Alpine Is A Great Value, But Not Quite Ready

Summary

• Alpine has a solid triple net property portfolio.
• It is trading at an attractive valuation.
• A couple of growing pains are present which are keeping me neutral for now. This is a great stock for the watchlist.
• This idea was discussed in more depth with members of my private investing community, Portfolio Income Solutions. Learn More »

Andre Schoenherr/DigitalVision via Getty Images

Alpine Income Property Trust (NYSE:PINE) is a great stock to have on the watchlist. It presently has some attractive investment characteristics including discounted valuation, high yield and reliable cash flows. However, in the near- and medium-term, these strengths are going to be challenged by a sub-scale market cap and the overhang of an upcoming internalization expense.

This article will discuss both the bull and bear arguments as well as when I believe will be an opportunistic time to get in.

The bull case for PINE stock

A triple net lease REIT is expected to do 4 things:

1. Provide a strong dividend yield
2. Steady revenues through long-duration cash flows
3. A healthy tenant roster to reduce chance of disruption
4. Grow FFO/share and dividend over time with accretive acquisitions

Alpine does each of these fairly well.

With a dividend freshly raised to $0.27 per quarter, it now has a yield of 6%. This yield is protected by a reasonably healthy payout ratio at 73% of forward FFO. The revenues are long duration in nature with minimal lease expiration through 2025 at which point lease expirations are nicely laddered thereafter.

Source: PINE

Any time a company has long leases, tenant credit becomes an important issue. In this regard, PINE has a similar tenant credit profile as other triple net REITs with 44% of tenants investment grade.

Source: PINE

Tenant concentration is a bit higher than normal with Wells Fargo and Hilton paying 10% and 6% of overall rent, respectively.

Source: PINE

Somewhat high tenant concentration is to be expected given the small size of Alpine. It is harder to be fully diversified with 89 assets as compared to some other triple nets that have thousands.

Leverage is slightly on the high end at 44% debt to TEV and 6.9X debt to EBITDA.

Source: PINE

Many institutional investors prefer to see debt to EBITDA in the 5X range, but I view appropriate leverage levels differently depending on sector.

A REIT in a volatile sector like hotels or malls should probably stick to lower leverage because high leverage could cause financial stress as the cycles hit their bottom. In contrast, triple net revenues are steady state making the leverage much less of a risk. I actually prefer when triple nets operate at somewhat high leverage because it improves the cash flow to shareholders.

Alpine's Growth

Growth has been strong so far with FFO/share expected to rise to $1.50 in 2021 and $1.48 in 2022 from $1.23 in 2020.

Source: SNL Financial

In companies this small, the growth tends to be quite lumpy where the FFO figure for a given year will vary drastically based on the timing of closing on an acquisition as compared to the timing of issuing the shares to pay for it.

So rather than just looking at the analyst numbers which should reflect this lumpiness, I would rather get a sense for the run rate based on acquisition volumes and cap rates.

Source: PINE

For a company with a market cap of $200 million, that is a massive acquisition volume. Going forward, I would anticipate cap rates to be in the mid 6% range. At that level, I believe acquisitions are mildly accretive against PINE’s cost of capital.

As such, I would anticipate PINE to grow at a slow to moderate pace that is typical of most triple net REITs.

So far, we have basically just shown that PINE checks all the normal boxes of a triple net REIT. The aspect that makes it compelling as an investment is its valuation.

Alpine's Valuation

Valuation always matters. It is a core concept of investment and is front and center in my investment philosophy.

It can be difficult to measure valuation in growthier asset classes where so much of the profitability is unknown, but it is plain as day in triple net where cash flows are highly visible up to a decade out.

In a triple net REIT, a cheaper valuation is so much better. All else equal, a lower P/FFO multiple does the following for a triple net REIT:

• Higher dividend yield at same payout ratio
• More cash flow to reinvest into acquisitions
• Reduced risk
• Higher expected return

Perhaps to a greater extent than in any other sector, value is the way to go in triple net and this is where Alpine shines.

With forward FFO/share of about $1.48, it is trading at just over 12X. With its NNN retail focus, its closest peers would be Realty Income (O), National Retail (NNN), Agree Realty (ADC) and Spirit Realty (SRC).

Company	Price/FFO (next 12 month est.)	P/NAV
O	18.1	125.7
ADC	18.3	114.8
SRC	13.4	107.8
NNN	15.9	105.0
Alpine	12.2	84.2

Click to enlarge

Data from SNL Financial

That is a rather steep discount in both FFO multiple and P/NAV. NAV is, of course, calculated using a cap rate, so I like to check to see that the cap rate is appropriate.

Source: SNL Financial

Most retail triple net properties trade at cap rates of 6.8% or lower, so I think it is entirely realistic that the portfolio of properties is worth at least $20.93 per share.

A discount to NAV means every dollar invested in Alpine buys the investor significantly more property as compared to that same dollar invested in a peer triple net REIT. More property means more cash flows and that is how PINE gets the investor a much bigger dividend yield.

Normally, a discount this compelling would be enough to get me to buy in, but there are a couple of challenges ahead that have kept me on the sidelines.

The bear case for PINE stock

It is challenging being a small-cap REIT in general, but there are 2 aspects unique to PINE that make it even more difficult.

1. Geographic spread
2. Encumbered by an expensive management agreement

Diversifying by geography is usually a good thing, but it requires a certain amount of scale in each market to be efficient. Below is Alpine’s property portfolio.

Source: SNL Financial

That is far too many submarkets for a total of 89 properties and that makes it financially inefficient to manage.

When properties are grouped in a submarket, a single property manager can handle them all quite efficiently, but when you have a single asset in Wisconsin and a single asset in Michigan along with a single asset in New Mexico, the necessary G&A cost of maintaining the properties and tenant relationships is going to be rather high relative to the revenues.

There are 2 ways to deal with this:

1. Hire a high ratio of property managers to properties
2. Outsource

So far, PINE has gone with the outsourcing method being externally managed by CTO Realty Growth (CTO) which is formerly known as Consolidated Tomoka. By combining forces with another REIT, it gives them the necessary scale to manage the assets efficiently, but it comes at the cost of an encumberment.

Below are the terms of the external management agreement.

Source: PINE

As far as external management contracts go, these terms are reasonably good. 1.5% of equity per year is a rather normal cost and roughly equivalent to what G&A would cost if PINE were internally managed.

With external management, however, it is rarely the expense of it that REIT investors fear. There is an inherent conflict of interest in that with the management fee being based on the size of the company, there is incentive to grow at all costs whereas shareholders might want to hold off on growth at times when it is not accretive.

This relationship is further complicated by the fact that much of PINE’s acquisition pipeline is expected to be purchased from CTO. I’m sure there are processes in place to make these transactions pass legal muster to be considered fair to both parties, but in real estate, there is a broad range of prices that could be considered fair.

As such, it is really hard to tell if CTO or PINE is getting the good deal when the companies transact with each other.

PINE has publicly stated that internalization is on the horizon. This is both a good and bad thing. Good in that it will remove the perceived conflict of interest and bad in that internalization events are usually quite costly as the external manager gets a substantial breakup fee.

Putting it together

Alpine is trading at a highly attractive valuation and has a strong asset portfolio. These strengths are weighed down in the near term by the challenges of being sub-scale and the complexities of the external manager relationship.

The success or failure of PINE as an investment will depend on how well they can manage their way through the next few quarters. If done well, they can accretively reach efficient scale and internalize at a reasonable cost. However, if cap rates move too low too quickly, there may not be a way to get to scale without substantially diluting FFO/share.

This is a great name to keep on the watchlist. As time goes on, it will become increasingly clear which direction they are headed and I would not be surprised to see this become a highly opportunistic investment down the road.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Important Notes and Disclosure All articles are published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person. Readers should verify all claims and do their own due diligence before investing in any securities, including those mentioned in the article. NEVER make an investment decision based solely on the information provided in our articles. It should not be assumed that any of the securities transactions or holdings discussed were profitable or will prove to be profitable. Past Performance does not guarantee future results. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. Historical returns should not be used as the primary basis for investment decisions. Commentary may contain forward looking statements which are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MCSC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts, and findings in this article. S&P Global Market Intelligence LLC. Contains copyrighted material distributed under license from S&P 2nd Market Capital Services Corporation(2MCSC) provides investment research and consulting services to the financial services industry and the financial media. 2MCSC does not provide investment advice. 2MCSC is a separate entity but related under common ownership to 2nd Market Capital Advisory Corporation (2MCAC), a Wisconsin registered investment advisor. Dane Bowler is an investment advisor representative of 2nd Market Capital Advisory Corporation.

Comments

[Zurich Skeptic]

Thanks for sharing!

[William Apel]

Yea, but do you really wanna invest with the guys who sold pretty much ALL of their Florida land, including the thousands of residential acres, and loaded up on retail stores and shopping centers, right before covid?

[Dane Bowler]

@William Apel Well, to be fair I don't think anyone saw COVID coming so that is more unlucky timing rather than a foreseeable mistake.

[William Apel]

@Dane Bowler People saw retail being a mess, for years. They had proxy fights over their insistence on buying things like JoAnn Fabric, Party City, etc. Then you look at the prices they got for the land and its just staggering. For instance they sold several thousand acres of residential to an Orlando developer for $40M in July 2020. Except a couple years earlier both parcels had previously been under contract for north of $50M, and today, that land is probably worth close to $100M.

The remaining land they are under contract to sell has a lot of industrial. 800 acres IIRC. With a little bit of effort you could self develop a few of those industrial parcels and get a price greater than what they are selling EVERYTHING for. Pure laziness. In general if you look back at their presentations, they told shareholders their remaining land was worth maybe $175M-200M, PRE COVID. Then they entered an onerous deal with Magnetar and outside of getting fleeced, used the proceeds to buy a bunch of shopping centers in December 2019, and January and February of 2020....That $175M-200M pre covid valuation Florida land, ultimately they got something like $120M selling it POST COVID!

They bought a golf course from the city of Daytona and touted it as a great investment longer term as Minto grew out. Two years later they wrote it down and sold it for like $3M. Less than two years later the new owner put it up for auction and it got nearly $11M. There are so many examples of just staggering stupidity here, its breathtaking if you really dig deep.

[William Apel]

@Dane Bowler another example announced today. CTO pays $70M for an old RVI asset previously sold for $52M in 2019! Total bozos.

[mt57]

Alpine spun out of CTO. That’s why the external management agmt. Personally, I think PINE begs to be acquired. That addresses every issue you’ve noted. As the term of the mgt agmt gets closer, I expect a sale will take place.

[635]

@mt57
Best comment here. Being small cap/sub scale makes an excellent m&a target. If NNN looks at this, they have National diversity, so sub markets nbd, Alpine cap rate I am guessing is 2X NNN , and NNN has property management capabilities. NNN can go thru the brain damage of individually buying 89 properties or offer a 25 premium to alpine and do an accretive deal. This is same playbook as new senior investment group.

[arson]

I choose CTO between the two. With its higher yield and larger size it seemed like a no brainer. Happily long, sitting on a 30% gain.

[Joseph Webster]

I enjoyed the article but somehow liked PINE more after reading. The scattered investments are not an issue IMHO because the owner will not need to visit the property frequently, if ever in some cases. Most passive NNN investments are owned by out-of-area entities. Keeping tenants happy was mentioned, but for a net lease to a national entity, you are concerned with keeping corporate happy, with their HQ typically being far from the property in question. It's not like an apartment or MH Reit that would need a presence in the location of the properties.
In regards to the external mgmt, Cto has ownership in PINE, so there are not disparate interests

[Keep it Country]

Good article Thank you. The company name originates from the music venue Apline Valley Theater that they own and lease to Live Nation.

Stevie Ray Vaughan died in a helicopter crash shortly after take off from here in 1990.

[JimDaisy]

Pine tenant concentration will go down dramatically when Wells and Hilton are sold. Hilton is under contract and will close this month. Wells might be sold this month but could slide into Q1 2022. They will then be out of office properties. Big $$ to reinvest. (Oct 2021 earnings call). I didn't see this mentioned in the article.

Pine has increased their dividend 5 quarters in a row. How many others can say that?

CTO is moving to own only shopping centers. Pine will be all net lease retail like O, NNN, and others. CTO is selling good properties to PINE. CTO is selling highly appreciated properties to 3rd parties. CTO is not dumping on Pine. CTO owns stock in PINE and gets fees from PINE. Why would they poison their own? (Not sure anyone can fully understand Pine without understanding their manager CTO and it's goals and relationship. Info is all there on their websites and other Seeking Alpha articles).

Yes, I own PINE and it's > 6% dividend. I also own some CTO. The business is evolving since converting to a REIT in 2021. CTO yield 7.3%.
I agree with "theheckwithtech". Now IS the time to buy.

[Lemonsack]

How do you feel about CTO? I was first turned onto them prior to their change to a REIT, and after that happened I bought a spec position. Seems discounted based on their holdings, even with the run up to the mid $50s.

[TraderJoeZ]

@Lemonsack I also wonder about CTO, very long history, could represent good value here

[Lemonsack]

@TraderJoeZ They sold their remaining land holdings which provides some dry powder for acquisitions. Also not entirely reflected in the stock price is their ownership stake in Alpine. Seems like its undervalued by about 20% or so, but they are small cap so a discount is warranted.

[theheckwithtech]

Good article...I had just done my DD on PINE last week and came to basically all the same conclusions as you except one....I felt now is the time to buy, not wait until the growth accelerates and the price reduces the dividend yield, so I went ahead and took a small starter position, with the hopes of adding to it on any crazy market drops in the meantime. If they issue more equity, I can use that as an opportunity to build a bigger position.

[ckarabin]

If we don;t know if CTO is shafting PINE on acquisitions then why should we assume that they are? The proof would be in the quality of the properties, such as did they pay rent in 2020, right? So do we have reason to suspect? Or is it just a super low valuation, growth galore and investors fearful of something which they little evidence to prove?

[Dane Bowler]

@ckarabin I'm not assuming anything. Merely saying it is an unknown.

Tenants paying rent is a great indicator of property quality, but it doesn't provide evidence of fair purchase price. Maybe the market rate for a property would be $100 and CTO had Alpine buy it from them for $105.

I don't know that is happening and if I had to guess it probably is NOT happening, but given the conflicts of interest inherent to the relationship there is that potential.

Just a risk of which to be aware and a reason that it will likely continue to trade at a discount to peer NNNs.

I like the company, just not quite ready to buy in.

[ckarabin]

@Dane Bowler Sorry I was kind of rude. You publish great thoughts. It appaers as though their partner is sending them good properties, but you are right, they are dependent on them to some extent

[Cdn_divman]

I believe you are putting too much emphasis on the perceived difficulty of managing the far-flung portfolio. The whole point of triple net leases is that all responsibility falls on the tenant. NNN is essentially a financing. So there is little active management required compared to other real estate investment.

Second, the management agreement expires after five years. It would be relevant to know what that expiration date is. Did you come across it in your research?

And my third comment is that you make such a strong bull case *and* you see an end to the overhang, isn’t there something to be said for buying low now rather than waiting for these things to clear up next year and having to pay more for the stock? Meanwhile earn 6% dividend and growing. Now if you feel that there is insolvency risk, or risk of a div cut, that is another matter. I would love to hear your thoughts about that…

[Dane Bowler]

@Cdn_divman I think there is a case to be made for getting in before all the issues are resolved so as to get in cheaper. That is largely why I have it on the watchlist as I think there will be a particularly opportunistic pricing window. My best guess at this point is there will be a large equity issuance that takes it down maybe 7% so something along those lines is where I would look to get in personally.