Q3 2022 Four Corners Property Trust Inc Earnings Call
Ladies and gentlemen, Hello, and welcome to the F. C. P. P third quarter 2022 financial results Conference call. My name is Maxine and it'll be coordinating the call today. If you would like to ask a question. During the presentation. You may do so by placing stuff they'd buy one I know Ted I think he put them in alcon.
C J P. Morgan to begin Debbie. Please go ahead when you're ready.
Thank you during the course of this call we will make forward looking statements, which are based on beliefs and assumptions made by us for actual results will be affected by known and unknown factors 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 for more detailed description of some potential risks. Please refer to our SEC filings.
Which can be found on our website at <unk> Dot com all of the information presented on this call is current as of today November 2nd. 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 on our website and with that I'll turn the call over to Bill.
Gerry good morning.
Thank you for joining us to discuss our third quarter results I'm going to make introductory remarks, Patrick who will review some details around acquisitions in the pipeline and then Jerry will discuss the financial and capital results. The existing portfolio continued to perform exceptionally well with rental collections at 99, 8% for the quarter.
Occupancy remaining at 99, 9%.
We reported third quarter, <unk> 41 per share, which represents a 5% increase year over year.
We grew cash rental revenues 12, 7% on a year over year basis, including the benefit of rental increases and $236 million of acquisitions over the trailing 12 months. This included the acquisition of 26 properties in the third quarter for $70 million at an initial cash yield of six 3% reflecting rent.
Credits at closing and near term rent increases or six 2% on rents in place as of September 30.
23 of the 26 acquired properties, our corporate operated and we remain highly confident we are aligning our portfolio with best in class operators at attractive rent levels 11 of the properties, where mall out parcels with strong operators top brands in 12 of these are ground leases further evidenced the low rents in place.
Patrick will soon discuss the investment environment in more detail, but we continue to see acquisition pricing improve in response to the higher cost of capital environment. This has been especially acute in the last month.
The higher interest rate environment became more entrenched and sellers expectations on cap rates.
We are actively bidding on portfolios 50 to 100 basis points above where they would have priced a few months ago. We are already seeing momentum this shift in pricing in our Q4 investments, but we note that in many circumstances. There is a delay between price agreement in closing.
We have also in selective cases readdress pricing on properties in our pipeline.
Since inception, we have run this business sensitive to our cost of capital and we've been careful to align incentives to this goal for example, our acquisition team has not paid on acquisition volume.
We have a team based approach to acquisitions and we don't provide acquisition guidance. This has allowed us to keep a clear head when markets are in flux.
In the quarter. We also sold four properties for a combined sales price of $8 6 million, representing a five 5% weighted average cash capitalization rate the strong demand for our portfolio of properties provides us an alternative source of capital and validation of our portfolio quality.
Moving on to our tenants' performance restaurant operators continue to have strong results in the most recent quarter. Although many are expecting a downturn and focusing on keeping meals affordable which has put pressure on pricing quick service restaurants that are our operating approximately 120% of weekly sales levels and.
Dining are operating approximately 103% of weekly sales levels as compared to 2019. According to bears most recent restaurant survey reported on October 24th.
Our estimated EBITDAR to rent coverage stood at four times for the 75% of our portfolio that report. This statistic. We believe that four times coverage is amongst the strongest within the net lease industry.
This is when we reflect on the importance of rent setting and how that ultimately leads to stable landlord cash flows even in challenging economic environments. These high levels of coverage provide a cushion for periods, where inflation impact store level performance.
Turning to the balance sheet, we raised $79 million of equity in the third quarter at an average price of $28 nine.
Per share to support our investment program and Delever.
And Additionally, the $8 6 million of dispositions helped fund our pipeline in the quarter at accretive rates.
We've looked at dispositions more often in and Opportunistically in 2002 than in prior years.
We would expect to continue utilizing dispositions as an alternative capital source to raising debt or equity in certain circumstances.
Last week, we also announced the amendment to our credit facility, which reduced pricing and extended maturities by five years on $150 million of existing term loans and raised $30 million of additional proceeds thanks Gerry.
Our leverage remains conservative and our debt maturities are fully staggered with the first maturity of $50 million not due until June of 2024.
With that I'll turn it over to Patrick.
Thanks Bill.
Like to start by discussing the sector exposure of closed investments in Q3 for.
For the quarter restaurants accounted for 52% of our new investments Auto service was 22% medical retail was 19% and the remaining six comprised about the retail.
Turning to the cap rate environment, there has been a significant shift from Q2.
Since April we've been observing a general softening of the market and sellers expectation on cap rates. However over the past 10 weeks to the momentum and that trend has accelerated considerably the rising borrowing cost extend out the pool of potential buyers for at least both on a local and an institutional level as a result of the reduced competition, we're seeing some very interesting investment.
And as many at going in cap rates near or above 7%.
To be clear, though we think that now at the time to be particularly prudent and selective on new investments as we consider where to deploy our capital we think about one how well the tenant's credit profile or the sector that they operate and fits within Svt's previously established criteria and two whether the cap rates still makes sense in a high interest rate environment.
So we are remaining highly focused on sticking with the niche we know best and protecting positive investment spreads will continue to exercise price discipline with what we introduced in the pipeline.
Bill mentioned this earlier, but we are now regularly submitting offers at cap rates that are 50 to 100 basis points higher than where those assets would have priced earlier this year.
Some of those deals are already in the pipeline and are expected to close in the coming months.
Speaking of the rest of the year, we've built out a pipeline of properties with high quality tenants and well located retail corridors, we're seeing more and more at least backing out parcel opportunities. This influx is directly related to the rise in debt costs, making real estate sales are more attractive capital source on a relative basis.
We anticipate that those opportunities will continue to present themselves into 2023.
On the disposition front as Tom mentioned, we completed the sale of four properties in the quarter for $8 $6 million at a five 5% cap rate.
Those were comprised of an applebee's, two Burger kings and apologize.
These stores were specifically selected as disposition candidates based on underperformance versus their respective brands or store level profitability.
We are particularly pleased with the strong cap rate achieved while still pruning our portfolio for quality.
To cap off my comments I'd reiterate that we're reacting to the changing landscape for net lease in real time, and we're optimistic about our outlook for Q4 and 2023.
Now turning to Jerry for a discussion on our portfolio and financial results.
Thanks Pat.
Generally at $47 6 million of cash rental income in the third quarter. After excluding $1 1 million of straight line and other noncash rental adjustments, we reported 99, 8% collections for the third quarter no material changes to our collectability of credit reserves, nor any balance sheet impairments in the quarter.
On a run rate basis, our current annual cash VAT cash base rent for leases in place as of September 30th is $185 5 million and our weighted average five year annual cash rent escalator is 1.44% cash G&A expense, excluding stock based compensation for the quarter was $3 7 million.
Presenting seven 8% of cash rental income.
Turning to the balance sheet, we are well capitalized to fund growth as Bill and Pat mentioned, we raised $79 million of equity via our ATM program in the third quarter at an average price of $28.09 per share.
At September 30, we held $37 million of cash and had $2 6 million shares under forward sales agreements with anticipated net proceeds of $71 million upon settlement.
This $71 million is made up of $48 5 million of forwards that were entered into in the third quarter and $22 5 million of forwards from prior quarters, including the $250 million of Undrawn revolver capacity, we start the quarter with over $358 million of available liquidity.
On October 25th we announced an amended $680 million bank credit facility and I wanted to highlight three aspects of this refinancing Firstly amendment extended $150 million of term loans due in 2023 and 2024 to mature in 2027 and 28 existing term loan tranches due in 2025 and <unk>.
26 were unaffected by the amendment overall, our first step maturity is now $50 million of private notes not coming due until June 2024, we remained committed to layering and and and and using conservatism on our debt maturity stacking.
Second we converted the facility from LIBOR to sulfur and improve the credit margin by five basis points to 95 basis points over adjusted sulfur on the amended term loans and finally, we increased the size of the facility by $30 million for additional proceeds to fund Q4 investments. Thank you to all of them.
Our existing and new Bank partners, who reiterated their support for F. C. P T and this transaction.
I'll remind everyone that we have an ongoing programmatic interest rate hedging program, where we extend hedges on a regular basis to fix the rate on much of the variable rate term loans, we are hedged on $325 million of the $430 million of term loans currently at an average all in rate of 279% <unk>.
<unk> the credit spread for 2023 overall, including the $575 million of fixed rate private notes with issued.
Four corners has fixed the rate on over 89% of our outstanding debt more information all all of our term loan interest rate hedges can be found in the investor presentation also posted on our website yesterday.
Final capital comment as also disclosed in the earnings press release, we have $75 million of forward starting swaps in place effectively fixing the 10 year Treasury base rate at approximately two 6% for a contemplated longterm debt issuance with respect to overall leverage our net debt to EBITDA in the third quarter was five five.
<unk> and our fixed charge coverage remains at a healthy four nine times.
Pro forma for settling in deploying the remaining equity forwards and for the increased credit facility described above we estimate our leverage is approximately five four times well below our target of six times leverage and with that we'll turn it back over to Max aim for Investor Q&A.
Yes.
Thank you if you would like to ask a question. Please press star one and there's no. Thank you.
Now if you do change your mind, Please press star two.
So ask your question. Please ensure your line is muted.
Our first question comes from Tony Howard.
From JP Morgan. Please go ahead. Your line is now open.
Great. Thank you and hi.
I guess first question Bill you had mentioned when you talked about the 50 to 100 basis point move in yields you had talked about I think you mentioned portfolios and so just wondering if that's a.
That type of movement is only being seen like for larger transactions or.
Are you seeing this just across everything.
Across the board.
Across the board.
Okay.
And can you talk about just you know.
The size of the pipeline and whether.
This movement and you're seeing.
Buyers kind of drop out of the pool, if that gives you an opportunity to perhaps do more here.
<unk> managed to volume, but just wondering how to size like sort of this movement and your ability to lean into it.
Yeah, I think what I would reflect is the spring. We said we think the second half of the year will provide a more target rich acquisition environment and so we modulate it our pipeline.
So that we'd be able to take advantage of pricing in the second half of the year and that's worked out.
Really well.
So do you think the fourth quarter will be.
Stronger or how should we think about the near term.
Yeah.
I really don't.
I don't you know we're going to own. These buildings for 50 years. So I don't I don't think about it on a quarterly basis.
But we feel very good that we have an acquisition pipeline that's priced.
At or very close to market and we are we as I mentioned, we've readdress pricing of some of the properties in our pipeline.
And we're very happy with where we're situated and we're very happy frankly that last year, we didn't drop into the mid fives cap rates as many of our competitors did so I think our prior.
Price discipline.
As I mentioned modulating R. R.
Our our bidding on assets in the spring has set us up very well for.
The remainder of this year and the beginning of next year.
Okay, and if I could just ask one thing on just the odd.
On the tenant side and your thoughts I think historically in recessions you'd see casual dining.
It hit with.
People's discretionary income pulling back and now there's delivery and the mix do you think that that ends up really buffering sort of the underlying tenant credit trends, if we get another recession or do you think delivery. Similarly, you know it was a.
A bit more of a discretionary items how are you thinking about just what happens in the sort of the next downturn if you will.
Yeah. So.
Darden has been.
Pretty conservative on delivery as a tenant in there most of them are casual dining brinker has as well frankly, but so we don't have a ton of delivery exposure and our rent coverage and casual dining has been.
Set at very conservative levels. So we.
We've been set up for more difficult times, just as a reminder, through Covid. We were collecting 99, 8% of our rents by June or July . So we have a very conservative portfolio built for difficult times and so.
To the extent that our capital.
Our cost of capital holds in there.
We think we have a very well positioned portfolio for.
Difficult macro environment.
Okay. Thanks for the time.
Thank you I appreciate the questions.
Thank you. Our next question comes from Rob Stevenson from Janney. Please go ahead. Your line is now open.
Good morning.
Bill.
Stronger non restaurants transactions, you're seeing better opportunities in one over the other or.
Better cap rates et cetera.
<unk> typically trades at a premium but even in <unk>, we're seeing really good stuff now in the mid to high sixes.
I would just reflect that having a broader aperture to our acquisition strategy is really paying dividends, because we're seeing really interesting stuff to do.
Across our three main verticals.
But the whole market has readjusted in pricing because frankly.
The cost of borrowing is is being affected across the board not just by any particular industry.
Okay and then other question it looks like you guys basically have about two quarters, plus or minus of acquisition funding available from the current unsettled forward deals your stock price has hung in there better than many of the peers do you become more aggressive here on fluor's to make sure you have capital in 2023 and no matter, what is 70 million plus or minus the right number there.
Or is it just as simple as the stock prices 28, and we'll do more if it goes to 22, we Walt how are you guys thinking about the right amount of forward equity to have in the in the current environment.
I think it's the second of the two arguments that you put forward.
We're price.
Price sensitive market sensitive and we try to be opportunistic as you saw us be opportunistic.
Now that were making it clearer in the summer when our stock price. We felt was an attractive funding source.
Thanks, guys appreciate the time.
Yes, great questions.
Okay.
Our next question comes from Linda <unk> from Evercore. Please go ahead Wendy Your line is now open.
Hi, Good morning, everyone and thank you for taking my question.
Thank you a question about <unk> acquisition cap rate.
You mentioned that the recent.
Improvement.
Computations where acquisition.
But you are right you are a.
Cash cap rates are actually below the ones you answered just now.
So I'm just curious is there any sense.
Thank you.
That decision Kathryn Miller.
Yep.
Two things one.
Just the mix in Q1 Q2, I think one of them was a six seven cap rate if I recall.
We tended to have it just the mix was higher.
And then.
Keep in mind that Q3 acquisitions or properties that we probably price agreed and you know May June 30 to 60 days of due diligence negotiating a purchase and sale agreement site inspections, environmental reports title and survey property condition reports roof inspections.
It takes some time and that is what causes your Q3 acquisitions.
To reflect a price set earlier, but as I mentioned.
Going forward, we've readdress pricing.
A number of properties in our pipeline and then what we're signing up now.
As at higher cap rates.
I would also mention that the Q3 properties are paid for with capital raised in Q1 Q2.
I would lastly, say that are reporting regime will allow you to see in real time.
<unk> more than our competitors where pricing is.
Okay, great. Thanks.
Yep. Thank you.
Thank you as a reminder, if you would like to ask a question. Please crystal today by Juan Thank you Pat now.
Our next question comes from the Donut mistake from Ladenburg Thalmann. Please go ahead. Your line is now open.
Good morning.
Yeah.
Just a quick question on kind of bifurcate, Okay got it.
As we think about the cap rate expansion, you mentioned kind of a 100 to 150 basis points. How much of that is stuff that was priced maybe of that six three level that is now above a seven cap and how much of that roughly speaking it's stuff that was kind of priced out of your target range that is now in a any more kind of attractive.
Area.
Because of that expansion.
Sure. So we said 50 to 100 basis points.
Youre trying to sneak 50 basis points in the us but related to the acquisition team that they need to work a little harder.
50 to 100 basis points Sean.
I would say, it's a combination right it's <unk> deals.
That they might have sold on the 10 31 exchange market earlier this year.
100 basis points lower now, there's agita around the capital markets and they want proceeds and they want surety of close.
Its deals that have been re traded from individual buyers who can't get financing.
It's.
Folks, who typically would rely on the high yield market to finance their business, who now are looking at net lease as an attractive alternative it's the whole gamut.
And so we're seeing really interesting stuff to work on we're very happy that we were.
Sort of slow playing it earlier this year to have plenty of capacity to execute our business plan. The second half of this year or the beginning of next year. So we feel really well positioned but John to your point, it's really a diverse range of acquisitions. Many frankly that we bid on earlier and were not selected.
And now they're coming back to us because they know we have the capital to close deals.
Okay apologies staying the bar.
That high on the acquisition side.
Maybe.
I appreciate it.
As you think about the 10 31 market is there a point you look back over the last six months, where maybe that demand has kind of broken or become a little bit more interest rate sensitive or is that even still bolt on the disposition side for you and maybe on the granular acquisition side is that still a.
A kind of very competitive.
Buyer on price that you potentially have to compete with aren't even sell to.
Yes. So we have had success selling we do compete with them, but I would just reflect that everyone has the same treasury rate.
Whether you're buying 10, 31, whether you're buying billion dollar portfolios. The same treasury rate applies and so we.
We have benefited by raising capital in prior periods at very attractive rates and that gives us dry.
Dry powder to make acquisitions.
I would also reflect that for 10 31 exchange buyers even borrowing in the mortgage market, which we don't do but 10 31 exchange buyers are typically pledging.
There are properties is in mortgages.
That those rates are now very high sixes or low sevens. So the ability to get positive leverage through financing is just not there and so.
It makes the REIT buyer more attractive counterparty.
Okay great.
Helpful. That's it for me thank you.
Yes. Thank you.
Thank you. This concludes our Q&A session for today, So I'll hand, you back to bill for closing remarks.
Well. Thank you everyone for joining our call. If anyone has any questions. Please reach out we'd be more than happy to help insurers.
Thank you ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.
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