Alpine Income Property Trust, Inc.

Good day and welcome to Alpine Income Property Trust Q3 2024 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded. I would like to turn the call over to John Albright, President and CEO. Please go ahead.

Good morning, everyone, and thank you for joining us today for Alpine Income Property Trust third quarter 2024 conference call. Before we begin, I'll turn it over to Phil to provide customary disclosures regarding today's call.

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 filings. You can find our SEC reports, earnings, release, and most recent investor presentation, which contain reconciliations of the non-GAAP financial measures we use, on our website at www.alpineread.com. With that, I will turn the call back to Joe.

Thanks, Bill. We are very pleased with our third quarter results across all aspects of our strategy. As we successfully continued the creative asset recycling, originated a high-yielding loan, raised our quarterly dividend, reduced our Walgreens exposure, and lengthened our weighted average lease term. These combined efforts resulted in another quarter of strong earnings growth, reduced leverage, and enabled us to again raise full-year earnings and investment guidance. Beginning with property acquisitions, during the quarter we acquired four net lease properties for $37.5 million at a weighted average initial cap rate of 8.8%. Three of these properties, all located in the greater Tampa Bay area, were purchased for $31.4 million at a sell-leaseback transaction with a subsidiary of Beachside Hospitality Group. The leases for these properties have a lease term of 30 years and include 2% annual escalations. While these properties did sustain some damage during Hurricane Helene and Milton, the operator expects to have them open and operating again toward the end of the year or the first part of next year. Further, our leases require robust insurance requirements, and these properties have more than adequate insurance coverage. Accordingly, we do not expect to have any material interruption in collecting rent from these properties due to the recent hurricanes. Additionally, in September, we purchased and amended a first mortgage construction loan secured by a Publix Anchored Shopping Center in Charlotte, North Carolina. The current loan commitment is for $17.8 million, of which $10 million was funded at closing and has an initial yield of 10.25%. On the decision front, we sold eight properties during the quarter for $48.6 million at a weighted average cash cap rate of 6.8%. These sales generated aggregate gains of $3.4 million and included two Walgreens locations as well as properties leased to Hobby Lobby, Lowe's, Chick-fil-A, Tractor Supply, and Long John Silver's. As previously disclosed, we are actively reducing our exposure to Walgreens, and with the sale of the two Walgreens during the quarter, Walgreens has dropped from our largest tenant concentration to the second largest. Given the attractive locations of our remaining Walgreens assets, we expect to continue reducing our exposure for them to continue moving down our tenant concentration list. Overall for the quarter, our $55 million of investment activity, including both acquisitions and structured investments, generated a weighted average yield of 9.2%, a positive spread of 240 basis points to the 6.8% weighted average cap rate on dispositions completed. As a result of our strategic asset recycling efforts, investment-grade Dick's is now our largest tenant at 11% of ABR, and the Beachside Hospitality Group is now our third largest. Notably, over 52% of our ABR is still derived from investment-grade tenants, and we have increased our weighted average lease term to 8.8 years. Regarding our investment strategy going forward, we continue to see attractive opportunities across the tenant landscape, including higher-yielding investments. Accordingly, while we continue to invest in attractive investment-grade opportunities, we are also comfortable allocating additional capital to more accretive opportunities given the attractive risk-adjusted yields. We expect our investment activity will result in a barbell approach with longer-term investment-grade activity balanced by investments in higher yielding and more accretive assets. Now turning to the loan investment front, at the end of the quarter, our loan portfolio had an aggregate outstanding balance of $43.2 million at a weighted average yield of 10.4%. Generally, we target our structured investment portfolio to be about 10% of the total asset value, but this will scale up or down to some extent depending on the quality of the opportunities we see. As we are currently seeing a lot of opportunities to originate high quality, high yielding loans secured by real estate, this portfolio is likely to scale up a bit in the near term future. One quick balance sheet note, during the quarter we were also pleased to opportunistically access the equity capital markets utilizing the company's common ATM program raising the net proceeds at $11.1 million. Phil will discuss our balance sheet and earnings in more detail and provide our increased outlook for the remainder of the year. However, before turning the call over to Phil, I wanted to take a moment on behalf of all here at the company to send our best wishes to the many impacted by the recent severe weather and our hope for them to have a speedy recovery. And with that, I'll turn the call over to Phil.

Thanks, John. Beginning with financial results, FFO was 45 cents per diluted share for the quarter, an increase of 22% compared to the 37 cents reported in the third quarter of 2023. AFFO was 44 cents per diluted share for the quarter, an increase of 16% compared to the 38 cents reported in the third quarter of 2023. Total revenue was $13.5 million for the quarter, including lease income of $11.7 million and interest income from commercial loans of $1.7 million. There are two notable accounting matters that may have caused loan interest income to be higher than some of you anticipated and lease income to be lower than anticipated. First, the three properties acquired this quarter through a sales leaseback transaction. These properties constitute real estate for both legal and tax purposes, and consequently, we include them in our property portfolio statistics. However, because the tenants have purchase options, GAAP requires this transaction to be treated as a financing. Second, as discussed last quarter, we sold an A1 participation interest in our portfolio loan, and GAAP also requires this transaction to be reported as a financing. If you exclude these two items from our commercial loan investment, they total $43.2 million outstanding at quarter end, consistent with the amount John discussed earlier, whereas our GAAP balance sheet reflects loan investments of $86.6 million. While the gap reporting for these matters may cause some line item classification differences, it does not have any significant impact on FFO or AFFO. Now moving to the balance sheet, during the quarter, we utilized our common equity ATM program to issue approximately 620,000 shares at a weighted average share price of $18.09 per share, resulting in total net proceeds of $11.1 million. As a result of this equity raise, along with the increase in our earnings from accretive asset recycling and growing commercial loan portfolio, we were able to incrementally improve leverage, ending the quarter with net debt to EBITDA of 6.9 times compared to the 7.4 times reported last quarter. Further, we currently have approximately $80 million of liquidity and no debt maturing until 2026. With regard to our common dividend, given our increased earnings and forward outlook, we raised our quarterly common dividend from 27.5 cents per share to 28 cents per share. Our dividend remains well covered as this represents a healthy AFFO payout ratio of 64%. Lastly, with regard to the guidance, we are raising our full year 2024 outlook to an FFO range of $1.67 to $1.69 per share. and an AFFO range of $1.69 to $1.71 per share. We have now closed $84 million of investments and $69 million of dispositions, inclusive of both property and structured investment activity. Accordingly, we are increasing our investment guidance to a range of $100 million to $110 million and nearing our disposition to a range of $70 million to $75 million. but that operator opened that line for questions.

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. Our first question comes from Michael Goldsmith with UBS. Your line is open.

Good morning. Thanks a lot for taking my questions. transaction activity picked up pretty materially from the first quarter and the second quarter. Can you just talk a little bit about the transaction environment? What you're seeing out there is the increased activity reflective of just a more liquid environment overall?

Yeah, thanks, Michael. Yeah, definitely the liquidity environment has improved, so you are seeing more folks that have wanted to sell assets go ahead and come to market and move through that sort of strategy. And so there are more opportunities out there. We're bidding on more acquisitions and finding, you know, assets that we like and like the risk reward. And so, you know, we're very pleased to see the environment being much more improved as far as opportunities, both on, you know, core acquisitions and on some loan investments.

Got it. And then my, my second question is related to the sale lease back of the properties in Tampa. Um, can you provide a little bit more color on the insurance arrangement? Many of these restaurants are, are closed right now. So, uh, you know, just, just providing, providing some, uh, some more detailed there and then, you know, separately, you know, what, while these have increased the, uh, Walt of, the portfolio has also reduced the investment grade percentage. So can you just talk about how you're thinking about kind of those two offsetting factors as you continue to build out the portfolio? Thanks.

Yeah. So on the restaurant, so they really had more impact from the first storm, Helene, and then the second storm, Milton, really did do much more damage. And so they're rapidly working to get those back open, and there'll probably be better news on that as far as happening, you know, next 30 days rather than at the end of the year. And as far as on insurance, there's two years of business interruption. And then there's full replacement insurance. And so we're in good shape and we're in contact with the operator. And the good thing is the operator has, you know, a significant amount of restaurants throughout the state. The ones that they have on the East Coast have been open. The ones that have in Clearwater open really fast after the storm. And so they're busy getting these reopened and they're going to be in a pretty good shape because unfortunately there are some other people that probably won't be reopening as fast. And so there's going to be less competition. So there's going to be some pent up demand. for those restaurants. And as far as on your question on weighted average life, basically it is closer to nine now than before. And we'll look to keep on increasing the weighted average term, least term of our portfolio, but We're not going to let it really be the tail of the wagon's dog. We can go to a lot of the tenants right now if we want to and quickly do lease extensions early, but they're going to want some sort of benefit as far as a reduced rate. And if you look at our portfolio, you know, our basis is so low compared to our competitors and our lease rates are already so low that we would just really be giving away the store for no reason but to, you know, satisfy Wall Street. So if we thought that we really had to do that and needed to do that, we could quickly go to tennis and do early sales. extensions but you know that's been part of our strategy is to take advantage of leases with maybe six seven years get a higher cap rate because They're great real estate and there's other tenants that would take over those spots. And so that's always been the strategy. And but, you know, we can we can definitely we'll we'll try to load up some more and and extend the term when we when we see fit. But it's real. a really good yield and having a little bit lower lease duration, but knowing that the rent's below market and way below replacement cost basis, that's been kind of the strategy.

Very helpful. And if I can squeeze one more in, you know, you talked about the loan portfolio, you know, being kind of, you know, 10% of the overall portfolio, but at times like now when there could be a little bit more activity there, you would take it higher. How high would you take it? And then inherently like with the loan portfolio, it adds a little bit more lumpiness to the earnings. So how do you go about kind of managing that going forward? Thanks.

Yeah, so I think it's Phil mentioned in his remarks that, you know, we're looking to kind of not go above 10% of total enterprise value as far as our loan book. But we could if we saw some opportunities and as the loan book naturally pays off, you know, that will come down. But given that we have some great relationships with these developers and we're starting to do second transactions with them and third transactions with them now that they know the process and we have the loan docs, maybe we're seeing situations where the deal we just did was a Publix-anchored shopping center in Charlotte with a Chase pad site, a Whataburger pad site. So incredibly great credits, long-duration leases, 20-year lease on public, 15 years or so on Chase. And so, you know, the property is only, you know, nine months away from being finished. And they had a situation where construction costs have increased. And there's a gap in basically between the first mortgage and what it needs to be to complete it. We would love to own it. And this developer has other public sort of developments. And if that happens where the same sort of situation, we're here to help. And we have first-order refusal to buy the Publix and the Chase if the cap rates go above a certain level. So we love the opportunity. It's great risk-adjusted yields and great markets. So we're going to wave it in if we see the opportunities. We're looking at one additional one, but it's a couple months away. But, yeah, we like it, and it keeps us engaged. keeps us abreast with a lot of the merchant developers, and it's great for the pipeline.

Thank you very much. Good luck in the fourth quarter. Thank you. Thanks.

Thank you. Our next question comes from RJ Milligan with Raymond James. Your line is open.

Hey, good morning, guys. Obviously, in the quarter, John, you took down your Walgreens exposure a little bit with some of the dispositions, and now under 10%. I'm just Curious how you feel about your current exposure to Walgreens, and maybe you could give us some detail on the nearest lease term expiration for the Walgreens and average lease duration.

Sure. So the average lease duration, RJ, is 7.6 years. The nearest coming up is six years. And we have a lot of these on the market, and we're getting active bids. We're being selective. If we have a larger acquisition to do, we may push through a couple more. But we're getting good bids because of the locations we have and the lease duration. And obviously you saw Walgreens had a bit of a lift this week from good earnings. So it's a very manageable portfolio. It's only 11, but obviously given our small size, you know, it kind of sticks out a bit. But as you can tell, given that we sold two and we have bids on additional two, it doesn't take much to get this off the top 10 if we really wanted to. But it would be nice to match it up with an acquisition.

Thanks. It's helpful. And so, more broadly, how do we think about, you know, the current macro environment and the potential impact on, on credit loss. And obviously I know that you guys can't provide 2025 guidance, but as you're looking into 2025, what's your outlook for, you know, potential credit loss and just given the current macro environment.

Yeah. I mean, really our portfolio is in pretty good shape and we've been, we've been proactive early on on selling things that, you know, could be issues. I would say the only one really is at home that, Clearly, at-home has a balance sheet issue, not an operations issue, and so I suspect that the lenders will negotiate something with the company that they're not going to harm their position. So I assume they'll work that out. But I would say if there's any sort of credit issue, I'd say at home would be the one. But, you know, those very low basis type properties and we can split up these big boxes and do leasing of smaller tenants to fill it up.

That's helpful. That's it for me. Thanks, guys. Thanks.

Thank you. Our next question comes from Wesley Galladay with Baird. Your line is open.

Hey, good morning, guys. Just sticking with the tenant front. Any plans to reduce exposure to the dollar stores?

You know, a very good question. They're just so small. They're like $800,000 apiece or a million apiece. And this really... You know, we've just been focused more on the Walgreens side. But, yes, the answer is we do have some of them on the market for sure. It just hasn't been a priority given that the Walgreens properties are more kind of $3 million to $4 million. So that's really been the real push rather than the Family Dollar and Dollar General's.

Okay. Can you give some background on the Tampa deal? How did that come about? How quickly were you able to close? And then I think you mentioned there was a purchase option. Can you talk about the timing on that and what the cap rate would be?

Sure. So the relationship with Krabby's, as you know, as CTO, we built two restaurants on the beach and we had, and this goes back seven years ago, we had an operator that didn't work out, that didn't perform. So we brought in Krabby's to take over a different concept And they've done fabulous. They really know how to operate and the sales have been very high performing. And so we've stayed in touch with them about other things we can do together. And they had a unique opportunity to purchase some real iconic restaurants over on the West Coast. They're very big ticket sort of items as far as this restaurant group that they were purchasing, roughly $50 million in value. We came in at a low $30 million to buy the real estate, sell lease back to them. They have a lot of equity in. They can bring a lot of operating synergies to the properties. And then we structured it where after a certain amount of years, after six years, they have an option, not the obligation, to buy out the lease. And that would be at an IRR that's basically double digits to us. So, you know, we love the real estate, love the yield, love the annual escalation. So worst case scenario in our minds is, you know, six years gets paid. sold out at big numbers for us, for the shareholders.

Okay, that sounds good. The presentation of the press release indicated the end-of-period rent was $41.5 million. Can you clarify if that is a cash rent number, and does that include the Tampa properties?

I'll let Phil answer that one. Yeah. Okay. Yeah, so that number is a gap number. The cash number is just a little lighter than that. It's not that different. It's like 39. But the number you're referring to is the gap number and the gap run rate.

Okay, fantastic. And then one last one for me. When you look at the balance sheet of capital markets, any plans for the fourth quarter? You do have a little bit floating on the line. Would you clear that out or get more swaps?

You know, I think we're okay with a little floating rate there. Obviously, depending on the capital markets, you know, we might look to utilize the ATM again. But, you know, we have $280 million of debt, $200 million fixed rate. We got $80 million floating. That rate is coming down. So we're okay with a little floating rate exposure there.

Okay. Thanks, everyone.

Thank you.

Thank you. Our next question comes from Rob Stevenson with Jenny Montgomery Scott. Your line is open.

Good morning. John, beyond the Walgreens and maybe some of the dollar stores, how much of the portfolio today is stuff that you really want to sell over time?

You know, it's really opportunistically selling at this point. So where we have an acquisition lined up, maybe the capital markets still are trading us at a big discount to, to what we think the company's worth. And so we may sell something that we would like to keep, but more of the recycling, Rob, as you've seen us in the past. So I would say we're kind of, everything I left is really muscle versus things that we'd like to discard. So not a lot beyond the Walgreens and dollar stores and that sort of thing.

Is that how you would characterize the low sale in the quarter?

The low sell was basically a group that had a 1031 need, could not find anything to buy in the market, and were really desperate to acquire the property because they knew the property very well and they're very comfortable. So we were able to sell that at a premium price just given their situation, not our desire.

Okay. Okay. And you've talked about the, you know, the Walgreens exposure. How are you guys feeling about the Dick's exposure and the prospect of potentially taking it above the current 11 percent?

I don't I don't think it's going to grow beyond 11 percent unless. there's some sort of unique opportunity, but then we might look to sell down property. So I wouldn't expect it to go above where it is right now.

Okay. And then fourth quarter is typically big transaction volume in the triple net space in a normal year. Can you talk about the size of your funnel today and how that's looking today, given the interest rate cuts, the sort of buyers and sellers, and how we should be thinking about the next couple of quarters in terms of volume of transactions, etc.? ?

Yeah, I mean, really the funnel right now is kind of plus or minus $200 million. They're rather chunky, so it's not a bunch of $5 million deals. It's maybe a portfolio here and there, and so we're being picky as always, but It seems like as we do a transaction, there's always something else behind it coming to us. So we feel very good about the ability to take advantage of the market right now, given that there is more capital out there, a lot more buyers, but the lending market is still constrained. And so we're trying to be aggressive here. It still feels like it's a good opportunity set for us.

Okay. And then, Phil, when you look at the roughly 1.7 of interest income from commercial loans and investments, you still got, I think, almost $8 million to fund on the public stuff. How much else is in the portfolio today that's committed but not yet

Funded that we should be expecting to flow through there over the next couple of quarters You know that the loan portfolio is a little grossed up because the sales leaseback transaction is treated as a financing And then we have the participation sale that I talked about in my comments of about 13 million that kind of grosses up the portfolio also and when you net all that out, it's about 43 million currently outstanding and The commitments are for about $55 million, so a little over $10 million spread there between outstanding and the commitments.

Okay. But neither the three restaurants that are being treated as a financing transaction nor the sale, that should continue to impact that line item on a quarterly basis similarly going forward, right? Absolutely. There isn't any fall-off or step-ups with that. It's just the incremental $10 million of deployment and the timing from the $10 million that you did deploy in the third quarter, right?

Yes, generally correct. Just keep in mind that the self-lease pack, there's not a full quarter in there, so it'll be a little higher next time. So the amount kind of coming through interest income, if you will, related to that is close to $700,000 on a full run rate going forward.

Okay, that's very helpful. Thanks, guys, and have a good weekend.

Thanks, you too.

Thank you. Our next question comes from Matthew Erdner with Jones Trading. Your line is open.

Hey, good morning, guys. Thanks for taking the question. I noticed that quarter over quarter, the Florida exposure went up and Texas kind of went down. Can you talk about where you're seeing the most transaction activity and kind of where the sellers are popping up in the market?

Yeah, I wouldn't say it's any kind of geographic, you know, it really just goes to the big states. You know, there's a lot of stuff in California that's still priced pretty tight. We are seeing a fair amount in Texas and Florida. Those are favored sort of acquisitions for 1031 markets. So, you know, the pricing is sometimes challenging. So I wouldn't say there's any kind of theme to one jurisdiction over the other, but you're just seeing it from more of the major states is where the predominance of the volume's coming from.

Yeah, that's good to know. And then I'm glad you guys made it out mostly unscathed in Florida down there, but do you think that kind of presents an opportunity going forward with sellers kind of wanting to get out of those markets? Are you seeing... Anything like that starting to happen?

Yeah, I mean, we're not seeing it starting to happen, but we're certainly, you know, keeping our eyes out for those opportunities where maybe someone suffered some damage and really doesn't want to go through a restoration work or they're just kind of, you know, uh done with it and you know we're you know i don't we don't see anything right now but you know certainly you know keeping our eyes out for it if there are some some unique uh circumstances great thank you guys thank you thank you and our last question comes from john masaka with b raleigh securities your line is open good morning

Good morning. Sorry if I missed this earlier in the call, but as we think of the kind of remaining investments kind of implying guidance for the rest of the year, what's kind of the split between mortgages and net lease acquisitions?

You know, there's kind of, I would say, a mix of a third on the loan investment side and the balance being core properties.

That's very helpful. And then in terms of kind of cap rate, I mean, you know, the beachhead hospitality portfolio was kind of its own thing. So maybe backing that out, it seemed like the cap rate on the Gulf Galaxy was like in the high sevens. I mean, is that typical of what you're seeing in the market today? Yeah.

Well, I mean, for what we're looking at, we're targeting predominantly seven and a half caps and above. But we may see an opportunity to bring in investment grade exposure or maybe find a Lowe's to replace the Lowe's we had. So we wouldn't mind, we wouldn't be opposed to dipping down the sixes to bring our Lowe's exposure back up. So it's a little bit of, you know, kind of as Phil mentioned earlier, barbell. But that's roughly what we're seeing is on the straight up acquisition side, non-investment grade, kind of in the seven and a half and above.

Is that specific to Lowe's or, you know, given, you know, the non-investment grade exposure increased in the quarter due to the big portfolio transaction, are you looking systematically to kind of increase exposure? investment grade exposure again, or are you kind of agnostic?

Agnostic a little bit. I mean, we like to have the exposure, but it doesn't seem like the market really appreciates it. So we're not going to get, you know, really wedded to it. But if opportunistically, we can kind of you know, put, as I mentioned, like a Lowe's back in higher up in our credit stats, I think that would be helpful. So we'll look to do that, but not, not kind of married to it. Okay.

And then last one for me, in terms of the three assets in Florida, you bought in the quarter or in the restaurant assets in Florida, you bought in the quarter, how big a percentage of Krabby's business are those? And I guess what was kind of, you know, the hurricane creates some disruption in terms of metrics, but what was kind of the trailing coverage on those assets, rent coverage?

You know, roughly where we were basically buying the real estate, it was like a 15% kind of yield to our basically valuation on their NOI.

And in terms of the size of the overall portfolio for them as an operator?

Well, they're 11%, Phil. As far as, you know, in our credit stats, they're 11%. I mean, those three assets. Oh, sorry.

I would say it's about 25%, maybe 20%. I really appreciate the color.

That's it for me. Thank you.

Great. Thanks.

Thank you. We have a question from Craig Cucera with Lucid Capital Markets. Your line is open.

Hey, good morning, guys. I noticed your G&A had picked up a bit this quarter due to legal expenses. Was that just a function of the higher transaction volume during the quarter, or should we expect somewhat higher G&A going forward?

No, that was one time. It didn't have to do with a certain amount of acquisitions, but that was a little bit of it, but that was really more one-time legal. Okay, great. Thanks. Thank you.

Thank you. There are no further questions at this time. This does conclude the question and answer session. You may now disconnect. Everyone, have a great day.