PINE - NYSE

Good day, and thank you for standing by. Welcome to the Alpine Income Property Trust Q3 Earnings Call. [Operator Instructions] After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jenna McKinney, please go ahead.

Thank you. Joining me in participating on the call this morning are John Albright, President and Chief Executive Officer; Philip Mays, Chief Financial Officer; and other members of the executive team that will be available to answer questions during the call. As a reminder, many of our comments today are considered forward-looking statements under federal securities laws. 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.alpinereit.com. With that, I will turn the call over to John.

Thank you, Jenna, and good morning, everyone. We are pleased to report another strong quarter highlighted by AFFO per share growth of 4.5% compared to the same quarter last year and meaningful investment activity, both during and shortly after the quarter end. We believe this investment activity has set a foundation for continued earnings growth through the remainder of 2025 and into 2026. Starting with our investment activity. During the quarter, we acquired 2 properties ground leased to Lowe's for $21.1 million at a weighted average initial cap rate of 6% and a weighted average lease term or WALT of 11.6 years. Investment-grade rate at Lowe's is now our largest tenant by AVR, surpassing investment-grade rated DICK'S Sporting Goods, which now ranks #2. Year-to-date, through the third quarter, property acquisition volume totaled $60.8 million at a weighted average initial cap rate of 7.7% and a WALT of 13.6 years. Regarding the property dispositions during the quarter, we sold 3 assets for $6.2 million, including an Advance Auto Parts, our vacant theater arena in a vacant property formerly leased to a convenience store. Year-to-date, disposition volumes through September 30 was $34.3 million, of which $29 million, excluding vacant properties was sold at a weighted average exit cap rate of 8.4%. As of quarter end, our property portfolio consisted of 128 properties totaling 4.1 million square feet across 34 states with approximately 99.4% occupied, with 48% of ABR derived from investment-grade rated tenants and a WALT of 8.7 years. Additionally, after the quarter end, we acquired a four-property portfolio for $3.8 million with a weighted average initial cap rate of 8.4% and went nonrefundable on a sales contract on 1 of our 8 remaining Walgreens for $5.5 million. Now moving to our loan investments. As a result of our long-term reputation and deep relationships, we continue to see and capitalize on exciting opportunities to originate high-yielding quality loans with strong sponsors at compelling risk-adjusted returns. During the quarter, we originated 2 loans and 1 upsized loan totaling $28.6 million at a weighted average initial yield of 10.6%. This included a first mortgage loan for industrial redevelopment and a seller financing note related to the sale of our former theater in Reno. Year-to-date, through September 30, we originated $74.8 million of commitments for loan investments at a weighted average initial cash yield of 9.9%. Additionally, as disclosed in our earnings release, we have originated 3 loans since the quarter end. Most notably, a first mortgage loan secured by luxury residential development located in Austin, Texas metropolitan area. Under this loan agreement, we have funded $14.1 million at closing related to a Phase 1 loan with a total commitment of $29.5 million. The loan agreement also provides for Phase II loan with a commitment of up to $31.8 million, all additional funding is subject to the borrower satisfaction of certain conditions. Currently, we anticipate funding the balance of the Phase 1 loan by year-end and the Phase II loan in early 2026. The 36-month loan initially bears interest at 17% inclusive of 4% paid-in-kind interest for the full loan term, stepping down to 16% for month 7 to 12 and 14% thereafter. The loan will be repaid as collateralized home lots are sold with such sales anticipated to begin as early as late 2025. We believe this loan as all of our loans is secured by strong real estate backed by high-quality sponsor. As is often the case with our larger loans, there is institutional interest in pursuing a purchase of a senior tranche of this loan, and we currently anticipate participating in a portion of it out to reduce our net hold and further enhance our yield. In summary, we believe that our recent investment activity across both property and loan investment positions Pine for continued growth through the remainder of 2025 and into 2026. With that, I'll turn the call over to Phil.

Thanks, John. Beginning with financial results. For the third quarter, total revenue was $14.6 million, including lease income of $12.1 million and interest income from loan investments of $2.3 million. FFO and AFFO for the quarter were both $0.46 per diluted share, representing 2.2% and 4.5% growth, respectively, over the comparable quarter of the prior year. Year-to-date through September 30, total revenue was $43.6 million, including lease income of $36 million and interest income from loan investments of $7.4 million. FFO and AFFO were both $1.34 per share, representing 3.9% and 3.1% growth, respectively, over the comparable period of the prior year. Regarding our common dividend, as previously announced, during the quarter, we declared and paid a quarterly cash dividend of $0.285. Our dividend represents an annualized yield of approximately 8.25% and remains well covered with an approximate AFFO payout ratio of 62% for the third quarter. Moving to the balance sheet, we ended the quarter with net debt to pro forma adjusted EBITDA at 7.7x and $61 million of liquidity, consisting of approximately $1.2 million of cash available for use and $60.2 million available under our revolving credit facility. However, with in-place bank commitments, the available capacity on our revolving credit facility can expand an additional $31.3 million as we acquire properties, providing total potential liquidity of more than $90 million. Regarding our property portfolio, we ended the quarter with annualized base rent of $46.3 million on a straight-line basis. As noted before, this amount includes approximately $3.8 million of ABR related to 3 single-tenant restaurant properties acquired in 2024 through a sales leaseback transaction. Under GAAP, we are accounting for these specific sales leaseback transactions as financings. Accordingly, the current annual cash payments of approximately $2.9 million are reflected as interest income in our statement of operations as opposed to lease income. Given the level of loan activity after quarter end, let me provide a current update. Our loan portfolio as of today, reflecting the activity John discussed and some other recent activity, is now approximately $94 million at a weighted average interest rate of 11.5%. Notably, of this amount, approximately $21 million at a weighted average rate of 10.4% is scheduled to mature in 2026. We currently expect to utilize proceeds from these 2026 maturities, selling a senior tranche of 1 or more loan investments, property dispositions and existing capacity on our revolving credit facility to fund loan commitments. One quick note, the $1.9 million impairment charge recorded this quarter related to Walgreens that is currently under contract to be sold. Now turning to guidance. As a result of our recent elevated investment activity, we are increasing both our FFO and AFFO outlook for the full year of 2025 to a new range of $1.82 to $1.85 per diluted share from the previous range of $1.74 to $1.77 per diluted share. With that, operator, please open the call to questions.

[Operator Instructions] Our first question comes from Michael Goldsmith with UBS.

A lot of investment activity, both during the quarter and subsequent to quarter end. So can you just provide a little color on how you're thinking about funding all of this activity?

Michael, it's John. Thanks. Look, we -- as you know, we've been very busy on the recycling side. So some of that's going to come from asset sales as we keep on continuing to increase the credit quality of our portfolio. And then a little bit of this is our loans maturing. And then basically a little bit going to be net growth in anticipation of additional sales so a little bit of balance on both sides.

Got it. And then all this loan activity, you're seeing really nice yields on that, I guess the way it cuts the other way is it can generate lumpiness in the quarters as they come due. So can you talk a little bit about how you're thinking about managing that and these loan expirations just to ensure the AFFO doesn't move around too much.

Yes. So obviously a good question. I mean when we started this kind of loan program about 3 years ago, that was a little bit of the pushback was, well, you can't replace these loans at these rates. But here we are. We are doing it with really existing relationships without even trying and so certainly, as we see more opportunities, part of that funding mechanism that Phil mentioned is selling off senior pieces of these loans. And these loans are very -- are very bite size, and there's a lot of capital out there. So there's a lot of opportunities. So I would -- I'm not worried about replacing these and having kind of earnings coming down because of these are onetime sort of opportunities. We're seeing a strong pipeline of super high-quality kind of assets and sponsorships.

Got it. Well, if you're doing this without really trying -- excited to see what you do when you put some effort into it. I'm just kidding. Thank you very much, good luck in the fourth quarter.

Our next question comes from R.J. Milligan with Raymond James.

John, with the recent activity now in residential development, I think you guys have a loan in Industrial. Just can you tell us how you're thinking about other property types and if you're going to continue to pursue things outside of retail?

Yes. It's not by design, kind of going out here just these unique opportunities with very strong sponsors and very strong assets. The industrial property that we did in Fremont outside of San Francisco, that was actually a retail property that the sponsor is basically converting to industrial to a higher and best use. So part of our underwriting on that is if it was -- if we ever had to foreclose it's roughly 50% of the acquisition, it could still be retail and work on our basis. So to answer your question, we're going to stay more focused on the retail side for sure. But not -- but if we see unique opportunities in that short duration, we're not opposed to taking on those opportunities.

Okay. That's helpful. And then, Phil, you talked about some of the sources of capital next year, some of the loan maturities, potential asset sales. Should we expect that to get reinvested? Or will those proceeds be used to pay down debt, lower leverage?

A little bit of both, but I think, first, they're going to get reinvested into a lot of the loans that were recently done, R.J. So the maturity is coming back from the '26 loans are going to -- we're just kind of proactively redeploying that capital a little early with the loans going out first. The new loans going out first. So a lot of that is going to just recycle into that. But on the margin, you could see leverage tick down a little bit.

Our next question comes from Alec Feygin with Baird.

So on the luxury residential development in Austin, can you talk about how you got comfortable with the loan and what stage of development it currently is at?

Yes. So we're familiar, if you think back at our origins of CTO and when I got here 14 years ago, we had 14,000 acres of land in the Daytona Beach to sell. So we are very familiar with residential lot development through that experience. So with regards to kind of where this project is, it's really at the kind of finish line of delivering lots and actually, there'll be some lot sales starting next week, in fact. So it's really kind of coming in at the late stage and not on the early stage.

Nice. And kind of on that loan, how much of the loan are you looking to sell?

We'll probably look to sell potentially 50% of it. It really depends on how fast the proceeds come back. So it could be less, but potentially up to 50%.

And then switching gears a bit with the vacant assets that were sold in the quarter, how much do we need to remove from operating expenses that you're carrying?

Yes. This is Phil. So the 2 largest vacant properties we have are the theater in Reno, which was sold, that had an annual run rate on the expense side of about $400,000. And the one that we have left at large is the former Party City and that also has a run rate of close to $400,000 on an annual basis. So you can -- if you were to run rate the current quarter, that will come down another about $400,000 on an annual basis once Party City is sold.

And Party City wasn't sold this quarter that...

It was not. Reno was sold in the quarter. It was sold early in the quarter. So pretty much the full impact of that is reflected. But Party City is not sold yet.

Okay. There were 2 vacant assets sold in the quarter. So is the other one just minor?

Yes, there was a little -- we have -- those are the 2 largest, Reno and Party City. We have a few. We had former convenience stores that are really small. There's sold one during the quarter, there's 2 left. Altogether, those don't even come up to $100,000 on an annual run rate. So they're very small and on the margin.

Our next question comes from Rob Stevenson with Janney Montgomery Scott.

Is the sale large loan interest that you may do, is that in the disposition guidance or dispositions just properties in terms of the guidance?

It's -- if we were -- it's not -- it would be on the high end, Rob, that happened or exceeding the high end if it happens before the end of the year. The timing of it is a little hard every day. It could be just before the end of the year or it could be a little bit after the end of the year. If that were to happen before the end of the year, that would put us on the high end or over the high end of guidance on the dispose side.

Okay. But you would classify that as a disposition? Okay.

We historically put dispositions of loans with properties there. And if you look at the guidance, we kind of added the line for that a little bucket when we put year-to-date actuals and there was a line that had loan sales and it showed 0 just to kind of help clarify that we do kind of look at that as a disposition, but if the loan 1 were to happen, we would probably be just over our high end.

Okay. Because the reason why I ask is, if I look at the year-to-date investment in disposition volumes versus the guidance, they are sort of implying between $50 million and $65 million of net investments in the fourth quarter. You got $27.5 million in terms of rough numbers from the proceeds from the repayment of Publix and Verizon. Just trying to figure out how you're going to finance that especially given where the stock price is. I don't know, John, if you're comfortable issuing equity here or whether or not you guys just use the line, but was sort of curious as to like how you guys are thinking about the sort of incremental there and where does sort of leverage peak out at here in the fourth quarter if you do decide to fund any of those net investments on the line?

Yes. So just before -- and then I can -- I'll let John answer. But on the investments, we always put the full amount for the properties, obviously. And for the loans, we put the origination or the initial amount committed. So today, we're sitting at almost $200 million if you include all the subsequent activity on investments. And of that $130 million, $135 million is loans, Rob, but only 72 have funded so far. So we also, in the guidance, put in brackets there kind of on the loans just to help clarify, because it's a great question, how much of the loans are funded year-to-date. So the full amount of that won't fund because the loans won't fully fund by the end of the year.

Okay. So the net would wind up being lower than that sort of $50 million to $65 million that you're implying because that's including the full value.

Yes. I mean there could be $50 million, $60 million of that, that's loans that are not funded.

Okay. That's helpful because it was looking like that leverage was going to peak out at something more substantial here if you guys did it all on the line?

Yes, yes. So there could be $50 million to $60 million of that number that's loan related, that's unfunded by year-end. And then on top of that, you could also see like an A note sale prior to the end of the year that would further help lighten that load for the funding.

Okay. And then I guess, John, what is sort of left within the property portfolio that you want to sell? I mean, is this going through in sort of cleaning up anything remaining? Is it whittling down some of the dollar stuff? How are you thinking about when you look at dispositions, not only in the fourth quarter but in 2026, like what are you sort of thinking that you're going to wind up selling and where is the market for those type of assets today?

Yes. So as we discussed previously, we still have some Walgreens that we definitely are moving through and with dollar stores, as you hit on certainly will be something we'll trim back on. And then there's some other -- we've sold Advance Auto Parts and that sort of things in Tractor supplies and so those sort of assets will continue to kind of grind through, if you will, as we see good pricing. So it's just really using that as a way to kind of reinvest in some of the high credits that we put on this quarter, Lowe's and so forth. So you'll see us be active at the end of the year here with continuingly bring in some real super high-quality type credits, and we're looking forward to kind of what this company looks like starting next year.

And then I guess given the acquisition of the Lowe's, was that opportunistic? Or just from your standpoint, is the property acquisitions going forward going to be more targeted towards the higher credit quality and basically investment grade and above quality tenants? Or are you still looking to acquire stuff across the spectrum on a property-specific basis?

Yes. On the Lowe's, that was off market. It was a relationship driven. We had seen these assets before a couple of years ago, and they're pulled off the market. So we're extremely excited about having those in our portfolio. With regards to -- so you'll see more of the high-quality credit, big box sort of assets coming in. You probably won't see us be active in buying a generic Tractor Supply. Clearly, we don't have car washes. So we like that distinction that no car wash is in the portfolio. So we feel like we're set up pretty strong to kind of offer investors something a little bit different, getting the Lowe's and DICK'S in the top 5 just gives investors an exposure that they can't get at other locations?

Okay. Then last one for me. Is all of beachside open and producing at this point? Or is there still some of that stuff that's down and that you're getting insurance payments on?

No, it's all been open for a while. I mean they opened those up less than 4 months after the hurricane last year. And interesting enough, I mean, they still -- when they open, they weren't obviously as polished looking as they were previous to the hurricane, but they did better sales than they did pre-hurricane. So a lot of pent-up demand from customers and unfortunately, some of their competition did not reopen. So it just kind of drove more traffic to those restaurants.

Okay. So rent coverage today is actually higher than where it was pre-hurricane?

Yes.

Appreciate the time, and have a great weekend.

you, too.

Our next question comes from Gaurav Mehta with Alliance Global Partners.

I wanted to ask if you had any update on your properties that are leased to At Home.

Yes. So those properties as we kind of -- the one is in Concord, North Carolina, that could be sold in the not-too-distant future. And the others are the same situation where we're monitoring kind of what At Home is doing. But if they come back, we have -- we're working on replacement tenants. So the idea would be if At Home vacated 1 of the properties, we would have a replacement tenant in and then we would sell it at a better cap rate than as At Home. So it's a manageable exposure and potential upside.

Okay. Second question, I want to go back to the 2 loans that you did after September, the interest rates on both of them are higher than the year-to-date loan activity, can you provide some color on why the rates were higher at 17% and 16%.

Phil, do you want to handle that?

Yes. So he was just asking about why the interest rates on the residential and the mixed use are significantly higher than the blended rate for the portfolio.

Yes. So on that, basically because it's such short duration loan that so kind of give you more background than maybe you want. Is that the competition for a loan for that sort of product would be mainly from an opportunity fund or a credit fund and those funds really aren't looking to invest where the duration is less than 2 years in order to kind of get a multiple. So we're able to give highly flexible loan, but for that we charge a much higher rate. And so just the flexibility of our loan in the short duration gives us that higher interest rate investment.

Our next question comes from John Massocca with B. Riley Securities.

So maybe given all of the investment activity on the loan front, in particularly subsequent to quarter end. Do you view that as maybe kind of the max level you want to be at in terms of a loan balance if this all kind of blends out? Or could you kind of pursue more of that and become, I guess maybe more of like a mixed loan net lease type 3. It feels like the amount of loan investments are starting to -- certainly in terms of the investment activity outweigh the net lease transactions.

I would say that the -- it just kind of really kind of came together here this last quarter. But the loan activity could tick up from here for sure. But as it's a little bit in anticipation of things burning off, paying down, paying off. And then we are super active on the core net lease side with larger type assets. So you'll see the similar balance, but we think we're delivering -- we know we're delivering really strong free cash flow and high earnings and there's other net lease REITs out there that do the loan program as well. And then you have REITs like VICI that have a balance of net lease and loans. So it's not like we're in a new frontier here.

I just remember thinking and maybe I'm misremembering, the loans are kind of an opportunistic thing a couple of years ago, and now it feels like they've become a bigger part of the investment strategy. I'm wondering if that's something you view as like permanent on a go-forward basis? Or if it's still something that's temporary where you found this kind of opportunistic way to kind of accretively deploy your capital even in a challenged equity market?

No, it's definitely a good point. Yes. So when we are opportunistically thinking that it was like a onetime opportunity. It's become repeat, customers are coming back to us because of the flexibility and the speed that we can transact on. They're willing to pay a higher rate. And then as you know, we get right of first refusal on acquiring these assets. So if the market stalls and cap rates tick up, we have an opportunity to bring these into our portfolio. And so like I've said before, we're getting paid a much higher yield than going out and buying some sort of generic net lease property in the middle of nowhere. We're basically in Austin with very opportunistic type yields with very high-quality sponsor and high-quality asset. And then the Publix that we had payoff in Charlotte, Publix in Charlotte, I think that paid off because they sold it at 5.25% cap. So these are we're getting double-digit unlevered yields on assets that will sell for really, really low cap rates. So it's great to see the opportunities that we're able to kind of -- it's become more of a permanent fixture as the sponsors are still very active in the development side on these credit tenants and the banking system just really is slower, less proceeds, and this is -- we're just basically providing an answer to their capital needs in a much more efficient fashion.

Understood. And then maybe on a very like micro level, with Cornerstone Exchange, pretty significant jump up in the amount you're kind of lending on that project. Why -- I guess maybe why did it increase by so much?

It's basically -- they ended up signing some additional leases. So as they've proven out their development with leases, we weren't alone on it until they have a signed lease and so that's what happened. The development has gotten larger as they've signed leases.

Our next question comes from Craig Kucera with Lucid Capital Markets.

John, I want to circle back with a few questions on the Austin loans. It sounds like you're not taking any entitlement or approval risk at least on Phase 1. Is that a fair assessment as Phase 2 need to be approved?

It's a fair assessment on both. The entitlements are there for both phases and everything needed to basically deliver.

Okay. Great. And what is the current LTV at those loans?

I would put that one in kind of the -- on a discount NPV basis, we're in the 70s.

Okay. And if you were to sell the senior tranche or a portion of those loans, and I think Phil mentioned it might be upwards of 50%, what would your yield be if you're holding the junior piece?

I don't want to like go out there with -- I mean it will be higher. I don't want to give you specific numbers.

Fair enough. All right. Changing gears to Lake Toxaway mixed-use development. Is that just raw land now? Or has the developer started or kind of where in the process of that development?

Yes. The developer has started. So kind of we're coming in like when they really need to really start doing some additional work and delivering pads and that sort of thing.

Our next question comes from Barry Oxford with Colliers International.

John, real quick, a couple of questions on the dividend. Given what I'm hearing on the conference call, you want to retain as much capital as possible. Is it fair to say that even though you could raise the dividend for lack of a better word, substantially, any dividend increase will probably be minimal because you want to retain as much capital from an asset allocation.

That's right. I mean -- so as we progress here and earnings grow, there will be pressure to freeze the dividend just based on what we need to pay out as a REIT.

Right. So you don't run afoul of the REIT rules.

Well, we don't want to pay a check to the IRS. We'd rather give it to our shareholders.

Right, right, right. And then one thing that I noticed in the press release was the credit rate at tenants. Now your investment-grade tenants, the percent of the portfolio was still roughly the same, but you had a fairly good drop with the credit rated tenants. What was going on there?

Credit rated as a percent of the total portfolio. So at the end of the last quarter, it was 51%.

Yes, it went from 81% to 66% and the credit. Yes, the credit is fine, but...

Yes. That was more -- Barry, that's more the Walgreens and the like that used to have a credit rating dropping them that were very, very low and h ad gone from credit rate to not from investment grade to not investment grade, but we're still carrying a rating. It's more related to a couple of tenants like that, like At Home, Walgreens and such dropping the credit rating altogether, and that's what caused that decrease.