Alpine Income Property Trust (PINE) reported a stellar Q1 2024, with FFO per share soaring 13.9% year-over-year to $0.41. On the surface, this paints a picture of a company firing on all cylinders, confidently navigating a challenging economic landscape. However, a deeper dive into the transcript, coupled with analysis of historical financial data, reveals a potential red flag that seems to have slipped under the radar of other analysts: the sustainability of PINE's dividend in the face of its aggressive loan portfolio expansion.

While PINE maintains its full-year FFO and AFFO guidance, projecting healthy growth, the transcript reveals an underlying tension. John Albright, PINE's CEO, acknowledges the reluctance of sellers in the traditional acquisition market and highlights the company's increasing focus on high-yielding loan investments as a more attractive alternative. These loans, while offering double-digit returns, come with a crucial caveat – their inherent short-term nature.

Specifically, Albright explains that the $24 million Micromont loan, PINE's largest, is structured for hyper-amortization as the borrower sells off assets. This creates a scenario where strong initial interest income from the loan portfolio could quickly dwindle, jeopardizing future earnings and potentially putting pressure on the dividend.

Albright assures that PINE's loan exposure has nearly reached its upper limit, capped at approximately $55 million due to credit facility constraints. However, this doesn't negate the risk of rapid income evaporation if borrowers accelerate asset sales, potentially outpacing PINE's ability to deploy capital into new loans or acquisitions.

Further analysis of PINE's financial data reveals a concerning trend. In 2023, PINE repurchased nearly 1 million shares at an average price of $16.23, representing over 6% of its outstanding shares. While this signals confidence in the company's value, it also significantly reduces the external management fee, impacting G&A expenses.

Looking at PINE's Q1 2024 income statement, G&A as a percentage of revenues decreased by 121 basis points year-over-year, directly attributable to this reduced management fee. This raises a crucial question: is PINE's strong FFO growth partially fueled by a one-time G&A reduction due to share repurchases, masking the underlying volatility of its loan-driven earnings model?

To test this hypothesis, let's delve into the numbers. Assuming the average price of repurchased shares in 2023 ($16.23) represents a fair valuation, and considering PINE's current dividend of $1.10 per share, the annual dividend payout on these repurchased shares would be approximately $1.1 million.

This represents a substantial portion of the G&A reduction PINE enjoyed in Q1 2024. While it's impossible to precisely quantify the ongoing impact of share repurchases on G&A, this simple calculation suggests a potentially unsustainable element in PINE's earnings growth narrative.

Loan Portfolio Composition

Projected Impact of Loan Paydowns on Interest Income

Note: This chart is a hypothetical projection based on the assumption of accelerated loan paydowns, especially from the Micromont Loan. The actual trajectory of interest income will depend on PINE's loan portfolio management and asset sales by borrowers.

Adding another layer of complexity is PINE's ongoing portfolio repositioning. The company is actively seeking to reduce its Walgreens exposure, its largest tenant, while pursuing higher-quality credits like Walmart and Lowe's. While this strategic shift aligns with PINE's long-term vision of a premium portfolio, it also adds uncertainty to its near-term earnings trajectory.

Disposing of Walgreens assets, even at favorable cap rates, could temporarily reduce rental income, further amplifying the potential earnings volatility stemming from the short-term loan portfolio.

In Conclusion

PINE's Q1 2024 results, while impressive, warrant a closer look. The company's increasing reliance on high-yielding but short-term loan investments, coupled with its ongoing portfolio repositioning and the potential for G&A normalization, creates an environment where dividend sustainability becomes a legitimate concern.

While PINE's long-term vision is commendable, its short-term earnings trajectory appears increasingly dependent on factors outside its control. Investors seeking a stable and predictable dividend stream should approach PINE with caution, closely monitoring the evolution of its loan portfolio and its ability to successfully execute its asset recycling strategy without jeopardizing its dividend payout.

"Fun Fact: Did you know that Alpine Income Property Trust's portfolio spans 35 states, housing tenants operating in 23 diverse sectors? That's a testament to PINE's commitment to building a geographically diversified portfolio resilient to localized economic shocks."