Alpine Income Property Trust, Inc. (NYSE:PINE) is a small cap REIT that owns and operates a portfolio of single-tenant net leased retail properties. The company model is not dissimilar to the earlier version of Realty Income (O). O has a market cap of $39.8 billion, while PINE has a market cap of $261.9 million, placing it at the lower end of the small cap range in size. Alpine says its goal is to “seeks attractive risk-adjusted returns and generate dependable cash dividends by….operating a portfolio of single-tenant net leased commercial income properties.” As of June 2023 it has 143 net leased properties located in 34 states. Alpine is a young REIT and its IPO launched in November 2019, offering 7.5 million shares at an opening price of $19.00. Since then the stock has been range bound trading between $13.00 and $20.61; the current price is $17.40, see chart below. I view Alpine as a dividend income play, but getting in at the right point might give you some nice share price appreciation. The company is significantly improving the quality of its portfolio of properties, as described below, and it’s worth consideration.
The Current Property Portfolio
Alpine currently owns properties in 34 states, the majority of which are east of the Mississippi in New Jersey, New York and Ohio. There are also some in Texas. These are freestanding big box retail stores and stores in power centers that are on their own parcel. As of year-end 2022, the company had 3.6 million square feet of retail space. By mid-year 2023, per the Q2 Report, this number increased 8.3% to 3.9 million SF. This space is leased at an average annual rental rate of $11.06 per SF, per the 2022 Annual Report.
I have calculated the top 10 tenants in the company’s 3.9 million square foot portfolio based on square footage leased. Lowe’s (LOW), Walmart (WMT), Family Dollar and Dollar General (DG) are the standouts.
The company’s portfolio also consists of leases in much smaller percentages to Home Depot, Best Buy, Big Lots, Buffalo Wild Wings and Harbor Freight. There is a unique lease for the Alpine Valley Music Theatre, in East Troy, Wisconsin. This is an entertainment venue consisting of a two-sided, open-air, 7,500-seat pavilion, an outdoor amphitheater with a capacity for 37,000, and over 150 acres of green space. The tenant is Live Nation Entertainment and the lease generates $634,000 per year in rent. There is also a Long John Silver fast food restaurant that is ground leased. Other than these two properties, the leases are straightforward net for buildings, either fixed or with rental escalations.
Notes on Lease Structure and Expirations
According to the company’s annual report, 38% of the leases in its portfolio have annual increases in the long-term rent. Nearly all of the leases are triple net, in which the tenant pays for all costs associated with the property including taxes, insurance, and common area maintenance (CAM) if any. Structural reserve in this type of lease may be paid by either the landlord or the tenant. Occupancy across the portfolio was 99.5% as of mid year 2023.
The weighted remaining lease term duration is 7.6 years as of the end of 2022, see chart below. Ideally this period would be longer, and 10% per year rollovers begin in 2027. At lease expiration, tenants can renew or depart, so there is an element of risk here. However, Net Lease Advisor has research on the standard lease terms for various retail tenants nationally, including some of Alpine’s. For example, the typical Family Dollar net lease is 15 years with successive option periods of five (5) years each. Hobby Lobby leases typically have a base term of 15 years, with three, 5-year renewal options. Walgreens apparently used to require eight to ten renewal options of five years each, but recently they ask for 75-year leases with cancellation options every year after year 25. In my real estate experience I have found that most triple net retail tenants have multiple renewal options, often five years in length, and usually at a pre-negotiated rate. This rate is higher than the base lease, but may be favorable compared to the current market. The probability of a tenant staying in place is usually higher much than 50%, due to relocation costs and other factors. This means that while more leases will start expiring after 2030 (and meaningfully in 2027), many of Alpine’s tenants are likely to have five-year renewal options, or more, so I look at this risk as not being excessive.
Credit Ratings of Current Tenants
I consulted Standard & Poor’s to get current credit ratings for the top 10 tenants that occupy over 60.0% of Alpine’s space. These are presented below.
Of course the most worrying tenant of this group is At Home, a Dallas based furniture store, which currently occupies 179,362 square feet or 4.91% of Alpine’s Portfolio. In May of 2023, Standard & Poor’s downgraded At Home, regarding a new $200 million private placement, stating as follows: “”We view the transaction as distressed and tantamount to default because consenting unsecured note holders will receive less than the original par amount promised. We lowered our issuer credit rating on the company to ‘SD’ (selective default) from ‘CCC+’ (substantial risk).” This company currently pays Alpine $1.44 million in rent per year. This is about 3.6% of the total annual rental income of $40.39 million.
Another company of concern is Academy Sports (ASO) a sporting-goods store headquartered in Houston with 268 locations, primarily in the south and southeast. It is rated non-investment grade speculative and leases 5.41% of Alpine’s total space. That said, ASO earnings per share increased 5.2% in 2022 to $7.49 and a new CEO is in place, the company’s former head of merchandising. There’s also some slight overlap here with Dick’s Sporting Goods (DKS), which has a higher credit rating of BBB, or lower investment grade. Like Target (TGT) before it, Dick’s said last week that retail theft is damaging its business and would lead to lower annual profits. This caused a 23.0% drop in second quarter profits, see article. Dollar General also says shrinkage is a concern. However, DKS is the largest US Sporting Goods retailer and has been around a long time, since 1948. I believe it’s likely to survive current shrinkage trends and consumer wallet-tightening.
If we make the hypothetical assumption that At Home goes away, it would remove $1.44 million in income. Funds from operations at the end of 2022 were $23.72 million and dividends were $15.12 million, leaving a difference of $8.6 million, easily covering any shortfall due to At Home. As a business, though, At Home has proved resilient in the past: it survived a 2004 bankruptcy filing, and was revived with a new name and new investors, see story.
2023 Rebalancing the Portfolio for the Better
Alpine has spent the last year restructuring its portfolio. This meant selling non-investment grade, low cap rate assets (i.e. bought at a premium) and moving the money into higher cap rate (lower valuation, more defensible) properties. In the first half of 2023, it focused on selling “non investment grade tenant properties” including two stores leased to Academy Sports, which is rated BB. These stores and the At Home stores would have been my choices to sell.
Alpine used the proceeds of $187 million to buy higher quality, investment grade-rated tenant spaces at cap rates averaging a 7.1%. This is well above the current retail cap rate of 6.17%, per the Boulder Group’s net lease research, see below, in an environment where cap rates have increased for five quarters. During the second quarter 2023, the company invested another $60 million into a number of new retail buildings leased to Lowe’s, Best Buy, and Dick’s Sporting Goods, all current tenants. It also expanded to buy buildings leased Marshalls (TJX), Chick-Fil-A, Starbucks (SBUX), and HomeGoods (a TJX subsidiary); these are all new tenants for Alpine. They were bought at an average cap rate of 6.8%, still well above the national retail average. About 85% of these new base rents acquired are from a tenant or parent company with an investment grade credit rating. Standard & Poor’s rates Best Buy BBB+, Starbucks BBB+, and TJX an A. BBB+ being lower medium investment grade, and A is upper medium investment grade. This rebalancing is a wise move on the part of Alpine, lowering risk and improving quality in a rising interest rate environment.
Although I am partial to discounted cash flows to value shares, the market approach for REITs is Price/Funds From Operations (FFO). FFO is essentially the REIT cash flow and Alpine publishes this metric in its annual report. In the second quarter 2023, the company’s FFO outlook was revised to $1.52-$1.55. Below is a list of price to FFO multiples for 13 different publicly listed retail REITs of various market caps. The average for this group was 13.75.
Alpine’s current share price is $17.62, which at a projected FFO of $1.55 is equal to a price/FFO multiple of 10.0, exceptionally low compared to other REITS. Below is a chart of retail REITs that are similar in strategy to Alpine, and considered its peers, including Agree Realty (ADC) and Four Corners Trust (FCPT). The average multiple for this group is 15.8. If we assume Alpine’s number should be between 13.75 and 15.8, or let’s say about 14.5, then the value of its share should be $22.48 using a FFO number of $1.55. At the lower multiple of 13.75, shares should trade at $21.31. At the current price of $17.62, shares are easily 15-20% undervalued.
The dividend yield is currently 6.32%. This is significantly higher than most of Alpine’s peer group, which have yields of 4.0-5.0%. Alpine’s first payment was December 2019 in the amount of $0.06. Alpine’s dividend was $0.658 in 2019, $0.82 in 2020, $1.015 in 2021, and $1.09 in 2022. I calculate an annual compound growth rate of 13.4%.
There have been two dividends paid in 2023, at $0.275 per quarter and there should be an increase in the next quarter or the fourth quarter. The dividend payout ratio has varied from 63.0% to 66.7% of FFO and for 2023 the company is estimating a higher payout of 72.0%, still well within industry norms and easily covered.
Risks to Outlook
My initial concern with this company was the percentage of non-investment grade tenants at the end of 2022, about 10% of the total square footage. However, Alpine began addressing this in 2023 by divesting of most of its Academy Sports spaces and rotating into Starbucks and Marshalls and adding more space leased to Lowe’s. These are all investment grade tenants. Alpine needs to continue this trend, but I think the company is taking the right steps. My other concern is that the remaining lease duration is 7.6 years, which in an ideal world would be longer. While more leases will start expiring after 2030, many of Alpine’s tenants are likely to have multiple five year renewal options, so I look at this risk as not being excessive.
I see Alpine as a dividend income play, paying 6.3% today and increasing next quarter. Getting in at the right point might give you some meaningful share price appreciation in the future. Using a Price/FFO metric, shares are as much as 20% undervalued compared to peers at their current $17.62 level (as of this writing). Alpine is well managed and has been steering its retail mix toward more investment grade companies like Lowe’s, Marshalls, Starbucks and Chik-Fil-A . I believe the stock is currently a smart buy for dividend investors.