2023-04-02 10:20:19 ET
Summary
- PINE's share price development since early 2022 has outperformed the broader REIT market by 15% implying less attractive case for the contrarian investors.
- The long-term prospects of the company are weak due to serious headwinds for tier-2 brick and mortar stores.
- However, PINE is well-positioned to provide extremely stable dividend yield of 6.5% with a notable potential of price appreciation in the medium term or until the emergence of new bull market.
- The medium-term stability and price appreciation potential are explained by the completely mitigated interest rate and refinancing risk until May 2026 in combination with accretive asset recycling strategy.
Alpine Income Property Trust ( PINE ) is one of the smallest US retail REITs with a market cap of just above $250 million that has been public since Q4, 2019. The key focus of the business is to own and operate a portfolio of single tenant net leased properties across a diversified set of sectors.
From January, 2022, PINE has significantly outperformed the broader REIT index Vanguard Real Estate ETF (NYSEARCA: VNQ ) on a relative basis. For contrarian and value investors this is obviously not a positive sign indicating that at the prevailing price levels, PINE might be somewhat overvalued with less potential to benefit from mean reversion.
Looking at the very long run, in my opinion, PINE is not that good investment either as it owns second tier brick and mortar stores in sectors that are extremely exposed to the e-commerce risks. For instance, 13% of the 2022 ABR came from sporting goods sector, 9% from home furnishings, 8% from home improvement and 5% from consumer electronics. These segments are on a structural decline implying that growth of PINE's long-term revenues is rather subdued.
The tiny capitalization levels in conjunction with high interest rate environment make it more difficult for the Company to diversify away from the significant exposure in the declining sectors.
PINE is not an attractive constituent in a buy-and-hold strategy and in the case of sudden bull market there is low upside given where the share price is relative to the recently depressed VNQ (i.e., benchmark portfolio).
However, I think that PINE is a solid investment for the medium-term play until the bull market comes back with a vengeance. The aforementioned secular headwinds should not cause a notable damage to PINE's business until either interest rates start to drop or a fresh bull market occurs.
Below are three main aspects, which justify that PINE's current dividend yield of 6.5% is safe and that there is a material potential for share price appreciation in the medium-term (2 - 5 years).
1. Well-structured portfolio
PINE has 148 net lease properties spread across 34 States. This indicates that there is a low concentration risk in terms of geography and single properties.
As of year-end 2022, PINE had 99.5% occupancy rate with the remaining 0.5% explained by redevelopment activities at several properties. The occupancy rate has not dropped since the IPO in late 2019.
Almost 80% of the ABR stems from credit rated tenants. The relevant leases have a weighted average term remaining of 7.6 years with 1% and 5% falling due in 2023 and 2024, respectively. PINE's margin of safety from the lease perspective is further strengthened with very attractive average cash rent per profile - i.e., $10.94 per square foot. This is very low compared to what can be obtained in the market.
2. Robust capital structure
PINE's management has managed to establish one of the safest capital structures among comparable REIT companies.
Going into 2023, PINE had a net debt to pro forma EBITDA of 6.6x, which has gradually fallen from 7.1x and 8.1x in 2022 and 2021, respectively. This has happened despite consistently growing dividends and expanding portfolio size. The main proceeds fueling the combination of debt reduction and Company's expansion stemmed from accretive asset recycling program and retained cash flows after dividend distributions.
More importantly, PINE has no debt maturities until May 2026 and all of its debt exposure is completely fixed. This is truly remarkable and positions the Company in a very solid spot. It makes the incremental CapEx planning processes more visible, which is very important for M&A-focused REIT such as PINE. Plus, all of the embedded rent escalators that are linked against inflation can be directly recognized in the FFO / AFFO figure without being offset by higher interest costs or surging operating costs (due to net lease principle).
3. Attractive earnings growth
Historically, PINE has proved that it can deliver on accretive asset recycling and M&A strategies. The AFFO per share growth in 2022 was 11% despite the inflation shocks in the market and surging interest rates.
For 2023, the Management expects AFFO to land at $1.52 - $1.57 per share with net acquisitions of $75 - 100 million. The net acquisition values represent roughly 25% of total portfolio. Provided that the Management can sustain its previous success, the incremental gain in value will be material.
Currently, PINE holds ~ $200 million in undrawn credit facilities and based on pro-forma AFFO and dividends, the expected retained cash is approximately $9.6 million. Considering that PINE's leverage is at all time lows, and that the interest rate risk is fully mitigated, we could expect some justified uptick in debt to accommodate the expansion plans.
The bottom line
While secular dynamics for brick and mortar stores are certainly not favorable, PINE's current capital and portfolio structure provide security against market turmoils in the short to medium-term.
PINE's dividend yield of 6.5% (~75% implied FFO payout for 2023) is extremely safe and with a growth potential, which allows to capture tangible current income streams, while waiting for market reversal.
In a nutshell, my expectation is that PINE will manage to generate 6.5% yield with a slight capital gain potential. In the case of further market drawdowns, PINE's share price should hold back as it did throughout 2022 - explained by the very distant refinancings and fully hedged interest rates. However, I would sell PINE when there will be some material signals on the market normalization. PINE is not a stock I would hold over very long term horizon due relative expensiveness and structural headwinds in the second tier brick and mortar business.
For further details see:
Alpine Income Property Trust: Stable Return Play Until Next Bull Market