Alpine Income Property Trust, Inc. Q2 FY2025 earnings call

• Earnings growth driven by investment activity over the last year; no additional property acquisitions this quarter but actively pursuing opportunities. - Sold 5 net lease properties for $16.5 million with weighted average exit cap of 7.9%; reduced Walgreens exposure to 7% of ABR. - Provided seller financing and originated commercial loans totaling $6.6 million with weighted average initial yield of 9.8%; year-to-date loan closings $46.2 million with weighted average initial yield of 9.1%. - Portfolio details: 129 properties, 3.9 million sq ft, 98.2% occupied; top tenants DICK's Sporting Goods and Lowe's at 20% of ABR; 51% from investment-grade tenants; weighted average remaining lease term 8.9 years. - Bass Pro Shops completed renovation and amended lease to 20-year term; At Home properties paid rent in July and not on initial closure list. - Repurchased approximately 273,000 common shares for $4.3 million this quarter; increased quarterly cash dividend to $0.285 per share. - Ended quarter with net debt to pro forma adjusted EBITDA at 8.1x and $57 million of liquidity; $2.8 million noncash impairment charges related to vacant properties. - Portfolio-wide in-place annual base rent $45.3 million on straight-line basis.

For the quarter, total revenue was $14.9 million, including lease income of $12 million and interest income from commercial loans of $2.7 million. FFO and AFFO for the quarter were both $0.44 per diluted share, representing 2.3% growth over the comparable quarter of the prior year. Year-to-date, total revenue was $29.1 million, including lease income of $23.8 million and interest income from commercial loans at $5 million. FFO and AFFO year-to-date were both $0.88 per share, representing 4.8% and 3.5% growth, respectively, over the comparable period of the prior year. The portfolio consists of 129 properties totaling 3.9 million square feet across 34 states and was 98.2% occupied. Top two tenants are Investment Grade, DICK's Sporting Goods and Lowe's that together represent 20% of the portfolio ABR. 51% of the portfolio ABR is derived from investment-grade rated tenants. Weighted average remaining lease term is 8.9 years, up from 6.6 years a year ago.

• Reaffirming FFO and AFFO guidance range of $1.74 to $1.77 per diluted share for full year 2025. - Increasing investment volume by $30 million to a new range of $100 million to $130 million for the year.

• Factors and risks that could cause actual results to differ materially from expectations disclosed in SEC filings. - Uncertainties in property acquisitions and loan investments due to competitive market conditions. - Potential impacts of tenant bankruptcies like At Home on property performance. - Risks associated with asset sales and redeployment of proceeds.

Q: With the given increase to the investment guidance and the opportunities that you guys kind of mentioned within the loan book, how should we kind of look at investments for the remainder of the year?

A: We're seeing right now pretty active on the both acquisition front and loan front, but I would say that more of the structured loan investment activity seems to be closer to happening than acquisitions. So we're hopeful that in the next 60 days, we're going to have some activity here on the structured loan investments that we're very excited about. On the acquisition side, we're pursuing things, but it's pretty competitive, as you know. And so less sure about the timing of those investments.

Q: What's going to be the quarterly AFFO impact on that [public payoff in July]?

A: With $25.5 million, it was really 9.5%. They'll go to pay down the line, the variable portion of the line, which is around 6%. So it's around a 300 basis point a little more spread, impact a couple of hundred grand a quarter, just kind of [ opening ] -- a little bit more number opening a quarter.

Q: Just first on Walgreens, you continue to pair down your exposure there. So can you just talk a little bit about what the market is like for Walgreens as well as At Home. Who are the potential buyers? What sort of cap rates are we looking at there and just the overall level of interest in boxes from those 2 tenants?

A: In general, the market is fairly active. So as we -- as we see reasonable pricing, we'll keep moving through the Walgreens, and we're actually working on a couple more sales, but the pricing, it just obviously depends on location, of course, and your lease term, but the cap rates can be anywhere from high 7s to early 10s or 11s, just depending on, again, location and quality. And we're seeing basically people that, a lot of high net worth people buying Walgreens and saying, okay, I'm going to take the rest of the term and get good yield and then it's a great location or a good location. And I know another tenant is going to want it because these are corners and drive-throughs. So they're not really worried about knowing exactly who's going to backfill it just knowing that on a macro sense, it's a good investment. So a fairly active market on the Walgreens side, on like At Homes, you're seeing users that want to get these big box positions. And as you know, most of At Homes are low rent payers. So a lot of these are in the money as far as market rates versus what At Home is paying. And so it's really, as big boxes become less available. There's a fair amount of people. Again, it's a good location, good market that people are interested in taking those down and either redeveloping them or their users that will take the box are split up.

Q: Can we look at the At Homes, the ones that you have currently operating? Would those be better productivity sites for them? Do you have any insight into that?

A: Yes. So they are. So we don't expect them to reject these whatsoever. There have good operations, so good locations. So I don't see that. And actually, we have people that are more interested in than being gone than being there. So we'll monitor it, but so far, so good.

Q: I wanted to go back to the acquisition market, and I wanted to get some more color on what kind of properties you're targeting? Are you looking for investment-grade property is the longer lease terms? Or are you kind of open to what you're seeing in the market?

A: Yes. I mean we're definitely doing the Barbell approach, as we mentioned in the call that we're looking for investment grade, longer duration leases or at least good locations where we think we can do an extended and blend after acquiring a property. And then basically coupling that with the kind of higher return yielding sort of investments. So we're pursuing on both sides, and we feel like we'll get something done here for sure this quarter. But that, in general, is like we're going for a higher quality on the acquisition side to couple that with the loan investment side.

Q: Your leverage was 8.1x as of 2Q. Can you provide some more color on how you think about the leverage and where you guys are targeting that number?

A: Yes. I mean as we're selling assets, that will come down and it would have come down in the quarter if the loan payoff happened in the quarter, but it happened a day after. So we can easily manage that on the leverage side and obviously, buying back stock accretively on earnings and accretively on NAV drives up the leverage a little bit, but right thing to do, and we have nice free cash flow. So we use that to keep leverage in check as well. But looking for the opportunities to make investments that would basically tick up the leverage a little bit, but then quickly sell through the Walgreens to bring it back down. So just appropriately managing the balance sheet.

Q: I think earlier this year, you were seeing some compression on structured finance yields versus last year. Is that still the situation today?

A: No. Most interesting thing. We think that the banks would be back at it and it would be competitive. But all of a sudden, talking to very high-quality sponsors with very high-quality projects or said that the banks are shrinking again, at least for the activities that these folks are taking on. And so we're seeing yields being as good or even maybe better on some certain situations. So luckily, we're back to a target-rich environment.

Q: You've got the Bass Pro Shops lease taking occupancy here in the third quarter. Was there any lift in that lease or any change?

A: Yes, there was. The rent rolled up about $40,000, $50,000 a quarter per month and almost $0.5 million a year. And additionally, the lease term that was remaining part of that assignment was less than 10 years, and now is 20 years.

Q: Maybe looking at the loan portfolio, again, I know it wasn't a particularly early prepayment. But -- do any of the other loans have kind of early repayment options. Could that be kind of a significant thing here if interest rates were to decline, call it, in the next 6 to 12 months?

A: Yes. You're not going to see as much early repayments, because it's really inefficient for the sponsors. Our loans are fairly short duration anyway. They're not going to go do a refi to save 200, 300 bps in spread. It's really they're looking to sell these assets primarily. So if interest rate drop, I wouldn't expect any sort of like mass payoff early payoffs.

Q: Given your comments about the difficult acquisition environment, these days. You increased the investment guidance, but left the dispositions, the same, why not look to sell more assets, especially with the stock trading at roughly an implied 10% cap rate and use those proceeds to both lower debt and buyback stock?

A: I think that certainly could be a possibility, but we are seeing good investments that are accretive to the company rather than shrinking the company. I think we're seeing some really good investment opportunities, which will make the enterprise worth more. So you won't see us rapidly selling just to buyback stock. As we're selling assets, we're being patient about it, not some sort of fire sales, so it's a little bit just kind of taking our time with it, unless we see a big acquisition happen and we really want to speed it up, which we would do that.