Q1 2025 SNDL Inc Earnings Call
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Patrick: I'll now hand over to your host Patrick <unk> Chief Financial Officer begin. Please go ahead.
Speaker Change: Thank you Becky.
Speaker Change: 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 some potential risks. Please refer to our SEC filings, which can be found at <unk> dot.
Speaker Change: Com.
Speaker Change: All the information presented on this call is current as of today May One 2025. In addition reconciliation to non-GAAP financial measures presented on this call such as <unk> can be found in the Companys supplemental report.
Bill: With that I will turn the call over to Bill.
Bill: Good morning.
Speaker Change: Following our typical cadence after my introductory remarks, Josh will comment further on the investment market and Patrick will discuss our financial results and capital position.
Speaker Change: The start of 2025 continued the momentum we had in the second half of 2024, we took advantage of our sustained strong cost of capital and added to the pipeline finding deals that both met our quality standards and with pricing that makes sense.
Speaker Change: This led to a Q1 being the highest acquisition volume for the first quarter in the company's history, which similarly, followed our highest Q4 volume.
Speaker Change: So far this year, we've closed $70 million of acquisitions at a blended six 7% cap rate.
Speaker Change: Looking back to when we fully turned the acquisition machine back on in late August we have close to $269 million of acquisitions over the past eight months.
Speaker Change: While we do not give acquisition guidance, we are continuing to add toward the pipeline and are seeing opportunities that are consistent with our quality thresholds and within our pricing standards.
Speaker Change: We note that we have not seen much change in cap rates for recently price deals.
Speaker Change: We've continued to build significantly liquidity, while delevering to preserve optionality on funding new opportunities as they arise. This includes leaning in on the equity sales via our ATM program, which we have used to raise $475 million in equity since July of last year.
Speaker Change: Including our unsettled equity forwards, we now have our lowest leverage levels in the last seven years.
Speaker Change: Simply put we are well positioned for uncertainty.
Speaker Change: Shifting to our in place portfolio, we continue to perform well with high rent collections in occupancy a rent coverage in the first quarter was four nine times for the majority of our portfolio that reports. This figure this remains amongst the strongest coverage within our industry.
Operator: During the presentation, you can register a question by pressing star followed by one on your keypad.
With our cannabis business.
Speaker Change: <unk> largest tenants our nationally branded restaurant operators, namely Olive garden, Longhorn and Chili's. They are leaders for their sectors and generally outperformed the industry peers as well as fine dining or local mom and pop brands. Most recently Brinker reported Chili's same store sales grew 31, 6%.
Our cannabis segments continued to show strong momentum achieving steady year on year revenue gains for the 13th consecutive quarter.
Operator: If you change your mind, please press star followed by two.
Patrick Wernig: I will now hand over to your host, Patrick Wernig, Chief Financial Officer, to begin. Please go ahead.
We continue growing well above the market average not only thanks to our strategic inorganic investments, but also due to a winning formula that drives organic growth ahead of the market.
Becky: Thank you, Becky.
Patrick 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.
Speaker Change: For the quarter ended March 25, Similarly, olive garden, and Longhorn reported same store sales growth of just shy of 1% and two 6% year over year for the three months ended February 2025, respectively.
Achieving a new all time high gross margin record of 27, 6% in the quarter affected by lower revenue seasonality leverage was particularly inspiring.
Patrick Wernig: Our assumptions are not a guarantee of future performance, and some will prove to be incorrect.
Patrick Wernig: For a more detailed description of some potential risks, please refer to our SEC filings, which can be found at scpt.com.
We are very pleased with how our teams consistently raise the bar executing well planned productivity initiatives and efficiency improvements across all areas of our business.
Speaker Change: While these brands remain core to our portfolio and strategy as we approach 10 years as a public company. We would also highlight our diversification progress over that period, we've grown from 418 properties inception to 1236 leases today Darden has dropped from 100% of our rent roll to now 47.
Patrick Wernig: All the information presented on this call is current as of today, May 1st, 2025.
Patrick Wernig: 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.
We are particularly encouraged by the progress made integrating the accretive endeavor business, while identifying additional synergies that exceed our initial estimates laying the foundation for further improvements in the coming quarters.
Bill: With that, I will turn the call over to Bill.
Bill: Following our typical cadence, after my introductory remarks, Josh will comment further on the investment market, and Patrick will discuss our financial results and capital position. The start of 2025 continued the momentum we had in the second half of 2024. We took advantage of our sustained strong cost of capital and added to the pipeline finding deals that both met our quality standards, and with pricing that made sense. This led to a Q1 being the highest acquisition volume for our first quarter in the company's history, which similarly followed our highest Q4 volume. So far this year, we've closed $70 million of acquisitions at a blended 6.7% cap rate.
Percent combined across all of their brands.
Free cash flow was marginally negative at minus $1 million despite.
Speaker Change: This improvement is despite acquiring 47 darden properties post spin.
Despite seasonal pressures from the years lowest revenue quarter and the need to rebuild inventory levels. Following the holiday demand peak.
Speaker Change: Our top five brands make up 55% of our annual base revenue.
Speaker Change: On sector diversification, 67% of our annual base rent comes from casual dining and 11% from quick service.
These improvements and cash generation are underpinned by ongoing operational enhancements and disciplined working capital management.
Speaker Change: Side of restaurants automotive service is our largest sector at 11% of ABR, followed by medical retail at 9% of ABR.
Delivering quarterly financial performance improvements and reliability is crucial to us we owe this to our shareholders our partners and ourselves.
As for portfolio management, we are not yet experiencing any material tenancy issues in the portfolio and no current indicators that inflation or tariff issues will impact our rent payments.
However, our work does not end there.
Unlike many other players in the industry, our strong balance sheet enables us to focus on building robust long term strategic foundations in recent months, we announced additional share buybacks acquired a minority stake in high tide.
Bill: Looking back to when we fully turn the acquisition machine back on in late August, we have closed 269 million of acquisitions over the past eight months. While we do not give acquisition guidance, we are continuing to add toward the pipeline and are seeing opportunities that are consistent with our quality thresholds and within our pricing standards. We note that we have not seen much change in cap rates for recently priced deals. We've continued to build significant liquidity while de-levering to preserve optionality on funding new opportunities as they arise. This includes leaning in on the equity sales for our ATM program, which we have used to raise $475 million in equity since July of last year.
Speaker Change: Further while the current tariff environment remains uncertain, we expect restaurants to be one of the least tariff affected sectors. Similarly, our other service based tenants should fare better than average retail operators given their low exposure to imported goods as part of their operations.
<unk> announced the arrangement agreement to acquire 32 cannabis retail doors from <unk>.
Today, we're announcing that our board of directors has initiated a formal strategic review to evaluate <unk> exposure to U S. Multistate licensed cannabis enterprises, and our current exchange listing status.
Speaker Change: While we would expect in a recession that we would see some pullback in our tenant performance. We believe that we are well positioned with cushion on our rent coverage to weather any potential issues.
I would like to elaborate further on this last point.
Speaker Change: Turning to the materials, we published last night, we would like to highlight a few new slides in our investor presentation that point to what we believe is <unk>.
We are in a unique position within our industry, which allows us to take the driver's seat when exploring additional strategic corporate transactions.
Speaker Change: CPT being calm port in the storm our portfolio was built brick by brick to be resilient and we've paired that with a prudent capital management, we have significant liquidity no near term debt maturities granular low basis properties high rent collections and low overhead.
We possess both the capability and expertise to successfully close of a variety of opportunities, giving us the flexibility to pursue alternative strategic paths.
Bill: Including our unsettled equity forwards, we now have our lowest leverage levels in the last seven years. Simply put, we're well positioned for uncertainty.
On an ongoing basis, we diligently reviewed numerous opportunities on both sides of the border with the overarching objective of maximizing shareholder value.
Speaker Change: <unk> portfolio is made up of well capitalized sophisticated operators, who we believe will be able to navigate and gained share in this challenging macro environment.
Bill: Shifting to our in place portfolio, we continue to perform well with high rent collections and occupancy. Our rent coverage in the first quarter was 4.9 times for the majority of our portfolio that reports this figure. This remains amongst the strongest coverage within our industry. FCPT's largest tenants are nationally branded restaurant operators, namely Olive Garden, Longhorn, and Chili's. They are leaders for their sectors and generally outperform the industry peers, as well as fine dining or local mom-and-pop brands. Most recently, Brinker reported Chili's same-store sales grew 31.6% for the quarter ended March 25. Similarly, Olive Garden and Longhorn reported same-sales growth of just shy of 1% and 2.6% year-over-year for the three months ended February 2025, respectively.
For this reason the board is evaluating whether to maintain our current equity market listings, which restrict us from operating U S assets or transitioned to an alternative structure that would grant us the regulatory flexibility to actively manage our broader north American cannabis platform.
Speaker Change: We pride ourselves on transparency and best in class disclosure. So in addition to our press release regime on new acquisitions. This quarter, we decided to further break out our portfolio to the top 35 brands, which make up more than 80% of our ABR.
This shift could potentially enable the consolidation of license candidates businesses across multiple U S States.
Speaker Change: Our goal is for our investors to understand our tenant exposures and have confidence that we will stay disciplined on meeting quality quality expectations for the properties we buy.
I want to make clear that while we have begun exploring various options no conclusions have been reached and no decisions have been made there is no assurance that any transaction or listing change will result from the strategic review the company does not intend to provide further updates unless or until the board approves a specific course of <unk>.
Speaker Change: To that end you will see in our filings, we have zero or near zero exposure to the problem net lease sector, such as theaters pharmacy high rent car washes and big box retail.
Josh: Over to you Josh.
<unk> or determined that additional disclosure is warranted.
Josh: Thank you Bill.
Bill: While these brands remain core to our portfolio and strategy, as we approach 10 years as a public company, we would also highlight our diversification progress over that period. We've grown from 418 properties at inception to 1,236 leases today. Darden has dropped from 100% of our rent roll to now 47% combined across all of their brands. This improvement is despite acquiring 47 Darden properties post spin. Our top five brands make up 55% of our annual base revenue. Our sector diversification 67% of our annual base rent comes from casual dining and 11% from quick service. Outside of restaurants, automotive service is our largest sector at 11% of ABR, followed by medical retail at 9% of ABR.
Josh: During the fourth quarter, we acquired 23 properties for $57 million at a blended six 7% cap rate with a weighted average lease term of 17 years, we did not sell any properties in the quarter.
Moving back to our short term results I want to hand, the call over to Alberto for more insights on our first quarter financial performance.
Alberto: Thank you Scott.
Alberto: Our team is prowler than ever to showcase the operational progress we continue to make.
Josh: While Q1 is typically our slowest quarter, we continued to deliver on the strong investment momentum we achieved in the second half of 2024.
Alberto: Let's move on to our first quarter financial highlights.
Alberto: I want to remind everyone that the amounts discussed today are denominated in Canadian dollars unless otherwise stated.
Josh: As a result, we believe that we stand very well positioned at the end of the first four months 825, having both come off a record Q1 to start the year right. After our record Q4 last year as we continue to build out the pipeline.
Alberto: Second figures referred to during this call on a non-GAAP non <unk> measures definitions of these measures. Please refer to lessen DFS management discussion and analysis document.
Josh: We are achieving this without compromising on the quality of our asset selection or the credit standards to meet yield or volume target.
Alberto: We continue to see improvements year over year in net revenue gross profit gross margin and free cash flow.
Josh: Our disclosure regime is particularly helpful. In times like these where investors can read through our frequent press releases to see how our acquisition and the brands. We work with are highly consistent with past years.
Net revenue in the first quarter of 2025 rates to 105 million three 6% increase compared to Q1 of last year.
Bill: As for portfolio management, we are not yet experiencing any material tenancy issues in the portfolio, and no current indicators that inflation or tariff issues will impact our rent. Further, while the current tariff environment remains uncertain, we expect restaurants to be one of the least tariff affected sectors. Similarly, our other service based tenants should fare better than average retail operators, given their low exposure to imported goods as part of their operation. While we would expect in a recession that we would see some pullback in our tenant performance, we believe that we are well positioned with cushion on our rent coverage to weather any potential issue.
Alberto: This was driven by a combined kind of his business growth of 16, 8%, which included contributions from our recent in D. Var acquisition, partly offset by declines in our legal retail segment.
Josh: Our team is being patient and organized tracking our opportunity sets for both on and off market investments, including robust analytics to help us identify the best opportunities and.
Alberto: Gross profit of $56 6 million reflects a $6 2 million increase or 12, 4% growth year over year.
Josh: In other words, we're not chasing deals, but rather selecting the best ones that fit our portfolio, even if that means weaning and slightly on cap rate to capture these high quality deals all while still protecting accretion.
Alberto: <unk> 220 basis points improvement in gross margin.
Alberto: This translates to another quarter of record gross margin, reaching 27, 6%.
Josh: Reflecting back on Q1, 83% of our investment volume was via sale leaseback as operators continuing to seek stable financing solutions in this current market.
Adjusted operating income for the quarter amounted to negative $9 million.
Alberto: Partially impacted by a loss of $4 5 million from the same store portfolio driven by a negative valuation adjustment as a consequence of a reduction in the bond market price of cannabis.
Josh: As such our weighted average lease term this year was much higher at 17 years.
Bill: Turning to the materials we published last night, we would like to highlight a few new slides in our investor presentation that point to what we believe is FCPT being a comport in the storm. Our portfolio was built brick by brick to be resilient. And we've paired that with our prudent capital management. We have significant liquidity, no near term debt maturities, granular low basis properties, high rent collections, and low overhead. FCPT's portfolio is made up of well-capitalized, sophisticated operators who we believe will be able to navigate and gain share in this challenging macro environment.
Josh: In particular, we had three sale leaseback of note with <unk> operators, one with burgers from corporate and other was a large multi unit Burger King franchisee and lastly, with a water broker franchisee.
Alberto: Year over year, we'll see a decline of $4 6 million as the negative adjustment from the sunstone portfolio in 2025 compared to a positive one of $9 1 million in 2024. This creates a swing of $13 $6 million year over year from the Sunshine portfolio that was partially offset by ongoing operational improvements.
Josh: The two Burger King deals were both part of M&A transactions, while the water broker deal was for their newly built stores.
Josh: It's worth noting that similar to <unk>, our properties typically command very aggressive cap rates in the upper five to low 6% cap rate range of unsold piecemeal.
Alberto: Free cash flow was marginally negative for the quarter of minus $1 1 million despite.
Josh: Individual investors favor to these small price points per property and the fungibility of the real estate.
Bill: We pride ourselves on transparency and best-in-class disclosure, so in addition to our press release regime on new acquisitions, this quarter we decided to further break out our portfolio to the top 35 brands, which make up more than 80% of our ABR. Our goal is for our investors to understand our tenant exposures and have confidence that we'll stay disciplined on meeting quality expectations for the properties we buy.
Alberto: Despite seasonal impacts on revenue on the associated buildup of working capital.
Josh: However, our team was able to achieve accretive pricing here by offering a portfolio of solution and efficient execution for our operating partners.
Alberto: Presented an improvement from the same quarter of 2024.
Josh: All three transactions were negotiated off market and a product of years of relationship cultivation from our investment team.
Alberto: Our historical quarterly performance evolution shows a clear upward trend indicative of our continuous focus on growth and efficiency improvements.
Josh: Looking forward, we will continue to target similar opportunities nationally recognized brands operated by best in class operators with appropriate basis.
Alberto: The only anomaly is the adjusted operating income impacted by the downstream portfolio body adjustment just as Delta spring.
Bill: To that end, you will see in our filings, we have zero or near zero exposure to the problem at least sectors such as theaters, pharmacy, high rent car washes and big box retail.
While this quarter ended up having more quick service restaurants, some automotive and no medical retail investments, we remind everyone that our team does not specifically allocate target buckets are quoted across our investment sectors.
Alberto: Looking at the contribution from each segment across our main financial Kpis.
Alberto: We'll notice how the net revenue decline in liquor is impacting the overall consolidated results. Despite the strong growth from both segments.
Josh: Over to you, Josh.
Rather we make investments when opportunities meet our underwriting criteria that being said, we still expect these sectors to be roughly even split between the three target categories of ours over the long term.
Josh: Thank you, Bill. During the fourth quarter, we acquired 23 properties for $57 million at a blended 6.7% cap rate with a weighted average lease term of 17 years.
Alberto: The revenue elimination from Canada is related to the cells from the cannabis operations segment in forward on retail. This elimination is increasing as a result of our cannabis business growth.
Josh: Looking forward.
Josh: He did not sell any properties in the.
Josh: Cpt's opportunity set continues to grow despite a volatile macro environment.
Josh: While Q1 is typically our slowest quarter, we continue to deliver on the strong investment momentum we achieved in the second half of 2024.
Alberto: In terms of gross profit liquor retail shows a small decline in the first quarter as a result of the lower revenue.
Josh: We have a steady pipeline built out for Q2, it aimed to continue to execute on our strategy with discipline Patrick back over to you.
Josh: As a result, we believe that we stand very well positioned at the end of the first four months in 25, having both come off a record Q1 to start the year, right after record Q4 last year, as we continue to build out the pipeline. We are achieving this without compromising on the quality of our asset selection or the credit standards to meet yield or volume targets. Our disclosure regime is particularly helpful in times like these, where investors can read through our frequent press releases to see how our acquisitions and the brands we work with are highly consistent with past.
Alberto: Kind of as retail and particularly cannabis operations continue to drive increases in gross profit with contributions of $1 three 6 million respectively.
Patrick: Thanks, Josh.
Patrick: I'll start by talking about capital sourcing and the state of our balance sheet.
Patrick: CBT, we're highly focused on efficient capital raising we raised over $169 million in 2025 to date on top of the $318 million equity in 2024 today.
Alberto: Adjusted operating income shows the improvement from our operating and corporate segments being offset by the year over year impacts of the sustained valuation.
Patrick: Today, we have $254 million of unsettled equity forwards the ability to raise 400 ATM quickly and at scale has allowed us to match sources and uses more effectively.
Alberto: Which was positive in 2024 and negative in 2025.
Martin: Free cash flow for the first quarter of 2025 remains Martin was negative at minus $1 1 million.
Patrick: Furthermore, the high sulfur rate has allowed for a minimum drag of our forward balanced given we receive interest income on the balance and over 4%.
Martin: However, this represents a $5 3 million improvement compared to the same period in the previous year, primarily driven by enhanced earnings and working capital management.
Josh: Our team is being patient and organized, tracking our opportunity sets for both on and off market investments, and including robust analytics to help us identify the best opportunities. In other words, we're not chasing deals, but rather selecting the best ones that fit our portfolio, even if that means leaning in slightly on cap rate to capture these higher quality deals. all while still protecting accretion. Reflecting back on Q1, 83% of our investment volume was via COE spec, as operators continue to seek stable financing solutions in this current market. As such, our weighted average leach time this year was much higher at 17 years.
Patrick: With respect to overall leverage our net debt to adjusted EBITDA in Q1 continued to move lower to four four times inclusive of outstanding net equity forwards as of March 31.
Martin: Examining the year over year drivers of free cash flow in greater detail wheel sets out the change in assumption valuation impacts net income bodies reverse through noncash opex.
Patrick: This leverage is at a seven year low and provides capacity for us to continue to execute our business plan, even if the current volatility persists or we are unable to raise additional capital for the rest of the year.
Martin: Inventory changes in the first quarter remained consistent with the prior year, while improvements in other working capital primarily driven by accounts payable.
Patrick: Software layered on additional hedges to our floating rate exposure raising us to over 95% through Q3 2027.
Martin: Additionally, capex in the first quarter is slightly lower compared to the previous year.
Patrick: Our revolver is fully available at $350 million and we have with extension options essentially no debt maturities for nearly two years. Additionally.
Martin: Nir in free cash flow breakeven in the first quarter is encouraging, especially considering the seasonality of our business, which consistently drives a stronger cash flows in the second half of the year.
Josh: In particular, we have three sale e-specs of note with QSR operators. One with Burger King Corporate, another with a large multi-unit Burger King Franchisee, and lastly with a Whataburger Franchisee. The two Burger King deals were both part of M&A transactions, while the one burger deal was for their newly built store. It's worth noting that similar QSR properties typically command very aggressive cap rates in the upper 5 to low 6% cap rate range when sold. Individual investors favor the small price points per property and the fungibility of it real However, our team was able to achieve accretive pricing here by offering a portfolio solution and efficient execution for our operating partner.
Patrick: Additionally, our fixed charge coverage ratio is a healthy four four times.
Patrick: Altogether this puts us in a great liquidity position, we have approximately $617 million available for funding acquisitions between cash unsettled forward equity and Undrawn revolver capacity.
Martin: Focusing on our operating segments lethal retail recorded net revenue of $109 5 million in the first quarter, reflecting a reduction of $6 6 million or five 7% decline.
Patrick: No further equity issuance, we have an approximate $565 million of available capital before reaching six times net leverage.
Martin: Compared to the prior year this quarter Watson was impacted by one less day in February and assist in Easter timing, which contributed an unfavorable impact of approximately four percentage points.
Patrick: Now turning to some of our financial highlights for Q1.
Patrick: We reported Q1 <unk> of <unk> 44 per share, which is up two 3% from Q1 last year.
Martin: As a result, the normalized underlying revenue declined for the quarter is closer to 2% represented a slight improvement compared to the trends observed last year.
Patrick: Cash rental income was $63 2 million representing growth of nine 1% for the quarter compared to last year.
Patrick: On a run rate basis current annual cash base rent for leases in place as of quarter end is $243 $9 million and our weighted average five year annual cash rent escalator remains one 4%.
Josh: All three transactions were negotiated off market and a product of years of relationship cultivation from our investors. Looking forward, we will continue to target similar opportunities, nationally recognized brands operated by best in class operators with appropriate While this quarter ended up having more quick service restaurants, some automotive, and no medical retail investments, we remind everyone that our team does not specifically allocate target buckets or quotas across our investment sector. Rather, we make investments when opportunities meet our underwriting criteria. That being said, we still expect these sectors to be roughly even split between these three target categories of ours over the long term.
Martin: Despite the net revenue decline the gross profit reduction was mitigated by an improved gross margin, which reached 25, 4% a 60 basis point increase compared to Q1 of the previous year.
Patrick: Cash G&A expense, excluding stock based compensation was $4 9 million, representing seven 7% of cash rental income for the quarter compared to seven 9% for the quarter last year.
Martin: Operating income of $2 million shows a marginal decline compared to the prior year as a reduction in SG&A expenses were offset by the lower gross profit as well as the lapping of a <unk> $9 million impairment reversal from the prior year.
Patrick: This progress illustrates our continued efforts at efficient growth and the benefits of improving scale.
Patrick: We're still expecting cash G&A will be in the range of 18% to $18 5 million for 2025 as a reminder, we take a conservative approach and do not capitalize any of the compensation costs related to our investment team.
Martin: Cannabis retail delivered strong financial performance in both top and bottom lines, despite being impacted by one fewer working day in the on the shift in Easter timing.
Patrick: As for managing our lease maturity profile. Our team has made significant progress on 2025 maturities with 80, 588% of those tenants already extending their leases or indicating an intent to do so.
Josh: Looking forward, FCPT's opportunity set continues to grow despite a volatile macro environment.
Martin: Net revenue for Q1 to 25 reached $77 5 million, an eight 7% increase compared to the prior year.
Patrick Wernig: We have a steady pipeline built out for Q2 and aim to continue to execute on our strategy with Patrick, back over to you.
Patrick: As of quarter end explorations represent just 5% of ABR in 2022, 3%.
Martin: This growth was primarily driven by a five 2% increase in same store sales and contributions from new store openings.
Patrick Wernig: That's Start by talking about capital sourcing and the state of our balance At SDPT, we are highly focused on official capital raising. We raised over $169 million in 2025 to date, on top of the $318 million equity in 2024. Today, we have $254 million of unsettled equity forwards. The ability to raise forward ATM quickly and at scale has allowed us to match sources and uses more effectively. Furthermore, the high SOFR rate has allowed for a minimum drag of our forward balance, given we receive interest income on the balance at over 4%. With respect to overall leverage, our net debt adjusted EBITDA REIT in Q1 continued to move lower to 4.4 times, inclusive of outstanding net equity forwards as of March 31st.
Patrick: Our portfolio occupancy today is 99, 4% and we collected 99, 5% of base rent for the first quarter.
Martin: The revenue growth supported a $1 3 million increase in gross profit.
Patrick: There are no material changes to our collectability or credit reserves, nor any balance sheet impairments.
Martin: The 40 basis point decline in gross margin compared to the same period last year.
Patrick: That will turn it back over to back to you for questions.
Martin: However, this represents an improvement in the gross margin trend as the 25, 3% reported for Q1 2025 exits both the average margin in the exit margin of 2024.
Patrick: Thank you.
Patrick: To ask a question. Please press star followed by one on your telephone keypad now.
Patrick: Is there any reason you wish to remove your question. Please press star followed by <unk>.
Martin: Both adjusted and Unadjusted operating income rose by over $6 million year over year, reaching $5 2 million in Q1 to 25.
Patrick: Im going to ask a question that peso shares advice is likely.
Speaker Change: Our first question comes from John Keller Chomsky from Wells Fargo. Your line is now open. Please go ahead.
Martin: This improvement was driven by revenue growth and enhance SG&A efficiency, while benefiting from lapping a fixed asset impairment reported in Q1 of the previous year.
Speaker Change: Good morning.
Patrick Wernig: This leverage is at a seven-year low and provides capacity for us to continue to execute our business plan even if the current volatility persists or we are unable to raise additional capital for the rest of the year. We've also layered in additional hedges to our flooding rate exposure, raising us to over 95% fixed through Q3 2027. Our revolver is fully available at $350 million and we have, with extension options, essentially no debt maturities for nearly two years. Additionally, our fixed charge coverage ratio is a healthy 4.4 times. Altogether, this puts us in a great liquidity position.
Speaker Change: Afternoon. Thank you.
Speaker Change: Maybe just on a little bit of slight yield compression in the quarter.
Martin: Our candidates operational segment continued to deliver as the largest P&L improvements.
Speaker Change: Is that due to the fact that there's maybe more competition in your sector for these assets given the installation from tariffs.
Martin: Net revenue for the first quarter of 2000 to $25 or $34 3 million, reflecting an $11 9 million or 53% growth compared to the prior year.
Speaker Change: Hard to say I would say the vast majority is related to the high percentage of <unk> restaurant acquisitions in the quarter.
Martin: This includes a $10 2 million contribution from the deal.
Martin: Gross profit achieved a significant increase compared to the prior year driven by a 12 four percentage points expansion in gross margin, which reached 26, 8%.
Okay, and then maybe just on the pipeline more generally.
Speaker Change: Big fourth quarter, followed up with a very strong first quarter.
Patrick Wernig: We have approximately $617 million available for funding acquisitions between cash on settled forward equity and on drawn revolver capacity. Assuming no further equity issuance, we have an approximate $565 million of available capital before reaching six times net leverage.
Martin: These improvements are mainly driven by our productivity program and initial synergies from the <unk> acquisition.
Speaker Change: What's your governor on growth and maybe just some color around what your pipeline looks like I am curious Patrick you talked about smart capital raising and I'm curious if that's it or if it's just the amount of deals or if it's the size of your your team I'm curious what keeps you from maybe taking up a step further from here.
Martin: Adjusted operating income for the first quarter came in at a positive $2 4 million, marking a $1 3 million improvement year over year.
Patrick Wernig: Now turning to some of our financial highlights for Q1. We reported Q1 amplifo of 44 cents per share, which is up 2.3% from Q1 last year. Q1 cash rental income was $63.2 million, representing growth of 9.1% for the quarter compared to last year. On a run rate basis, current annual cash base rent for leases in place as of quarter end is $243.9 million and our weighted average five year annual cash rent escalator remains 1.4%. Cash G&A expense, excluding stock-based compensation, was $4.9 million, representing 7.7% of cash rental income for the quarter, compared to 7.9% for the quarter last year.
Martin: This growth was achieved despite lapping a $1 8 million bad debt reversal reported in the first quarter of 2024.
Speaker Change: Sure.
John: John maybe just two.
John: We're completely answer your first question I think if we were targeting.
Speaker Change: Now I will hand, it over to <unk> for additional insights into our strategic priorities.
John: Sectors that we're very exposed to tariffs.
Speaker Change: Thank you Alberto as expected during 2025, we remain focused on our three strategic pillars, which are essential to our long term success growth profitability and people starting.
John: We would have a much higher cap rate, obviously, but as the great research published recently we have.
John: Very low tariff exposure in our portfolio.
Speaker Change: Starting with growth our Canada retail segment is outperforming the market as previously mentioned this segment reported net revenue growth of eight 7% in the first quarter of 2025 significantly ahead of the market.
John: As far as governors to growth.
John: A much longer answer, but I think the the.
John: Kind of acquisitions that we're working on.
John: What largely determines.
Patrick Wernig: progress illustrates our continued efforts at efficient growth and the benefits of improving scale. still expecting cash DNA will be in the range of 18 to $18.5 million for 2025.
Speaker Change: Our performance is bolstered by strong same store sales growth of five 2% during the period, reflecting not only excellence in execution, but more importantly, the trust our consumers continue to place in us.
John: How much we buy in a quarter, so whether it's sale leasebacks, which were prominent in this quarter and in Q4.
John: And much more efficient individual one off deals.
Patrick Wernig: As a reminder, we take a conservative approach and do not capitalize any of the compensation costs related to our As we're managing our lease maturity profile, our team has made significant progress on 2025 maturities with 85 88% of those tenants already extending their leases or indicating an intent to do so. As of quarter end, expirations represent just 0.5% of ABR and 2026 is 2.3%. Our portfolio occupancy today is 99.4% and we collected 99.5% of base rent for the first quarter. There were no material changes to our collectability or credit reserves, nor any balance sheet impairments.
Speaker Change: The combination of robust same store sales growth and new store openings has resulted in an additional <unk> three percentage points of year on year market share gains.
John: It becomes challenging to have that many balls in the year on $2 million acquisitions.
John: $3 million acquisitions to put up.
John: Larger volumes, but we really don't look at it that way, we're trying to score assets and buy assets that have sufficient quality and then making sure that we raise the money the right way and I think.
Speaker Change: The acquisition of <unk> announced after the quarter's end is not only another key milestone, but also demonstrates our strategic commitment to expanding our cannabis retail footprint.
John: We feel particularly proud over the last couple of years that when the <unk>.
Speaker Change: We anticipate closing this transaction by the end of the third quarter.
John: Environment was.
Speaker Change: We are enthusiastic about this acquisition not only for the exposure it provides to new store formats and shopper insights, but also for its potential to drive substantial incremental organic growth.
John: Sufficient for acquisitions, but our cost of capital wasn't there.
Becky: We'll turn it back over to Becky for questions.
John: We responsibly paused, but then when the.
John: There was alignment where there was acquisitions to do and our cost of capital was there.
Operator: If you wish to ask a question, please press star followed by one on your telephone keypad now.
Speaker Change: Our cannabis operations segment posted a strong 53% revenue growth in the first quarter as we continue gaining distribution points and leveraging the incremental platform provided by the acquisition of endeavour during the fourth quarter of 2024.
Operator: If for any reason you wish to remove your question, please press star followed by two.
We acted with with emphasis.
Operator: When preparing to ask your question, please ensure your device is unmuted locally.
John: Alright, thank you.
John Kielichowski: Our first question comes from John Kielichowski from Wells Fargo. Your line is now open, please go ahead. Morning or afternoon. Thank you. Uh, maybe just on a little bit of slight yield compression in the quarter. Um, is that due to the fact that there's maybe more competition in your sector for these assets, given the insulation from tariffs? Hard to say.
John: Thank you. Our next question comes from Michael Goldsmith from UBS. Your line is now open. Please go ahead.
Speaker Change: Under our profitability priority. We are pleased to report continued improvements in free cash flow generation, specifically $5 3 million better than the same quarter in 2024.
katherine grades: Hi, this is katherine grades.
Grades from Michael Thank you for taking my question.
Speaker Change: This progress is driven by contributions from both income growth and effective working capital management.
Greg: Thanks, Greg.
Speaker Change: Just looking at the volume that you achieved in Q2 last year, the acquisition sort of ramped up through the year.
Speaker Change: Incremental productivity improvements of $3 million during Q1, primarily from our cannabis operation segment through procurement manufacturing and cultivation efficiencies have contributed to the new gross margin record previously mentioned.
Speaker Change: Can you provide any color on what you're expecting as far as the cadence for this year, especially starting at such a higher base.
Bill: I would say the vast majority is related to the high percentage of QSR restaurant acquisitions in the quarter.
Speaker Change: Yes.
Speaker Change: Data licensing revenue contributed another $4 5 million in the quarter.
Speaker Change: Q4 has historically been a <unk>.
Speaker Change: Very strong quarter for us.
John Kielichowski: Okay, and then maybe just on the pipeline more generally, you know, you have a big fourth quarter followed up with a very strong first quarter. You know, what's your governor on growth and maybe just some color around what your pipeline looks like?
Further supporting gross margin expansion.
katherine grades: And I'm not sure why Katherine to be honest with you.
Speaker Change: We also achieved $4 million and overhead savings in Q1, driven primarily by the results of the restructuring program that was announced last July.
katherine grades: There's a dynamic where people want to get things done in a fiscal year perhaps.
katherine grades: But we have a very good pipeline right now.
John Kielichowski: I'm curious, Patrick, you talked about smart capital raising. I'm curious if that's it, or if it's just the amount of deals or if it's the size of your, you know, your team. I'm curious what keeps you from maybe taking up a step further from here. Sure.
Speaker Change: On this last point restructuring program continues to be executed according to plan delivering $4 million in savings during the first quarter.
katherine grades: Deals typically have 60 to 90 day.
katherine grades: Sort of lifecycle 60 would be a minimum.
katherine grades: So we're really don't have a lot of visibility on the second half of the year and certainly with all the macro uncertainty, it's very hard to tell.
Speaker Change: This achievement corresponds to an annualized run rate of $17 million or <unk>, 85% of our planned target.
Bill: And John, maybe just to more completely answer your first question. I think if we were targeting sectors that were very exposed to tariffs, we would have a much higher cap rate, obviously. But, you know, as the great research you published recently, we have, you know, very low tariff exposure in our portfolio.
Speaker Change: Last but not least our people remain our greatest competitive advantage and we are committed to continuing investment in their development, while creating a work environment that fosters engagement and enables all team members to contribute and grow to their full potential.
katherine grades: But we are staffed and capitalized and very focused and organized and executing the rest of the year, but we don't give guidance because really.
katherine grades: We want to make sure that we have the best sort of decision, making hygiene and making acquisitions.
Speaker Change: Under our strategic talent development process, we are pleased with the progress and enhancements made to our annual performance review cycle.
Bill: As far as governors to growth, that's a much longer answer. But I think the kind of acquisitions that we're working on is what largely determines how much we buy in a quarter. So whether it's sale leasebacks, which were prominent in this quarter, and in Q4, are much more efficient, individual one off deals, it becomes challenging to have that many balls in the air, you know, on $2 million acquisitions, $3 million acquisitions to put up. larger volumes. But we really don't look at it that way. We're trying to score assets and buy assets that have sufficient quality and then making sure that we raise the money the right way.
Speaker Change: Okay Fair enough. Thank you and then my second question.
Speaker Change: This initiative gave our organization and opportunity to step back and both individually and collectively reflect on what we did well during the year and the lessons we learned to help us raise the bar in the future. This.
You acquired several Burger Kings in this past quarter and I'm sure you saw that was recently.
Speaker Change: Large franchisee who filed for bankruptcy is your sense that this is.
Speaker Change: This is a key component of our continuous improvement mindset.
Speaker Change: So the best franchisee specific issue or has anything changed just alright, how you monitor the health of FBR.
Speaker Change: Following the engagement survey survey conducted in the fourth quarter of 2024, we hosted several focus groups with our teams to develop actionable strategies targeting the biggest opportunities to further enhance our employee experience and engagement.
Speaker Change: Okay.
Speaker Change: Very much a specific issue to that franchisee.
Speaker Change: Got it thank you.
Speaker Change: During the quarter, we successfully transitioned all legacy <unk> employees to our consolidated HR platform facilitating the seamless integration of this business into the <unk> family.
Anthony: Thank you. Our next question comes from Anthony <unk> from JP Morgan. Your line is now open. Please go ahead.
Speaker Change: Yes. Thank you.
Speaker Change: I know this may not be completely apples to apples because I understood yet understand the skew towards <unk> with your cap rates, but we do see some of the other net lease names doing deals in the sevens and so I was wondering if you can maybe give us some sense as to maybe how you see the difference between going from like say high <unk> into the low mid sevens.
Speaker Change: Finally, we have received very positive feedback from our employees regarding the distribution of an annual total compensation letter. This letter summarizes the individual compensation components achieved during 2024, along with merit adjustments and incentive targets for 2025.
Bill: And I think we feel particularly proud over the last couple of years that when the environment was sufficient for acquisitions, but our cost of capital wasn't there, we responsibly paused. But then when there was alignment, where there was acquisitions to do, and our cost of capital was there, we acted with emphasis.
Speaker Change: This initiative aligns employee incentives with both in the individual contributions and overall company performance, while also showcasing the competitiveness of our total compensation philosophy.
Speaker Change: And what the give and take might be there.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: We certainly see.
Speaker Change: As we conclude I would like to take a moment to reflect on the progress our team has made we.
Speaker Change: Things that are for sale that are.
Speaker Change: Let's start drug too fine a point on it call it 705 caps and north.
Catherine Graves: Our next question comes from Michael Goldsmith from UBS. Your line is now open, please go ahead.
Speaker Change: We continue to seize new opportunities.
Speaker Change: Tackling challenges head on by laying down a strong foundation for the future.
Speaker Change: And they typically have.
Speaker Change: Have.
Speaker Change: They're either in Subsectors that we don't like like pharmacy or experiential.
Speaker Change: We are thrilled with this progress and remain confident in our ability to successfully navigate the complexities of our industry.
Catherine Graves: Hi, this is Catherine Graves on for Michael. Thank you for taking my question. So my first just looking at the the volume that you achieved in one cue. So last year, the acquisition sort of ramped up through the year. Can you provide any color on what you're expecting as far as the cadence for this year, especially starting at such a higher base? Yeah.
Speaker Change: We haven't historically been involved with.
Speaker Change: Once again I would like to thank our entire team for their contributions and our shareholders for their continued trust I will now hand, the call back to the operator for the analyst Q&A session.
Speaker Change: Or are the credit isn't very good.
Speaker Change: Or the rents are really high.
Speaker Change: And so all of those factors show up in our scorecard to scores that are insufficient for us to proceed.
Speaker Change: Thank you.
Speaker Change: We will now begin the analyst question and answer session.
Speaker Change: Now that doesn't mean that there isn't one transaction, where you feel like youre getting a great price or another transaction, where you still see real strategic reasons to lean in by 20 basis points or something like that but on average what we use what we have seen is that cap rates there.
Catherine Graves: Q4 has historically been a very strong quarter for us. And I'm not sure why, Catherine, to be honest with you, there's a dynamic where people want to get things done in a fiscal year, perhaps. But, you know, we have a very good pipeline right now. Deals typically have 60 to 90 day sort of life cycles, 60 would be a minimum. So we're really don't have a lot of visibility on the second half of the year. And certainly, with all the macro uncertainty, it's very hard to tell. But we are staffed and capitalized and very focused and organized in executing the rest of the year.
Speaker Change: The question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request and if you are using a speakerphone. Please pick up your handset before pressing any keys too.
Speaker Change: And to withdraw your question. Please press Star then one one again.
Our.
Speaker Change: Higher enough from what we're posting to matter involved.
Frederico Gomez: And our first question will come from Frederico Gomez with <unk> capital markets. Your line is open.
Speaker Change: Measurably more risk.
Speaker Change: And I would say that one of the things that I think very hopeful about our reporting regime as you know what we're buying for that cap rate.
Frederico Gomez: Thank you.
Speaker Change: Good morning, Thanks for taking my questions.
Speaker Change: Zach maybe just speaking more broadly here.
Speaker Change: What we see some of our peers do pursue what I would call barbell strategies, where they disclose.
Speaker Change: You I guess do indeed decide to enter the U S market directly.
Catherine Graves: But we don't give guidance, because really, we want to make sure that we have the best sort of decision making hygiene and making acquisitions.
Speaker Change: Just curious whats the strategy that you think would make sense given the current state of the industry and what could be the differentiator is that it could.
Speaker Change: Tenants that.
Speaker Change: Shareholders are happy that they are buying.
Speaker Change: Disclose a cap rate that involves a bunch of tenants.
Speaker Change: Could bring to the U S market.
Speaker Change: They don't talk about.
Speaker Change: What would be your competitive advantage and how you would plan to explore that.
Speaker Change: So I think our straightforward very transparent strategy.
Bill: And then my second question, you acquired several Burger Kings in this past quarter, and I'm sure you saw there was recently a large franchisee who filed for bankruptcy. Is your sense that this is sort of a franchisee specific issue or has anything changed as far as how you monitor the health of your Burger Kings? very much a specific issue to that franchisee.
Speaker Change: Should give you comfort that what we're buying.
Speaker Change: Good morning, Fred and thanks for the question just as a preface to not just want to make clear that this decision is under review.
Speaker Change: As thoughtfully selected and not to hit some.
Speaker Change: Metric for a quarterly.
Speaker Change: Disclosure.
Speaker Change: By our board of directors. So no decision has been made.
Speaker Change: Okay. Thanks, and then just on the pipeline.
Speaker Change: But your question directly in terms of how would we enter and what would our competitive advantages be please.
Speaker Change: Are there any larger type transactions that you see in the mix or is it pretty much all the one by one.
Speaker Change: Please recall that we have.
Speaker Change: Two exposures through credit investments and our sons Dream vehicle that are subject to current restructuring activity, we believe that those.
Speaker Change: It's a mix.
Anthony Pallone: Our next question comes from Anthony Pallone from J.P.
Speaker Change: We're always working on larger transactions, we have a handful in the hopper I would reflect that.
Anthony Pallone: Morgan. Your line is now open, please go ahead. Yeah, thank you. I know this may not be completely apples to apples because I understand the skew towards QSRs with your cap rates, but we do see some of the other net lease names doing deals in the sevens. And so I was wondering if you can maybe give us some sense as to maybe how you see the difference between going from like, say, high sixes into the low mid sevens and what the give and take might be there. You know, we certainly see things that are for sale that are You know, let's not draw too fine a point on it.
Speaker Change: Those restructurings are going to be completed in the coming months and so in terms of the notion of entering the United States, we have existing capital exposure with previously committed investments that would take us there. So it's not as if we would be looking at.
Speaker Change: We haven't really seen a dynamic where there is portfolio.
Speaker Change: Discounts in fact in some cases, we found that the larger transactions have more competition and I think we saw that clearly in a large transaction.
Speaker Change: Some imminent large cash outlay or issuance of shares.
Speaker Change: One of our peers did last winter so.
Speaker Change: It's a mixed Anthony but I also wouldn't say that large transactions come at bargain prices by any means.
Speaker Change: To do so those enterprises are in existence today, and we do have exposure that will be would be converted from.
Speaker Change: Okay. Thanks.
Speaker Change: Senior credit into.
Speaker Change: A mix of equity and other instruments and in terms of kind of competitive advantage.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Wes Golladay from Baird. Your line is now open. Please go ahead.
Speaker Change: Look the fact that we've we've lived through and weathered a very deep cycle in the federally legal Canadian landscape, where we've seen over capitalization.
Bill: Call it seven and a half caps in North. And they typically have They're either in subsectors that we don't like like pharmacy or experiential, or we haven't historically been involved with, or the credit isn't very good, or the rents are really high. And so all those factors show up in our scorecard to scores that are insufficient for us to proceed. Now, that doesn't mean that there isn't one transaction where you feel like you're getting a great price or another transaction where you still see real strategic reasons to lean in by 20 basis points or something like that.
Wes Golladay: Hey, Good morning, guys can you talk about how you underwrite the smaller franchisees I think you mentioned you do get a corporate guarantee but how smaller some of these franchisees.
Access infrastructure build out, which then drove massive oversupply in the market.
Speaker Change: Yes, so our small franchisees I think would be considered very large for our peers. We don't have a ton of franchisee exposure and the franchisee exposure, we have tends to be with franchise times.
Speaker Change: And we're even at the margin the failure or lack of payment of excise taxes.
Speaker Change: By certain companies was used to.
Wes Golladay: <unk> hundred.
Wes Golladay: Type size franchisees. So we get financials, we do a typical credit underwriting, but franchisee credit is not a big part of our.
Speaker Change: Fund discounting behavior, which drove a very aggressive race to the bottom in terms of product pricing, which then in turn drove very.
Wes Golladay: Business and I would say the.
Speaker Change: Challenging margin profiles for.
Wes Golladay: The dynamic where.
Speaker Change: Businesses up and down the supply chain.
Wes Golladay: Some of our peers will sort of put people into business by buying real estate for them, we're developing real estate for them and Baidu.
Bill: But on average, what we've what we have seen is that cap rates that are Higher enough from what we're posting to matter involve, you know, measurably more risk. And I would say that one of the things that's, I think, very helpful about our reporting regime is you, you know what we're buying for that cap rate. And what we see some of our peers do is pursue what I would call barbell strategies where they disclose tenants that shareholders are happy that they're buying, but disclose a cap rate that involves a bunch of tenants that they don't talk about.
Speaker Change: We believe that we've learned significantly from that cycle and developed strength and skill set which is very applicable in many different international markets, including.
Wes Golladay: By definition, that's a very very small sort of individual size.
Wes Golladay: Business entity is not something we do.
Speaker Change: U S state markets, which are in various states of play as you know in terms of being medical recreational or both so the discipline that we've had to learn in terms of labor management.
Speaker Change: Okay, and then you have been building up the team development a lot of new relationships over the last few years, just curious how much the new deal flow is from these new relationships.
Speaker Change: And everything from our real estate exposure to our state of automation in terms of manufacturing and our vertical model.
Speaker Change: Theres some of that but a lot of it is frankly deals that we've been tracking for years.
Speaker Change: And now have advantaged cost of capital and seller.
Speaker Change: It gives us a very clear view as to which strategies will be successful.
Speaker Change: Sellers are more willing to meet us on price because of the overall macro uncertainty so I don't think its.
Bill: And so I think our straightforward, very transparent strategy should give you comfort that what we're buying is thoughtfully selected and not to hit some, you know, metric for quarterly disclosure.
Speaker Change: In markets outside of Canada.
Speaker Change: And while it will be very difficult to say this and many other industries. In this specific case I believe that the Canadian experience is actually a massive asset we imported to these other markets.
Speaker Change: The algorithm isn't something like new acquisition person at six months has four relationships in the 12 months is eight.
Speaker Change: Therefore, you can count on deal flow from that we have.
Speaker Change: So not only do we have the talent and we've built the capabilities, but we have the balance sheet and capital base to exploit these opportunities.
Speaker Change: Been doing more Outreached outreach recently and as you mentioned we've <unk>.
Anthony Pallone: Okay, thanks.
Anthony Pallone: And then just on on the pipeline, are there any larger type transactions that you see in the mix? Or is it pretty much all the one by ones? It's a mix, you know, we're always working on larger transactions.
Speaker Change: Expanded our acquisition team, we have the largest acquisition <unk>.
Speaker Change: Right now we're considering this the board is working to make the right decision for the long term for shareholders and we will certainly update you and our investors when a decision is made.
Speaker Change: <unk> coming in the summer three folks.
Speaker Change: Out of underground too in terms and we're really excited to get them up to speed.
Speaker Change: I think it will make a real impact.
Anthony Pallone: We have a handful in the hopper, I would reflect that Okay, thanks.
Speaker Change: Okay. Thanks.
Speaker Change: Thank you I appreciate that.
Speaker Change: Second question on your.
Speaker Change: Thank you next.
Speaker Change: Our next question comes from <unk> <unk> from Janney. Your line is now open. Please go ahead.
Canada.
Speaker Change: Retail platform, just curious about the M&A outlook there.
Speaker Change: Obviously or something.
Speaker Change: Hey, good morning, guys. What is the range of EBITDAR coverage ratios for recent acquisitions and is there any difference between restaurant and non restaurant segments there.
<unk>.
Speaker Change: But are you looking at making further acquisitions of a similar size.
Speaker Change: You have a good pipeline of opportunities.
Speaker Change: Yes, we don't disclose.
Speaker Change: On a quarterly basis.
Speaker Change: In Canada for retail.
Speaker Change: Coverage ratios.
Speaker Change: Yes, I really appreciate the question. The answer is yes, while we are still focused internally on optum.
Speaker Change: Obviously, we have to sign confidentiality agreements.
Speaker Change: To get financials and so.
Speaker Change: I don't think were going to be in a position to disclose those on a quarterly basis I would say on a.
Where's Goliday: Our next question comes from Where's Goliday from Baird? Your line is now open, please go ahead.
Speaker Change: Optimization, and we believe that we have.
Quite a bit of running room in terms of margin improvement and free cash flow improvement. We are very active in terms of evaluating both organic and inorganic growth in our Canadian retail network as we stated over the last several quarters.
Speaker Change: I think the credit metrics are fairly similar across the different industries, although I would say within medical.
Where's Goliday: Hey, good morning, guys. Can you talk about how you underwrite the smaller franchisees? I think you mentioned you do get a corporate guarantee, but how small are some of these franchisees? Yeah, so our small franchisees, I think, would be considered very large for our peers. We don't have a ton of franchisee exposure. And the franchisee exposure we have tends to be with franchise times, you know, 100 type size franchisees. So we get financials, we do a typical credit underwriting. But franchisee credit is not a big part of our business.
Speaker Change: It's a little bit harder to define four wall, because you might have a patient who's.
Speaker Change: Capital deployment to build out a dominant retail footprint is a top priority for our board and management team.
Speaker Change: Visiting our retail.
Speaker Change: Outpatient Center for example, but also as part of their care going to the hospital system that is associated with so so saying that that four wall is ex us.
Speaker Change: That has not changed.
Speaker Change: And second to that as we as we talked about was the potential to invest in core markets in the U S.
Speaker Change: Is a little bit more ambiguous, but the credit is very similar on a corporate leverage basis.
Speaker Change: So just.
Speaker Change: Just speaking maybe more specifically about opportunities.
Speaker Change: We are engaged.
Speaker Change: Being in the mid single digits and four wall coverage being.
Speaker Change: And continue to receive unsolicited inbounds from certain parties that are retail operators in Canada. We're also still doing careful site work to position new door openings in key locations and there are also a number of bolts are medium sized and larger scaled portfolio.
Where's Goliday: And I would say the, the dynamic where Some of our peers will sort of put people into business by buying real estate for them, or developing real estate for them. And, you know, by definition, that's a very, very small sort of individual size.
Speaker Change: Typically three plus times.
Speaker Change: Okay, and then at what point would you guys consider lease too conservative where there is potential opportunity cost in the form of loss rents and then on the flip side, what point would you feel uncomfortable underwriting a new lease in terms of coverage just trying to get a range and how you guys think about that thanks.
Speaker Change: <unk> that.
Where's Goliday: Business entity is not something we do. Okay, and then you have been building out the team developing a lot of new relationships over the last few years. Just curious how much the new deal flow is from these new relationships. Um, you know, it's, there's some of that, but a lot of it is, frankly, deals that we've been tracking for years. And, you know, now have a advantage cost of capital and Sellers are more willing to meet us on price because of the overall macro uncertainty.
Speaker Change: That we are watching very carefully and engaged in constructive conversation.
Speaker Change: Yes, so if I understand your question.
Speaker Change: These things can take some time to come to fruition.
Speaker Change: Is could we take more risk and still be in a safe position.
Speaker Change: And given the fact that we expect the <unk> transaction to close.
Speaker Change: Sometime late in Q3.
Speaker Change: Yes, that's the gist, yes, exactly yes.
Speaker Change: We have a really important window to focus on internal improvement and efficiency while we.
Speaker Change: And then the upper limit to conservative coverage ratio like at what point.
Speaker Change: Thanks.
Speaker Change: Wait.
Speaker Change: <unk>.
Speaker Change: <unk> leg of growth that should should position us for a very strong Q4.
Speaker Change: Sure so.
Speaker Change: Okay.
Speaker Change: Well I guess I'd make two reflections.
Speaker Change: Thank you and then just final question for me.
Speaker Change: Back test are we being too conservative.
Where's Goliday: So I don't think it's, you know, the algorithm isn't something like new acquisition person at six months has four relationships and at 12 months has eight, and therefore you can count on deal flow from that. You know, we have been doing more outreach recently, and as you mentioned, we've expanded our acquisition team. We have the largest acquisition class coming in the summer of three folks out of undergrad and two interns, and we're really excited to get them up to speed. You know, I think they'll make a real impact.
Speaker Change: You could.
Speaker Change: We do go back and look at things that we looked at and didn't do it.
Speaker Change: Comment on the rollout of your loyalty program in detail what it did that.
Speaker Change: And it's very clear to us that the outcomes of the things that we passed on are far less favorable than what we've done okay and thats both.
Speaker Change: You expect to get out of that program.
Speaker Change: Health care operations for margins or sales and your strategy.
Speaker Change: Thanks.
Speaker Change: And taking.
Speaker Change: You want to add some.
Speaker Change: Buildings that to the naked eye, it's a brand it's a business that we bought it's a brand that we've bought but what you can't see is the leases to short or the rents are too high or the tenant has bad financials that that.
Speaker Change: Yeah, Hi, Federico this is all vertical.
Speaker Change: Luckily, we're very excited about the potential our loyalty program can offer.
Speaker Change: Starting we've given us a platform to communicate effectively with our consumers.
Speaker Change: And given them as well as the possibility to leverage a stronger value.
Speaker Change: Very frequently things that we've looked at and passed on have turned out to be.
Speaker Change: From their loyalty to us.
Speaker Change: Unfortunate outcomes. So that's one.
Kyle Katarinkic: Our next question comes from Kyle Katarinkic from JANI. Your line is now open, please go ahead. Hey, good morning, guys.
Speaker Change: In every purchase opportunity.
Speaker Change: Two I would observe that rents on net lease.
Speaker Change: They can certainly leverage that <unk>.
Speaker Change: A relatively random and so you may have a burger king that has $70000 worth of rent and one that has a $107000 for the rent and one that has $170000 worth of rent.
Kyle Katarinkic: Where's the range of EBITDA coverage ratios for recent acquisitions, and is there any difference between restaurant and non-restaurant segments there? Yeah, we don't disclose on a quarterly basis coverage ratios. Obviously, we have to sign confidentiality agreements to get financials. And so I don't think we're going to be in a position to disclose those on a quarterly basis. I would say on a I think the credit metrics are fairly similar across the different industries, although I would say within medical, it's a little bit harder to define four-wall because you might have a patient who's visiting our retail outpatient center, for example, but also as part of their care going to the hospital system that it's associated with.
Speaker Change: Rewarded accordingly.
Speaker Change: So I would say, it's both the advantage that it provides to our consumers, particularly those that are the most loyal.
Speaker Change: Well as I said, an opportunity to create a direct communication channel with them.
And they look exactly the same other than the rent number and so the coverage would obviously be way different on the $70000 worth of rent than the 170, and so I think a big part of our job is.
Speaker Change: And make sure that they understand what type of offers promotional activity or new product.
Speaker Change: <unk> that we have in our retail locations.
Speaker Change: Searching for properties that have great performance, but reasonable rents.
Speaker Change: We have as well the potential and we are actively working on expanding that loyalty program across our different banners.
Speaker Change: And so I don't think that there is an upper limit of what we would consider now obviously when that lease matures, which is usually very far into the future given the extension options. We have some rent upside and we have experienced some positive outcomes there.
Speaker Change: And that is not only within kind of is what it cost as well as the potential to expand in our <unk> network.
Speaker Change: Great. Thank you very much.
Speaker Change: Last thing I'd point out maybe a different answer to your question.
Brad: Thank you Brad.
Speaker Change: And our next question will come from Ivan Kang with Canaccord. Your line is open.
Speaker Change: Having gone through the financial crisis earlier in my career that the Dot com bust very early in my career.
Kyle Katarinkic: So saying that that four-wall is X is a little bit more ambiguous, but the credit is very similar on a corporate leverage basis, being in the mid-single digits and four-wall coverage being typically three plus times. Okay.
Ivan Kang: Hi, Good morning, and thank you for taking my question just one from me here in recent days following the federal elections in Canada.
Speaker Change: Covid more recently.
Speaker Change: There is a dynamic where when there is substantial uncertainty and you have the ability to be on offense theres enormous advantage to that and so we go into this current environment with the lowest leverage we've had in a long time.
Ivan Kang: <unk> have been a bit of a renewed sense of optimism towards the government and implementing does that a regulatory recommendations that have been previously brought forth by the scanning Finance Committee.
Kyle Katarinkic: And then at one point, would you guys consider lease too conservative where there's potential opportunity costs in the form of lost rents? And then on the flip side, what point would you feel uncomfortable underwriting a new lease in terms of coverage? Just trying to get a range of in how you guys think about that. Thanks. Yeah, so if I understand your question is could we take more risk and still be in a safe position? Yeah, that's the gist of it. Yeah, exactly. Yeah. And then like, upper limit to conservative of the coverage ratio. Like, at what point is that?
Speaker Change: We have more liquidity.
Ivan Kang: Obviously, the most topical one being the recommended I think tax reform to move towards the 10% dollar rate could.
Speaker Change: Undrawn forward than we've had in a long time and we have a portfolio that is in fantastic shape. So if the issue is we might be a little bit too conservative historically I'll take that.
Speaker Change: Could you share any insights on how you guys are thinking about the path towards this reform and if you believe that the ongoing trade war has any sort of impact on how the government is doing the cannabis industry.
Speaker Change: In order to be.
Speaker Change: In a position to be aggressive if opportunities knock.
Speaker Change: Good morning, and thank you so much for the question.
Speaker Change: Thank you I appreciate the context.
Speaker Change: That's a great question look I would say that we don't want to go too far beyond cautious optimism.
Speaker Change: Yes.
Speaker Change: Thank you as a reminder to ask a question. Please press star followed by one on your telephone keypad.
Speaker Change: I think <unk> reform has been obviously, a really hot topic for Canadian operators, we're not convinced that material change is going to happen in the near term I would say that we are seeing some.
Bill: Is that six and a half times? store. So, um, Well, I guess I'd make two reflections to back test, are we being too conservative? We do go back and look at things that we looked at and didn't do. And it's very clear to us that the outcomes of the things that we passed on are far less favorable than what we've done. Okay, and that's both and taking buildings that to the naked eye, you know, it's a brand, it's a it's a business that we bought, it's a brand that we bought, but what you can't see is the leases too short, or the rents are too high, or the tenant has bad financials that that very frequently things that we've looked at and passed on have turned out to be, you know, unfortunate outcomes.
Speaker Change: Our next question comes from RJ Milligan from Raymond James Your line is now open. Please go ahead.
RJ Milligan: Yeah, Hey, good afternoon guys.
Speaker Change: Bill you talked about running leverage at the lowest level, it's been in quite some time however.
Speaker Change: Some degree a very positive and constructive regulatory reform, whether youre looking at some of the retail regulations across provinces on packaging restrictions. We also expect a milligram limits on edibles to shift this year, which will likely be a boon for that for that category. So.
Speaker Change: I'm just curious given the fact that your cost of capital is attracted to your how do you think about potentially further delevering or loading up the balance sheet for opportunities that might arise later.
Speaker Change: So.
Speaker Change: So we are seeing important marginal.
Speaker Change: It's a great question and I think the interesting dynamic as Pat mentioned, when <unk>, 4% and so that.
Speaker Change: <unk> that's happening.
Speaker Change: But the notion that we are.
Speaker Change: Months away from all seeing excise tax rates drop and that this will be some big boon for the industry.
Speaker Change:
Speaker Change: You pay your dividend in essence on the forward and you'll receive sofa.
Speaker Change: There are some fees involved but thats the basic building blocks.
Speaker Change: Not quite prepared to make that call just yet so no. Other particular insights beyond what you are hearing and reading.
Speaker Change: The cost of having this liquidity is very low.
Bill: So that's one. Two, I would observe that rents on that lease are relatively random. And so you may have a Burger King that has $70,000 worth of rent and one that has $107,000 for the rent and one that has $170,000 worth of rent. And they look exactly the same other than their rent number. And so the coverage would obviously be way different on the $70,000 worth of rent than the 170. And so I think a big part of our job is searching for properties that have great performance, but reasonable rents. And so I don't think that there's an upper limit of what we would consider.
Speaker Change: When rates were zero and you are paying a 5% dividend.
Speaker Change: And the industry in media today and in terms of trade disputes.
Speaker Change: While shocks it gets expensive if you have too much of a forward youre not using it in the <unk>.
Speaker Change: Not going to put words in mark Carnies in mouth, so to speak.
Speaker Change: Finally manner, so we felt that the.
Speaker Change: I think he has got a number of priorities that are seen as significantly more important than the five plus billion dollars cannabis industry in Canada.
Speaker Change: The opportunity cost of having substantial liquidity was very.
Speaker Change: Minimal.
Speaker Change: And we were opportunistic.
Speaker Change: But I'm sure that the Liberal government, we'll continue with many of the same approaches and policies that it has.
Speaker Change: Because of the fee structure of the ATM and just so everyone's clear ATM has been the technology, we've used to raise equity.
Speaker Change: In previous administrations, but importantly, when you referenced the trade war.
Speaker Change: Almost explore exclusively for something like the last seven or eight years.
Speaker Change: I think gratuitously I should just mentioned that we are not expecting or experiencing any material disruption in our business from.
Bill: Now, obviously, when that lease matures, which is usually very far into the future, given extension options, you know, we have some rent upside and we have experienced some positive outcomes there.
Speaker Change: It has a very advantaged fee and discount structure and so when that capital was available because the opportunity cost of holding that for position was minimal.
Speaker Change: This dueling and uncertain tariff dynamic that's in play.
Speaker Change: Our real exposure there we had approximately 5% of sales in our liquor business coming from U S products. So.
Speaker Change: We took advantage of it and.
Bill: The last thing I'd point out, maybe a different answer to your question. Having gone through the financial crisis earlier in my career, the dotcom bust very early in my career, COVID more recently, there is a dynamic where when there's substantial uncertainty, and you have the ability to be on offense, there's enormous advantage to that. And so we go into this current environment with the lowest leverage we've had in a long time. We have more liquidity from undrawn forwards than we've had in a long time. And we have a portfolio that's in fantastic shape. So if the issue is we might be a little bit too conservative, historically, I'll take that in order to be in a position to be aggressive if opportunities not.
Speaker Change: I think that puts us in a really good position.
Speaker Change: When I say, it's volatile out there it's not sort of my opinion, you can look at the VIX and it's a quite volatile environment.
Speaker Change: When you look at products like Kentucky Bourbon for example.
Speaker Change: You may see shifts in terms of presence on shelf in the Canadian landscape, but we were also in the midst of working new working towards very new and expanded private label options.
Speaker Change: But we're.
Speaker Change: We love being very liquid.
Speaker Change: Liquid when there is stress in the streets.
Speaker Change: To better reach consumers and deliver value and so.
Speaker Change: Okay, and so bill you had given some same store stats on some of the tenants are at the beginning of the call. Obviously concerns out there that we might head into a recession or downturn, obviously the data has been pretty mixed.
Speaker Change: This is in no way sort of an excuse for our teams our leadership in terms of performance and then on the cannabis side. There are some modest exposures through.
Speaker Change: But if we were to see a downturn or a recession. How do you think that might change the pipeline, whether it being volume competition on pricing.
Speaker Change: Potential.
Speaker Change: Inflation dynamics with packaging, specifically, but we don't see that having a material impact on the business that would result in.
Speaker Change: Material materially impaired margins or anything like that so as an industry, particularly being based in Canada.
Bill: I appreciate the contact.
Speaker Change: We went through.
Speaker Change: Covid and our portfolio performed extremely well, but I wouldn't say there were bargains to be had on any sustained basis during that time.
Operator: Thank you, as a reminder to ask a question please press star followed by one on your telephone keypad.
Speaker Change: We're going to fare reasonably well relative to many others in terms of potential disruption from from trade related disputes.
RJ Milligan: Our next question comes from RJ Milligan from Roman James. Your line is now open, please go ahead. Yeah, hey, good afternoon, guys. Billy talked about running leverage at the lowest level it's been in quite some time, or if not ever. I'm just curious, given the fact that your cost of capital is attractive to you, how do you think about potentially further delevering or loading up the balance sheet for opportunities that might arise later? Yeah, so it's a great question, and I think the interesting dynamic is, as Pat mentioned, when SOFR is 4%, and so that...
Speaker Change:
Speaker Change: Thank you.
Speaker Change: This is a different scenario I think our portfolio will perform very well.
Speaker Change: Once again, if you have a question. Please press Star then one line.
Speaker Change: We're essentially 100% occupied so I can't promise that it would improve because it's about as full as it can be but.
Speaker Change: This concludes the question and answer session I would like to turn the conference back over to Zach George for any closing remarks.
Speaker Change: We'd be in a really good position do we then have.
Speaker Change: Interesting opportunities to deploy capital.
Speaker Change: Acquisitions.
Zach George: Thank you Michelle and thank you all for joining US today. We appreciate your time and look forward to updating you on our progress in the near future. Thank you.
Speaker Change: Unclear to.
Speaker Change: An earlier question, we tend to target sectors that have less targeted tariff exposure theres been two wall Street research reports on the net lease industry and tariff exposure I think we we were sort of the most favorable of the industry in both of those I'd encourage you to track them down.
Speaker Change: This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Bill: Hey, your dividend in essence on the forward and you receive so for and there's some fees involved, but that's the basic building blocks. The cost of having this liquidity is very low. When rates were zero and you're paying a 5% dividend, well, shucks, it gets expensive if you Italy. almost exclusively for something like the last seven or eight years, has a very advantaged fee and discount structure. And so when that capital was available, because the opportunity cost of holding that forward position was minimal, we took advantage of it. And I think that puts us in a really good position.
Speaker Change: But.
Speaker Change: Will we get the situation, where we have really interesting investment opportunities.
Speaker Change: [music].
Speaker Change: I can't say for sure I can say that we have the money for it we have the people for it we're focused on it but.
Okay.
Speaker Change: But we need the market to come to us to find.
Speaker Change: [music].
Speaker Change: High quality deals that we can buy it at a better than historic prices.
Speaker Change: Okay. That's helpful. Thanks, guys.
Speaker Change: Thank you.
Operator: Next question comes from Jason Wang from Barclays. Your line is now open. Please go ahead.
Hi, good afternoon.
Speaker Change: Rent collections ticked up a bit this quarter on there is still strong, but just wondering what types of tenants and non paying now.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: If youre working on anything at those properties to increase collections numbers further.
Speaker Change: Yes, it's basically one tenant.
Speaker Change: We have a personal guarantee from that tenant that we're pursuing and we've made substantial progress releasing the buildings. So it's very very small.
Bill: You know, when I say it's volatile out there, it's not sort of my opinion, you can look at it's a quite volatile environment. But we're, you know, we love being very liquid when there's stress in the streets.
Speaker Change: Sort of.
Speaker Change: A one off thing.
Speaker Change: Mhm.
Speaker Change: And what kind of re leasing spreads.
Yes.
Speaker Change: That's like that historically, yes.
Speaker Change: It's just a couple of buildings I think we'll be in a good spot.
Bill: Okay. And so, Bill, you had given some same source stats on some of the tenants at the beginning of the call. Obviously, concerns out there that we might head into a recession, downturn. Obviously, the data has been pretty mixed. But if we were to see a downturn or a recession, how do you think that might change the pipeline, whether it be volume, competition, or price? You know, we went through COVID and our portfolio performed extremely well. But I wouldn't say there were bargains to be had on any sustained basis during that time. this is a different scenario.
Speaker Change: But we're not going to comment on ongoing lease negotiations when it's only a couple of buildings.
Speaker Change: Thank you for the questions.
Speaker Change: Yes.
Speaker Change: Thank you. Our next question comes from James <unk> from Evercore. Your line is now open. Please go ahead.
Speaker Change: Thank you. Thanks for the time kind of a bigger picture question Bill you.
Speaker Change: Here, you mentioned Youre building acquisitions to half and then you've got the.
Balance sheet in a great position are you, adding other sort of capabilities or datasets to your underwriting I know you've been pleased with like deal path technology et cetera to date and I'm. Just curious how you are setting up for the next phase of growth.
Bill: I think our portfolio will perform very well. You know, we're essentially 100% occupied, so I can't promise that it would improve, because it's about as full as it can be. But I think we'd be in a really good position. Do we then have interesting opportunities to deploy capital in acquisitions? Unclear. To an earlier question, we tend to target sectors that have less targeted tariff exposure. There's been two Wall Street research reports on the net lease industry and tariff exposure. I think we were sort of the most favorable of the industry in both of those. I'd encourage you to track them down.
Speaker Change: Is there any other incremental steps that you are doing to further enhanced underwriting. Thanks.
Speaker Change: That's a really good question.
Speaker Change: I think like every company we are.
Turning to figure out how AI will make us more efficient.
Speaker Change: I think we have just more people to work on projects and to explore potential new industries.
Speaker Change: We've built more substantially more muscle in our asset management.
Speaker Change: Group with some really exciting hires there that are getting up to speed historically, we didn't need much of that function, but as we have added several hundred buildings it's become.
Bill: But You know, will we get this situation where we have really interesting investment opportunities? I can't say for sure. I can say that we have the money for it. We have the people for it. We are focused on it. But we need the market to come to us to find high quality deals that we can buy it better than historic prices. Okay, that's helpful. Thanks, guys.
Speaker Change: Our portfolio is in fantastic shape, but theres more to do.
Speaker Change: But I am really excited as I said about the new folks that are joining.
Speaker Change: There'll be able to.
Speaker Change: Use the technology that we have will be able to put more emphasis.
Speaker Change: On automating things that can be automated.
Speaker Change: But there is there is a lot.
Speaker Change: That we can do with the existing technology that we have and as you mentioned.
Jason Wayne: Our next question comes from Jason Wayne from Barclays. Your line is now open, please go ahead. Hi, good afternoon.
Speaker Change: Deal path as an integral part of running our business and.
We've done a number of investor.
Speaker Change: Sessions, where we take people through our underwriting and deal path. If there are those who would like to do that we'd be more than happy to do it I think investors have almost universally founded a valuable 45 minutes of their time.
Bill: Rent collections ticked up a bit this quarter, they're still strong, but I'm just wondering what types of tenants are non-paying now, and if you're working on anything at those properties to increase the collections numbers further? Yeah, it's basically one tenant. We have a personal guarantee from that tenant that we're pursuing. And we've made substantial progress releasing the buildings. So it's very, very small, sort of one off.
Speaker Change: Yeah.
Speaker Change: Thank you for your time.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Thank you. We currently have no further questions. This concludes our Q&A and consequently today's call. Thank you for joining US you may now disconnect your lines.
Bill: And what kind of releasing spreads, you know, have you gotten on trade-outs like that historically? Yeah, it's just a couple buildings. I think we'll be in a good spot, but we're not going to comment on ongoing lease negotiations when it's only a couple buildings.
Bill: Alright, thank you for the questions.
James Cammett: Our next question comes from James Cammett from Evercore. Your line is now open, please go ahead.
James Cammett: Thank you. Thanks for the time.
Bill: Kind of a bigger picture question, Bill. You know, you mentioned you're building acquisition staff and have been. You've got the balance sheet in a great position. Are you adding other sort of capabilities or data sets to your underwriting? I know you've been pleased with like DealPath technology, et cetera, to date, but I'm just curious, you know, how you're setting up for the next phase of growth and if that entails any other incremental steps that you're doing to further enhance the underwriting. Thanks.
Bill: It's a really good question. You know, I think like every company, we're trying to figure out how AI will make us more efficient. I think we have just more people to work on projects and to explore, you know, potential new industries. We've built more, substantially more muscle in our asset management group with some really exciting hires there that are getting up to speed. You know, historically, we didn't need much of that function. But as we have added several hundred buildings, it's become much more efficient. Our portfolio is in fantastic shape, but there's more to do.
Bill: But I'm really excited, as I said, about the new folks that are joining, they'll be able to use the technology that we have, we'll be able to put more emphasis on automating things that can be automated. But there's, there's a lot that we can do with with the exact existing technology that we have. And as you mentioned, you know, DealPath is a integral part of running our business. And we've done a number of investor sessions where we take people through our underwriting and DealPath. If there are those who would like to do that, we'd be more than happy to do it.
Bill: I think investors have almost universally found a valuable 45 minutes of their time.
Operator: We currently have no further questions.
Operator: This concludes our Q&A and consequently today's call.
Operator: Thank you for joining us. You may now disconnect your lines.