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Four Corners Property Trust Inc
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Good day, and welcome to the FCPT Fourth Quarter 2020 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Gerry Morgan. Please go ahead.
Thank you. 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 potential risk, 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, February 18, 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 Web site.
With that, I'll turn the call over to Bill.
Thank you, Gerry. Good morning. Thank you to everyone for joining us to discuss our fourth quarter results, which we are very pleased with in terms of continued strong collections, high acquisition volumes, meaningful equity capital raised, and the continued growth of the FCPT team. While this pandemic period has been one of the most challenging operating periods for the restaurant industry overall, it is important to distinguish between different restaurant types, and specifically the kind of properties that Four Corners owns.
Our buildings are typically suburban and are not located in central business districts of large cities. They are not one-off concepts, but instead are a part of large, branded companies who are often publicly traded enterprises. These restaurant operators have proven resilient in adjusting their business models. Our casual dining tenants remain in rebound mode, but our QSR tenants are often reporting results above pre-COVID levels. We are watching with interest the stimulus discussions, in Washington, that could result in the significant federal support in the restaurant industry as well as the end consumer.
As we have seen with our Kerrow Group, Garden, and other casual dining operators, EBITDA margins have improved because of simplified menus, lower levels of dining room staffing, higher profitability for to-go businesses, investment in technology, and a significant focus on overhead efficiency. Our collections at quarter end, we had collected 99.7 of scheduled 2020 rents, that is an impressive accomplishment for our tenet operators and for our team who had worked hard engaged with our tenants this year. We continue to see strong collections in this range for 2021 to date. We are working with tenants in three locations representing less than 0.2% of portfolio rents to either modify their lease or terminate and then release the building. Otherwise, we are not seeing rent deferral requests from our tenants, but instead are spending time with them on potential expansion opportunities in connection with our joint venture.
Our Kerrow subsidiary in San Antonio, which operates the six Longhorn Steakhouses, continues to also be impacted by COVID restrictions. Kerrow provides a wonderful window and real-time understanding into what our tenants are doing to adapt. The Kerrow team's hard work resulted in return to profitability in the third quarter, with positive EBITDA of $110,000, and an increase in profitability in the fourth quarter, to positive EBITDA of $244,000. My thanks to Carol Dilts and her team, who run these restaurants, and have shown this year how skilled and committed they are.
We broke ground, in October, to construct our seventh Kerrow Longhorn restaurant in the Live Oak area in San Antonio, which will open in early in the second quarter, and is located next to a new Olive Garden property that we acquired in July. We reported fourth quarter AFFO per share of $0.37, which represents $0.01 year-over-year increase. We are set up well for growth in 2021, as much of the $100 million of acquisitions in the quarter occurred toward the end, and we de-levered the balance sheet with $88 million in equity raised via the ATM -- at an average price of $28.66 per share.
Turning to acquisitions, in the quarter, we acquired 48 properties for a combined purchase price of $103 million, and an initial weighted average cash yield of 6.4%. Looking at 2020 in total, we acquired or made investments into a 101 properties totaling $233 million, even with pause in acquisitions for the most of the second quarter. Approximately 50% of these properties were sourced as the outparcel strategy, and therefore, many of the properties were setup as ground leases with lower rents. As evidenced, of the quality of the 2020 acquisitions, 71% of the leases are the brand’s corporate operated or guaranteed by corporate entity, and 45% of the leases are ground leases, where FCPT owns the land and tenant constructed the building.
Now, let me update you on the vacant venture of Lubert-Adler that we announced in October. We are very active in the vacant venture. We have formerly underwritten over 1,000 properties, held conversations with dozens of tenants, and have issued a number of letters of intent. The thesis that there would be obviously well-located properties that has formerly been weak brands is confirmed, and so is tenant interest in strong brands growth mode. With that said, pricing remains difficult. So, we are turning over a lot of rocks, but we believe pricing will improve over time. As a reminder, we will announce these transactions in our quarterly results rather than the day they close as we do with other FCPT acquisitions.
We are learning a lot about what finds good locations in our tenant’s eyes specific to each tenant. And Lubert-Adler has been a great partner so far. They bring a lot to the table. Just a quick comment on the acquisition environment for leased buildings is very competitive, especially for QSR properties. We are in a low interest rate environments and the financing markets are aggressive. High leveraged buyers are pushing up pricing. We intent to remain disciplined and will continue to focus on making quality acquisitions and our pipeline is strong. In summary, we posted 99.6% rent collections for Q4 that I believe are the highest in the net lease sector, and which hope and expect to continue to go to forward. We acquired 48 properties in the quarter. And the team is excited to be building portfolio and making progress on the venture with Lubert-Adler.
Gerry?
Thanks, Bill. We generated $40.1 million of cash rental income in the fourth quarter after excluding $1.6 million of straight line and other non-cash rent adjustments. As Bill mentioned, we reported 99.7% of collections for 2020 as of yearend. One caveat to this collection result is that it includes $1.6 million of second quarter rent in the collected rental revenue totaled which we abetted in return for favorable long-term lease modifications and other extensions.
Including the abetted rent, in-rental revenue totaled is required by GAAP revenue accounting, but to remind everyone we did not include these amounts in our reported AFFO. Excluding the abetted rent, our collection results for 2020 were 98.7%, so, still very high. With these results, there were no material changes to our collectability or credit reserves in the quarter. And we also had no balance sheet impairments in the quarter.
On a run rate basis, the current annual cash based rent for leases in place as of December 31, 2020 is a $156.0 million. And our weighted average 10-year annual cash rent escalator is 1.44%. As a reminder, the rent on all of the original Garden leases increased by 1.5% on November 9th this quarter. You will also see that we have estimated the rent coverage for the Garden leases in our portfolio at 4.3 times for their quarter ending November 29, 2020 and even though their sales were down over 20% year for this quarter.
This estimate is calculated by using Garden’s reported sales on our portfolio to us, and Garden’s brand average margins for the same time period to estimate EBITDA. This result evidences for low rent and room we have on have rent collection in our portfolio. We have excluded coverage estimates for the non-Garden portion of the portfolio since much of the re-financial reporting still includes time periods prior to COVID-19 and may not be representative of current tenant operations. It’s our expectation that tenant operations will normalize this year and we will see rent coverage return to its historical levels over time.
Our fourth quarter AFFO per share results of $0.37 represented $0.01 per share increase in year-over-year results. Over 70% of the $103.4 million of acquisitions in the quarter were closed in December. Much of that toward the end of December and all these properties will contribute to AFFO in Q1 for the full quarter. We ended the quarter with $10 million balance on our revolver and $240 million of availability and $11 million of cash reserves. Our leverage metrics improved in the quarter given the equity capital raising with a fixed charge coverage of 5.1 times in the fourth quarter and net debt to EBITDA of 5.2 times. I would estimate we are closer to 5.0 times leverage at the year-end run rate EBITDA. This sets us up well from a capitalization standpoint going in to 2021, and to remind everyone we are committed to maintaining net debt leverage targets below 5.5 to 6 times. Finally, we paid an increased dividend for the quarter of $0.3175 or $1.27 on an annualized basis, which represented a 4% increase over the prior quarter.
And with that, I'll turn it back over to Bill for closing comments before Q&A.
Thanks, Gerry. In conclusion, we are very happy with the fourth quarter results and for the year-end total. 2021 is off to a very good start, and we are working extremely hard. As always, we are available to answer any questions on the quarter or the portfolio, so please reach out.
With that, we will turn it back over to the operator for Q&A.
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Nate Crossett with Berenberg. Please go ahead.
Hey, good morning, guys.
Good morning.
Was wondering if you could just give a little bit more color on how the pipeline looks right now? And maybe you can just remind us how much is left between Seritage and Brookfield? And could there be more of these kind of outparcel agreements that are initiated this year?
Sure. There are significant properties with Brookfield, with Seritage, with Washington Prime, et cetera. But we also have a robust pipeline with other -- with one-off deals in other portfolios, and a significant mix of non-restaurant as well, so making a ton of progress. We don’t give specific pipeline numbers, but as I said, we've been quite busy and making a lot of progress. And it's very granular actually at this point, lots of individual transactions, so that gives us some comfort that we're not resting on a single transaction.
Okay. But I guess my question is how much is left on the agreements that you guys have announced in the past, like…
Nate, yes, it's about $45 million as of the end of the year.
Okay.
Of deals that we've announced, but not yet closed.
Okay, cool, that's helpful. Thank you. So, on the JV, it sounded like things are progressing quite quickly. I was just curious how you expect the amount that was initially disclosed, like when could we expect that that would get deployed, versus kind of your initial expectations? Are things progressing quicker than you initially thought or…
Yes, I think we're making a ton of progress. As I said, Lubert-Adler really brings a lot to the table, and we made really good progress. Lots of properties to look at, it really is a matter of pricing. A lot of sellers are holding on to pricing that would only be appropriate if you were a user. So we think that will change over time. But I am very excited with how it's going. And I think we're going to end up finding a lot of good properties. And again, the conversations with the tenants we've been having have been very productive. So, in and of itself, that was -- made the whole effort worthwhile.
Okay, I'll leave it there. Thank you.
Thanks, Nate.
The next question comes from Sheila McGrath with Evercore ISI. Please go ahead.
Yes, good morning. Bill, I was wondering if you could give us a little more detail on the ground lease transactions. It appears that 40 out of 100 properties were ground leases. Are those all mall outparceled?
Yes, and Sheila, great question. I think we said about 45% were ground leases. Many of the other that aren’t ground leases have very low rents, so share a lot of the attributes to ground lease. Yes, the shopping center and mall outparcels are very often ground leases. And it's a lot of work for a small amount of dollars deployed, but very low rents and very sticky tenants. And so when you have a year like we've just had they tend to pay, which is huge benefit. And that's one the reasons our collections are so high. But continue to focus on that strategy. We've bought a lot of ground leases over the last handful of years. And I think overall, very happy with that strategy over the long-term. And we've even seen some that have had lease maturities come up having rents roll-up to higher market levels.
And because you have to do the extra work of often like outlining the parcel, or whatever the terminology is, do you limit the competition because it requires a lot more effort on your part?
Indeed, and in fact, we've now had a handful of deals that other of our public competitors have signed up to do. They've dropped out after they realized how much work is to complete these deals. And we've taken them on. So again, lots of work, credit to Jim Brat, our Chief Transaction Officer for being super organized and having the knowledge to do this, lot of work up front. There's a lot of value over time.
And last one, are the cap rates on those transactions similar to the average that you’ll report for all acquisitions?
Yes.
Okay, thank you.
Thanks, Sheila.
The next question comes from Anthony Paolone with JPMorgan. Please go ahead.
Thanks. I guess just following on Sheila's question, I guess as you think about doing some of these transactions with small operators and other shopping center owners, just like what's their continued motivation to do these deals, I mean your yield seem to be pretty strong. The credit seems to be pretty strong. How are they looking at these?
I think they're attracted by the proceeds. And the relative valuation about parcels versus malls, which malls used to have very high values. Now they don't. So the parcel is accretive to the overall valuation. So and again, proceeds to retire debt to have cash to fund redevelopment in Seritage's case, it's having creating cash to pay for very accretive redevelopment activities that they're pursuing.
Okay. And as you're looking at the pipeline, outside of the deals, that that are teed-up and were put in place previously, do you think you'd be able to keep yields in the same range you've been running them?
Seems a great question, it wouldn’t surprise me if yields come down slightly, but I would also just point out short, the cost of debt has declined very, very significantly over time as well. So the relative yields, we would expect to stay relatively flat.
Okay, and then the tenant expansion, you've talked about that a bit? Can you talk about just, what your conversations are like on that front where the real estate solution comes into play, and just how quickly that that's going to play a role in things?
I think there's a handful of different routes there. One is simply where rents were super, super low, 1%, 2% rent sales, we increased the rents and gave them proceeds, but still kept rents in 3% to 4% rent sales, just super safe. And then in other cases, it was remodeled capital. And I think over a long period of time, we’ll see a lot of casual dining restaurants try to reconfigure their space to accommodate to go percentages that were single digits that now, post-COVID might be 25% to 30% and accommodate brands within a brand. For example, it's just wings concept that Brinker has rolled out, I think those changes to the business model and how the boxes used may manifest in actual changes to the box. And because our rents are so low and we have very good credit tenants, we can help finance them, typically with the lease extension as part of the bargain.
Okay, and then just last detail question, the joint venture, is your $20 million commitment, was that all funded already, or do you put that in as you go?
Just carry on as we go.
Got it. Thank you.
Yes, thanks.
The next question comes from Rob Stevenson with Janney. Please go ahead.
Good morning, guys.
Good morning, Rob.
The 98.7% collect excluding the abated rent, what types of tenants are those? Is there any commonality there by operator or concept, is it what's the commonality there?
Let’s start with 68% being Darden and then a good chunk in being Brinker. So that those two get you approaching, so excuse me, approaching 80%. But basically everyone's pay that the few exceptions are really one-off, there's not a commonality. One was a brand that had credit issues and closed down an entire region, so a multi-state region.
So we had a really good building with low rents that we'll be able to release without much issue, I don't imagine. I think closed down the entire region of the country. So one of our properties was caught up in that and stuff like that, but it's a handful of buildings...
Okay, all right. Perfect. And then from the - you guys are basically essentially fully occupied, the assets or assets that - the couple of assets that you have that are not occupied at this moment. How is the releasing of those going? Are they more likely at this point to be sales? You still think that keep them in retained at them. Help us give us some color there, if you wouldn't mind.
Sure. Well, we had one empty building that we already sold. We actually sold it for a game. So it was sort of more advantageous for us to sell it and book the game then to go through the effort of releasing it. We have one building that we will definitely release. We're in advanced discussions with one of our existing large tenants to take the building. I think it's situational, but it's literally a building or two and we're making good progress in any case.
Okay. And then last one for me, Gerry, when you guys raised the dividend, how close to minimum repay out were you before that increase.
Not close. We're very comfortably over the minimum, even without the increase.
Okay. Thanks, guys. Appreciate it.
Yes, welcome.
The next question comes from John Massocca with Ladenburg Thalmann. Please go ahead.
Good morning.
Good morning.
I guess building on some of the earlier conversations around out-lots. I mean what's kind of the expectation maybe for new out-lots transactions, next year, I mean how deep is that potential transaction-based, even you're probably not turning over a lot of new leads on that front, maybe what gets other landlords kind of over the finish line?
Great question, I mean it's not infinite obviously. But I think what we've found is every time we thought we were done with our partial strategies, we found another counterparty or additional properties with our current counterparties Seritage as an example is active and leasing, and we are doing our best to be their go to as they leased up properties. So I think we still have quite a ways to go in this. And where I had defined this opportunity in the early days was way too narrow. And as small companies engage in transactions, M&A, there's some restructuring those types of things try tend to create partial deals. So we'll continue to focus on it. I think we've really developed a core competency to be able to get these buildings to be in a situation where we can buy them. And we've proven out the strategy. So I think it's something around $300 million that we've either done or have under contract to do so, it's meaningful for the company.
Okay. And then maybe on the other side of the kind of investment platform, there's been some conversation around M&A activity on a QSR side in terms of operators that might create some sale leaseback opportunities. Is that something you think FCPT can play in or do you think pricing maybe would be too rich, even on larger transactions that come out of that type of M&A?
Yes, the big one obviously for 2021 will be the convenience store transactions driven by M&A. And so we look at everything we see all the deals, it really comes down to pricing. And we have some competitors who - private competitors who will use 80% financing or structured ABS financing. And I think the values that they play out are not realistic for us, but that's okay. There's plenty for us to work on. And when people make sure you've closed that's where we really shine.
Okay. Well, it sounds like pricing pressure is kind of at both the granular level for individual assets and even up to some of the bigger portfolios…
I think that’s correct.
I guess that's it for me. Thank you very much.
And on the investment group side more generally.
Okay.
[Operator Instructions] The next question comes from Peter Hermann with Baird. Please go ahead.
Hey guys, there are multiple ports out there that Steak 'n Shake as higher to be structuring, advice and looks like they’re taking on some water. If they were to file and reject stores, would you look to contribute those vacant properties to the JV?
Yes.
Okay. And then, the next one I have is, do you guys expect to continue funding acquisitions to the higher percentage of new equity going forward in 2021 as well?
It’s a great question. We try to be price sensitive when we raise equity. And so it really depends on our stock price, which I can’t predict, but we had some interest in our stock price in December and prices that we thought made some sense. And so, we were active again, very price dependent, and we modulate given our pipeline again, always trying to be conservative with our balance sheet.
Got it. That’s it for me. Thanks guys.
Yes, thanks.
This concludes our Q&A session. I would like to turn the conference back over to Bill Lenehan for closing remarks.
Thanks everyone. 2020 was a difficult year. Our team really responded. Thank you to our board and to our shareholders. If anyone has any questions, please feel free to reach out. Thank you.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.