Q2 2021 Four Corners Property Trust Inc Earnings Call

Good day and welcome to the F. C. P T second quarter 2021 financial results conference call all of <unk>.

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After today's presentation there'll be an opportunity to ask questions.

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To withdraw your question. Please press Star then 2 please note. This event is being recorded I would now like to turn the conference over to Gerry Morgan. Please go ahead.

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, including the uncertainty related to the remaining scope severity and duration of the COVID-19 pandemic that are beyond our control of our ability to protect our assumptions are not a guarantee of future performance and some will prove to be incorrect.

For a more detailed description of 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 August 5th 2021. In addition reconciliation to non-GAAP financial measures presented on this call such as <unk> and <unk> can be found in the <unk>.

Company's supplemental report also available on our website with that I'll turn the call over to Bill.

Good morning, Thank you for joining us to discuss our second quarter results I'm going to make some introductory remarks top warning our director of acquisitions just wanted to go into some detail around acquisitions and then we will hand, it back to Jerry to discuss the financial results.

In summary, we continue to have industry, leading collections at 99, 8% for the quarter and occupancy was unchanged at 99, 7% of restaurant and other retail tenants are experiencing top line performance often above 2019 pre pandemic levels.

The quarter. We also acquired 23, great properties characterized by low rents and high quality tenants and recast our $650 million credit facility to both extend the term and improved pricing.

We reported second quarter of <unk> of 38 per share, which represents a 4 cent year over year increase.

I'll remind everyone that second quarter of 2020 results.

Were impacted negatively by approximately <unk> <unk> per share due to COVID-19 related variances.

We are excited to see the strong rebound of restaurant operators continuing in the first half of the year. We included a slide in our investor presentation posted to the website yesterday with the updated survey information.

From Baird that shows quick service restaurants are operating at 119% of 2019 weekly levels and casual dining restaurants are operating at 100% of 2019 levels.

Darden and the other operators are also reporting higher margins from before the pandemic.

How well leading restaurant operators are adjusting their business models, including simplifying menus enhancing to go operations and leveraging technology are the case in point, our <unk> subsidiary experienced its highest EBITDA results in the second quarter since our inception and that is part of the including the contribution from care of seventh Longhorn which opened.

In April well done Carol and teams.

Turning to investments, we acquired 23 properties in the quarter for combined price of $45.6 million and an inch.

Cash yield of 6.9% the acquisitions represent strong tenants with 21 of the 23 properties leased to corporate operators and 10, new brands added to the portfolio.

In addition, we have closed on over $28 million of properties in the third quarter to date looking back from the last 2 months Youre seeing increased momentum with $49 million closed in total.

Importantly, we've been able to build our pipeline, while staying committed to our focus on quality of investments with every property approved for acquisition of standing on its own merits.

While we don't give guidance.

We feel the pipeline is very very strong and we're expecting a pickup in closings in the second half of the year Pat is going to discuss this pick up in a bit more detail later on in the call.

On the vacant funds, we've yet to see large bankruptcies of scale, where <unk> unique abilities will allow us to opportunistically buy in bulk opportunities in the space may arise eventually as weaker brand struggled to keep pace with the shift to digital off premise of sales or if large casual dining our retail operators follows the portfolio equation.

On the personnel front.

We've continued to hire into the investment accounting legal and property management teams. It is the competitive market today, but there is nothing more important than our recruiting and team development efforts with that I'll turn it over to Pat for some additional comments on the acquisition environment.

Thanks Bill.

I'll start by highlighting that we continue to observe strong net lease buyer demand, particularly for tenants with high quality credit profile and this is the F. Cpt's area of focus the view that as an affirmation in our underwriting approach and overall strategy.

As 1 example, we regularly receive unsolicited offers for our casual dining properties in the mid fours to mid 5 cap rate range, depending on the asset quality and lease term.

That's essentially back to where we saw pricing pre pandemic and the buyer pool of themes as deep as it's ever been.

We remain confident in our tenant base over the past year and now the market is showing other net lease investors are also confident in the top tier operators that makeup the majority of our portfolio.

As far as we can tell focused on credit quality has outweighed any inflation concerns among net lease investors. It's been truly remarkable to observe the market moved from a state of complete pause in summer 2020, the Red Hot 12 months later.

Turning to our own pipeline, we've reacted to the market shift positively it made a lot of progress in Q2 and in Q3 to date and building out the pipeline.

This has been driven principally by 3 factors.

First we benefited from several of direct sale leaseback deals due to the strength of our existing tenant relationships.

1 of those deals closed last week and 8 property portfolio with the Sonic franchisees for over $10 million.

Second we are now more focused on non restaurant retail properties than we've ever done with about half of our new acquisition volume coming from auto services and repair convenience stores and medical retail.

These numerous doctors for F. C. P. T have the added benefit of diversifying our tenant mix.

Finally, we've increased our flexibility to slightly lean in on cap rates for strong brands, while staying disciplined in ensuring we don't overpay for assets in this current market environment.

And now I'll turn it back over to Gerry.

Great. Thanks, Pat we generated $40.9 million of cash rental income in the second quarter. After excluding $1.2 million of straight line and other noncash adjustments and as Bill highlighted we reported 99, 8% of collections for the second quarter. There were no material changes to our collectability of credit reserves in the quarter, nor any balance.

She'd impairments on a run rate basis current annual cash base rent for leases in place as of June 30th is $161.6 million and our weighted average 10 year annual cash rent escalator is at 142%. We estimate the portfolio of rent coverage is 4.4 times for the second quarter, which is of <unk>.

Approaching pre pandemic levels and I remind everybody that coverage includes the darden properties through their fiscal year, which ended may 32021.

Turning to the balance sheet, we funded our previously announced $100 million private placement split between 8 and 10 year notes and priced at an all in interest rate of 1.7%, including the amortization of gains on a pre issuance hedge we did not issue any equity under the ATM program in the quarter in June we.

The amended our existing $650 million unsecured credit facility. The recast extended the maturities of the revolving facility by 4 years to November 2025, and $250 million of of the $400 million of term loan tranches by 3 years. Each credit spreads were improved by 20 basis points on the revolver and we were happy to see <unk>.

<unk> support with 100% re participation from our existing relationship banks and the addition of 3 new banks to the facility. We ended the second quarter with $278 million of liquidity, comprising $27.6 million of cash reserves and 250 million of availability on our revolver, our fixed charge coverage for the quarter as of <unk>.

4.9 times in the quarter and net debt to EBITDA is 5.6 times finally remind everybody we paid a dividend for the quarter of $31.75 per share and with that back to bill for closing.

Terrific operator, do you want to open it up for questions.

Thank you we will now begin the question and answer session.

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To withdraw your question. Please press Star then 2 at this time, we will pause momentarily to assemble our roster.

Our first question comes from Anthony Powell with J P. Morgan. Please go ahead.

Yeah.

Good morning, Anthony.

Oh, sorry, I was on mute hi, everybody.

All right.

My first question is just on the deals you did during the quarter.

Weighted average duration was on the short side can you talk about just the thinking there and how youre looking at those.

Yes, I wouldn't read too much into it some of those deals we've actually already executed the extensions of our discussions to entrance to the extensions with the tenants.

Some of them were O parcel deals where the mall companies don't manage to lease term at the same way, we do and then since the quarter end of the last handful of deals we've announced I think the average term is 16 plus years, so it's kind of bounce around quarter to quarter, but I wouldn't read too much into it.

Okay got it and then you mentioned a bit more willingness to to meet into yields for good operators.

That you feel strongly about can you put any order of magnitude around that or give us a sense as to maybe where some of the buckets are from the stuff Youre looking at.

Yes, it's probably 2030 basis points, but I guess, the 1 of the ways I would look at it as our average.

The average cap rate for the quarter was almost 7%, which is almost a little high for where we want to be and so we're.

We have a handful of really high quality of things in the pipeline, where we leaned in north of 6 but but you know in the.

<unk> is I would describe it.

Okay, and then just the last 1 on the Libertad, where J D.

Was there any activity of that in the quarter or did you find any of your commitment in the quarter.

We haven't.

We're trying to find the portfolio to start off with.

And frankly, theres just not of lot of distressed and I think that's across the board of I, even talked to fellow Ceos, who run large <unk> companies and they're not even finding distress to do so at the.

The world Snap back pretty fast.

And just to confirm on that we have not made any commitment.

The pay as we go type of deal.

Got it okay.

Thank you that's all I had.

Thanks Anthony.

Operator next question comes from.

Thank you. Our next question comes from Wes Golladay with Baird. Please go ahead.

Hey, Hey, guys just going back to that last question that can you maybe comment on why you wanted to start with the portfolio would there be a big step up in G&A when the program officially gets going.

No I think it's just.

From a time management standpoint don't want to start with.

1 property.

Got you it makes sense and then for the shorter lease term deals where you're already extending them is there any change of the economics for those deals.

Nothing material.

Okay, and then last 1 with the.

I guess, the the transaction Mark I think you guys called the Red Hot would you look to sell into the sort of any of your assets right now.

Yes, we everyone's from while we will sell assets when someone has a particularly aggressive bid.

It's not a big part of our business, we haven't sold any to date.

But it's something we always consider.

Thanks, a lot guys.

Thanks.

Okay.

Again, if you'd like to ask a question. Please press Star then 1 our next question comes from Sheila Mcgrath with Evercore ISI. Please go ahead.

I guess good morning, I was just wondering if you could give us some insight on how cap rates might compare casual dining auto service and medical retail and.

Same question on <unk>.

The coverage for those different product types.

Sure.

<unk>.

In order of B.

Auto service of medical or slightly higher casual dining maybe just below that and then quick service has the tightest cap rates.

What I would say is the the.

Spread between high quality.

The net lease and some of the weaker quality stuff.

Brands that are in bankruptcy, they are paying rent, but the the corporate entities and bankruptcy being marketed in the mid sixes, which.

Quite aggressive and then trophy.

Properties, which we tend not to be super active in but certainly seeing a number of listings with 3 handles or low 4 handle the cap rates.

And then Bill do you get unit unit level economics on the.

Although the service and medical retail to opine on where the rent coverage metrics might be.

Yes, we do.

It's very similar and searching out properties that have modest brands and strong coverage, but the coverages are quite similar.

What you see in.

Uh huh.

And in the restaurant space.

Very similar it's not it's not like.

In a.

Certain kinds of medical.

At least for 1 of her recently.

Comfortable with just over 1 times coverage its not like that these are 2 to 3.4 times covered in typical deals.

Okay, Great and then the out parcels that remain to be closed is now $23 million. Just wondering if you think there'll be opportunities to bring the shell of that.

The pipeline or do you think that all the kind of wind down.

I think the I think there will be continued opportunities and have conversations on those daily.

Okay, great. Thank you thanks Sheila.

Showing no further questions. This concludes our question and answer the question I would like to turn the conference back over to Bill Lenehan for any closing remarks.

The conclusion, we're very happy with our results for the second quarter, and we're very happy with where we stand on our pipeline. We are looking forward to getting out on the road. This fall as always we were able to answer any questions on the quarter or the portfolio of so please reach out with that thank you everyone.

Yes.

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