Alpine Income Property: Earnings Mostly In Line While Valuation Remains Cheap (PINE)

Alpine Income Property Trust (NYSE:PINE) announced its results for the last quarter and full year of 2023 last week. The company posted flat revenues of $11.58 million for the quarter (down 0.1% YoY) while analysts were expecting it to have generated $11.61 million, and it posted FFO (funds from operations) of 38 cents while analysts were looking for 37 cents, so the company’s results were more or less in line with analyst estimates.

I find it interesting that the company’s rental revenue actually dropped from $11.59 million to $11.01 million year over year, which was a drop of about 5%. Meanwhile, the company’s real estate expenses jumped by almost 50% during the same period (up from $1.2 million to $1.8 million) and its total operating expenses rose from $9 million to $10 million, which represents a rise of 11%. The company didn’t offer a good explanation for why its revenues dropped year over year while it added more properties. It is possible that its rent price mix got worse from last year, which would be interesting to note, because investors would have liked to see a better price mix during an inflationary period like the one we experienced last year even though it wasn’t as bad as 2022’s almost double-digit inflation (peaking at 9.6%).

On FFO basis, last quarter’s $5.65 million was an improvement over $5.30 million during the same quarter a year ago, but most of this outperformance was caused by a differential of disposition of assets. During the fourth quarter of 2022, the company posted capital gains of $6.55 million from the assets it sold, whereas during this quarter its capital gains was limited to $1.55 million. After adjusting for that, this quarter’s FFO was better than last year’s since FFO is supposed to reflect how much a company is making from continued operations and excludes sold properties as well as capital gains.

For the full year of 2024, the company guided for an FFO of $1.51 to $1.56 per share or an AFFO of $1.53 to $1.58 per share, which is also in line with analyst estimates who were looking for a guidance of $1.55 for the upcoming year. Interestingly enough, the company also guided for $50 to $80 million in acquisitions and for the same amount for dispositions for the year. I am interpreting this as the company is looking to get rid of some non-performing or low-performing properties and replacing them with potentially better performing properties, which is something real estate companies often times do. This strategic move is sometimes referred as “asset recycling”.

During the quarter, the company has made two strategic moves that might influence its future direction and profitability. First, it originated $31 million of first mortgage loans with an initial yield of 9.2%. Second, it created a partnership involving fee sharing with CTO Realty Growth, which will allow Alpine to earn fees from properties managed by CTO. This is significant because these moves will allow the company to generate income from new sources such as mortgages and fees in addition to collecting rent as its traditional business.

The company finished the year acquiring 14 new properties with an average cash cap rate of 7.4% and these properties already started adding up to the company’s profits right away as they were already under contracts with existing tenants paying up rent. During the same year, the company sold 24 properties that had an average cap rate of 6.3% which means between acquisitions and depositions, the company created an additional cap rate margin of 1.1%, not to mention capital gains of $9.3 million on the properties that were sold because properties were sold at a higher price than they were originally purchased.

One thing I find impressive about the company’s results is that it ended the year with significantly more assets than it had just a few years ago when the company had its IPO. By the time the company had its IPO in 2019, it had only 20 properties in 12 states, with a total portfolio size of 0.9 million square feet and $13.3 million annualized rent. Now it has 138 million properties in 35 states with 3.8 million square feet and $38.8 million in annualized rent. Back in 2019, the company’s biggest tenant accounted for 21% of its revenues, which meant that it had high reliance on one customer. Now the biggest tenant only accounts for 12% of the total revenues. The rate of revenues that came from tenants that had an IG rating (investment grade rating) jumped from 36% to 65% indicating that it now has a higher quality of tenants than it did a few years ago.

Along with its earnings, the company also published a list of its top tenants as of the end of last year based on rent amount it collects. The top spot now belongs to Walgreens (WBA) which used to belong to Wells Fargo not long ago. When we look at the list of tenants, one thing stands out. About half of the tenants are specialized retail chains such as Loews (L), Home Depot (HD), Best Buy (BBY), Hobby Lobby (privately owned) and Dick’s Sporting Goods (DKS). On the other hand, we are also seeing a good mix of general stores or discount stores such as Dollar Tree (DLTR), Dollar General (DG) and Walmart (WMT). Of course the top company in the list is a pharmacy store which doesn’t clearly belong to either group and is in a category of itself. This distinction is interesting to note because we see different types of stores performing better under different economic conditions. Specialty stores tend to be more cyclical and perform better when the economy is doing well, and general/discount stores do relatively better when the economy is not doing so hot because people look for cheaper options. By having a good mix of both types of stores as its tenants, Alpine should perform decently under both scenarios. While most of the company’s tenants have an investment grade, their grade is still less than perfect in most cases, with the exception of Walmart. Typically, most retailers will have a BBB rating or below unless they are in an exceptionally dominant position like Walmart is.

The company renewed a lot of contracts during the last year, and now only a handful of contracts are due to expire this year or the next. As a matter of fact, only 8% of the company’s lease contracts are expected to expire in the next 3 years (from early 2024 to end of 2026). Close to half of the existing contracts have almost a decade before they expire. This puts the company in a comfortable position for the foreseeable time and offers a lot of visibility for its existing rent contracts.

Say what you want about the company’s management, but their commitment to raising dividends is pretty impressive. The company currently supports a dividend yield around 7%, and it comes with dividend growth as well. Even though the company didn’t raise its dividends in 2023, it raised dividends a total of 7 times in the last 4 years (basically since its IPO). 2021 was a particularly impressive year, which allowed investors to enjoy 4 dividend hikes. Between Q1 of 2020 and Q4 of 2023, the company hiked its dividends by a total of 37%, and I wouldn’t be surprised if we see more hikes in 2024. Keep in mind that the company’s guidance of FFO of $1.55 means that its current dividend payout ratio will be as high as 71% which means it won’t have that much room to hike its dividends unless the company significantly beats its guidance. A payout ratio of 75% would imply only about a 5-6% dividend hike for 2024 assuming the company meets its guidance.

The company currently trades at a decent valuation based on FFO and AFFO income. It trades at a Price to FFO ratio of 10-11 which gives it a 20-30% discount against its peers depending on whether you are looking at trailing or forward metrics. It has a price to book value of 0.87 which is significantly cheaper than its peers at 1.47 and price to cash flow ratio of 8.5 which is also significantly below sector median of 12.3.

Even though the company has grown its assets and income significantly since its IPO in 2019, the company’s share price hasn’t followed this trend. As a matter of fact, PINE’s share price is down close to 20% since its IPO in 2019. Granted, some of these declines are due to dividend distribution reductions, but investors are still valuing the company at a lower value than they were when the company had way less assets as if all this growth never happened. This also explains why the stock is trading at a significantly cheaper valuation than its peers.

Investors don’t seem to like the company’s reliance on specialty retailers which are seen as a cyclical play, but it also has almost as much exposure to general retails and discount retails. The stock offers a 7% dividend yield, a management committed to hike dividends as much as they can and offers a cheap valuation as compared to its peers. At this point one could at least say that it offers a margin of safety that you don’t see very often these days with its current valuation and income investors might want to take a bite out of this apple.