Four Corners Property Trust Inc

NYSE:FCPT

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and welcome to the FCPT Second Quarter 2021 Financial Results 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, including uncertainty related to the remaining scope, severity and duration of the COVID-19 pandemic 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 of the information presented on this call is current as of today, August 5, 2021. 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 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 second quarter results. I'm going to make some introductory remarks. Pat Wernig,, our Director of Acquisitions, is going to go into some detail around acquisitions, and then we will hand it back to Gerry to discuss the financial results.

In summary, we continue to have industry-leading collections at 99.8% for the quarter, and occupancy was unchanged at 99.7%. Our restaurant and other retail tenants are experiencing top line performance often above 2019 pre-pandemic levels. In the quarter, we also acquired 23 great properties characterized by low rents and high-quality tenants and recast our $650 million credit facility to both extend the term and improve pricing. We reported second quarter AFFO of $0.38 per share, which represents a $0.04 year-over-year increase. I remind everyone that second quarter 2020 results were impacted negatively by approximately $0.03 per share due to COVID-related variances.

We are excited to see the strong rebound of restaurant operators continuing in the first half of the year. We included a slide in our Investor Presentation posted to the website yesterday with updated survey information from Baird that shows quick-service restaurants are operating at 119% of 2019 weekly levels and casual dining restaurants are operating at 100% of 2019 levels.

Darden and other operators are also reporting higher margins than before the pandemic, highlighting how well leading restaurant operators are adjusting their business models, including simplifying menus, enhancing to go operations and leveraging technology. As a case in point, our Kerrow subsidiary experienced its highest EBITDA results in the second quarter since our inception. And that is prior to including the contribution from Kerrow 7th LongHorn, which opened in April. Well done Kerrow and team.

Turning to investments. We acquired 23 properties in the quarter for a combined price of $45.6 million and an initial cash yield of 6.9%. The acquisitions represent strong tenants with 21 of the 23 properties leased to corporate operators and 10 new brands added to the portfolio. In addition, we have closed on over $28 million of properties in the third quarter to-date. Looking back on the last 2 months, you're seeing increased momentum with $49 million closed in total.

Importantly, we've been able to build our pipeline while staying committed to our focus on quality investments with every property approved for acquisition standing on its own merits. While we don't give guidance, we feel the pipeline is very, very strong, and we are expecting a pickup in closings in the second half of the year. Pat is going to discuss this pick-up in a bit more detail later on in the call.

On the vacant front, we have yet to see large bankruptcies of scale where FCPT's unique abilities would allow us to opportunistically buy in bulk. Opportunities in this space may arrive eventually as weaker brands struggle to keep pace with the shift to digital off-premises sales or if large casual dining or retail operators files for full liquidation. On the personnel front, we've continued to hire into the investment, accounting, legal and property management teams. It is a competitive market today, but there is nothing more important than our recruiting and team development efforts.

With that, I'll turn it over to Pat for some additional comments on the acquisition environment.

[Patrick Wernig, executive]

Thanks, Bill. I'd start by highlighting that we continue to observe strong net lease buyer demand, particularly for tenants with high-quality credit profiles. For this is FCPT's area of focus, we view that as an affirmation in our underwriting approach and overall strategy. As one example, we regularly receive unsolicited offers for our casual dining properties in the mid-4s to mid-5s cap rate range depending on the asset quality and lease term. That's essentially back to where we saw pricing pre-pandemic and the buyer pool seems as deep as it's ever been.

We remain confident in our tenant base over the past year, and now the market is showing other net lease investors are also confident in the top-tier operators that make up the majority of our portfolio. As far as we can tell, focused on credit quality has outweighed any inflation concerns among net lease investors. It's been truly remarkable to observe the market move from a state of complete pause in summer 2020 to red hot 12 months later.

Turning to our own pipeline. We've reacted to the market shift positively and made a lot of progress in Q2 and in Q3 to-date in building out the pipeline. This has been driven principally by 3 factors. First, we benefited from several direct sale-leaseback deals due to the strength of our existing tenant relationships. One of those deals closed last week and a property portfolio with the Sonic franchisee for over $10 million.

Second, we are now more focused on non-restaurant retail properties than we've ever done with about half of our new acquisition volume coming from auto services and repair, convenience stores and medical retail. These newer sectors for FCPT have the added benefit of diversifying our tenant mix. Finally, we've increased our flexibility to slightly lean in on cap rates for strong brands, while staying disciplined and ensuring we don't overpay for assets in this current market environment.

And now, I'll turn it back over to Gerry.

[Gerald Morgan, executive]

Great. Thanks, Pat. We generated $40.9 million of cash rental income in the second quarter after excluding $1.2 million of straight-line and other non-cash adjustments. And as Bill highlighted, we reported 99.8% of collections for the second quarter. There were no material changes to our collectability or credit reserves in the quarter nor any balance sheet impairments.

On a run rate basis, current annual cash base rent for leases in place as of June 30, is $161.6 million, and our weighted average 10-year annual cash rent escalator is at 1.42%. We estimate the portfolio rent coverage is 4.4x for the second quarter, which is approaching pre-pandemic levels. And I'd remind everybody that coverage includes the Darden properties through their fiscal year, which ended May 30, 2021.

Turning to the balance sheet. We funded our previously announced $100 million private placement split between 8- and 10-year notes and priced at an all-in interest rate of 1.7%, including the amortization of gains on a pre-issuance hedge. We did not issue any equity under the ATM program in the quarter. In June, we amended our existing $650 million unsecured credit facility. The recast extended the maturities of the revolving facility by 4 years to November 2025 and $250 million of the $400 million of term loan tranches by 3 years each.

Credit spreads were improved by 20 basis points on the revolver, and we were happy to see strong support with 100% re-participation from our existing relationship banks and the addition of 3 new banks to the facility. We ended the second quarter with $278 million of liquidity, comprising $27.6 million of cash reserves and $250 million availability on our revolver. Our fixed charge coverage for the quarter is 4.9x and the quarter end net debt-to-EBITDA was 5.6x. Finally, remind everybody we paid a dividend for the quarter of $0.3175 per share.

And with that, back to Bill for closing.

[William Lenehan, executive]

Terrific. Operator, do you want to open it up for questions?

[Operator]

[Operator Instructions] Our first question comes from Anthony Paolone with JPMorgan.

[Anthony Paolone, analyst]

My first question is just on the deals you did during the quarter, weighted average duration was on the short side. Can you talk about just the thinking there and how you're looking at those?

[William Lenehan, executive]

Yes. I wouldn't read too much into it. Some of those deals, we've actually already executed are extensions or discussions to enter into extensions with the tenants. Some of them were out-parcel deals where the mall companies don't manage to lease term in the same way we do. And then since the quarter end, the last handful of deals we've announced, I think the average term is 16-plus years. So it's going to bounce around quarter-to-quarter, but I wouldn't read too much into it.

[Anthony Paolone, analyst]

Okay. Got it. And then you mentioned a bit more willingness to lean into yields for good operators that you feel strongly about. Can you put any order of magnitude around that or give us a sense as to maybe where some of the yield buckets are for the stuff you're looking at?

[William Lenehan, executive]

Yes, it's probably 20 basis points, 30 basis points. But I guess one of the ways I would look at it is our average cap rate for the quarter was almost 7%, which is almost a little high for where we want to be. And so we're -- we have a handful of really high-quality things in the pipeline where we leaned in north of 6%, but in the low 6s is how we describe it.

[Anthony Paolone, analyst]

Okay. And then just last one on the Lubert-Adler JV. Was there any activity in that in the quarter? Or did you fund any of your commitment in the quarter?

[William Lenehan, executive]

We haven't. We're trying to find a portfolio to start off with. And frankly, there's just not a lot of distress. And I think that's across the board. I even talked to fellow CEOs who run lodging companies, and they're not even finding distress to do. So the world snapped back pretty fast.

[Gerald Morgan, executive]

And just to confirm on that, we have not made any commitment. It's a pay-as-we-go type of deal.

[Operator]

Our next question comes from Wes Golladay with Baird.

[Wesley Golladay, analyst]

Just going back to that last question. Can you maybe comment on why you want to start with the portfolio? Would there be a big step up in G&A when the program officially gets going?

[William Lenehan, executive]

No, I think it's just from a time management standpoint, I don't want to start with one property.

[Wesley Golladay, analyst]

Got you. Makes sense. And then for the shorter lease term deals where you're already extending them, is there any change to the economics for those deals?

[William Lenehan, executive]

Nothing material.

[Wesley Golladay, analyst]

Okay. And then last one with the -- I guess, the transaction market, I think you guys called it red hot. Would you look to selling of your assets right now?

[William Lenehan, executive]

Yes. We, every once in a while we'll sell assets when someone has a particularly aggressive bid. It's not a big part of our business. We haven't sold any to-date, but it's something we always consider.

[Operator]

Our next question comes from Sheila McGrath with Evercore ISI.

[Sheila McGrath, analyst]

I was just wondering if you could give us some insight on how cap rates might compare casual dining, auto service and medical retail, and same question on rent coverage for those different product types.

[William Lenehan, executive]

Sure. I think in order it would be auto service and medical or slightly higher casual dining, maybe just below that. And then quick service has the tightest cap rates. What I would say is the spread between high-quality net lease and some of the weaker quality stuff doesn't -- seems quite tight. And when we're seeing brands that are in bankruptcy, they're paying rent, but the corporate entities in bankruptcy being marketed is in the mid-6s, which is quite aggressive. And then trophy properties, which we tend not to be super-active in, but certainly seeing a number of listings with 3 handles or low 4 handle cap rates.

[Sheila McGrath, analyst]

And then, Bill, do you get unit level economics on the auto service and medical retail to opine on where their rent coverage metrics might be?

[William Lenehan, executive]

Yes. We do. And it's very similar in searching out properties that have modest rents and strong coverage. But the coverages are quite similar to what you see in the restaurant space. Very similar, it's not like in certain kinds of medical net lease for whatever reason they get comfortable with just over 1x coverage. It's not like that. These are 2, 3, 4x covered in typical deals.

[Sheila McGrath, analyst]

Okay. Great. And then the out-parcels that remain to be closed is now $23 million. Just wondering if you think there will be opportunities to refill that pipeline? Or do you think that will kind of wind down?

[William Lenehan, executive]

No, I think there will be continued opportunities, and have conversations on those daily.

[Operator]

Showing no further questions, 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]

In conclusion, we're very happy with our results for the second quarter, and we're very happy with where we stand on our pipeline. We are looking forward to getting out on the road this fall. As always, we are available to answer any questions in the quarter or the portfolio, so please reach out. With that, thank you, everyone.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.