Q3 2020 Four Corners Property Trust Inc Earnings Call
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Please note. This event is being recorded I would now like to turn the conference over to Mr. Gerry Morgan CFO. Please go ahead Sir.
Thank you Judith.
During the course of this call we will make forward looking statements, which are based on beliefs and assumptions made by US are actual results will be affected by known and unknown factors, including the uncertainty related to the scope severity and duration of the COVID-19 pandemic that are beyond our control or ability to predict our assumptions are not a guarantee of future performance and somewhat.
To be a correct for more detailed description on some potential risks. Please refer to our FCC filings, which can be found at Sep Si Dot com all the information presented on this call is current as of today October 28 2020. In addition reconciliation to non-GAAP financial measures presented on this call such as Apple going after spoken to.
He found in the company's supplemental report also payable on our website and with that I'll turn the call over to Bill.
Good morning.
Thank you everyone for joining us to discuss our third quarter results.
As we approach the fifth anniversary of F.C.P.T. is formation, we're proud of the progress made in building the team and growing and diversifying our high quality portfolio.
We're very pleased with the third quarter results and the strong level of 99% contractual rent collections for the quarter and for October.
Well this has been one of the most challenging operating periods for restaurants in recent history, it's very important to differentiate between different restaurant pipes, and specifically the kinds of properties before warmer zones.
Our assets are typically suburban and not an urban course, they're all branded were all part of works change.
These restaurant operators are proven resilient and trusting their business models.
Many in the quick service in casual dining sectors have returned to sales near 2019 levels.
And that creates a quick service operators some have even exceeded 2019 levels.
As we said last quarter, we continue to believe the strong operators like those in our portfolio.
And in the long run from their scale and from their investment in technology and off premise to go capabilities, the coming months could be a fluid situation and of course hard to predict for restaurant operators, but we believe that the F.C.P.T. portfolio.
They need to perform very well.
On collections, a quick recap of the second and third quarters for the second quarter, we collected over 92% of second quarter rent payments agreed to approximate to defer approximately 3% from payments until.
For the 3% to abate, an incremental 4% of rent as part of lease amendments with favorable modifications to they were working with three remaining tenants representing less than 0.4% for the portfolio to either modified their leases or terminate and then released the properties.
The third quarter, we have collected 99.6% of contractual rent and there were no additional deferrals or abatements.
[noise] or curl subsidiary, which operate six longer steak houses in San Antonio continues to also be impacted by covert.
Carol provides a wonderful window and real time understanding to water tenants are going are doing to adapt.
The girls team teams' hard work resulted in a return to profitability in the third quarter with positive EBITDA of 110000, we broke ground in October to construct her seventh Carl Longhorn restaurant, which we locate an extra brand new olive garden that we acquired in July.
Now turning to our reported results in the second quarter, we achieved FFO per share of 37 cents, which represents a two cents and 5.7% year over year increase and a 3% increase from the second quarter, which had been impacted by covert related variances.
Turning to acquisitions.
I remind everyone that we resumed our acquisition activities in the second half of June after we had clarity that our portfolio is going to be in very strong shape, we sharpened our focus on the most stable in credit worthy properties in our pipeline. This month there were some targets that we decided to pass on but in almost every case, we found substitutes from sellers that we liked.
In the quarter, we acquired 18 properties for a combined purchase price of $48 million at an initial weighted average cash yield of 6.3% speaking to the qualities recent acquisitions 17 of the 18 leases are with the brands corporate operator or guaranteed by the corporate entity and tenant polices or ground leases, where F.C.P.T. owns the land and the tenant can start.
The building.
This typically equates to very low rents.
Stepping back I'd like to make two different comments on acquisitions.
For the year to date through today, we required or made investments into properties totaling over 133 million even with the pause.
Sorry for the second quarter.
We are quite busy now which is typical for this time of the year, but specifically I wanted to highlight the potential for.
For tax driven.
Transactions that were seeing in large volumes right now.
With sellers trying to get ahead of possible tax law changes.
Secondly, our Outparcel acquisition strategy continues to pay dividends almost half of the acquisition volume in the quarter were out parcels and since we initiated the outparcel effort in October 2017, Weve now closed over $220 million, representing 120 properties. These can be difficult lengthy transactions to close due to the person.
The station and legal process, but they're compelling properties given the typically low rents a preponderance of ground leases and strong corporate operators.
Now I'd like to turn to the announcement, we made on October 5th regarding the strategic venture with Lubert Adler.
To invest up to 150 million to acquire and re tenant vacant retail buildings.
We began thinking about this idea in July how we can position ourselves to buy vacated restaurant properties.
These are brands that Weve, what did you do to credit concerns, but some were.
Well located from a fundamental real estate standpoint.
Many of these operators have been in these locations for 30 or 40 years. So we could see some good location, where there's an opportunity to convert them into new stores for strong and growing brands. This in turn will support the local local retail areas community communities in the recovery from the economic impact of COVID-19, M. CPT will invest up to $20 million in the venture with lupus.
Contributing the remainder of the capital.
In addition, actually P.T. will have the right, but not the obligation to purchase property from the venture for FCB to use long term ownership portfolio once the properties properties or re tenanted and stabilized.
We think this is a great vehicle for us to strengthen the relationships with existing tenants and Lupron other brings experience and a strong track record of releasing vacant properties.
Alluding transactions, such as toys or rush Shopko and Albertsons.
Thus far we are really impressed with what they bring to the table and we very much enjoy working with them.
Finally, before I turn it over to Jerry to discuss some of the financial results and operational update.
Our team continues to work in combination of remote and office days and remains highly effective we made some wonderful additions to the group in the third quarter with Samantha joining is real State Council Kelly coming on board is real estate controller.
Christy, becoming our new human resources manager and true crewman Reterming, returning full time farm account as an investment analyst.
Once buyers on the website, if you're interested in learning more.
In summary, we posted rent collections for Q3 that I believe are the highest net lease sector, which we hope and expect to continue on a go forward basis. We are acquiring properties a good pace again, we were excited to be building a portfolio and working on a new strategic venture with Lubert Adler now drew will take you through the financial results Gary.
Thanks, Bill our results returned to more normalized level in the third quarter with less impact to cope with 19 related items and then the second quarter.
We generated 36.8 million of cash rental income in the third quarter. After excluding 1.8 million up straight line. Another non cash write all adjustments three comments on accounting for rental income. This quarter first we had no rattled the wet deferrals in the third quarter as you may recall, we deferred 1.1 billion of cash rent.
In the second quarter, which we recognized in the second quarter and still expect to be paid by the end of the year second.
Secondly, we did not abate any third quarter rat, we did complete several lease amendments in the third quarter in which we agreed to abate 1.6 million of second quarter rat as we disclosed on last quarter's call in accordance with the appropriate GAAP revenue guidance in cases, where the company abates threat as part of lease amendments we are required to recognize the right.
No pretty abated rent in that current period, and then treat the abated ran as a lease incentive to be amortized against future GAAP rental revenue over the remaining life of the leases as part of straight line rent adjustments.
We have deducted 32, two way up at both $1.4 million as the rent we had expected to abate. We are deducting. The remaining 200000 of abated rent from third quarter. After that though we did not to dock abated rent for ethanol in accordance with the name redefinition about that though.
Finally on collections as Bill mentioned, we collected 99% of contractual rent in Q3 and also over 19 or at approximately 99% collected for Q2 after taking into account the deferred and abated rent referenced above this means we had no material change to our collectability or credit reserves and the.
Quarter, and also had no balance sheet impairments in the third quarter on.
On a run rate basis, the current annual cash base rent for leases in place as of September 32020 is 147.8 million and our weighted average tenure annual cash rent escalator remains at approximately 1.5%.
As a reminder, the rent on all of the original Darden leases increases by 1.5% on November night of each year, including this year.
Following up on one point from Bill, we have purchased or invested 133.9 million Oh properties year to date through today.
This includes a $4.2 million tenant allowance payment we made in the third quarter in exchange for increased rat extended term and enhance financial reporting among other items.
Similar to last quarter. You also note that we again excluded our tenants EBITDAR rental coverage. This quarter. This was because much of the financial reporting includes time periods. Prior to the COVID-19 pandemic and we want to be careful not to present, a number that may no longer be representative of current tended operations. It is our expectation is that adds to.
And it operations normalize we will see rent coverage return to our historical levels.
Our third quarter. After all per share results of 37 cents represented a two cents per share increase in year over year results results were impacted negatively by approximately half a cent per covert related variances to our Carol operating business and due to the $200000 adjustment for abated ran in the second quarter as I've mentioned.
But.
Turning to the balance sheet in the quarter, we issued 2.4 million shares of common stock via the ATM program at a weighted average offering price of $25.65 for gross proceeds of $62.5 million.
We ended the quarter with no balance and full availability on our $250 million revolving line of credit and over 17 billion of cash reserves, our leverage metrics remained quite strong with a fixed charge coverage of five times in the third quarter and net debt to adjusted EBITDA free up 5.3 times at quarter end.
We remain committed to maintaining a net debt leverage target below 5.5 to six times. Finally, we paid our full third quarter dividend of 30.5 cents per share, which represented a payout ratio of 82% or they have to adult.
With that back to bill for closing comments.
Thanks Jerry.
As I mentioned when we opened the call we were closing in next week on our fifth anniversary.
Our founding [noise], we're grateful to our board members, who always provide meaningful council and to all of you our equity and debt investors, who have been supporting us throughout.
Over the last five years, we've been prudent in our investment approach conservative in our capitalization and stand ready now to take advantage of opportunities in the marketplace, where they derive from tax motivated selling orphan covert related vacancy in the joint venture. We look forward to speaking with many of you during the upcoming virtual may read meetings and otherwise are available to answer any questions.
<unk> in the quarter or the <unk> portfolio. So please reach out.
With that we'll turn it back over to Judas for Q and a.
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 to withdraw your question. Please press Star then two at this time, we will pause mode.
I'm entirely to assemble roster.
The first question is from me Cross Eyed Burke. Please go ahead.
Hey, good morning, guys.
<unk>.
Hey, obviously it was it's John Threeq you I was wondering if you give us some color on how the pipeline looks going into the end to end the year.
You mentioned attached or anything else can you quantify.
Quantified it for us potentially and.
Doug in your mind.
To close on the Seritage and Brookfield agreements.
Sure. So on the the mall Outparcel transactions will be filing an updated presentation and all that detail will be in the appendix, but as far as the pipeline overall, a very busy don't quite know exactly how much.
We're going to see is on these tax motivated deals, but it's been ramping the last couple of weeks.
And depending on the outcome of the election could imagine very busy ended the year.
No. So we don't provide guidance or talk about pipeline amounts, but I'd simply say, we're we're very busy.
Okay on the recent bench nail it little bear out.
Just curious how did that come about and they come to you do you go to them and it's just something where you could actually acquired Oh, I mean, a 15 million back from them. Once everything is stabilized there I'm just trying to stop.
You bet.
Sure. So it's very difficult to read to buy non income producing properties.
And so we wanted to bring in outside capital and specifically outside capital that brought expertise with it and we're very excited to work with <unk> Radler, we were introduced by a and investment investor and in both of our platforms, who we've known for.
Well over a decade so.
It's been a terrific working relationship thus far.
I do expect that we will be acquiring for full ownership a significant number of the properties that we invest in and we really think it will be.
Has the potential for really eat ignore 2022, and 2023 a acquisition volumes.
Okay, as well as being strategic for our tenants, who who are looking for ways to grow.
Okay, I guess like who is doing a muscle legwork in sourcing that potential properties for that guidance or is that down or is it you guys are edging [laughter], we're working cooperatively, but obviously we're in this market every day.
And you know, even though the mall or Counterparties that we worked with <unk> are already providing an example.
List of properties that are actionable.
Okay, and maybe just on the waiting the types of properties is it going in the most the right restaurants or is it just.
Very at retail.
I think it will be mostly restaurants, but certainly we will shy away from the other kinds of property types that we.
We work with but I think that the source of the vacant property will be largely restaurant and these would be the brands that were struggling pre cove. It brands like sizzler, Ponderosa fuddruckers red roof pizza huts.
Captain D.'s or things like that that we're struggling pre covidien Cove. It is a.
Really made it difficult to see how those brands are gonna come come through.
Okay. So I mean does this thing that's a little restaurant brands right now.
They are you guys in dialogue with them and that they were looking for new high quality locations and so when you I know everyone. The joint venture eat Bacon asset you in and they go to them that Neely and say, we have a location where you are out of that.
I think that's precisely what the the the winners in this marketplace brands like Darden, but also brands like Taco Bell and KFC and be Jayson chili's or are going to want to grow coming out of this and I know you.
We provide a real estate solution for that growth.
Okay. That's it for me and we've been in and we've been in constant dialogue with those brands over the last few months.
Okay. Thanks.
Thanks, Mike.
The next question is from a Sheila Mcgrath with Evercore ISI. Please go ahead.
Hi, Yes, good morning, I'm delighted on the joint venture I was wondering if you could give us a little bit more detail on how the pricing mechanism might work. Once the property is leased how will you agree on terms and pricing and do you envision that the cap rate to the read on these acquisitions will compare.
<unk> favorably to pricing in the auction auction market and if so about how much of an advantage.
Sure so.
So the <unk>, we don't have an obligation to purchase the properties and and separately there isn't a fixed cap rate that we can demand to purchase them out we will have to work out and negotiate a fair price, but I would.
Note that if in fact with the transaction we brought to the table and therefore earn a promote crediting that promote against the purchase price. The basic math. This 50 to 60 basis points in cap rate credit and so obviously, we want to be fair with our partners, but I think they clearly understand our motivation which is.
Not to be generating fees and promote frankly, but the long term ownership of well located high quality properties. So.
It's a negotiation.
Thus far lupron, others been very fair straightforward and they're doing so we're we're looking forward.
To executing on that.
And then on the mall relationships you, but you know mostly leased properties. Just wondering if this venture would enable you to go back to those partners and possibly purchase vacant properties.
Precisely.
And we're already doing so.
Okay, Great and one last one on Jerry on the 1.5% Darden increase that you mentioned I think you said November night is that already street line into rent revenues or how will we see that in the income statement.
Yes, it's it's already part of our straight line I'm, just saying in the <unk>.
Income yield you'll see that increase in our fourth quarter cash revenues.
Okay perfect. Thank you [noise] thing.
Thanks Sheila.
The next question is from RJ Milligan with Raymond James. Please go ahead.
Hey, Good morning, guys, just one question or the mix towards non restaurant properties and acquisitions, our third quarter was a little bit higher than it's been in the past just curious how you envision that mix going forward for acquisitions.
[noise] yeah. Its archery is not something that we plan specifically, obviously, we widened our aperture.
A year ago, or so and so deals have just been coming through the pipeline a lot of these are in the server cars.
Deals, which were a little bit more evenly.
Distributed between restaurants in our restaurants, but.
Well theres not theres not a master plan behind that were going to.
Look to buy properties that we think are sensible.
The mix will change over time, certainly Uh huh.
You know as we've looked into other property types, we feel like the.
The amount of properties that we can address was greater.
Okay, and then nothing specific.
Thanks Roger.
The next question is from John and muscle car with Ladenburg Thalmann. Please go ahead.
Good morning.
Good morning.
So I'm looking at the portfolio stands today and kind of in the context of the fact that you know your first kind of five tenants are publicly traded and what they've done to kind of fill the capital reserves and in light of the current volatile environment.
Publicly known but maybe outside of that if you look at the portfolio today and what portion roughly do you think is maybe slightly at risk. If you go into either a second locked down on some of these commercial restrictions.
And that being a little longer term just any color there would be helpful.
Very small.
But.
And then you know I think about Aero maybe longer term, obviously, it's been insightful view into the restaurant industry. You know kind of recent months, but he always that longer term a portion of a kind of business you want to keep or could that potentially be something that's.
You know fully disposed of or a kind of structured into more of a a net lease kind of investment for you guys.
Sure.
So I.
I think it's important to keep in mind that Karro is an extraordinarily well run business.
Ah Terrell, who runs that business in San Antonio obvious.
Obviously overseen you're in mill Valley, but Carole who runs that business and the six managing partners that report to her are true professionals and it's been very valuable to understand day by day, how they're operating.
So I'll leave it at that it it obviously.
Put a little bit of noise and torn numbers, but I think it's understandable.
And it's proven to be very valuable as we negotiate with tenants and want to understand exactly what's going on on a day to day basis and it allows us to explore some growth that we wouldn't normally be able to or as we were able to purchase.
And olive garden. This summer that had adjacent land in which we can in a very sort of [noise].
Mindful of risk way gross seventh property, which further.
Provide some learnings on on that process. So.
Again, very well run very insightful.
Certainly during the spring we were in daily contact with Carol on exactly what was going on in the business changes she was making ways in which they were creating additional revenue but.
No plans as of today.
No that's it for me.
Thank you very much.
<unk>.
Again, if you have a question. Please press Star then one.
The next question is a follow up from Sheila Mcgrath with <unk>. Please go ahead.
Yes, I was wondering if since you're ramping up acquisition, if we expect any increasing DNA without adding personnel for the you know going into fourth quarter and 2021.
Yes.
I wouldn't look at fourth quarter as much as going forward I think DNA.
Well it increases our properties number increases, but we've been.
Very careful on DNA and now in addition to that we have the offset of.
Some of the economics from the Loopnet other venture but.
I don't think the G and H <unk>, who will be anything surprising to folks, we're just maturing as a team bringing in more capability.
But but nothing nothing substantial.
And then on the JV should we be modeling some sort of other income fee stream or it's just immaterial or how should we think about that.
I mean, our our reason for doing this deal is not to create an asset management business, it's not really capturing onetime promotes its.
Providing a oh, a pipeline of great tenants long term leases or lease form.
That will that we intend to have a 100% ownership of.
Once the properties are paying so so that's the way I'm thinking a bit.
How we think it will unfold.
But it certainly it does it will offset some amount of the additional overhead that were going to incur in order to execute the plan on the joint venture.
Okay, great. Thank you.
Again, if you have a question. Please press Star then one.
There are no more questions registered this this concludes our question and answer session I would like to turn the conference back over to Mr. Morgan for any closing remarks.
Bill.
Hi, None for me thanks, everyone. We're certainly available for questions if anyone.
We'd like to try to reach Oh possible. Thanks, great. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[noise].