Q1 2024 Four Corners Property Trust Inc Earnings Call
Operator: Welcome to the FCPT First Quarter 2024 Financial Results Conference Call. My name is Carla, and I will be coordinating your call today. During the presentation, you can register to ask a question by pressing star followed by 1 on your telephone keypad. If you change your mind, please press star followed by 2. I would now like to hand you over to Patrick Wernig. Patrick, please go ahead.
Welcome to the CPT first quarter, Tony could you for first financial results Conference call. My name is Carla and I will be coordinating your call today. During the presentation can we like to try to ask a question by pressing star followed by one on your telephone keypad.
Patrick L. Wernig: You change your mind lifestyle, all about you I will now like Huntsville.
Patrick L. Wernig: 100, <unk>, Richard Patrick where Nick Patrick Please go ahead.
Patrick L. Wernig: Thank you Carlos during.
Patrick L. Wernig: During the course of this call, we will make forward-looking statements, which are based on our beliefs and assumptions. However, 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 some potential risks, please refer to our SEC filings, which can be found at scpt.com.
Patrick L. Wernig: 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 more detailed description of some potential risks. Please refer to our SEC filings, which can be found at CPG.
Patrick L. Wernig: Dot com.
Patrick L. Wernig: All the information presented on this call is current as of today, May 2, 2024. In addition, reconciliation to non-GAAP financial measures presented on this call, such as FFO and AFFO, can be found in the company's supplemental report. With that, I'll turn the call over to Bill.
Patrick L. Wernig: All the information presented on this call is current as of today May <unk> 2024. In addition reconciliation to non-GAAP financial measures presented on this call such as <unk> and <unk> can be found in the Companys supplemental report.
Patrick L. Wernig: With that I'll turn the call over to Bill.
William Howard Lenehan: Good morning. Thank you for joining us to discuss our first quarter results. I will make introductory remarks, and Patrick, Josh, and Jerry will comment further on the acquisition market and our financial results and capital position. We reported first quarter AFFO of $0.43 per share, which is $0.02 or 4.9% higher from Q1 last year. Our existing portfolio continues to perform very well, with 99.7% rent collections for the quarter and 99.6% occupancy at quarter end.
Bill: Good morning, Thank you for joining us to discuss our first quarter results I will make introductory remarks, and Patrick Josh and Jerry will comment further on the acquisition market and our financial results and capital position.
William Howard Lenehan: We reported first quarter <unk> 43 per share, which is <unk> <unk> or four 9% up from Q1 last year.
William Howard Lenehan: Our existing portfolio continues to perform very well with 99, 7% rent collections for the quarter and 99, 6% occupancy at quarter end, our EBITDAR to rent coverage in the first quarter was four nine times for the significant majority of our portfolio that reports this figure.
William Howard Lenehan: Our EBITDA to rent coverage in the first quarter was 4.9 times for the significant majority of our portfolio that reports this figure. This remains amongst the strongest coverage within the net lease industry. According to Baird Research, year-over-year sales for the restaurant sector as a whole remain positive in the first quarter in the 4% range after flat results in January, which were impacted by bad weather. Similar to last quarter, casual dining saw small declines off strong levels in the prior year period.
William Howard Lenehan: This remains amongst the strongest coverage within the net lease industry.
William Howard Lenehan: According to <unk> research year over year sales for the restaurant sector as a whole remain positive in the first quarter in the 4% range. After flat results in January which was impacted by bad weather.
William Howard Lenehan: Similar to last quarter casual dining saw small declines are strong levels in the prior year periods.
William Howard Lenehan: Darden reported a 1.8% decline in same-store sales for Olive Garden and a 2.3% increase for Longhorn for the quarter ending February 25th. Overall, for Darden, the restaurant-level EBITDA margin improved 70 basis points to 20.6%, reflecting commodity pricing and productivity improvements. We note that our second-largest tenant, Brinker, also announced positive results on Tuesday. Chili's same-store sales grew 3.5%, and their restaurant-level EBITDA margin improved 90 basis points to 14.1%.
William Howard Lenehan: Darden reported a one 8% decline in same store sales for olive garden, and a two 3% increase for longhorn for the quarter ending February 25th.
William Howard Lenehan: Overall for Darden restaurant level, EBITDA margin improved 70 basis points to 20, 26%, reflecting commodity pricing and productivity improvements.
William Howard Lenehan: We note that our second largest tenant Brinker also announced positive results on Tuesday.
William Howard Lenehan: <unk> same store sales grew three 5% and their restaurant level EBITDA margin improved 90 basis points to 14, 1%.
William Howard Lenehan: FCPT acquired four properties in a quarter for $15.9 million at a 6.9% cap rate. All of the properties were in the medical retail sector, and we continue to benefit from establishing verticals in addition to restaurants, our historical core area of focus. Similar to the fourth quarter of 2023, we slowed down acquisition activity in the quarter to reflect the current cost of capital, equity, and debt, in comparison to the acquisition market price. The current capital markets backdrop and seller reticence to accept higher cap rates have made it challenging to deploy capital accretively.
William Howard Lenehan: <unk> acquired four properties in the quarter for $15 $9 million at a six 9% cap rate all of the properties were in the medical retail sector and we continue to benefit from establishing verticals. In addition to restaurants, our historical core area of focus.
William Howard Lenehan: Similar to the fourth quarter of 2023, we slowdown acquisition activity in the quarter to reflect the current cost of capital of equity and debt.
William Howard Lenehan: In comparison to acquisition market pricing.
William Howard Lenehan: The current capital markets backdrop, and seller reticence to accept higher cap rates has made it challenging to deploy capital Accretively.
William Howard Lenehan: In this environment, we remain disciplined allocators of capital. As we've stated in the past several quarters as well, we have established mental models and structured our team incentives to discourage deploying capital just to grow the company's size without also increasing per share metrics of earnings or intrinsic value. Turning to capital sources, we issued $6.9 million of equity early in the first quarter at an average offering price of $25.38. In March, we issued $85 million of term loans, utilizing the accordion feature of our credit facility to achieve favorable borrowing costs.
William Howard Lenehan: This environment, we remain disciplined allocators of capital and we stated in the past several quarters as well we have established mental models and structure our team incentives to discourage deploying capital just to grow the company size with without also increase in per share metrics of earnings or intrinsic value.
William Howard Lenehan: Turning to capital sources, we issued $6 9 million of equity early in the first quarter at an average offering price of $25 38.
William Howard Lenehan: March we issued $85 million of term loans utilizing the accordion feature of our credit facility.
William Howard Lenehan: Achieve favorable favorable borrowing costs.
William Howard Lenehan: Fifty million of the offering was used to pay down a private note debt maturity that was due in June of 2024. Our balance sheet is in great shape with our next debt maturity not scheduled until November 2025. The remaining $35 million was used to fund acquisitions.
William Howard Lenehan: $50 million of the offering was used to pay down our private note debt maturity that was due in June of 2024, our balance sheet is in great shape with our next debt maturity not scheduled until November 2025.
William Howard Lenehan: The remaining $35 million was used to fund acquisitions.
William Howard Lenehan: While we normally do not get into detail on individual tenants, we are aware of the public reports that Tye Union is exploring options for Red Lobster, including selling the brand or restructuring alternatives. Before going into detail, it is important to note that we own a group of stores with below-average brand rents and above average brand ePetarda rent coverage. Now on to specifics.
William Howard Lenehan: While we normally do not get into details on individual tenants. We are aware of the public reports that Thai Union is exploring options for red lobster, including selling the brand or restructuring alternatives.
William Howard Lenehan: Before going into detail. It is important to note that we own a group of stores with below average brand rents and.
William Howard Lenehan: And above average brand EBITDAR to rent coverage now on to specifics.
William Howard Lenehan: First, I'll start with portfolio management. In 2022, we noticed a few stores beginning to show weaker performance through our monitoring of store-level sales and profitability. Over the next 18 months, we sold some of our highest-rent and lower-performing stores at an average cap rate of 6.5% for a positive gain. This dropped our exposure from 2.9% of annual base rent to 1.7% today. Today we own 18 properties, of which 10 are in a master lease with an average rent of $276,000. The remaining eight are low-rent ground leases and out parcels with an average rent of $117,000. Blended together, this equates to an average rent of $206,000 per property.
William Howard Lenehan: First I'll start with portfolio management and 2022, we noticed a few stores beginning to show weaker performance through our monitoring of store level sales and profitability over the next 18 months, we sold some of our highest rent and lower performing stores at an average cap rate of six 5% and a positive gain.
William Howard Lenehan: This dropped our exposure from two 9% of annual base rent to one 7% today.
William Howard Lenehan: Today, we own 18 properties of which 10 are in a master lease with an average rent of $276000. The remaining eight are low rent ground leases and out parcels with average rent of $117000.
William Howard Lenehan: Blended together this equates to an average rent of $206000 per property.
William Howard Lenehan: In both the case of the master lease and the ground leases, we have good red cover. Second, it's important to remember that we were highly selective in acquiring Red Lobsters in the first place. Over the years, we passed on a lot of Red Lobster locations where the rent was set very high or the underlying store performance was low. We recently reviewed nearly 200 Red Lobster rent comps to compare them to our 18 locations. We found that 15 of our 18 restaurants had rents below the brand median for this comp set, and the remaining three were in the ballpark of the brand median rent.
William Howard Lenehan: In both the case of the master lease and the ground leases, we have good rent coverage.
William Howard Lenehan: Second it's important to remember that we were highly selective in acquiring red lobsters in the first place over the years, we pass on a lot of Red lobster locations, where the rent was set very high or the underlying store performance.
William Howard Lenehan: It was low we recently reviewed nearly 200 red lobster rent comps to compare to our 18 locations. We found that 15 of our 18 restaurants have rents.
William Howard Lenehan: Below the brand media for this comp set in the remaining three were in the ballpark of brand median rent.
William Howard Lenehan: Well, we hope Red Lasseter avoids restructuring, but if it does come to that, we feel that we are well positioned to manage the process. More importantly, in March, we announced Jerry's retirement from FCPT and Patrick's promotion to CFO. This transaction has been carefully planned over the last year and a half and will be completed tomorrow. I would like to sincerely thank Jerry for his service and contributions in helping us grow from a spinoff in 2015.
William Howard Lenehan: Well, we hope red lobster avoids restructuring if it does come to that we feel that we are well positioned to manage the process.
William Howard Lenehan: More importantly in March we announced Jerry's retirement from FTP and Patricks promotion to CFO. This transaction has carefully has been carefully planned over the last year and a half and will be completed tomorrow.
William Howard Lenehan: I'd like to sincerely thank Jerry for his service and contributions in helping us grow from a spin off.
William Howard Lenehan: Origin of 2015.
William Howard Lenehan: Jerry was here on day one as part of six employees many years ago. He has been a great financial steward and has been instrumental in helping make FCPT what it is today. While Jerry will be around in an interim advisory role to support the team, we wish him all the best in the future. I'm also very excited to have Patrick step up in the CFO role. Patrick was working on the creation of Four Corners at J.P. Morgan even before Four Corners existed.
William Howard Lenehan: Gary was here day, one as part of six employees.
William Howard Lenehan: Many years ago sure has been a great financial steward and has been instrumental in helping make FCP what it is today.
William Howard Lenehan: While Jerry will be around in the interim advisory role to support the team we wish him all the best in the future.
William Howard Lenehan: I'm also very excited to have Patrick step up in the CFO role Patrick was working on the creation of four corners at Jpmorgan, even before four corners existed.
William Howard Lenehan: He was one of our first hires and brings a deep understanding of our capital markets, our acquisition process, and our culture. With that, I'll hand it over to Patrick to further discuss the investment environment. Thanks, Bill.
William Howard Lenehan: He was one of our first hires and brings a deep understanding of our capital markets, our acquisition process and our culture with that I'll hand, it over to Patrick to further discuss the investment environment.
William Howard Lenehan: Bill.
Patrick L. Wernig: Before I get into specifics on investments, I'd also like to just echo your comments about Jerry and his significant contribution to our company and culture. I would be remiss if I also didn't take this moment to thank him personally for over eight years of mentorship and guidance over the last 12 months as we work through the transition process.
Patrick: Where I get into specifics on investments I would also like to just echo your comments about Jerry and his significant contribution to our company culture.
Patrick L. Wernig: Be remiss if I also didn't take this moment to thank him personally for over eight years of mattress, yet and guidance over the last 12 months as we work through the transition process.
Patrick L. Wernig: Now turning to our acquisitions outlook, we're seeing a lot of interesting opportunities that may be added to the pipeline. Said another way, there's no shortage of tenants seeking net lease capital, and there are fewer buyers out there pursuing them. What is missing, though, is a stable pricing environment where sellers are comfortable transacting at prices that make sense for Four Corners. And while we continue to see increases in seller cap rate expectations as interest rates remain elevated, we've also seen that net lease pricing adjusts more slowly than capital markets. The bid-ask spread between buyers and sellers, while converging, still exists.
Patrick L. Wernig: Now turning to our acquisition outlook, we're seeing a lot of interesting opportunities that may be added to the pipeline.
Patrick L. Wernig: Another way there is no shortage of tenants seeking at least capital and there are fewer buyers out there pursuing them with isn't messing around with a stable pricing environment, where salaries are comfortable transacting at pricing that makes sense for four corners.
Patrick L. Wernig: And while we continue to see increases in salary cap rate expectations as interest rates remain elevated we have also seen that net lease pricing adjusts more slowly than capital markets. So the bid ask spread between buyers and sellers are all converging sell tests that resulted in transaction volume being down for the sector overall.
Patrick L. Wernig: That's resulted in transaction volume being down for the sector overall. However, it's worth pointing out that net lease can be lumpy, and while we had a slow start to the year in 2023, we also had a record acquisition year on the back of strong closings from April through July. Overall, our portfolio now stands at 1,137 leases, with Darden at 51% of our annual base rents and restaurants at 80%. Non-restaurant is now 20% of our portfolio, with automotive as our largest non-restaurant sector at 9%, followed by medical retail at 8%.
Patrick L. Wernig: It's worth pointing out that net lease can be lumpy and while we had a slow start to the year. In 2023. We also had a record acquisition year on the back of strong closings from April through July.
Patrick L. Wernig: Overall, our portfolio now stands at 1137 leases with Darden at 51% of our annual base rents and restaurants at 80% non.
Patrick L. Wernig: Non restaurant and about 20% of our portfolio with automotive is our largest non restaurant sector at 9% followed by medical retail at 8%.
Patrick L. Wernig: On the disposition front, we did not sell any properties in Q1, but we frequently receive reverse inquiries on our properties and continue to consider strategic dispositions as a potential attractive alternative to issuing new debt and equity capital as well as part of our active portfolio management strategy. We are fortunate that our portfolio continues to attract buyers, and we can utilize dispositions for creative capital recycling when needed or when capital markets are less attractive. Josh, I'll turn it over to you.
Patrick L. Wernig: On the disposition front, we did not sell any properties in Q1, but we frequently receive reverse inquiries on our properties and continue to consider strategic dispositions as a potential ultra attractive alternative to issuing new debt and equity capital as well as part of our active portfolio management strategy we.
Josh: We are fortunate that our portfolio continues to attract buyers and we can utilize dispositions for accretive capital recycling when needed when capital markets are less attractive.
Patrick L. Wernig: Josh I'll turn it over to you.
Joshua C. Zhang: Patrick, turning to leasing, we had 13 leases expire in Q1, with all but two tenants renewing. Those 11 leases had positive renewal spreads of 12.5%. We expect positive results on the two sites that did not renew, but we are early in the process. These results reinforce our underwriting confidence that we are partnering with the right tenants and that the rents are set at attractive levels for the tenants in our portfolio. Portfolio occupancy stands today at 99.6%.
Josh: Thanks, Patrick turning to leasing we had 13 leases expire in Q1 with all but two tenants renewing those 11 leases had positive renewal spreads of 12, 5%.
Joshua C. Zhang: We expect positive results of the two sites that did not renew but we are early in the process there.
Joshua C. Zhang: These results reinforce our underwriting confidence that we are partnering with the right tenants in that.
Joshua C. Zhang: Rents are set at attractive levels with the tenants in our portfolio.
Joshua C. Zhang: Portfolio occupancy stand today at 99, 6% and remains well positioned with only <unk>, 9% and two 2% of annual base rent maturing in 2024 and 2025, respectively.
Joshua C. Zhang: This ticked up slightly for the quarter, what we already have strong leads on re leasing at several locations.
Joshua C. Zhang: It remains well positioned with only 0.9% and 2.2% of annual base rent maturing in 2024 and 2025 respectively. This ticked up slightly for the quarter, but we already have strong leads on release at several locations. To continue on Bill's statements on Red Lobster, we understand bankruptcy can be a complicated and uncertain process, but if the brand is unable to avoid it, we are prepared to respond. However, any offer made for rent reduction would be weighed against what we expect to be strong demand to backfill the properties given the real estate quality.
Joshua C. Zhang: Continuing on bills statements on Red lobster, we understand bankruptcy can be complicated and uncertain process.
Joshua C. Zhang: The brand is unable to avoid it we are prepared to respond.
Joshua C. Zhang: Any offer made for rent reduction would be weighed against what we expect to be strong demand to backfill the properties given the real estate quality.
Joshua C. Zhang: Fortunately, a lot of Red Lobsters are located adjacent to Olive Garden and Longhorn Steakhouse stores, which means at least one of our preferred tenants already knows these sites. Before turning it over, I'd also like to thank Jerry for the past eight years of mentorship and service to FCA. Jerry, I'll turn it over back to you.
Joshua C. Zhang: Fortunately a lot of our boxes are located adjacent to olive garden, Longhorn steakhouse stores, which means at least one of our preferred tenants already knows these sites well.
Joshua C. Zhang: Before turning it over I'd also like to thank Jay for the past eight years of inventory shape and Sandra SaaS GPT share.
Jerry: I'll turn it over back to you.
Gerald R. Morgan: Thanks, Josh. For the first quarter, our cash rental revenues grew 12.9% on a year-over-year basis, including the benefit of rental increases and $329 million in acquisitions over the last 12 months. We reported $58.0 million of cash rental income in the first quarter after excluding $0.6 million of straight line and other non-cash adjustments. And on a run rate basis, the current annual cash-based rent for leases in place as of quarter end is $219.6 million, and our weighted average five-year annual cash-rent escalator remains at 1.4%.
Jerry: Thanks, Josh for the first quarter, our cash rental revenues grew 12, 9% on a year over year basis, including the benefit of rental increases and $329 million of acquisitions over the last 12 months, we reported 58.0 million of cash rental income in the first quarter after excluding.
Gerald R. Morgan: <unk> <unk> 6 million of straight line, another noncash adjustments and on a run rate basis current annual cash base rent for leases in place as of quarter end is $219 6 million and our weighted average five year annual cash rent escalator remains at one 4%.
Gerald R. Morgan: We collected 99.7% of base rent in the quarter, and there were no material changes to our collectability or credit reserves nor any balance sheet impairments. Cash G&A expense excluding stock-based compensation was $4.6 million, representing 7.9% of cash rental income for the quarter and compared to 8.4% for the prior year quarter.
Gerald R. Morgan: We collected 99, 7% of base rent in the quarter and there were no material changes to our collectability or credit reserves, nor any balance sheet impairments cash G&A expense, excluding stock based compensation was $4 6 million, representing seven 9% of cash rental income for the quarter and compares to eight four.
Gerald R. Morgan: <unk> for the prior year quarter.
Gerald R. Morgan: Overall leverage, our net debt to adjusted EBITDAR in the first quarter was 5.6 times, and our fixed charge coverage ratio was a very healthy 4.3 times. We had $277 million of liquidity, comprised of $27 million of cash and $250 million of full revolver capacity at the beginning of the quarter. We remain committed, and I know Patrick and the team will continue to maintain a conservative balance sheet and extend and layer our debt maturities as we can.
Gerald R. Morgan: Overall leverage our net debt to adjusted EBIT in the first quarter was five six times and our fixed charge coverage ratio was a very healthy four three times, we have $277 million of liquidity comprised of $27 million of cash and $250 million of full revolver capacity at the beginning of the quarter.
Gerald R. Morgan: We remain committed and I know Patrick and the team will continue to maintain a conservative balance sheet and extend and layer our debt maturities as we can.
Gerald R. Morgan: We issued $85 million in term in March, as we mentioned, and that did take care of our only debt maturity before November 2025. The loan matures in March of 2027 with a 12-month extension exercisable by us. In conjunction with the offering, we entered into $85 million of interest rate swaps to fix the reference rate at 3.94% through maturity, including the credit margin of 0.95%. As determined by our current investment grade ratings, the effective interest rate is 4.89%.
Gerald R. Morgan: We issued $85 million of term in March as we mentioned and that did take care of our only debt maturity before November 2025, the loan matures in March of 2027, with a 12 month extension exercisable by us in conjunction with the offering we entered into $85 million of interest rate swaps to fix the reference rate at $3.
Gerald R. Morgan: Nine 4% through maturity, including the credit margin of <unk>, 95% determined by our current investment grade ratings. The effective interest rate is 489% were very appreciative of the support from our existing bank partners on the loan.
Gerald R. Morgan: We are very appreciative of the support from our existing bank partners on the loan. As the others mentioned, this is my last quarter and earnings call at Four Corners. I, too, want to thank all of my colleagues here at Four Corners for their support and collaboration over the last eight plus years and our board, which is an amazing board. FCPT is a special place, and I know it is in great hands going forward. And with that, I'll turn it back over to Carla for investor Q&A.
Carla: As the others mentioned this is my last quarter on earnings call at four corners, I too want to thank all of my colleagues here at four corners for their support and collaboration over the last eight plus years and our board, which is an amazing board.
Gerald R. Morgan: <unk> is a special place and I know it is in great hands going forward and with that I'll turn it back over to Carla for Investor Q&A.
Operator: Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Anthony Paolone from J.P. Morgan.
Carla: Thank you.
Carla: I'd like to ask a question. Please press star followed by one on your telephone keypad.
Anthony Paolone: Your line this Christophe I'll invite you to.
Anthony Paolone: Ask your question. Please ensure your devices Amit locally.
Anthony Paolone: Our first question comes from Anthony <unk> from JP Morgan.
Anthony Paolone: Thanks. And first of all, thanks, Jerry, for all the help over the years. So, good luck with everything.
Operator: Thanks.
Anthony Paolone: First of all thanks, Gerry for all the help over the years. So good luck with everything.
William Howard Lenehan: My first question is on just cost of capital versus yields. And so, if we think about just like your blended cost of capital right now seems like maybe a high sixes, or thereabouts, and you've been doing deals at seven. Like, do you think that's enough? Or where do you think, you know, yields need to be for you to feel like you could lean into transactions more?
Anthony Paolone: My first question is on just cost of capital versus yields and so if we think about just like your blended cost of capital right now it seems like maybe a high sixes thereabouts and you've been doing deals that <unk> like.
William Howard Lenehan: Do you think that's enough for where do you think yields need to be for you to feel like you can lean into transactions more.
William Howard Lenehan: It's a great question, Anthony. It's darn close. You know, we've been able to consistently acquire things with the seven handle, you know, after seven, eight years of six and a half to six and seven cap rates. So it's quite close.
Speaker Change: It's a great question, Anthony it's darn close.
William Howard Lenehan: We've been able to.
William Howard Lenehan: <unk> acquire things.
William Howard Lenehan: With the seven handle after.
William Howard Lenehan: 708 years of six 5% to six seven cap rate so it's quite close.
William Howard Lenehan: We've been a little cautious. It's not super creative where the market is, but with a slightly higher stock price, a slightly lower 10-year, or slightly higher cap rates, it begins to really work. So we're being patient. We're not lowering our credit quality and our acquisitions. We're playing for the long haul.
William Howard Lenehan: Been a little cautious.
William Howard Lenehan: It's not super accretive where the market is but.
William Howard Lenehan: With.
William Howard Lenehan: With a slightly higher stock price of slightly lower 10 year or slightly higher cap rates. It begins to really work. So we're being patient, we're not lowering our credit quality and our acquisitions, we're playing for.
William Howard Lenehan: The long term.
William Howard Lenehan: Alright, and do you see a sizable pipeline that you like right now so that if your capital costs do line up a bit better, you could turn it on a bit faster, more robustly, or does the pipeline have to work? That's exactly right. And that informs our confidence to be patient. To the extent that the numbers lined up a little bit better, we feel like there's a buildup in the market, and that we could deploy capital creatively again if the numbers were slightly different.
Speaker Change: Alright, and do you see a sizable pipeline that you like right now so that if your capital costs do line up a bit better you can you can turn it on a bit faster more robustly.
William Howard Lenehan: Or does the pipeline George Thats exactly.
William Howard Lenehan: That's exactly right and that informs our our confidence to be patient.
William Howard Lenehan: To the extent that the numbers lined up a little bit better we feel like there is a.
William Howard Lenehan: A buildup in the market.
William Howard Lenehan: And that we could be.
William Howard Lenehan: We could deploy capital Accretively again, if the numbers were slightly different.
William Howard Lenehan: Yeah.
Speaker Change: Okay. Thank you.
William Howard Lenehan: Yes.
Wesley Keith Golladay: Our next question comes from Wes Golladay from Baird.
William Howard Lenehan: Our next question comes from Wes Golladay from Bank.
William Howard Lenehan: Hey, good morning, everyone. And congrats, Jerry and Patrick. I just want to go back to the comment about the strong demand for the Red Lobster units and, in a worst case scenario, just if you can clear or just give us maybe some of your views on how quickly you can turn a unit, maybe where you see the mark to market and if you would, in this situation, having to release it, would you look to put in TI's if you had the
Wesley Keith Golladay: Hey, good morning, everyone and congrats Gerry and Patrick I, just want to go back to the comment about the strong demand for the Red lobster units in a worst case scenario.
William Howard Lenehan: Or just give us maybe your views on how quickly you can turn a unit, maybe where you see the mark to market and if you would in this situation happened to release that would you look to put in Ti.
William Howard Lenehan: If you have the choice.
William Howard Lenehan: Um, you know, honestly Wes, I don't think there's a high likelihood that we will be getting these buildings back. I mean, eight of them are ground leases with $12 a foot rents. We get a percentage rent from those properties. They're healthy. The master lease is well covered.
William Howard Lenehan: Honestly was I don't think there is.
William Howard Lenehan: Oh, hi, likelihood that we will be getting these buildings back I mean eight of them are ground leases with $12 a foot rents.
William Howard Lenehan: We get percentage rent from those properties they are healthy.
William Howard Lenehan: The master lease is well covered.
William Howard Lenehan: We sold the weaker properties, so I don't think that that's likely. But to directly answer your question, these are in good locations, as, as Pat mentioned, they're very often next to a Longhorn or an Olive Garden. Just to remind everyone, Red Lobster was a Darden brand a decade ago.
Speaker Change: We sold the weaker properties, so I don't think that Thats likely.
William Howard Lenehan: But to directly answer your question. These are in good locations is as.
William Howard Lenehan: As Pat mentioned, they are very often next to a longhorn or an olive garden just to remind everyone Red lobster was a darden brand.
Speaker Change: Okay to go.
William Howard Lenehan: So I think it's unlikely. I think if we got back the ground lease properties, we'd likely make money. I think it's highly unlikely they'd reject the entire mass release, but if they did, I'm not concerned. As far as TIs are concerned, you know. T.I.
William Howard Lenehan: So.
William Howard Lenehan: It is unlikely I think if we got back the ground lease properties, we'd likely make money.
William Howard Lenehan: Yeah.
William Howard Lenehan: I think it's highly unlikely they'd reject the entire master lease, but if they did I'm not concerned as far as <unk>.
William Howard Lenehan: 's on a couple buildings in the context of a $3 billion company, you know, isn't terribly meaningful. But it would be part of, you know, the whole..., you know, bargain that you'd have with the new tenant. So I don't think we'd think about it, you know, as a hard no; it would be part of the negotiation. But again, I think it's pretty unlikely, but as Josh mentioned, restructurings, if it comes to that, are uncertain, and, you know, I would just say that we have a lot of experience investing in distressed properties in my background and Jim's background. We're well equipped to handle it.
William Howard Lenehan: Ti is on a couple of buildings in the context of a $3 billion company.
William Howard Lenehan: Isn't terribly meaningful.
William Howard Lenehan: It would be part of the whole.
William Howard Lenehan: Bargain that you would have with the new tenants. So I don't think we think about it.
William Howard Lenehan: As a hard no it would be part of the negotiation, but again I think it's pretty unlikely, but as Josh mentioned restructurings if it comes to that.
William Howard Lenehan: Our uncertain and I would just say that we have a lot of experience investing in distressed properties in my background in Jim's background.
William Howard Lenehan: Well.
William Howard Lenehan: Equipped to handle it.
William Howard Lenehan: And then when we look at the pipeline, what are you seeing as far as deal volume goes? Is it that you've closed more deals on medical retail? Is that just because the more realistic pricing is the volume gets bigger there? And do you see more opportunities for third party transactions? Yeah.
William Howard Lenehan: And then when we look at the pipeline what are you seeing as far as deal volume and go.
William Howard Lenehan: Closing more deals on the medical retailers that just because the more realistic pricing the volume that the bigger there.
William Howard Lenehan: You see more opportunity for so I think that is just third party transaction.
William Howard Lenehan: Yeah, that's just sort of lost small numbers and how it happened. We're looking at automotive service, we're looking at medical retail, we're looking at restaurants. I think the only thing that I would note on the acquisition pipeline is that there seems to be more larger portfolios being discussed now, as it's been, you know, 12 months with a difficult acquisition environment, and people are starting to face debt maturities. Equity Partners are, you know, on private deals seeing higher costs of capital, just like the public market. So we're seeing more of that, but nothing that's hit paydirt yet.
Speaker Change: Yes, it's just that's just sort of law of small numbers.
William Howard Lenehan: It happened, we're looking at automotive service, we're looking at medical retail we're looking at restaurants.
William Howard Lenehan: The only thing that I would note on the acquisition pipeline is there seems to be more larger portfolios being discussed now.
William Howard Lenehan: As it's been.
William Howard Lenehan: No.
William Howard Lenehan: Nine.
William Howard Lenehan: Months with a difficult acquisition environment and people are starting to face debt maturities.
William Howard Lenehan: Equity partners are.
William Howard Lenehan: On private deals seeing higher cost of capital just like the public markets. So we're seeing more of that but nothing that's hit pay dirt yet.
William Howard Lenehan: Okay, and then just last one for me, you know, on the disposition front, you do have a lot of assets that are in high demand in the private market. What type of spread, initial spread, do you think you can get and redeploy the capital at? And also, another component of the value creation would be the annual escalators and the new properties. Do you think that'll be higher for what you buy versus what you're selling?
Speaker Change: Okay, and then just last one for me.
William Howard Lenehan: The disposition front are you do you have a lot of assets that are in high demand in the private market what type of spread in the initial spread do you think you can get.
William Howard Lenehan: Redeploy the capital at and then also another component of the value creation would be the annual escalators in the new properties, you think that'll be higher for <unk> versus what you're selling.
William Howard Lenehan: It won't be lower to answer the last question first. It won't be lower
William Howard Lenehan: It will be lower to answer the last question first it won't be lower we have seen some higher escalations, we've seen some more discipline on tenant friendly lease extensions as far as dispositions, we get inquiry incoming inquiries.
William Howard Lenehan: We have seen some higher escalations. We've seen some more discipline on tenant-friendly lease extensions. As far as dispositions go, we get inquiries, incoming inquiries, almost daily, certainly weekly. Very often, those are in the mid-fives.
William Howard Lenehan: Almost daily certainly weekly.
William Howard Lenehan: Very often those are in the mid fives.
William Howard Lenehan: But, you know, they're... We like our existing portfolio, so to be incentivized to sell something, you know, needs to be compelling. And so, and I would also mention that, you know, very often the buyers need to get financing, they're part of a 1031 exchange, and so the closing rates are, you know, 50-50, and that means there's a lot of work to do. So, it's an option, as you say, we have, you know. Hundreds of buildings leased to investment-grade tenants that are very desirable, but it hasn't been compelling mathematically for us just yet.
William Howard Lenehan: But yes they are.
William Howard Lenehan: We like our existing portfolio, so to be incentivized to sell something.
William Howard Lenehan: <unk> needs to be compelling and so.
William Howard Lenehan: And I would also mentioned that very often the buyers.
William Howard Lenehan: They need to get financing they are part of a 10 31 exchange and so the closing rates are.
William Howard Lenehan: 50, 50 and that means it's a bunch of work.
William Howard Lenehan: To do so as an option as you say we have.
William Howard Lenehan: Hundreds of buildings leased to investment grade tenants.
William Howard Lenehan: That are very desirable.
William Howard Lenehan: But it hasnt been a compelling mathematically for us just yet.
Wesley Keith Golladay: Thanks for your time, everyone.
Speaker Change: Okay. Thanks for the time everyone.
Speaker Change: Yes. Thank you.
Richard Jon Milligan: And our next question comes from R.J. Milligan from Raymond, James.
Wesley Keith Golladay: And our next question comes from RJ Milligan from Raymond James.
Richard Jon Milligan: Hey, good morning, guys. Actually, my questions have been answered, but I just wanted to stay in the queue.
Richard Jon Milligan: Hey, good morning, guys.
Richard Jon Milligan: Actually my questions have been answered, but I just wanted to say in the Q congratulate projects on the new role and more importantly, thank you Gerry for the relationship over the past eight years I really appreciate all of your help and congratulations on your retirement.
Gerald R. Morgan: I want to congratulate Patrick on his new role, and, more importantly, thank you, Jerry, for the relationship over the past eight years. I really appreciate all of your help. And congratulations on your retirement. Thank you.
Gerald R. Morgan: Thank you, RJ. Thanks, RJ.
Speaker Change: Thank you RJ Im sorry, Jeff.
Gerald R. Morgan: Okay.
James Hall Kammert: As a reminder, to ask a question, please press star followed by one on your telephone keypad. Our next question comes from Gene Kammert from Evercore.
Gerald R. Morgan: As a reminder to ask a question. Please press star followed by one on your telephone keypad.
James Hall Kammert: Good morning. Thank you.
James Hall Kammert: Our next question comes from Jim colored from Evercore.
James Hall Kammert: You know, Bill, building on your comment that potentially there are some larger portfolios out there, which makes sense logically, right? Their pressures are magnified given the scale of what they have to refinance or pay off, etc. But how would you think about that from Four Corners' perspective? If there was a $300 million portfolio out there, would you require a bigger, wider spread to your cost of capital at the time than a pipeline of one-offs because you're maybe precluding yourself from optionality to see the market evolve over time? I'm just curious how you think about a bigger transaction versus if you've been in a pretty steady cadence of one-offs.
James Hall Kammert: Hi, Good morning. Thank you build building on your comment that potentially there are some larger portfolios out there, which makes sense logically right there.
James Hall Kammert: Pressures are magnified given the scale of what they have to refinance or pay off et cetera, but does that mean, how would you think about that.
James Hall Kammert: Owners' perspective, if there is a $300 million portfolio out there would you require a bigger wider spread to your cost of capital at the time, then a pipeline of one offs because you maybe precluding yourself from Optionality to see the market evolve over time I'm. Just curious how you think about a bigger transaction versus to Keith you've been pretty steady cadence of one off.
William Howard Lenehan: Yeah, it's a really great question. The crux of it, though, is, is it $300 million for one tenant? Or is it?
Bill: Yes, it's a really great question.
William Howard Lenehan: The crux of it though is is it $300 million of one tenant.
William Howard Lenehan: Or is it three.
William Howard Lenehan: $300 million of a diversified pool that's, for argument's sake, analogous to our existing portfolio. What we've seen in the market is that $300 million of one tenant trades at a discount because you're buying tenant concentration when you buy that, a well-diversified pool less so. So I would look at a well-diversified pool that we're buying as very efficient. And I wouldn't demand a premium. 300 million of a sale lease back of one tenant in today's market would get a premium, would get discounted pricing or a premium cap rate, however you want to say it.
William Howard Lenehan: <unk> $300 million of a diversified pool, that's for argument's sake is analogous to our existing portfolio.
William Howard Lenehan: What we've seen in the market is that the $300 million of one tenant.
William Howard Lenehan: Trades at a discount because you are buying tenant concentration when you buy that.
William Howard Lenehan: Well diversified pool less so so I would look at it well diversified pool that we're buying as very efficient so I wouldnt demand a premium.
William Howard Lenehan: $300 million of a sale leaseback of one tenant in today's market would get a premium would get discounted pricing or a premium cap rate. However, you want to say it.
William Howard Lenehan: And I think the other thing that we've noticed in the market... Yeah, the other thing we've noticed in the market just to close the loop is that, generally, my feeling is that if acquisitions require capital raises, there's a higher level of hesitancy because, you know, bank debt capital is more dear, capital markets are more fickle, and most people are a little bit where we are, where they'd like to So a transaction that requires a capital raise, You know, three, four years ago, that was an advantage. You wanted a reason to go to the capital markets. Today, that causes a pause.
William Howard Lenehan: Okay.
William Howard Lenehan: The other thing that we've noticed in the market.
William Howard Lenehan: The other thing we have noticed in the market just to close the loop.
William Howard Lenehan: Is that.
William Howard Lenehan: <unk>.
William Howard Lenehan: Reached generally my feeling is that if acquisitions will acquire capital raises.
William Howard Lenehan: A higher level of hesitancy because.
William Howard Lenehan: Bank debt capital is more Dear capital markets are more picky.
William Howard Lenehan: And most people are a little bit where.
William Howard Lenehan: Where we are where they'd like to see their stock price a little higher so a transaction that requires a capital raise.
William Howard Lenehan: Three four years ago that was an advantage you wanted a reason to go to the capital markets today that.
William Howard Lenehan: Causes pause.
William Howard Lenehan: It's a very good color. And just to close the loop, I know it's a fluid situation, but on those, let's just call them larger portfolios from your perspective. What's the kind of dollar value that is in your shadow pipeline today, say, versus six or nine months ago? Just ballpark. Curious what you're looking at.
William Howard Lenehan: Good color and just to close the loop I know, it's a fluid situation, but on those let's just call them larger portfolios from your perspective.
William Howard Lenehan: What's kind of dollar value that is in your shadow pipeline today versus six to nine months ago.
William Howard Lenehan: Ballpark.
William Howard Lenehan: But youre looking at.
William Howard Lenehan: Yeah, these are more quite large transactions that we're kicking the tires on, but I want to just be very clear, nothing's imminent or even probable. Just things that we're looking at. We have, we've had large transactions that we've been looking at since inception. We've done a handful of them with Brinker, with a bank that was selling some net leases a year ago, but nothing is imminent or probable. This is just an observation that they seem to be more prevalent than in the past.
Speaker Change: Yes. These are more quite large transactions that were kicking the tires on but I wanted to just be very clear nothing's imminent or even probable just things that we're looking at we have we've looked at we've had a large transactions that we've been looking at since inception, we've done a handful of them with brinker.
James Hall Kammert: Okay, I understand. Thank you.
James Hall Kammert: With.
James Hall Kammert: Bank that was selling some net lease a year ago.
James Hall Kammert: But nothing is imminent or probable.
James Hall Kammert: An observation that they seem to be more prevalent than in the past.
Speaker Change: Okay understood. Thank you.
James Hall Kammert: Yes.
William Howard Lenehan: And that was our final question, so we'll hand it back over to Bill for his final remarks.
James Hall Kammert: And now with our final question I will hand back over to Bill for final remarks.
Operator: Thank you, everyone, and another efficient conference call. If anyone has any questions, please reach out. Thank you.
Bill: Great. Thank you everyone.
Bill: Another efficient conference call. If anyone has any questions. Please reach out thank you.
Operator: And this concludes today's call. Thank you for joining us. You may now disconnect your line.
Speaker Change: And this concludes today's call. Thank you for joining you may now disconnect your lines.
Operator: Okay.