Q2 2023 Four Corners Property Trust Inc Earnings Call
Okay.
Good morning, and welcome to the U S. C. P. T second quarter 2023 financial results Conference call. My name is Carla and I will be the operator of today's coke.
You'd like to register a question of the Q&A portion of the call. Please press star followed by one on your telephone keypad when asking your question. Please ensure your telephone as Amit said locally Troy if I ask a question you can press star followed by two I would now like to pass the conference over to our host Jerry to begin. Please go ahead when you're ready.
Thank you Carla during the course of this call we will make forward looking statements, which are based on our beliefs and assumptions 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 a more detailed description of potential risks. Please refer to our SEC filings.
Which can be found on our website at <unk> Dot com all the information presented on this call is current as of today August 2nd 2023. In addition reconciliation to non-GAAP financial measures presented on this call such as <unk> can be found in the Companys supplemental report and with that I'll turn the call over to Bill.
Thank you Gerry good morning, Thank you for joining us to discuss our second quarter results I'm going to make introductory remarks, Patrick and Josh will give more details on acquisitions and then Jerry will discuss the financial and capital raising results.
Commercial real estate as a whole is facing challenges F. C. P. T. Specifically is very well positioned our portfolio continues to perform exceptionally well with 99, 7% collections for the quarter and occupancy at 99, 9%.
We reported second quarter, <unk> 42 per share, which is up a cent from Q2 last year and the first quarter of this year.
Our casual dining and quick service tenants continue to perform very well, which along with our low rent levels provides us ample support to continue growing our dividend.
EBITDAR to rent coverage in the second quarter was four eight times for the significant majority of our portfolio that reports. This figure. This is amongst the strongest coverage within the net lease industry.
Olive garden, Longhorn Steakhouse and Chili's three of our most prominent brands saw same store sales rose, 4%, 7% and 10% respectively. In all three cases margins improved as commodity and labor inflation eased.
For Q2, our cash rental revenues grew 11, 1% on a year over year basis, including the benefit of rental increases and $379 million of acquisitions in the last 12 months.
This included the acquisition of 48 properties in the second quarter for $170 million at an initial cash yield of 6.85%, reflecting rents in place as of June 30th.
We have continued to be quite busy in July with the closing of the previously announced darden transaction for $80 million and an $18 million acquisition of recently constructed.
Developer portfolio with high qualified high quality and diversified corporate credit.
Including the deals closed in July for 2023 year to date, we have acquired 79 properties for $301 million at a six seven cap rate, which is more than our acquisitions for the full 12 months of 2022 or any prior year for that matter.
I'd be remiss, if I did acknowledge our incredibly talented and dedicated legal and accounting teams led by our COO, Jim Brat, and our Chief Accounting Officer, Nicole Stuart without their efforts, we would not have been able to seize these acquisition opportunities over the past quarter.
We have invested more time and energy over the years to build out our capabilities as a larger and more capable organization.
Now taking a step back when speaking with investors, we sometimes get the feedback that we have that they have come to know F. C. P. T as a stable and predictable story as a REIT, we take great complement to have or not that conservative reputation will continue to carve out our niche for quality and the competitive field of net lease. However, we also believe the 2020.
<unk> has been and May continue to be differentiated breakout acquisition year for the company in Q2, we saw F. C. P. T continue to benefit both from an accretive cost of capital and reduce competition for acquisitions overall, particularly in the higher quality brands credit opportunities we focus on.
We are planning to continue to press our advantage and we're working on a attractive pipeline with that I'll turn it over to Patrick.
Thanks Bill.
Our Q1 earnings call in early May we discussed the shifting market dynamics and increasing salary receptivity to more buyer friendly pricing dynamic really gain steam following the collapse of the Silicon Valley Bank in March and continued his other lender stage challenges, we're still seeing the after effects of a tighter lending market, namely reduced private equity competition fewer 10 31.
Buyers and higher borrowing costs paired with lower debt proceeds.
Developers and operators parties are more willing to engage with CPT on portfolio opportunities now seven months into 2023, our numbers show that effect with F. CPT already out of record acquisitions here.
We've hired new team members to help manage the increased workflow our acquisitions team now has a full time members focused on sourcing new opportunities. We also recently welcome Justin Peters, who is leading our asset management in lease extension negotiations.
Shifting to the pipeline, we continue to see a strong set of opportunities in line with recent closings year to date, our acquisitions had been roughly split among restaurant at 40% medical retail, 36% and auto service and other at 23% wed.
We would expect the mix to remain balanced based on the pipeline over the course of the year barring an unforeseen large sale leaseback or portfolio sale opportunity.
Of those three core sectors, we wanted to spend a moment on medical retail, which now represents 7% of our portfolio and reference several slides. We've included in our investor presentation posted to the website yesterday.
Much of a net lease investment opportunity for medical retail comes as operators seek to meet new consumer demand and to bring down overall medical costs, particularly around outpatient care 10 years ago. The urgent care sector was virtually nonexistent in today those facilities are fixture of many retail corridors, but also seen Cvs Walgreens and Amazon enter the primary care space with the acquisition.
<unk> Street village M D and one medical respectively.
Real estate is still catching up with demand from these medical operators for Prime retail corridor. This trend within health care to move services out of hospitals and office buildings and closer to the end consumers and retail areas, it's going to be impactful, but at least for years to come and importantly for our CPG strategy. These properties often utilize smaller footprint fungible buildings similar to the traditional net lease.
<unk>, we've been acquiring for years.
And as important as F. CPT is not currently pursuing investment in traditional medical office nursing hospitals or other specialty slash large box yes.
With that I'll turn it over to you Josh.
Thanks, Patrick and addition to the improving buying environment and we've touched on we have also been able to purchase properties tenants and brands that were historically too expensive on a cap rate basis for FCT.
We have three examples of larger transactions, we've recently closed which highlight these types of opportunities.
First in June we acquired a portfolio of nine car wash properties via sale leaseback for $40 million. The portfolio is geographically diversified across six states and under a long term master lease with annual rent increases to one of the largest national operators.
<unk> been actively underwriting car wash properties for several years the industry typically add properties selling well above replacement cost and at a low 6% or high 5% cap rate range, we were able to negotiate reasonable rents, resulting in an average basis of $4 4 million per property.
Much lower than the other car wash sale leasebacks previously seen.
Second in July we closed on a portfolio of Darden properties comprised of 12 Chatters in one olive garden for $80 million.
As Bill highlighted Darden continues to outperform and it's one of the strongest credits in that lease the properties had an average term of 13 years of corporate guarantee from Darden and an annual rent increase of one 5%.
The quality end markets of these properties are very similar to our original spin portfolio and allowed us to acquire the portfolio at attractive pricing.
The cap rates, there was a bit tighter than more recent deals due to the strong credit markets and restructure it was matched with pre raised funds such that it was accretive from day one.
The last example is a first tranche of a large developer portfolio for $18 million that we also closed in July .
Portfolio included four newly constructed properties reached eight different brands.
Credit and this portfolio is very strong instead of the nine leases are with corporate operators, including Starbucks Aspen Dental Oak Street, and well know urgent urgent care.
This transaction is part of our larger strategy to utilize our reputation for handling complex deals and providing surety of execution to work more actively with developers of high quality projects in this challenging environment.
For avoidance of doubt at CPD did not fund the construction of these assets, but instead provided a takeout commitment once construction is complete.
Turning to dispositions, we sold one Burger King property that was underperforming versus brand average at a six 6% cap rate representing a small gain.
In prior years, we've been opportunistic on selling properties at low cap rates as a source of funding for new acquisitions.
<unk> available capital source option for our steel.
I will now turn it back over to Gerry.
Thanks, Josh we generated $51 9 million of cash rental income in the second quarter after excluding $8 million of straight line and other noncash rental adjustments on a run rate basis current annual cash base rent for leases in place as of June 32023 is $207 6 million and our weight.
Average five year annual cash rent escalator is one 4%.
As Bill mentioned, we collected 99, 7% of base rent for the quarter and there were no material changes to our collectability of credit reserves, nor any balance sheet impairments cash G&A expense, excluding stock based compensation was $4 eight.
$4 1 million, representing seven 8% of cash rental income for the quarter. We continue to expect cash G&A will be approximately $16 million for the year in total.
On June 30, we held 11 million of cash and $235 million of Undrawn revolver capacity.
In the second quarter, we funded the $170 million of acquisitions with cash on hand, and equity. The equity consisted of $9 million raised in the second quarter at $26 11 per share and $110 million of equity forwards initiated in prior quarters at an average execution price of $27.
<unk> 25 per share and.
In July we issued $100 million of 10 year senior unsecured notes, which were used upon July acquisitions. The notes have a coupon of 644%, but price set of 539% yield to maturity, including the benefit of an $8 $1 million gain on the termination of pre occurrence treasury hedges the.
Debt markets are more challenging than in recent memory, but we received strong investor support in this offering given the quality of our credit story.
With respect to overall leverage our net debt to adjusted EBIT in the second quarter was five five times and our fixed charge coverage was a very healthy four eight times.
Pro forma for the July debt offering our leverages approximately five eight times prior to any third quarter equity activity, which we will announce in our third quarter earnings release in October .
We repaid we remain focused on maintaining a conservative balance sheet, and extending and layering our debt maturities and repayment obligations. Our only debt maturity before November 2025 is a $50 million private note due in June of next year.
With that I'll turn the call back over to Carla for Investor Q&A.
Thank you.
To ask a question you may do so if my question followed by one on your telephone keypad.
Your question. Please press star followed by K when preparing for your.
Question. Please ensure your phone is on mute lately.
Our first question comes from Anthony <unk> from Jpmorgan. Your line is now open. Please go ahead.
Great. Thank you.
My first one relates to just the pipeline and whether you can talk about what youre seeing out there beyond what was pretty strong level of activity in July and also kind of what the.
Yield picture looks like in terms of.
Cap rates right now.
Sure.
I would say that consistent with past comments.
Pipeline is robust opportunity set is as good as we've seen in our history.
And my direction to the team is too.
Quality sort.
What's available for us to work on.
To be in the very high sixes or seven cap and.
We think that that's the sweet spot of the risk return spur.
Spectrum at the moment, given our cost of capital.
Yeah.
And what you.
You did the debt deal and you had some hedges to apply to that.
Where do you see your incremental capital costs from here and trying to understand just kind of what the spread with US look like if youre deals are in the high sixes.
Right. So what's really interesting now is for the first time, our equity cost of capital is advantaged over our debt cost of capital or a blended cost of capital. So I think.
As mentioned a terrific job from jewelry hedging.
Note that we closed.
Few weeks ago a.
Funded a few weeks ago.
So we are sort of did our debt deal for the year so to speak.
And equity is a more attractive source of funds so.
I think pretty straightforward.
With that.
We don't need to be in the debt markets right now.
And the equity markets are a more favorable source of funds.
Great. Thanks for the time.
Thanks.
Thanks, Anthony our next question comes from Rob Stevenson from Janney. Your line is now open. Please go ahead.
Good morning, Bill what are there any areas beyond auto and healthcare that you're targeting for any significant investments beyond restaurants.
Yes, great question, we have a formal process with our board.
We review.
New sectors tenants.
Every quarter and then we retroactively review all the rocks we've turned over in the past so we'd probably be very thorough about it.
And.
Answer a slightly different question, we're really happy because many of the sectors that we didnt enter.
When times were very frothy.
So we always are trying to better understand the medical ecosystem. So I think over time Youll see us.
Expand into different sectors there.
But.
Really well.
A lot of white space with auto service.
And.
And medical and then just overall the acquisition environment.
It is much more favorable so.
Properties that historically.
Really wouldn't even have been shown to the REIT market.
It would have been sold to the 10 31 exchange market one by one are.
Are showing up.
And obviously a lot of the folks that we have built.
Built relationships with over the last seven eight years.
At a high level now understand at least capital.
It is much more attractive compared to high yield debt or loans from banks or cips.
So I guess accordingly.
Do you guys have any desire to go to the next level and be.
Loan to own partner for some of these merchant developers given the market conditions.
They'd have opportunities, but not access to cost effective capital these days.
Yeah loans have been the topic does were for many of our competitors. It was the hot topic at the Springs ICSC meeting.
We received a lot of questions about it at NAREIT.
I think we have the capability to do loans.
Jim and I worked on loans when I worked at the hedge fund.
Sure.
Very substantially but I would say that we feel like we have just a really attractive opportunity set with the down the middle of acquisitions that we have evidenced in Q2.
And I think that.
We'd never say never but that certainly is keeping us.
A very busy.
Okay, and then last one for me just as you know loans can be challenging around setting dividend policy because it can be repaid that it can be challenging.
Because theyre short term she are asset liability mismatches, there can be document intensive.
And typically the developer deal that we announced this was someone who.
Within six months of all of the properties being a certificate of occupancy.
And so we were able to come up with pricing that was fair and then we close when the properties are open.
Okay, and then last one for me.
You've mentioned longhorn did like 7% same store.
Cairo doing relative to that.
Cairo is doing great.
We post the <unk> results.
They had a good quarter.
Extremely well managed.
Make sure that you're adjusting for the seventh property that we opened but.
But yes, they are doing great.
Okay. Thank you.
Little different seven sample size versus 700.
But but yes, they are doing terrific for the market Theyre in.
Thanks, Rob.
A reminder, if you'd like to ask a question. Please press star followed by one on.
Next question comes from Wes Golladay from Baird. Your line is now open. Please go ahead.
Hey, good morning, everyone can you maybe talk about the Carwash deal I guess will this be a big part or is this are you.
Unique one off I believe in the past you did not like having a high basis in an asset and I get that for a car washed slow, but it maybe it's still a little higher than a traditional space you would go for.
Yeah, we've looked at so many car wash deals.
And as you said very often.
Seeing 789 million dollar bases.
They can cover because the car wash business is very profitable.
Our recurring revenue business now with subscription but.
But we have.
Turned down 90 plus percent of the car wash deals we've looked at and this one really lined up with with the.
The lower basis.
With a top operator so.
It's nothing against car washes specifically.
We were nervous.
With that level of basis.
These companies are typically.
Pretty aggressively growing.
And I'm not sure, we really understand or anyone really understands what the through the cycle performance of these businesses or with a new model and that level of rent. So we.
We are happy with the one that we did we continue to look at them, but I would expect us to be selective.
Okay and then when you look at your pipeline will that be constrained at all from your cost of equity where it is I get that it's still relatively high but it's.
Come in a little bit and maybe Conversely, you do have this alternative form of equity where you have your low cap rate dispositions would you dial those up.
Yes, we receive offers for our properties in the five and a half cap and below pricing very regularly.
They are very high quality darden assets typically great locations investment grade long term leases, we sold properties in the past as you said, it's a it's a terrific option to have but.
And we've always been sensitive to our cost of capital when we make acquisitions and because of our acquisitions are small.
It allows us and our pipeline is very crystal clear allows us to modulate but.
Our hope is that with the elevated level of acquisitions.
We've evidenced.
Frankly, having a full year of acquisitions already completed by the beginning of August is quite advantageous that our equity valuation will respond to that.
Great. Thanks for the time everyone.
Yep.
Thanks <unk>. Our next question comes from Jim comment from Evercore. Your line is now open. Please go ahead.
Thank you good morning.
The team that <unk> had about 18 million acquisition in the quarter from.
So I take out the developer would you be willing to share you said it was the first tranche, how large that ultimately could be.
In terms of dollars.
Yes, so we're not going to get.
Get into things that could relate to guidance, but we've done two or three tranches with this developer in the past, it's a great relationship that Josh has nurtured.
So we're not going to give guidance, but just maybe more generally on developers.
Historically at ICSC meeting in Las Vegas.
Every year, we meet with two or three developers and frankly rarely did that lead to an acquisition.
This year that we met with dozens.
So we think that that's a.
A fertile opportunity.
By newly constructed high credit quality.
Tenants.
With with long term leases because the buildings are a relatively new and I think our reputation as someone who can perform in a difficult market, we don't need property financing.
Well capitalized.
As a as an advantage.
Great well that was my second question, how many of these efficiency cultivating but it sounds like you said it proliferation from 12 to 18 months ago.
Yes.
Jim I would say 12 to 18 months ago. The business models of the developer was almost certainly.
To capture the widest possible spread selling into a 10 31 exchange market one by one.
And.
Frankly timing wasn't that much of a concern because they were borrowing at 3%.
Now even personal personally guaranteed loans might start with an eight.
And so timing is very important.
And banks are trying to shrink their balance sheets, and so our purchase and sale agreement.
Even prior to close I think it's something that's a value that they can evidence to their financial partners.
Liquidity is coming.
That's useful color. Thank you very much.
Thanks, Jim we have no further questions at this time, so with that I'll hand back to Bill for final remarks.
Excellent. Thank you Carlos well, it's been an exciting year, so far for a CPT and we are very excited for the second half of the year as well. If you have any questions. Please reach out to myself or Terry or trick and we can set up follow up thanks. So much.
This concludes today's call. Thank you for your participation you may now disconnect your lines.
Okay.
[music].
Yeah.
Yes.
Okay.
Okay.
Yeah.
Yes.
[music].
Okay.
Okay.
Yeah.
[music].