Alpine Income Property Trust (PINE 2.20%) was spun out of CTO Realty Growth (CTO 1.55%) in late 2019. That was just in time for the the real estate investment trust (REIT) to deal with the headwinds of the coronavirus pandemic, muddying the long-term picture for a small, brand-new REIT. As the world learns to live with the coronavirus, however, Alpine has materially changed its business for the better. Here's why this REIT is now ready for prime time.
Bad timing
Holding an initial public offering (IPO) just a few months before the coronavirus started its march across the globe wasn't something for which Alpine could have prepared. But it had to deal with the headwind just the same. What's interesting is that the REIT didn't skip a beat, increasing its dividend in both 2020 and 2021 and growing its portfolio.
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To put a number on that last fact, Alpine owned 20 properties when it IPOed. At the end of 2020, it had more than doubled that count to 48. And by the end of 2021 the figure was up to 113. By the end of the first quarter of 2022, meanwhile, the tally had grown to 128. This is a fast-growing REIT, though that growth is coming from a small base, so its rapid portfolio expansion isn't exactly shocking.
That said, there's another statistic that's important here. When Alpine came public, the REIT generated a huge 43% of its rents from office properties. Management made the decision that retail was going to be the focus, so it had to sell off its office assets at the same time it was buying retail properties. Offices are large buildings that can be hard and time-consuming to sell. So, initially, the reduction in office exposure was driven by acquiring retail assets. However, the company has just managed to sell its last office property, so it's now a pure-play retail net lease REIT.
The next big step
Net lease REITs own single-tenant assets, but their tenants are responsible for most of the operating costs of the buildings they occupy. It's a fairly low-risk business model for a REIT, assuming they own enough properties. Indeed, any single property is actually fairly high-risk, given that there's just a single tenant. That's why it has been so important for Alpine to expand from 20 properties to 128. However, it is not done yet, as some of the industry's larger names have thousands of assets.
That number of properties is a long way off, but it is important to note that there is another important step for the REIT. Getting out of the office sector has turned Alpine into a pure-play retail net lease name, but it is still so small that it is externally managed by its former parent CTO Realty Growth. Investors often worry about the alignment of management and shareholders when there is an external manager. To CTO Realty's credit, it is both the manager and an owner, with a 15% interest in Alpine. So there is an obvious reason for CTO Realty Growth to take shareholder returns very seriously.
Still, Alpine is looking forward to the day when it can internalize management and become a fully stand-alone REIT. To get there it needs to keep growing its business. That means continued portfolio growth, with a full-year investment goal of up to $250 million. And yet management isn't actually looking to grow for growth's sake, because it is also planning to sell up to $100 million worth of assets.
The high side of the sales guidance is roughly double what it was when the year started, thanks to the market placing premium prices on some of the REIT's assets. Basically, management believes it can sell some properties at a profit while managing to reinvest those proceeds in more attractively priced buildings. That's the kind of approach that investors should appreciate and proves that Alpine isn't simply looking to go from point A to point B as fast as it can -- it wants to grow deliberately and as profitably as possible for shareholders.
Worth a closer look
Alpine's dividend yield is around 5.6% today, toward the high end of the net lease peer group. There are a lot of reasons for this, but now that the last office property has been sold, the list is getting shorter. And when you add in the solid portfolio plan that management has laid out for 2022, investors still worried about the external manager might want to rethink their stance. Indeed, so far having an external manager hasn't been a bad thing. And since the end goal is to internalize management, getting in before Alpine is big enough for that move could be a good long-term investment decision.
