Missing the forest for the (PINE) trees?

Alpine Income Property Trust (NYSE: PINE), one of the smallest publicly traded net lease focused REIT, recently announced updated 3Q transaction activity that provides a useful example of the use of averages and medians in statistics.

Between 7/1/24 and 8/2/2024, PINE acquired 4 properties totaling $37.5 million in purchase price (8.8% initial cap rate). The majority of the acquisitions entailed a $31.4 million sale/leaseback with a subsidiary of Beachside Hospitality for 3 restaurants (Beachside operates ~18 restaurants in Florida with relevant concept names including Crabby’s and the Salty Crab). Most interesting, the new leases include 30-year base terms and 2.0% annual rental escalations.

PINE also acquired a Golf Galaxy retail net leased asset for $6.1 million (lease term not disclosed—perhaps not as exciting as 30 years but a frustrating omission for analysts). Additionally, the REIT also sold one store each tenanted by Lowe’s and Walgreens (again, lease term not disclosed…) totaling $15.6 million in proceeds priced at a 5.7% cap rate.

Within PINE’s press release, we’ll focus on the following line:After adjusting for the announced transaction activity, PINE’s weighted average remaining lease term has increased from 6.6 years as of June 30, 2024, to approximately 8.35 years as of August 2, 2024.

Weighted average remaining lease term (“WALT”), an industry-accepted non-GAAP portfolio metric, is typically calculated by multiplying the lease term remaining by the straight line annualized base rent (average annual rent over the firm lease term) for each lease and then dividing by total portfolio annualized base rent.

In this case, PINE’s addition of just 2 net assets (4 acquisitions; 2 dispositions) had a profound impact on its overall WALT.1

How can a portfolio’s WALT increase by over 25% from such minimal portfolio composition change? The succinct answer: outliers. The 30-year base lease term of the Beachside acquisition is atypical compared to PINE’s usual leases (and most market transactions). A simple average calculation skews greatly towards the direction of an outlier; try finding value in the average wealth among your closest contacts if you happen to know (and include) Elon Musk or Warren Buffet in the sample.

PINE completed other activity, as noted above, in addition to the Beachside acquisition; however, this deal drives the material change in WALT. For example: adjust the Beachside base lease term to 20 years (a more common/market length for restaurant sale/leaseback deals) and the new portfolio WALT falls by nearly a full year to ~7.5 years.

The use of median can help provide a more relevant comprehension. As of 6/30/24, PINE’s estimated median lease term2 (meaning how many years until leases expire that generate one-half of the ABR or “MELT” in the halls of the Observer) was 6.8 years. After recent transaction activity, the Observer estimates the new MELT at 7.1 years.

From an investor perspective, does the PINE portfolio seem more secure? The Observer would argue that MELT is much more relevant than WALT in this case and thus the headline increase in lease term is much less impressive than the press release entails. Averages tend to skew when outliers are present - perhaps the net lease community will push for MELT disclosures from the public REIT over time.

Overall, evaluating true asset composition is key to understanding prospects for REIT and other net lease property portfolios.