Alpine Income Property: Double Digit Upside But Tenant Portfolio Could Be Improved (Downgrade)

Core Viewpoint - The real estate sector, particularly Alpine Income Property Trust, Inc. (PINE), has faced challenges due to elevated interest rates, but it remains a solid investment option with a focus on high-quality commercial net lease properties. However, vulnerabilities, particularly related to tenant Walgreens Boots Alliance, Inc. (WBA), necessitate a reconsideration of previous strong buy ratings [2][14]. Portfolio Analysis - PINE's annualized base rent is significantly exposed to Walgreens, which accounts for 12% of total rent. Walgreens is experiencing declining revenues and is closing over 150 stores in 2024, raising concerns about its ability to pay rent [4][14]. - The majority of PINE's tenants are investment-grade rated, with 65% of total portfolio rent coming from such tenants. The average lease term is 6.9 years, providing revenue predictability [5][6]. - PINE lacks exposure to West Coast markets, particularly California, which presents potential expansion opportunities [6]. Financial Performance - PINE reported Q1 revenue of $12.47 million, reflecting an 11.7% year-over-year growth. Funds from Operations (FFO) per share were $0.41, exceeding expectations by $0.03 [7][8]. - The company has a market cap of $228 million, with cash and equivalents totaling approximately $5.1 million, offset by long-term debt of $272 million. However, there are no debt maturities until 2026, allowing time for cash accumulation [7][8]. - PINE maintains a high occupancy rate of 99% and has been managing operating expenses effectively, reducing them from $10.2 million in Q4 to $9.9 million in Q1 [8]. Dividend Insights - The current dividend yield is 7%, with a declared quarterly dividend of $0.275 per share. The FFO coverage ratio for the dividend is 149%, indicating a strong capacity for future dividend increases [9][14]. - Since 2021, PINE has achieved an average compound annual growth rate (CAGR) of about 8% in dividends, suggesting potential for reliable income growth [9][10]. Valuation Metrics - PINE trades at a price-to-FFO ratio of 10.14x, below the sector median of 12.7x. Wall Street's average price target for PINE is $18.25 per share, indicating a potential upside of 17% [12][13]. - A fair value estimate of approximately $22 per share suggests a potential upside of 41.5% if PINE can achieve a modest growth rate of 4% [13][14]. Conclusion - PINE is well-managed in a challenging interest rate environment, with strong FFO coverage for dividends and potential for growth. However, the significant reliance on Walgreens for rental income poses a risk that needs to be monitored [14].