Alpine Income Property Trust, Inc.

Good morning and welcome to the Alpine Income Property Trust second quarter 2020 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 telephone keypad. 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 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 June 30, 2020. My name is John Albright, President and CEO of the company. On the call with me is Mark Patton, 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-month 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 our call today, we may 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 revisions 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 of the SEC and 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. Our investor presentation provides additional information you may find useful and then we may reference during this call. With that, I'll turn it back over to John.

Thanks, Mark. Much like all of our REIT peers, the latter part of Q1 2020 and much of Q2 were spent focused on working with our tenants to navigate the impact of 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 towards 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, and the other property, which is leased to Hobby Lobby in Asheville, North Carolina, which we acquired for approximately $8 million and has 11.2 years remaining on the lease. We completed these two acquisitions at a weighted average going-in 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 remain steady performers during these challenging times, but we're certainly pleased to add another Hobby Lobby to our portfolio and our first Walmart. We're hopeful that the economy in our 10th business will continue to improve and the dislocation caused by the COVID pandemic will soon be in our rear view 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.

Thanks, John. As John mentioned, we 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 and bringing our year-to-date total revenue to approximately $8.8 million. And our FFO was approximately $2.6 million for the quarter, or approximately 29 cents per share, which is an increase of more than $500,000 from Q1, or 26%, and a per-share increase of nearly 32%. Our FFO was approximately $1.4 million, or approximately 16 cents per share, which is a decrease from Q1 of approximately $439,000. Our EFFO was adversely impacted by approximately $625,000 of deferred rent relating to our 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%, which is 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, which reflects 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 also 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 Friday last week, 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% before the end of the month as we wrap up agreements with LA Fitness. Our June collections 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 open, either fully open or open under modified or limited operations. Those 28 properties represent approximately 90% of our ABR. Now I'll turn it back over to John.

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 were particularly pleased with the quality of the acquisition of a Walmart property and another Hobby Lobby property. You'll 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 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 of the 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 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?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

Thank you, operator. Just one note I would like to make or 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%, and that's based on receiving a payment from LA Fitness that knocked us up to 94%. That is an adjustment from our prepared remarks. Thank you.

Thank you, sir. And our first question today will come from Barry Oxford with DA Davidson. Please go ahead, sir.

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 kind of divide by 12 and they – start making it up between now and halfway through next year? Is that how it's working? 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 manner and same timeframe?

Thanks, Barry. Go ahead.

No, no, no, I just said yes.

So the rent deferrals, you know, there are all kinds of different negotiations that go on there. But it's easy to, you know, or it's a good assumption that a basic ask from a tenant has been, This is kind of going on when it was the early side of the pandemic when folks didn't know when things were going to get reopened. But the initial kind of ask generically was, hey, give us three months and we'll pay it over the next 12 months. It's safe to say that we didn't agree to, you know, very many of those that we – any kind of – and many others. So, now that a lot of the tenants have reopened and their businesses are getting more re-established, certainly we're not hearing anything more from tenants at this point. We did, you know, actually, you know, just to give you kind of a point of reference, we had, we were on in negotiations with a tenant about structuring a re-spread of rent of the firmament. And while we're having those negotiations, they ended up paying all their rent. And so that happened when, you know, one half of the house didn't really, when talking to the other half, you know, the real estate department was kind of trying to negotiate something, and the finance department, I guess, just decided to pay the rent. So, anyway, hopefully that gives you a little bit of flavor kind of for what the negotiations were like. But the bulk of the deferred rent is being paid in the back half of this year.

Okay. No, that helps. That helps. Has Hilton requested anything? No.

Well, I don't want to go through specifically on each tenant, but I'll just say generically on someone like Hilton that it's safe to assume that we, and I mentioned this in an earlier earnings call, that tenants, a lot of tenants were asking, and we were happy to give proposals that would advance our interests, if you will. That would be a better economic deal for us. And so for someone like a Hilton, we would certainly give them some options to be helpful in good client relationships and good relationship with our tenants. And it's safe to assume that They thought they were better off just with the current rent than doing some sort of structure with us that we thought would be better for our shareholders.

Okay. That makes sense. And then last question, kind of 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 kind of pulling back or are you guys still looking at a fair amount of product? Just as you were, you know, let's just say the beginning of the year.

Yeah, I would say there's maybe not as much product, but much more interested sellers, counterparties. So there's less buyers out there, which is good for us, and 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 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 but 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 to sell, you want to get it sold.

Right. Right. Perfect. That definitely makes sense. All right. Thanks, guys. Thanks, guys. Thank you.

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

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 at least not entering into a deferral agreement with you guys?

So they are in bankruptcy, but they are open, and we did receive a payment from them. And so we have been in discussions with them. They would like to keep the location. And we have been basically talking with them about what that looks like. So they didn't reject the lease. And as you know, they need to start paying, and they have started paying. So that's good. And the rent there is very low rent. That's why we were attracted to the property. They're only paying $4.50 a square foot, and 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.

And, you know, from the standpoint, do they need all – I think that facility is like 80,000, 84,000 square feet. I mean, is it a downsized candidate and, you know, reportioned? Or do they still want basically all the square footage there?

Yeah, that's a good size for them. So it's not like they need – you know, actually 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 that amount of square footage.

Okay. And then can you talk about what the trend is on the abatement and the abatement discussions? I mean, when we hit August here, you know, 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?

We don't see that we're going to, at least right now, we don't see that we're going to go through this routine again. As you know, 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, and so I think they're all in better shape or feeling better or have more avenues for liquidity. So 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. So I think we're in pretty good shape right now.

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

Yeah, I mean, I think as we are growing the company and with the expectations that we're going to have some more high-quality acquisitions happen at some time later, in the third quarter. You know, I think, you know, we obviously look at the dividend every quarter and obviously happy to announce another 20 cent dividend. But that was the, you know, expectation for the first year as we grow the company that, you know, I think the dividend would be, you know, held at this level depending on how the portfolio performs and acquisitions perform. But I think that as we add acquisitions, you can assume that there's going to be More of an upward movement to the dividend. But, you know, as you know, in this last quarter, we had pulled down on our credit line, you know, just to be proactive. And we're carrying, you know, kind of that negative arbitrage that we had a lot of cash on the balance sheet and we're paying interest on that cash. And it was only until, you know, fairly recently that we deployed that capital. So now we're back to You know, very creative income streams coming into the company. So to really answer your questions is once we have some more acquisitions in and that cash flow is building, you know, we hope to kind of revisit that and hopefully there's some upward movement in the dividends.

Okay, one more actually. The stuff that you're looking at acquisition-wise for the back half of this year, is that like your guidance range for cap rates is six and a half to seven and a half. The second quarter stuff with the Hobby Lobby and the Walmart was at the low end of that sort of spectrum given the quality. Are you guys still going to be trending more likely towards the higher quality end of the spectrum and thus 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?

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

Okay. Thanks, guys. Appreciate it. Appreciate it.

Sure.

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

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, the same amount that you just did in the last part of June. So I guess, one, do you think you could do more than the $30 million? And, two, if you could or did, how would you fund it?

Thanks. Yeah, so, I mean, look, we're ambitious folks, and if we see more opportunity – We would love to basically do better than that. We're looking very hard at lots of acquisitions and 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. We have obviously a line up to $100 million, but we have an accordion feature. And there may be discussions about bringing more banks into our credit facility to basically accommodate that growth.

Okay, that's helpful. And then the office exposure, 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?

Sure. So I think you're right. The office performed very well for our portfolio. And so if we saw a particular opportunity in the office side that fit well in a portfolio, we would not – and so forth. I don't hesitate to bring that into the portfolio. I think on the work from home aspect, I totally get that, but there are some sectors that you can't work from home, whether it's defense industry, whether it's particular healthcare. We are looking at are keeping our eye out for different office aspects where it's a critical facility, mission critical, kind of like the Hilton Metro West properties where one of the buildings houses their IT. And so Wells Fargo in Hillsboro is out in the burbs where I think you're going to see that trend. and actually Wells Fargo had a division leave downtown to fill that location in Hillsboro. So I think you are going to see that trend where big companies move some of their operations out of the urban centers, save rent, be closer to people's homes, less disruption, people don't want to be in High-Rise Elevator Buildings, and so forth, all things that we all know about. If that's helpful, that's kind of how we're approaching things.

That is. And just one last question, and this is longer terms. There's obviously been some winners and some losers just in terms of categories through the pandemic. I'm 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 sort of the ones that are struggling coming out of this.

Yeah, I'll answer it a different way. I think the one aspect that I think we all need to be looking 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, 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. So I think that's probably one to look out for to see if there's any kind of movement there as far as cap rates on what we're seeing. I do think there is a flaw to higher quality, so you're not going to see cap rates move too much on the Walmarts of the world or 7-Elevens of the world. 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's operations have been shut down. But those cap rates have widened out and probably will stay wide and maybe even widen out further.

Helpful. Thank you, guys.

Thank you.

Next question will come from Michael Gorman with BDIG. Please go ahead.

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.

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 directly with tenants as they have described what they're seeing in their operations, what they would like to see help with from our side. and so getting that lens with regards to 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 the developers and brokers, and the tenants. And the tenants will say, yeah, it's a good store and stuff like that. They're not giving you a lot of information, but you're trying to analyze it from all kinds of different variations. So we'll talk to competitors and say, hey, what do you think about this location if this tenant ever left? And that's always very helpful. And so what this has told us is that the strength of a lot of our locations which we're obviously very happy with and that is going to help us now that we have good, even more connectivity with our tenants is helped us look at other acquisition opportunities and we'll know that when we look at acquisition opportunity and see what their dialogue with that landlord had been during the pandemic, we'll know whether that store, that location has been strong or not. So In a roundabout way, we know more about our customers now, and we know a lot more about what to look for in a successful location. And so I'd say that it's easier to assess now a good location and a weak location than it was before.

Great, that's helpful. And then, Mark, maybe just a quick housekeeping. Obviously, you have the COVID rent deferral adjustment on the AFFO side. Are 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?

No, we haven't had to encounter any sort of cash accounting versions for any of the arrangements. So 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 sort of unusual alterations or accounting issues.

Okay, fantastic. Thank you very much. Thank you.

Again, if you would like to ask a question, please press Starr, then Juan. Our next question comes from Craig Cucera with B Reilly FBR. Please go ahead.

Hey, 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 phase reopening, but just sort of curious what you're hearing from them.

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. If things aren't looking great for October, then you could be having another discussion with them. But they didn't have any grand plans for late summer. They felt, at least the way they were operating, that things are going to be shut down until fall.

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

The dialogue there has been great. They, you know, I mean, look, if anything's going to come back on the concert side, it's going to be a large open-air venue. And, you know, obviously, Alpine Valley doesn't book anything in the winter in Wisconsin. So, you know, so this year had been basically written off. And so they're, you know, they're basically planning, obviously, they feel like Thank you. Thank you. They'll have a high class problem on their hands because everyone's going to be booked next year.

Okay, great. That's it for me.

Thanks. Thank you.

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.

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

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