Alpine Income Property Trust (PINE 2.24%) is a tiny net lease real estate investment trust (REIT) with a still-modest portfolio of properties. Unlike a giant like Realty Income (O 1.39%), which owns over 11,000 properties, Alpine can really dig in and understand the dynamics driving the 128 buildings it owns. Right now, management thinks bond investors, in general, are making some asset allocation shifts that will help Alpine sell more assets than it had originally planned in 2022.
A different scale
Alpine Income Property Trust and Realty Income are both net lease REITs with a retail focus. A net lease REIT owns single-tenant properties for which the tenants are responsible for most of the asset's operating costs. Over a large enough portfolio, it is a fairly low-risk approach even though any single property is high risk because it contains just one tenant. There's another similarity here, as well, in that Realty Income just spun off its office assets as a stand-alone company and Alpine sold its last remaining office property so it could be 100% retail.
That's pretty much where the similarities end, however, given that Realty Income is a $40 billion market cap giant and Alpine is a $240 million market cap pipsqueak. The size of their portfolios, noted above, highlights the difference even more, given that Realty Income's portfolio is more than 88 times the size of Alpine's modest collection of properties. In many ways, that means that Realty Income's portfolio is more robust to adversity, but there are positives in being small, too.
Notably, Alpine is buying and selling properties in smaller numbers and it likely has a much better understanding of each individual asset. Realty Income needs to make big moves to impact its top and bottom lines. Which is why it was so interesting to see Alpine increase its projected asset sales target for 2022 from $40 million-$50 million to $75 million-$100 million. That change is from a small REIT that's focused on growth, where selling any asset ends up creating a growth headwind.
The word "on the ground"
What's particularly notable here is that Alpine didn't increase its acquisition guidance, preferring to just narrow its original range (slightly increasing the bottom end). So it is entirely possible that the REIT doesn't actually put the proceeds from its expected sales back to work in new investments this year. That would likely be a timing issue, since management has been growing the portfolio aggressively, but it speaks to a market that could best be described as favoring sellers.
CEO John Alright offered up some interesting reasoning for this situation. Net lease assets are often viewed as bond alternatives because they generally come with long leases. Adding to the allure here is that net lease properties can offer higher "yields" than bonds if you consider the income stream created by rental payments. And, net lease leases generally include regular rent rate hikes, which means income rises over time to combat the impacts of inflation. As if all of that weren't enough, a rental property is a hard asset that provides additional inflationary protections and can act as a store of wealth.
Bonds, by contrast, generally only give investors the right to collect a fixed level of income and the principle back at the end of the loan period. Both amounts of cash here get eaten away by inflation. Worse, since the income and bond principle are both static, rising interest rates generally lead to a decline in the value of the bond. This is because yield and price go in opposite directions, meaning that for a bond to offer a competitive yield when rates increase, the price of the bond has to be reduced. Albright sees bond investors facing that ugly scenario looking for alternatives with better protection in the current environment. Given the benefits of net lease assets noted above, Alpine's property portfolio is filled with options.
Alpine isn't looking to liquidate its portfolio or sell off great properties at discount prices. However, if it can get what it considers a premium price for a property, locking in future returns by selling it isn't a bad call. And, if Alpine is patient and uses its small size to be nimble, it can put the freed-up cash to work in new assets and, perhaps, better-positioned properties.
Working the portfolio
Active portfolio management is a good thing in most cases, and it's nice to see Alpine doing the extra work it takes to maximize shareholder returns. It's also encouraging to see it take advantage of the potentially unique situation that has arisen because of rising interest rates. While such moves may slow the REIT's growth in the near term, it's likely to make it a better investment over the long term. For more aggressive investors looking for a high-yield option in the net lease space, Alpine and its 5.5% dividend yield are probably worth a closer look.