Q2 2022 Four Corners Property Trust Inc Earnings Call
Yeah.
100% of the acquired properties are corporate operated and we remain highly confident we are aligning our portfolio with best in class operators at attractive rent levels.
We built the portfolio since inception to be conservative and not stretch on credit underwriting. We believe we are well positioned even in this challenging macro environment to continue to execute on our strategy.
Patrick will discuss the investment environment in more detail, but we're seeing a structural change pricing has started to improve in response to higher cost of capital and more counting any sellers, which should lead to a busy second half of the year.
Yes.
In the quarter. We also sold three properties for combined sales price of $12 8 million.
Representing a four 7% weighted average cash cap rate the strong demand for our properties provides us an alternative source of capital and validation of our portfolio quality.
Moving onto our tenants' performance restaurant operators continue to have strong results in the most recent quarter quick service restaurants are operating at approximately 115% in casual dining is operating in line with 2019 weekly sales levels. According to bear to the most recent weekly restaurant survey reported on July 18.
Of course, all of our operators are experiencing the effects of inflation on food labor and other input costs, which is pressuring margins.
Interesting inflation in grocery and at home food prices has outpaced inflation in restaurants for the past nine months. We've added a slide from Baird research to this quarter's investor presentation to highlight this trend Barrett estimates inflation in grocery stores of 11, 6% in Q2 compared to seven four.
Our percent in restaurant.
Sumer behavior is difficult to predict but generally a faster rise in grocery prices should provide restaurant operators flexibility to increase prices as well.
We note that June 1% increase in consumer spend at restaurants marks the fifth consecutive month of increased restaurant spending.
Turning to the balance sheet, we have raised over $186 million of capital year to date to support our investment program. This included the closing of $125 million private notes that funded in March but it was priced last December at a three 1% coupon.
And $61 million of equity via via a forward sale agreements, we settled $4 6 million of this forward in the second quarter and expect to settle the remaining 50 $56 million over the next.
No.
Period of time to fund acquisitions. Additionally, the $13 million of dispositions helped fund our pipeline in the quarter at accretive rates.
Finally, a few important comments on the team over the last three months, we have hired two additional investment analysts to the acquisition team a new associate General counsel and HR manager and an operation director and have added new rules and property management.
Along with additional investments, we are making in our financial and property systems that improve automation and efficiency. This staffing extensive set us up well to support continued portfolio growth with that I'll turn it over to Pat.
Thanks, Bill I'd like to start by discussing the cap rate environment, and our acquisition mix for Q2.
We spoke on the last call in April about the tightening Capex, we observed in 2021 and how that trends have held steady in the first four months of 'twenty two.
He also stated that we are seeing the initial signs of that momentum swelling and an expectation that capex would moderate as borrowing costs rise.
Over the past three months, we've witnessed upward movement in cap rates.
We're seeing transactions come back to us or other potential buyers cannot secure debt financing.
And the decrease in competition is allowing us to increase our pipeline for the coming quarters, while also being more selective in our asset screening.
We're pleased with the state of our pipeline and in particular the opportunities that has grown for us over the past month.
Our CPT maintain price discipline over the past several years and avoided any real cap rate compression any assets. We acquired as a result, our investment spreads continue to be positive.
We will continue to exercise price discipline with what we introduced to the pipeline.
We've also seen increased engagement from mall and shopping center owners an out parcel transaction.
Ample of this 11 property $33 million out parcel transaction that we announced in June with period.
The portfolio includes eight restaurant properties.
We also announced a seven property out parcel portfolio in Texas earlier, this month for $17 million, which includes six restaurant properties.
Expect the $50 million of combined out parcels will close mainly in the third quarter and we are actively engaging other parties to continue building out the out parcel pipeline.
For the quarter Auto service accounted for 63% of our investments medical retail for 23% and the remaining 13% consisted of casual dining and well located investment grade bank branches.
Turning to our pipeline for the rest of the year, we built out a stable of properties with high quality tenants and well located retail quarters.
Pipeline sector, and extra restaurants auto service and medical will shift in one line with passengers in the second quarter as deal timing led to a higher number of auto service transactions closing in Q2.
On the disposition front as Bill mentioned, we completed the sale of three properties in the quarter. These.
These are comprised of our Bob Evans, and an olive garden, both at four 5% cap rate as well as the franchisee operated outback at a 5% cap rate.
Each of these stores sales volumes underperformed the brand average removing them from the portfolio such attractive pricing was particularly compelling.
Just one final reminder, historically Q1, and Q2 had been lower acquisition volume quarters in the second half of the year. For example in 2019, 2020 one each year's first six months represented approximately 31% of total closings for that year, while we don't provide acquisition guidance.
Looked at the pipeline, we do expect the dynamic of higher volume in the second half of the year to continue that.
Now turning to Jerry for a discussion of our portfolio and financial results.
Thanks, Pat we generated $46 8 million of cash rental income in the second quarter. After excluding $1 1 million of straight line and other noncash rental adjustments as Bill mentioned, we reported 99, 9% collections for the second quarter with no material changes to collectability or <unk>.
Credit reserves or any balance sheet impairments.
On a run rate basis, our current annual cash base rent for leases in place as of June 30th is $181 2 million at a weighted average five year annual cash rent escalator is 145%.
Cash G&A expense, excluding stock based compensation for the quarter was $3 7 million, representing seven 8% of cash rental income for the quarter.
For the second quarter, we estimated tenant rent coverage was maintained at four six times for the 75% of our tenants will report financial results, which continues to highlight how low F. CPT rents are.
On the capital front as Bill mentioned, we have entered into equity forward agreements in the first half of the year totaling $61 million based on the initial average forward price of 27.
Dollars 28 per share we settled the $44 6 million in the second quarter, and we will expect to settle the remainder.
In the second half of this year to fund acquisitions net debt to EBITDA for the quarter was five seven times pro forma for settling in deploying the remaining equity forwards. We estimate our leverage was five six times and well within our range of five five to six for our leverage target.
In May we received a second investment grade rating of <unk> from Moody's. In addition to the upgrade in Q1 from Fitch to double to Triple B flat. The second rating allows us to decrease the credit margin on our existing term loans and our revolver by 25 basis points. This will lead to at least $1 million in annual interest.
<unk> expense savings on the term loan incremental savings when we use the revolver and will benefit future private note and bond offerings.
We ended the second quarter with over $267 million of liquidity, comprising $17 million of cash and full availability on our $250 million revolver, we remain focused on maintaining a conservative balance sheet, extending and layering our debt maturities.
And thinking thoughtfully about a repayment obligations, our next debt maturity of $50 million.
Not due until November of 2023.
And with that I'll turn it back over to Sam for Investor Q&A.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press stuff on a biopsy.
And for <unk> to ask a question. Please ensure your line is only issued locally.
Our first question comes from Sheila Mcgrath of Evercore Sheila Your line is now open. Please go ahead.
I guess good morning.
Bill I was wondering if you could help us understand the differential on cap rates on acquisitions versus the asset sold I see the acquisition lease term was like.
Just under six years and the asset told was 12 years would you say that a lot of the differential in cap rate is driven by the remaining lease term.
I think sure Theres some of that but what I would say is.
The assets that we sold.
We are relatively reactive we don't sell many assets, we get incoming inquiries.
We only accept those at very strong pricing and then what we've been purchasing.
Have had moderate lease terms.
But we score of the property Holistically.
And the score quite well because the rents are low in many cases, they are ground leases and they have good corporate credit.
Okay, Great and then on the.
The PV and the other out parcel transaction that you mentioned are most of those ground leases are they.
Improvement.
Yes, they're mostly ground leases.
Okay, Great and then I guess last question for Jeff.
Oh, sorry go ahead.
<unk>.
So much about these other personal transactions.
Is the low rents.
And the corporate operations.
Tenants, so we listen to those very favorably.
Okay, Great and then on.
This one is for Jerry on the investment grade rating.
That helps the pricing is a line of credit I believe and maybe the term loan can you provide a little bit more detail on interest savings and did you get any benefit of that in <unk>.
Great. Thanks, Sheila, yes, we get a bit with.
With the second rating and with the Triple B flat rating from Fitch, we qualify on a pricing grid that reduced our margin on our all of our term loans by 25 basis points and also the revolver.
We started to benefit from that roughly the middle of the second quarter on our term loans, we didn't have any usage on our revolver in the second quarter and so youll see that continued benefit on the 400 billion of term loans for all of the third quarter and beyond.
Yeah.
Okay. Thank you.
Thank you Sheila.
Okay.
Our next question comes from Anthony <unk>.
Higher loan from J P. Morgan Anthony Your line is now open. Please go ahead.
Great. Thanks.
I guess Patrik you mentioned some cap rate movement in the last few months would you be able to put.
Maybe some brackets or numbers and maybe by product type kind of what the order of magnitude. It's been in and also maybe if you think that's when we're done or there is more to go there.
Yes sure.
I think.
Hard to place an exact amount because there are so many variables.
Leading.
Alluding to earlier.
Certainly.
You can be comfortable saying 15 basis points and 20 basis points.
But I think there was more of a dynamic of.
What this allows us to do from a quality filtering perspective, and making sure that we can even more stringent than what we're introducing to the portfolio versus just taking incremental.
10, or 15 basis points and then on your second question, Yes, we are.
Our view would be that there's more to come by.
We're waiting on what the fed does today and what the fed does the rest of the year.
And a lot of other factors in the macro environment.
Yeah.
The only thing I'd add.
Is that there is a delay.
You would between identifying a property doing due diligence is getting it under LOI purchase and sale agreement further due diligence and closing.
It usually takes.
Several months so.
We do is reiterate exactly what Patrick said that we're seeing.
Higher cap rates that allows us to be a little bit more selective.
But it will take months for that to filter into the announced results.
Okay, and then Bill you mentioned or talked to this a little bit too.
To Sheila's question, but just wanted to revisit the shorter lease ranks.
That you did this past quarter and you've done some of that in the past any way to.
Give us a sense as to.
What you kind of get in return like either your IRR is where you think yields go by doing some of these shorter duration deals versus if you were to do something like 10 years or something more down the fairway like that.
Well I think it really.
If something you can do when you finance at the corporate level, So we're not putting property mortgages.
On the individual properties.
Lenders are very focused on having lease ratio well past there.
Mortgage recruiting so we don't finance that way.
And then what I would say is you want to be very careful that you are selecting good credits with low rents. So the renewal probability is very high but we've had.
Very good success.
In.
<unk> high renewals.
Very very.
The usual circumstance, where a tenant hasn't renewed.
We have back filled with other tenants in some cases at much much higher rents, but maybe more of that.
These are.
One or two properties per annum.
But we've had very good results so far.
Okay, but is it the sort of thing where.
As opposed to doing something with a percent or two bump every year you feel confident that if it works out six yield goes to a seven or what's what's kind of like what are you kind of playing for there wouldn't look at it that way.
I wouldn't look at it that way most of the time of the tenants do have renewal options not always but very often they have five year renewal options.
So it's not we're not doing this to get a big jump on renewal that you can.
Five better tenants with better located real estate with low rents.
The shorter lease term the pricing is still pretty reasonable.
So you have to be confident in your ability to underwrite the renewal probability.
Got it I understand.
And then.
Last question just any.
Desire to increase.
Dispositions just given the execution you showed relative to the stuff you're buying.
I think youll see the last couple of years, we haven't sold anything.
You've seen us do a couple of sales this year, you'll see you'll see that continue through the second half of the year.
Theme will be very consistent which is pruning the portfolio.
Still getting very attractive cap rates.
Okay. Thank you.
Yeah.
Our next question comes from the line of RJ Milligan from Raymond James Your line is now open. Please go ahead.
Thanks, and good morning, guys. We've been hearing from some of your peers not just in the net lease space, but maybe elsewhere in retail that their expectations as the cap rates will continue to rise to the back half of the year. So maybe they're taking a little bit slower approach at least in the very near short term on acquisitions and I'm. Just curious if that's something that you guys are considering or thinking about.
Yes.
Yes, that's a great question.
And the history of the company, we've always tried to have as large of a pipeline.
As we could but being thoughtful about the quality going into this year, we felt like the second half of the year would be better and offer us fatter pictures to swing up.
So we were a little conservative earlier in the spring.
I think and as Pat mentioned, we have seen cap rates go up 15.
20 basis points at least in the last month or so we have become more aggressive on acquisitions.
And so we do agree that.
Maybe the last seven months of the year will be better than the first handful.
So that dynamic is definitely the case with us and as Pat said, it's not just pricing it's.
Quality of the portfolio are we how difficult it is to source.
And because we're well capitalized with low leverage and a favorable stock price. We do think this is the time to be a bit more aggressive.
And build the pipeline and the acquisition cadence into the second half of the year.
Okay. That's helpful and then.
Maybe you guys could talk about.
Competition out there four corners, obviously has a slightly different sandbox. They plan given the smaller price points more of a restaurant focus at least.
On the restaurant side and I'm, just curious what youre seeing out there given the move in interest rates the impact of the 10 31 market at all or what does the competition look like out there for <unk>.
Competing for assets.
I think I would highlight.
On one hand, the one off market.
Individual buyers are going to their banks and finding the mortgages on the properties are significantly more expensive than.
Six months ago, given what's happened in rates so.
Folks, who whose business was to buy using a local bank mortgage.
That is less attractive and then on the other hand, we had a lot of concern in the fall with new entrants from a private equity arena again, they use more financings. So their business is not nearly as attractive when the 10 years at <unk>.
3% and Theyre borrowing costs are in the mid to high fives. So.
We feel like the competitive environments.
For the more favorable and I would also say the sellers.
Going into this year had extreme confidence right. They felt like if they didn't get.
The price they want they would just hold out.
Another buyer would come in the next week and their financing was attractive.
So there were cash flowing a significantly now financing is react to higher rates of incremental cash flow is lower they've had buyers who are relying on the mortgage market walk away. So we've actually are doing a number of properties.
We call it rebounds.
What are they fallen out of contract with someone else and we've been able to acquire them.
More favorable pricing.
Yeah.
Great. Thank you guys.
Yeah.
Our next question comes from Jim <unk> from Ladenburg Thalmann. John Your line is now open. Please go ahead.
Good morning.
Just a couple of quick detailed questions for me I guess first off.
Our cash G&A expectation still at around the $50 million, mark or full year <unk>.
I'm sorry, John I missed the first part of your question.
I'm sorry.
Cash G&A expectations for this year are they still around $15 million.
That's correct.
Okay.
And then maybe just could you provide some color on.
The differential between the six 1% cap rate.
<unk> in the six four when all of the kind of credits and rent Escalations are factored in.
The exact details, but just kind of broad strokes, what's going into that 30 basis points.
Yeah, we just had an unusual.
Results. This quarter is this dynamic happens.
All the time, but it was 30 basis points was a little higher level much higher than it's been in the past. It's essentially when you buy a property, let's say in May and there's a 10% rent bumps that happens in August .
If you use the may rent it to six one if you use the August brand. It's a six four and were very often getting credit at closing for the differential so I think John most folks would.
Talk about it globally as a six four cap, but we wanted to make sure we were being conservative and pointing out the difference but.
It's basically very near term rent bumps.
Instances, where were credited for additional rent on the closing statement.
Okay.
And then maybe in terms of kind of in place tenant credit and even as you look in the acquisition environment are you seeing any kind of.
Yes.
Conservatism, if you will from tenants around some of these kind of recessionary concerns I know obviously.
It doesn't seem like it from some of the public names in the portfolio today.
Strong earnings, but yes.
Anything you're seeing out there that any kind of concerns about the health of the consumer or any impact on flow through to your tenants.
Yes, we are.
We're definitely seeing it in the marketplace just not in our portfolio I mean, if you look at.
Inflation.
Fuel prices, obviously has impact on dollar stores other retailers of goods.
So have supply chain issues.
Obviously gas stations with.
Very significantly fluctuating gas prices and the impact that has on demand and therefore their C store business.
We're seeing it across the board, but our portfolio.
Seems quite immune to it.
Feel like that's going to put us in a position where from a time management standpoint, we can be.
Very focused on acquisitions and not working out problem credits.
Okay.
And that's it for me thank you very much.
Thanks, Sean.
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Our next question comes from Wes Golladay of bad, whereas your line is now open. Please go ahead.
Hey, good morning, guys I wanted to look at the shorter term lease deals that youre doing are there a lot of tenant options with those deals.
Yes, typically theres multiple tenant options, usually two to three five year options with rent growth continuing on the option periods.
Yeah.
Gotcha, and I guess, maybe a quick question for you.
We are in a little bit more inflationary environment instead of like fed can't get the two it's more of a 3% plus environment. I guess, how are you going to approach the business. If you get more conviction that that may be the case.
It really doesn't have as much effect on us as you might think we don't use much debt before stock price hangs in there where it is it's still quite accretive for us to buy things and it makes it what we found is it makes it easier to.
To procure acquisitions as owners of assets, who finance at the property level are challenged to finance accretively.
And if you think about it I think one of the really interesting dynamics right now is at a very high level at least capital competes against capital.
Given the high yield market it competes against mortgage capital.
It's against equity multiples.
And historically when.
Old economy retailers, we're treating to private equity firms.
15 to 18 times multiples net lease.
Less attractive because of the private equity firm will pay for your business at a very high multiple when high yield.
It was 4%.
It was a very attractive source of capital versus.
Doing in at least the sale leaseback.
If you could get a mortgage on your property at 3% again very attractive compared to doing a sale leaseback of six 5%.
So.
We are quite excited that we're going into a period, where net lease capital at a very high level.
Is much more attractive on a relative basis than it has been in the last half half.
Half decade.
Post financial crisis.
Great. Thanks for the detailed answer.
Offer and a new framework.
Theres no further questions I would like to hand, the call back to bill for any closing remarks.
Thank you Sam I Hope you can tell that we're quite excited about the second half of the year and we'd be more than happy to do any investor outreach. Please reach out to a great. Thank.
Thank you everyone for their time.
Yeah.
Thank you everybody. This concludes today's call. Thank you for joining you may now disconnect your lines.