Q1 2021 Four Corners Property Trust Inc Earnings Call
Good day and welcome to the F. C. P T first quarter 2021 financial results conference call.
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After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on and Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn on the conference over to Gerry Morgan. Please go ahead.
Thank you Betsy during the course of this call we will make forward looking statements, which are based on beliefs and assumptions made by us and our actual results will be affected by known and unknown factors, including uncertainty related to the remaining scope severity and duration of the COVID-19, pandemic and it'll be under our control or ability to predict our assumptions are not a guarantee of future performance and some.
Will prove to be incorrect for a more detailed description on some potential risks. Please refer to our SEC filings, which can be found at F. C. P. T dot com all of the information presented on this call is current as of today April 28, and addition reconciliation to non-GAAP financial measures presented on this call such yourself, that's all and Amp up though it can be found on the company's sub.
And that'll report also available on our website with that I'll turn the call over to Bill.
Thank you Jerry.
Good morning, Thank you for joining us to discuss our first quarter results and summary, we were very pleased with our continued industry leading collection levels. The quality of the acquisitions closed year to date and the pricing of the private note offering raised this quarter, which represented our lowest ever no coupons.
We reported first quarter <unk> of 38 cents per share, which represents a one cent year over year increase we benefited from a four quarter of income from the larger set of acquisitions closed at the end of 2020.
Let me start with the health of our portfolio.
While the restrictions related to the pandemic period have continues to be a challenge for the restaurant industry overall, the operators and our portfolio have pivoted, well and are seeing strong rebounds, and their business. We collected 99.7% on the schedule rents with the non collection is largely related to new acquisitions, where rents were sent to the prior owner.
And are in the process of being rerouted to us.
We're not see rent deferral requests for more accounts, but and center spending time with them on potential expansion opportunities and connection with our venture with Bluebird Adler.
And if anything the focus of operators and our portfolio is on finding sufficient labor as the business picks back up and watching some signs of commodities inflation, especially beef prices and even catch and shortages, which some of you may have read about.
And as you've seen with our current operation and is supported by Darden and other casual dining operators EBITA margins have improved because of simplified menus lower and lower levels of in dining room service staffing higher profitability for to go business investments and technology and a focus on overhead efficiency Darden is a good example of this.
And the quarter ending February 28, where they reported olive garden EBITDA margins had increased from 18.4 to 19, 9% year over year, even though sales were down 27%. That's a hard thing to do with a business that has fixed expenses.
We've discussed before Howard Taro subsidiary, which now operates seven longhorn steakhouses and San Antonio is a wonderful window and real time understanding and to what our tenants are doing to adapt the current team continues to post proving results with EBITDA of 373000 as compared to EBITDA of 244000, and the fourth quarter. This is and impressed.
Result, especially since includes some preopening costs for the seventh Carol Longhorn restaurant, and San Antonio, which opened for business earlier this week and congratulations to Carol Dilts, who runs the current subsidiary and her team. The additional restaurant will contribute to results for the quarter for the rest of the year offset by some preopening costs that will occur and the second quarter.
[laughter] restaurant operators have also proven resilient and adjusting their business models sprinkler is a great example of this where and 2020 they've built $850 million sales annual run rate to go business called its just weeks. This business is highly profitable given given the simplified menu inefficient provisioning out to existing chili's restaurants, even red lobster.
And I wish to go concept has adjusted their menu and important strong to go business growth staffing models are changing as well with digital payments increasing.
Darden reported debt for the first time over 50% of its sales for subtle digitally meaning via online self service tabletop tablets or mobile pay options.
Turning to investments, we acquired 13 properties and the quarter four combined price of 34 million and and initial yield of six 6%.
And this group represents strong credit with 10 of the property is leased to corporate operators and the remaining leased to the largest franchisee of Brinker International.
Seven of the 13 transactions were with non restaurant tenants and the auto services auto collision and medical retail sectors that is.
And anomalies have some and non restaurants and one quarter, but these are both sectors. We continue to like because they are well insulated from internet and disruption.
Our pipeline is strong and we remain busy.
And at the same time, the restaurant acquisition market and it's gotten more competitive since the pandemic for strong operators, especially for quick service restaurants. This is an interesting dynamic to see cap rates coming in and while the 10 year has increased 75 basis points.
Competitors include private buyers.
Buyers using ABS financing and individuals' chasing yield and the result is that buyers are not getting compensated to take on complexity.
Or for portfolio transactions.
We remain committed to maintaining our strong investment discipline, which has proven out with the strong operating results. During the pandemic. We have also noticed some of the brands and locations. We passed on and have not performed as well. This confirms our skepticism of high high rents and weaker brands and novel net lease concepts.
Only one acquisition and the quarter came from our own partial strategy due to the timing of personalization. So as of today, we have $45 million of O parcel transactions that have been not been announced but not yet closed.
As we've highlighted previously and then.
And the transactions we have closed on over the past two years have been ground leases.
Wanted to really one example of the benefit of low rents associated with ground leases, we ever Ruby Tuesday's property, and Maine, and we took back and connection with the brands and bankruptcy filings are only Ruby Tuesday, however, given the low rents we were able to we were able to re leased the property to a very strong tenant.
And with slightly higher rents.
On Bluebird Adler, we expect to close on our first property in the venture and the second quarter. As a reminder, we will announce these transactions and our quarterly results rather than the day they close as we do with the other acquisitions.
We announced two dispositions this quarter for three and 5 million, representing a six 1% cash yield on prior in place rents and a $400000 gain and both cases the sales were a chance to prune the portfolio. The first was a vacant building, where we were able to sell above our basis given the low rents that were in place and the second was one of the lowest rated properties and our portfolio.
So what attracted a sub six cap rate offer.
You will see that our cash G&A was up slightly a good chunk of that is timing, which Perry will detail on his comments, but I do think it's important to comment that we are increasing our acquisition groups capabilities. Both at both as our team now has more experience and also by adding new team members and also bolstering our legal and accounting groups. We believe that is important to have additional.
He has to grow whether that is and the loopnet Adler JV or on our regular way business.
Everyone on the team remains healthy and is excited to return to the office in earnest the summer and start hitting the road again soon and summary, we are proud of another quarter of strong portfolio results and continued investment and team building progress Jerry.
Thanks, Bill I will highlight.
Highlight a couple of our financial results.
Results we.
As Bill indicated we had 99.7% collections for the first quarter and there were no material changes to our collectability of credit reserves in the quarter four and your balance sheet impairments on a run rate basis. The current annual cash base rent for leases in place as of March 31, 2020, one is $158 million and.
Our weighted average 10 year annual cash rent escalator is 1.43%.
We estimate the rent coverage for the portfolio was four one times for the first quarter, which is approaching pre pandemic levels. This includes coverage for the Darden properties four its quarter ending February 28, 2021, we've also restarted reporting the non darden coverage this quarter, which was two seven times and <unk>.
And actual reporting has become more representative of a post pandemic operating levels.
Cash G&A expense as Bill mentioned after excluding stock based compensation for the first quarter was $3 4 million, representing eight 5% of cash rental income for the quarter cash.
Cash G&A expenses increased approximately 500000 over the fourth quarter, principally due to higher compensation related expenses roughly two thirds of this increase was due to higher payroll related taxes. This is typical for the first quarter because of taxes paid on vesting of stock Awards. This was particularly true this year.
And with 200 per cent award levels achieved on performance stock units given F. C. P. Ts equity return outperformance over the prior three years. The remaining one third of the increase represents higher compensation for the existing team and new team members as Bill remarked, which sets us up well to support the growth of the portfolio turning to the balance sheet.
On the quarter, we issued $5 million of common stock on our ATM program at a weighted average offering price of $29.56 per share and we announced in February the pricing of a $100 million private notes with an average nine year tenure, all and average interest rate of two 7%, including swap gain amortization.
Represent our lowest ever note rate reflection on the strong support we have and this market. The offering was six times oversubscribed and consisted of 100% repeat investors and the notes funded yesterday.
We ended the first quarter with $228 million of available liquidity with $12 million of cash reserves and $216 million available on our revolver.
Our leverage metrics for the quarter, alright fixed charge coverage of five one times and net debt to EBITDA at five three times with the funding on the private note. This week, we are set up well from a capitalization standpoint, and finally, we paid a dividend for the quarter of 31.75 cents per share.
With that I'll turn it back to bill.
Thanks, Jerry we wanted to finish our prepared remarks with a thank you to one of our board of directors, We announced last month. The Polzer head informed us that he was not going to stand for reelection at our June annual meeting to allow him to focus on his role as CEO of course site.
We have tremendous appreciation for the insights guidance and encouragement that Paul has given us a director since our inception in 2015.
Like all of our directors Paul comes to every conversation prepared and ready to engage on how to make F. C. P. T better. Thank you Paul on behalf of the rest of our board all of our team members and the equity restaurants, you have represented so well.
As always we are available to answer any questions on the quarter, where the portfolio. So please reach out we look forward to speaking with many of you during the NAREIT conference in June and hoping to start seeing our investors and person and they're not too distant future with that we'll turn it back to Betsy for Q&A.
We will now begin the question and answer session.
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At any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Okay.
My first question comes from Nate Crossett with bear and bags.
Please go ahead.
Hey, good morning day.
Good morning, Matt.
And.
Maybe you can just characterize and deal flow today and.
And give us some color on on the pipeline looks right now.
Thank you mentioned there was $45 million last.
<unk> is there any color you can give us on the timing on those closings.
And could we see more and those types and strategic relationships this year.
Yeah, I think you'll see a lot of those closed in Q2 and.
Not all but and and obviously, we have other deal flow and theres not a parcels, but a lot of those will close in Q2 and you know we're working hard to make.
And make sure we do have additional relationships like that close.
So it's been quite busy and feel like the existing portfolio is in terrific shape and that gives US you know.
Permission to go out there and and and try to add to it.
Okay.
Data on a real growth.
And the prepared remarks went through very fast and I couldn't catch it all and so sure.
Yeah, I think going well, you'll start to see deals closing and the next quarter and and the next couple of weeks actually we don't announce those when they close but it's going well and you know lots of demand from tenants for for good real estate and.
And obviously a lot of a lot of rocks to turnover as far as vacant real estate, so so going well a great partner.
As expected.
Okay, and then just lastly, do you guys and all the hiring and place that you think you need four.
Sure and deal flow.
And we expect more.
We have won a search for an acquisition associates, a level person and the market, but but by and large I think we're in pretty good shape.
Okay. Thank you.
Yep.
Our next question comes from Sheila Mcgrath with Evercore.
Please go ahead.
Yeah good morning.
Bill It sounds like Darden Brinker has tweak their models to be more profitable even on lower sales I was just wondering if you could give us your views on.
And if this puts these companies are similar companies and growth mode as far as new locations go and just if that would increase acquisition opportunity. It's four four corners.
Yes, absolutely Sheila and I think and I think darden and bring her are very well run companies and have survived. This pandemic and now are looking to grow market share and it was.
Absolutely one of the top few reasons that we went down the road of this JV. So that we can provide capital to help them grow.
Absolutely I think I think that the pandemic will create a dynamic and the restaurant space where were the big will get bigger and stronger who have been able to survive it will gain market share.
Okay, great and you're on.
Or are you seeing it and a big way you're already seeing on a big way.
That's great and just in.
And on commenting on your new additional hires do you think that that puts four corners in position just to on board more acquisition opportunities. This year and do you think that you'll.
And you'll be expanding expanding the funnel beyond our restaurants or just your thoughts on that yeah, well, we certainly have increased the number of auto service and and medical retail we call. It mid tail acquisitions and you know the the reason we're adding to the team is to have more capability to grow them and it doesn't happen where you hire someone.
And the next month, you're asked your acquisitions would go up and it takes it takes some time to train people up and and and get them and the deal flow, but that's absolutely. The reason we're doing it.
In addition to being able to add acquisitions through the loop at Adler JV and the timing is such that we're adding people and the acquisition economics of the JV have not yet hit and so theres a little bit of front and running and then really what it was as Jerry mentioned as additional benefits and and load on on <unk>.
And assist that we're sort of on a three year lag of performance.
Well, the JV reimburse them or their fees to four corners to reimburse for some of the additional.
You know people count sure, yes, there are acquisition fees and asset management fees.
We think we will offset a significantly the amount of additional G&A.
Okay, great. Thank you.
Thanks.
Our next question comes from Wes Golladay with Baird. Please go ahead.
Hey, good morning, guys and I just wanted to go back to those comments about the to go business for the restaurant companies are you seeing any opportunity for incremental investment there and existing asset.
We're definitely working on it it's a little soon but it seems logical that that given you know a change and to go business from a couple of percent a few years ago to 20, 30% now that there would be some changes and the physical and lay out of the building. So that's something we're working on but it hasn't happened yet, but I think it's quite logical and it would.
And that's something that would happen on the future.
And you are seeing in the existing acquisitions and.
A real primacy of the drive thru is how I would describe it so brands that were.
Dipping their toe and the water on drive throughs like Panera and Starbucks are now very much a drive thru centric.
Got it and then.
And maybe if you can go back to the I guess the pipeline of deals and how would you characterize it today versus maybe last year and a similar time.
Okay.
Hum.
I would say.
Similarly robust and in the sense that we have a very good line of sight for these from these oh parcel deals and and you know of.
A little bit.
Broader in the sense that we're looking at Mattel and and all the surface, but you know obviously last year, specifically, we were and the you know the.
Very heat of COVID-19. So so we were thinking about our pipeline differently than we are today, but I think.
The point, you're trying to make is you know versus a historic level of pipeline I think we feel very good where we are.
Where we're at.
Got you and and maybe one last one and you did mentioned about being disciplined on pricing and I guess are you seeing any more incremental competition for those out parcels. It from I understand there's a little bit more complex and that's kind of where you get a dig in and and maybe create a little bit more often than normal.
Yeah, I think we've seen competition and in the past than people realize that its difficult to do and.
And and usually they fade away. So we'll see them and I think that the big takeaway that we've seen on pricing is last quarter. We saw a high quality properties trading at low cap rates and I think and the last few months, we've started to see a low quality properties, even ones that were bad behaviors or income.
And to trade at low cap rates so.
And we're being disciplined we reflect on the properties that we passed on pre COVID-19 and and their results. During during this pandemic versus or more select group of assets that we acquired and we're pretty we're pretty clad that we've been and discipline.
And now that you haven't have any assets you probably wouldn't want to sell but I guess with price and the way you. Just described it would there be something like maybe five years out maybe just macy and issue, where you're just going and decided to get rid of it now are with that but I think if you look at that too, but yeah. I think if you look at the two properties. We sold this quarter one was.
Dark and one was Uh huh.
High rent.
And not not grade performer, so and I think we're doing that.
I appreciate you taking all the questions. Thanks, guys Yeah of course of course.
The next question comes from John Moscow with Ladenburg Thalmann. Please go ahead.
Good morning.
Good morning.
And so maybe building on that last point I guess.
Given the kind of cap rate compression, we've seen over the last couple of quarters. What are some of the levers you can pull to kind of maintain accretion.
Either.
Ken and non restaurant property types that maybe have some kind of better risk adjusted returns are focusing on franchisees versus kind of corporate credit just anything there that you're looking at to kind of maybe maintain yield.
Right, well I think as far as.
Maintaining spread.
On the bond deal that Terry executed as it is a great.
Our help to that and then as far as on acquisitions I think we benefit from the fact that we're at on a scale, where we don't have to find.
Hundreds of millions of dollars of acquisitions per quarter.
And so we just need to make sure that we're turning over a lot of rocks.
And we have a good pipeline.
And on with contracted prices to close on and it's our job to make sure that we keep that filled up for the second half of the year.
And.
But nothing specific in terms of maybe continuing and a little bit more on the non restaurant side or I don't like using the term and a move kind of up and credit risk curve.
Hmm.
Well I think.
You know, there's always assets that you can purchase that have higher spreads and and <unk>.
Just making sure that.
They're higher spread isn't there for a reason.
So so we just have to be careful and I think you know as our team is trained up and.
Now after five years and you know.
Having underwritten 15000 properties, where we're and a good place to do it.
But it's it's something that everyone in the industry is facing.
And I think.
No.
Would be very difficult to come to a different view.
Okay, and then maybe looking at the broader and kind of restaurant.
Real estate investment universe has there been any convergence and cap rates between kind of <unk> and casual dining is as things have reopened.
In terms of Capex.
I think cap rates.
I'm not sure conversions is the right term there both on.
They're both falling and especially Q S are it's very typical to see <unk> restaurants, with a four handle cap rate some even below that of southern California or Florida.
And then it's very common now to see casual dining cap rates and the mid fives.
But on a magazine I think Brad.
And.
It's just I guess, one thing I would reflect on is it speaks to what I would say is a significant change and the NAV via the company across the 810 properties, we own a if that's the case.
Okay, but I mean, if the spread between the two.
Narrowed at all on the last couple of months and quarters or is it pretty much stayed steady.
I would anticipate it's pretty steady maybe narrowed and just a tiny bit.
Uh huh.
That's it for me thank you very much.
And as a reminder, if you have a question. Please press star then one to be joined into the queue.
Our next question comes from RJ Milligan with Raymond James. Please go ahead.
Hey, good morning, guys Bill It seems like your comments point to the fact that asset pricing today doesn't accurately reflect risk and I'm curious, what you think needs to happen and the market for pricing to come back to sort of that equilibrium I guess I'm just trying to gauge how long do you think this pricing environment will last.
R. J I think that's above my pay grade to predict that's like predicting interest rates are.
Have a very hard time doing that but I would say that your your comment about seeing pricing on assets.
Being a bit of a head scratch or Oh, it's true I I got.
Why properties that performed well during COVID-19 would trade at really premium prices like the darden assets that we on so many of them, but I've been surprised frankly by.
And tenants that there were not.
Payers during COVID-19 have compressed cap rates.
Okay and so.
I mean at least right now there's just a ton of capital out there chasing all sorts of assets. So you would expect the current pricing environment to last for some time on it.
Yeah, I think that's right.
Shouldn't overstate that we we don't we're a medium sized company, we have reasonable acquisition.
Appetite and a good pipeline, so I'm I wouldn't be.
Two negative about it.
Okay. That's it for me guys. Thanks.
Yeah.
Yes.
Our next question is a follow up from Sheila Mcgrath with Evercore.
Please go ahead.
Yes Bill.
Thank Jerry quoted 4.1 times coverage ratio and approaching pre pandemic level and the idea of what percent of your portfolio is open to Max capacity versus restricted capacity and assuming reopening of those restrictions do you think that the coverage levels could exceed pre pend.
And I think levels.
Once they're on.
Yeah, I don't have the.
On the Max capacity, because those rules are quite Byzantine and it and I'll just use as an example, our kearl facility where the.
And the capacity restrictions were not as relevant as the six foot distance restrictions for for many months, but we were above 19 levels for for some weeks here recently, so I think the coverage could in fact.
Exceed pre pandemic levels.
And certainly would expect it to and time.
But yeah, the portfolios and really good shape.
And.
You know average coverage is terrific, but but I I always worry about the property set that are in the bottom, 10% and and you know even those properties are in great shape, we have.
Very very few concerns.
And.
Okay, and then Bill you mentioned 45 million.
And our out parcels remaining to be closed and.
Do you think that opportunity on it.
Is somewhat exhausted or.
Can we think about you guys uncovering some more opportunity.
I think there'll be more for sure.
Okay and last question for me I I was a little low on G&A for the quarter I apologize.
But just wondering if you were Gerry can help us a little bit and.
In terms and cause some of that was access and are just elevated comp costs just give us some insight on how we should think about that for the balance of the year, maybe the cash part of it.
Yeah, Sheila I'll jump in and notwithstanding the elevated nature of the first quarter I think it's it's a decent number to use for the rest of the year. If you annualize that to reflect the increase and the staffing and as Bill said you know some of that will be frontloaded vs fees that'll be earn maybe over the second half of the year.
Our ore oriented next year.
Okay, great. Thank you.
Yeah.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Bill Lenehan for any closing remarks great.
Great. Thanks, everyone and if you have questions. Please don't hesitate to call. Thank you.
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