Q2 2020 Four Corners Property Trust Inc Earnings Call
Property Trust's second quarter 2020 earnings conference call.
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I would now like to turn the conference over to Jerry Morgan.
Financial Officer. Please go ahead.
Thank you Allison during the course this call we will make forward looking statements swisher based on beliefs and assumptions made by us or actual results will be affected by known and unknown factors, including uncertainty related to the scope severity in duration of the cobot 19 pandemic that are beyond our control or ability to predict our assumptions are not a guarantee of future performance and some will prove to.
<unk> correct for more detailed description of some potential risks. Please refer to our S. You see filings, which can be found that F.C.P.T. dot com all the information presented on this call is current as of today July Thirtyth 2020. In addition reconciliation to non-GAAP financial measures presented on this call such as that that's all one at the thought can be found in the car.
Being supplemental report also available on our website and with that I'll turn the call over to Bill.
Thank you Gerry good morning, everyone.
Thank you for <unk>.
Well, it's two skus for second quarter results I hope all here in your families are staying healthy.
We were very pleased with the second quarter results in the strong level of collections were reporting for that quarter and as of today collections are over 99% for July.
I'd like to clarify the number for investors and the plaintiffs terms possible for all leases in our portfolio, we've already received over 99%.
Cost base rent payments for the month of July given that we've only agreed to be approximately $20000 went doing toward not agreed any difference for the month of July. We believe this is remarkable achievement for team not shareholders given the ongoing pandemic.
This is a testament to both the low rents or the properties in our portfolio into the strength of our tenants and her tenacity and adjusting their operating models to the current coven environment.
Let me start was a few additional comments on collections or team has worked tirelessly with her tends to stay abreast of their business operations and to recruit creatively when applicable on lease modifications.
Through this effort we've collected over 92% of second quarter repayments. In addition, we've agreed to defer approximately 3% of second quarter, where payments until later this year and agreed or expect to shortly agreed to pay an incremental 4% of second quarter reps. This leaves only approximately 1% of a rents for Q2 unresolved.
Well most retail landlords have observed other tenants cluster relief over this period F.C.P.T. only agreed to a select number of different abatement agreements in cases, where tenants exchange favorable concessions and lease modifications for those deferments or payments decent importantly, these concessions include lease term extensions increased funding.
The reporting geared toward improvement annual rent bumps swapping fair market rent adjustments were stable contractual rent an incremental percentage rent amongst other terms.
Despite the ongoing difficulties and coping with the pandemic through these difficult negotiations, we have longer contractually situation and higher rent growth than we had going into this I believe we believe we're screen streams that are working relationships with many of our times.
In essence, the stance we've taken over the last few months is that F.C.P.T. is always willing to listen to work with our tenants, but we need to make sure that we're capturing <unk> for our shareholders as part of any occasion, where we opened at least document.
Free rent relief in deferment, it's not something F.C.P.T. has provided any time, we were careful not to rush to negotiations in the early days the pandemic.
When operators were most fearful of the environment.
It was very hopeful that we've acquired in scored and our investment model. All these properties when the past few years. This proved important or tell me, where we wanted to focus our efforts at least modification discussions.
You're all deferment and abatement was contained within the second quarter resulted in our step up for July collections to over 99% of rental payments. We expect the collection trend to continue going forward.
And that remaining outstanding rent balances for April through June will reach resolution in the very near term.
We do note there for a very small number tenants, we established a minimal credit reserve for the second quarter runs.
Please note that we've included a new slide in our quarterly supplemental titled Cobot, 19 rent collections update which summarizes the rent collection deferral and abatement numbers, we've disclosed in tabular form I think you'll find it very helpful.
The reopening of the country and the impact on restaurant traffic will continue to be a flu situation and of course, it's hard to predict as we've said last quarter. However, we continue to believe that strong operators like Darden Brinker Bloomin brands.
<unk> and others in our portfolio should benefit in the long run from their scale.
And in the near term from an investment in technology, specifically off premise and to go capabilities.
It's worth calling out that in an environment. Like this is exactly why have CPT. That's focused on low red properties was strong sales and rent coverage and on fortified balance sheets.
We have sort of many tens and the quick service and casual dining sectors returns sales near 2019 levels by late June the case, a quick service operators. Some even exceeded 2019 sales levels. This is despite one of the most challenging operating periods in restaurant history.
And yet despite these challenges we believe are performing remains very healthy.
The coming months, one doubly continue to have market volatility consumer behavior Mein Schiff once again, but we believe that are conservative underwriting. We appreciate F.C.P.T. distinguishes in times of term turbulence and we'll continue to sort of the portfolio well through the pandemic.
[noise] or Carol subsidiary, which I'll remind you as the six lot more steak houses we operate in San Antonio is very easily managed by Carol built because of covert quarterly results were negative $415000 versus a positive contribution of or $200000 in the first quarter.
Carol and her team did an extraordinary job given the circumstances.
In addition, Carol provided a real time understanding a water tenants were going through and how they're adopting.
<unk> recovered very quickly from the first phase of Cobot art dissipate them doing well later this year.
Now turning to our reported results in the second quarter, we attribute cheap if <unk> per share of 34 cents.
Which represents flat year over year results.
That's true outlined in more detail. If this is this included approximately four cents per share of dilution from cobot related items.
Our if so this quarter includes the deferred deferred rents outlined above which believable received by the end of the year, but excludes second quarter rent, we expect to abate in conjunction with lease modifications.
Turning to acquisitions, we reserved activities in the second half for June, but even greater focus on acquiring only the most stable in creditworthy properties with an or pipeline and applying that same stringent filter to any new investments.
We acquired 11 properties in the second quarter for combined purchase price of 32.7 million at initial weighted average cash yield of 6.3%.
In July we were part of an additional five properties for combined purchase price of 10.3 million with an initial average cash yield of 6.5% speaking to the quality. These recent acquisitions 17 of the 18 leases or are these properties are with the brands corporate operator or guaranteed by the corporate entity and 11 leases or ground leases, where F.C.P.T. owns the.
Land in attendance construct the building, which typically equates to low rents.
Well the pricing of these acquisitions stayed in line with our historic yield range. We believe the quality of the real estate in tight credit strong further improved the quality brand of the overall portfolio.
We would expect more of the same in the coming months.
Finally, before I turn it over to jury to discuss some of the financial results one operational update and a recap of where we stand today on operations, we moved into a new larger office space and our current office building and no valley and we look forward hosting any of you in the area once travel resumes.
Our team is currently working remotely but remains highly effective.
In summary, we posted rent collections for Q2 amongst the strongest and then at least sector. We're at a high level run collections for July, which we hope and expect to continue going forward.
We are once again acquiring properties are excited to return to growth and building the portfolio.
Now Jerry will take you through our financial results Gerard.
Thanks.
As Bill mentioned, we want to highlight a couple of points on revenue recognition in the second quarter. If at all and also outlined the impact of Cobot 19 related variances in our Q2 results.
We generated 34.8 million of cash rental income in the first quarter. After excluding 1.9 million of noncash straight line rental adjustments.
And after backing out 1.4 million of rental revenue receivables, we expect to abate two comments on the accounting this quarter first on rent deferrals and football includes 1.1 million of deferred rent, which we are recognizing in Q2 and booking a receivable for on rent deferral.
As we have agreed to so far we expect payment by the end of this year secondly on the rent abatements after discussion with our auditors, we believe the appropriate GAAP revenue guidance in cases, where the company anticipates abating rents for certain tenants as part of lease amendments.
That GAAP requires us to recognize the revenue for the abated rent and the current period. Despite the expectation of non payment due to the ongoing lease amendment discussions and agreements for the second quarter of 2020. This one point Fourmillion amount is recorded in rental revenue and accounts receivable. The abated. When we'll then be treated.
That's a lease incentive in Q3 and amortized against rental revenue over the remaining life of the lease as part of straight line rent adjustments to arrive at gap rental revenue.
Deducted the 1.4 million in Red we expect to abate from Q2 in arriving at our at that though.
We did not deduct the to be abated ramp from Epo in accordance with the name redefinition of that that though.
We have provided supplemental disclosure at the bottom of the Epo Epo statement in our disclosure. So investors are aware of in the matter and can make any adjustments you feel warranted.
This supplemental disclosure on that that though after both statement also shows that we had 1.5 million of uncollected base rent included in revenues as of June 30. In addition to rent that was deferred or expected to be.
Abated with our announcement at the updated 92% collection result for the second quarter you can see that much of this receivable has now been collected.
In addition, and performing our quarterly Collectability in credit analysis rig recorded a non material reserve of approximately $100000 for accounts receivable in the second quarter.
On a run rate basis, the current annual cash base rent cash base rent for leases in place as of June 30, 2020.
It's 144.1 million our weighted average tenure annual cash rent escalator remains at approximately 1.5% and.
And virtually all of the rent deferrals and abatements, we have agreed to cover second quarter Rep. So we believe that 144.1 million is it fair representation of the going forward cash base rent for the portfolio.
You will note that we did not disclose our estimate for our tenants EBITDAR rent coverage for this quarter. This is because much of the financial reporting that we get from tenants still includes time periods. Prior to the cobot 19 pandemic and we wanted to be careful not to present, a number that may no longer be representative of current tenant operations. It is our.
Our expectation that as tenant operations normalize we will see rent coverage return to our historical levels over time.
The second quarter after FFO per share of 34, SAS represents flat year over year results and three cents per share declined from the first quarter 2020 results were impacted negatively by four cents per share for the following cobot related variances, which were offset partially by the accretive benefit of first quarter in second quarter acquisitions.
Approximately 50% of the impact or two cents per share was from the him what is from the 1.4 million dollar rental abatement in connection with the lease modifications as we've outlined above.
Approximately 25% of the impact or or a penny per share was due to the Carol operating loss given its operations were closed or negatively impacted for much of the quarter.
And approximately 25% of the impact or a penny per share was due to other covert related expenses, including abandon deal costs lease modification costs. The small credit reserve I mentioned and higher interest expense to fund the excess cash reserves that we held in April and May.
Turning to the balance sheet since our last update the funding of the final 50 million of nine year notes of the $125 million private note offering that was announced in March was completed on June nine.
Regarding our cash and revolver balance we ended the second quarter with 4.5 million of a revive or revolver balance and about 5 million a cash reserves and importantly, 245 million availability on our revolving line of credit.
As a reminder, we paid our full second quarter dividend, which was fully covered by recurring cash flows.
Finally, our leverage metrics remain quite strong with the fixed charge coverage of 4.8 times in the second quarter and net debt to adjusted EBITDAR of 5.6 as of June 30.
Revolver maturity can many can be extended to November 2020 at our option, which is also the timing of the first 150 million of term debt maturity, we remain committed to maintaining a net debt leverage target below 5.5 to six times.
With that I'll turn it back over to Bill for closing comments. Thanks Gerry.
We remain focused on staying nimble in the current environment. We're pleased with the strong rent collection results and have our you're back to the ground on new investment opportunities.
We are available to answer any questions on a quarter or the portfolio. So please reach out if you'd like to speak.
Finally, especial no to acknowledge and acknowledgement tour colleague floor Gotti Who's worked tirelessly. This quarter on collections were was born in Colombia, and as the first in her family to immigrate to the United States. We're happy to report that she passed for U.S.U.S. is ship test yesterday way to go Laura.
Let's turn it back to the operator for today.
Thank you Sir we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press star and then too.
Our first question today is from Nate Casa ups Baron Burke. Please go ahead.
Hey, good morning, guys more Nate.
Hey.
Morning.
You're right deal flow today now that you guys are acquiring again now how would you decide the pipeline today versus what it was.
Pre cove it.
So I'd say the opportunity set.
We haven't seen higher cap rates for the high quality stuff that we tend to buy they've been quite stable.
But I would say that it seems like deals were a little easier to come by your volume remained similar to what it was before even though we've closed on some assets recently, so we feel really good.
And that we're very well positioned develop relative to our peers to grow going forward.
Okay I wanted to get your guys.
This proposal by Biden, maybe eliminate the 10 31 exchange would that have any effect and you guide.
I can.
See how can be quite positive.
Pricing I think quite often is set for these smaller one off deals by that market.
But.
We've seen Tenthirty one exchange.
Legislation proposed in the past so I don't want to just jumped any judgments, but I.
I guess I would say cautiously optimistic.
Okay and then just finally on how much do you guys have left to close on Seritage portfolio and some of these other strategic portfolio sale that you guys have done.
I don't think we've disclosed stuff, but you can back into the math and essentially what I would say as some of the properties and those portfolios.
We've dropped but in most cases, we've replaced them with a.
New properties and in fact in some of the cases.
We think the deal sizes will increase so.
It's still very substantive.
Okay and just one quick last when do you guys don't any Dunkin' Donuts that's on their closing you presented their restaurants today.
I don't believe so.
Okay Thats it they're typically in line.
Okay.
Our next question today is from Sheila Mcgrath.
Evercore. Please go ahead.
I guess good morning, Bill I was wondering wondering if you could give us some insight on how much of the portfolio was open and operating and do most restaurants still have capacity constraints in place.
Yeah I'd say.
To best to my knowledge virtually all of its open an operator to some extent.
And most are taking.
Diners into the restaurant.
At our operating on Curbside, what I would say is.
We've seen.
States go from Curbside to 25 to 50 to 75 200, and then very often back to 75 or 50 in states like Texas and Florida.
But.
Generally speaking almost all the restaurants are open and I think we'll just see it be a fluid situation as time goes goes on I would also say that I think a lot of our casual dining restaurants are seeing continued elevated to go sales.
Which is something I think a well be stick your than many had initially predicted.
Yeah, Okay, almost all the properties are our offerings.
Okay, Great and then just to clarify I know you went through a number of.
These kind of changes that could be possible, but the abatement part that you mentioned was it most typically that.
You gave a rent abatement, it's a tenant agreed to a lease extension and if not like what were the other like good amendment changes script, we're corners sure in all the deferment an abatement discussions.
I think almost all of them included lease term extensions of between five and in some cases 10 years.
We added some properties to master leases we changed.
Renewal terms to be more favorable in some cases, we changed rent growth that was 10% every.
Five years to annual growth, which is a little bit more attractive and haven't consistent income.
We've had discussions with tenants about purchasing properties off their balance sheet, but.
But as you said Sheila the big one is lease extensions and so we were able to negotiate a very significant number of meaningful Oh lease extensions.
For what we view is.
Quite moderate.
You know rent abatement our deferral.
Okay, Great and one last one on those you looked at me rephrase that my answer one whats your another way to think about this is if absent coated the tenant had approached US and said if you are willing to pay this fee now will extend the lease.
Really.
If that's something that we would have done absent cove it.
That's sort of how that how to think about it these were.
Exchanges of lease modification for money that we would've done in a normal environment.
Okay, Great and one last one.
Recent investments they are many of 'em shorter lease terms just wondering what's the appeal there do you get better pricing or just you know.
Just want to understand the lease like.
Sure I think one to one of the advantages of four corners.
As it was created we had very quite long lease term. So it allows us to layer in some diversity of lease term.
Earlier than.
Sort of the 10 year portfolio average.
So as you mentioned, you get better pricing better credit.
We're self we're selecting for properties that have very high level of performance and given we have very little lease turned.
The next several years, it's something that we can do pretty favorably and of course during.
Something like the current environment. That's the first thing we go to when we open a police document is to get more term.
Okay, great. Thank you.
Our next question today is from Rob Stevenson of Janney. Please go ahead.
Hi, good morning, guys.
Just a 144 million of Hbr that you talked about earlier is non restaurant today and then what percentage of that is also ground lease.
It's a couple a couple of percent is non restaurant at this point, it's almost entirely restaurant and we don't disclose the ground lease percentage a other than to save you a significant number the outparcel transactions that were doing our ground lease, but that's not something that we breakout.
Okay, and then Aquas with acquisition volume returning you guys. Once you you know what use some of the liquidity on the balance sheet. Today. How are you looking to finance future deals from the equity side with a $24 stock price.
Turns attractive enough that funding via comment even at that level makes sense to you you ramp up dispositions to trade in and out issue preferred how you guys thinking about equity.
Financing you know in the current environment.
Yeah certainly.
Making acquisitions with the $24 stock prices still accretive it's not as accretive as it as it once was but it still is accretive and we are committed to keeping our balance sheet in that five and a half to six times levered.
Place, so not really a huge change Rob.
Okay, and any plans to sell more assets, especially if the if the rhetoric on the 10 31 exchange it starts to ramp up even more.
We always keeping in mind and we have actually the last couple of months receive some really attractive offers to purchase some of our darden assets.
Properties that performed through the pandemic.
I had very strong coverage great corporate credits are in high demand. So that somebody we always consider but it is interesting over the last couple of months, we've had some really attractive inbound.
Interest.
Okay. Thanks, guys appreciate it yeah of course.
Our next question today is from R.J. Milligan of Baird. Please go ahead.
Hey, guys. Good morning, a generic fill on Oh, this second quarter abatements deferrals as or whether you guys can bucket them into you know you came to those that that's more relieved due to closings versus a drop it they were opened and they just had a drop in revenues versus strong credits that just.
Wanted to extend their German and not pay rent.
I don't think Theres, a huge steam one way or the other we just had constructive conversations with the tenants and tried to figure out what they were looking for and term what we wanted to get it was a pretty organic process that happened over a couple of months, but it we spent a lot of time on the phone with or tenants trying to figure out ways.
That.
We can help them.
In.
Particularly unusual time, but at the same time make sure that our shareholders get a lot.
For modifying leases.
And I think we'll be able to evidence.
More and more that we're getting.
Really.
Attractive terms, when we agreed to modify.
And just to clarify one point you made in your opening remarks, no deferrals and only 20 cave abatements in July.
Correct.
Okay, and then longer term and I really encourage you to check out that new table, we put in the supplemental it really laser though clearly.
The progress we've made.
Okay. Thanks, and then the longer term a as we move through sort of this pandemic in the ensuring recession do you think the cap rates for the types of assets that you guys own typically low rents in a successful track record through this will move lower overtime.
I think it's a great question too soon to tell but I have seen.
You know offering memorandum four properties that performed really well through this especially QSR.
Some coverage that seem to me to be lower than in the past.
Huh.
That being said I think our pipeline.
Kerry Kerry that goes through.
20, $20 in really good shape and Ah.
I do think there'll be some interesting opportunities for those that are well capitalized.
The industry can move fast.
I think there's going be a lot of change coming over the next year as you inferred in your question.
Great. Thanks, guys.
Thanks order.
Our next question today will come from Makita Belie of JP Morgan. Please go ahead.
Hi, Good morning, Oh do pipeline the acquisition opportunities do you guys look at how many of those are outside the mall parcel agreements that you all they've talked long boss.
A number of Amar and we're looking at some non restaurant opportunities as well so it's a it's a nice.
Diverse group and in addition to some of them all out parcels that we've announced the past we're working on some new ones, Obviously shopping center strip center grocery anchored all sorts of retail landlords are looking for ways to access liquidity and no parcels or great way to do.
So it's both a mix of.
Dawn announced Oh personal deals.
Deal sourced.
From other net lease owners, it's really diverse and we feel quite good about where we stand.
Yeah, a wage so look in rough terms may put a either number on a percentage terms the percentage outside of malls. We don't we don't provide acquisition guidance in a percent.
So we would like to back into it so I.
I would simply say, we think we're in as good of a places we've we've been in in our history as far as pipeline and you know really advantageous things to execute on.
<unk>.
Well what about the restaurant traffic could you just talk spend a little bit on the traffic trends that you're seeing in the restaurants in your portfolio right now.
Yeah, I would say that by the end of June.
We were back and quite comparable to 2019, QSR at or above 2019 casual dining typically a call it.
Down tend to down 20, maybe if you were more focused on the breakfast day part it was a little worse than that that's sort of been slower to recover.
So we felt really quite good with additional cases in the last few weeks a traffic has slowed.
But I think we'll see that come back a if cases.
Into Wayne again so.
I think the notable thing is in the last handful weeks, we haven't had tenants requesting a any sort of a really for accommodation.
I think it's a quite good sign.
<unk>.
And is there way that you guys know, what's the percentage of revenue the restaurants will make you know versus prequaled level, whether it's some.
Jordan or non dog in the aggregate level. They do have a sense as to know the making 90 cents revenue on the dollar that they used to make before covered as though we too.
Yes.
The we follow the public companies and were in daily discussions with or tenants and how they're doing it's very.
It was highly depended on what geography, or and then lastly, we operate six restaurants and San Antonio. So we have that case study you know literally daily of how they're performing so we track at Feverously that being said or our rents and the performance of our leases.
Or not directly tied to traffic or the tenants revenue of their contractual in fixed.
Well. Thank you watch thank you.
Again, if you would like to ask a question. Please press Star then one.
Our next question today will come from John Misaka of Ladenburg Thalmann. Please go ahead.
Good morning, I don't.
So.
Give you little bit kind of standing up from your earlier comments and I missed this in the prepared remarks, but.
We expect any more kind of need rent for lease modification transaction you know in the next couple of quarters or you know with.
Yes, I would say that weve.
We feel it's largely behind us.
But it's obviously a fluid situation, but but as of now if we feel it's largely behind us.
Understood and then.
It was a kind of sourcing the non restaurant transaction or a couple recently are those primarily coming from I guess, how are you kind of sourcing to really any those one off deals are those maybe deals where you're also looking at restaurant properties from a seller and those are kind of getting put into not a portfolio a basket of transaction and you're looking at or.
Are you starting in kind of on a one off basis for most of them have come from the Outparcel deals where they were part of a broader portfolio, but we're also looking now at.
Individual properties and small portfolios outside of the Outparcel strategy. So it's it's a mixed bag and were.
Actually agnostic as to how the the transactions come to us once they're in the portfolio.
They are performing outperform on their own right. So, but yeah I think we're looking at a parcel transactions, but as we've evidence of the market that we're buying on restaurants.
We've seen some C stores.
Adequately uses things like that.
Sorry, you agnostic and maybe as to whether a transaction is restaurant or non restaurant or when you you favor a restaurant properties.
That's not transaction still.
I think we're looking at the asset level, Oh, that's too high level too.
To make decisions on we're looking at the attractiveness of the asset location the credit worthiness, where the rents are set what kind of diversification and provides et cetera.
Okay, and then maybe with regards to leverage and there may change in the new on leverage as it kind of come out and then they or maybe even.
Given this building in kind of rental performance here in the last quarter.
I think we.
Five years ago, Cios are an appropriate level and I think pandemic as evidenced that being conservative financially is the right move and it allows you.
To get through environments like this.
And then be aggressive when the opportunity set allows.
Okay. That's it for me. Thank you very much great. Congrats the Laura Lori War.
That's all are terrific.
Ladies and gentlemen, this will conclude our question and answer session. At this time I'd like to turn the conference back over to Bill Lanahan for any closing remarks, great. Thanks, everyone and sort of this cohen couple of minutes longer than typical we've got lots to talk about Jerry and I are here. If you have any questions. Please feel free to reach out.
We'd love to Chuck Thanks, So much trust.
The conference has now concluded we thank you for attending today's presentation and you may now disconnect your lines.