Q1 2020 Earnings Call
[music].
Okay and welcome tail.
S.C.P.T. at El Pen earnings first quarter 2020 conference call.
Participants will be in listen only mode.
Do you need assistance, please pick helicopter specialist by pressing the Starkey followed by zero.
After today's presentation there'll be an opportunity to ask question.
Please note the best is being recorded.
I would now like to turn the conference over to Jerry Morgan. Please go ahead.
Thank you Sarah during the course of this call we will make forward looking statements, which are based on beliefs and assumptions made by us our actual results will be affected by known and unknown factors that are beyond our control or ability to predict our assumptions are not a guarantee of future performance and some will prove to be incorrect for more detailed description of some potential risks. Please.
Refer to our FCC filings, which can be found at F.C.P.T. Dot com all the information presented on this call is current as of today May 7th 2020. In addition reconciliation to non-GAAP financial measures presented on this call such as ethanol and ethanol can be found on the Companys supplemental report also available on our way.
Website, and with that I'll turn the call over to Bill.
Good morning, Thank you for joining us to discuss our first quarter results and ongoing response to covert 90.
First our best wishes to all of you and your family's health and safely during these uncertain times and our thanks to all the medical and other service providers, who are working during this time for all of our benefit.
Ill begin with a few broad comments about our response to the current environment before discussing the first quarter results in the second quarter collection results, including in our earnings release.
First my sincere thanks, and admiration to all the of CPT team will continue to perform tirelessly from home over the last two months.
Specialty acknowledgment to our team under Jim Bratton, Carol built within Carol Longhorn group in San Antonio who have been innovative in achieving to go business over the past six weeks approaching 30% of rigor levels with a much reduced team to returning to 20.
This is prior to returning to 25% maximum occupancy in restaurant dining in Texas last week.
The last two months' had been unprecedent environment for restaurant operators, but many have shown tenacity and adjusting their operating model. We are starting to see different parts of the comp the country reopen and restaurant traffic will rebound accordingly, strong operators like Darden, and Brinker and others should benefit in the long run from their scale will we believe this spring.
Both of our portfolio, which was built on strong locations well capitalized tenants and benefits from industry, leading rent coverage were relatively outperformed during this time.
Now turning to our reported results in first quarter, our portfolio performed as expected in the quarter as we benefited from a full quarter of rent from properties acquired at year end, we achieved AFFO per share of 37 cents, which represents an 8.8 year over year increase.
During the first quarter CPT acquired 23 properties.
For combined purchase price of 36.2 million at an initial weighted average cash yield of 6.9.
Prior to our decision in March to extend deadlines on existing pipeline in response to covert 19.
Speaking to the quality of the first quarter acquisitions 19 of the 24 leases or with the brands corporate operator.
And our average basis per property is less than 1.6 million.
Further 14 of the 23 properties or ground leases were half CPT owns land and the tenant constructed the building, which equates to low rents.
With respect to the acquisition environment in general we have paused for acquisition activities by requesting counterparties to extend deadlines until later in the year, but we will we believe we will be poised for great acquisition environment in the near future as competition for acquisitions will decline, which should improve pricing.
We have spent the last four years being disciplined and how we construct and underwrite acquisitions and finance, our balance sheet, which will position us well.
With regard to second quarter ranked collections rents continue to be received daily for April and we currently stand at over 89% collected.
We are off also off to a strong start on may collections with over 83% collected through may fiveth with additional rent payments coming.
The team remains engaged in construction rent deferral conversations with tenants.
Of course, we will continue to enforce the provisions of the leases in cases, where tenants choose not to pay and we and we're not discussing rent forgiveness with tenants nor are we lending money to any tenants.
We would note that number tenant seeking lease modification as decreased and we recent weeks.
It is also noteworthy that many of our tenants have raised equity recently Darden raised $527 million Brinker announced last night that it raised around 125 million and and B-j's recently raised 70 million as examples.
We are in preliminary discussions with the fewer tenants to extreme short term rent deferments for concessions, including lease extensions and conversion to fiber bumps into annual rent increases.
That approach has been limited in scope will improve our portfolio and drive long term value for our shareholders.
But it may put the rent collections from a slightly below April.
Regardless, we expect collections to continue to rise in the coming weeks for both periods.
Finally, before I turn it over to Jerry to discuss some of the financial results in our liquidity position a few words on our dividend.
I will nine to everyone that we paid our declared first quarter dividend in mid April the FCB Board and I will review the second quarter to dividend payment in early June based on full assessment of the environment.
Our dividend payout ratio was approximately 83% in the first quarter, which has a conservative level.
Now Terry will take you through our financial results Derek. Thanks, Bill few quick comments on the first quarter recognizing it is less of a focus at this point, we generated $35.7 million of cash rental income in the first quarter. After excluding noncash straight line rental adjustments and then on a run rate basis. The current annual cash.
Base rent for leases in place as of March 31 is 142 million our weighted average tenure annual cash rent escalator remains at approximately 1.5% and our EBITDAR coverage was one was 4.7 times as measured in the time period prior to the impact of the Corona.
As a slowdown in forced closures.
As Bill mentioned, we reported 37 cents per share and AFFO, which was a three cents increasing quarter over quarter results versus the first quarter of 2019.
Turning to the balance sheet to capital offerings to know first we entered into agreements on March 30, Onest two issue 125 million a private senior unsecured notes in the second quarter 75 million of 10 year notes, which funded on April 8th at a fixed interest rate of 3.2% and 50 million of nine year notes, which are expected.
Defined on June 9th at a fixed interest rate of 3.15%. These notes were issued at par and in connection with the offering. We also terminated interest rate swaps at a loss, which will be amortized over the life of the notes and add approximately 67 basis points to the all in annual interest rate.
Second during the first quarter F. CPT sold approximately 144000 shares at an average offering price of $30.23 per share for total net proceeds of approximately 4.3 million after deducting fees and expenses.
Turning to our cash and win and revolver balance we ended the second quarter with a $178 million revolver balance and over $90 million of cash reserves out of an abundance of caution given the cobot 19 environment.
As disclosed in Yesterdays release, we currently stand with a cash reserve of over 150 million. After funding of the first 75 million up the private note.
We may utilize some portion of this cash balance to pay down the revolver over the remainder of this core quarter as the environment further stabilizes.
Our overall leverage metrics remain quite strong with a fixed charge coverage of 5.2 in the first quarter and net debt to adjusted EBITDA of 5.3 times at March 30, Onest, our revolver maturity can be extended to November 2022 at our option, which is also the timing of the first term debt maturity about.
150 million.
We remain committed to maintaining a net debt to leverage target of below 5.5 to six times.
With that Bill back to you for closing comments. Thanks, Jerry in conclusion, we will remain very focused on working with our tenants as they reopen and adjust their business model over the upcoming weeks and months, we've always prided ourselves on transparent transparency in our reporting to shareholders fact, based investment decision, making and responsiveness and all of our interactions.
We will have continued to be guided by these principles.
With that we will turn it back over to Sarah for today.
Thank you.
We'll now begin the question answer session.
You ask a question you May press Star then one on your Touchtone phone.
If you're using a speakerphone please pick up your handset before Chris.
What's your question. Please press Star then Tim.
This time, we'll pause momentarily to assemble era.
My first question comes from make crossed with Baird. Please go ahead.
Hey, good morning, guys.
Good morning.
Hey, so question on acquisition I.
I know you're on hold at the moment, but how would you kind of characterize the pod deal finite life, you well I think last time it was pretty strong.
Is there a lot in Q1, you guys are acquiring again and then how many of the acquisitions, we're kind of signed and are now just postponed.
Yes, I think we have that we're in a great great place with.
Minimal deposits.
But the assets or.
Strong assets that if the world stabilized as we'd like to buy.
Vast majority or under contract with the folks that are willing sellers.
So I think it's a prudent thing to pause and see what the world holds but.
As as our stock has stabilized off off sort of panic levels earlier in the year.
And we can have better clarity on what's going to happen I think it won't take much to get us back into acquisition mode.
Yes, but what about the actually side.
Pipeline has there been any 14 days.
With all day.
I mean, I know everything down hole.
Side of the opportunities out there has that changed.
What I would say no not much mean, our pipeline is pretty similar to what we reported in the past.
I would simply say that the dynamic for acquisitions more more acquirer friendly than it was pre pre cogan just to state the obvious.
Okay, and then just one quick one on the 17% of brands not yet collected in May.
Any in Delhi tenant accessing any of that that'd programs or.
As we are they to Baker PDP, what's what are they think.
It's a mixed bag and I think part of its just earnings calls a little bit early in the month. So.
The collection process is ongoing but we just wanted to make sure people had the most updated information, but I would say what we're hearing it in recent weeks is the underlying businesses reopening performance.
It is improving across the board people have been accessing cares act and PPP.
And we're having discussions.
Along with the collecting rent.
For every day.
Okay. That's helpful. Thank you.
From it.
Our next question comes from Collin Mings with Raymond James. Please go ahead.
Thanks, and good morning.
Morning on first Hey, good morning.
I wanted to go back to was just on made question just in terms the kind of acquisitions and you touched on your expectation the prepared remark that you expect pricing will change moving forward.
But just more broadly bill longer term, what if anything you change about your investment strategy I would assume that creates some dislocation and more opportunities on the restaurant front, but does that actually lead to maybe accelerate your diversification beyond restaurants moving forward.
I think it's too soon to tell Collyn I will comment that.
A lot of the basic tenets of our acquisition strategy going into this focusing on national brands that are well capitalized.
Focusing on low rent properties being so we're very methodical.
Has served us really well so I would think a lot of those tenants will will remain the same.
Coming out of this.
Okay I.
I would also comment we've avoided calling we've avoided.
Menu the.
Property types.
Like Big box retail and.
Cause I strip centers and entertainment focused net lease stuff thats more off the run and that served us really well.
Got it okay.
And then in your comment as well.
That's really you outlined how the companies looking to strike a balance between collecting short term rent, but then also taking the opportunity for ways to create long term by you and again in the prepared remarks, I think you touched on getting maybe annual rent bumps in exchange for.
From short term deferrals, but maybe just can you expand on that bought profit the little bit more maybe quantify what you've agreed to thus far in terms of short term deferrals and I'll kind of what you're getting in exchange for that sure will.
Mostly has been discussions thus far we haven't.
Paper much of anything with with tenants.
But the idea is just to take a long term shareholder value creation.
Standpoint, where is that there is something that we can do for a couple of months that on a long term basis.
It was very positive for four corners I think that's that's what we're we're here to do so.
Just trying to be flexible being very communicative with our tenants. We operate six restaurants. So we have a sense of what's going on literally in real time.
And so we're trying to be responsive to our tenants.
In ways that help them during this short period of dislocation.
Taken over the long term of.
2030, 40, 50 year lease a couple of months is pretty short term.
And trying to to to do things that when we come out of this we'll look back and say well that that really nor to the benefit of four corner shareholders.
Okay.
And then.
Ill, maybe to be a bit more specific I mean, the obvious one is having tenants exercise there.
We will options.
Early.
Got it okay.
And then fill going back the dividend in recognizing there's multiple variables at play in.
June fall, while away, but maybe just talk a little bit more about how the aboard just a plan to think about the dividend here and then is there a willingness to paid the current distribution if not fully funded by cash flow in the quarter is there a lot that may be speaking, the cash and being able to utilize for acquisitions and better just some more.
Bob just on the capital allocation there might be helpful well.
Sure I think column, we haven't really even begun those conversations I think we're simply saying if you just reflect back of how much more we know now than we knew three weeks ago.
Right.
I don't know the exact number but our board meeting something like five weeks away. We'll know so much more at that time, we have a very strong liquidity position as Gerry mentioned, we have I think amongst the highest collections in the industry.
We're in really good position so.
I don't want to speculate what the board's going to decide will decide in June the point that we're trying to make is.
Just think about how much more we'll know about how the world books.
Four or five weeks from now.
And so.
On the we're going to discuss but.
[music].
The company is in great shape.
Okay, I guess, maybe Ethernet a slightly different way is there that bought that.
Just.
The dividend.
Impart even if it's not at the same level at dividend is an important part of the.
The value proposition, if you will for shareholders.
As opposed to.
Maybe even if you have to align that maybe with operating capital in the short term is that that.
Fair way to think about it.
Yes, I mean common dividends are important important to reads, but im not going to make further comments.
Fair enough.
I.
Thanks, I'll turn it over.
Thanks.
Our next question comes from Rob Stevenson with Janney. Please go ahead.
Hi, Good morning, guys Rockville, you've got good morning, you've talked in the past Bill about when four quarters was formed at the Darden leases were set at a level, where they had some cushion operationally what those sort of ballpark number on a revenue basis relative to pre cobot that darden really needs to be at to the comfortably cover your.
It.
The going into this the darden rents were about 4% to 5% rent to sales that's versus a kind of standard industry level of 8%.
So when when things reopened.
I think we're going to very very quickly get to a point where.
Our leases are well covered again will they be the five and a half times.
Four wall coverage that they were going into this immediately no, but if you think about industry standard metrics of two and a half times.
Our leases would have been two and a half times during the bottom of the Onein to 2008 2009 recession, So I think that.
Will it be immediately that there there is the same level coverage no, but it won't take that long for them to be very well covered.
Okay and given that you also operate.
Some assets how are you.
Struan tenant viewing the return of restricted in house dining is that person that's now going to come in inside the location. The same as those that were doing take out from location in other words is the expectation that the in house Donnie will cannibalize some of the takeout it'd be somewhat limited in terms of the positive impact, especially once you increase expenses.
For the staffing needed to deal with in house donning or is there are people viewing that is all additive at this point I think it's a fantastic question.
And the real answer is no one knows but it's important to just think for a moment of how dramatic.
The the changing consumer behavior.
We've we've seen we've seen some casual dining brands.
We have 50%.
Take out delivery sales that going into this would have been 5%.
So what are the factors driving that one states like Texas, and California, allowing well.
Alcohol sales to go to obviously far less competition from from any in dining experience.
And then innovation and so we've seen brands like Chili's really lead from a technology standpoint.
And our own restaurants, they've been very innovative stake as a cuisine type typically doesnt do all that well on delivery.
But they've.
Call inaudible, they're selling meal kits unprepared meal kits. So you can cook at home.
Just really great thinking and I think what's going to be interesting to see is a year or two from now.
Did that 5% to go and pickup that went to 30%.
Clearly, it's going to get cannibalized by in dining, but even if it were to receive by 50 or 70%, it's still multiples of what it was before.
And I would also note it to.
Terrific way to keep.
Key people.
During this time, it's a terrific way to serve Youre most loyal customer.
And it's quite profitable certainly as if it's an adjunct two in dining.
In person dining.
And so what we've seen in Texas for example is they've gone to 25%.
We had strong business over the weekend.
We check on a daily.
I think you can anticipate over time than the 25% going to 50%.
Going to 75 going going back to two full experienced that might take some months, but.
The restaurants in operated 100% capacity previously.
But I think I do think it's a it's a long term positive for branded restaurants, who can combine the technology of ordering execution and that have relevant cruising types.
All right and then you said that in the relief that you were 83%.
On may rents as of May fit where you typically collection wise pre coded five calendar days in the month I mean is that 83 sort of typical are you normally at 90 or 95% given electronic pay you get a perspective, where that would be normally yes, yes. We're certainly we're certainly north of that on a typical base.
Yes, but if you think about the co bid.
Update that we provided a couple of weeks ago, and how that number has increased I think 200 basis points or so.
You know similar sort of thing we do have tenants that had withheld April and May ran wanting to have a discussion.
As we've had those discussions.
Folks have sent rent and so it's certainly under normal environment, it's much higher.
But.
We're showing improvement is how I would I would position.
All right and then last one from me Gary has anybody followed below the 75% Collectability threshold and you've had to move them to cash basis revenue recognition, yet and what do you accruing for 2020 now for bad debt expense.
Yes, the the Collectability test is done at the end of the quarter. So so if you remember back at the end of March that those really before most of this happened. So we had a minor amount of Collectability reserve that we took at the end of March I think the bigger.
Number four our whole industry and for ourselves we'll be at the end of the second quarter. So so I think the answer is a minor amount at the end of the first quarter and we'll just have to see at the end of the second quarter.
Okay and at this new insourcing into things out yes. It was issued to Bill's point. It was it was sub 50000 to in terms of reserve for the first quarter. So so element to clearly an immaterial amount sorry, Rob okay. Okay. Thanks, guys appreciate it.
Our next question comes from Sheila Mcgrath with Evercore. Please go ahead.
Hi, Yes, good morning on on the ball side is on thing Malone. There is obviously very challenged I just wondered if you think there is more opportunities when you get to the other side is this.
Kind of pause on acquisitions in that or do you think you pretty much tapped out that opportunity previously.
It's a terrific question I think there will be much more opportunity.
Key will be to remain very selective and I think that that's really important to remember.
We might buy one out of three properties that were seeing that are more Jason.
And we're also very selective off mall, but I think it will that continue to be an opera opportunity.
What I would say as I think over 19 is likely sort of drawing forward.
What would have happened in the next five years in malls to happen sort of in 2020.
Okay and then on the.
Acquisitions in the quarter could you provide any more detail on those.
It was shorter remaining lease term to where these ground leases are well below market rents or just any color. Yeah. Let me just give my notes here.
The number was 14 of the 23 were ground leases.
An average basis of of around one of that 1.5 million. So.
Quite a bit below replacement cost.
And the short lease term.
Is reflective of buying properties from mall owners, and that's not a metric that they manage to.
But I'll just point out this.
Coven 19 operation.
Pandemic provides a really interesting opportunity if you have low rents to go in and get extensions and so in the past, where it's been somewhat difficult to get tenants attention.
To exercise.
The five year extension when they still have five six years on their lease.
We now have a real specific reason to have a conversation and things we can trade that I think in the long term will really benefit our shareholders.
Hi, Great and then one last one, Florida and Texas. Your two largest state open any idea either either what percentage of your portfolio is in states, where restaurants are open or or reverse split.
What percentage in.
States that are currently opened.
It will show I would say that I think the vast majority the vast vast majority of our.
Properties are open it's just that they're open in more restricted state.
So for four QSR.
There are open and their revenues generally are flattish to two last year because most of their business was through a drive through anyway.
And then for Darden most of them are open Theres, just with limited seating so its state by state, we don't track it that way.
Our leases don't contemplate whether the buildings, operator or not but as you mentioned, it's it's great to have our top two states reopening.
Okay. Thank you thanks Sheila.
Our next question comes from John Soda with Latin America. Please go ahead.
Good morning.
Morning.
At the risk of maybe parsing your earnings release like at the Fed statement.
You mentioned that you received a short term rent relief requests most often in the former rent deferrals.
I mean, we're in kind of further discussions with basically your entire portfolio, which for the kind of broader language that was in the April coped update.
Can you maybe provide some color on how far along those conversations are are they more funding or cursory in nature.
Just any color there would be helpful.
Yes, I mean, John is almost exactly the same languages. We had in our last report we're talking to our tenants I don't understand what the expectation would be for us otherwise that's what we do as landlords.
So theres no there's no gotcher there.
Okay. That's why should it wasn't like need obviously the obligation your tenants kind of reach out.
And asking about potential rent deferral given current situation just.
How far along some of those conversations are people that are paying rent in may.
Yes, I mean, I would say that we haven't had any material.
Sort of finalized transact amendments, we're having discussions and trying to figure out what what's a mutually beneficial.
You too.
Amendment to their lease, but we're having a lot of those discussions that theres no. There's no different from any other right that's responsibly manage.
I understood and then I guess and in some of those discussions not necessarily all go just in general and maybe even people who are trying to currently deferring rent and our tenants, hoping to kind of asset for rent swaps and maybe that would that be something you guys are open to.
We're definitely having those conversations.
Okay. That's it for me he has very much.
Thanks, John.
Your next question comes from Anthony.
JP Morgan. Please go ahead.
Okay. Thank you.
So bill maybe just following up on that that last question I didn't know if it so much gotcha, but.
I guess, there's maybe a perception that that darden's appear at 69% year revenues, maybe more of a viewed as a binary kind of situation should take your comments space. We mean that you had this is just a lot more fluid. The madsen that you know there's a lot of other things on the table I mean, I guess, that's kind of what you know kind of thinking about.
Yeah, I mean, I'd say Darden has.
Roughly 1 billion and a half dollars cash on hand.
And so they have lots of capability to pay rent and we're talking to them and all of our other tenants about what can we do that we'd be long term beneficial for four corners.
But provide them some relief in the short term but.
You know those conversations depend on the tenant some some are more advanced than others, but.
All the conversations revolve around.
Deferment.
Not abatement all the conversations are sort of short term in nature, because we do view this as being a relatively short term phenomenon.
And I think coming out of this there'll be some really interesting things that we'll be able to point to where we create value for our shareholders, which is obviously what our job is to do.
And just again, just given the size of Darden in the mix.
Is this something you think will kind of get a sense as to how that plays out and in what you ultimately want to do there in the next few months or do you think that could get drag out.
Yeah, I would certainly say that.
My expectation would be that.
The environment will feel very different among from now as it does it does feel very different today than a month ago.
And frankly, nothing may happen with with Darden nothing they happened with with many of our tenants.
Okay and then just one other question I had a with respect to the Outparcel deals with the various Ike mall operators. It sounds like you have your give a lot of control over what you want to do there does this does it give you just the ability to push things out and you have to close or is there any sort of performance requirements.
That you have or any financial risk there.
Well, we have deposits, but they're pretty minimal and I think everyone understands not not just four corners in mall counterparties, but.
In real estate in America, right now most transactions or are on costs, especially if there isn't.
Very significant deposit.
Yes so.
We're having discussions with them they are great assets that we'd like to own. We just want to have a better understanding what the what the future holds.
Okay, great. Thank you.
And if you'd like to ask a question. Please press Star then one our next question comes from Michael to layer with.
Curington. Please go ahead.
Hey, Thanks for the call most of mine had been answered just curious if you do take back any buildings from tenants.
Mhm.
I don't think so.
I mean, maybe there is one I don't think so.
Hi, Thanks.
Thanks.
Our next question comes from Cheshire.
So Sean Quinn Dumbbell. Please go ahead.
Thank you good bonding bad I had a good morning question.
So in terms of collections for me. So you said you all that 83% and I'm not sure value all ended up on a bid but could you break that that collections number, but and don't so it's got to goody, though QSR versus fast casual doses casual dining.
Sure.
Well the prior month, we were at 89.
So what I.
I would say I don't have the exact numbers in front of me I would say QSR.
Has been a higher percentage because their business hasn't been impacted nearly as much but that's not universally true we do have QSR tenants who haven't paid.
[music].
But I would say that.
It does it really skew as much.
Casual dining fast casual QSR as it skews bigger companies versus private equity owned companies.
Interesting Okay got it. Thank you. Thank you.
This concludes our question and answer session.
I'd like to turn the conference back over to build out ahead for any closing remarks.
Great. Thank you everyone. Appreciate it were around if you have questions overall holes will.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.