Q3 2023 Four Corners Property Trust Inc Earnings Call
Thank you for your patience the F. G. P T third quarter 2023 financial results conference call, we'll get it in approximately one minute.
[music].
Okay.
Hello, and welcome to the F. C. P T third quarter 'twenty 'twenty 'twenty financial results Conference call.
My name is Lauren and I'll be coordinating your call today.
There'll be the opportunity for questions at the end of the presentation.
If you would like to ask a question. Please press star one when you're trying to think he paths.
I'll now hand, you over to host Jerry to begin Geri. Please go ahead.
Thank you Lauren 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 inaccurate for a more detailed description of some potential risks. Please see our SEC filings, which can be found it.
<unk> Dot com all of the information presented on this call is current as of today November 2nd in addition, reconciliations to non-GAAP financial measures presented on this call such as <unk> and <unk> can be found in the Companys supplemental report with that I'll turn it over to bill.
Good morning, Thank you for joining us to discuss our third quarter results I'm going to make introductory remarks, Patrick and Josh will comment further on the acquisition market and then Jerry will discuss our financial results and capital position.
We reported third quarter, <unk> 42 per share, which is up or sent from our Q3 last year and in line with expectation.
Our existing portfolio is performing exceptionally well with 99, 9% rent collections for the quarter and 99, 8% occupancy at quarter end.
F. CPT has had a record acquisition year already with $322 million of capital deployed year to date that is up 13% from the full year of 2022, which was also a record acquisition year, we continue to see benefits of our investments in our people and the platforms keep capacity.
These transactions were funded with equity raised in late 2022 in early 2023 at an average price above $27 per share and with our June debt offering where we benefited from hedge gains to lock in a five 4% yield to maturity.
Year over year sales for the restaurant sector as a whole remain positive in the third quarter in the 3% range. According to Baird research, although the casual dining sector is seeing small declines off of a strong 2022 Darden was a standout from that trend reporting same store sales growth of six 1% an eight 1% for olive.
Garden in longhorn respectively.
Chile, you saw same store sales were up 6%.
As highlighted last quarter restaurant margins are also improving as commodity and other inflation eases.
Our EBITDAR to rent coverage in the third quarter was four eight times for the significant majority of our portfolio that reports. This figure. This remains amongst the strongest coverage within the net lease industry and is a reflection of our underwriting standards.
Turning to capital sources, which Jerry will discuss in more detail, we issued $100 million of private notes in July and did not issue equity during the quarter, we know stores, the fourth quarter with $220 million of availability on our revolver and no near term debt maturities at very attractive properties to sell.
10, 31 buyers if we choose to access this liquidity source.
As we look ahead, the current capital market environment is making it challenging to deploy capital Accretively in this environment, we remain disciplined allocators of capital and when we say that a gap in this environment, we remain disciplined allocators of capital since our inception in 2015, we have established mental models and structured our teams.
Incentives that discourages us from deploying capital just to grow the company size without an increase in per share metrics of earnings or intrinsic value.
Our compensation is not tied to acquisition volumes.
And we have never given acquisition our earnings guidance finally, we benefit from low absolute and relative overhead costs and can be nimble and modulate investment activities up and down without negatively impacting the organization or employee morale.
We believe that we are prepared to operate successfully entities environment and expect to ratch up activity. When it is accretive to do so with that I will turn it over to Patrick to further discuss the investment environment.
Okay.
Thanks Bill.
We had a busy quarter closing on $132 million across 31 properties for 2023 year to date, we have acquired 90 properties for $322 million at a six 7% cap rate, which is a record high volume for us.
Year to date, our acquisitions have been roughly split between restaurant at 38% in volume medical retail, 37% and auto service at 23% would.
Would you expect the mix to remain balanced based on the pipeline over the remainder of the year.
We remind ourselves often that our business is relatively simple.
Our focus on long term covered land plays a trophy properties that come to market every 10 to 20 years.
<unk> decisions are based on our consistently applied scoring model and yield spread.
The tire store restaurant does not pencil it can be patient pass on it and wait for the next one to come along that guys.
The industry story remains similar to recent quarters, where were seeing the effects of the tightening lending market, namely reduced private equity competition fewer 10, 31 buyers and sellers.
More accommodating on compress closing schedules and other non price deal terms.
Clippers and operators are more willing to engage with CPG on portfolio opportunities than in prior years.
We've also seen cap rates improved a great deal over the past several months as a reaction to the higher interest rate environment.
There are opportunities for some really interesting portfolios that would've been priced 100 plus basis points tighter a year ago.
Pricing has not moved enough in our view, but pressures building on sellers as institutional net lease investors are largely holding the line and passing at current cap rates.
Cap rates to move up over the short term and the absence of meaningful interest rate movement.
We've been asked recently by some investors what is the most interesting acquisition opportunity for four corners right now.
The answer is the same down the middle of the fairway deals we've been doing for years, but at more attractive pricing and even stronger tenant credit than previously available in our cap rate range.
So I'll turn it over to you to discuss dispositions and re leasing.
Thank you Patrick we sold three Red lobster properties in September and early October that were underperforming versus brand average for $15 million, representing a small gain.
These dispositions in the works for several months and it was just happenstance that they wind up with the right buyers at similar closing timelines.
These stores were underperforming relative to others in our portfolio and we are maintaining our discipline of proactive portfolio management housekeeping to sell them at an attractive exit price, particularly when we have ample opportunities to redeploy the proceeds to further diversification at a positive spread.
Turning to leasing since inception through the end of the third quarter. We've had 81 leases reached term exploration.
These 72 leases or almost 90% renewed by the existing tenants and another seven over 8% were released to new tenants many of with a positive rent spread and or credit upgrade.
Of the 81 only to remain baking the existing tenant is often the best candidate to continue on at a site, but in certain cases, where there's a higher and better use or rents are well below market, we've been able to capture that positive rent spread and create meaningful value.
We have no lease expirations in the portfolio for the remainder of 2023 and <unk>.
2% of the rent stream is maturing in 2020 for Jerry I'll turn it over back to you.
Thanks, Josh.
For the third quarter, our cash rental revenues grew 12, 3% on a year over year basis, including the benefit of rental increases and $439 million of acquisitions in the last 12 months we've.
We reported $56 1 million of cash rental income in the third quarter. After excluding $1 2 million of straight line and other noncash rent adjustments and on a run rate basis. Our current annual cash base rent for leases in place as of quarter end is $215 3 million and our weighted average five year annual cash rent.
Escalated remains at one 4%.
We collected 99, 9% of base rent for the third quarter and there are no material changes in our collectability or credit reserves, nor any balance sheet impairments cash G&A expense, excluding stock based compensation was 4 million representing seven 2% of cash rental income for the quarter. We continue to expect cash G&A will be.
Proximately $16 million for the year.
And as a reminder, we take a very conservative approach to G&A and expense, 100% of the costs associated with our internal investment program.
We generated <unk> 42 per share results were in line with expectation, but were impacted by higher interest expense on the $80 million of term loans that are unhedged and on the revolver balance. We also experienced a slight uptick in non reimbursed property expenses from higher abandon deal costs as we adjusted our deal.
Pipeline to the rapid increase in treasury rates.
With respect to the balance sheet at quarter end, we held $6 million of unrestricted cash.
$7 million or $10 31 proceeds available to redeploy and have $220 million of Undrawn revolver capacity in total that gives us $237 million of available capacity at quarter.
Fourth quarter begins.
In the third quarter, we funded the $130 million of acquisitions with cash on hand, the $100 million private note offering that funded in July and $15 million of net revolver borrowings.
On overall leverage our net debt to adjusted EBITDA in the third quarter was five six times and our fixed charge coverage ratio is a healthy four seven times, we remain focused on maintaining a conservative balance sheet and extending and layering our debt maturities.
Our only debt maturity before November of 2025 is a $50 million private note due in June 2024, and otherwise are net next debt obligation is $150 million of term debt due in November 2025, and with that we'll turn it back over to Lauren for Investor Q&A.
Thank you.
Thank you I would like to ask a question. Please press star one on your telephone.
Pat.
Your question, Please press Star Lake Wojciech Pisa.
<unk> study showed that you'll find some muted lately.
As a reminder that is stock based <unk> wanted to ask a question.
Our first question comes from Rob Stevenson from Janney Montgomery Scott. Please go ahead.
Good morning, guys can you talk about what youre seeing in terms of the differential if any between cap rates for restaurant assets that you would want to own and add to the portfolio and the non restaurant medical and auto assets any real gap there.
Not really.
It's.
It really being driven by rates and availability of credit and that effects.
<unk>.
Not just all net lease, but all real estate generally.
Okay. So if those are on top of one another.
How are you thinking about it today in terms of.
At the same return.
Whether or not you do the incremental restaurant asset or non restaurant asset to diversify the portfolio.
Given the scarcity of capital these days.
Yes, it's really about scoring the assets Rob.
As a process.
In our model that we've had in place now for years and so we really look at.
Properties.
Thinking more of this one is in <unk> and this one is 74.
And the model really builds in our preferences for different building types.
And not to get too into the weeds, but.
There tends to be more prevalent for.
Double net.
Buildings or double net leases.
Auto service, so if anything maybe a little bit of a preference to stay away from that or ensure that we've got a brand new roof.
Okay, and then Gerry anything that we need to be thinking about in terms of <unk> going from third quarter to fourth quarter beyond acquisitions and dispositions the impact of higher rates and any capital raising you do anything sticking out as abnormal between either the third or fourth quarter that we need to take into consideration.
No not really I think as.
You highlighted the one item that is variable and that is what is the interest rate on the unhedged portion of our debt, which is $80 million of term loans and whatever the revolver balance is otherwise typically the fourth quarter is a fairly normal quarter quote unquote from a G&A perspective, we don't have big proxy costs or other things like.
That and generally nothing that we see on the horizon with respect to property expenses that would be larger in the fourth quarter.
Okay. Thanks, guys appreciate it.
Yes of course.
Thank you.
Our next question comes from Anthony Pallone from J P. Morgan Anthony. Please go ahead.
Yes. Thank you.
Maybe like to start with just how youre thinking about where spreads need to be compared to your weighted average cost of capital because I know.
Cap rates is expected to go up your capital costs have gone up but just trying to understand like if youre looking at this in terms of a target spread or just what would get you to do something or it makes sense.
Yes, we don't have.
A specific number that.
As in the bullpen of our acquisition group that they know specifically.
Were looking were calculated on a cost of capital, which really today as our cost of equity frankly, because the debt markets are so dislocated.
And then comparing.
How we think about the quality of our portfolio versus what we're buying so.
We don't get into specifics for competitive reasons, but I think our view is.
We have this mental model that we've taken most people through sort of the Green zone yellow zone in Red Zone. Our stock is right now right at the bottom of the yellow zone.
It's gone up a little bit in the last couple of days so.
We're pretty cautious.
And that's a mental model we've had again since inception.
In preparing for this call I went back and read.
Our transcripts from 2016, our first handful of.
Conference calls and.
What I would say is our thought process about this business is remarkably similar to where it was then.
Got it.
So just to kind of push or just to understand your capital costs and how youre thinking about it when you say youre equity are you should we be looking at just the inverse of your multiple like a longer term number implied cap rate like like what's most.
Important to you on that front.
Triangulate different methods.
We typically look at the anniversary of the multiple adjusted for some cost to raise money.
Unfortunately.
Raising money has has some minor costs associated with it even if you use the ATM.
So that would be a good way to look at it got check that with.
The cap rate would be probably even better.
Yeah.
Okay, and then in terms of.
Thinking about the balance sheet capacity.
Up in the high fives right now any appetite.
To push a bit above that or you really need to wait and see where cap rates at all.
I would say, it's a different analysis than wind.
Youre borrowing on our revolver was 3% or 2%.
Now borrowing on our revolver.
Is is expensive and so unless you have some crystal ball that says rates are going to dramatically decline.
In the future.
And frankly, if we had that crystal ball, we wouldn't be buying buildings for a living we'd be trading derivatives.
Is that borrowing on our revolver to buy buildings isn't sort of artificially accretive.
The game plan that <unk> had in the past so.
I think the way to look at it as cost of equity.
And I would just add I think we have been.
Pretty consistent Tony that we want to keep our leverage below six times and that doesn't mean that it can't go up periodically above six times for good reasons I think what bill is highlighting is right now I'm not sure. There's good reasons to go above six times leverage.
Okay got it.
I can get one last one in here just to follow up on Rob's.
Questions and you mentioned just no real difference between restaurant returns in some of the other product types. There is a lot of discussion around <unk> one drugs in restaurants.
If they're if they're about the same like do you find it's still worth taking the tail risk there or how do you think about that if at all at this point.
Yeah.
Yes, I am certainly not an expert on the GOP, one drugs, but we've been doing our homework on the implications of our current view is that the.
Semi drugs may lead to some minor behavioral changes might have some minor effect on our tenants' businesses.
But thats why we have <unk>.
Conservatism in our underwriting model.
I don't think its a major concern.
Sure.
We're buying buildings with very long term leases it allows our tenants to adapt their business.
If there is some sort of.
Behavioral shift.
And I think we're going to own these buildings for decades, So we want to look.
Long term and not be.
Knee jerk reactions based upon whats sort of trending.
We're not dismissive I think it's a great question.
We really put our head down on this issue we've actually brought in experts to advise us on this.
And at the current moment, even sort of adjusting for what will certainly be a.
Lower cost probably.
Consumable versus injectable, probably with lower side effects in the future.
Don't think it's a major concern.
But we're monitoring.
Great. Thank you.
Okay. Thanks.
Thank you. Our next question comes from Jim <unk> from Evercore. Please go ahead.
Hi, good morning, Thank you.
Noodling on your medical retail deck, you put out this week and I was just curious as a general rule, obviously emergency rooms urgent care at higher per square foot.
Rents and rents, but how much of that improvements in those types of assets with four corners be paying for versus the Kenny I just want to understand kind of that split if possible.
Yes, it's a mixed bag I would say we reject the.
Basic premise that some some market participants.
Hang their hat on which is the tenant should be able to get out the entirety of their construction costs and the sale leaseback that thats sort of a.
Rule of thumb that some people follow that we don't.
But but I would reiterate what you said, which is that these are real costs. So this is.
These are these are improved buildings.
Our expensive to improve its something that we watch closely I would say.
The higher construction costs.
Come back to us as rents.
And we have a.
Demonstrated track record of being very rent sensitive our model.
Is.
25% to 30% rent related factors and it's something that we're particularly focused on in medical.
So I don't have a.
Precise number because its all across the board everything from ground leases, where you have none of the construction cost to some of the larger facilities that are brand, new where youre bearing.
A majority of the construction costs, but not all.
But it's something that we focus on in our underwriting.
I would draw a.
A distinction of medical retail to some other forms of.
Net lease where you're in.
At a substantial premium to any reuse scenario.
Sometimes maybe double what any reuse would be.
Those are the kinds of transactions, we've really stayed away from and maybe to circle back to Rob's question about the distinction between restaurant and other forms and at least we look at what I would say is where we've seen the most cap rate move.
In the kinds of buildings that we were not buying before experiential retail new concepts.
Brand Spanking, new brands with no track record highly specialized use buildings things of that nature.
Okay very good thank you and just surfing back clean up on the Red Lobster's or are you pretty much done on that sort of calling in.
Can you remind me of the remaining assets largely under a master lease.
They are the ones that are very well covered we have a couple of property is still on the market but.
I don't think it's it's a major item we had success selling.
What we wanted to sell there's a couple more out there, but again what remains is a very high quality and mostly in a master lease.
And Red lobster is doing better.
Thank you.
Our next question comes from Goldman Sachs.
Colin Please go ahead.
Good morning out there I think for the time, maybe just another one on the medical retail presentation I appreciate the detail in that presentation. So.
You described the scoring criteria you use for restaurant and other net lease assets I'm wondering if you applied the same kind of scoring system to these assets, which might be a little more generic in nature.
And then with that scoring system and play this potentially where you think you could find maybe higher yields on acquisition that would.
Screen more favorably against the cost of capital as it sits today.
Yes, great question.
So I would say that our scoring model for restaurants has a north of 80% overlap with how we think about medical lease term credit.
Rent per square foot rent growth is the least truly triple net et cetera et cetera. Those those are very similar between the different property types. The locations are similar.
Between the property types.
As far as finding higher yield.
We're really not.
<unk>.
Focused on.
Thinking about the world that way, we are trying to find high quality properties at a yield that pencils not.
Here's our cost of capital today and patent Josh go find things that are north of that.
And we will convince ourselves that the risk is acceptable. So we really look at the world a different way.
Which is focusing on quality.
And making sure that what we buy we're very happy with because we're going to live with it for a long time.
Got it understood.
No. It was touched on earlier again in.
In the context of the cost of capital as it sits today, but.
At the margin for any acquisition, how should we be looking at that funding mix or modeling that funding mix.
Well I think for now equity would be the primary we have 10 31 exchange proceeds as Jerry mentioned sitting on our books. So those need to be used we've obviously considered that and made appropriate.
High quality acquisitions in our.
In our pipeline, but.
I would say as Patrick alluded to this is the most.
Rich acquisition environment that we've had since inception.
Very good stuff to do pricing is coming our way, it's just not there yet with the stock price that we have so to the extent that you see our stock price rebound you will see us aggressively towards the business to take advantage of very attractive acquisitions, but today.
If we acquired assets at our stock price, we would be buying buildings for practice.
We bought 700 buildings and since inception, we don't need to practice.
Understood I appreciate the color. Thank you.
Great.
Thank you.
Our next question comes from Alex Zukin from Baird. Please go ahead.
Hi, Thank you for taking my question today.
First one is what's the baked in earnings growth for 2024.
Four corners does nothing external front.
Well, we don't give earnings guidance, but what I would say is that.
The primary factor in driving earnings growth and our business is the annualized <unk> of assets purchased in the year prior.
One 5%.
Rent bumps, one 4% rent bumps.
Pretty conservative on G&A, we are a little bit of floating rate debt, but most of it's fixed.
So the primary.
Driver is the timing of acquisitions throughout the year. So we've tended to be backend loaded. This year, we are front end loaded.
But the primary is annualized nation.
We don't give guidance, we try to stay away from that because it sets perverse incentives.
But it's pretty easy to calculate where we stand.
And what I would also say is given our disclosure regime of announcing every property bought or sold the day occurs you can follow in almost real time.
What that progress looks like.
Okay helpful. Thank you.
Second one kind of two parts.
Will you look to sell more assets over the near term and the spread between where you guys can buy and sell either widely by contract.
Well I would say, it's probably widening a little bit because our existing portfolio is largely investment grade very high quality properties. That's what's financeable in the world today, if anything is financeable.
And so.
And we have properties in 47 states. So we get to meet the 10 31 exchange buyer, where he or she lives.
We have.
Gold assets in the past, it's never been a large portion of our business I don't think today.
<unk>.
A huge focus of ours, but if approached.
We always are thoughtful and responding.
And to the extent that we wanted to do some calling as you've seen with some of the red Lobster's, we've been able to do that at pricing higher than what we purchased the properties for.
Yeah.
And the last one for me.
You mentioned Red lobster. It is doing better are there any other tenants on the watch list hasn't changed much since the beginning of the year.
No.
Well, thank you guys.
Yes of course.
Yes.
Thank you.
Ask any question. Please press star one on your telephone keypad.
We have no further questions I will now hand, it back over to Bill.
Fox.
Great. Thank you Laurent thanks for the robust questions.
Specifically, thank you for being interested in our medical research.
Reported a lot of good work went into that if you have follow up questions. Please reach out with love to continue the dialogue. Thank you.
This concludes today's call. Thank you for joining you may now disconnect your lines.
Okay.
Yes.