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spk00: to the FCPT fourth quarter 2020 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jerry Morgan. Please go ahead.
spk08: 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 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, February 18th, 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. With that, I'll turn the call over to Bill.
spk06: Thank you, Jerry. 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 FCPTT. 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're not one-off concepts, but instead are 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 a significant federal support in the restaurant industry as well as the end consumer. As we have seen with our Carol Group, Darden, 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 tenant 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 Caro subsidiary in San Antonio, which operates six long-term state houses, continues to also be impacted by COVID restrictions. Caro provides a wonderful window and real-time understanding into what our tenants are doing to adapt. The Caro team's hard work resulted in a 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 Diltz and her team who run these restaurants and have shown year how skilled and committed they are we broke ground in october to construct our seventh carroll longhorn restaurant in the live oaks area of 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 afvo per share of 37 sets which represents a cent year-over-year increase we are set up well for growth in 2021 as much of the 100 million dollars of acquisitions in the quarter occurred toward the end and we delivered the balance sheet with $88 million in equity raised by 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 101 properties totaling $233 million, even with pause in acquisitions for most of the second quarter. Approximately 50% of these properties were sourced out of the out parcel strategy, and therefore many of the properties were set up as ground leases with lower rents. As evidenced of the quality of the 2020 acquisitions, 71% of the leases are with the brand's corporate operator or guaranteed by the corporate entity, and 45% of the leases are ground leases where FCPT owns the land and the tenant constructed the building. Now let me update you on the vacant venture with Luper Dadler that we announced in October. We are very active in the vacant venture. We have formally 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 had formerly been weak brands is confirmed, and so is tenant interest in strong brands in growth mode. That said, pricing remains difficult, so we're turning over a lot of rocks, but 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're learning a lot about what defines good locations in our tenants' eyes, specific to each tenant, and Lupert 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. It's very competitive, especially for QSR properties. We are in a low interest rate environment, and the financing markets are aggressive. High leverage buyers are pushing up pricing. We intend 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 we hope and expect to continue to go forward. We acquired 48 properties in the quarter, and the team is excited to be building the portfolio and making progress on the venture with Rupert Adler. Jerry?
spk08: 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 year end. One caveat to this collection result is that it includes $1.6 million of second quarter rent in the collected rental revenue total, which we abated in return for favorable long-term lease modifications and other extensions. Including the abated rent in rental revenue totals is required by GAAP revenue accounting, but to remind everyone, we did not include these amounts in our reported AFFO. Excluding the abated rent, our collection results for 2020 were 98.7%, so still very high. With these results, there were no material change 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 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 Darden leases increased by 1.5% on November 9th this quarter. You will also see that we have estimated the rent coverage for the Darden 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-over-year for this quarter. This estimate is calculated by using Darden's reported sales on our portfolio to us and Darden's brand average margins for the same time period to estimate EBITDA. This result evidences the low rent and room we have on rent collection in our portfolio. We have excluded coverage estimates for the non-Darden portion of the portfolio since much of the 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'll see rent coverage return to its historical levels over time. Our fourth quarter AFFO per share results of 37 cents represented a one cent 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 of these properties will contribute to AFFO and 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 into 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 31.75 cents, 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.
spk06: Thanks, Jerry. In conclusion, we are very happy with the fourth quarter results and for the year in total. 2021 is off to a very good start, and we're 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 of Q&A.
spk00: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Nate Crossett with Barenburg. Please go ahead.
spk02: Hey, good morning, guys. Good morning. I 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 Heritage and Brookfield, and could there be more of these kind of out parcel agreements that are initiated this year?
spk06: Sure. There are significant properties with Brookfield, with Ceratage, with Washington Prime, etc. But we also have a robust pipeline with one-off deals and other portfolios, a significant mix of non-restaurant as well. 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. Yeah.
spk02: But I guess my question is, how much is left on the agreements that you guys have announced and passed?
spk08: Nate? Yeah, it's about $45 million as of the end of the year. Okay. Of bills that we've announced but not yet closed.
spk02: 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?
spk06: Yeah, I think we're making a ton of progress. As I said, Liberty Adler really brings a lot to the table and we've 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'm 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 made the whole effort worthwhile.
spk02: Okay, I'll leave it there. Thank you. Thanks, Nate.
spk00: The next question comes from Sheila McGrath with Evercore ISI. Please go ahead.
spk01: 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 out parcels?
spk06: Yeah, Sheila, great question. I think 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 a ground lease. The shopping center and mall out parcels are very often ground leases. And, you know, 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 a huge benefit. And that's one of the reasons our collections are so high. But continue to focus on that strategy. We've bought a lot of ground bases 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.
spk01: 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?
spk06: 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 it is to complete these deals, and we've taken them on. Again, lots of work, credit to Jim Brad, our chief transaction officer, for being super organized and having the knowledge to do this. A lot of work up front, I think a lot of value over time.
spk01: And last one, are the cap rates on those transactions similar to the average that you will report for all acquisitions?
spk06: Yes.
spk01: Okay, thank you.
spk06: Thanks, Sheila.
spk00: The next question comes from Anthony Paoloni with JP Morgan. Please go ahead.
spk05: Thanks. I guess just following on Sheila's question, I guess as you think about doing some of these transactions with mall operators and other shopping center owners, just like what's their continued motivation to do these deals? I mean, your yields seem to be pretty strong. The credit seems to be pretty strong. You know, how... How are they looking at these?
spk06: I think they're attracted by the proceeds and the relative valuation of out-parcels versus malls, which malls used to have very high values. Now they don't. So the out-parcel is accretive to the overall valuation. And again, proceeds to retire debt, to have cash to fund redevelopment. In Sartaj's case, it's creating cash to pay for very creative redevelopment activities that they're pursuing.
spk05: As you're looking at the pipeline outside of the deals that were teed up and were put in place previously, do you think you'll be able to keep yields in the same range you've been running them?
spk06: I think it's a great question. It wouldn't surprise me if yields come down. slightly, but I would also just point out the cost of debt has declined very, very significantly over time as well. So the relative yields I would expect to stay relatively flat.
spk05: 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's going to play a role in things?
spk06: Yeah, 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, so super safe. And then in other cases, it was remodel capital. And I think over a long period of time, I think 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%, 30% and accommodate brands within a brand, for example, the it's just wings concept that brinker has rolled out i think those changes to the business model and how the box is 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 a typically with a lease extension as part of the bargain okay
spk05: And then just last detailed question, the joint venture, is your $20 million commitment, was that all funded already, or do you put that in as you go? As you go. As you go. Okay. Got it. Thank you. Yep.
spk00: Thanks, John. The next question comes from Rob Stevenson with Journey. Please go ahead.
spk07: Good morning, guys. The 98.7% collect excluding the abated rent. What types of tenants are those? Is there any commonality there by operator or concept? What's the commonality there?
spk06: Well, I'd start with about 68% being Darden and then a good chunk then being Brinker. So those two get you approaching 80%. But basically everyone was paid. 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. they closed down an entire region of the country. So one of our properties was caught up in that, um, stuff like that, but it's a handful of buildings out of eight.
spk07: All right. Perfect. And then, you know, from the, you know, you guys are basically essentially fully occupied, um, the assets or assets that, you know, the couple of assets that you have that are not occupied at this, at this moment, how is the releasing of those going? Are they more likely at this point to be sales? You still think that, you know, keep them and retend at them? Help us, you know, give us some color there, if you wouldn't mind.
spk06: Sure. Well, we had one empty building that we already sold. We actually sold it for a gain. So it was sort of more advantageous for us to sell it and book the gain than 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 developers. 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.
spk07: Okay. And then last one for me. Jerry, when you guys raised the dividend, how close to minimum repayout were you before that increase?
spk08: Not close. We're very comfortably over the minimum. Okay. Even without the increase.
spk07: Okay. Thanks, guys. Appreciate it.
spk00: The next question comes from John Masoka with Leidenberg, Palman. Please go ahead.
spk03: Good morning.
spk06: Good morning.
spk03: I guess building on some of the earlier conversations around outlots, I mean, what's kind of the expectation maybe for new outlot transactions next year? I mean, how deep is that potential transaction base just, you know, given 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?
spk06: It's a 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 strategy, we found another counterparty or additional properties with our current counterparties. Sertage, as an example, is active in leasing, and we are doing our best to be their go-to as they've leased up properties. I think we still have quite a ways to go in this. Where I had defined this opportunity in the early days was way too narrow. As small companies engage in transactions, M&A, there's some restructuring, those types of things tend to create out parcel 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 strategies. 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.
spk03: Okay. And then maybe on the other side of the kind of investment platform, there's been some conversation around M&A activity, particularly on the QSR side in terms of operators, and 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?
spk06: Yeah, the big one, obviously, for 2021 will be the convenience store transactions driven by M&A. And so, you know, we look at everything, we see all the deals, it really comes down to pricing. And, you know, we have some competitors who, you know, private competitors who will use, you know, 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, you know, when people make sure you've closed, that's where we really shine.
spk03: Okay. But 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. Yes. That's it for me. Thank you very much.
spk06: And on the investment grade side more generally. Okay.
spk00: As a reminder, if you have a question, please press star, then want to be joined into the queue. The next question comes from Peter Herman with Baird. Please go ahead.
spk04: Hey, guys. There are multiple ports out there that Steak and Shake has hired to be structuring and buys 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 with a higher percentage of new equity going forward in 2021 as well?
spk06: 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 at 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.
spk04: Got it. That's it for me. Thanks, guys. Yep, thanks.
spk00: This concludes our Q&A session. I would like to turn the conference back over to Bill and Ahan for closing remarks.
spk06: 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.
spk00: The conference has now concluded. Thank you for attending today's presentation.
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