Alpine Income Property Trust, Inc.

Good day, and welcome to the Alpine Income Property Trust Quarter 1 2020 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. John Albright, President and CEO. Please go ahead.

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 March 31st, 2020. My name is John Albright, President and CEO of the company. On the call with me is Mark Patton, our CFO, and Dan Smith, our General Counsel and Corporate Secretary. Mark and I will review the details of our first quarter 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.

Thanks, John. Good morning, everyone. During the call today, we'll make certain statements that may be considered to be forward-looking statements under federal securities law. Companies' actual future results may differ significantly from the matters discussed in these forward-looking statements. and we may not release revision of 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 and in our earnings release issued last night. Let me note that we filed our Q1 2020 investor presentation last night, which is now available on our website. Our investor presentation 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. Thanks, Mark. Needless to say, the last two months have been an extraordinary time in our country's history and certainly in the short history of our company. Prior to the onset of the COVID-19 pandemic, our acquisition activities were ahead of our expectations as we purchased nine single-tenant net lease retail properties deploying approximately $47 million at a weighted average going-in cap rate of 7.1%. The weighted Average lease term of nine properties with 11 and a half years. At the end of the quarter, our portfolio consists of 29 properties with over a million square feet of rentable space located in 13 states, and notably, approximately 68% of our annualized base rent is located in the top 10 ULI top 25 markets. While the additions to our portfolio in the quarter were retail properties, as we indicated, with our focus, we are certainly pleased to have our two largest properties representing 34% of our portfolio leased to office tenants. Given the impact that the governmental response to the COVID-19 pandemic has had on the retail tenants, in terms of our future acquisition activities at the onset of the COVID-19 pandemic, we felt it was prudent to take a more defensive posture until the uncertainties created by the pandemic were reduced and as a result, we terminated approximately $75 million in pending acquisitions. And we went through our guidance for 2020. We're hopeful that the disruptions to the economy and our tenants' businesses specifically will soon subside. I'll provide some additional perspective on actions we have taken in response to the COVID-19 outbreak. But first, I'll turn it over to Mark to highlight a few elements of our first quarter operating results and some of our balance sheet activities.

Thanks, John. As John mentioned, we had a productive first quarter in terms of our acquisition activity. The onset of the COVID-19 pandemic in the back half of the quarter impacted our operating results for the quarter, which I'll mention in a moment. As our release noted, our total revenue for the quarter was approximately $4.2 million. Our FFO was approximately $2 million, or approximately $0.22 per share, and our FFO was approximately $1.8 million, or approximately $0.20 per share. Our operating results were impacted by our expensing of approximately $83,000 of deal costs, which were the result of the termination of the $75 million worth of acquisitions that John mentioned. We also had higher than expected G&A costs due to the recognition of approximately $288,000 of costs associated with the audit services related to our 2019 annual audit. Given the short stub period in 2019 subsequent to our IPO, the majority of that audit work for that year occurred in the first quarter, so the expense was a bit larger than we expected. While we expect going forward this expense will be recognized more ratably over the course of an annual period, This particular circumstance we think was unique to our coming out from our IPO. Lastly, our interest expense was higher by about $19,000, which stems from our draw of $20 million on the credit facility in mid-March, which was in connection with our more defensive posture that John mentioned, which enabled us to further solidify our liquidity due to the uncertainty surrounding the COVID-19 pandemic. In terms of our liquidity position, in addition to the $20 million that we drew and the Board of Directors of Income Property Trust. 1.83% to 2.43% range on our rate of half of our credit facility. The rate swap goes into effect at the end of this month. We're very pleased with the execution on this swap. Lastly, I wanted to review the current status of our portfolio in terms of collections of April 2020 rent and our efforts in working with tenants as they contend with the impact of the COVID-19 pandemic and the government mandated basically shutdown of the economy. As of Friday last week, we've collected 62% of our April 2020 rent. Of the remaining 38%, we have reached agreement with tenants on 13% of that total, generally allowing for rent deferral typically of monthly rent in the second quarter of 2020 and with repayment of the deferred amounts ratably in the latter part of 2020. For the remaining 25% of that 38%, we're in active negotiations with tenants or otherwise holding firm and hope to have those agreements ironed out during the coming weeks. I'll also mention that 24 of our 29 properties remained open, either fully open or open under modified or limited operations since the onset of the pandemic. Those 24 properties represent approximately 78% of our AVR.

Now I'll turn it back over to John. Thanks, Mark. In closing our prepared remarks, I'd like to summarize some of the actions we have taken in response to the outbreak, a few that we've mentioned already. As Mark mentioned, we have approximately $50 million of the liquidity, including the $20 million drawn on our credit facility in the remaining available capacity. This puts us in a strong position and supports our defensive posture during this period of uncertainty in the market. Our stock was not spared with the severe dislocation in the equity markets. And given the significant discount of our stock price to our view of the company's NAV, our board approved a $5 million stock buyback in March. And through April 24th, we have utilized nearly $4 million of the program to acquire approximately 350,000 shares at an average price of 1077. In closing, I'd like to express our sincere hope that our shareholders, friends, and colleagues are all well and remain so during this challenging time in our nation's history. We remain optimistic that the impact of the COVID-19 pandemic will soon dissipate and the strength of the U.S. economy will return for the benefit of our tenants and our shareholders. That concludes our prepared remarks, and at this time, Operator, I'd like to open up for questions.

Thank you. We will now begin the question and answer session. To ask your question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. Our first question today will come from Barry Oxford with DA Davidson. Please go ahead.

Great. Thanks, guys. When you look at the 25% of the tenants that you're kind of in negotiation with, do all of them need some sort of rent deferral? Or are some of those just, for lack of a better word, form letters that have come that you probably won't give any deferment?

Thanks, Barry. Definitely, everyone can pay the rent. It's more of a form of negotiation. We're taking the approach that we will agree to something only if we get something out of it. We're kind of economic animals as anyone else, and so if we can make our position better, then that's terrific. But if tenants are just strictly looking for a rent deferral without anything, then we're fine with going the default route.

Right. So it's something along the lines of a blend and extend type of thing?

All kinds of different scenarios. Obviously, lease extension would be something high up on our list. If they want to defer it and pay a penalty rate, an interest rate, we'll look at that. It's all across the board.

Right. Switching gears to the acquisitions that you had in the pipeline, did you withdraw from that pipeline because You felt that pricing kind of had moved and it was not favorable to kind of push forward? Or was this more, look, we want to rein in the horns and kind of hoard cash at this particular moment?

A little bit of both. I mean, clearly putting something under contract before the pandemic and lockdowns. clearly there need to be a reprice adjustment. We didn't go that route as far as talking about repricing. We just said who knows how far this economic collapse goes. So just a lot of the more conservative nature. Let's kill off the pipeline, hold back. We knew that tenants were going to have issues, and so we didn't know how broad that would be or how deep. And so that's more of a conservative posture and not wanting to buy assets, just to buy assets when there may be better opportunities down the road.

Right. Now, that absolutely makes Then in light of that last question is when I'm looking at the dividend and I guess the, you know, throughout 2020, as long as we're kind of in this environment forever how long, is it safe to say, look, Barry, kind of hold our dividend flat in here, you know, until we can kind of, you know, kind of get back into acquisition mode? Is that a fair way to look at your dividend?

Yeah, I mean, look, we'll wait and see kind of how we end up with the tenants that we're negotiating with and see how May is and reassess. But clearly, the company has the capital, and it's just a matter of how the cash flows look. And so the board will basically – determine that after seeing another call of 30 days of activity here and see where we are and see where the world is.

Makes sense. Thanks a lot, guys. Appreciate it.

Thanks, Jerry.

Our next question will come from Colin Sming with Raymond James. Please go ahead.

Hey, good morning. Thank you. First question for me is just on the durability of office rents moving forward, specifically Hilton Grand Vacations. has announced some cost savings measures. Just can you discuss if they have sought some form of rent relief and just your outlook on kind of the office component of your portfolio going forward?

Sure. Obviously, they paid April, but it wouldn't be outlandish to assume that everyone's looking for something. Obviously, as you can tell, their market cap and their liquidity is certainly sufficient. These office assets we have with them where their lessee is our critical assets or mission critical. Again, it's like in Barry's question, we may negotiate with them, but it's only if we can enhance our position. So that's kind of where we are with Hilton.

Okay. So I guess maybe moving past just the Hilton Grand Vacation part of the portfolio, can you just maybe elaborate on to the extent there's discussions with tenants that paid April rent but are looking at deferring future rent or looking at other accommodations moving forward? I mean, is there a bucket or a percentage, John, that you would think about, hey, this – you got your April rent checks, but depending upon the duration, you kind of view this at-risk component of that – of kind of that 60-plus percent that actually paid April.

Yeah. Outside of Hilton, which is obviously a larger tenant with us, there's very little of those type of tenants that paid April that wanted to have a discussion.

Okay. That's helpful. So moving back to the dividend and recognizing there's a lot of uncertainty in the current environment, I guess maybe more directly, would you and the board look at potentially levering up modestly to continue to maintain the dividend at the current run rate? Or if the operating cash flows aren't there, would you look to reset the dividend to align with operating cash flows?

Well, I mean, I think it's really, you know, the board is going to look at all those sort of alternatives. But I would say that even, you know, when you say levering up, it's, you know, because, you know, the cash flows even from one of our tenants, which is, you know, Wells Fargo, you know, they're just not, even if a lot of these tenants, you know, didn't pay, you have, it's not a huge amount on the dividend side. But, of course, we want to be prudent and, you know, have appropriate cash flow versus dividend. And so I think it's just kind of a discussion that, you know, the board will have later in May to make that determination. But I would say that, you know, paying the dividend, you know, our company, our size is not a large amount.

Okay. So it sounds like if I – It sounds like there's a willingness where even if the payout ratio for a quarter or two exceeds 100%, there might be some willingness just to kind of establish that track record to continue to maintain the dividend. But, again, obviously the situation is evolving. So is that a fair takeaway?

Yeah, that's fair to say. If the skies are clearing and things are getting better and we just have this moment in time, I don't think we're going to do something drastic just to – meet a couple-month problem.

Okay. That's helpful. And then kind of sticking with capital allocation, share repurchases, $5 million buyback in place, just maybe talk about the willingness or capacity just in context of your borrowings and things like that to maybe move beyond the $5 million buyback moving forward.

Yeah, I think really, you know, when it was a little bit more of a moment in time, or we hope it's a moment in time, where the stock was at a ridiculous price and clearly the best capital allocation is buying back the stock at, you know, these implied cap rates and discounting AV and all that kind of stuff. So I wouldn't say that that's going to be programmatic going forward unless for some reason, you know, things revert back.

Okay, and one more for me, and then I'll turn it over. But just, Mark, just as far as all the borrowing-based commentary in the press release, is there a way to think about what that borrowing base would be reduced down to if in kind of a scenario where if, call it the remaining 25% of tenants that there is no deferral agreement with and there's no April rent, how would that, what would the borrowing base look like If you call it the 25% of the tenants just don't pay and you run into that kind of 60-day past due situation. Recognizing that there's some moving pieces here, right, because of the properties that were acquired during the quarter entering the borrowing base. Is there a way to just kind of quantify or think about that in that scenario? Yeah.

I mean, there's a way to think about it. I think that's probably, since that's the most extreme, my first reaction to it would be that we've got nine assets that we've acquired that are yet to be put onto the borrowing base. So I could offer that 25% if you take the extreme, although I do think the extreme is probably, you know, not the measured way to look at it. But first things first is other assets that would replace them. You could also, if you, you know, when we resume acquisition activity in earnest, I think that's another way to buffer that. But I think the other thing we tried to point out, but using your scenario, if they went six days past due, they'd come off. You know, so you try real hard not to have that occur, and you've got a couple of different levers to do it. Again, I think for me, if all 25% were to, for some reason, fall off, the first thing we'd be looking to do is backfill it with the acquired assets.

Got it. So it sounds like you feel that even in a more severe scenario where the borrowing base would remain around that $80 million number, $80 to $90 million number, where maybe you don't get the full capacity, but you don't necessarily think and others. So, given the moving piece that they're being able to bring in some recently acquired assets, you don't necessarily see a dramatic reduction in the borrowing base relative to what it was at quarter end. Is that a fair takeaway from those statements? That's fair, yes. Okay. I'll turn it over and jump back into you. Thanks, guys. Thanks, Phil.

Our next question will come from RJ Milligan with Bayer. Please go ahead.

Hey, good morning, guys. In the press release, you mentioned that, you know, depending on the duration and magnitude of the current shutdown and what's likely to be the ensuing recession, that, you know, there's still a possibility to hit acquisition guidance for the year or previously, previous acquisition guidance has since been withdrawn, but, you know, just over $100 million. I'm curious what your thoughts are on, obviously you have the liquidity right now, but looking to preserve liquidity. So how do you judge the idea of preserving that liquidity versus continuing to look out and acquire assets?

Thanks. Obviously, as you mentioned, we have plenty of capacity and liquidity, so we don't Given that it feels like things are opening up a bit, we're certainly looking at acquisitions and pursuing opportunities, really trying to find where we can really get some phenomenal properties and locations that would really look great with our portfolio or fit well with our portfolio. So we have no problem of being in the market right now, and we are looking at opportunities, but it's just we're going to be patient because we think there'll be some dislocation. There'll be some buyers. The private rates probably are out of the market. The 1031 market is kind of, you know, again, taken care of as far as what's out there with 1031 buyers once Those buyers have satisfied their 1031 needs, but there's not a huge pipeline of more 1031 money. Once that buyer pool goes away, evaporates, we think the cap rates will be interesting for high-quality properties.

Okay, that's helpful. Earlier this year, the bulk, if not all, of the external growth pipeline, the deals you were looking at, were retail assets. And I think now that we've gone through two months of this, obviously the office and industrial exposure, just in terms of the general U.S., have been paying more in rent than the retail category. And so I'm curious if you're now considering looking at some more office, because it's actually viewed as a little bit more defensive here in this current environment. and if you think there's going to be any opportunities there on the office side.

To answer the latter, for sure there's going to be opportunity on the office side and to answer your former question, definitely we would consider office because as you mentioned, that has held up very well, a strong component of our portfolio and hopefully investors will see that as kind of a big plus for our company. So we definitely keep an eye out for those special situations where office meets all the criteria, great location, great tenant, long-term lease. But we do have still looking at some of the retail. I would say that the retail that we're looking at, are tenants who have been open during this whole time period. So, you know, kind of the survivors in the world of whether it's, you know, just necessary retail, that sort of thing. So that's kind of where Outlook is right now.

And my final question is, are there any categories within, in terms of industry type, within the portfolio today that Longer term, you're concerned about the long-term health of that specific category, not necessarily retailer?

Yeah, I mean, look, I think some of the tenants that we have as far as casual dining, theater, you won't see us acquiring more of that, and I think that will have Great, thanks, guys. Thanks, RJ.

This will conclude today's question and answer session as well as today's conference. Thank you for attending today's presentation, and you may now disconnect.