Alpine Income Property Trust, Inc.

Good morning and welcome to the Alpine Income Property Trust fourth quarter and full year earnings conference call. All participants will be in 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.

Good morning, everyone, and thank you for joining us today for the Alpine Income Property Trust Fourth Quarter and Year-End 2020 Operating Results Conference Call. With me is Matt Partridge, our Chief Financial Officer. Before we begin, I'll turn it over to Matt to provide the customary disclosures regarding today's call. Matt?

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-GAF financial measures we use, on our website at alpinerec.com. With that, I will turn the call back over to John.

Thanks, Matt. In our first full operating year, 2020 was filled with unprecedented challenges and a number of notable achievements for us here at Pine. We had a significant fourth quarter, capping off a very strong first year, despite the challenged macro environment. highlighted by outstanding rent collections, strong dividend growth, and beating our full-year acquisition guidance. In the fourth quarter, we invested in three properties in Texas, Arizona, and Washington State for $17.4 million at a weighted average cap rate of 7%. For the second quarter in a row, 100% of our acquired rent from investment-grade tenants, where we continue to add exposure to Dollar General and Walgreens, while also adding Kohl's to our portfolio's high-quality list of tenants. The weighted average lease term of our fourth quarter investments was nearly 10 years at the time of acquisition. For the full year 2020, we acquired 29 properties for $116.6 million and a weighted average cap rate of 6.9%, performing towards the top end of our cap rate guidance and exceeding our acquisition volume guidance. Taking a step back and looking at the acquisitions we made throughout the year, We were able to invest in a mix of industry-leading tenant credits and high-quality real estate whose performance throughout the pandemic demonstrated the attractiveness and long-term viability of operational success at the various locations. We added exposure to 10 sectors in 2020, including the grocery, convenience store, dollar store, automotive parts, consumer electronics, home furnishings, entertainment, pharmacy, general merchandise, and QSR sectors. with 76% of acquired annualized base rent focused on the better-performing grocery, general merchandise, dollar stores, and convenience stores. Over 60% of the rent acquired during 2020 was concentrated in investment-grade rated tenants, including best-in-class operators such as Dollar General, Walmart, 7-Eleven, Kohl's, and Walgreens, and the 28% of acquired rents associated with non-rated tenants 61% was related to Hobby Lobby, who has maintained an excellent credit profile and sector-leading operations in spite of the challenges many tenants have faced during the pandemic. Our acquisitions during the year were spread across 23 markets in 13 states with notable emphasis on Texas, where nearly 20% of our 2020 acquired base rent was concentrated and where we are seeing business and population trends that suggest attractive shifts in medium and long-term demographics. Of the 23 markets where we made acquisitions, 80% of the rent is within the top 10 markets, which include larger MSAs such as Austin, Boston, Phoenix, Jacksonville, and Dallas. In addition to our acquisition activity throughout the year, we sold an Outback Steakhouse in Virginia for a 5.75 cash cap rate in September for a gain of $300,000, which we believe is not one-off, but representative of the valuation data point regarding the quality of our assets in our portfolio and the attractiveness of the underlying real estate and the ongoing stability of the net lease transaction market. As of the end of the year, our growing portfolio was 100% occupied, consisted of 48 properties in 18 states, totaling 1.6 million square feet, with top tenants that included Wells Fargo, Hilton, Hobby Lobby, Dollar General, Walmart, and Walgreens, all of which are leaders in their respective industries. We continue to favor tenants where we can efficiently monitor corporate level stability and financial performance. And as of the end of 2020, more than 80% of our rent comes from tenants who are publicly traded and 83% of our annualized base rent comes from publicly rated tenants, giving us outstanding transparency into the corporate credit profiles of our tenants. Within the portfolio, I'm excited to announce that through negotiations with Old Time Pottery during their restructuring, we have gained control of an out parcel within the parking field in Jacksville, Florida. Our team has been working with a number of potential operators and buyers, and we believe we will have signed ground lease or a contract to sell the out parcel by Q1 2021 earnings call. Based on our ongoing conversations, we believe the value of the parcel will generate at least $60,000 of ground rent or a sales price of $1 million, which will be highly accretive to our original investment in the asset. While ground leases have not historically been a significant portion of our portfolio, we currently have 2.4% of the rents coming from ground lease properties. We do anticipate maintaining or increasing our exposure to this lease structure. as we believe there is potential for better tenant stability when the tenant makes meaningful investments in improvements of the asset. Shifting to 2021, we are now a month and a half into the new year, and we are encouraged by some of the positive data points related to a rebound in business activity and the progress being made to combat the ongoing pandemic. However, we do believe uncertainty remains regarding the operational performance of our existing and prospective tenants. That said, we will maintain our targeted approach to acquisitions, focusing on strong operators in sectors that have exhibited stable operating trends where we see long-term tenant demand being driven by the quality of the underlying real estate fundamentals and of which our data-driven underwriting suggests stability and value. With our portfolio's positive operating trends, continued conviction in our ability to effectively execute our investment strategy, In the anticipation of continued economic improvement, all serving as a central set of assumptions for our future performance, we have announced 2021 FFO and AFFO guidance, both of which imply per share growth that should be towards the top end of the net lease REIT and broader REIT sectors, and for which Matt will outline in more detail later in these prepared remarks. And finally, I'm very excited about our recent announcement that Pine has expanded its board of directors to six members with the addition of Rachel Elias-Wien. Rachel has had an illustrious career focused on consumer trends, digital adoption, and commercial real estate, where she has advised companies such as Kroger, Publix, and a number of public REITs through her advisory firm, WienPlus. Prior to founding WienPlus, Rachel served as a development executive with a similar company and a senior associate with E&Y real estate advisory practice. Rachel brings to us a unique perspective, having advised both owners and operators on many relevant issues, and I think many of you listening have probably run into her at various ULI and ICSC events where she has a very active presence. Needless to say, we are looking forward to benefiting from our position on the Alpine Board. With that, I'll turn the call over to Matt to discuss our financial results and balance sheet activities.

Thanks, John. As John referenced, the quality of our assets and stability of our tenants resulted in excellent rent collections during the fourth quarter of 2020 and for the first two months of 2021, where we collected 100% of contractual base rents for each month. Total revenues for the fourth quarter of 2020 were $5.4 million, and total revenues for the full year of 2020 were $19.2 million. The calculation of the payment percentage of contractual base rents includes the required repayments of previously deferred rent, and I'll remind everyone that 100% collection rate represents rents that were contractually due in each respective month and include the positive and negative effects of rent deferrals or abatements agreed to prior to the rent payment date. When comparing our rent collections to what would have been due if we had not entered into COVID-19-related amendments, Rent collected during the fourth quarter, excluding the repayments of previously deferred rents, was, on average, approximately 3.8% less per month. However, I'm pleased to say that December was the final month for which the company expects to experience a negative impact to rents from COVID-related abatements and deferrals. For the fourth quarter of 2020, funds from operations were $3.2 million or $0.36 per share, and adjusted funds from operations were $3.1 million or $0.36 per share. Our ASFO in the fourth quarter was positively impacted by approximately $160,000 from the net impact of previously agreed to deferrals and repayments of deferrals related to the previously mentioned rent deferral agreements. We expect to experience a continued positive impact to our ASFO in future periods related to the scheduled repayments of previously deferred rent. For the full year of 2020, funds from operations were $10.8 million, or $1.23 per share, and adjusted funds from operations were $9.2 million, or $1.04 per share, with AFFO being negatively impacted by approximately $287,000 from the net impact of previously agreed-to abatements, deferrals, and repayments of deferred rent. As previously announced, the company paid a cash dividend for the fourth quarter of $0.22 per share on December 31st to stockholders of record on December 15th. This represented a quarterly payout ratio of 60% of FFO per share and 62% of AFFO per share. The company paid cash dividends for the full year of 2020 of 82 cents per share, which represented the payout ratio of 67% of FFO per share and 79% of AFFO per share. As highlighted in yesterday's press release, our board of directors has approved and the company has declared a first quarter cash dividend of 24 cents per share to be paid on March 31st, 2021 to stockholders of record as of the close of business on March 22nd, 2021. This first quarter cash dividend represents a 9.1% increase over the company's previous quarterly dividend and a year-over-year increase of 20% when compared to the company's first quarter 2020 cash dividend. The first quarter 2021 24-cent cash dividend represents an annualized yield of approximately 5.4% and was set by the Board in consideration of our previously communicated policy of providing a consistent and reliable cash dividend to our shareholders. As John mentioned, we provided 2021 FFO and AFFO guidance within our release yesterday. This guidance includes a number of significant assumptions, including but not limited to acquisition and disposition volume, associated yields, outside capital, continued improvement in the broader economy, and timing related to a number of these items. For the full year of 2021, FFO guidance is $1.50 to $1.70 per diluted share and AFFO guidance is $1.45 to $1.65 per diluted share. Based on the full year 2020 results communicated in yesterday's press release and summarized in today's prepared remarks, Our 2021 FFO and AFFO guidance suggests FFO per share growth of approximately 22% to 38% over 2020, and AFFO per share growth of approximately 40% to 58% over 2020. Turning to the balance sheet, total debt outstanding as of December 31, 2020, was $106.8 million, and total cash on hand was $1.9 million. Net debt to total enterprise value at quarter end was approximately 45%. while our net debt to EBITDA was approximately 7.2 times. As previously announced, we expanded our revolving credit facility during the fourth quarter from $100 million to $150 million through the addition of two new banking relationships, so we continue to be in a strong position with no debt maturities until late 2023 and more than $40 million of availability on the credit facility at year end. With that, I'll turn the call back over to John for his closing remarks.

Thanks, Matt. As evidenced by the execution of our investment strategy since the IPO, strong portfolio performance, and 2021 guidance. We are excited about our accomplishments and looking forward to what the future holds for Alpine. I want to thank our shareholders for their continued support and congratulate our team on a terrific year. At this time, we'll open it up for questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are 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. And the first question comes from Barry Oxford of D.A. Davidson. Please go ahead.

Great, thanks. John, if you could give me a little color on the acquisition pipeline as it relates to the type of tenants that you're currently looking at right now. I know you don't want to mention a specific tenant, but if you could give me the kind of types of tenants that are currently kind of in that pipeline.

Yeah, thanks, Barry. So the pipeline includes various amount of tenants who we don't presently have in ownership, so it would be great on the diversity. They're well-known tenants with very substantial operations. So I don't want to probably go too much into kind of categories, but whether the companies are dominant in their sector or the real estate that we're looking at, is so strong and a strong performing store and operations for a tenant that we feel very confident that even if this operation didn't work in the future, that the real estate will be very strong for another operator. So it's a little bit of a mix, but the good news is it's a mix of tenants that we don't have presently in the ownership.

Okay, great, great. And when you guys are competing for these acquisitions, Is the environment more competitive now today than maybe it was previously? What are you seeing? And then are there any different types of buyers that are showing up at the table than what you have typically seen?

Yeah, I would say that for the really favored type of 1031 tenant property, you're seeing really a lot of competition and cap rates compressing. You know, whether it's, you know, a grocery store with, you know, 20 years or something like that, you're going to see some unusually low cap rates than traditional. So there is a flock to quality and strength and durability. But what we're looking for, you know, we're finding our pockets and we're finding, you know, really a good, you know, attraction as far as different opportunities that we're looking at potential opportunities where the real estate's very strong, tenant may have just renewed, but it's just too big for the mom and pop 1031 capital. And it's a lot of one-off type transactions where we can kind of be we can focus on it really quick and execute really quick, so before it kind of gets too far out into the competition.

Okay, great. That makes sense. And then, John, just lastly, you touched on the ground lease and that you wanted to do a little more of that. Can you give me a sense of how deep that market is and maybe how much volume you're looking at right now? Right now?

Well, obviously the ground lease kind of category is such a favored sector, so we wanted to, we never had highlighted it before that we own these ground leases, but given that You know, people are looking at companies that are trading at incredible multiples. We decided we definitely need to highlight that we have ground leases in our portfolio, and we're looking at acquisitions with ground leases. But it's not an unusual structure for us to execute on, whether it's an origination or an acquisition. So you're going to see us highlighting it more in the future.

Okay, great. Thanks so much, guys, and good quarter. Thank you.

The next question comes from Rob Stevenson of Jani. Please go ahead.

Good morning, guys. Matt, the guidance, what level of acquisitions beyond the $4.5 million that you've done thus far in the first quarter, is that based on?

Yeah, Rob, obviously there's a lot of assumptions in the guidance, and given the size of the company and the fluid nature of a lot of those assumptions, timing probably being the most impactful thing. We're not going to disclose specifics, so I'm not going to outline what the volume assumptions are because it varies based on the low end and the high end, but you can expect us to be pretty active this year on the acquisitions front.

Okay. Then I guess the other question on that would wind up being, how are you guys thinking about capital raising at this point with giving your cash position? You still got debt capacity, et cetera, but You know, the stock price is up. You know, it's obviously a strong market for preferred as well. How are you guys sort of thinking about the equity side of the capital equation, at least here early in 2021?

Yeah, obviously the stock's done pretty well over the last 30 days. Yesterday, probably the best day for the company from a stock price performance standpoint. You know, we're focused on driving risk-adjusted returns, right? To John's point, on the acquisitions pipeline, we've got a lot of good opportunities we're looking at, and so we're trying to find opportunities that are high quality that are additive to the portfolio, and then we'll evaluate the right capital to fund those transactions as they materialize.

Okay. John, how high of an exposure to Dollar General do you feel comfortable with? You guys have done a bunch of those over the last few quarters. Is there sort of an upper limit as you're obviously the Wells and the, and the Hilton stuff you inherited, um, at the beginning of the company. But I mean, from the standpoint of adding incremental dollar generals, is there an upper limit that you and the board feel comfortable with before you say, Hey, I need to diversify, even if it's within other dollar, uh, store operators or within that, that merchandise category? Yeah.

So, you know, I think you could say to say that we've, um, As you mentioned, we've done a lot of Dollar Generals as of lately, but I think that's kind of the end of it for now. So as we grow the company, we certainly like that operator. I mean, they're as strong as you can get almost as far as a credit and their performance. And we have long leases. And so we like the exposure definitely. But you can see that you'll probably see going forward this year that exposure will go down as we grow the portfolio with other credits.

Okay. And then last one for me, John. How much have you and the board sort of held back the dividend growth just to be prudent given COVID in the market environment versus now? If that had never really happened, how much more aggressive the dividend growth would have been over the last year?

Yeah, I mean, look, obviously there's room, as you can see, on the payout ratio for more growth, but you were just being conservative as we move it up. So certainly as we progress, it will move up, given just what we have to pay out as a rate for sure. So we're not looking to increase it dramatically and pull it forward, just going to be methodical about it.

And Matt, where are you with the new dividend level versus payout of taxable net earnings?

Yeah, so at the end of the year, we were just over 100% of taxable income. Obviously, we weren't fully invested throughout 2020, so we had to grow in a little bit to the dividend. I think you can expect us to target around 100% of taxable income since free cash flow is our most efficient form of equity these days. But with the existing guidance, to John's point, it's a pretty attractive payout ratio right now.

Okay. Thanks, guys, appreciate it. Thank you.

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

Yeah, thanks. Good morning. If I could just follow up on that one on the dividend. You talked about the free cash flow as a source of equity. As you think about the payout ratio, you know, you definitely have plenty of room there, but how do you balance that or how do you think about balancing that? returning cash flow to shareholders versus having that source of equity to continue to fund your growth in 2021? How do you strike that balance?

Yeah, so it's a good question, Michael. You know, the board looks at it on a quarterly basis. Obviously, we have our own internal projections for the year and beyond this year, and we try to balance the growth with the payout ratios that we were talking about. I think for us, Providing a consistent and predictable dividend is first and foremost for the shareholders, but a well-covered dividend given our size and growth profiles, probably a pretty important consideration at this point for the board.

Okay, great. And John, you talked about some of your market activity in 2020 and some of the concentrations and demographic trends that you're seeing. And I just wonder if you've seen any cap rate moves or cap rate arbitrage between markets based on what happened in 2020 Have you seen cap rates move down in some of your target markets versus some of the more traditional coastal type markets? Have you seen any cap rate movement yet because of what happened in the pandemic?

Yeah, I mean, I think you're not seeing as much cap rate improvement a little bit, but you're seeing a lot more buyers. So definitely investors have shifted the focus. from kind of the Northeast or something like that, or even, you know, California is still a strong market for capital, but definitely those California investors are now looking at showing up in Arizona and Texas and so forth. So you're seeing more buyers, but the cap rate's not as much compression.

Okay, great. And then I apologize if I missed it, but you mentioned the unlocking the ground lease, which is obviously a great value add. What was kind of the consideration on the other side in your conversations with the pottery location, if you could share, for them giving up that out parcel or giving up the rights to that out parcel?

Yeah, they had gone through bankruptcy, and we had basically, because of their lease default, we had the chance to just terminate them. and that site that they have is very attractive, and they're paying a very low rent, and they have a very large parcel. And so for us, allowing them to come back in to the lease, we got the out-parcel approval from them so we can go out and execute on an out-parcel, whether a ground lease or a sale, and we have several... offers already in combination of a sale and a lease. So it just shows the strength of the location that, you know, we have plenty of opportunity there. So we'll kind of try to pick the best we can as far as rent and credit. But that's how it kind of shook out.

That's great. Yeah, so just letting them back in the lease. Okay. And then last one for me, Matt, I didn't see it in the release. Have you guys made any use of the ATM on a year-to-date basis, just looking at what's happened to the stock price?

No, no, we haven't used the ATM year-to-date.

Great. Thanks, guys. Thank you.

The next question comes from Wes Goloday of Baird. Please go ahead.

Hey, good morning, guys. Did you guys mention how much you're going to, I guess, benefit from the scheduled repayments this year from the deferred rent?

Hey, Wes. No, that's a good question. So, if you look at the 2020 financials, we have a specific line item for COVID deferrals and repayments, which had a net impact of $378,000 for 2020. we expect the impact for 2021 to be around $400,000 of repayments to the positive, which is call it $0.05 upside on the current share count for AFFO on a relative basis.

Got it. Thanks for that. And then maybe you could talk about the, I guess, long-term plans with the balance sheet. I know timing of a transaction is going to probably move the numbers if you were to do one this year, but maybe just a big picture. Would you look to the bank loan market? And if so, what kind of rate could you borrow at?

Yeah, so, you know, currently we've obviously got over $40 million of availability on the facility, so no near-term needs. I think what you can expect us to do is probably term out through the banking relationships a term loan as we continue to grow the outstandings on the facility to stagger out the maturities, and then, you know, we'll see how the other capital sources and uses materialize. But I think for the foreseeable future, continuing to grow the banking relationships, grow the bank group, and turn out the balances is the long-term strategy.

And then maybe one on acquisitions. I mean, are there any constraints outside of equity for the company? Now that equity price has clearly rebounded, but I guess is there, you know, deal flow, would that be a potential constraint or resources at the company? Is there anything other than capital that would be holding you back?

Yeah, I mean, look, I mean, we're in good shape. I mean, we have a good pipeline in front of us, and it's all about kind of executing and we have kind of a team that's well-structured. We brought in people last year and so everything's in good shape and we're just really concentrating on executing on some acquisitions in the first quarter and then we'll see kind of how things progress.

Great. Thanks for taking the questions.

Thank you.

The next question comes from Craig Cucera of B Riley securities. Please go ahead.

Hey, good morning guys. Uh, thanks for the color on the deferred rent. Um, is that going to be weighted more towards the first half of 2021? I think that was the expectation last quarter, or does the activity in the fourth quarter make that a little bit more ratable throughout 2021?

No, that, um, that's a really good question, Craig. Um, it will be weighted more towards the first and second quarter. So I think you can expect approximately half of that in the first quarter, and then it's a little bit more routable throughout the rest of the year.

Okay, great. And as far as the pipeline goes, you have the two large office assets. They performed very well during COVID. Are you looking at primarily retail, as you were, I think, in kind of the second half of the year, or are there any office assets you're potentially looking at?

Yeah, thanks, Greg. Yeah, it's 100% retail. There's no office in the pipeline. But, yeah, we're mainly focused on retail.

Got it. And as you become a larger company over time, do the office assets potentially become sources of additional capital just to become more of a pure play in retail, or are those better long-term holds?

No, I mean, look, it definitely could be that opportunity to become pure retail, but we know the value of those properties, so we'd have to execute on a sale there where we know that the the values being fully recognized by the buyer. So it's nothing that's gonna happen anytime soon, but could be in the future when things kind of stabilize in the macro market.

Got it. And just circling back to capital, I know you still have some room on the line of credit, you know, 40 plus million. Is there an opportunity or an existing accordion feature there, if you needed it?

Yeah, there is. When we expanded the facility in the fourth quarter, we also expanded the accordion to take it up to $200 million, obviously with additional commitments from the lender group.

Got it. Okay, that's it for me. Thank you.

Thanks. Great. Thank you.

Once again, if you have a question, please press star, then 1. And our next question comes from R.J. Milligan of Raymond James. Please go ahead.

Hey, good morning, guys. Most of my questions have been answered, but I'm curious on the more captive pipeline through CTO, do you expect to, you know, how much do you expect to become available through CTO this year? How much do you expect to potentially source from that avenue?

Yeah, I mean, look, there are some attractive assets at CTO, and as CTO, you know, continues to work through, you know, selling its single tenant type properties, We feel like there'll be some opportunity for sure for Alpine this year.

Do you expect the mix of acquisitions, say, over the next two to three years to increase from CTO, or do you think this is going to be a smaller portion of the overall total acquisition activity?

I would say that, you know, it's really in the next 18 months that you would see activity if there's good opportunity for Alpine to buy some attractive credits and cap rates that would probably be in the next 18 months.

Great. That's it. Thanks, guys.

Thanks.

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 for attending the conference call.

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.