Q1 2022 Four Corners Property Trust Inc Earnings Call

Hello, and thank you for your patient today's call will begin shortly.

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Hello, everyone and a warm welcome to the F. C. P. T first quarter 2022 financial results conference call.

My name is Lydia on Dolby you operate today.

If you'd like to ask a question at the end of the presentation. You may do so by pressing star followed by the number one on your telephone keypad. It's.

It's my pleasure now enjoyed the dry dairy Morgan. Please go ahead.

Thank you Lydia during the course of this call we will be making 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 our assumptions are not a guarantee of future performance and some will prove to be.

You are correct for a more detailed description of potential risks. Please refer to our SEC filings, which can be found at F. C. P. T Dot com all the information presented on this call is current as of today April 27th to 'twenty 'twenty. Two in addition reconciliation to non-GAAP financial measures presented on this call such as <unk> can be found on the.

Company's supplemental report also available on the website and with that I'll turn the call over to Bill. Thank you Gerry Good morning. Thank you for joining us to discuss our first quarter results I'm going to make introductory remarks, Patrick warning will review some details around our acquisitions in the pipeline and then Jerry will discuss the financial results in summary, we continue to have industry leading.

Actions at 99, 7% for the quarter and occupancy remained at 99, 9% of restaurant and other retail tenants are experiencing topline performance often above 2019 pre pandemic levels.

We also acquired 18 properties in the fourth first quarter characterized by low rents and high quality tenants and we remain highly confident were aligned our portfolio with best in class operators at attractive rent levels.

We reported first quarter <unk> 41 per share, which represents an 8% increase year over year moving onto our tenants' performance restaurant operators continued to have strong results in the most recent quarter quick service restaurants are operated at approximately 122% of 2019 weekly levels.

And casual dining is operating at approximately 103%. According to bear its most recent weekly restaurants survey reported April 25th.

As mentioned, we acquired 18 properties in the quarter for combined price of $42 million at an initial cash yield of six 7%.

Yeah.

The acquisitions represent strong tenant credit profiles 16 of the 18 leases are with corporate operators and seven are ground leases, where F. CPT owns the land and the building would revert to F. Cpt's ownership. If the tenant were to vacate the first quarter's investments include one new brand, bringing us to a total of 113 brands in the portfolio.

Turning to the balance sheet, we have raised over $186 million of capital year to date to support our investment programs. This includes the closing of $825 million private note that funded in March but was thankfully priced last December at a three 1% coupon. We also agreed to issue $61 million of equity via forward.

All agreements, which we expect to settle over the remainder of 2022 to fund acquisitions in March Fitch announced an upgrade about gpt's debt rating to triple B flat with a stable outlook as Jerry will further describe we expect this will lead to a reduction in interest expense on our existing term loans and credit facility as well as future private note and bond.

Racing.

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 discussing the cap rate environment, and our acquisition mix for Q1.

We've spoken in the past about the advertising and cap rates, we observed in 2021, those trends and pricing have persisted so far into 2022 as well to the point, where compelling returns on quick service properties with national brands and quality markets or less frequently available to us there are still a few in our 2022 pipeline, but to us when cap rates for franchisee quick service.

Operators approach government bond yields it makes sense to focus our efforts and more accretive sectors until those cap rates normalize.

We are of course glad to see the private market valuing assets that comprised a significant portion of our portfolio at cap rates in the four to low 5% range I would just quickly now that <unk> and fast casual makes up 10% of VAT Cpt's right Raul.

Fortunately due to the wider set of retail Subsectors are platform now pursue as we were able to shift our acquisitions team to closing deals within casual dining medical retail and auto service.

For the quarter casual dining accounted for 51% of our new investments and medical retail was 33%. We closed on one auto service property in a handful of out parcel properties leased to other service oriented retail.

Looking at our pipeline for the rest of the year, we've built out a stable of properties with high quality tenants and well located real estate.

Our yields remain consistent with prior acquisitions, the pipeline sector mix for restaurants auto services and medical retail will likely shift a bit from Q1 as we expect the auto service to be a greater contributor for the full year similar to what we saw in 2021.

As previously mentioned the net leased asset pricing, we've observed year to date has been consistent with 2021 levels that said our view is rising interest rates should be a factor in how salaries price assets. While we are still waiting for that price relief to occur in at least in recent weeks. We have started to see early signs of modest movement in cap rates. We will see in time is that dynamic holds.

To further improves.

Regardless FCB T has been able to maintain price discipline over the past several years and what do you have any real cap rate compression.

Our spreads continue to have some cushion in that.

As we further build out the pipeline will remain prudent in selecting new opportunities carefully.

On our last call, we mentioned that we would take advantage of disposition opportunities, especially where we can simultaneously improve the portfolio.

We closed the sale of the Bob Evans property at a four 5% cap rate earlier. This month the store sales volumes underperformed the brand average and so removing it from our portfolio such attractive pricing was particularly compelling we.

We have several other properties that should close this quarter at similar pricing or slightly higher cap rates, we recognize the strong demand for our properties provides us an alternative source of capital and validation of our portfolio quality.

One final reminder, here historically Q1 has been our lowest volume quarter of the year. For example, in Q1 2021, and 2020, we closed on $34 million and $36 million of acquisitions, respectively.

Ended up being 13% and 16% of our full year volumes.

Now turning to Jerry for a discussion of our portfolio and financial results.

Thanks, Pat I'll.

I'll first start with a couple of the standard comments I'd make we generated $45 8 million of cash rental income in the first quarter. After excluding $1 1 million of straight line. Another noncash rent adjustments, we reported 99.7% collections for the first quarter and there were no material changes to our collectability or credit reserves in the quarter nor any.

Sheet impairments on a run rate basis current annual cash base cash base rent for leases in place as of the end of the quarter is $178 2 million and our weighted average 10 year annual cash rent escalator remains at 1.4% cash G&A expense, excluding stock based comp for the quarter was <unk>.

$3 8 million and consistent with our comments on our last call. We continue to expect that cash G&A will be around $15 million for the year for.

For the first quarter, we estimated 10 tenant rental coverage to be four six times for the 77% of the tenants who report financial results. This compares to four four times in the fourth quarter and continues to highlight how low F. CPT rents are.

As Phil mentioned, we have sold approximately $61 million of equity based on the initial weighted average forward price of $27.28 per share through forward sale agreements under our ATM program. We expect to draw. These funds later in the year as needed to fund acquisitions and similar to last quarter. This equity raise is greater than the.

<unk> volume in the quarter, which lowers our leverage with respect to that activity and sets us up well to maintain our leverage target range of five 5% to six times net debt to EBITDA in the quarter was five seven times and pro forma for the forward equity. We're at approximately five three times we ended the first.

With $308 million of liquidity comprised of $58 million of cash reserves and full availability on our revolver.

Finally, we are pleased by the recent rating upgrade from Fitch from Triple B minus to Triple B flat Fitch highlighted in their announcement that the upgrade was due to the quality and performance of our portfolio, including during the pandemic strength of our financial position and our commitment to conservative capitalization policies.

Pursuant to our credit facility agreement as Bill mentioned, if we achieve our second investment grade rating from either Moody's or S&P, we will save at least $1 million per year in interest expense on the term loans by switching to a rating based pricing grid. We also expect to benefit from lower.

Spending on the revolver and on future private note issuances, thanks, and with that I'll turn it back over to Lydia for Q&A.

Yeah.

Yeah.

Lithium.

Thank you.

If you'd like to ask a question. Please press star followed by one on your telephone keypad now.

If you change your mind Staphylococci when preparing to ask your question. Please ensure your device unneeded lately.

Our first question today comes from Nate Crossett of <unk>. Your line is open.

Hey, good morning, guys.

Good morning, the question.

And a question for Jerry.

Where did you guys raise I guess 10 year debt today.

I know you kind of talked about the recent credit rating and is there another credit ranging from one of the other agencies eminent or what.

What are the what's the process at the other ones.

Yeah.

I won't comment on current pricing because it varies greatly but you know treasury rates are up spreads are up so it's probably.

It's clearly higher than where we were today.

We don't comment on on an ongoing activity, but you're exactly right.

Next step for us would be to get a second rating from either Moody's or S&P. We've we've been in contact with both agencies. Since we came into inception in 2015 at no one know them well.

Okay. That's helpful.

The comment on the pipeline it kind of sounded like I guess, you mentioned, how Q1 was light in the last two years or so.

I'm reading that as we should maybe see a ramp in the next two coronary non deal flow is that kind of what you guys are signaling by saying that.

I think I would say Nate that that's been what's happened historically, obviously this is a more volatile environment than most years, but we do feel like there's a reasonable chance that the second half of the year provides us with some pretty interesting.

Opportunities, especially in the event that our equity multiple hangs in where it is right now.

Okay.

And I think there was a comment on cap rates I mean that makes sense.

I mean, depending on what you're buying but.

It was mentioned that you are seeing some evidence of.

Cap rates, moving and maybe related to rates like is there any way you can kind of quantify that or.

When do we kind of need to see.

Maybe moving on.

Yeah.

I would just say that in the last couple of weeks in literally the last couple of weeks need we found a few opportunities that I would describe as.

We had been hanging around the hoop on deals where they had the seller had gone with a more levered buyer and is that levered buyers that repriced.

Oh.

You know the original buyer dropped out and we were able to pick up properties on a rebound.

Okay. Okay. That's helpful. Thank you.

Yep.

Our next question comes from Anthony <unk> of Jpmorgan. Please go ahead.

Yeah. Thank you I'll just follow up on the last comment.

Because there was going to ask as well like what kind of needs to happen to see cap rates start to adjust here and it sounds like maybe levered buyers.

It could be part of this can you comment on just how prevalent those are in the market you know maybe how sensitive they are and just your own deal pipeline a little bit more more color around the types of things you are saying.

Yes, so depending on what leverage.

LTV you assume Anthony if you run the math on a 10 year basis.

Holding the equity IRR constant.

And you look at the change in base rates and spreads from November to today.

Cap rates need to go out 60, 70, plus basis points for you to hold the equity rate of return constant.

Not seeing anything like that.

What I would say is it.

At some point it becomes math.

The buyer needs to get that.

You know.

Banks reference widely published reference base rates and as Jerry mentioned and I will concur, our credit spreads are out too. So youre just either the equity holder needs to accept a much lower rate of return or the asset level pricing must change and so.

We've begun to see that I think we've begun to see it where.

Folks have larger portfolios and and they can't close them imminently.

Theres been more conservatism in the pricing.

Okay, Thanks greenhouse because as Pat mentioned.

Yeah, So, let's say it would be great to see since as Pat mentioned, it's been very competitive over the last couple of years post COVID-19 .

Alright, and then I remember a couple of quarters ago. You had mentioned just a lot of a boy in from the restaurant operators looking for new sites and being an expansion mode. Do you feel like that's still the case due to how do they feel about their businesses. These days these days and expanding and just what are you seeing on that.

Outside.

Yeah, I think it is still the case.

I would say that the pressures for construction cost and the pressures for labor.

Our mitigates to that enthusiasm, but I would still say that brands are looking to grow with.

With those two important caveat that construction costs are substantially higher than they were two years ago and labor is expensive and hard to find.

Okay and then last question for me just on your $42 million of deals in the quarter.

The Walt in the in the Sevens seemed a little on the lower side of traditional types of deals can you talk about just you know how how you thought about those.

There are positive Mark to market did you feel like you are compensated for that just any thoughts there.

Yeah, So I would say that we've been incredibly consistent since our first acquisition that we score all our properties in a very consistent way, we've taken tens of thousands of properties through our scoring methodology and term has a waiting and so in order for us to get comfortable buying.

Our property with less term other factors in that model need to be strong.

And I would say that is exactly how we've done it from the beginning and so where you have years, where we were.

Quarters, where term is less.

You should feel confident that other factors are performing strongly.

And that's how we look at the world. Its term is an important factor, but it's one factor and there are other important factors like the level of rent the strength of the brand how good the lease terms are et cetera et cetera.

Okay, great. Thank you.

Thank you.

Thank you as a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad now.

Our next question in the queue comes from Wes Golladay of Baird.

Your line is open.

Hey, Good morning, guys I wanted to go back to the dispositions can you quantify the size of the bucket of the call. It the noncore low cap rate assets and who are the buyers. This 10 31 money that needs to be put to work.

Yes, we don't give acquisition or disposition guidance, but we havent had dispositions for the last couple of years. So the fact that we're talking about it means that we think it will be notable.

And what I would say is it's interesting that Bob Evans.

Don't exactly know of course, what the buyers intentions are.

But the low cap rate.

Yeah.

Which is important.

We're able to have significant accretion from our purchase price, but overall since we focus on low rents the property purchase price was under $2 million. So my presumption is that buyer is going to redevelop that property into another brand now that being said that that speaks to what's happening in construction costs because buying.

Our property and remodeling it is of course, much less expensive than ground up construction.

Got it and then.

Looking forward do you have any near term changes I guess in store for the capital structure for funding deals cost of equity is a much more favorable now for you and the cost of debt has widened and there is a little bit more economic uncertainty at the moment. So would you lean in a little bit more on equity going forward.

I think that's a reasonable assumption.

Got it thank you and consistent with what we've actually doing over the last six months too.

And kudos to Jerry for pricing a bond deal before rates moved.

Okay.

Yes.

With you. Thank you.

Next question comes from John <unk> of Ladenburg Thalmann. Please go ahead.

Good morning.

Alright, let me following up on the earlier question on kind of a lease lease term and acquisition holding all of the other factor. If you look at constant what's kind of the broad.

Cap rate spread for some of these kind of sub 10 year.

Lease term assets versus something with kind of more of a traditional sale leaseback lease duration.

Sure.

I would say that it is.

In the 2030 basis point range.

But I would also point out that.

You know what was traditional 10 years ago of non IAG being you know 15 to very often 20 years and investment grade very often being 15 years, but certainly 10 has changed over the last 10 years and all.

Note that darden.

Darden, obviously IAG has sold a number of properties recently.

In the 10 31 exchange market with primary lease terms of five years, so you're you're just not seeing.

As many.

15 to 20 year lease terms as you had historically.

So what was traditional may not be available in the market today, but.

But I would say that we feel like we are being well compensated.

It's helpful that we don't have to put.

Property mortgages are on on individual properties that that.

Makes shorter lease term acquisitions that are very sensible harder to do they're harder to finance the property level and then I would also say it was 1000 properties and virtually no vacancies.

This is a it's a manageable risk for our portfolio.

Okay.

And then moving onto the balance sheet.

How are you thinking about the floating rate portion of the term loan that you have today.

It kind of an ideal time to be swapped that out just because of the uncertainty.

It can kind of weigh on how people are thinking about that portion of a penny of interest cost or is it something that youre kind of comfortable with.

Given the size.

Yeah.

Yes, John .

John just to.

Remind us where 350 are hedged on the 400 million of term debt. This year and next year, you Youll see in our supplemental and a footnote we communicate the hedging that we've done in years.

After that we're hedged to some extent all the way out through 2028. So we've we've taken some interest rate risk off the table on those term loans, even though they renew during that time period since obviously with variable rate bank loans. Its a different process to put the debt in place versus the hedges. So we feel like we've done a good job of.

A mitigating risk remember our policies are to be predominantly fixed since our ink. Our rental income is fixed at one 4% on average a year.

I guess that one notch higher level.

Since inception, we've essentially been fully hedged.

I mean, the 12, 5% when does that answer your question are there any.

So but.

I would just say that this.

This is going to go I'm, sorry, 5% unhedged alright.

Alright for a short period of time here. So I mean is that something you would look to potentially address near term or is it.

I mean, you kind of comfortable with that.

Well why don't we take this question off line because I.

I think we are actually.

Virtually entirely hedged and as we enter into new swaps as time goes by.

We would expect to be almost.

Charlie hedged going forward.

Okay.

The next question and the key comes from Sheila Mcgrath of Evercore.

Please go ahead Sheila.

I guess good morning, I just wanted to ask you on your comments on that highly levered buyers.

Do you think that there are more this will give you more opportunity because interest rates are higher for them or do you see evidence that the loan to values that they're able to.

Obtained from lenders have reduced at all.

Okay.

I wouldn't say Sheila that the the ability to push LTV is down perhaps slightly.

What I would say is as we were looking at the competitive environment last quarter.

And at the end of last year I was very concerned.

A number of private equity firms were building that lease groups and they typically use far more leverage than we were.

We do and so I was concerned.

That that would create a competitive dynamic.

Of course.

It makes the existing assets that we own more valuable, but would make acquisitions, a little bit harder and I guess, what I would say is as rates have gone up.

They will struggle to make their levered leveraged driven returns pencil and so either they will be less effective in deploying capital or cap rates need to go up.

Okay. Thank you.

Thanks Sheila.

As a reminder, if you'd like to ask a question. It staff by one on your telephone keypad now.

We have no further questions in the queue at this stage, so I will hand, the call back over to the management team for closing remarks.

Thank you Lydia and thanks, everyone for joining us on the call today to the extent folks have further questions. Please let us know.

This concludes today's call. Thank you for joining you may now disconnect your line.

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