Q4 2022 Four Corners Property Trust Inc Earnings Call
Thank you for a patient's ladies and gentlemen.
The <unk> first quarter two financial results conference call will begin shortly.
During the presentation you have the opportunity to ask a question by pressing star followed by one type or keypad.
So for the patients.
[music].
Ladies and gentlemen, welcome to the <unk> quarter <unk> financial results Conference call. My name is Graham Miao BD moderator for today's call if.
If you would like to ask a question. During your presentation you may do so by pressing star one on pet when Keith.
I'll now hand, you over to host Gary to begin Geri. Please go ahead.
Thank you Glenn 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 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 potential risks. Please refer to our SEC filings.
Which can be found at <unk> dot com all the information presented on this call is current as of today February <unk> 2023. In addition reconciliation of non-GAAP financial measures presented on this call such as <unk> and <unk> can be found in the Companys supplemental report also on the website and with that I'll turn the call over to Bill. Thank you Jerry.
Good 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.
Jerry will discuss the financial and capital raising results.
The existing portfolio continued to perform exceptionally well with 99, 9% collections for the year ended December 31, and occupancy remaining at 99, 9%.
We reported fourth quarter, <unk> 41 per share and $1 64 per share for the full year, which represents 5% growth for 2022 over 2021.
We grew cash rental revenues 11, 4% on a year over year basis, including the benefit of rental increases and $286 million of acquisitions. In 2022. This included the acquisition of 42 properties in the fourth quarter for $120 million at an initial cash yield of six 6%, reflecting rents in place as of December .
31.
Yes.
33 of the 42 acquired properties, our corporate operated and we remain highly confident we are aligning our portfolio with best in class operators at attractive rent levels, Patrick will discuss the current investment environment in more detail, but in the fourth quarter. We continued to see acquisition pricing improve in response to the higher cost of capital environment.
The Q4 acquisitions average cap rate reflected that dynamic at six 6% versus six 3% in Q3 blended Q4 figure included deals priced earlier in the year prior to the shift in cap rates with more recently priced deals above the average for the quarter.
We note that sale leaseback transactions.
Have more appeal now to operators versus other forms of financing in recent years equity capital.
Term loan C MBS.
All have become more expensive in the last six months and this has led us to more opportunities and discussions with tenants looking to expand operations or monetize their real estate.
I wanted to note.
Two very specific but very minor headwinds we experienced in the quarter in regards to <unk> first our restaurants subsidiary experienced a much lower EBITDA margin in the quarter sales remained strong and in line with prior quarters procure experienced higher food and beverage labor utility and other services costs impacted by inflation.
Sure has already starting to see some relief in the increase in beef and other costs. So we expect this impact to moderate in the first quarter of this year.
The second minor headwind was higher interest expense, 90% of our one just over $1 billion of debt is fixed currently at a rate of 339%.
However, interest rates on the remaining 10% of our debt are variable and pricing increased on average by over 145 basis versus the third quarter. A reminder, to our investors that we think 90% fixed 10% variable rate debt is appropriate for our business and we benefited some quarters, but unfortunately, we were impacted in quarters like last quarter.
Our current all in rate as of quarter end is three 6%.
In the quarter, we sold one property for a sales price of $4 9 million, representing a gain of 600000 for the full year 2022, we sold eight properties for $26 million.
The strong demand for our properties provides an attractive alternative source of capital while also improving the overall quality of the portfolio.
Moving to our tenants' performance.
Restaurant operators continue to have strong sales results in the most recent quarter. Although many are experiencing pressure on margins as cost increases in food and labor are not fully passed onto the end consumer however, as I mentioned earlier, while discussing Carol it looks like restaurants, or seeing a slowing of commodity cost increases, especially meat prices sales.
Continue to hold up as restaurants are operating approximately 120% of pre Covid weekly sales levels and an approximately.
109% of last year's weekly sales levels. According to <unk> restaurant Survey reported February six.
Our estimated EBITDAR to rent coverage stood at four times for the 72% of our portfolio that reports. The statistics. This is amongst the strongest coverage within the net lease industry.
To reiterate a point, we make almost every quarter focusing on a low rent provides cushion when inflationary input prices impact store levels.
Turning to the balance sheet.
We raised $72 million of equity in the fourth quarter at an average price of $26 70 per share.
We also raised $30 million of incremental debt proceeds as part of extending our credit facility in October .
We would also expect to continue to utilize dispositions as another source of capital.
Finally, one comment on the team.
We are very excited to announce in January that promotion of Jim Brat to serve as <unk> Chief operating officer.
Jim has been with us since inception and during this time <unk> has acquired 624 properties grown its employee base from six to 35 and invested significantly in operations. Jim has been an integral part of all of this in our effort to drive value for our shareholders given his unique skill set.
Operations real estate transactions and legal judgment. Thank.
Thank you, Jim and with that I'll turn it over to Pat.
Thanks, Bill I'd like to start by discussing the sector mix of the $120 million of closed investments in Q4.
For the quarter restaurants accounted for 40% of new investments auto service with 33%.
Medical retail is 24% and the remaining 3% consisted of other retail.
Others. These investments included a portfolio for Buffalo Wild wings properties in Illinois for $14 million at a seven 3% cap rate a medical retail portfolio in Chicago for $12 million at a six 8% cap rate.
And the sale leaseback of five <unk> properties in Indiana for $8 million at a six 5% cap rate.
As Bill mentioned the impact of higher interest rates allowed cap rates to trend upward last quarter ultimately because of how quickly the market moved in the second half of 2022, we did go back several salaries and discuss price adjustments I would also note that deals priced in the latter part of Q4 and now into 2023 has generally been above the six 6% cap rate.
Average for Q4.
We remain highly focused on protecting our positive investment spreads.
So far in 2023, we've observed cap rates get back a bit of the pricing gains we are enjoying as buyers in Q4, but not much. We believe this is a direct result of lower interest rates in 2023, and some net lease investors reentering the market.
We continue to bid on properties 50 to 75 basis points above where they price in the first eight months of last year.
We've also had several salaries that previously refused or pricing in Q4 come back to us with adjusted expectations. This year.
We remain active on the acquisition strategy as we look at our pipeline. We expect to have a busy March with a number of deals closing in the latter half of the quarter I'd like to remind everyone that Q1, typically ends up being our lowest volume quarter for the year. For example in 2021 and 2022 Q1 was 15% of acquisition volume for those years.
Regarding the pipeline, we're seeing some very interesting I'll parcel in sale leaseback opportunities, we've been able to remain selective on Hana and real estate quality, while finding deals that fit in our target yield profile.
Momentum on our dispositions effort has also continued.
As I mentioned, we completed the sale of eight properties in 2022 for $26 million with also sell another two red lobsters and one Burger King so far in 2023 or $12 million. These stores were specifically selected disposition candidates based on relative underperformance versus their respective brands.
We expect to continue recycling capital Opportunistically into new acquisition, particularly where we can improve portfolio quality.
Now turning to Jeremy for a discussion on our portfolio and financial results.
Thanks, Pat we generated $49 2 million of cash rental income in the fourth quarter. After excluding point 9 million of straight line and other noncash rental adjustments.
We reported 99, 7% of collections for the fourth quarter at the end of the year at 99, 9% for the full year. There were no material changes to our collectability of credit reserves, nor any balance sheet impairments in the quarter on a run rate basis current annual cash base rent for leases in place as of the end of the year is 194.
$4 $9 million and our weighted average five year annual cash rent escalator is 142% cash G&A expense, excluding stock based compensation for the quarter was $3 9 million, representing 8% of cash rental income for the quarter and cash G&A for the year was $15 1 million.
For your modeling purposes, we expect cash G&A for 2023 will be approximately $16 million representing around 6% growth. The increase was tied principally to compensation expense as we focus on retention of our existing team additional team and additional team members to bolster our investment and operating prowess, we continue to focus on.
<unk> systems to help us with the increased complexity of the portfolio and improve efficiency since inception, we have grown from six team members to 35 today.
Turning to the balance sheet, we are well capitalized to fund growth as Bill mentioned, we raised $72 million of equity via our ATM program in the fourth quarter at an average price of $26 70 per share on December 30, <unk>. We help on December 31, excuse me, we held $26 million of cash and had $2 5 million shares under <unk>.
<unk> sell agreements with anticipated net proceeds of $68 million upon settlement, including the $250 million of Undrawn revolver capacity, we start the year with over $343 million of capacity, we discussed last quarter, but to remind everyone that in October we announced an amendment to our credit facility, which reduced pricing.
Attended maturities by five years on $150 million of existing term loans and raised $30 million of additional proceeds.
Facility was converted from LIBOR to sulfur.
Credit margins were improved by five basis points and our overall leverage remains conservative our debt maturities are fully staggered with the first maturity of $50 million not due until June 2024.
We have an ongoing programmatic interest rate hedging program, where we extend hedges on regular basis to fix the rate on much of our variable rate term loans as of the end of the year. We are hedged on $325 million of the $430 million of term loans currently at an average all in rate of 279% and as Bill mentioned.
When you add the fixed rate private notes, we are over 90% hedged at a 339% rate.
With respect to overall leverage our net debt to adjusted EBITDAR in the fourth quarter was five six times, our fixed charge coverage ratio remains at a healthy four seven times pro forma for settling in deploying the remaining equity our leverages approximately five five times and well below our target of six as we discussed in the earnings press release.
As of December 31, we had $75 million of forward starting swaps in place effectively fixing the 10 year Treasury base rate at two 6% for that portion of our next long term private note issuance and with that I'll turn it back over to you Glen for Investor questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on telephone keypad now.
The paint to ask your question.
Mr Milton locally.
We have our first question comes from Rob Stevenson from Janney Ralph Your line is now open.
Hi, good morning, guys.
Bill I appreciate the color that you guys gave on.
The dispositions being some relative underperformers, but anything to the underperformance to red lobster, specifically since you've been selling a number of those over the last six to eight months.
Yes.
Over the years, Rob we've bought 24 Red Lobster's.
$75 million ish long lease term.
And we bought them at about a six seven cap.
Sold three of them as you mentioned for just over $14 5 million. So that is a couple million dollars game.
That puts red lobster at under two 5% of our rent.
We have five that are on the market.
And so that would.
And then you may or may not sell but.
We've had good luck, thus far that would leave 16 properties half of those are in a master lease that has two times coverage in 21 years of term.
And the rest are low rent ground leases that we bought in our out parcel strategy.
We think those probably have coverage over five times.
So.
Okay.
So those.
Those eight properties I think this is an important point.
Have.
The ground leases have just over $100000 in rent.
That would get if we so if we sold.
Those we'd be under 2% just over one 5% of rent, but I think that the two important things to consider on Red Lobster's of those 16 remaining they have 40% lower rents than the universe of the universe of Red lobsters that we've underwritten to date, which is 65%.
For them.
And 11 of the 16 are next to.
And olive garden or a longhorn adjacent to.
And the remainder are also very well located so we feel pretty comfortable.
Try to Union, who owns red lobster.
Just red lobster on their call.
And.
Dave.
Provided more credit support.
Changing up management, so we feel very good about our position there.
Okay, and then the restaurant category.
In general are you seeing.
Whether or not it's by price point or by offering between.
<unk> and limited and full service anything where.
Certain people are having more pricing power in order to enable a raise.
<unk> entre prices to offset some of the higher food input cost and others are struggling with that or is it fairly even across the board how should we be thinking about that.
As long as food input costs remain high.
Yes, so we're seeing some brands raised prices.
Others.
Really trying to attack market share and not raise prices as much.
But I'd also say we are seeing these commodity costs now sort of recede a bit.
So I think it's across the board.
And the branded restaurants to kind of restaurants, we own.
<unk>.
Dramatically outperformed chef Allen doing local restaurants and gained significant share I'd also say.
Dine out inflation has been more moderate than supermarket or dine in inflation.
Okay, and then last one for me.
You guys talked about how the in the owned.
Longhorn portfolio the expenses, what's the combination of food input and labor what was the sort of breakdown I mean, how much of the additional expenses was the food input cost that maybe coming down versus labor costs, which don't appear to be.
<unk> in the near term and anything tenants are able to do technology wise these days to reduce staffing needs and mitigate some of the labor costs.
Yes, it's a really small number I mean, our business is so predictable that.
Even though on a $3 billion business, even the $100000 here or there.
It seems to be noticeable because we are so predictable generally so.
<unk>.
Delta on Kearl was staffing up over last year, where we were struggling to find labor.
We had a specific training program that increased hours in the quarter, which was sort of a one off thing and then beef prices, which are moderating, but <unk> is an exceptionally well run business. We've had it now for <unk>.
<unk> 35 quarters. This is the first quarter that it has had a result that was a little lower than we expected. So I don't think theres anything to read into that and probably most folks wouldn't even mentioned it but we thought it would be worth calling out just because it was a couple of hundred thousand dollars lower than we thought it would be.
Yes.
Okay, and then anything on the technology side that that either you guys with your own stuff or you are seeing.
Widespread among the tenants.
Apply to reduce staffing needs.
In our acquisition effort, we use deal path to manage the process, we've actually taken a number of investors through that we find that that helps efficiency. It keeps us very organized.
You buy a building every one five days like we did last quarter.
Really you need to be organized and that helps us we use place for AI to track track traffic I think that's directionally helpful.
But but those I think it would be the two callouts for our business and then.
In.
And the restaurant level I think the big call out would be <unk>, becoming.
Almost entirely drive through business. It was already a majority drive through business, but almost entirely a drive thru business during COVID-19.
And I would imagine over time, it will settle not at the peak of near 100% during COVID-19, but it will settle at a higher level of drive through than pre COVID-19.
Okay. Thanks, guys I appreciate the time.
Yes.
Thank you Laura.
SME minded, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on task with Keybanc.
We have our next question comes from basketball.
Ross Your line is now open.
Hey, good morning, everyone.
On the follow up on the Red Lobster, obviously, some very low ground rents. There now I guess ideally would you want to get those back in I guess, a broader picture are you seeing much distress on the restaurant side, where maybe you're in do you still have that JV with Rupert either because this all come into play at some point.
Yes.
<unk> actually had pretty favorable.
Look on getting properties back, but the sample size is really small thankfully, we got back to Ruby Tuesdays in Maine, and re leased it to darden to put an olive garden there.
Had a little bit of a pickup.
It is not our strategy it can be distracting.
And much rather be going into those discussions with very low rents.
Very low rents.
Speaking to Red lobster, specifically I'm just speaking in general very low rents are more likely to be reaffirmed in restructuring all else being equal.
Not seeing a ton of distress.
In the restaurant space.
As.
Sales are so much higher rent as a percentage of sales has moderated.
<unk>.
And construction costs are so expensive that people are repurposing old buildings, and they don't want to move out of existing buildings. So.
I think that addresses the question.
Okay. Yes. Thank you and then I'm just curious I think you commented that the pipeline this quarter would be back half loaded, but just curious how much visibility you have into the end of the year is it more like a six month view on the pipeline that you have visibility on understanding that some of these deals are large complex, where you have to do a lot of work on the ground leases.
Carbon stuff out.
How much visibility you have.
Yes.
We have substantial visibility over the next three months I would say and then some of the properties.
We know we're going to purchase them, but.
But we know that there are steps that need to take place and sometimes in the parcels that could take a year.
There are certain jurisdictions more.
And so we try not to.
Be overly fussed with managing the pipeline quarter to quarter.
Once you once you own. These buildings you have to live with the consequences of your decision to buy them. So.
The last thing you want to do is lower.
Youre quality expectations in order to even out a quarter.
But as Patrick mentioned, it's typically.
Busy at the end of last the end of the year as it was last year and then a little softer in Q1. So this is frankly the same dynamic we've had for the last.
Three years.
Got it and then maybe just one for Gary how should we think about timing of a debt deal. Once you get to the line to a certain level just take down the debt issuance.
Yes.
Great question.
On time this year would be the answer I would give obviously our line of credit with zero balance on that at the end of the year. We've got forwards at the start of the year. So we're in great shape, but we will.
We will also be opportunistic to take advantage of that market when we see margin rates.
In the private note market you can forward fund that forward funding option has actually extended as the curve is negative now and invest or insurance companies are more willing to do that so I think we have a lot of optionality around when we do it.
Great. Thanks, everyone.
Thank you.
Thank you Wes.
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Please press star one on telephone keypad now.
With our next question comes from John Mitchell from maybe platform.
John Your line is now open.
Good morning.
Good morning.
Yes.
Yes.
And then on the acquisition side of things as you think about the competitive set.
When youre going into kind of yes.
Deals are closing deal than what's been happening with the 10 31 buyer over the last couple of months.
Faded away a little bit as the year ended is that.
But I can tell you one by individual buyers I know fires et cetera.
Sure so so.
30 ones require what's called the downlink.
Assets that they are selling.
Where the proceeds get escrowed, and then reinvested in assets they are buying and so the transaction market for the downlink, which is very often not net lease its usually an apartment building.
Very typically so the transaction volume of those have fallen consequently with.
With a lag.
The amount of temporary one buyers in the market has has fallen.
That doesn't mean, it's not still competitive but.
Those are often levered buyers and their cost of financing has gone up so.
There was a dynamic as Patrick alluded to in his comments were properties that were on the market over the summer and fall.
<unk> had to readdress their pricing.
Those properties have either been pulled from the market or were actually sold and now we're in the process of new properties entering the market with different pricing expectations. I would also maybe add on that we were anticipating in 2021 heading into 2022.
And a large influx of private equity.
New private equity vehicles in net lease.
Obviously much more leveraged focused.
And as cost of financing has gone up their ability to create attractive yields has declined. So we're seeing less competition from private equity funds. Then we thought we would experience.
That makes sense and then maybe internally.
The in place tighter credit on potential acquisitions, how are you thinking about franchise versus corporate down, especially given.
Some of the pricing pressures that are kind of being seen industrywide.
You made some kind of.
And personally.
Cara side of your business.
Yes, I think we've always been.
Pretty thoughtful.
And conservative around the kind of credit.
Credit is roughly half of our underwriting model roughly the remaining half is real estate matters.
I wouldn't necessarily draw the line franchise versus corporate.
To literally there are some very very large franchise businesses and there are some.
Very small or levered.
Corporate operated properties so.
We've never really played in the very small franchisee.
Financing game that some of our peers have.
And Youll see our cap rates are relatively consistent adjusted for what's happening in the market. So we're not going out the risks curve.
By any means.
Okay, and then when you look at kind of either the financials that are being recorded in our financials on new transactions. I mean, what are you seeing in terms of responses to some of these pricing pressures.
The casual dining space versus.
The <unk> is actually pricing rather than a spot was more just kind of the impacts of some of those pricing pressures.
Yes, I think what we felt to Cairo is pretty consistent and what's happening in the industry.
In 2021.
One in many cases, you couldnt get the staffing levels you wanted to so.
That led to sort of abnormal profitability, but it was at the.
The consequence of not being able to serve the guest so.
Youre seeing more staffing youre seeing commodity costs increase but again.
Both of those factors are moderating in real time.
And what's happened is as the number of the weaker.
Brands are over Levered franchisees.
Have struggled and we don't play in that sandbox.
Okay.
Very helpful.
Thank you. Thank you.
Thank you John .
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Follow up on one pad from Keybanc.
We have our next question comes from Tayo Okusanya from Credit Suisse. Your line is now open.
Hi, yes, thank you and good morning, everyone.
Bill just given kind of your comment around.
Kind of what's happening with restaurants, generally what's happening with retail.
If you guys would consider at any point and looking beyond the world of retail for acquisition opportunity.
Yes.
We are always looking at.
[noise] strategies acquisitions that are adjacent to what we have purchased in the past we have a formal process with our board where we review.
Jason sees annually.
We started restaurant only we have now.
Honestly, a number of medical retail a number of auto service retail.
We continue to.
Try to expand the opportunity of our acquisition of apparatus thoughtfully, but wouldn't expect.
Us to buy hotels or apartment buildings or office or anything like that.
I think it's more of a natural progression and if you look at some of the.
Older and larger net lease Reits they follow that same path over a long period of time.
And it's worked quite well for them.
Great. Thank you.
Thank you.
As a reminder, ladies and gentlemen, if you would like to ask any further question. Please press star one on tackling Keith.
We have no further questions from the line.
Great. Thank you, everyone and management's available for Q&A, if anyone is interested thanks.
Thanks again for joining the call.
Okay.
Thank you ladies and gentlemen. This concludes today's call. Thank you for Tony you May now disconnect your lines.
Yeah.
Yeah.