Q2 2024 Alpine Income Property Trust Inc Earnings Call

Good day and welcome to the Alpine Income Property Trust's second quarter 2024 Operating Results Conference Call. At this time, all participants are in a listening mode.

Operator: Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question, please press star 1 1. As a reminder, this call is being recorded. I would like to turn the call over to John Albright, President and CEO. Please go ahead.

After the speaker's presentation, there will be a question and answer session.

To ask a question, please press star 1 1. As a reminder, this call is being recorded. I would now like to turn the call over to John Albright, President and CEO . Please go ahead.

John P. Albright: Good morning, everyone, and thank you for joining us today for the Alpine Income Property Trust second quarter 2024 operating results conference call. I'm pleased to have Bill Mays, our new chief financial officer, joining me this morning. Before we begin, I will turn it over to Phil to provide customary disclosures regarding today's call. Okay, Phil?

John P. Albright: Good morning, everyone, and thank you for joining us today for the Alpine Income Property Trust Second Quarter 2024 Operating Results Conference Call. I am pleased to have Phil Mays, our new Chief Financial Officer, joining me this morning. Before we begin, I will turn it over to Phil to provide customary disclosures regarding today's call. Phil?

Phil: Thanks, John. I would like to remind everyone that many of our comments today are considered forward-looking statements under federal securities law. These actual future results may differ significantly from the matters discussed in these forward-looking statements, and we undertake no duty to update these statements. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's Form 10-K, Form 10-Q, and other SEC filings.

Phil: Thanks, John . I would like to remind everyone that many of our comments today are considered forward-looking statements under federal securities law.

Phil: The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we undertake no duty to update these statements. Factors and risks that could cause actual results to differ materially from expectations

Phil: are disclosed from time to time in greater detail in the company's Form 10-K , Form 10-Q , and other SDC files.

Phil: You can find our SEC reports, earnings release, and most recent investor presentation, which contains reconciliations of the non-financial measures we use, on our website at alpinereit.com. With that, I will turn the call back over to John. Thank you.

Phil: You can find our SEC reports, earnings release, and most recent investor presentation, which contains reconciliations of the non-financial measures we use, on our website at alpineread.com.

John P. Albright: Thanks, Bill. We are pleased that our successful asset recycling and investments and higher-yielding quality loans have delivered a strong quarter and led to an increase in our earnings On the Asset Recycling Front, during the quarter, we acquired a $14.6 million property leased to investment grade tenants Best Buy and Golf Galaxy, and a creative yield to the disposition of two properties leased to Festival Foods and Hobby Lobby for a disposition volume of $6.6 million and a blended exit cap rate of 7% for the sold property.

Phil: With that, I will turn the call back over to John .

John P. Albright: Thanks, Bill. We are pleased that our successful asset recycling and investments and higher-yielding quality loans have delivered a strong quarter and led to an increase in our earnings guidance.

John P. Albright: On the Asset Recycling Front, during the quarter, we acquired a $14.6 million dollar property, leased to investment grade tenants Best Buy and Golf Galaxy.

John P. Albright: and a creative yield to the disposition of two properties leased to Festival Foods and Hobby Lobby for a disposition volume of $6.6 million and a blended exit cap rate of 7% for the sold properties.

John P. Albright: Further, we're beginning to see investment opportunities in the market that we plan to take advantage of and continue recycling at a creative yield. On the loan investment front, we originated a $6.1 million first mortgage investment, of which $4.6 million was funded during the quarter. The initial yield on this investment was 11.5%, and it was to provide funding toward a four-pad retail development anchored by Wawa in a growing sub-market of Cincinnati, Ohio.

John P. Albright: Further, we are beginning to see investment opportunities in the market that we plan to take advantage of and continue recycling at accretive yields.

John P. Albright: On the loan investment front, we originated a $6.1 million first mortgage investment, of which $4.6 million was funded during the quarter.

John P. Albright: The initial yield on this investment was 11.5%, and it was to provide funding toward the four-pad retail development anchored by Wawa in a growing sub-market of Cincinnati, Ohio.

John P. Albright: During the quarter, we also sold $13.6 million of A-1 participation interest in our $23.4 million portfolio loan secured by 39 properties that we originated in November 2023. As a part of the transaction, the loan was rated by Independent Rating Agency, whereby it received an A- rating.

John P. Albright: During the quarter, we also sold $13.6 million A-1 participation interest in our $23.4 million portfolio loans, secured by 39 properties.

John P. Albright: that we originated in November of 2023. As a part of the transaction, the loan was rated by an independent rating agency, whereby it received an A- rating. This sale frees up capital for additional quality, high-yielding loan investments.

John P. Albright: This sale frees up capital for additional quality, high-yielding loan investors. Including both property and structured investments, year to date through June 30, 2024, the company has made total investments of $28.9 million at a weighted average initial investment yield of 9.8 percent, while our disposition activities total $20.2 million at a weighted average exit yield of 7.7 percent. As of quarter end, our portfolio was 99% occupied and consisted of 137 properties, totaling 3.8 million square feet, with tenants operating in 23 sectors within 34 states.

John P. Albright: Including both property and structured investments, year-date through June 30, 2024, the company has made total investments of $28.9 million at a weighted average initial investment yield of 9.8 percent.

John P. Albright: while our disposition activities total $20.2 million at a weighted average exit yield of 7.7%.

Speaker Change: As of quarter end, our portfolio was 99% occupied and consisted of 137 properties selling 3.8 million square feet with tenants operating in 23 sectors within 34 states.

John P. Albright: Our top tenants remain unchanged from our first quarter earnings call in April, with Best Buy making it into our top five tenants after our recent acquisition. Furthermore, we're actively tearing down our Walgreens exposure and currently have two Walgreens in the sales process.

Speaker Change: Our top tenants remain unchanged from our first quarter earnings call in April , with Best Buy making it into our top five tenants after our recent acquisition.

Speaker Change: Further, we are actively tearing down our walgreens exposure and currently have two walgreens in the cells processed.

John P. Albright: All of our top five tenants carry investment grade credit ratings, and we ended the quarter with 67% of our total annualized base rents coming from tenants with investment grade credit ratings, an increase of 400 basis points from this time last year. From a valuation perspective, we are currently trading well above an implied 8% cap rate on our real estate portfolio and at a meaningful discount to our book value of approximately $18 per share.

Speaker Change: All of our top five tenants carry investment grade credit ratings, and we ended the quarter with 67% of our total annualized base rents coming from tenants with an investment grade credit rating, an increase of 400 basis points from this time last year.

Speaker Change: From a valuation perspective, we are currently trading well above an implied 8% cap rate on our real estate portfolio and at a meaningful discount to our book value of approximately $18 per share.

John P. Albright: Additionally, we have one of the highest dividend yields in our peer group, along with a healthy free cash flow and strong AFFO per share growth projected for 2024. Simply put, Alpine shares are a great value today. Lastly, given our strong earnings during the first half of the year, we have increased our full FFO and AFO guidance by $0.07 per share, or 4.6% at the low end, and $0.06 per share, or 3.8% at the high end. With that, I'll turn the call over to Phil to talk about our second quarter performance, balance sheet, and guidance.

Speaker Change: Additionally, we have one of the highest dividend yields in our peer group, along with a healthy free cash flow and strong AFFO per share growth projected for 2024. Simply put, Alpine shares are a great value today.

Speaker Change: Lastly, given our strong earnings during the first half of the year, we have increased our full FFO and AFFO guidance by $0.07 per share, or 4.6% at the low end, and $0.06 a share, or 3.8% at the high end.

Speaker Change: With that, I'll turn the call over to Phil to talk about our second quarter performance balance sheet and guidance.

Phil: First, it's a privilege to join the team here at Alpine. I've only been here a few weeks, but it is clear that management and the board do not sit still and are constantly working to increase shareholder value. That's the new CFO I will endeavor to do. Today we'll briefly highlight our earnings, balance sheet, and guidance, and then open the call. Beginning with financial results, FFO and AFFO were both 43 cents per share for the quarter. This represents an increase of 6 cents per share, or 16%, over the second quarter of 2023. The growth in our earnings was driven by interest income from our loan portfolio, along with pre-disaster recycling.

Phil: Thanks, John . First, it's a privilege to join the team here at Alpine.

Phil: I've only been here a few weeks, but it is clear that management and the board do not sit still and are constantly working to increase shareholder value. As the new CFO , I will endeavor to do the same.

Phil: Additionally, other revenue for this quarter includes $100,000 of non-recurring lease income related to the 39 properties securing our $23.4 million portfolio. Our G&A for the quarter was $1.6 million. This was consistent with G&A for both the prior quarter and the second quarter of last year. As a reminder, G&A primarily consists of our external management fee, which was $1 million for the quarter. During the quarter, the company paid a cash dividend of $0.275 per share.

Speaker Change: Today we'll briefly highlight our earnings, balance sheet and guidance, and then open the call to questions.

Speaker Change: Beginning with financial results, FFO and AFFO were both 43 cents per share for the quarter. This represents an increase of 6 cents per share, or 16%, over the second quarter of 2023.

Speaker Change: The growth in our earnings was driven by interest income from our loan portfolio, along with the credit asset recycling.

Speaker Change: Additionally, other revenue for this quarter includes $100,000 of non-recurring leasing commission.

Speaker Change: related to the 39 properties securing our $23.4 million portfolio loan.

Speaker Change: Our G&A for the quarter was $1.6 million. This is consistent with G&A for both the prior quarter and the second quarter of last year.

Speaker Change: As a reminder, G&A primarily consists of our external management fee, which was $1 million for the quarter.

Phil: Your dividend is well covered as this represents an FFO payout ratio of 64%. We do aim to pay out 100% of our taxable income each year, and consistent with past practice, we will announce at the end of August our quarterly dividend amount for the third quarter.

Speaker Change: During the quarter, the company paid a cash dividend of $0.275 per share.

Speaker Change: Our dividend is well covered, as this represents an FFO payout ratio of 64%.

Speaker Change: We do aim to pay out 100% of our taxable income each year, and consistent with past practice, we will announce towards the end of August our quarterly dividend amount for the third quarter.

Phil: Moving to the balance sheet, we ended the quarter with a net debt-to-enterprise value of 53%, net debt to EBITDA at 7.4 times, and a fixed charge coverage ratio of 30.4 times. Additionally, we ended the quarter with $185 million in liquidity, and we have no debt maturities until 2026. One final balance sheet note, as John discussed, we sold a one participation interest and our $23.4 million portfolio. As required by GAAP, we will continue to report the full amount of this loan receivable on our balance sheet, with a separate liability line item for the $13.6 million participation. Additionally, interest income will continue to be recorded on the full loan amount, with interest expense including an offsetting amount for the participation interest sold.

Speaker Change: Moving to the balance sheet, we ended the quarter with net debt to enterprise value of 53%, net debt to EBITDA of 7.4 times, and a fixed charge coverage ratio of 30.4 times.

Speaker Change: Additionally, we ended the quarter with $185 million in liquidity, and we have no debt maturities until 2026.

Speaker Change: One final balance sheet note, as John discussed, we sold at $13.6 million, a one participation interest, in our $23.4 million portfolio loan.

Speaker Change: As required by GAAP, we will continue to report the full amount of this loan receivable on our balance sheet with a separate liability line item for the $13.6 million participation interest.

Speaker Change: Further, interest income will continue to be recorded on the full loan amount with interest expense, including an offsetting amount for the participation interest sold.

Phil: With regard to guidance, we are increasing our full year 2024 outlook to a new FFO guidance range of $1.58 to $1.62 per share and a new AFFO guidance range of $1.60 to $1.64 per share. This represents a 4.2% increase at the midpoint of these ranges.

Speaker Change: With regards to guidance, we are increasing our full year 2024 outlook to a new FFO guidance range of $1.58 to $1.62 per share, and a new AFFO guidance range of $1.60 to $1.64 per share.

Speaker Change: This represents a 4.2% increase at the midpoint of these ranges.

Operator: Underlying our guidance remains unchanged at a range of $50 million to $80 million for each. Lastly, a couple of quick modeling notes to begin the third quarter with in-place annualized straight-line base rent at $39.8 million and $39.5 million of in-place annualized cash basis. Our annualized interest income currently has a run rate of $4.3 million, which, as previously discussed, is now offset by approximately $1.1 million of additional interest expense associated with the loan participation. With that, Operator, please open the line for questions. Thank you.

Speaker Change: The Acquisition and Disposition Assumption.

Speaker Change: Underlying our guidance remains unchanged at a range of 50 million dollars to 80 million dollars for each.

Speaker Change: Lastly, a couple of quick modeling notes. We begin the third quarter with in-place annualized straight-line base rent at $39.8 million.

Speaker Change: and $39.5 million of in-place annualized cash-based rent.

Speaker Change: Our annualized interest income currently has a run rate of $4.3 million, which, as previously discussed, is now offset by approximately $1.1 million of additional interest expense associated with the loan participation sale.

Operator: Thank you. If you would like to ask a question, please press Star 11. If your question has been answered and you would like to remove yourself from the queue, please press Star 1 again. One moment for questions. And our first question comes from Gaurav Mehta with Alliance Global Partners. Your line is open.

Speaker Change: With that, Operator, please open the line for questions.

Speaker Change: Thank you. If you'd like to ask a question, please press star 1 1. If your question has been answered and you'd like to remove yourself from the queue, please press star 1 1 again. One moment for questions.

Speaker Change: And our first question comes from Gaurav Mehta with Alliance Global Partners. Your line is open.

Gaurav Mehta: Thank you. Good morning. I want to ask you some color on what you're seeing in the transaction market for net news properties.

Speaker Change: Thank you. Good morning.

Gaurav Mehta: I want to ask you some color on what you are seeing in the transaction market for net lease properties.

John P. Albright: Yeah, so we're still seeing some very good buyer interest for smaller net lease properties, kind of $5 million and below. It's still a very active market, and not a lot of dislocations. Larger properties aren't moving as much, but there's a little bit more activity than last quarter, for sure. We are seeing opportunities where people need capital, want to sell properties, or need some financing. But it's a much better environment now than it was last quarter.

Speaker Change: Yeah, so, so we're seeing still some very good buyer interest for smaller

Speaker Change: Natalie's property, kind of $5 million and below, is still very...

Speaker Change: You know, active market and not a lot of dislocations, larger properties aren't moving as much.

Speaker Change: You know, there's a little bit more activity than last quarter for sure.

Speaker Change: We are seeing our opportunities where people need capital, want to sell properties, or need some financing, but it's a much better environment now than it was last quarter.

John P. Albright: Okay. I also wanted to ask you about the acquisition that was completed in the second quarter. The lease term on the acquisition was lower than your weighted average lease term, and I wanted to get some color on the lease term and is that something you plan to pursue going forward? Yeah, we...

Speaker Change: OK.

Speaker Change: I also wanted to ask you on the acquisition that was completed in second quarter, the lease term on the acquisition was lower than your weighted average lease term, and I wanted to get some color on the lease term, and is that something you plan to pursue going forward?

John P. Albright: Yeah, we mentioned in our investment presentation that we're going to look to increase our weighted average lease term as we move from here. That property that we bought, you know, can invest in great credit tenants, lease rates at or below market in a location where there's no supply. So the tenants are doing well. They don't have the opportunity to move and find another available site, and the disruption might make no sense.

Speaker Change: Yeah, we mentioned in our investor presentation that we're going to look to increase our weighted average lease term as we move from here.

Speaker Change: that property that we bought, you know, in investment grading.

Speaker Change: credit tenants, lease rates at or below market,

Speaker Change: in a location where there's no supply, so the tenants aren't doing well. They don't have opportunity to move and find another available site, and the disruption might make no sense.

John P. Albright: So we have very high confidence that they're going to renew and discussions with them as the store does well and it's the right size. So as you know, that's been our strategy is to pick up high quality property that has higher yields with a strong conviction that they're going to renew. And knowing that in the context of the public markets, we will work on increasing our weighted average lease length.

Speaker Change: So we have a very high confidence that they're going to renew, and discussions with them, and the store will do well, and it's the right size.

Speaker Change: So, as you know, that's been our strategy is to...

Speaker Change: pick up high quality property at higher yields with a strong conviction that they're going to renew. But, you know, knowing that in the context of the public markets, you know, we will work on increasing our weighted average lease length.

Gaurav Mehta: Okay, thank you. That's all I have.

Richard Jon Milligan: Thank you. Our next question comes from RJ Milligan with Raymond James. Your line is open.

Speaker Change: Okay, thank you. That's all I have.

Speaker Change: Thank you.

Speaker Change: Thank you. Our next question comes from R.J. Milligan with Raymond James. Your line is open.

John P. Albright: Hey, good morning guys. John, you mentioned that you're looking to, I think you have two Walgreens under contract to dispose of. I'm just curious what the lease expiration schedule looks like for the first.

Richard Jon Milligan: Hey, good morning guys. John , you mentioned that you're looking to, I think you have two Walgreens under contract to dispose. Just curious what the lease expiration schedule looks for your Walgreens exposure, if there's any short-term, you know, releasing risk.

John P. Albright: Yeah, so our average, weighted average lease length of the watering is about eight years. So we have a longer duration there with the watering, and that obviously gives us a better opportunity to sell the properties at reasonable cap rates. And so, you know, obviously mentioning that we have two in the sales process, and we'll start working through some others that are, you know, really good locations and look to actively bring down waterings from the number of years.

Speaker Change: Yeah, so our average, weighted average lease length of the watering is about eight years. So we have a longer duration there with the waterings and that obviously gives us

Speaker Change: a better opportunity to sell the properties at, you know, reasonable cap rates.

Speaker Change: And so, you know, obviously mentioning that we have two in the sales process.

Speaker Change: And we'll start working through some others that are, you know, really good locations and look to actively bring down more greens from the number one position. So I feel like we'll definitely make some good headway for the rest of the year on doing that.

John P. Albright: Thanks, that's very helpful. And just given the recent recovery in some of the net lease stocks, I'm curious how that changes your cost of capital equation and the outlook for the rest of the year in terms of right now, I think you're set to be, per guidance, sort of a net neutral in terms of acquisitions and dispositions, and I'm curious if, Where do we need to see Alpine stock go to get to a net acquirer position?

Speaker Change: Thanks, that's helpful. And just given the recent recovery in some of the net lease stocks,

Speaker Change: Curious how that changes your cost of capital equation and the outlook for the rest of the year in terms of, right now, I think you're set to be, per guidance, sort of a net neutral in terms of acquisitions and dispositions, and I'm curious if...

Speaker Change: Where do we need to see Alpine stock go to get to a net acquirer position?

John P. Albright: Yeah, I mean, look, we're finding, you know, as I mentioned, good opportunities, and we still, you know, given that we do want to sell Walgreens down, that's a good source of capital to redeploy. And so we don't necessarily need the public markets to grow. Obviously, we'd love the public markets to be supportive of growth, but we're going to be patient and see whether, you know, that basically happens for us.

Speaker Change: Yeah, I mean, look, we're finding, you know, as I mentioned, good opportunities and we still, you know, given that we do want to sell Walgreens down, you know, that's a good source of capital to redeploy.

Speaker Change: And so we don't necessarily need the public markets to grow. Obviously, we'd love the public markets to be supportive for growth.

John P. Albright: And so we'll, you know, keep trying to put points on the board here and, obviously, you know, stream some good successes here. And we feel like, you know, as much as the broad markets are supportive, that will come for us, but we don't need to depend on it to be somewhat of a net acquirer. And so, you know, that's kind of where we are right now.

Speaker Change: But we're going to be patient and see whether, you know, that basically happens for us.

Speaker Change: And so we'll, you know, keep on trying to put points on the board here and obviously, you know, stream some good successes here, and we feel like, you know,

Speaker Change: As much as the broad markets are supportive, that will come for us, but we don't need to depend on it to be somewhat of a net acquirer. And so that's kind of where we are right now.

Richard Jon Milligan: Great, that's it for me. Thanks for the color.

Robert Chapman Stevenson: Thank you. Our next question comes from Rob Stevenson with Jason Montgomery Scott, LLC.

Speaker Change: Great, that's it for me. Thanks for the color. Thank you.

Speaker Change: Thank you. Our next question comes from Rob Stevenson with J.M. Montgomery Scott, LLC.

Robert Chapman Stevenson: Good morning, John. Just to follow up on the Walgreens, given the issues of the fact that a lot of people want to reduce their Walgreens exposure, who are the prospective buyers of these properties these days? Are these just local guys that want the, you know, eight to ten years of investment grade tenant? Are these guys looking to do something else if Walgreens doesn't renew? How would you characterize the potential buyer pool for Walgreens assets today?

Robert Chapman Stevenson: Good morning. John , just to follow up on the Walgreens, given the issues of the fact that a lot of people want to reduce their Walgreens exposure, who are the prospective buyers of these properties these days? Are these just local guys that want the, you know, 8 to 10 years of investment grade tenant?

Speaker Change: Are these guys looking to do something else if Walgreens doesn't renew? How would you characterize the potential buyer pool of Walgreens assets today?

John P. Albright: Yeah, Gaurav, you basically answered it all above. You know, we have, you know, again, looking at our demographics of our total portfolio, you can basically summarize that we have really good locations. And so you have 1031 buyers who are basically saying, okay, I've got Walgreens, good credit for a good lease length in a market that's dynamic and growing. You know, no one's building anything, and you're buying it, you know, below replacement costs.

John: Yeah, Gaurav, you basically answered it all day long. You know, we have, you know, again, you know, looking at our demographics of our total portfolio, you can basically summarize that we have really good locations. And so...

John: You have 1031 buyers who are basically saying, okay, I get Walgreens, good credit for a good lease length in a market that's dynamic, growing, you know, no one's building anything, and you're buying it, you know, below replacement costs. And then we've had situations where...

John P. Albright: And then we've had situations where tenants want the Walgreens box and will basically say, I can probably negotiate maybe an early termination with Walgreens, even though we don't have any indications they're closing the store. But, you know, there's a little bit of that situation where tenants want to get a hold of a good corner. So it's all above.

John: tenants want the Walgreens box and will basically say I can probably negotiate maybe an early termination with Walgreens.

Speaker Change: Even though we don't have any indications that are closing the store, but you know there's a little bit of that situation where tenants want to get a hold of a big corner. So it's all they love.

John P. Albright: Okay, and then to your comments on, you know, extending Walt, there are four, you know, a little over four and a half years left on the Best Buy and Golf Galaxy Dick's lease. Any sense where these properties rank within the, you know, overall profitability scale of these retailers?

Speaker Change: Okay.

Speaker Change: And then to your comments on, you know, extending Walt, there's four, you know, a little over four and a half years left on the Best Buy and Golf Galaxy Dick's lease. Any sense where these properties rank within the, you know, overall profitability scale of these retailers? And have you guys...

John P. Albright: Yeah, I mean, look, we talked to them when we bought the property, and they basically said the properties are doing, or those locations are doing very well for them. And so certainly, we can go in there and negotiate some sort of early extension, but it's a little early for them and for us. And so, at the appropriate time, we'll definitely discuss that with them. Usually, we'd like to wait for them to want to refresh the store and maybe provide some capital to basically get a longer lease, a longer lease term, and a return on that capital, but, you know, we don't feel like there's a rush to do anything. Where they're located has very strong demographics, and so, you know, the market should even be better in the next couple years.

Speaker Change: already had conversations with them about extension.

Speaker Change: Yeah, I mean, look, we talked to them when we bought the property, and they, you know, basically say the properties are doing, or those locations are doing very good for them.

Speaker Change: And so certainly we can go in there and negotiate some sort of early extension, but it's a little early for them and for us.

Speaker Change: And so, at the appropriate time, you know, we'll definitely, you know, discuss that with them. Usually, we like to wait for them to want to refresh the store and maybe provide some capital to basically get a longer lease.

Speaker Change: Matthew Partridge, John Albright

John P. Albright: Okay. And then these assets are obviously big boxes. How are you thinking about the overall portfolio mix going forward in terms of smaller boxes versus bigger boxes? Or is it just all opportunity-driven at this point for you guys?

Speaker Change: Okay, and then these assets are obviously big boxes. How are you thinking about the overall portfolio mix going forward in terms of smaller boxes versus bigger boxes or is it just all opportunity driven at this point for you guys?

John P. Albright: It is opportunity driven, but we're seeing more opportunity, as I mentioned before, on the larger boxes, given that, you know, you're not really talking about the smaller 1031 buyers. So, the arbitrage is much greater, and the smaller properties, we're seeing cap rates with, even though the interest rate is coming down, you know, cap rates being extremely supportive of selling the properties. And so, we'll take advantage of, you know, that top capital selling that has, you know, very low cap rates and buying where there's value opportunity. So, we kind of like that, but I mean, we'll be, in general, opportunistic, but we're seeing more opportunities on the larger ticket items.

Speaker Change: It is opportunity driven, but we're seeing more opportunity, as I mentioned before, on the larger boxes, given that, you know, you're not really talking about the smaller 1031 buyers.

Speaker Change: So the arbitrage is much greater.

Speaker Change: And the smaller properties, we're seeing cap rates, even though the interest rate is coming down, you know, cap rates being extremely supportive of selling the properties.

Speaker Change: And so we'll take advantage of, you know, you know, that cost of capital selling that, you know, very low cap rates and buying where there's value opportunity. So we kind of like like that. But I mean, we'll.

Speaker Change: We'll be, in general, opportunistic, but we're seeing more opportunities on the larger ticket items.

Robert Chapman Stevenson: Okay. And then last one for me: how should we be thinking about the second half earnings? Is there anything that's non-recurring this quarter to next or any drags that you expect in the back half of the year? If I look at either the $0.84 of FFO that you guys have done year to date or the $0.43 in the second quarter, both of those run rates are well above where the $1.59 to $1.62 guidance range is. What's the drag, or what's the non-reoccurring that needs to come out of these numbers when we're thinking about the back half of the year?

Speaker Change: Okay, and then last one for me, how should we be thinking about the second half earnings?

Speaker Change: Is there anything that's non-recurring this quarter to next or any drags?

Speaker Change: that you expect in the back half of the year if I look at either the 84

Speaker Change: sense of FFO that you guys have done year-to-date or the 43 cents in the second quarter both of those run rates are well above where the the buck 59 to buck 62 guidance range is what's the drag or what's the non-reoccurring that needs to come out of these numbers when we're thinking about the back half of the year

Phil: Yeah, Rob, it's Phil. You know, I think any time you're talking about earnings per share, you've got to keep in mind that just $150,000 represents one cent, so that's a small amount, or just time can move the needle here. Dispositions could very well lead to acquisitions, and that would be diluted. And look, we've got a line of credit largely swapped out, so if that were to happen, you know, we may not, we can't really pay down the line all the way because we've got $50 million of it swapped, so there could be a temporary time, just a temporary time, where we're sitting on some cash, right, before we redeploy it.

Speaker Change: Yeah, Rob is still. I think any time you're talking about earnings per share, you've got to keep in context.

Speaker Change: It's just 150,000 represents one cent, so that's a small amount.

Speaker Change: or just time can move the needle here.

Speaker Change: With that, then, the current quarter did have, as I mentioned in my remarks,

Speaker Change: 200,000 non-recurring leasing commissions in primary fees management and leasing commissions.

Speaker Change: for managing the 39 properties that underlie the portfolio loan.

Speaker Change: And there was an unusual large amount of leasing commissions from that this quarter, so it was about $200,000.

Speaker Change: non-recurring in their current quarter.

Speaker Change: And then I think, you know, you've got to keep in mind just transaction timing, which falls into a couple of buckets, right, one with our properties and one with our loan portfolio.

Speaker Change: with properties, you know, acquisitions and dispositions, dispositions at very low lead.

Speaker Change: The acquisition, and that would be dilutive, and look, we've got a line of credit largely swapped out.

Speaker Change: So if that were to happen, you know, we may not, we can't really pay down the line all the way because we've got $50 million on the swap, so there could be a temporary time.

Phil: And with the loan portfolio in particular. The portfolio loan, right? That buyer, that borrower is selling those properties, wants to sell those properties and repay the loan, so you could have some time there. So I think, you know, between the one-time item in this quarter and then just largely transaction timing, you have a relatively small amount that can quickly move the needle.

Speaker Change: The portfolio loan, right, that borrower is selling those properties, wants to sell those properties and repay the loan so you could have some time there. So I think, you know, between the one-time item in this quarter and then just largely transaction timing and you have a relatively small amount that can quickly move the needle.

Robert Chapman Stevenson: Okay, that's helpful. Thanks, guys, and have a great weekend. You, too.

Wesley Keith Golladay: Thank you. Our next question comes from Wes Golladay with Baird. Your line is open.

Speaker Change: Okay, that's helpful. Thanks, guys, and have a great weekend.

Speaker Change: Thank you. Our next question comes from Wes Golladay with Baird. Your line is open.

Wesley Keith Golladay: Hey, good morning to everyone. When you look to make future loan investments, are you looking to sell parts like you did with the A-1 deal?

Wesley Keith Golladay: Hey, good morning to everyone. When you look to make future loan investments, are you looking to sell parts like you did with the A-1 deal?

John P. Albright: Now, you know, the selling day one deal just freed up some capital because we are restricted in how much we can do in loan investments. And so, you know, that allowed us to do another loan in the quarter. And we still have the opportunity now to do roughly, you know, 20 million additional loan investments. And so we're being patient and picky, but that was early. I don't see us doing that unless we have some sort of larger loan opportunity, but I don't expect that.

Speaker Change: Now, you know, selling the A1 deal just freed up some capital because we are restricted from how much we can do of the loan investments.

Speaker Change: And so, you know, that allowed us to do another loan in the quarter, and we still have opportunity now to do roughly, you know, 20 million additional loan investments, and so.

Speaker Change: We're being patient and picky, but that was really, I don't see us doing that unless we had some sort of larger loan opportunity, but I don't expect that.

Wesley Keith Golladay: Okay, how are you thinking about your exposure to Family Dollar? You know, what happens to the dual-branded stores if the brand is sold? And were your stores originally Family Dollars for the dual-branded ones?

Speaker Change: Okay, how are you thinking about your exposure to family dollar? You know, what happens to the dual branded stores if the brand is sold? And were your stores originally family dollars for the dual branded ones?

Steven Greyhouse: I'll let Steven Greyhouse join us, our Chief Investment Officer, and let him speak to that. Hey, Wes.

Stephen Greyhausen: I'll let Steven Greyhouse join us, our Chief Investment Officer, and let him speak to that. Hey, Wes. Yeah, most of what we bought are new, so we have plenty of lease term on them. And, you know, really when we're looking at fees and underwriting, it's more of a credit play. So, you know, right now our important goal is...

Steven Greyhouse: Yeah, I mean, most of what we bought is new, so we have plenty of lease terms on them. And, you know, really, when we're looking at fees and underwriting, it's more of a credit play. So, you know, right now, our portfolio is sitting fine, and then we'll look to, you know, potentially reduce exposure, but that way, you won't be buying any more of them. So, we kind of like where we're sitting right now, and we're all in.

Speaker Change: We're sitting fine, and then we'll look to, you know, potentially reduce exposure, but that way you won't be buying any more of them. So, we kind of like where we're sitting right now, and we're pulling it.

Matthew Erdner: Thank you. Our next question comes from Matthew Erdner with Jones Trading. Your line is open.

Speaker Change: Okay, thanks, everyone.

Gary: Thank you, Gary.

Speaker Change: Thank you. Our next question comes from Matthew Erdner with Jones Trading. Your line is open.

Matthew Erdner: Hey, good morning guys. Phil, welcome to the team. So what kind of drives the acquisition activity towards the higher end of your guidance? Because right now, you're a little over half, but what kind of takes those numbers towards that higher range?

Matthew Erdner: Hey, good morning guys. Phil, welcome to the team. So what kind of drives the acquisition activity towards the higher end of your guidance? Because right now you're a little over half, but what kind of takes those numbers towards that higher range?

John P. Albright: You know, we're seeing some, as I mentioned, some good opportunities. Obviously, our main subject is due diligence and execution, so we feel very comfortable that we'll definitely meet expectations there. We obviously have the second half of the year to work, so we have plenty of opportunities. So we're happy with what we see, and I think we'll be able to execute it and deliver.

Speaker Change: You know, we're seeing some, as I mentioned, some good opportunities, you know, obviously are being subjected to diligence and execution.

Phil: So we feel very comfortable that we'll definitely meet expectations there.

Speaker Change: You know, we obviously have a second half of the year to work, so we have plenty of opportunity. So we're happy with what we've seen, and I think we'll be able to execute it and deliver.

Matthew Erdner: Yeah, that's good to know. And then, I guess, how comfortable are you taking the credit facility up? Are you guys comfortable where it is and kind of want to start taking it down?

Speaker Change: Yeah, that's good to know. And then I guess, how comfortable are you taking the credit facility up? Are you guys comfortable where it is and kind of want to start taking it down?

John P. Albright: Now, we're comfortable with where it is, you know, as far as on the leverage side, that will, you know, again, we have a nice, strong, free cash flow, and, you know, given it's a small company, it doesn't take much to bring it down, and so, you know, we're comfortable with where it is. But, you know, as we mentioned, we have some very large money swaps, so you wouldn't want to take it down beyond kind of where we have a certain level of swaps.

Speaker Change: Now, we're comfortable with where it is, you know, as far as on the leverage side, you know, that will, you know, again, we have a nice, strong, free cash flow, and, you know, given that it's a small company, it doesn't take much to bring it down, and so, you know, we're comfortable with where it is, but, you know, as I mentioned, we have some very, you know, in the money swaths, so you wouldn't want to take it down beyond, you know, the kind of, you know, where we have certain level of swaths.

Matthew Erdner: Yeah, that's helpful. Thanks, guys. Thank you.

John James Massocca: Thank you. And our last question comes from John Massocca with B Raleigh Securities. Your line is open.

Speaker Change: Yeah, that's helpful. Thanks guys.

Speaker Change: Thank you.

Speaker Change: Thank you. And our last question.

Speaker Change: comes from John Massocca with B Raleigh Securities. Your line is open. Good morning.

John James Massocca: So with regard to the loan investment, what is the long-term outlook for that portion of the portfolio? Is the thought to replace exposure here as loans are repaid, or should that kind of wind down over time, especially if we're in a more kind of normalized interest rate environment?

John James Massocca: With regards to the loan investment, what is the long-term outlook for that portion of the portfolio? Is the thought to replace exposure here as loans are repaid?

Speaker Change: Or should that kind of wind down over time, especially if we're in a more kind of normalized interest rate environment?

John P. Albright: Yeah, I mean, if we get into more of a normalized, I would call it, rather than industry environment, normalized banking market, you know, that's really what's causing the opportunity. If, you know, the banks are tapped out, they're not looking to lend further in real estate, and they work their books down. I mean, they're stuck with a lot of loans that aren't paying off. You know, in the department sector and industrial, those are really, really hard to refinance now, given where they were. And so that's where the real opportunity is.

Speaker Change: Yeah, I mean, if we get into more of a normalized, I would call a residential environment, a normalized banking market, you know, that's really what's causing the opportunity. If, you know, the banks are tapped out, they're not looking to lend further in real estate as they work their books down. I mean, they're stuck with a lot of loans that aren't paying off, you know, in the department sector and industrial. Yeah.

Speaker Change: really, really hard to refinance now, given where they were. And so that's where the real opportunity is. But we expect it at some point.

John P. Albright: But we expect it to burn down at some point and be with more of a, you know, obviously a net lease kind of ownership interest. But we're taking advantage of the market as we see it right now. We don't see it getting better on the credit availability side. And so, you know, again, finding really high-quality properties that we would not be able to purchase because the cap rates would be way inside of where we have an interest.

Speaker Change: to burn down and be with more of a, you know, obviously fully a net lease kind of ownership interest. But we're taking advantage of the market as we see it right now. We don't see it getting better on

Speaker Change: on the credit availability side, and so...

Speaker Change: So, you know, again, finding really high-quality properties that we would not be able to purchase because the cap rates would be...

John P. Albright: And basically, being able to loan money at double digits on levered first mortgage positions at lower rates, then we'd be able to buy the properties. It's just fantastic. And so we'll keep being selective and investing there. But eventually, you know, things will level out, but we don't see that anytime soon.

Speaker Change: way inside of where we have an interest.

Speaker Change: And basically being able to loan money at double digits on levered first mortgage positions at lower bases than we'd be able to buy the properties is just fantastic.

Speaker Change: We'll keep being selective and investing there, but eventually, you know, things will level out, but we don't see it anytime soon.

John James Massocca: Okay, and I know most of those loans are kind of shorter duration in nature, but as interest rates shift here, are there any kind of prepayment options for those counterparties?

Speaker Change: Okay, and I know most of those loans are kind of shorter duration in nature, but as interest rates shift here, are there any kind of prepayment options for those counterparties?

John P. Albright: They can prepay, but there's make holes, so you know, we didn't do all this effort to just get a loan to prepay in six months. The average duration is roughly 18 months, and so yeah, they can pay early, but we would have a make hole provision. Most likely, the borrowers aren't going to go through the effort of refinancing just to save a certain amount for such a short duration. They just have, you know, a bigger fish to fry, if you will.

Speaker Change: They can prepay, but there's make holes, so, you know, we didn't do all this effort to just get a loan to prepay in six months on average duration is roughly...

Speaker Change: 18 months. And so, yeah, they can pay early, but we would have to make all the provision, most likely.

Speaker Change: The borrowers aren't going to go through the efforts of refinancing just to save a certain amount for such a short duration. They just have, you know, a bigger fish to fry, if you will.

John James Massocca: Okay. And then, you know, you talked a bit about Walgreens and where the, you know, demand for potential sales is coming from. I mean, how is that translating, maybe, broadly, with the whole Walgreens transaction market into cap rates? I mean, where are the kind of cap rate ranges for those types of assets?

Speaker Change: Okay. Great.

Speaker Change: And then, you know, you talked a bit about the Walgreens and where the demand for potential sales is coming. I mean, how is that translating maybe broad strokes or the whole Walgreens transaction market into cap rate? I mean, where are kind of the cap rate ranges for those types of assets?

John P. Albright: Yeah, I'm not going to give you cap rates once we start closing on some of the HLC, but I will say that what we're seeing is really, it's more localized about the location, not as much about the credit. And so it's not someone just saying, I don't need to go see the property because I'm buying the property for this duration of the Walgreens credit, and so here's my cap rate. It's more, I will never be able to basically buy this corner for this price, and they're willing to pay, perhaps, a higher cap rate than you might imagine.

Speaker Change: Yeah, I'm not going to give you cap rates once we start closing on some of the HLC, but I will say that

Speaker Change: You know, what we're seeing is really, you know, it's more localized about the location, not as much about the credit.

Speaker Change: And so it's not someone just, you know, saying, I don't need to go see the property because I'm buying the property for this duration of the Walgreens grant, and so here's my cap rate.

Speaker Change: It's more, I will never be able to buy this corner for this basis.

John P. Albright: Now, there'll be certain situations where it will lean on the Walgreens credit, and the cap rate will be higher, so it's a little bit of a barbell effect where you'll get really good, strong locations where there are a lot of tenants who want to be at that location, and that cap rate will be lower, and it would basically be based on the strength of the location.

Speaker Change: You know, they're willing to pay perhaps a higher cap rate than you might imagine. Now, there'll be certain situations where...

Speaker Change: you know it will lean on the Walgreens credit and the cap rate will be higher so it's a little bit of you know a barbell effect where you get you know really good strong locations where there's a lot of

Speaker Change: tenants who want to be at that location and that cap rate will be lower and would basically be based on the strength of the location.

John James Massocca: Okay, that's very helpful. And that's it for me. Thank you very much.

Speaker Change: Okay, that's very helpful. And that's it for me. Thank you very much. Great. Thank you.

Barry Paul Oxford: Thank you. We have a question from Barry Oxford with Colliers International. Your line is open.

Speaker Change: Thank you. We have a question from Barry Oxford with Colliers International. Your line is open.

Barry Paul Oxford: Great. Hey, John, how are you doing? My question revolves around Walgreens and if they're getting out of a lease early, who are the tenants that are kind of growing and that are kind of the natural tenants to replace a Walgreens? Because if people are more concerned about the location than they are kind of about the duration, that's telling me that they want to have some certainty that if Walgreens walks away and does a lease termination, they've got somebody that can backfill.

Barry Paul Oxford: Great. Hey John , how are you doing? Excellent.

Barry Paul Oxford: Good.

Barry Paul Oxford: My question revolves around the Walgreens and if they're getting out of a lease early.

Speaker Change: Who are the tenets that are kind of growing and that are the kind of the natural

Speaker Change: Tenants to replace a Walgreens because if people are more concerned about the location than they are kind of about the duration That's telling me that they want to have some certainty that if Walgreens walks away And does a lease termination that they've got somebody that can backfill

John P. Albright: Yeah, I mean, you have a medical box for, you know, urgent cares. You have, you know, restaurants that would scrape it, you know, small, you know, fast categories, which, as you know, are growing like crazy. You know, the raving canes of the world that, you know, God knows how they're going to find the locations they need to find. So, you know, even if you went to schools and dollar stores and that sort of thing.

Speaker Change: Yeah, I mean, you know, you have a medical, you know, if they're good boss, or, you know, or who cares, um, you have, you know, restaurants that would scrape that, you know, small, you know, uh, fat casuals.

Speaker Change: which, as you know, are growing like crazy. If, you know, the rain came to the world, that, you know, God knows how they're going to find the locations they need to find to grow. You know, even if you went to school, the dollar stores and that sort of thing, so there's...

John P. Albright: So there's, you know, really quite a bit of that sort of demand because if you think about the Walgreens, it's on the corner, it's out front, you know, mostly drive-through. So, there's a fair number of Andrews there.

Speaker Change: There's really quite a bit of that sort of demand, because if you think about the Walgreens, it's on the corner, it's out front, mostly drive-thru, so there's a fair amount of interest there.

John P. Albright: John, would you be a buyer of an asset where Walgreens is leaving just because you might have a tenant or two that you know would love it?

John: John , would you be a buyer of an asset where Walgreens is leaving just because you might have a tenant or two that you know would love that spot?

John P. Albright: And you could get a good deal on it because they're moving out. Yeah, we're opportunistic and very location, real estate focused. So we absolutely would buy a dark Walgreens if we knew we had a tenant in hand, and we were getting paid handsomely for that sort of transaction. We haven't really been searching for that, but yeah, we're all about location. You could see us perhaps even holding someone, bridging that capital for that transaction. Right. So it could be on that side of the equation as well.

Barry Paul Oxford: Because it seems to me like the 1031 buyers would not be interested in that kind of deal.

John: And you could get a good deal on it because they're moving out. Yeah, we're opportunistic and very location, real estate focused.

John: So we absolutely would buy a dark Walgreens if we knew we had a tenant in hand.

John: and we were getting paid handsomely for that sort of transaction.

John: You know, we haven't been really searching for that, but yeah, I mean, we're all about location. I mean, you could see us, you know, perhaps even...

John: You know, helping someone, you know, bridge that capital for that transaction. Right. You know, so it could be on that side of the equation as well.

Speaker Change: Because it seems to me like the 1031 buyers would not be interested in that kind of deal. No, I wouldn't come to that conclusion.

John P. Albright: Now, I wouldn't come to that conclusion.

Barry Paul Oxford: Okay, that's all I have for today. Thanks, guys. Sorry. Thank you, Barry.

Speaker Change: Yeah.

Speaker Change: Okay, that's all I have for today. Thanks, guys.

Operator: Thank you. This concludes the question and answer session. Thank you for your participation. You may now disconnect. Everyone, have a great day.

Speaker Change: Thank you. This concludes the question and answer session. Thank you for your participation. You may now disconnect. Everyone, have a great day.