2023-04-11 09:00:00 ET
Summary
- Alpine Income Property is an externally-managed net-lease retail REIT. PINE has underperformed its real estate peers since December 2022.
- The recent banking crisis sparked a selling frenzy fueled by mounting concerns among investors regarding PINE's non-investment grade tenant base.
- Despite its steep decline, PINE's valuation has reached more attractive levels, potentially enticing long-term buyers to consider increasing their positions.
Investors in externally-managed net-lease retail REIT Alpine Income Property Trust, Inc. ( PINE ) saw its stock recover remarkably from its dislocated October lows but met with stiff resistance in early February (pre-FQ4 earnings).
We assessed PINE sellers capitalized on the opportunity in early February to cut exposure, taking late momentum buyers for a ride. The selling pressure accelerated through early March, in line with the banking crisis, before bottoming out three to four weeks ago.
As such, PINE collapsed by nearly 25% (in price-performance terms) toward its recent lows, setting up another possible buying opportunity for investors who missed its previous October panic-selling.
Notwithstanding, the selloff was not limited to PINE but broadly affected its real estate and REIT peers represented in the Vanguard Real Estate Index Fund ETF Shares ( VNQ ), as seen above.
VNQ recovered from its October lows but it met a bull trap or false upside breakout in early February, which ensnared late buyers. The selling pressure intensified in early March as investors de-rated the real estate players, given worries over significantly tightened lending requirements by the regional banks.
Moreover, a " wall of debt " in commercial loan repayment is building up, raising the specter of increasing default risks if property values fall further, potentially worsening the fallout from the banking crisis.
Hence, we were not surprised that highly concentrated retail REITs like PINE saw a worse selloff as it underperformed the VNQ (in price-performance terms) since the start of 2023.
It's important to note that the company already highlighted potentially weaker acquisition and disposition conditions in FY23 as it issued its guidance in February. As such, its markedly lower AFFO per share midpoint guidance of $1.545 is nearly 13% below its AFFO per share of $1.77 in FY22.
Hence, we parsed that market operators have likely lowered their expectations further, given the hamstrung market environment, which could further impact the company's investment and asset recycling cadence.
Moreover, PINE's non-investment grade or IG-rated tenant base accounted for 46% of its annualized base rent or ABR. As such, investors are likely discounting a more significant hit to PINE's rental base if a worse economic fallout occurs.
Even if the impact of the banking crisis was less feared than anticipated, weaker tenants could be affected more substantially than stronger ones. As such, we believe it could possibly explain why the market has been reticent in attributing a higher valuation on PINE relative to its leading peers over time.
With that in mind, and knowing that the market is forward-looking, the critical question is whether these headwinds have likely been accounted for in its current valuation?
PINE buyers returned over the past few weeks since its bottom in March, as they helped to prevent it from sliding further against VNQ.
Notably, PINE remains in a medium-term uptrend against the VNQ since April 2022. The steep downward de-rating from December 2022 could be resolved at the current support levels, as PINE/VNQ has retraced back to its 50-week moving average or MA (blue line).
Moreover, PINE's NTM AFFO per share multiple of 10.6x has dropped well below its all-time average of 12.9x. As such, it bolsters the thesis that long-term buyers have likely returned to support PINE's buying sentiments at its March lows.
Rating: Buy (Revised from Hold).
Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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For further details see:
Alpine Income Property: If You Waited, Now's Your Chance