Earnings Call Transcript - PINE Q2 2020

Operator, Operator

Good morning, and welcome to the Alpine Income Property Trust Second Quarter 2020 Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to John Albright, President and CEO. Please go ahead.

John Albright, President and CEO

Thank you, operator. Good morning and welcome to today's conference call to review the operating results of Alpine Income Property Trust for the quarter ended June 30, 2020. My name is John Albright, President and CEO of the company. On the call with me is Mark Patten, our Chief Financial Officer, and Dan Smith, our General Counsel and Corporate Secretary. Mark and I will review the details of our second quarter and six months financial results in a moment. First, I'll turn it over to Mark to provide you with the customary disclosures regarding our comments on this call today and a few points regarding the format of our call.

Mark Patten, CFO

Thanks, John. Good morning, everyone. During our call today, we may make certain statements that may be considered to be 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. We may not release provisions to these forward-looking statements to reflect changes after the statements were made. 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 filings with the SEC in our earnings release issued last night. Let me note that we filed our Q2 2020 investor presentation last night, which is now available on our website. It provides additional information you may find useful and that we may reference during this call. With that, I'll turn it back over to John.

John Albright, President and CEO

Thanks, Mark. Much like all of our rate peers, the latter part of Q1 2020 and much of Q2 were spent focused on working with our tenants to navigate the impact of the COVID-19 pandemic. While we certainly believe we've addressed these issues that we needed to, as evidenced by our collection of 89% of July rent and the resolution of all but one tenant issue, we recognize that the uncertainty surrounding the recent developments associated with the pandemic and the potential for future dislocation still remains. As we discussed in our first quarter call, our acquisition activity during the quarter was ahead of our expectations, but we suspended those efforts at the onset of the COVID-19 pandemic. We're pleased to have been able to restart our investment activities in the latter part of the second quarter with a focus toward credit and quality. We completed the purchase of two single-tenant retail properties in June, one property that is leased to Walmart outside of Lansing, Michigan, which we acquired for approximately $20.6 million and that has 6.6 years remaining on the lease. The other property, which is leased to Hobby Lobby in Asheville, North Carolina, was acquired for approximately $8 million and has 11.2 years remaining on the lease. We completed these two acquisitions at a weighted average going and cap rate of 6.7%. As of the end of the quarter, our portfolio consists of 31 properties with over 1.3 million square feet of rentable space, located in 14 states and notably, approximately 61% of our annualized base rent is located in 10 of the ULI top 25 markets. In addition, our portfolio is now 70% retail and 30% office, which is comprised of one office property leased to Wells Fargo and two properties leased to Hilton Grand Vacations. Our three office properties remained steady performers during these challenging times. We're certainly pleased to add another Hobby Lobby to our portfolio and our first Walmart. We're hopeful that the economy and our tenants' business will continue to improve and the dislocation caused by the COVID pandemic will soon be in our rearview mirror. I'll provide some additional perspective on the results and activities in a moment, but first, I'll turn it over to Mark to highlight a few elements of our second quarter operating results and some of our balance sheet activities.

Mark Patten, CFO

Thanks, John. As John mentioned, we've finished the quarter with two terrific acquisitions and our collection experience continued on a significant upward swing with very strong collections in June and particularly in July. As our release noted, we achieved total revenue of approximately $4.6 million for the quarter, an increase of 10% from Q1, bringing our year-to-date total revenue to approximately $8.8 million. Our FFO was approximately $2.6 million for the quarter, or approximately $0.29 per share, which is an increase of more than $500,000 for Q1 or 26%, and a per share increase of nearly 32%. Our AFFO was approximately $1.4 million, or approximately $0.16 per share, which is a decrease from Q1 of approximately $439,000. Our AFFO was adversely impacted by approximately $625,000 of deferred rent, relating to arrangements with tenants stemming from the resolution of the COVID-19 impact. We expect that as we receive the deferred rent payments, this impact will be alleviated entirely. Our G&A also trended favorably compared to the first quarter, decreasing by approximately $152,000, or nearly 12%, primarily due to a $211,000 decrease in audit tax fees, as the first quarter included the recognition of approximately $288,000 related to the 2019 annual audit. Lastly, our interest expense was higher by about $94,000 over the first quarter expense, totaling $343,000 for the second quarter, reflecting the higher outstanding balance on our credit facility, which is attributable to our borrowings late in the first quarter, relating to the COVID-19 pandemic, and the draws we made late in the second quarter to fund the acquisition of the properties leased to Walmart and Hobby Lobby that John noted earlier. In terms of our liquidity position, our borrowing capacity on the credit facility stands at approximately $30 million. Regarding the credit facility, I'll also note that we are working with our lending group to potentially access some portion of the $50 million accordion feature to help facilitate our continued acquisition efforts. Lastly, I wanted to review the current status of our portfolio in terms of collections for the three months in the second quarter and the month of July. Steven and his team have done an incredible job working with our tenants, as they have dealt with the impact of the COVID-19 pandemic, which for some remains ongoing. As of last Friday, our collections in July stood at 89%, with just 2% of our rent unresolved, which relates to the property leased to Old Time Pottery in Jacksonville, Florida. We expect July collections to increase to approximately 94% for the end of the month as we wrap up agreements with LA Fitness. Our June collection stood at 83%, which was up from 74% and 75% in May and April, respectively. I’ll also mention that 28 of our 31 properties are either fully open or open under modified or limited operations. Those 28 properties represent approximately 90% of our AVR. Now, I'll turn it back over to John.

John Albright, President and CEO

Thanks, Mark. In closing our prepared remarks, I'd like to summarize some of the highlights of the quarter. We were not only pleased to restart our acquisition activity late in the quarter, but we're particularly pleased with the quality of the acquisition of a Walmart property and another Hobby Lobby property. We also note that we reintroduced guidance for the full year 2020, including our expected full year FFO and AFFO estimates, which reflect our expectations of the impact of the COVID-19 pandemic, assuming no major setbacks in the near term. We also indicated that we hope to achieve total acquisitions of approximately $105 million, which we hope is attainable given that we've completed nearly $76 million in acquisitions through the end of the second quarter. We also completed $5 million of the buyback program in the second quarter. As we said previously, we felt this was an appropriate allocation of capital given the severe dislocation in the equity markets brought on by the COVID-19 pandemic, which resulted in our stock trading at a notable discount to our view as a company's NAV. I would like to thank Mark, as this is his last earnings call with us, and wish him well in his new endeavors with Essential Properties. We have already started a search for a new CFO and have had discussions with several candidates. We hope to identify a candidate in the third quarter. In closing, we'd like to express our sincere hope that our shareholders, friends, and colleagues remain well during this challenging time in our nation's history. We remain optimistic that the impact of the COVID-19 pandemic will soon dissipate and that the strength of the U.S. economy will return for the benefit of our tenants and our shareholders. That concludes our prepared remarks. At this time, we'll open it up for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session.

John Albright, President and CEO

Thank you, Operator. Just one note I would like to make a clarification. In our prepared remarks, we mentioned that we collected 89% of contractual base rent and as most of the folks on the phone will notice in our earnings release, we're up to 94%. That's based on receiving a payment from LA Fitness that brought us up to 94%. That is an adjustment from our prepared remarks. Thank you.

Operator, Operator

Thank you, sir. Our first question today will come from Barry Oxford with D.A. Davidson. Please go ahead, sir.

Barry Oxford, Analyst

Great. Thanks, guys. First off, I think you guys have done a great job managing collections through this environment. When you are offering deferrals, what type of package does that look like? Is that three months, and then you divided by 12 and they start making it up between now and halfway through next year? Is that how it's working? And also in relation to the AFFO, should we be ratcheting up the cash component of the rent deferrals that were there as we unwind that in the same timeframe?

John Albright, President and CEO

Yeah. Thanks, Barry.

Barry Oxford, Analyst

Yeah.

John Albright, President and CEO

The rent deferrals involved various negotiations. Initially, during the early pandemic, tenants typically requested a three-month deferment to be paid back over the following year. We did not agree to many of those terms. Any rent deferment and rescheduling occurred within a shorter timeframe and in a more uneven manner, primarily in the latter half of this year. Now that many tenants have reopened and their businesses are stabilizing, we aren't receiving any new requests from them. For context, we were negotiating a rent deferment with one tenant, but during those discussions, they chose to pay all their rent instead. This situation arose because while our real estate department was negotiating, the finance department decided to settle the rent. Overall, most of the deferred rent is being settled in the latter half of this year.

Barry Oxford, Analyst

Okay. That helps. That helps. Has Hilton requested anything?

John Albright, President and CEO

Well, I don't want to go through specifics on each tenant, but I'll just say generically on someone like Hilton that it's safe to assume that we gave them some options to be helpful, maintaining good client relationships and good relationships with our tenants. It's safe to assume that they thought they were better off just with the current rents and doing some sort of structure with us that we felt would be better for our shareholders.

Barry Oxford, Analyst

Okay. That makes sense. And then, last question, switching gears, when you guys are looking at the acquisition pipeline and product that is out there in the marketplace, is it less today because the sellers are pulling back, or are you guys still looking at a fair amount of product just as you were at the beginning of the year?

John Albright, President and CEO

Yeah. I would say there's maybe not as much product, but much more interested sellers or counterparties. So, there's less buyers out there, which is good for us. The product that's out there on the market is looking to be sold versus just seeing what they could get, not as much interest in as much interest in selling. In fact, what we're seeing a lot lately are properties that we saw before and either passed on or made a bid on, and the seller didn't transact with us or didn't show interest. Buyers are now coming back around saying, okay, the seller really would like to sell this property. So, that's good. So we're seeing more interest on the seller part. If you're in the market for sale, you want to get it sold.

Barry Oxford, Analyst

Right, perfect. That definitely makes sense. All right, thanks guys.

John Albright, President and CEO

Thank you.

Operator, Operator

And our next question will come from Rob Stevenson with Janney. Please go ahead.

Rob Stevenson, Analyst

Hi. Good morning, guys. John, can you talk about what's going on operationally with the Old Time Pottery location, given that they're not paying and they're not in deferral, are they open? Are they a bankruptcy candidate? Is there some rationale why they're not at least entering into a deferral agreement with you guys?

John Albright, President and CEO

So, they are in bankruptcy, but they are open and we did receive a payment from them. We've been in discussions with them; they would like to keep the location. We're basically talking with them about what that looks like. They didn't reject the lease, and as you know, they need to start paying. They have started paying, so that's good. The rent there is very low rent, that's why we were attracted to the property, only paying $4.50 a square foot and the market is well above that. Not quite double, but pretty close. So anyway, it's a profitable location for them. They didn't reject it, and we're negotiating with them.

Rob Stevenson, Analyst

And from the standpoint, do they need all, I think that facility's like 84,000 square feet? I mean, is it a downsize candidate and reapportion, or do they still want basically all the square footage there?

John Albright, President and CEO

Yes. That's a good size for them. It would be beneficial for us if they wanted only half of it, because we could then subdivide and get better rents, and they could pay more, and we could then get better rents from another user next to them, but actually they require the full square footage.

Rob Stevenson, Analyst

Okay. And then you’re talking about what the trend is on the abatement discussions. I mean, when we hit August here, all things being equal, are we getting to the point where the abatements are essentially going to be gone? I mean, how do you guys look at that versus just the deferral piece?

John Albright, President and CEO

I mean, we don't see that we're going to do lease right now. We don't see that we're going to go through this routine again. Most of our tenants are publicly traded, and some of the tenants that maybe we were worried about — if you look at At Home and Container Store, they've had quite a rally in their stocks. I think they're all in better shape or feeling better or have more avenues for liquidity. I don't feel like we're going to go through this routine unless something dramatic happens in the global market or national market again. I think we're in pretty good shape right now.

Rob Stevenson, Analyst

Okay. And then last one for me. How's the Board thinking about dividend increases? What metrics are they using? I mean, you've reported AFFO, which deducts out the deferral amount, you've got a normalized AFFO type of number that you could be looking at, which is what it is with the deferrals repaid over the remainder of this year. How are they looking at various metrics in order to determine whether or not to continue to pump the dividend? Hold it here for a while until things shake out? What are those discussions like at the Board level these days?

John Albright, President and CEO

Yes. I think as we are growing the company and with the expectations that we're going to have more high-quality acquisitions happen sometime in the third quarter, I think we obviously look at the dividend every quarter. I am happy to announce another $0.20 dividend. That was the expectation for the first year, as we grow the company; I think the dividend would be held at this level depending on how the portfolio performs and acquisitions perform. As we add acquisitions, you can assume that there's going to be more upward movement to the dividend. But as you know, in this last quarter, we had pulled down on our credit line just to be proactive. We’re carrying kind of that negative arbitrage and had a lot of cash on the balance sheet, and we're paying interest on that cash. It was only until fairly recently that we deploy that capital. Now we’re back to having very accretive income streams coming into the company. To really answer your question, once we have some more acquisitions and the cash flow is building, we hope to revisit that and hopefully there's some upward movement in the dividend.

Rob Stevenson, Analyst

Okay. One more actually, when you look at the stuff that you're looking at acquisition-wise for the back half of this year, is that like — your guidance range for cap rate is 6.7% to 7.5%, the second quarter stuff with Hobby Lobby and Walmart was at the low end of that spectrum, given the quality. Are you guys still going to be trending more likely towards the higher quality end of the spectrum and the lower part of the cap rate spectrum on second half 2020 acquisitions, or are you going to start mixing back in other stuff as well?

John Albright, President and CEO

No, I think you'll see that, obviously the 2020 acquisitions you mentioned blended form out of the whole year at 6.93%. The recent ones were a little bit shy of that, more in the 6, 7 range. I would say you're probably going to see more in that 6, 7-ish range, but the way we've thought about it is that, when we set up the company and went public, we were expecting some of the acquisitions to be more than that 7%. Now we've switched gears to higher quality. But remember, when we started out, we were thinking our debt costs would be closer to 4%. We've locked in a rate that's below 2%. Our spread is actually higher. So we think that's a great trade-off. We're able to buy higher quality at a good cap rate, and we have much more favorable debt costs so that spread differential is stronger now than before.

Rob Stevenson, Analyst

Okay. Thanks, guys. Appreciate it.

John Albright, President and CEO

Sure.

Operator, Operator

And our next question will come from RJ Milligan with Baird. Please go ahead.

RJ Milligan, Analyst

Hey, good morning, guys. Guidance for acquisitions calls for another $30 million for the rest of the year, which is, John, as you pointed out, that same amount that you just did in the last part of June. So, I guess, one, do you think you can do more than the $30 million? And two, if you could or did, how would you fund it?

John Albright, President and CEO

Thanks. Yeah. So, I mean, look, we're ambitious folks. If we see more opportunity, we would love to basically do better than that. So, we're looking very hard. There are lots of acquisitions, and I feel comfortable, obviously, with the $30 million. If we had the good fortune to find good assets and could do more, we will find a way to do more, where we have obviously a line up to $100 million, but we also have an accordion feature. There may be discussions about bringing more banks into our credit facility to accommodate that growth.

RJ Milligan, Analyst

Okay, that's helpful. And then the office exposure is obviously a positive through the pandemic, a lot more uncertainty with retail. As you acquire more retail, obviously, that office mix will decrease, but can you just talk about how you feel about the office exposure going forward on a longer-term basis, especially given the work-from-home trends that we're seeing?

John Albright, President and CEO

Sure. I think you're right, the office performed very well for our portfolio. If we saw a particular opportunity in the office side that fit well in the portfolio, we would not hesitate to bring that into the portfolio. But I think on the work-from-home aspect, totally understand where you're coming from, but there are some sectors that you can't work from home, whether it is the defense industry or particular healthcare. We are looking at different office or keeping our eye out for different office aspects where it's a critical facility or mission-critical, kind of like the Hilton-MetroWest properties, where one of the buildings houses their IT. The Wells Fargo in Hillsborough is out in the burbs, where I think you're going to see that trend. In fact, Wells Fargo had a division leave downtown to fill that location in Hillsborough. I think you're going to see that trend where big companies move some of their operations out of the urban centers to save rents, be closer to people's homes, and have less disruption for people who don’t want to be in high-rise buildings with elevators.

RJ Milligan, Analyst

That is. And just one last question and this is longer term. There's obviously been some winners and some losers just in terms of categories through the pandemic. Just curious how you think cap rates will shake out over the long-term over the next 12 to 24 months for the winners and the ones that are struggling coming out of this?

Mark Patten, CFO

Yes, I'll answer it in a different way. I think the one aspect I think we all need to look at — I know that every couple of years you hear this, where Congress is going to relook at certain tax aspects of real estate, but obviously a presidential candidate has mentioned that they're going to look at 1031 tax-free exchanges. If they did something dramatic there, you're going to see cap rates expand dramatically for the very core type of net lease space that we've seen in the market, like for instance, a McDonald's ground lease may trade at a three and three-quarters cap rate. If you get rid of 1031 tax-free exchanges, it probably goes up at least 100 basis points, I'm guessing. I think that's probably one to look out for to see if there's any movement there. As far as cap rates on what we're seeing, I do think there is a flock to higher quality, so you're not going to see cap rates move too much on the Walmarts of the world and other strong performers. But for the lower cap rate or higher risk type of tenants, the cap rates are expanding. So, we're not looking at those opportunities where tenant operations have been shut down. However, those cap rates have widened out and probably will stay that way and may even widen out further.

RJ Milligan, Analyst

Helpful. Thank you, guys.

John Albright, President and CEO

Thank you.

Operator, Operator

Our next question comes from Michael Gorman with BTIG. Please go ahead.

Michael Gorman, Analyst

Yeah, thanks. Good morning. John, I was just wondering, following up on some of the acquisition discussion as you guys are looking at new opportunities and some of the changes that have gone on in the marketplace, maybe how that's impacted your underwriting process? What you're looking for in existing leases in terms of security or in terms of disclosure of tenant financials and maybe just the impact on your own internal underwriting process that the last three months has had?

John Albright, President and CEO

Yeah, so the last three months have been really beneficial for us in one respect, in really getting to know our tenants even better. Having the dialogue with directly with tenants as they have described what they're seeing in their operations and what they would like to see help with from our side. Getting that lens regarding how our particular locations are performing has been very beneficial. When you buy an asset, you're doing your regular underwriting, you're talking to people in a particular market, whether they are developers, brokers, or tenants. The tenants will say, yes, it’s a good store, that sort of thing, and they're not giving you a lot of information, but you're trying to analyze it through many variations. We'll talk to competitors and say, hey, what do you think about this location? Have they ever left? That's always very helpful. What this has told us is that many of our locations are strong, which we're obviously very happy with, and that is going to help us. Now that we have good, even better connectivity with our tenants, we have better insight into other acquisition opportunities. When we look at an acquisition opportunity and see what their dialogue with that landlord had been during the pandemic, we'll know whether that store or that location has been strong or not. In a roundabout way, we know more about our customers now, and we understand much more about what to look for in a successful location. I'd say that it's easier to assess now what constitutes a good or weak location than it was before.

Michael Gorman, Analyst

Great, that's helpful. And then Mark, maybe just a quick housekeeping, obviously you have the COVID rent deferral adjustment on the AFFO side. Is there any other accounting adjustments that have been undertaken or any of the tenants on cash accounting? Or how are you guys thinking about maybe the straight-line rent accruals for any of the tenants that were either under deferral or abatement? Were there any changes there as well?

Mark Patten, CFO

No, I wouldn't say we have encountered any sort of cash accounting versions for any of the arrangements. We haven't had to deal with that, and I'm not sure there would be anything else that might fall into the category of unusual alterations or accounting issues.

Michael Gorman, Analyst

Okay, fantastic. Thank you very much.

John Albright, President and CEO

Thank you.

Operator, Operator

Our next question comes from Craig Kucera with B. Riley FBR. Please go ahead.

Craig Kucera, Analyst

Hi. Good morning, guys. I'm curious to hear about your discussions with your movie theater tenants. I know AMC pushed back opening up another couple of weeks this morning. I think, Cinemark is expecting a phased reopening but just, sort of curious what you're hearing from them?

John Albright, President and CEO

Yeah. I would say that they weren't expecting to open up this month or next month back when we negotiated our deals. I think where the rubber meets the road is if they're not starting to open up in October, then you could be having another discussion with them. But they didn't have any grand plans for late summer. They felt lease there, the way they are operating, that things are going to be shut down until fall.

Craig Kucera, Analyst

Got it. And, kind of circling back to another tenant that I think has been closed at Alpine Valley, have they, kind of, what's the dialogue there?

John Albright, President and CEO

Dialogue there has been great. If anything is going to come back on the concert side, it's going to be a large open-air venue. Alpine Valley didn’t book anything in the winter in Wisconsin. So this year has been basically written off. They're planning, obviously, they feel like next year is going to be a huge year, hopefully knock on wood that we're past this pandemic. Every act in the world is going to need a tour just to make money. I mean, I think there will be a high-class problem on their hands because everyone's going to be booked next year.

Craig Kucera, Analyst

Okay, great. That's it for me. Thanks.

John Albright, President and CEO

Thank you.

Operator, Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to John Albright for any closing remarks.

John Albright, President and CEO

Thank you very much and I look forward to discussing any further questions you may have. Thank you, operator.

Operator, Operator

Thank you, sir. This concludes today's call. Thank you for attending today's presentation. You may now disconnect.