Four Corners Property Trust Inc

NYSE:FCPT

Earnings Call Transcript 2020-Q1

[Operator]

Good day. And welcome to the FCPT Announces Earnings for First Quarter 2020 Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Gerry Morgan. Please go ahead.

[Gerald Morgan, executive]

Thank you, Sarah. During the course of this call, we will make forward-looking statements, which are based on beliefs and assumptions made by us. Our actual results will be affected by known and unknown factors that are beyond our control or ability to predict. Our assumptions are not a guarantee of future performance and some will prove to be incorrect. For a more detailed description of some potential risks, please refer to our SEC filings, which can be found at fcpt.com. All the information presented on this call is current as of today, May 7, 2020. In addition, reconciliation to non-GAAP financial measures presented on this call, such as FFO and AFFO, can be found on the company's supplemental report, also available on our website.

And with that, I'll turn the call over to Bill.

[William Lenehan, executive]

Good morning. Thank you for joining us to discuss our first quarter results and ongoing response to COVID-19. First, our best wishes to all of you and your family's health and safety during these uncertain times and our thanks to all the medical and other service providers who are working during this time for all of our benefit.

I'll begin with a few broad comments about our response to the current environment before discussing the first quarter results and the second quarter collection results, including in our earnings release. First, my sincere thanks and admiration to all the FCPT team who have continued to perform tirelessly from home over the last 2 months. A special acknowledgment to our team under Jim Brat and Carol Dilts within Carol, Longhorn group in San Antonio, who have been innovative in achieving ToGo business over the past 6 weeks, approaching 30% of regular levels with a much reduced team to returning to 20 -- and this is prior to returning to 25% maximum occupancy in restaurant dining in Texas last week.

The last 2 months have been an unprecedented environment for restaurant operators, but many have shown tenacity in adjusting their operating model. We are starting to see different parts of the country reopen and restaurant traffic will rebound accordingly. Strong operators like Darden and Brinker and others should benefit in the long run from their scale. We believe the strength of our portfolio, which was built on strong locations, well-capitalized tenants and benefits from industry-leading rent coverage will relatively outperform during this time.

Now turning to our reported results in the first quarter. Our portfolio performed as expected in the quarter as we benefited from a full quarter of rent from properties acquired at year-end. We achieved AFFO per share of $0.37, which represents an 8.8% year-over-year increase. During the first quarter, FCPT acquired 23 properties for a combined purchase price of $36.2 million at an initial weighted average cash yield of 6.9% prior to our decision in March to extend deadlines on the existing pipeline in response to COVID-19.

Speaking to the quality of the first quarter acquisitions, 19 of the 24 leases are with the brand's corporate operator and our average basis per property is less than $1.6 million. Further, 14 of the 23 properties are ground leases, where FCPT owns the land and the tenant constructed the building, which equates to low rents.

With respect to the acquisition environment in general, we have paused our acquisition activities by requesting counterparties to extend deadlines until later in the year, but we believe we will be poised for a great acquisition environment in the near future as competition for acquisitions will decline, which should improve pricing. We have spent the last 4 years being disciplined in how we construct and underwrite acquisitions and finance our balance sheet, which will position us well.

With regard to second quarter rent collections, rents continue to be received daily for April, and we currently stand at over 89% collected. We are also off to a strong start on May collections with over 83% collected through May 5, with additional rent payments coming. The team remains engaged in construction rent deferral conversations with tenants. Of course, we'll continue to enforce the provisions of the leases in cases where tenants choose not to pay and we are not discussing rent forgiveness with tenants nor are we lending money to any tenants. We would note that the number of tenants seeking lease modification has decreased in recent weeks.

It is also noteworthy that many of our tenants have raised equity recently. Darden raised $527 million, Brinker announced last night that it raised around $125 million, and BJ's recently raised $70 million as examples. We are in preliminary discussions with a few of our tenants to exchange short-term rent deferments for concessions, including lease extensions and conversion of 5-year bumps into annual rent increases. That approach has been limited in scope, will improve our portfolio and drive long-term value for our shareholders. But it may put the rent collections for May slightly below April. Regardless, we expect collections to continue to rise in the coming weeks for both periods.

Finally, before I turn it over to Gerry to discuss some of the financial results and our liquidity position, a few words on our dividend. I will remind everyone that we paid our declared first quarter dividend in mid-April. The FCPT Board and I will review the second quarter dividend payment in early June based on a full assessment of the environment. Our dividend payout ratio was approximately 83% in the first quarter, which is a conservative level.

Now Gerry will take you through our financial results. Gerry?

[Gerald Morgan, executive]

Thanks, Bill. A few quick comments on the first quarter, recognizing it is less of a focus at this point. We generated $35.7 million of cash rental income in the first quarter after excluding noncash straight-line rental adjustments and on a run rate basis, the current annual cash base rent for leases in place as of March 31 is $142 million. Our weighted average 10-year annual cash rent escalator remains at approximately 1.5%, and our EBITDAR coverage was 1 -- was 4.7x, as measured in the time period prior to the impact of the coronavirus slowdown and forced closures.

As Bill mentioned, we reported $0.37 per share in AFFO, which was a $0.03 increase in quarter-over-quarter results versus the first quarter of 2019.

Turning to the balance sheet, 2 capital offerings to note. First, we entered into agreements on March 31 to issue $125 million of private senior unsecured notes in the second quarter; $75 million of 10-year notes, which funded on April 8 at a fixed interest rate of 3.2%; and $50 million of 9-year notes, which are expected to fund on June 9 at a fixed interest rate of 3.15%. These notes were issued at par and in connection with the offering, we also terminated interest rate swaps at a loss, which will be amortized over the life of the notes and add approximately 67 basis points to the all-in annual interest rate.

Second, during the first quarter, FCPT sold approximately 144,000 shares at an average offering price of $30.23 per share for total net proceeds of approximately $4.3 million after deducting fees and expenses.

Turning to our cash and revolver balance, we ended the second quarter with a $178 million revolver balance and over $90 million of cash reserves out of an abundance of caution, given the COVID-19 environment. As disclosed in yesterday's release, we currently stand with a cash reserve of over $150 million after funding of the first $75 million of the private note. We may utilize some portion of this cash balance to pay down the revolver over the remainder of this quarter as the environment further stabilizes.

Our overall leverage metrics remained quite strong, with a fixed charge coverage of 5.2 in the first quarter and net debt-to-adjusted EBITDA of 5.3x at March 31. Our revolver maturity can be extended to November 2022 at our option, which is also the timing of the first term debt maturity of $150 million. We remain committed to maintaining a net debt to leverage target of below 5.5 to 6x.

With that, Bill, back to you for closing comments.

[William Lenehan, executive]

Thanks, Gerry. In conclusion, we will remain very focused on working with our tenants as they reopen and adjust their business model over the upcoming weeks and months. We have always prided ourselves on transparency in our reporting to shareholders, fact-based investment decision-making and responsiveness in all of our interactions, and we will continue to be guided by these principles.

With that, we will turn it back over to Sarah for Q&A.

[Operator]

[Operator Instructions] Our first question comes from Nate Crossett with Berenberg.

[Nathan Crossett, analyst]

So a question on acquisitions. I know you're on hold at the moment, but how would you kind of characterize the paused deal funnel, if you will? I think last time, it was pretty strong. Is there a lot in the queue for when you guys start acquiring again? And then how many of the acquisitions were kind of signed and are now just postponed?

[William Lenehan, executive]

Yes, I think we have -- we're in a great place. We have minimal deposits, but the assets are -- strong assets that if the world stabilizes, we'd like to buy. The vast majority are under contract with folks that are willing sellers. So I think it's a prudent thing to pause and see what the world holds. But as our stock has stabilized off sort of panic levels earlier in the year and we can have better clarity on what's going to happen, I think it won't take much to get us back into acquisition mode.

[Nathan Crossett, analyst]

Yes. But what about the actual just size of the pipeline? Has there been any meaningful changes with all this? Or is it just -- I mean I know everything is on hold, but like in terms of size of the opportunities out there, has that changed?

[William Lenehan, executive]

What I would say, no, not much. I mean our pipeline is pretty similar to what we've reported in the past. I would simply say that the dynamic for acquisitions more acquirer-friendly than it was pre-COVID, just to state the obvious.

[Nathan Crossett, analyst]

Okay. And then just one quick one on the 17% of rents not yet collected in May. Do any of those tenants, are they accessing any of the Fed programs or PPP? Or are they too big for PPP? Or what's -- what are they saying to you?

[William Lenehan, executive]

It's a mixed bag. And I think part of it is just our earnings call is a little bit early in the month. So the collection process is ongoing. But we just wanted to make sure people had the most updated information. But I would say what we're hearing in recent weeks is the underlying businesses are reopening, performance is improving across the board. People have been accessing CARES Act and PPP. And we're having discussions along with collecting rent sort of every day.

[Operator]

Our next question comes from Collin Mings with Raymond James.

[Collin Mings, analyst]

First thing I wanted to go back to is just on Nate's question, just in terms of kind of acquisitions. Just -- and you touched on your expectations in the prepared remarks that you expect pricing will change moving forward. But just more broadly, Bill, longer term, what if anything, do you change about your investment strategy? I would assume this inherently creates some dislocation and more opportunities on the restaurant front. But does this actually lead you to maybe accelerate your diversification beyond restaurants moving forward?

[William Lenehan, executive]

I think it's too soon to tell, Collin. I will comment that a lot of the basic tenets of our acquisition strategy going into this, focusing on national brands that are well capitalized, focusing on low rent properties being sort of very methodical, has served us really well. So I would think a lot of those tenets will remain the same coming out of this.

I would also comment, we've avoided -- Collin, we've avoided many of the property types like big box retail and quasi strip centers and entertainment-focused net lease, stuff that's more off the run, and that served us really well.

[Collin Mings, analyst]

Got it. Okay. And then in your comments as well as in the press release, you've outlined how the company is looking to strike a balance between collecting short-term rent but then also taking the opportunity to explore ways to create long-term value. And again, in the prepared remarks, I think you touched on getting maybe some annual rent bumps in exchange for some short-term deferrals. But maybe just can you expand on that bump process a little bit more? And maybe quantify what you've agreed to thus far in terms of short-term deferrals? And kind of what you're getting in exchange for that?

[William Lenehan, executive]

Sure. Well, mostly it's been discussions thus far. We haven't papered much of anything with tenants. But the idea is just to take a long-term shareholder value creation standpoint, where it's that there's something that we can do for a couple of months that on a long-term basis would be very positive for Four Corners, I think that's what we're here to do. So we're just trying to be flexible, being very communicative with our tenants. We operate 6 restaurants. So we have a sense of what's going on literally in real time. And so we're just trying to be responsive to our tenants in ways that help them during this short period of dislocation. It's taken over the long-term of a 20, 30, 40, 50-year lease. A couple of months is pretty short-term and trying to do things that when we come out of this, we'll look back and say, well, that really inured to the benefit of Four Corners shareholders.

[Collin Mings, analyst]

Okay. And then, Bill...

[William Lenehan, executive]

Maybe to be a bit more specific. I mean the obvious one is having tenants exercise their renewal options early.

[Collin Mings, analyst]

Got it. Okay. And then, Bill, going back to the dividend and recognizing there's multiple variables at play and I mean, June's still a while away. But maybe just talk a little bit more about how the Board just plans to think about the dividend here. And then is there a willingness to pay the current distribution, if not fully funded by cash flow in the quarter? Is there a lot that may be keeping the cash and being able to utilize it for acquisitions is better? Just some more thoughts just on the capital allocation front there might be helpful as well.

[William Lenehan, executive]

Sure. I think, Collin, we haven't really even done those conversations. I think we're simply saying, if you just reflect back of how much more we know now than we knew 3 weeks ago, right, I don't know the exact number, but our Board meeting's something like 5 weeks away, we'll know so much more at that time. We have a very strong liquidity position, as Gerry mentioned. We have, I think, amongst the highest collections in the industry. We're in a really good position. So I don't want to speculate what the Board is going to decide. We'll decide in June.

The point that we're trying to make is just think about how much more we'll know about how the world looks 4 or 5 weeks from now. And so it's something we're going to discuss, but the company is in great shape.

[Collin Mings, analyst]

Okay. I guess maybe asking that in a slightly different way, is there the thought that just the dividend is a important part, even if it's not at the same level, a dividend is an important part of the kind of the value proposition, if you will, for shareholders as opposed to maybe even if you have to align that maybe with operating cash flow in the short term, is that a fair way to think about it?

[William Lenehan, executive]

Yes. I mean, Collin, dividends are important to REITs, but I'm not going to make further comments.

[Operator]

Our next question comes from Rob Stevenson with Janney.

[Robert Stevenson, analyst]

You've talked in the past, Bill, about when Four Corners was formed that the Darden leases were set at a level where they had some cushion operationally. What's the sort of ballpark number on a revenue basis relative to pre-COVID that Darden really needs to be at to comfortably cover your rent?

[William Lenehan, executive]

Going into this, the Darden rents were about 4% to 5% rent to sales. That's versus a kind of standard industry level of 8%. So when things reopen, I think we're going to very, very quickly get to a point where our leases are well covered again. Will they be the 5.5x four-wall coverage that they were going into this immediately? No. But if you think about industry standard metrics of 2.5x, our leases would have been 2.5x during the bottom of the '09 -- 2008-2009 recession. So I think that -- will it be immediately that there's the same level of coverage? No, but it won't take that long for them to be very well covered.

[Robert Stevenson, analyst]

Okay. And given that you also operate some assets, how are your restaurant tenants viewing the return of restricted in-house dining? Is that person that's now going to come in and eat inside the location the same as those that were doing take out from the location? In other words, is the expectation that the in-house dining will cannibalize some of the takeout and be somewhat limited in terms of the positive impact, especially once you increase expenses for the staffing needed to deal with in-house dining? Or is -- are people viewing that as all additive at this point?

[William Lenehan, executive]

So I think it's a fantastic question. And the real answer is no one knows. But it's important to just think for a moment of how dramatic the change in consumer behavior we've seen. We've seen some casual dining brands have 50% take-out delivery sales that going into this would have been 5%. So what are the factors driving that? One, states like Texas and California allowing, well, alcohol sales ToGo; two, obviously, far less competition from any in-dining experience; and then innovation. And so we've seen brands like Chili's really lead from a technology standpoint. At our own restaurants, they've been very innovative, steak as a cuisine type typically doesn't do all that well on delivery. But they've call an audible. They're selling meal kits, unprepared meal kits, so you can cook at home. Just really great thinking. And I think what's going to be interesting to see is a year or 2 from now, did that 5% ToGo and pick-up that went to 30%, clearly, it's going to get cannibalized by in-dining. But even if it were to recede by 50% or 70%, it's still multiples of what it was before.

And I would also note, it's a terrific way to keep key people during this time. It's a terrific way to serve your most loyal customer. And it's quite profitable, certainly as if it's an adjunct to in-dining -- in-person dining.

And so what we've seen in Texas, for example, as they've gone to 25%, we had strong business over the weekend. We check on it daily. I think you can anticipate over time that the 25% going to 50% and going to 75%, going back to a full experience, that might take some months. But the restaurants didn't operate at 100% capacity previously. But I think -- I do think it's a long-term positive for branded restaurants who can combine the technology of ordering, execution and that have relevant cuisine types.

[Robert Stevenson, analyst]

All right. And then you said that in the release that you were 83% on May rents as of May 5, where are you typically collection-wise pre-COVID 5 calendar days in the month? I mean is that 83% sort of typical? Are you normally at 90% or 95% given electronic pay? Can you give some sort of perspective where that would be normally?

[William Lenehan, executive]

Yes, we're certainly north of that on a typical basis. But if you think about the COVID update that we provided a couple of weeks ago and how that number has increased, I think, 200 basis points or so. Similar sort of thing that we do have tenants that had withheld, April and May rent, wanting to have a discussion. As we've had those discussions, folks have sent rent in. So certainly under a normal environment, it's much higher. But we're showing improvement as how I would -- how I'd position it.

[Robert Stevenson, analyst]

All right. And then last one for me. Gerry, has anybody fallen below the 75% collectibility threshold and you've had to move them to cash basis revenue recognition yet? And what are you accruing for 2020 now for bad debt expense?

[Gerald Morgan, executive]

Yes. The collectibility test is done at the end of the quarter. So if you remember, back at the end of March, that was really before most of this happened. So we had a minor amount of collectibility reserve that we took at the end of March. I think the bigger number for our whole industry and for ourselves will be at the end of the second quarter. So I think the answer is a minor amount at the end of the first quarter, and we'll just have to see at the end of the second quarter.

[Robert Stevenson, analyst]

Okay. And at this point...

[William Lenehan, executive]

It was sub $50,000.

[Gerald Morgan, executive]

Yes. It was -- to Bill's point, it was sub $50,000 in terms of reserve for the first quarter. So clearly, an immaterial amount. Sorry, Rob.

[Operator]

Our next question comes from Sheila McGrath with Evercore.

[Sheila McGrath, analyst]

On the mall side of things, mall owners are obviously very challenged. I just wondered if you think there's more opportunities when you get to the other side of this kind of pause on acquisitions in that? Or do you think you pretty much tapped out that opportunity, previously?

[William Lenehan, executive]

It's a terrific question. I think there'll be much more opportunity. The key will be to remain very selective. And I think that that's really important to remember, we might buy 1 out of 3 properties that we're seeing that are mall adjacent. And we're also very selective off mall. But I think it will continue to be an opportunity. What I would say is I think COVID-19 is likely sort of drawing forward what would have happened in the next 5 years in malls to happen sort of in 2020.

[Sheila McGrath, analyst]

Okay. And then on the acquisitions in the quarter, could you provide any more detail on those? It was shorter remaining lease term to -- were these ground leases or well below market rent? Or just any additional color?

[William Lenehan, executive]

Yes. Let me just get my notes here. The number was 14 of the 23 were ground leases. An average basis of around $1.5 million. So quite a bit below replacement cost. And the short lease term is reflected of buying properties from mall owners, and that's not a metric that they manage to. But I'll just point out, this COVID-19 pandemic provides a really interesting opportunity if you have low rents to go in and get extensions. And so in the past, where it's been somewhat difficult to get tenants' attention to exercise a 5-year extension when they still have 5, 6 years on their lease, we now have a real specific reason to have a conversation and things we can trade that I think in the long-term will really benefit our shareholders.

[Sheila McGrath, analyst]

All right. Great. And then one last one. Florida and Texas, your 2 largest states are open. Any idea, either what percent of your portfolio is in states where restaurants aren't open? Or reverse, what percentage in states that are currently open?

[William Lenehan, executive]

Right. Well, Sheila, I would say that I think the vast majority, the vast, vast majority of our properties are open. It's just that they're open in a more restricted state. So for QSR, they're open and their revenues generally are flattish to last year because most of their business was through a drive-through anyway. And then for Darden, most of them are open, there's just with limited seating. So it's state-by-state, we don't track it that way. Our leases don't contemplate whether the building is operating or not. But as you mentioned, it's great to have our top 2 states reopening.

[Operator]

Our next question comes from John Massocca with Ladenburg.

[John Massocca, analyst]

So at the risk of maybe parsing your earnings release like it's a Fed statement, you mentioned that you received short-term rent relief requests, most often in the form of rent deferrals. And we're in kind of further discussions with basically your entire portfolio, which was a kind of broader language that was in the April COVID update. Can you maybe provide some color on how far along those conversations are? Are they more -- something more cursory in nature? Just any color there would be helpful.

[William Lenehan, executive]

Yes. I mean, John, it's almost exactly the same language as we had in our last report. We're talking to our tenants. I don't understand what the expectation would be for us otherwise. That's what we do as landlords. So there's no got you there.

[John Massocca, analyst]

Okay. I just want to make sure there wasn't like -- I mean, obviously, the obligation to your tenants kind of reach out and ask about potential rent deferral given the current situation, just maybe how far along some of those conversations are for people that are paying rent in May?

[William Lenehan, executive]

Yes. I mean I would say that we haven't had any material sort of finalized amendments. We're having discussions trying to figure out what's a mutually beneficial amendment to their lease. But we're having a lot of those discussions. There's no different from any other REIT that's responsibly managed.

[John Massocca, analyst]

Understood. And then I guess, in some of those discussions, not necessarily all of them, but just in general and maybe even people who are kind of currently deferring rent, are tenants open to kind of asset for rent swaps? And would that be something you guys are open to?

[William Lenehan, executive]

We're definitely having those conversations.

[Operator]

Your next question comes from Anthony Paolone with JPMorgan.

[Anthony Paolone, analyst]

Okay. So Bill, maybe just following up on that last question. I don't know if it's so much a got you, but I guess there's maybe a perception that Darden's 69% of your revenues, maybe more of a viewed as a binary kind of situation. Should we take your comments to basically mean that this is just a lot more fluid than that and that there's a lot of other things on the table? I mean, I guess that's kind of what kind of thinking about.

[William Lenehan, executive]

Yes. I mean I would say Darden has roughly $1.5 billion of cash on hand. And so they have lots of capability to pay rent, and we're talking to them and all of our other tenants about what can we do that would be long-term beneficial for Four Corners, but provide them some relief in the short term. But those conversations depend on the tenant, some are more advanced than others. But all the conversations revolve around deferment not abatement. All the conversations are sort of short-term in nature because we do view this as being a relatively short-term phenomenon. And I think coming out of this, there'll be some really interesting things that we'll be able to point to where we created value for our shareholders, which is obviously what our job is to do.

[Anthony Paolone, analyst]

And just again, just given the size of Darden in the mix, is this something you think we'll kind of get a sense as to how that plays out and what you ultimately want to do there in the next few months? Or do you think that could drag out?

[William Lenehan, executive]

Yes. I would certainly say that my expectation would be that the environment will feel very different a month from now as it does feel very different today than a month ago. And frankly, nothing may happen with Darden, nothing may happen with many of our tenants.

[Anthony Paolone, analyst]

Okay. And then just other question I had. With respect to the outparcel deals with the various like mall operators, it sounds like you have your -- like you have a lot of control over what you want to do there. Does it give you just the ability to push things out and you have to close? Or is there any sort of performance requirements that you have or any financial risk there?

[William Lenehan, executive]

Well, we have deposits, but they're pretty minimal. And I think everyone understands not just Four Corners and mall counterparties but in real estate in America right now, most transactions are on pause, especially if there isn't a very significant deposit at risk. So we're having discussions with them. They're great assets that we'd like to own. We just want to have a better understanding of what the future holds.

[Operator]

[Operator Instructions] Our next question comes from [ Michael Caler ] with [ Cureton ].

[Unknown Analyst]

Most of mine had been answered. Just curious, have you had to take back any buildings from a tenant?

[William Lenehan, executive]

I don't think so. I mean maybe there's one. I don't think so.

[Operator]

Our next question comes from [indiscernible] with [ Stone Bell ].

[Unknown Analyst]

Bill, I had a quick question. So in terms of collections for May, so you said you all are at 83%. And I'm not sure where you all ended up in April. But could you break that collections number in terms of categories of QSR versus fast casual versus casual dining?

[William Lenehan, executive]

Sure. Well, the prior month, we were at 89%. So what I would say, I don't have the exact numbers in front of me. I would say QSR has been a higher percentage because their business hasn't been impacted nearly as much, but that's not universally true. We do have QSR tenants who have been paid. But I would say that it doesn't really skew as much casual dining, fast casual QSR as it skews bigger companies versus private equity owned companies.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Bill Lenehan for any closing remarks.

[William Lenehan, executive]

Great. Thank you, everyone. Appreciate it. We're around if you have questions. Hope all is well.

[Operator]

The conference is now concluded. Thank you for attending today's presentation, you may now disconnect.