Alpine Income Property Trust, Inc. (NYSE:PINE) Q3 2022 Earnings Conference Call October 21, 2022 9:00 AM ET
Company Participants
Matt Partridge – Chief Financial Officer
John Albright – President and Chief Executive Officer
Conference Call Participants
Rob Stevenson – Janney Montgomery Scott
RJ Milligan – Raymond James
Jason Stewart – Jones Trading
Craig Kucera – B. Riley Securities
Operator
Good day and thank you for standing by. Welcome to the Alpine Third Quarter 2022 Earnings Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Partridge, Chief Financial Officer. Please go ahead.
Matt Partridge
Good morning, everyone and thank you for joining us today for the Alpine Income Property Trust third quarter 2022 operating results conference call. With me today is our CEO and President, John Albright.
Before we begin, I’d like to remind everyone that many of our comments today are considered forward-looking statements under federal securities laws. 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 the 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 non-GAAP financial measures we use on our website at alpinereit.com.
With that, I will now turn the call over to John.
John Albright
Thanks, Matt and good morning everyone. We had a solid third quarter as we continue to improve the quality of our earnings by executing our accretive capital recycling strategy and meaningfully de-risking our balance sheet.
During the quarter, we sold 6 net lease properties for a total disposition volume of $50.5 million, generating total gains of $11.6 million and a weighted average exit cap of 5.5%. The dispositions included properties leased to scrobbles carwash, Container Store 711, Kohl’s, and Jo-Ann Fabric. These sales allowed us to reduce our exposure to low quality tenant credits and correspondingly reinvest the proceeds into predominantly investment grade tenants. Year-to-date, we have sold 11 properties for just over $123 million at a weighted average exit cap rate of 6.5% or 5.6% when removing the impact of the sole remaining office property we sold in the second quarter.
The market for net lease assets remains strong through the third quarter and our buyer pool has been diverse. We sold properties to family offices and other public and private REITs and high net worth individuals and we continue to evaluate attractive disposition opportunities as we work our way into the fourth quarter. We plan to continue our opportunistic approach to capital recycling as we look to generate attractive net investment spreads and pay down debt. Our acquisitions in the quarter were weighted towards high quality national tenants exhibiting strong operating trends, while also opportunistically layering in well-located assets of values below replacement costs.
In total, during the quarter we acquired 9 properties located in 8 states that have a weighted average lease term of 7.5 years at a weighted average cash cap rate of 7.1%. More than 75% of the acquired rents come from tenants with an investment grade credit rating, including Lowe’s, Family Dollar, Dollar Tree, and Dick’s Sporting Goods. Year-to-date, we have acquired 44 net leased properties for just over $145 million at a weighted average going in cash cap rate of 7% and a weighted average remaining lease term and acquisition of 8.9 years.
Coming into the fourth quarter, we owned 146 properties totaling $3.4 million square feet with tenants operating in 26 sectors within 35 states. Of note, Lowe’s is now our number three tenant joining Walgreens, Family Dollar, Dollar Tree, Dollar General, Walmart and Best Buy as investment grade tenants in our top 10 tenant list. While our disposition activities naturally require some reinvestment, we are taking a judicious approach to acquisitions, given the market volatility and deterioration in our cost of capital as a result of higher interest rates and lower stock price. While this is obviously not specific to our company, our approach has been and will continue to be focused on maximizing value for our shareholders, while actively managing risks.
As we communicated in April during our first quarter earnings call, we anticipated upward pressure on cap rates as rising interest rates have not only impacted investment turns, but also liquidity in the market. We started to see a notable shift in tone in September after the Labor Day holiday as cap rates began to drift upwards. We believe this is an opportunity as we exercise patience and position ourselves to drive attractive spreads between our acquisitions and dispositions through active portfolio management.
I will now turn the call over to Matt to talk about our third quarter performance, balance sheet and capital market activities and revised guidance.
Matt Partridge
Thanks, John. Our portfolio continues to perform very well. It was 100% occupied at quarter end and we collected 100% of our contractual base rents during the quarter. We grew Q3 2022 total revenues by more than 40% as compared to the prior year period and while our general and administrative expenses for the quarter increased by 6.5%, G&A as a percentage of revenues decreased by more than 400 basis points reflecting the efficiency of our growth. As John previously mentioned, our disposition efforts generated substantial gains on sale totaling $11.6 million. These gains and our team’s ability to transact in a quickly evolving market, speaks to the attractiveness of the real estate they have been able to aggregate and the implied value of our existing portfolio.
Third quarter 2022 FFO was $0.40 per share, representing an 8.1% increase compared to the third quarter of 2021 and third quarter 2022 AFFO was $0.42 per share, representing a 13.5% increase over the third quarter of 2021. Year-to-date, FFO was $1.36 per share and AFFO was $1.37 per share, representing year-over-year per share growth of 18.3% and 16.1% respectively when compared to the first 9 months of 2021. Our FFO was negatively impacted by our write-off of $284,000 of unamortized financing costs related to our prior revolving credit facility. Our prior facility, which was set to expire in 2023, was terminated in conjunction with our origination of a new $250 million revolving credit facility, which included a $100 million increase compared to our prior revolver.
Our new revolving credit facility also includes certain changes in terms and covenants as well as improved pricing at the lower end of our leverage based pricing grid a sustainability linked pricing component that reduces the applicable interest rate margin if the company meets certain sustainability performance targets and a new maturity date of January 2027. I would like to acknowledge and thank all of our banking partners for their support and efficient execution in what has been a very busy financing market.
Additionally, as we recently announced in our corporate update, we entered into interest rate swaps for the previously unhedged portions of our 2026 and 2027 term loans fixing SOFR over the remaining life of the term loans. As a result of our new revolving credit facilities’ extended maturity date and our new interest rate swaps, we have no debt maturing until 2026 and the only floating rate exposure on our balance sheet is related to our revolving credit facility balance.
We ended the quarter with net debt total enterprise value of 55%, net debt to pro forma EBITDA of 8.3x and we continue to maintain a very healthy fixed charge coverage ratio of 4.4x. Overall, we have ample liquidity to be opportunistic in this volatile market and we continue to make positive strides to improve our balance sheet while maintaining strong earnings growth and driving efficient free cash flow.
As previously announced, the company paid a third quarter cash dividend on September 30 of $0.275 per share, representing a 7.8% year-over-year increase when compared to the company’s Q3 2021 cash dividend and a current annualized yield of approximately 6.5%. Our third quarter FFO and AFFO payout ratios remain very strong at 69% and 65% respectively. We anticipate announcing our regular quarterly cash common stock dividend for the fourth quarter towards the end of November.
As we look towards the balance of the year, we have revised our full year 2022 guidance to account for our Q3 2022 results and revised expectations for our acquisition and disposition activities, capital markets transactions, a steepening of the yield curve and other influential assumptions. We begin the fourth quarter of 2022 with portfolio-wide in-place annualized straight line base rent of $39.2 million and in-place annualized cash based rent of $38.6 million.
Our full year 2022 FFO guidance range was increased by $0.13 at the low end and $0.10 at the high end and our AFFO guidance range was increased by $0.16 at the low end and $0.13 at the high end. 2022 FFO is now projected to be between $1.73 and $1.75 per share and our full year 2022 AFFO guidance range was increased to $1.74 to $1.76 per share. The weighted average share count for the year was lowered by 0.5 million shares at the low end and 1 million shares at the high end, which removes the assumption of a meaningful equity issuance in 2022. We have brought down the top end of our acquisitions guidance to account for our third quarter results in the patience John alluded to earlier and we are tightening the range of our disposition guidance, including raising the midpoint to reflect our revised expectations for asset sales through the end of the year.
I will now pass it back to John for his closing remarks.
John Albright
Thanks, Matt. As we approach our 3-year anniversary as a public company, I am very pleased with the strong dividend growth that we have delivered to our shareholders and the way we have been able to put together and consistently improve our portfolio, which is one of the highest quality collections of net lease assets in the industry. I am confident our strong operational roadmap will enable us to outperform over the long run and as we continue to build the track record of success. We appreciate all of our team’s hard work and continued support of our shareholders.
At this time, we will open it up for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Rob Stevenson with Janney Montgomery Scott. Your line is now open.
Rob Stevenson
Good morning. John, how are you guys thinking you talked about continuing to look for dispositions, but how are you guys looking at acquisitions in the current pricing environment and given your current cash position? You are going to be holding on tight and looking for the absolute best transactions or if stuff meets your transaction criteria, you are still going to be buying stuff here in the fourth quarter?
John Albright
Yes. Thanks, Rob. So we are definitely still active in pursuing, but we are definitely bidding wide. And we are kind of waiting for that pitch moment on some opportunities. So we think that the stress in the system will get more pronounced at the – towards the end of the year. So I think there will be good opportunities that were – so we are active, but we’re not stretching to make a deal for sure.
Rob Stevenson
Okay. And then the existing assets, is there any capital improvements contemplated in the back half of this year into 2023 of any material note?
John Albright
We just on the old-time pottery piece we have another retailer that looks like a much more favorable deal for us that we are working on. So that, but that would be kind of start next year.
Rob Stevenson
Okay. And then can you talk about the movie theater business if you are seeing anything change at the margins there?
John Albright
So, as you know, we only have two theaters. We are really working on the theater right now in Reno in redevelopment. It’s a fantastic site, as I mentioned, on many calls when people ask about the theaters and it looks like we have a hotel developer very interested in the site. So we are really working on alternative uses rather than having into the theater which should produce better economics for us. So that’s where we are spending time with that property and then the other property, the AMC, we do have some buyer interest there. And we will look to execute on it, if it works out. So that will kind of be the theater solution for us.
Rob Stevenson
If you go the hotel route on the one theater, is that something that you would keep or is that something that once it’s done is likely to be a disposition?
John Albright
Likely to be a disposition. There is a chance that it could be in the form of a ground lease, but we wouldn’t be, you won’t see a hotel development in our portfolio.
Rob Stevenson
Okay. And then last one for me, Matt, given your comments about the dividend, where are you guys expected to be in terms of payout of taxable earnings at the current run-rate?
Matt Partridge
We should be at 100% for 2022 and that’s really how we plan to manage the dividend going forward.
Rob Stevenson
Okay. So I mean it’s not like that you have a lot of room to not increase the dividend going forward if earnings grows, that’s right?
Matt Partridge
That’s right. We are trying to manage to 100% of taxable income and maximize free cash flow.
Rob Stevenson
Okay, thanks, guys. Appreciate the time. Have a good weekend.
John Albright
Yes, you too.
Operator
Thank you. Our next question comes from the line of RJ Milligan with Raymond James. Your line is now open.
RJ Milligan
Hey, good morning, guys. I just wanted to follow-up on Rob’s question. But obviously, John, you are a little bit more cautious here, given the lagging cap rates and your higher cost of capital. So, I am curious if you think Alpine will do more dispositions versus acquisitions, say over the next few quarters? And how do you now think about the trade-off between allocating disposition proceeds into acquisitions versus de-lever?
John Albright
Yes. Thanks. So, we think that the activity on continuing to sell assets where it makes sense and recycling into higher yielding assets, is a form of deleveraging. However, on some non-1031 properties that we have, we would look to sell and just pay down the line. So, both in our opinion kind of de-levers, but will be more direct de-lever on some non-1031 assets.
RJ Milligan
Got it. And then John, you described a couple of the buyers for some of the asset sales, but you sold six, which isn’t a lot and include the benefit of having a small portfolio. I am just curious to see, could you do a lot more not that Alpine has to, given your size, but I guess I am more asking about a reboot of the broader market, is there enough demand out there to do this recycling sites?
John Albright
There is on the smaller assets for sure. There is still very active 1031 market. It’s just – it’s time consuming, right, because every deal is a transaction, a contract and LOI and title. And just so we have been doing it really more methodically, rather than just everything on the market kind of thing. So, the answer is, yes, there is still a dynamic 1031 market. Some of our recent acquisitions – our dispositions have happened from markets are still very strong Jacksonville, Florida markets where someone has sold something at a low-cap rate and they are buying multiple net lease properties, whether they sold apartment project or industrial at very low-cap rate. And they are using that to buy five or six net lease type properties. So, the answer is yes, it’s not – I think it’s kind of dissipating as the broader markets have less of that larger transaction stuff going on, but still there.
RJ Milligan
My last question is clearly you guys were sort of ahead of the curve and the dispositions front, especially on the office side, and the portfolios certainly improved in overall quality, but curious where there might be any credit issue concerns going forward, given some of the macro headwinds we have?
John Albright
Yes. I mean look, we obviously, there is, we – on some of the dispositions, we certainly leaned into some of the credits that you could have that concern, so we sold The Container Store, we sold Joanne’s, and looking at our portfolio now. Some of those weaker credits that it was kind of in the, like, let’s just say we have one party setting, and but it’s in New York, in Oceanside, New York. So, it’s like very infill located and when we bought it, we bought it knowing that it’s below market rents, and low per square foot versus kind of that market. So, it could be redeveloped into something else. So, there is kind of a strategy behind what if that tenant was no longer. So, that’s just one example. But we keep on monitoring it. But so far, so good. But we will keep an eye on all the credits.
RJ Milligan
Thank you.
John Albright
Thank you.
Operator
Thank you. Our next question comes from the line of Jason Stewart with Jones Trading. Your line is now open.
Jason Stewart
Thanks. John and Matt, do you guys see any opportunities for distressed investing yet, or is that something that’s sort of to come still?
John Albright
Yes. I think it’s a little too early. We are kind of hearing the stress in the developers that are developing for these tenants on new store growth. Because of construction costs are still fairly elevated in interest rates and banks tightening, the developers are no longer having a comfortable spread on what they can build to and what they could sell. And so we are hearing that sort of stress, if you will. So, I think what’s going to happen is for retailers that want to keep on expanding, they are either going to have to pay more rent, or they are going to have to take over the development themselves or something, because I think it’s going to really, the developers is not going to be able to make money that’s worth the risk. So, we are seeing some opportunities to maybe getting that opportunity zone as far as helping developers on funding them for a development and having the right to buy a property. But it’s too early right now, but it is heading that way.
Jason Stewart
Yes. And what is your – what would be your expectation for where developers were underwriting in terms of cap rates, and where they could probably exit today?
John Albright
I mean I think you are going from call it 200 bases [ph] spread to 100 bases spread from what they can originate to what they can sell. And that’s just – that’s a thin margin.
Jason Stewart
Yes. Okay. Thank you.
John Albright
Thank you.
Operator
Thank you. Our next question comes from the line of Craig Kucera from B. Riley Securities. Your line is now open.
Craig Kucera
Yes. Thanks. Good morning guys. I know earlier in the year, you thought cap rates would start to back up maybe a little earlier than they did. And from second quarter to third quarter, I think it’s about a 10 basis point increase. But, John, you mentioned in your commentary that you saw a real break in September. Can you talk about, maybe where you saw things go in September versus maybe the first quarter or second quarter of the year, and kind of what you are seeing here in October as well?
John Albright
Yes. I will give you kind of interesting tidbit, I guess. We had ICSE had the regional Orlando event about a month ago, maybe a little over a month ago. And it was incredibly happy talk, everyone was very engaged, lots of activity, retailers, even some development, capital transactions. And it was just incredibly positive. And then last week, we were in Atlanta for the Atlanta ICSE, and it was incredibly downer. Everyone was pretty glum about the prospects. And it really goes to the debt markets, that is always as obvious by last week that there is no debt market available for projects. And so it’s less on the leasing side, and more on the capital needed to acquire properties or do development. So, that’s just really translating into higher cap rates. Less so for the net lease space, I will say, that’s more multitalented kind of dynamics on that sort of talk. But on any kind of sizable transactions, the spreads are definitely widened out more pronounced in the last 30 days for sure, than the 90 days. So, I think we expect that same trajectory. I don’t think anyone expects it going back to the good old days, but anytime soon. But there is a little bit of standstill from people that like to sell some properties and still have an old price in mind. So, I think you just have kind of that shadow possible, inventory out there, people that would like to transact. And maybe at some point, they do decide to break price and sell. So, it is creeping up for sure. But there is less transactions as well as sellers are sticking with some of their price expectations.
Craig Kucera
Got it. And are you seeing when you are looking at sort of investment grade versus non-investment grade or any particular sectors where you are starting to see things becoming mispriced because of the change in the debt markets, or is it still pretty much all boats moving or are sinking with the tide?
John Albright
Yes. We are not looking as much for the non-investment grade anymore. I mean I think you probably saw our investor presentation that Matt put out. And if you look at where our multiple is and our portfolio of investment grade has been almost 50%. When you look at the much the – other net lease REITs who have the same investment grade exposure are higher. Their multiples are much, much more than ours. And so that’s kind of the angle we are going to is continue that march to higher investment grade weighting. And so we are not really participating in the non-investment grade market unless there is a good story behind it. But yes, you can assume that the non-investment grade cap rates have moved higher faster than the investment grade.
Craig Kucera
Okay. Thanks for the color.
John Albright
Thank you.
Operator
Thank you. And I am currently showing no further questions at this time. I would like to turn the call back over to John Albright for closing remarks.
End of Q&A
John Albright
Thank you very much for attending the call. Appreciate it.
Operator
This concludes today’s conference call. Thank you for your participation. You may now disconnect.
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