Summary
- From a P/FFO standpoint, the company is undervalued relative to its peers, probably due to its external management.
- Such discrepancy shouldn't exist, as the current management agreement supports shareholder and external manager interest alignment.
- The company doesn't have any debt maturities until 2026, while the only exposure to variable rate debt comes from its renewed and sustainability-linked revolving credit facility.
- While on the retail commercial real estate, Alpine's portfolio is characterized of high-quality tenants and diversified businesses.
- At the current valuation, the company offers at least 16% upside potential and, together with its 6.8% dividend yield, represents a solid investment opportunity.
A few months ago, I had written an article about Alpine Income Property Trust ( PINE ), concluding that it was a nice choice for investment among retail REITs, despite that class (retail) being one of the most volatile. In this article, I'm going to take a look into the company's recently released earnings and provide comparisons with its peers, trying to reach some meaningful conclusions.
A brief company snapshot
Those encountering PINE for the first time, should know that Alpine Income Property Trust is an externally managed REIT, investing in triple - net lease retail properties. The company owns a total of 146 properties across 35 States, with a total footprint of 3.4 million square feet. It is a small-cap REIT, with a total market cap of $220 million.
Funds from operations: Exceeding internal expectations, supporting a higher valuation
Alpine Income Property Trust recently released their Q3 2022 earnings, outperforming consensus in both FFO and revenue. More specifically, reported FFO per share was $0.40, beating estimates by $0.02, while revenues reached $11.53 million, outperforming estimates by $1.01 million. On a YoY basis, the company saw its revenues increase by more than 40%. Also, note that the reported FFO was negatively impacted by the $284k write - off of unamortized financing costs related to the company's previous revolving credit facility. For the full year 2022, the company expects an FFO figure within the range of $1.70 to $1.75 per share. As I'm writing this article, the company is trading at $18.18 per share, which implies a forward P/FFO figure of 10.5x, using a projected FFO/share of $1.725. As it is shown in the graph listed below, the company is trading at a more compelling valuation than most of its peers. In fact, that 10.5x FFO multiple is sitting well below the average of 13.4x, implying that there's a valuation gap to be filled.
Price to FFO and FFO payout ratio (Alpine Income Property Trust October 2022 Investor Presentation)
Of course, externally managed REITs are subject to larger discounts, as sometimes conflict of interest may occur. There are several examples, that I will not mention now, but in our case, the external manager is CTO Realty Growth ( CTO ). I recently wrote an article on them, explaining why I like their investment case. Additionally, as external managers, they have a 16% interest in Alpine, which stand for a pretty good interest alignment. According to the external management deal, CTO is paid a base management fee, equal to 0.375% per quarter, of PINE's total equity. On top of that, there's also an annual incentive fee, should Alpine's stockholder return exceeds an 8% cumulative annual hurdle rate. The external management deal expires on November 2024. In other words, it is to the best interest of CTO Realty Growth, to do their best as managers of Alpine. This means, that based on the current and average FFO multiples, Alpine Income Property Trust has a target price of $23.10, or an upside potential of 16% from the current share price level.
Moreover, the second graph listed above, shows the 2023 projected FFO ratio of Alpine Income Property Trust vs its peers. Currently, the company is paying a dividend yield of 6.8%, which is translated to a 71% forward FFO payout ratio. As we can see, it lies in the ballpark of their peers' average. However, the dividend yield is much higher than the peer group average of 5.4%.
Nicely laddered, low-cost debt
Alpine recently signed a new, $250 million revolving credit facility, which improved the previous one in terms of size, covenants and cost of finance, as it also included a sustainability clause. In addition, the company entered into interest rate swap agreements for the unhedged parts of the 2026 and 2027 term loans. All of the above, resulted in the company having no debt maturities until 2026. This also has an additional advantage: Now, the company's only variable rate debt exposure comes from its revolving credit facility. Currently, the company has $272 million of debt outstanding, at an aggregate interest rate of 3.7%.
Alpine Income Property Trust Debt Maturity Schedule (Alpine Income Property Trust October 2022 Investor Presentation)
Great portfolio fundamentals
The last time I looked at the company, I was impressed by the quality of their holdings, the nice tenant diversification and the high rent collection and occupancy rates. Fortunately, this is also the case this time. As I mentioned earlier, retail is one of the riskiest forms of commercial real estate, as retail businesses are heavily reliant on consumers' disposable income. In a time of economic slowdown and increased inflation, consumer disposable income is reduced. This is where quality tenants come into play. Almost 50% of the company's annual base rent comes from investment grade rated tenants, such as Walgreens (WBA), which is responsible for 12% of Alpine's ABR, and Lowe's (LOW), which brings in 6% of Alpine's ABR. From a business segment perspective, 14% of the company's ABR is generated from pharmacies while just 5% from volatile entertainment businesses. Finally, what is even better is that there are almost no rent renewals for the remainder of this year and 2023, while in 2024 there's the expiration of leases that account for 5% of Alpine's ABR. This is good news in a slowing market.
Bottom Line
I maintain my previous view on Alpine Income Property Trust. This is a nice, small REIT, paying a very nice and safe dividend. Their manager, CTO Realty, are doing a great job, supported by a very shareholder - friendly management agreement. The company has healthy portfolio and balance sheet fundamentals to further fund and support its expansion. According to peer valuations, there's at least 16% upside potential in the company. Even after the recent share price increase, this still stands for a good investment opportunity in a triple-net retail REIT.
For further details see:
Alpine Income Property Trust: Recent Earnings Reveal Double-Digit Upside Potential