

Michael Gorman, Analyst

Can you discuss your strategic approach to potential opportunities and improved pricing for assets with shorter lease durations? How do you evaluate this from a credit standpoint? Additionally, what is your comfort level with the weighted average lease term when you assess the overall portfolio?

John Albright, CEO

We are quite confident about certain assets that have very short lease durations. The store is performing well, and the rent is below market rates. We appreciate these situations because if a retailer were to relocate, it could negatively impact store operations and profitability. We value these scenarios and are willing to let the lease term decrease until the timing is right to discuss extending the lease with the retailer. It all hinges on strong fundamentals, including solid real estate, understanding lease comparisons with similar properties, and analyzing data on sales, traffic, and how these factors align with the retailer's portfolio. This approach helps us identify the best opportunities, especially with shorter lease durations that have higher cap rates in prime locations where tenant loyalty is strong.

Operator, Operator

The next question comes from Wes Golladay with Baird. Please go ahead.

Wes Golladay, Analyst

Just had a question on the deals that have no escalator, no annual escalators. Everyone is 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.

John Albright, CEO

Yes. Look, it's a function of a lot of these credits. The IGE credits almost across the board have no lease escalations. So it's a little bit of a dance between the IGE exposure, which will have less of a bump in escalations and then the non-IGE, which you will pick up the lease escalation. 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 kind of our kind of reaction to it.

Matt Partridge, CFO

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

Wes Golladay, Analyst

And 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 a few of them are showing up, because they're a little concerned about the escalators. It sounds like maybe people are just so focused on the IGE credit at this moment. They’re willing to look past the CPI. Is that the correct read?

John Albright, CEO

Yes. I think that's right. I think the market is 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.

Wes Golladay, Analyst

Got it. We are looking at some of the shorter lease term deals you're entering into, such as with Advance Auto Parts this year, which has less than four years remaining on the lease. When do you plan to start pursuing renewals for those leases?

John Albright, CEO

Obviously, we know that the market kind of 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 the question is we're not in a rush. But if we feel like it's important for portfolio dynamics, we could kind of start going through the portfolio and approaching some tenants.

Operator, Operator

The next question comes from Craig Kucera with B. Riley Securities. Please go ahead.

Craig Kucera, Analyst

Most of my have been answered. But 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 kind of a unique one-off with that party?

John Albright, CEO

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 amounts of portfolios 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 a 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, definitely one that with we have some time to kind of get out there, we plan on speaking to groups and trying to do more of those types of transactions.

Craig Kucera, Analyst

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 they'll be meaningful dispositions beyond sort of what's currently held for sale as well as the office?

John Albright, CEO

No, it's not significant; however, if the opportunity arises, we would be pleased to showcase the strength of our portfolio, particularly with assets that we are confident can be easily and profitably reinvested.

Operator, Operator

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 remarks.

John Albright, CEO

Thank you very much for attending the call.

Operator, Operator

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