Q3 2021 Four Corners Property Trust Inc Earnings Call
27 2021. In addition reconciliation to non-GAAP financial measures presented on this call such as <unk> and <unk> can be found in the Companys supplemental report also on our website and with that I'll turn the call over to Bill.
Thank you for joining us to discuss our third quarter results I'm going to make any introductory remarks, then Patrick <unk>, our director of acquisitions, where we will review some details around acquisitions in the pipeline and then back to Jerry to discuss financial results.
In summary, we continue to have industry, leading collections at 99, 8% for the quarter and occupancy improved to 99, 8% as well our restaurant and other retail tenants are experiencing topline performance often above 2019 pre pandemic levels. We also acquired 53, great properties this quarter.
Characterized by low rents and high quality tenants.
We reported third quarter <unk> of <unk> 39 per share, which represents a <unk> <unk> year over year increase.
We are pleased to see restaurant operators as strong performance in the third quarter quick service restaurants are operating at a 118% of 2019 weekly levels in casual dining is operating a 107% of 2019 levels. According to Baird. Most recent weekly restaurant survey.
Turning to investments, we acquired 53 properties in the quarter for a combined price of $107 4 million and an initial cash yield of six 4%.
The acquisition represents strong tenant credit profiles. The group includes two dual tenant properties and 44% to 55 leases are with corporate operators. The third quarter's investments includes six new brands, bringing us to a total of 101 brands in the portfolio.
In addition, we have closed an incremental $9 million of properties in the fourth quarter to date, bringing us to $196 million closed in total so far in 2021.
Taking a step back to put that $196 million figure of new investments in perspective, and compares to $132 million for the same 10 month period in 2020 and $94 million in 2019. So we're heading into the last months of the year very well positioned and with a robust pipeline.
For the quarter restaurants, and auto service each represented.
40%, 44% of the total investment volume and medicine and other retail made up the balance.
For the year overall medical and other retail have comprised approximately 20% of total volume.
We've been pleased with the opportunity set and we are seeing with while restaurants remain our primary focus for new acquisitions, we are taking advantage of the flexibility to invest in other sectors as well.
As I mentioned, our <unk> pipeline continues to be very strong I'd reiterate what I said in the second quarter that we are pleased with the pipeline for the remainder of the year.
With that I'll turn it over to Pat for some additional comments on recent acquisitions and overall investment and the overall investment environment.
Thanks Bill.
As you mentioned, our third quarter was quite strong in terms of new acquisition and building out the pipeline.
Collecting on recent deal volume, it's worth noting that this was our biggest quarterly investment volume in the fourth quarter of 2019 right before the pandemic. It is also one of the highest volume quarters in our company's six year history.
We believe that success has been due in part to our investment platform maturing and expanding the universe of properties. We're going after is much broader than in the past sales pricing shifts against us in one sector, where there are fewer restaurant opportunities in any given three month period and can now find opportunities in other sectors and make our volume less choppy quarter to quarter Casey.
Case in point, we noted on our last earnings call that the pricing environment was very competitive for restaurants and retail net lease in general despite that pricing headwind, we've still been able to build out the pipeline and the mid fixed cap rate area high quality tenants in real estate, our pipeline sector and extra restaurants auto services and medical is similar to what we've seen so far this year.
Sure.
As we look towards new opportunities for Q4 and into 2022, you can expect us to stick with the same formula that made Q3 a success.
We're actively engaging our existing tenant roster for new direct sale leaseback deals in Q3, and we benefited from several of these transactions, including a $21 million Chile's deal and others with restaurant operators that had been repeat sellers to four corners.
The fact that these operators are coming back to four corners demonstrates the positive relationship and deeper ties that came out of our tenant interaction during the pandemic.
Second we continue to explore new subsectors in retail in adjacent services.
There is still principally auto services and repair convenient stores and medical retail, but it may further diversify in the future.
And finally, we're focused on quality operators and being flexible clean and slightly for strong brands and credit profiles and.
And just to expand on that for a second we still believe every deal needs to stand on its own merits and economics, we achieved a six 4% average cash yield for the quarter and stand at six 6% for the year, which we think is a great outcome, particularly given the asset quality, we have added to the portfolio.
And now I'll turn it back over to Gerry.
Thanks Pat.
Just a recap of a couple of the financials. We reported we generated $42 2 million of cash rental income in the third quarter. After excluding $1 4 million of straight line adjustments and as Bill highlighted we reported 99, 8% of collections for the third quarter no material changes to collectability or credit reserves in the quarter.
And no balance sheet impairment on a run rate basis, our current annual cash base rent for leases in place as of the end of the quarter is $168 8 million our weighted average 10 year annual cash rent escalator is one 4% to remind everybody that number was $94 million when we started.
In late 2015, so nice progress we estimated the portfolio rent coverage is four six times for the third quarter, which is in par on par with pre pandemic levels that includes coverage for the Darden properties of approximately five five times using the latest report itself results from Darden on our portfolio in there.
Brand average margins for the quarter ending August 2021, and Additionally, non darden restaurant coverage is estimated at approximately three times also approaching or passing in some cases pre pandemic levels. We note that while not all of our tenants report financials to us rental coverage at these levels would translate often to rent to sales values.
5% to 8% for restaurant operators in the portfolio, which is lower than typical levels and shows both the strength of our tenants' operations and the low rents that are in place.
Turning to the balance sheet in the quarter, we issued $27 7 million of common stock on our ATM program at a weighted average price of $27 67 per share.
We ended the third quarter with 204.
$8 million of liquidity, which included $197 million of availability on the revolving line of credit our fixed charge coverage for the quarter was four nine times and our quarter end net debt to EBITDA is five eight times finally, we paid a dividend for the quarter of $31 75 per share.
With that I'll turn it back to bill for closing comments.
In conclusion, we're very happy with our results for the third quarter. We look forward to speaking with many of you at the upcoming NAREIT and <unk>.
Now, we'll open it up to questions.
If you'd like to ask a question. Please press star followed by one on your telephone keypad now if you changed your mind. It is star followed by <unk>.
Our first question comes from RJ Milligan of Raymond James Your line is open. Please go ahead.
Hey, good morning, guys.
Bill.
There's a lot of capital out there chasing restaurants.
We're seeing improving fundamentals as you pointed out and it seems like cap rates are going to continue to compress I'm just curious.
If you see anything out there that sort of pauses that cap rate compression or if you expect that cap rate compression to continue and then secondly.
You mentioned that the pipeline is pretty similar in terms of mix between restaurants, and non restaurants and I'm. Just curious how you guys view that trending as we move into 'twenty. Two if you expect to do a greater percentage.
Percentage of non restaurants versus 21.
To your first point about cap rate compression on restaurants.
We own over $2 $5 billion worth of restaurants, so that's not a bad thing.
For our portfolio.
Overall, I don't have any specific callouts RJ on what would <unk>.
Change cap rates other than obviously interest rates moving around.
But the brands continue to do well and it's a dynamic where the the strong brands continue to get stronger so that.
Is beneficial to our portfolio and strategy since our existing portfolios with industry, leading brands and we tend to focus on the higher end of the credit spectrum.
As far as the mix of the pipeline I think it will.
As Pat mentioned remained relatively consistent with what we have.
Close to date.
Okay and my second question is.
Still have some out parcel closes left for the transactions already announced I'm just curious if theres any opportunity out there or what youre seeing in terms of.
Either off market opportunities similar to what you did with the out parcel strategy or if pricing is slightly better for maybe a portfolio of assets versus individual one off assets.
Yes, we do have a number of out parcel portfolios in the pipeline and we do think the pricing is a little advantage, but RJ, that's often becomes because <unk> come with a lot of work.
So in some ways are getting paid for labor.
But once it's in the portfolio.
They are very strong properties with again low rents typically corporate operators and the vast majority of ground leases.
And my final question is.
Third quarter volume, obviously pretty big relative to the first half of this year and I think traditionally we've seen quite a bit of activity as sellers look to to sell before the end of the year I'm just curious if you anticipate.
Another rush as we head into the end of the year.
Yes, I think it's going to be relatively busy RJ I don't think theres anything.
In particular that I would note.
I would anticipate that fourth quarter being busy as we said in our prepared remarks for sure.
Thanks, guys. Thanks.
Thanks RJ.
Our next question is from Sheila Mcgrath with Evercore. Your line is open. Please go ahead.
I guess good morning, Bill you mentioned broadening the opportunity set has helped in acquisition volume.
Wondering.
If you could remind us how big your acquisition team is currently.
And how does that compare to a year ago and do you plan on growing that team.
Any point in the future.
Yeah, Sheila Great question. In addition to myself, there's six members I believe from the acquisition team.
Very much in line with.
Last year, we've had very good retention and it's nice to see Youre hearing now Pat on the calls.
And Josh Bulge.
<unk> now have some real significant number of reps under their belt and so the team is stable.
It's really now acquired over $1 billion worth of properties. So there.
There very well.
Accustomed to the market and to answer your question about recruiting we're always looking for talented driven people to join the team.
Okay great.
I would say just to add to that no lack of competition.
For talented.
And focused acquisition people in the market, but.
I think as we've gotten larger we have more confidence that we can recruit people earlier on in their career and train them to think through the acquisition process consistent with how we've done it in the past.
Okay, Great and then just curious on deals when you.
Our targeting the corporate guarantee or also on the bigger portfolio.
The $1 million to $21 million that you mentioned.
Pricing.
The initial yield on those transactions lower then.
Non corporate guarantee just how does that pricing and for the portfolio.
Sure corporate guarantee having a corporate guarantee is an important part of the credit.
Underwriting and as you know, we view credit as about half of what we look at the other half being real estate.
But.
Maybe in your question is there a portfolio premium or discount.
I would say if anything theres a portfolio premium today, but in the two chunkier portfolios that we had we did in Q3.
All of them had.
Compressed timeline component to them and in both cases, they will repeat tenants. So we had already negotiated a lease.
So that portfolio of premium was perhaps less than it would be if it was a fully marketed transaction.
Okay, Great and last question just curious on your insight.
Given.
That you owned.
Restaurants.
Did your big picture thoughts on current labor challenges in food cost challenges to the restaurant industry.
Yes sure Great question, we benefit in our <unk> subsidiary in San Antonio, which to remind people our seven longhorn steakhouses that we operate as a franchisee to darden, we benefit in that business.
The management team that runs that subsidiary is superb so Carroll, who is the leader of that business on a day to day basis. It's just an exceptional people leader and understand the business very well and is extremely driven.
But I would say that Carol if you were on the call would say.
That very much. So there is a labor shortage and in fact that this.
Curtailing factor in the restaurant business now is the availability of labor and not demand from the consumer and I think.
You could say that for many retail subsectors Sheila.
As far as food costs.
<unk>.
It's a factor.
It's perhaps less of a factor than youre seeing the supply chain of other retail subsectors, but the lack of labor is very real.
Okay. Thank you.
Thanks Sheila.
Our next question comes from Nate Crossett of <unk>. Your line is open. Please go ahead.
Hey, good morning, guys.
I was wondering if you can.
Good morning.
I was wondering.
Hey, Gary.
What is the actual aside.
Might land right now.
Then maybe just related to that if you could give us an update on the <unk> JV.
What are you seeing come out of that so far.
Sure, we don't provide guidance on pipeline or acquisition volumes.
And we announced transactions the day they close.
As far as loop at Adler, we have not seen much activity there.
The.
I think gene Lee Darden's conference call referenced.
The level of speculation and vacant properties and.
Unbuilt sites, we just have not been able to find properties at the right price point, such that you could redevelop them.
<unk> a reasonable profit so speaks to the supply demand dynamic in that.
Hands are growing but we have not been able to find.
And properties at bargain prices.
Okay.
And as it relates to kind of the price of the strategy.
Obviously, youre disclosing that not a lot left on that so.
How should we think about those relationships I guess going into 'twenty two.
In terms of like the total addressable market in both out parcel relationships is there anything I think note there youll see youll see some.
Closed into Q4 Q1, we have some in our pipeline. We continue to think that as an opportunity set we've been aggressive I think we've bought nearly $300 million worth of out parcels they performed exceptionally well through COVID-19.
So I would certainly not say that that opportunity set is.
Over but obviously, we've made very good progress.
Thus far in addressing.
That unique.
Yes.
Avenue for acquiring properties I would also say that.
There are folks now who are trying to imitate that strategy I think they're finding it very labor intensive as we have but.
Like many things when you have figured out a good idea and begin to implement it sometimes people follow in your footsteps.
Okay.
Maybe just one last one again on the disposal side is there anything that you'd be looking at crown or is there anything on the watch list.
That we should be aware of.
We occasionally.
Think about selling properties.
Really get inbound inquiries for properties, but nothing notable.
And nothing along the lines.
Disposition watch list.
Okay.
Okay.
Thanks Nate.
Operator any more questions.
Yes. The next question comes from Wes Golladay of Baird. Your line is open. Please go ahead.
Hey, Good morning, guys. That's had a quick question on the drivers of the acquisition closing this quarter is it primarily deal flow to you, having a higher close rate now.
Oh, it's.
It is deal flow.
Okay.
That hotel.
Verticals.
Yes, no notable change in selectivity.
It's how I would describe it is just.
Happen stance on timing of when things occur.
Okay.
You have built out the team over the last year and I guess has that deal flow been ramping throughout the year.
I think there is a dynamic of that.
But the team is relatively stable year over year, certainly the senior members of the team.
I think it's just.
Acquisitions are lumpy with us.
Okay, and then when we look at leverage can you remind us of your targeted leverage and I guess, how would you fund the future pipeline with dispositions would be part of the mix.
Thanks, guys. This is Jerry just to remind everybody our targeted leverage is five five to six times net debt to EBITDAR were at $5 eight right now will continue to fund.
Our investments through a combination of both equity and private notes.
And using our revolver in the interim dispositions is always a great card to have and one we can always pull if that if the if those other markets warrant cooperating but as of now it really hasn't been to date.
Okay. Thanks, guys.
Thanks.
Our next question is from John <unk> of Ladenburg Thalmann. Your line is open. Please go ahead.
Good morning, everyone.
Morning.
With regards to the mix on non restaurant acquisitions is the focus that kind of seem to be out there in <unk> on auto service tire.
And Aerie health et cetera.
Is that being driven by underwriting and how you view that real estate and those tenant industries potentially maybe being undervalued or is that just where deal flow is today.
Trying to think of why those kind of industries.
Maybe Carlos <unk> off price retail home decor et cetera.
Yes, we haven't done much off price retailer home decor or dollar stores.
But when you think about I think as you said its when we look at the different net lease sub sectors.
The sectors that we like as much as restaurants, where pricing is as good or more favorable than restaurants tend to be those auto services uses and medical retail broadly defined human and pet.
Yeah.
I mean is any of that driven by just kind of your thoughts on the size of the footprint.
Obviously some of those categories you haven't invested in a larger footprint of news is that our focus going forward.
Do you mean footprint.
Leasable area.
Yes, yes total square footage.
Yes, I don't think Thats a driver I don't think Thats a driver was that.
They are.
Very often the same square footage as a casual dining restaurant as an example, I don't think that's the real driver and we focus on low rents so.
Our.
Average purchase price has been highly consistent.
Okay.
And then.
How is pricing trending for portfolios versus one off transactions. If I look at the <unk> transaction activity Sonic portfolio that was on the lower end of kind of cap rates, but there's also <unk>. So is there any pricing premium or discount there if you do kind of.
Mid size ones that are eight 910 assets or even larger than that.
Yes, I would say that.
What we're seeing in the market, especially for larger well marketed portfolios is a port portfolio premium if anything.
Most of the Sonic maybe at least transaction that we spoke to earlier.
<unk> had as I mentioned, the timing component to them. So we were able to get them at pretty good prices, but if anything the market is quite strong and our competitors are really volume focused is our view and so portfolios tend to be.
Well bit.
Okay.
That's it for me thank you very much.
The next question is from Anthony <unk> of Jpmorgan. Your line is open. Please go ahead.
Okay. Thanks, not much left here, but just on on yield so I could go back to the absence of the year. It seems like cap rates compressed, particularly in restaurants, but seemed to be across the board in net lease so.
Do you think they've they're now stabilized over the last say quarter or so or have they moved up at all because of interest rates are.
Kind of where things have settled.
It's a great question I think we sort of.
Have a little bit of a stabilization.
Have not increased because of interest rates by any means but seem to be quite stable.
If anything I would anticipate compression continued compression but.
As of today, we've been pretty consistent in the low to mid sixes.
What we've been looking at to acquire.
Okay, Yes, it seems as if.
Earlier in the year, but maybe we were going to head into the fives in terms of your deal for it but it sounds like.
It sounds like you could you think you could hold here with a six handle.
I think that's fair certainly lots of properties that we're seeing are.
In that high fives mid fives cap rate range of some of our competitors have gone aggressively into that area, but we've tried to.
Have sufficient deal flow stream strong deal flow, but a low to mid six cap rate.
Okay and then just following up on prior question about just the type of things. We're looking at as you look at other areas any.
Plans to go into things like industrial product, where just the average ticket size.
Could go up meaningfully from from like a smaller box retailer or a restaurant.
Auto type service, it's something we're constantly testing.
In the acquisition group with our board, but I think our philosophy, thus far has.
Ben to feel very comfortable with what were acquiring versus just migrating two asset types that will allow us to deploy more capital.
And perhaps regret it later, so we're always testing that open minded, but for us. Thus far I think you should expect to see a continuation of the kinds of properties we bought historically.
Great. Thanks.
Thanks.
As a reminder, if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
We have a follow up question from Sheila Mcgrath. Your line is open. Please go ahead.
I guess bill.
Last couple of years, you've announced the dividend increase in November I was just wondering if you could give us remind us your dividend policy are you looking at managing to a certain.
<unk> payout ratio.
Yes, sure we address it with the board annually.
It's always been in the late fall early winter.
Said that we wanted a payout ratio in and around 80%.
I don't think any of that's changed overall, but it's a decision we bring to the board.
In our November meeting.
Yes.
Okay. Thank you.
Thanks Sheila.
There are no further questions from the lines at this time.
Thank you Charlie.
Thank you for a robust.
A set of questions. We're here if anyone would like to talk and again. Thank you.
We feel great about the quarter and the pipeline for the remainder of the year. Thank you everybody.
This concludes today's call. Thank you for joining you may now disconnect your lines.