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spk01: Good day, and welcome to the Alpine Income Property Trust Second Quarter 2024 Operating Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, please press star 1-1. As a reminder, this call is being recorded. I would like to turn the call over to John Albright, President and CEO. Please go ahead.
spk02: Good morning, everyone, and thank you for joining us today for the Alpine Income Property Trust second quarter 2024 operating results conference call. I am pleased to have Phil Mays, our new chief financial officer, joining me this morning. Before we begin, I will turn it over to Phil to provide customary disclosures regarding today's call.
spk07: Phil? Thanks, John. I would 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 files. You can find our SEC reports, earnings release, and most recent investor presentation, which contains reconciliations of the non-gap financial measures we used on our website at alpinereed.com. With that, I will turn the call back over to John.
spk02: Thanks, Bill. We are pleased that our successful asset recycling and investments and higher yielding quality loans have delivered a strong quarter and led to an increase in our earnings guidance. On the asset recycling front, during the quarter, we acquired a $14.6 million property leased to investment grade tenants Best Buy and Golf Galaxy. and a creative yield to the disposition of two properties leased to Festival Foods and Hobby Lobby for a disposition volume of $6.6 million and a blended exit cap rate of 7% for the sold properties. Further, we're beginning to see investment opportunities in the market that we plan to take advantage of and continue recycling at accretive yields. On the loan investment front, we originated a $6.1 million first mortgage investment of which $4.6 million was funded during the quarter. The initial yield on this investment was 11.5%, and was to provide funding toward the four-pad retail development anchored by Wawa in a growing submarket of Cincinnati, Ohio. During the quarter, we also sold $13.6 million A1 participation interest in our $23.4 million portfolio loans, secured by 39 properties that we originated in November of 2023. As a part of the transaction, the loan was rated by an independent rating agency, whereby it received an A- rating. This sale frees up capital for additional quality, high-yielding loan investments. Including both property and structured investments, year-to-date through June 30, 2024, the company has made total investments of $28.9 million and a weighted average initial investment yield of 9.8%. while our disposition activities totaled 20.2 million at a weighted average exit yield of 7.7%. As of quarter end, our portfolio was 99% occupied and consisted of 137 properties totaling 3.8 million square feet with tenants operating in 23 sectors within 34 states. Our top tenants remain unchanged from our first quarter earnings call in April, with Best Buy making it into our top five tenants after our recent acquisition. Further, we're actively tearing down our Walgreens exposure and currently have two Walgreens in the sales process. All of our top five tenants carry investment-grade credit ratings, and we ended the quarter with 67% of our total annualized base rents coming from tenants with an investment-grade credit rating, an increase of 400 basis points from this time last year. From a valuation perspective, we are currently trading well above an implied 8% cap rate on our real estate portfolio and a meaningful discount to our book value of approximately $18 per share. Additionally, we have one of the highest dividend yields in our peer group, along with a healthy free cash flow and strong AFFO per share growth projected for 2024. Simply put, Alpine shares are a great value today. Lastly, given our strong earnings during the first half of the year, we have increased our full FFO and FFO guidance by $0.07 per share, or 4.6% at the low end, and $0.06 a share, or 3.8% at the high end. With that, I'll turn the call over to Phil to talk about our second quarter performance balance sheet and guidance.
spk07: Thanks, John. First, it's a privilege to join the team here at Alpine. I've only been here a few weeks, but it is clear that management and the board do not sit still and are constantly working to increase shareholder value. As the new CFO, I will endeavor to do the same. Today, I will briefly highlight our earnings, balance sheet and guidance, and then open the call to questions. Beginning with financial results, FFO and AFFO were both 43 cents per share for the quarter. This represents an increase of 6 cents per share, or 16%, over the second quarter of 2023. The growth in our earnings was driven by interest income from our loan portfolio along with accretive asset recycling. Additionally, other revenue for this quarter includes $100,000 of non-recurring leasing commission related to the 39 properties securing our $23.4 million portfolio loan. Our G&A for the quarter was $1.6 million. This is consistent with G&A for both the prior quarter and the second quarter of last year. As a reminder, G&A primarily consists of our external manager fee, which was $1 million for the quarter. During the quarter, the company paid a cash dividend of 27.5 cents per share. Our dividend is well covered, and this represents an FFO payout ratio of 64%. We do aim to pay out 100% of our taxable income each year, and consistent with past practice, we will announce towards the end of August our quarterly dividend amount for the third quarter. Moving to the balance sheet. We ended the quarter with net debt to enterprise value of 53%, net debt to EBITDA of 7.4 times, and a fixed charge coverage ratio of 30.4 times. Additionally, we ended the quarter with $185 million in liquidity, and we have no debt maturities until 2026. One final balance sheet note. As John discussed, we sold at $13.6 million A1 participation interest in our $23.4 million portfolio loan. As required by GAAP, we will continue to report the full amount of this loan receivable on our balance sheet with a separate liability line item for the $13.6 million participation interest. Further, interest income will continue to be recorded on the full loan amount with interest expense, including an offsetting amount for the participation interest sold. With regards to guidance, we are increasing our full-year 2024 outlook to a new FFO guidance range of $1.58 to $1.62 per share, and a new ASFO guidance range of $1.60 to $1.64 per share. This represents a 4.2% increase at the midpoint of these ranges. The acquisition and disposition assumptions underlying our guidance remains unchanged at a range of $50 million to $80 million for each. Lastly, a couple of quick modeling notes. We begin the third quarter with in place annualized straight-line base rent of $39.8 million and $39.5 million of in-place annualized cash base rent. Our annualized interest income currently has a run rate of $4.3 million, which, as previously discussed, is now offset by approximately $1.1 million of additional interest expense associated with the loan participation sale. With that, operator, please open the line for questions.
spk01: Thank you. If you'd like to ask a question, please press star 1-1. If your question has been answered and you'd like to remove yourself from the queue, please press star 1-1 again. One moment for questions. And our first question comes from Gaurav Mehta with Alliance Global Partners. Your line is open.
spk04: Thank you. Good morning. some color on what you were seeing in the transaction market for net lease properties?
spk02: Yeah, so we're seeing still some very good buyer interest for smaller net lease property, kind of $5 million and below. It's still a very active market and not a lot of dislocation. Larger properties aren't moving as much. um you know there's there's a little bit more activity than last quarter for sure we are seeing our opportunities where you know people need capital uh one want to sell properties uh or need some financing uh i wouldn't if but it's much much better environment now than it was last quarter okay um i also wanted to ask you on the
spk04: acquisition that was completed in second quarter. The lease term on the acquisition was lower than your weighted average lease term and wanted to get some color on the lease term. And is that something you plan to pursue going forward?
spk02: Yeah, we mentioned in our investor presentation that we're going to look to increase our weighted average lease term as we move from here. That property that we bought, you know, again, investment grade credit tenants, lease rates at or below market in a location where there's no supply. So the tenants are doing well. They don't have opportunity to move and find another available site, and the disruption might make no sense. So we have a very high confidence that they're going to renew and discussions with them as the stores do well and it's the right size. So as you know, that's been our strategy is to pick up high quality properties at higher yields with a strong conviction that they're going to renew. But knowing that in the context of the public markets, we will work on increasing our weighted average leaf length.
spk04: Okay, thank you. That's all I had. Thanks.
spk01: Thank you. Our next question comes from RJ Milligan with Raymond James. Your line is open.
spk03: Hey, good morning, guys. John, you mentioned that you're looking to, I think you have two Walgreens under contract to dispose. Just curious what the lease expiration schedule looks for your Walgreens exposure, if there's any short-term, you know, releasing risk.
spk02: Yeah, so our average lease length of the Walgreens is about eight years. So we have a longer duration there with the Walgreens, and that obviously gives us a better opportunity to sell the properties at reasonable cap rates. And so obviously mentioning that we have two in the sales process, and we'll start working through some others that are really good locations. and look to actively bring down Walgreens from the number one position. So I feel like we'll definitely make some good headway for the rest of the year on doing that.
spk03: Thanks. That's helpful. And just given the recent recovery in some of the net lease stocks, I'm curious how that changes your cost of capital equation and the outlook for the rest of the year in terms of Right now, I think you're set to be, per guidance, sort of a net neutral in terms of acquisitions and dispositions. And I'm curious if, you know, where do we need to see Alpine stock go to get to a net acquirer position?
spk02: Yeah, I mean, look, we're finding, you know, as I mentioned, good opportunities. And we still, you know, given that we do want to sell Walgreens down, you know, that's a good source of capital to redeploy. And so we don't necessarily need the public markets to grow. Obviously, we'd love the public markets to be supportive for growth. But we're going to be patient and see whether, you know, that basically happens for us. And so we'll keep on trying to put points on the board here and obviously stream some good successes here. And we feel like as much as the broad markets are supportive, that will come for us. But we don't need to depend on it to be somewhat of a net acquirer. And so that's kind of where we are right now.
spk03: Great. That's it for me. Thanks for the color. Thank you.
spk01: Thank you. Our next question comes from Rob Stevenson with J&M Montgomery Scott, LLC.
spk05: Good morning. John, just to follow up on the Walgreens, given the issues and the fact that a lot of people want to reduce their Walgreens exposure, who are the prospective buyers of these properties these days? Are these just local guys that want the, you know, 8 to 10 years of investment grade tenants? Are these guys looking to do something else if Walgreens doesn't renew? How would you characterize the potential buyer pool of Walgreens assets today?
spk02: Yeah, Rob, you basically answered it all day above. We have, again, looking at our demographics of our total portfolio, you can basically summarize that we have really good locations. You have 1031 buyers who are basically saying, okay, I get Walgreens, good credit for a good lease length in a market that's dynamic, growing, you know, no one's building anything, and you're buying it, you know, below replacement costs. And then we've had situations where tenants want the Walgreens box and will basically say, I can probably negotiate maybe an early termination with Walgreens. even though we don't have any indications they're closing the store. But, you know, there's a little bit of that situation where tenants want to get a hold of a big corner. So it's all they love.
spk05: Okay. And then to your comments on, you know, extending Walt, there's four, you know, a little over four and a half years left on the Best Buy and Golf Galaxy Dick's lease. Any sense where these properties rank within the, you know, overall profitability range? scale of these retailers? And have you guys already had conversations with them about extension?
spk02: Yeah. I mean, look, we talked to them when we bought the property and they, you know, basically decided the properties are doing, or those locations are doing very good for them. And so certainly we can go in there and, you know, negotiate some sorts of early extension, but it's a little early for them and for us. And so, at the appropriate time, we'll definitely discuss that with them. Usually, we'd like to wait for them to want to refresh a store and maybe provide them capital to basically get a longer lease term and a return on that capital. You know, we don't feel like there's a rush to do anything. You know, where they're located is very strong demographics. And so, you know, the market should even be better in the next couple of years.
spk05: Okay. And then these assets are obviously big boxes. How are you thinking about the overall portfolio mix going forward in terms of smaller boxes versus bigger boxes? Or is it just all opportunity driven at this point for you guys?
spk02: It is opportunity driven, but we're seeing more opportunity, as I might have mentioned before, on the larger boxes, given that you're not really talking about the smaller 1031 buyers. So the arbitrage is much greater. In the smaller properties, we're seeing cap rates, even though the interest rate is coming down, cap rates being extremely supportive of selling the properties. And so we'll take advantage of, you know, that cost of capital selling at, you know, very low cap rates and buying where there's value opportunities. So we kind of like that. But, I mean, we'll be in general opportunistic, but we're seeing more opportunities on the larger ticket items.
spk05: Okay. And then last one for me. How should we be thinking about the second half earnings? Is there anything that's non-recurring this quarter to next or any drags that you expect in the back half of the year? If I look at either the 84 cents of FFO that you guys have done year to date or the 43 cents in the second quarter, both of those run rates are well above where the buck 59 to buck 62 guidance range is. What's the drag or what's the non-reoccurring that needs to come out of these numbers and when we're thinking about the back half of the year.
spk07: Yeah, Rob, it's Phil. I think any time you're talking about earnings per share, you've got to keep in context that just $150,000 represents one cent of FFO, so a small amount or just time can move the needle here. With that said, the current quarter did have, as I mentioned in my remarks, $200,000 non-recurring leasing commissions in primary fees, management and leasing commissions, for managing the 39 properties that underlie the portfolio loan. And there was an unusual large amount of leasing commissions from that discord. non-recurring in the current quarter. And then I think, you know, you got to keep in mind just transaction timing, which falls into a couple of buckets, right? One with our properties and one with our loan portfolio. With properties, you know, acquisitions and dispositions. Dispositions can very well lead the acquisition, and that would be diluted. And look, we've got a line of credit largely swapped out. So if that were to happen, you know, we may not, we can't really pay down the line all the way because we've got $50 million of it swapped. So there could be a temporary time, just temporary where we're sitting on some cash, right, before we redeploy it. And with the loan portfolio in particular, the portfolio loan, right, that borrower is selling those properties or wants to sell those properties and repay the loans, you could have some time there. So I think, you know, between the one-time item in this quarter and then just largely transaction timing, you have a relatively small amount that can quickly move the needle.
spk05: Okay, that's helpful. Thanks, guys, and have a great weekend. You too. Thanks.
spk01: Thank you. Our next question comes from Wes Galladay with Baird. Your line is open.
spk10: Hey, good morning to everyone. When you look to make future loan investments, are you looking to sell parts of it like you did with the A1 deal?
spk02: No, you know, selling the A1 deal just freed up some capital because we are restricted from how much we can do in the loan investments. And so, you know, that allowed us to do another loan in the quarter, and we still have opportunity now to do roughly, you know, 20 million additional loan investments. And so we're being patient and picky, but that was really, I don't see us doing that unless we had some sort of larger loan opportunity, but I don't expect that.
spk10: Okay. How are you thinking about your exposure to family dollar? You know, what happens to the dual branded stores if the brand is sold? And were your stores originally a family dollars for the dual branded ones?
spk02: I'll let Stephen Greathouse join us, our chief investment officer, and let him speak to that.
spk11: Hey, Wes. Yeah, I mean, look, most of what we bought are new, so we have plenty of lease term on them. And, you know, really when we're looking at deeds and underwriting, it's more of a credit play. So, you know, right now our portfolio is sitting fine, and then we'll look to, you know, potentially reduce exposure, but that way you won't be buying any more of them. So we kind of like where we're sitting right now. We're all in.
spk10: Okay. Thanks, everyone. Thank you.
spk01: Thank you. Our next question comes from Matthew Erdner with Jones Trading. Your line is open.
spk09: Hey, good morning, guys. Phil, welcome to the team. So what kind of drives the acquisition activity towards the higher end of your guidance? Because right now you're a little over half But what kind of takes those numbers towards that higher range?
spk02: You know, we're seeing some, as I mentioned, some good opportunities, you know, obviously are being subject to due diligence and execution. So we feel very comfortable that we'll, you know, definitely meet expectations there. You know, we obviously have the second half of the year to work, so we have plenty of opportunities. We're happy with what we see and, you know, I think we'll be able to execute and deliver.
spk09: Yeah, that's good to know. And then I guess how comfortable are you taking the credit facility up? Are you guys comfortable where it is and kind of want to start taking it down?
spk02: No, we're comfortable with where it is. You know, as far as on the lever side, you know, that will, you know, Again, we have a nice, strong free cash flow. And, you know, given it's a small company, it doesn't take much to bring it down. And so, you know, we're comfortable with where it is. But, you know, as I mentioned, we have some very, you know, in the money swaps. So you wouldn't want to take it down beyond kind of where we have a certain level of swaps.
spk09: Yeah, that's helpful. Thanks, guys. Thank you.
spk01: Thank you. And our last question comes from John Masaka with B Raleigh Securities. Your line is open.
spk08: Good morning. Good morning. So with regards to the loan investment, what is the long-term outlook for that portion of the portfolio? Is the thought to replace exposure here as loans are repaid? Or should that kind of wind down over time, especially if we're in a more kind of normalized interest rate environment?
spk02: Yeah, I mean, if we get into more of a normalized, I would call it rather than an interest rate environment, a normalized banking market, you know, that's really what's causing the opportunity. If you don't, the banks are tapped out, they're not looking to lend further in real estate as they were there before. their books down. I mean, they're stuck with a lot of loans that aren't paying off, you know, in the department sector and industrial, you know, those are really, really hard to, uh, to refinance now given where they were. And so, um, so that's where the real opportunity is. So, but we expect it at some point to burn down and be, uh, with more of a, you know, obviously, uh, fully a net lease kind of ownership interest. But, um, But we're taking advantage of the market as we see it right now. We don't see it getting better on the credit availability side. And so, again, finding really high-quality properties that we would not be able to purchase because the cap rates would be way inside of where we'd have an interest. and basically being able to loan money at double digits on levered first mortgage positions at lower basis, then we'd be able to buy the properties. It's just fantastic. And so we'll keep being selective in investing there, but eventually, you know, things will level out, but we don't see it anytime soon.
spk08: Okay. And I know most of those loans are kind of shorter duration in nature, but if interest rates shift here, are there any kind of prepayment options for those counterparties?
spk02: You know, they can prepay, but there's main holes. So, you know, we didn't do all this effort to just get a loan to prepay in six months. On average duration is roughly... 18 months um and so yeah they can pay early but we would have a make whole provision most most likely the the borrowers aren't going to go through the efforts of refinancing just to save a certain amount for such a short duration they just have you know a bigger fish to fry if you will okay um
spk08: And then, you know, you talked a bit about the Walgreens and where the demand for potential sales is coming. I mean, how is that translating maybe broad strokes with the whole Walgreens transaction market into cap rate? I mean, where are kind of the cap rate ranges for those types of assets?
spk02: Yeah, I mean, I'm not kind of going to give you cap rates. I mean, once we, you know, start closing on some of the HLC, but I will say that, you know, whatever, we're seeing is really, you know, it's more localized about the location, not as much about the credit. And so it's not someone just, you know, saying, I don't need to go see the property because I'm buying the property for this duration of the Walgreens credit and so here's my cap rate. It's more, I will never be able to basically be able to buy this corner for this basis and you know, they're willing to pay perhaps a higher cap rate than you might imagine. Now, there'll be certain situations where, you know, it will lean on the Walgreens credit and the cap rate will be higher. So it's a little bit of, you know, a barbell effect where you'll get really good, strong locations where there's a lot of tenants who want to be at that location, and that cap rate would be lower and would basically be based on the strength of the location.
spk08: Okay. That's very helpful, and that's it for me. Thank you very much. Great. Thank you.
spk01: Thank you. We have a question from Barry Oxford with Colliers International. Your line is open.
spk06: Great. Hey, John, how are you doing?
spk01: Excellent.
spk06: Good. My question revolves around the Walgreens, and if they're getting out of a lease early, who are the tenants that are kind of growing and that are kind of the natural tenants to replace a Walgreens? Because if people are more concerned about the location than they are kind of about the duration, that's telling me that they want to have some certainty that if Walgreens walks away, and does a lease termination that they've got somebody that can backfill.
spk02: Yeah, I mean, you know, you have a medical, you know, it's a good box for, you know, urgent cares. You have, you know, restaurants that would scrape it, you know, small, you know, fat catechols, which, as you know, are growing like crazy. You know, the rating pains of the world that, you know, God knows how they're going to find the locations they need to find to grow. You know, even if you went to schools and dollar stores and that sort of thing. So there's, you know, really, you know, quite a bit of that sort of demand because if you think about the Walgreens, it's on the corner, it's out front, you know, mostly drive-thru. So there's a fair amount of interest there.
spk06: John, would you be a buyer of... of an asset where Walgreens is leaving just because you might have a tenant or two that you know would love that spot. And you could get a good deal on it because they're moving out.
spk02: Yeah, we're opportunistic and very location real estate focused. So we absolutely would buy a dark Walgreens if we knew we had a tenant in hand and we were getting paid handsomely for that sort of transaction. You know, we haven't been really searching for that, but, yeah, I mean, we're all about location. I mean, you could see us, you know, perhaps even, you know, helping someone, you know, bridge that capital for that transaction. Right. You know, so it could be on that side of the equation as well.
spk06: Okay. Because it seems to me like the 1031 buyers would not be interested in that kind of deal.
spk02: No, I wouldn't come to that conclusion.
spk06: Yeah. Okay. That's all I have for today. Thanks, guys. Sorry. Thanks, Barry.
spk01: Thank you. This concludes the question and answer session. Thank you for your participation. You may now disconnect. Everyone, have a great day.
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