Alpine Income Property Trust (NYSE: PINE) traces its history back to 2019, when it was spun off from CTO Realty Growth (NYSE: CTO). The small real estate investment trust (REIT) has actively looked to expand and improve its portfolio, but investors have not been particularly impressed. Management is open to all possibilities if the current discount relative to peers doesn’t close.
Small and focused
When CTO shed Alpine, the point was to create two REITs with different goals. CTO has focused on strip malls and mixed-use developments. Alpine has focused on net-lease properties. In a net lease, the tenant is responsible for most of a property’s operating costs. With a large enough portfolio, net-lease assets are fairly low risk. At its initial public offering (IPO), Alpine owned just 20 properties, including some large office buildings. It was not a low-risk portfolio.
However, since that point, CTO, which acts as an external manager, has made a lot of progress with Alpine’s portfolio. It has increased the number of properties to 143, and sold off all of the office assets it owned. Now Alpine owns more generic retail properties that are much easier to maintain, buy, sell, and release. In addition, its geographic diversification has increased from 12 states to 35. And it has increased the dividend regularly, going from $0.06 at the time of its IPO (for a partial quarter) to the most recent payment of $0.27. The yield is a generous 5.9% today.
External management is a factor to consider carefully, as there can be conflicts of interest. However, CTO owns 16% of Alpine, so anything it does to you it also does to itself. Thus this issue isn’t as material as it may at first seem.
What’s not to like?
So far the story with Alpine is a generous yield and solid growth. Although it is a small REIT, it might be worth the risk for more aggressive investors. In addition, it is trading at a material discount to peers on various industry metrics, and the strong growth so far has yet to change this fact. This is an opportunity for value-focused investors, but it could also lead to an even bigger change.
Some numbers will help here. Alpine estimates that its projected 2022 funds from operations (FFO) payout ratio of 66% is one of the lowest in the retail net-lease peer group, and yet its annual dividend yield of almost 6% is at the high end of the group’s range. Its price-to-FFO multiple is at the low end of the group, and well below the peer average. And, perhaps most notable, the company believes it trades for less than what it would cost to replace its property portfolio.
There are some caveats, including a balance sheet that’s more leveraged than those of many peers. However, like the office exposure and portfolio diversification, that’s on the list of items to be addressed. Specifically, Alpine has been selling assets at premium prices and using the proceeds to buy similar properties at more attractive valuations. It recently bumped up its asset sales target for 2022. And it is looking to improve its leverage metrics as well, which will likely entail a stock sale at some point this year.
Essentially, Alpine is trying to look more and more like the companies it competes against. The hope is that this will help close the valuation gap with those peers. But if it doesn’t, well, management has basically said it would be willing to sell Alpine to the highest bidder. The list here could realistically include REITs like bellwether National Retail Properties (NYSE: NNN) and up and coming STORE Capital (NYSE: STOR).
While a giant like Realty Income, with over 11,000 assets, probably wouldn’t bother with Alpine, National Retail and STORE, with roughly 3,200 and 2,965 properties, respectively, would find 143 properties meaningful and not too big to swallow. National Retail and STORE, meanwhile, both have investment-grade-rated balance sheets, so they could take on the higher leverage at Alpine in relative stride. A sale to either of these solid net-lease REITs would probably be a win for investors if Alpine’s management can’t convince Wall Street to give the REIT a little more respect.
Wait and see
At this point investors that own Alpine should continue to hold the REIT. The logic here hasn’t materially changed. It is a fast-growing, undervalued net-lease REIT with a generous dividend yield. The fact that management is aware of the discount to peers, and is working to close the gap, is good news. That the REIT would be willing to sell itself, meanwhile, suggests there will be a positive outcome one way or another. And, notably, CTO’s stake in Alpine hints strongly that it won’t sell on the cheap.