Q4 2021 Four Corners Property Trust Inc Earnings Call
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If you'd like to ask a question during the Q&A portion of today's call you may do so by pressing star one on your telephone keypad now.
I'll hand, you over to Gerry Morgan to begin to Geri. Please go ahead when you're ready.
Thank you Adam 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 uncertainty related to the remaining 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 some will prove to be incorrect.
A more detailed description of some potential risks please refer to our SEC filings, which can be found at <unk> dot com all of the information presented on this call is current as of today February 17 2022. In addition reconciliation to non-GAAP financial measures presented on this call such as <unk> and <unk> can be found in the company's supplemental report.
Also available on the website and with that I'll turn the call over to Bill.
Morning, Thank you for joining us to discuss our fourth quarter results I'm going to make introductory remarks, Patrick who will review some details around acquisitions in the pipeline and then back to Gerry and Nicole Stewart, our Chief accounting officer to discuss the financial results.
Summary, we continue to have industry, leading collections at 99, 8% for the quarter and auction occupancy improved to 99, 9%.
Our restaurant and other retail tenants are experiencing top line performance often above pre pandemic levels. We also acquired 33 properties in the fourth quarter characterized by low rents and high quality tenants.
We reported fourth quarter, <unk> 41 per share, which represents a 10% increase year over year full year 2021, <unk> per share was $1 56.
Or an 8% increase compared to 2020.
One item I do want to point out here is that those are for both figures included the impact of Carol restaurants, our longhorn Steakhouse operating business in San Antonio Carol had a week or 2020 due to the impact of dining restrictions in the early days of the pandemic.
But the business fully rebounded last year with a strong result of $2 million of positive EBITDA.
We're very excited about the results and outlook for 2020, but we understand many investors focus on our core contractual recurring rent revenue if we remove the impact of tariffs on our <unk> growth for both 2020 and 2021 and instead just focus on our core real estate operations.
F O grew by eight 1% in Q4, and six 3% for the full year as compared to 2020, we thought this nuance was worth highlighting.
Moving onto our tenants' performance restaurant operators continued to have strong results in the most recent quarter quick service restaurants are operating at approximately 118% of 2019 at weekly levels in casual dining is operating in line with 2019 levels, even with the recent cold weather in much of the country.
Our two largest tenants darden restaurants, and Brinker international.
Announced their earnings publicly in the past two months those were highlighted by strong sales comps versus last year and pre pandemic periods as compared to the same to same quarter two years ago average store sales at Olive garden, Longhorn and Chili's have increased by five 2% 22, 3% and 5% respectively. Combined these brands.
Represent approximately 66% of our rental revenue and are just a sample of the positive performance. We are seeing amongst our portfolio's restaurant tenants.
We remain highly confident we will align our portfolio with best in class operators and the results are continuing to speak for themselves.
Turning to investments, which Patrick will detail in a moment, we acquired 33 properties in the quarter for a combined price of $70 million five and an initial cash yield of six 4%.
The acquisition acquisitions represent strong tenant credit profiles. The group includes three dual tenant properties and 34% 36 leases are with corporate operators.
The fourth quarter's investments include 10, new brands, bringing us to a total of 112 brands in the portfolio in total for 2021, we acquired $257 million across 122 properties.
Taking a step back to put that 257 million figure of new investments into perspective. It compares to 223 million in 2020 and $199 million. In 2019. This represents average growth of 14% in acquisition volume in the next in the last two years and demonstrates how our investment platform and widening segment.
Exposure has allowed us to consistently increase our volumes.
With that I'll turn it over to Patrick for some additional comments on recent acquisitions and the overall investment environment.
Thanks, Bill I'd like to start by touching on our ongoing efforts in diversification.
<unk> now makes up 59% of our rental revenue and restaurant properties overall are 90% with non restaurant properties at 10%.
We remain anchored to darden in the restaurant sector, but we're now seeing meaningful portfolio exposure in other areas of service oriented retail as well.
For the year restaurants accounted for 39% of our new investments and auto service was 36%.
Medical retail was 18% and the remaining seven was other service oriented retail.
We've been pleased with the opportunities that we're seeing and while these categories remain our primary focus for new acquisitions, we will continue to evaluate investing in adjacent retail categories as well.
Core competency is finding value and strong real estate with quality operators and this focus will continue regardless of the sub sector.
Pricing for assets in 2022 year to date has been consistent with 2021 levels. The rising interest rates and volatility we've seen in public equity markets recently has not yet translated to private market cap rates Gen.
Generally private market cap rates tend to lag the public market by several months. So we may see some relief on cap rates later this year current expectations for rate hikes, and a pullback in fed stimulus hold.
In the interim, though we're just being prudent to select opportunities carefully.
We are also planning to take advantage of the salaries market with a few select disposition transactions we do.
Do not anticipate selling more than a handful of properties over the course of the year as compared to recent years and Acs be more opportunistic with dispositions as an alternative source of capital.
Turning to our pipeline we remain active in building a stable of deals for 2022.
Right the pricing headwind, we still been able to build out the pipeline in the mid six cap rate area with high quality tenants in retail real estate.
Our pipeline sector mix for restaurants auto surfaces and medical is similar to what we did in 2021.
One final reminder, historically Q1 has been our low volume quarter for acquisitions. For example, in Q1, 'twenty, one and 'twenty, we closed $34 million and $36 million respectively.
It was ended up being 13% and 16% of our full year volumes now.
Now back to Jerry for a discussion of our portfolio and financial results.
Thanks, Patrick.
A couple of numbers as we typically quoted in the quarter, we generated $44 2 million of cash rental income for the fourth quarter. After excluding $1 3 million of straight line and other noncash rental adjustments as Bill highlighted we reported 99, 8% of collections for the fourth quarter and 99, 9% for the year in total.
No material changes to our collectability or credit reserves in the quarter, nor any balance sheet impairments on a run rate basis, our current annual cash base rent for leases in place as of the end of the year is $175 2 million and our weighted average 10 year annual cash rent escalator remains at one 4%.
Cash G&A expense, excluding stock based compensation for the quarter ending December 31 was $3 3 million, representing seven 5% of cash rental income.
Cash G&A for all of 2021 was $13 7 million.
For your forecasting purposes, we expect cash G&A for 2022 will be under $15 million, representing approximately 7% growth.
The increase was tied principally to compensation expenses, we focus on retention of our existing team and additional team members to bolster our investment and operating prowess, we continue to invest into technology and systems that improve the efficiency of the team as Nicole will expand on.
Turning to the portfolio, we estimate the rent coverage to be at four four times for the fourth quarter, which is on par with pre pandemic levels I'll add two other statistics underlying the quality of our portfolio first we estimate a 5% rent to sales level for the original Darden portfolio, where rents were set at low level.
Similar to ground leases it is common to see restaurants, with 8% to 10% of rent to sales figures.
Secondly, we note that a full 10% of the portfolio now consists of ground leases where levels were set low tied to the value of the land since the tenant typically constructed the building overall the low rents in our portfolio as we have reminded you before should lead to higher lease renewal probability and give <unk> the ability to invest further into properties.
If needed to support tenant upgrades of re tenant them turning quickly to the balance sheet in the quarter, we issued $86 1 million of common stock on our ATM program at a weighted average price of $28 36 per share. This equity raise was greater than the acquisition volume in the quarter, which meant we de levered, our net debt to EBITDA in the quarter.
From five eight to five four times in December we entered into agreements to issue $125 million of 9% and 10 year senior unsecured notes, which are scheduled to fund on or before March 17th this quarter. The notes priced at three 1% and we felt fortunate for fixing the rate in December given the recent increase.
Rates and spread environment.
We ended the fourth quarter with $220 million of liquidity comprised of 6 million of cash and $214 million of availability on our revolver, our fixed charge coverage for the quarter was $5 two and as we mentioned earlier, our net debt to EBITDA is five four times, which is below our targeted range of five five to six we paid a dividend in the quarter.
Of 33, 2%, which was an increase of four 7% over the previous quarter and with that turn it over to Nicole for a few comments on accounting matters.
Thank you Jerry.
And our fourth quarter financials, we recognized a one time $864000 noncash tax benefit that arose from the removal of a valuation allowance.
Net deferred tax asset at the Kearl restaurant operating business now that <unk> has achieved a three year cumulative positive taxable income position among other factors.
These tax benefits are largely tax credit like FICA tip credits and charitable food contributions that can be used to reduce taxes in the future for Carol in accordance with the NAREIT definition of funds from operation. The tax benefit is included in SSO, but we backed it out in the calculation of adjusted funds from operation.
At this point in case any investor wants to similarly reflect this noncash item in their calculation of SSL.
I also wanted to comment that CPT, that's been busy in 2021, implementing MRI software for accounting and financial reporting as noted in our investor presentation uploaded to the website yesterday the size of our portfolio has more than doubled since its inception and the number of tenants has gone from one to over 150.
This has also been true in other areas such as accounts payable, where we have seen a significant increase in volume.
In the past two years, we have added two senior accounting team members as well as SaaS level accountants to address the increased complexity and size of our portfolio.
With this increase in staffing and through the use of technology and increased process efficiencies the accounting and finance team is now set up for future growth of the portfolio.
And with that I will turn it back over to Adam for Q&A.
Yeah.
As a reminder, if you'd like to ask a question today. Please press star followed by one on your telephone keypad now from the parent to ask a question. Please ensure your headsets fully plugged it in on me two likely still bound to ask a question.
Our first question today comes from Anthony <unk> from J P. Morgan Anthony. Please go ahead.
Great. Thanks, good morning.
My first question relates to the balance sheet and would be interested in getting your thoughts on how you think about <unk>.
How much runway you want as a smaller company in terms of capacity because if you think about like the equity you did in the quarter you can move the needle pretty quickly.
On net debt to EBITDA and you can do an overnight deal.
And just really reduce leverage quickly, but I guess that could also go the other way if we have X.
Market volatility.
You get cut out of the equity market. So like what do you think is the right sort of runway on the balance sheet.
You'll be able to continue your deal flow.
Yeah.
So terrific question and Anthony Thank you Alright, I think we try to be opportunistic so.
Heading into the end of the year.
<unk> had strong acquisition volumes, we knew we were going to end the year with a flurry of acquisitions.
Our stock price was.
An elevated level compared to today.
The advantage of it.
So you just don't want to get behind the April as far as.
Your leverage metrics and we've just tried to keep the balance sheet and prudent shape.
And I think the other thing thats in the back of our minds as we are.
And our minds due for an upgrade in our ratings so wanting to make sure that we keep those metrics in good shape.
As well.
I mean do you think.
Because if you didn't do equity and you kept your acquisition pace for the next two to three quarters. It would seemingly move your leverage up to six or something like that is that something you feel comfortable with or do you know.
Again, just given your size like it can move in both directions quickly.
For sure.
Stated our leverage target of being five 5% to six times.
I don't have an exact figure off the top of my head, but I would say we've been below that 80% of our existence plus.
So we just we try to make sure that we have room, we don't think six times is elevated.
And so if we went there that would be okay, but we haven't needed to to date.
Yes, and I would just to remember.
We talked about the low reps the high coverage. We have that also translates into very high interest rate coverage. So our coverage today is over five times and so I agree with you Bill five five to six is up as a metric of target will be we've been below that much of the time, there's could be short period of time, where we're above it but the quality of the cash flow that supporting.
Interest expense is strong and I would also just.
Wholeheartedly agree with you Anthony that.
Demand for our shares.
<unk> has been has been.
Strong in a number of our shareholders have expressed interest in.
Acquiring our shares in an offering.
Thus far the ATM has been a more efficient way.
Less expensive way for us to tap the equity markets.
Got it okay.
Then.
Just a second question on the.
The idea of reinvesting in the portfolio, which you mentioned and also had talked about in previous calls just any sense as to like how much of your pipeline or those types of transactions that are just harvesting from the existing assets.
It's been de Minimis to date, but we're always working on the edges to find accretive things to do.
<unk>.
Just yesterday for example, Patrick showed me an opportunity to buy some adjacent land to one of our garden properties.
Doing something helpful to our tenants.
Economically advantageous for ourselves.
Nearly getting close to 1000 properties so those.
Opportunities are more apparent today than they were at inception.
Okay, great. Thanks for the time.
Thank you.
The next question comes from Sheila Mcgrath with Evercore Sheila Your line is open. Please go ahead.
Okay.
Hi, good morning.
2021, with an active acquisition year, just wondering about.
The programmatic opportunities like you had with the mall landlord.
Are you are there more opportunities in that vein or was that just because of a distressed time just wonder wondering.
Yeah.
Actually its interesting Sheila.
We have a number of those kinds of transactions.
In sort of the.
The pipeline today, so you'll hear more about that next quarter would be my guess.
So it's an ongoing process, we really like those properties.
Liquidity, providing liquidity to folks who are.
In the mall space or acquiring shopping centers has been.
A good deal for them a good deal for us the properties.
Are well suited for our portfolio and have performed well and performed exceptionally well during COVID-19 .
Okay, Great and then.
The highlight I think Gerry mentioned that you are now.
10% ground leases.
That's an interesting addition to the disclosures just curious are you sourcing those opportunities from.
From the team acquisition pools, or do you have to search for those opportunities elsewhere.
If when you aggregate a bunch of ground leases like that just curious like if you were to sell a portfolio what the.
Cap rate would be in your opinion versus where you are buying.
Yes.
Yes.
Sure most of those are sourced in parcel strategy.
The way I look at it.
Our guard in leases.
Their ground leases, but for the fact that you don't see the word ground at the top of the lease rate they have very low rents very high coverage.
Uh huh.
Very low rent to sales.
As far as the exit cap rate.
I'm, probably not going to speculate on that but but.
We do think we are buying these.
Smartly.
And they are very safe.
So.
Yes.
We're really happy they're hard to do Sheila.
<unk>.
I'll give Jim Brown, our chief transactional or a ton of credit.
They're just hard to do a lot of work to put out.
$1 $2 million, but over the long term it will serve us really well.
So the coverages on those would be more.
Similar to a.
To the Darden coverages is that right.
Yes, I would I would suspect it would be very similar just very low rents very low rent to sales very high EBITDA coverage.
And.
Tenants that are.
Heavily invested because they built the building.
Okay and last question on.
The restaurant, just curious what you're observing because everybody talks about the labor challenges, but you.
Turned pretty positive just wondering how your operation is managing the labor challenges.
It's almost unfair.
Our <unk> subsidiary is run by Carol Dilts.
She is an exceptional business person.
And does a tremendous job, we're feeling it like everyone else.
But she does a tremendous job running that.
Division, we're at now up to seven restaurants.
Operating in a very strong manner. So.
Definitely labor food inflation.
Our very real stake as a sub.
Category of casual dining has been affected more than average.
But she is doing an incredible job.
Lee.
Large tick up in profitability year over year.
Okay. Thank you.
Okay.
The next question comes from Rob Stevenson of Janney. Please go ahead.
Okay.
Good morning Bill.
Bill.
60% of your 2021 acquisitions, where non restaurants than they were at 30% to 40 basis points higher cap rates. When you look in 2022 and forward, what's the right mix in terms of restaurant acquisitions going forward and what sort of driving you.
Two restaurant deals at this point, what's the overriding factor that you want to do more of those.
Today versus higher cap rate acquisitions that diversify the portfolio.
Great question.
We have a long history and deep relationships in the restaurant business.
We feel like the restaurant acquisitions, we're doing.
Very high quality, and we want to be there for our tenants as they grow.
And I think you will.
See that a number of the acquisitions, we made in 2021 in the restaurant space were with existing relationships that we've nurtured over the years as far as non restaurant acquisitions.
We are glad we made the decision pre COVID-19 to expand our aperture.
Specifically to medical retail and auto service, especially auto service that does not involve the can bus combustion engine.
So we're always.
Looking for other sector.
Sectors that we find attractive we keep detailed lists and review them quarterly with our board to try to have.
Sensible.
Why does an aperture as we can.
The cap rates for non restaurant properties that are slightly higher.
In our view fairly deserved.
Taking different sorts of risks.
And those cap rates are appropriate so we don't feel like.
We're getting a free lunch there I would also comment and I'm trying to keep my comments brief that the.
Run of the mill medium quality <unk> cap rate today is very low and that cap.
Cap rates, even for casual dining and I would add even casual dining that did not have a consistent consistent payment record. During COVID-19 is similarly, very low so you will see us.
Sell some properties this year and we would expect cap rates to be quite accretive to our trading cap rate.
Yes.
Okay. Because that was my next question in terms of the acquisitions that you guys talked about sort of keying up for the year are those offense or those defense. So it sounds like more you're taking the low cap rate bid more so than finding.
Tenants that you don't want to be in business with going forward is that.
Accurate or is it a mix.
What's the overriding characteristic of the dispositions that you are going to do with 2022.
It's a mix.
And in some cases, it's both.
Okay, It's a very low cat alright, guys. Thanks, John appreciate the time.
Thank you.
As a reminder, if you'd like to ask a question Thats star one on your telephone keypad.
Our next question comes from John <unk> from Ladenburg Thalmann. John . Please go ahead. Your line is open.
Yes.
Good morning.
Good morning, John .
I do appreciate the new disclosure.
That was given on what kind of cap rates kind of bifurcated amongst the restaurant and non restaurant.
I mean, both categories as you look out.
'twenty two.
Matt.
Cap rates that you kind of were able to achieve on the 2021 acquisitions in both buckets moving relatively stable in your mind going forward at least in the near term this year.
We've seen further.
The cap rate compression either in restaurants, specifically on both categories.
I think you'd probably see cap rates go down a little bit John but but not a ton.
Some of our competitors.
Youre seeing a lot of cap rates in the mid fives.
And we haven't been.
Interested in doing that but I think cap rates will come down a small amount.
For us.
Every basis points.
Twisting our arm half a turn.
But.
That being said.
We want to remain competitive and it is still quite accretive for us to acquire.
GAAP rates that were acquiring assets at.
So slightly slightly lower would be my general guess I mean, I think Pat made a very very interesting comment in his prepared remarks, which is what will the second half of the year looked like and I don't know nor does anyone else, but if you look at what's happened with the risk free rate one would presume that the second half of the year.
They have a different cap rate regimes and current.
And then a question kind of related to what we've been talking about.
Specifically indication you tend to buy more granular assets and have you seen any change in demand.
From the 10 31 market over the last six to nine months given some of the.
Lack of changes, let's say in legislation out there.
Yeah.
Not really.
There's been there's been way more in the.
The trade rags than what we've been feeling on the ground.
You mean, there has been more pressure from 10 31 buyers or you just.
More impressive about regulatory.
Just more more press around regulatory change.
Uh huh.
It really didn't come to be.
If anything if you are looking for a macro trend.
We are hearing is.
Some fatigue amongst older franchisees in older business operators, given the complexity of the Covid operating environment.
And high multiples have led to franchisees.
Who were staring down generational ownership transfer to simply sell.
So we're seeing some deal flow from from that dynamic.
Okay.
Very helpful. That's it for me thank you.
Thanks, Thanks, John .
Nothing further in the queue at present Pleasant reminder, that star one on your telephone keypad to ask a question.
As we have no further questions I'll hand back to the management team for any closing remarks.
Well. Thank you everyone for attending an astoundingly long 29 minute four corners conference call, we won't let that become our practice. We are here for questions. If anyone would like follow up thank you for attending.
This concludes today's call. Thank you very much for your attendance you may now disconnect your lines.