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spk02: Good day and welcome to the FCPP First Quarter 2021 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.
spk04: Thank you, Betsy. During the course's 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 the information presented on this call is current as of today, April 28th. 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.
spk07: thank you jerry good morning thank you for joining us to discuss our first quarter results in summary we are very pleased with our continued industry leading collection levels the quality of the acquisitions closed year to date and the pricing of the private note offering raised this quarter which represented our lowest ever note coupon we reported first quarter affo of 38 cents per share which represents a one cent year over year increase. We benefited from a full quarter of income from the larger set of acquisitions closed at the end of 2020. Let me start with the health of our portfolio. While the restrictions related to the pandemic period have continued to be a challenge for the restaurant industry overall, the operators in our portfolio have pivoted well and are seeing strong rebounds in their business. We collected 99.7% of the schedule rents with the non-collections largely related to new acquisitions where rents were sent to the prior owner are in the process of being rerouted to us. 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 venture with Lubert Adler. If anything, the focus of operators in our portfolio is on finding sufficient labor as the business picks back up. and watching some signs of commodities inflation, especially in beef prices and even ketchup shortages, which some of you may have read about. As you've seen with our cattle operation, and as supported by Darden and other casual dining operators, EBITDA margins have improved because of simplified menus, lower levels of in-dining room server staffing, higher profitability for to-go business, investments in technology, and a focus on overhead efficiency. Darden is a good example of this. In their quarter ending February 28th, where they reported Olive Garden EBITDA margins had increased from 18.4% to 19.9% year over year, even though sales were down 27%. That's a hard thing to do with a business that has fixed expenses. We've discussed before how our Caro subsidiary, which now operates seven Longhorn Steakhouses in San Antonio, is a wonderful window and real-time understanding into what our tenants are doing to adapt. The Carrow team continues to post improving results with EBITDA of $373,000 as compared to EBITDA of $244,000 in the fourth quarter. This is an impressive result, especially since it includes some pre-opening costs for the 7th Carrow Longhorn Restaurant in San Antonio, which opened for business earlier this week. Congratulations to Carol Diltz, who runs the Carrow subsidiary and her team. The additional restaurant will contribute to results for the rest of the year, offset by some pre-opening costs that will occur in the second quarter. Restaurant operators have also proven resilient in adjusting their business models. Rinker is a great example of this, where in 2020 they've built a $150 million sales annual run rate to-go business called It's Just Wings. This business is highly profitable given a simplified menu and efficient provisioning out to existing Chili's restaurants. Even Red Lobster, not an obvious to-go concept, has adjusted their menu and reported strong to-go business growth. Staffing models are changing as well, with digital payments increasing. Darden reported that for the first time, over 50% of its sales were settled digitally, meaning via online, self-service tabletop tablets or mobile pay options. Turning to investments, we acquired 13 properties in the quarter for a combined price of $34 million and an initial yield of 6.6%. This group represents strong credit with 10 of the properties leased to corporate operators and the remaining leased to the largest franchisee of Brinker International. Seven of the 13 transactions were with non-restaurant tenants in the auto services, auto collision, and medical retail sectors. That is an anomaly to have so many non-restaurants in one quarter, but these are both sectors we continue to like because they're well insulated from Internet disruption. Our pipeline is strong, and we remain busy. But at the same time, the restaurant acquisition market has gotten more competitive since the pandemic for strong operators, especially for quick service restaurants. This is an interesting dynamic to see cap rates come in while the tenure has increased 75 basis points. Competitors include private buyers using ABS financing and individuals chasing yield. The result is that buyers are not getting compensated to take on complexity or for portfolio transactions. We remain committed to maintaining our strong investment discipline, which has proven out with the strong operating results during the pandemic. We have also noticed some of the brands and locations we passed on have not performed as well. This confirms our skepticism of high rents, weaker brands, and novel net lease concepts. Only one acquisition in the quarter came from our out-partial strategy due to the timing of partializations. So as of today, we have 45 million out-partial transactions that have been announced but not yet closed. As we've highlighted previously, many of the transactions we have closed on over the past two years have been ground leases. I want to relay one example of the benefit of low rents associated with ground leases. We have a Ruby Tuesdays property in Maine that we took back in connection with the brand's bankruptcy filing, our only Ruby Tuesday. However, given the low rents, we were able to release the property to a very strong tenant with slightly higher rents. On Lubert Adler, we expect to close on our first properties in the venture in the second quarter. As a reminder, we will announce these transactions in our quarter results rather than the day they close as we do with the other acquisitions. We announced two dispositions this quarter for $3.5 million, representing a 6.1% cash yield on prior in-place rents and a $400,000 gain. In both cases, the sales were a chance to prune the portfolio. The first was a vacant building where we were able to sell above our basis given the low rents that were in place, and the second was one of the lowest-rated properties in our portfolio but attracted a sub-six cap rate offer. You will see that our cash G&A was up slightly. A good chunk of that is timing, which Jerry will detail in his comments. But I do think it's important to comment that we are increasing our acquisition group's capabilities, both as our team now has more experience and also by adding new team members, and also bolstering our legal and accounting groups. We believe that is important to have additional capabilities to grow, whether that is in the Lupert Adler JV or in our regular way business. Everyone on the team remains healthy and is excited to return to the office in earnest this summer, and start hitting the road again soon. In summary, we're proud of another quarter of strong portfolio results and continued investment and team building progress. Jerry?
spk04: Thanks, Bill. I will highlight a couple of our financial results. We, as Bill indicated, we had 99.7% collections for the first quarter, and there were no material changes to our collectability or credit reserves in the quarter, nor any balance sheet impairments. On a run rate basis, the current annual cash-based rent for leases in place as of March 31, 2021, is $158 million, and our weighted average 10-year annual cash rent escalator is 1.43%. We estimate the rent coverage for the portfolio is 4.1 times for the first quarter, which is approaching pre-pandemic levels. This includes coverage for the Darden properties for its quarter ending February 28, 2021. We've also restarted reporting the non-Darden coverage this quarter, which was 2.7 times as financial reporting has become more representative of post-pandemic operating levels. Cash G&A expense, as Bill mentioned, after excluding stock-based compensation for the first quarter was $3.4 million, representing 8.5% of cash rental income for the quarter. Cash G&A expenses increased approximately $500,000 over the fourth quarter, principally due to higher compensation-related expenses. Roughly two-thirds of this increase is due to higher payroll-related taxes. This is typical for the first quarter because of taxes paid on vesting of stock awards. This was particularly true this year with 200% award levels achieved on performance stock units given SCPT's equity return outperformance over the prior three years. The remaining one-third of the increase represents higher compensation for the existing team and new team members, as Bill remarked, which sets us up well to support the growth of the portfolio. Turning to the balance sheet in the quarter, we issued $5 million of common stock on our ATM program at a weighted average offering price of $29.56 per share. And we announced in February the pricing of a $100 million private note with an average nine-year tenure, all-in average interest rate of 2.7%, including interest swap gain amortization. This represents our lowest ever note rate, reflection of the strong support we have in this market. The offering was six times oversubscribed and consisted of 100% repeat investors, and the note funded yesterday. We ended the first quarter with $228 million of available liquidity, with $12 million of cash reserves and $216 million available on our revolver. Our leverage metrics for the quarter are a fixed charge coverage of 5.1 times and net debt to EBITDA of 5.3 times. With the funding of the private note this week, we are set up well from a capitalization standpoint. Finally, we paid a dividend for the quarter of 31.75 cents per share. With that, I'll turn it back to Bill.
spk07: Thanks, Jerry. We wanted to finish our prepared remarks with a thank you to one of our board of directors. We announced last month that Paul Zurich had informed us that he was not going to stand for reelection at our June annual meeting to allow him to focus on his role as CEO of CoreSight. We have tremendous appreciation for the insights, guidance, and encouragement that Paul has given as a director since our inception in 2015. Like all of our directors, Paul comes to every conversation prepared and and ready to engage on how to make FCPT better. Thank you, Paul. On behalf of the rest of our board, all of our team members, and the equity investors, you have represented so well. As always, we are available to answer any questions on the corridor or the portfolio, so please reach out. We look forward to speaking with many of you during the NAIRI conference in June and hoping to start seeing our investors in person in the not too distant future. With that, we'll turn it back to Betsy for Q&A.
spk02: 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. Our first question comes from Nate Crossett with Barenburg. Please go ahead.
spk00: Hey, good morning, guys. Good morning, Nate. Hey, maybe you can just characterize the deal flow today, you know, give us some color on how the pipeline looks right now. I think you mentioned that there was $45 million left on the out parcels. Is there any color you can give us on the timing of those closings? And could we see more of those types of strategic relationships this year?
spk07: Yeah, I think you'll see a lot of those closing Q2 Not all, and obviously we have other deal flow that's not all parcels, but a lot of those were closed in Q2, and we're working hard to make sure we do have additional relationships like that closed. So it's been quite busy. I feel like the existing portfolio is in terrific shape, and that gives us permission to go out there and try to add to it. Okay. Yeah.
spk00: What's the update on Lubert Adler? Because the prepared remarks went through very fast, and I couldn't catch it all. Sure.
spk07: Yeah, I think going well, you'll start to see deals close in the next quarter, in the next couple weeks, actually. We don't announce those when they close, but it's going well. And, you know, lots of demand from tenants for good real estate. and obviously a lot of rocks to turn over as far as vacant real estate. So going well, great partner, you know, as expected.
spk00: Okay. And then just lastly, do you guys have all the hiring in place that you think you need for the deal flow this year, or should we expect more?
spk07: We have one search for an acquisition associate level person in the market. But by and large, I think we're in pretty good shape.
spk00: Okay, thank you.
spk02: Our next question comes from Sheila McGrath with Evercore. Please go ahead.
spk01: Yes, good morning. Bill, it sounds like Darden and Brinker have tweaked their models to be more profitable, even on lower sales. I was just wondering if you could give us your views if this puts these companies or similar companies in growth mode as far as new locations go, and just if that would increase acquisition opportunities for Four Corners.
spk07: Yeah, absolutely, Sheila. I mean, I think Darden and Brinker are very well-run companies and have survived this pandemic and now are looking to grow market share. And it was absolutely one of the top few reasons that we went down the road of this JV so that we can provide capital to help them grow. Absolutely. I think the pandemic will create a dynamic in the restaurant space where the big will get bigger and the stronger who have been able to survive it will gain market share.
spk01: Okay, great.
spk07: And you're already seeing it in a big way. You're already seeing it in a big way.
spk01: That's great. And just in commenting on your new additional hires, do you think that that puts Four Corners in a position just to onboard more acquisition opportunities this year? And do you think that you'll be expanding the funnel beyond restaurants or just your thoughts on that?
spk07: Yeah, well, we certainly have increased the number of auto service and medical retail. We call it MedTail acquisitions. And, you know, the reason we're adding to the team is to have more capability to grow it doesn't happen where you hire someone in the next month, your acquisitions go up. It takes some time to train people up and get them in the deal flow. But that's absolutely the reason we're doing it. In addition to being able to add acquisitions through the Luper Adler JV. And the timing is such that we're adding people and the acquisition economics of the JV have not yet hit. So there's a little bit of front running and then You know, really what it was is, as Jerry mentioned, is additional benefits and load on bonuses that were sort of on a three-year lag of performance.
spk01: Will the JV reimburse or are there fees to Four Corners to reimburse for some of this additional, you know, people count?
spk07: Sure. Yeah, there are acquisition fees and asset management fees. that we think will offset significantly the amount of additional G&A.
spk01: Okay, great. Thank you.
spk02: Thanks. Our next question comes from Wes Galladay with Baird. Please go ahead.
spk06: Hey, good morning, guys. I just want to go back to those comments about the to-go business for the restaurant companies. Are you seeing any opportunity for incremental investment there at existing assets?
spk07: We're definitely working on it. It's a little soon, but it seems logical that given, you know, a change in to-go business from a couple percent a few years ago to 20, 30 percent now that there would be some changes in the physical layout of the building. So that's something we're working on, but it hasn't happened yet. But I think it's quite logical that it would be something that would happen in the future. And you're seeing in the existing acquisitions and a real primacy of the drive-thru is how I would describe it. So brands that were dipping their toe in the water on drive-thrus like Panera and Starbucks are now very much drive-thru centric.
spk06: Got it. And then maybe if we can go back to, I guess, a pipeline of deals, how would you characterize it today versus maybe last year at a similar time?
spk07: I would say... similarly robust in the sense that we have a very good line of sight for these, from these out parcel deals. And, and, you know, a little bit, you know, broader in the sense that we're looking at med tail and auto service, but you know, obviously last year to specifically, we were in the, you know, the very heat of COVID. So, so we were thinking about our pipeline differently than we are today, but, I think the point you're trying to make is, you know, versus a historic level of pipeline, I think we feel very good where we're at.
spk06: Gotcha. And maybe one last one. You did mention about, you know, you being disciplined on pricing. And I guess, are you seeing any more incremental competition for those out parcels? From what I understand, they're a little bit more complex, and that's kind of where you get to dig in and maybe create a little bit more alpha than normal?
spk07: Yeah, I think we've seen competition in the past, and people realize that it's difficult to do, and usually they fade away. So we'll see. I think the big takeaway that we've seen on pricing is last quarter we saw high-quality properties trading at low cap rates, and I think in the last few months we've started to see low-quality properties, even ones that were bad behaviors during COVID, trade at low cap rates. So We're being disciplined. We reflect on the properties that we passed on pre-COVID and their results during this pandemic versus our more select group of assets that we acquired. And we're pretty glad that we've been disciplined.
spk06: Not that you have any assets you probably would want to sell, but I guess with pricing the way you just described it, would there be something that maybe five years out, maybe you just may see an issue where you're just going to decide to get rid of it now?
spk07: I think if you look at the two properties we sold this quarter, one was dark and one was high rent, not great performer. So I think we're doing that.
spk06: I appreciate taking all the questions. Thanks, guys.
spk02: Yeah, of course.
spk07: Of course.
spk02: The next question comes from John Masco with Leidenberg Thalmann. Please go ahead.
spk03: Good morning. Good morning. So maybe building on that last point, I guess, you know, given the kind of cap rate compression we've seen over the last couple of quarters, what are some of the levers you can pull to kind of maintain accretion? Either, you know, kind of non-restaurant property types that maybe have some kind of better risk-adjusted returns or focusing on franchisees versus kind of corporate credits, just anything there that you're looking at to kind of maybe maintain yield?
spk07: Right. Well, I think as far as maintaining spread, the bond deal that Jerry executed is a great example. help to that. And then as far as on acquisitions, I think we benefit from the fact that we're at a scale where we don't have to find hundreds of millions of dollars of acquisitions per quarter. And so we just need to make sure that we're turning over a lot of rocks. And we have a good pipeline with contracted prices to close on. And it's our job to make sure that we keep that filled up for the second half of the year.
spk03: but nothing specific in terms of maybe continuing in a little bit more of the non-restaurant side, or I don't like using the term, but maybe move kind of up the credit risk curve?
spk07: Well, I think, you know, there's always assets that you can purchase that have higher spreads. It's just making sure that their higher spread isn't there for a reason. So we just have to be careful that, And I think as our team is trained up now after five years and having underwritten 15,000 properties, we're in a good place to do it. But it's something that everyone in the industry is facing, and I think it would be very difficult to come to a different view.
spk03: Okay. And then maybe looking at the broader kind of restaurant real estate investment universe, has there been any convergence in cap rates between kind of QSR and casual dining as things have reopened in terms of cap rates?
spk07: Yeah, I think cap rates, I'm not sure conversions is the right term. They're both falling. And especially QSR, it's very typical to see QSR restaurants with a four-handle cap rate, some even below that if they're in California or Florida. And then it's very common now to see casual dining cap rates in the mid-fives. I guess one thing I would reflect on is it speaks to what I would say is a significant change in the NAV of the company across the 810 properties we own, if that's the case.
spk03: Okay. But, I mean, is the spread between the two narrowed at all in the last couple of months and quarters, or is it pretty much stayed steady?
spk07: I would anticipate it's pretty steady, maybe narrowed just a tiny bit.
spk03: Okay. That's it for me.
spk02: Thank you very much. As a reminder, if you have a question, please press star then 1 to be joined into the queue. Our next question comes from RJ Milligan with Raymond James. Please go ahead.
spk05: Hey, good morning, guys. Bill, it seems like your comments point to the fact that asset pricing today doesn't accurately reflect risk. And I'm curious what you think needs to happen in the market for pricing to come back to sort of that equilibrium. I guess I'm just trying to gauge how long you think this pricing environment will last.
spk07: RJ, I think that's above my pay grade to predict. That's like predicting interest rates. I would have a very hard time doing that. But I would say that your comment about seeing pricing on assets being a bit of a head scratcher is true. I got why properties that performed well during COVID-19 would trade at really premium prices like the Darden assets that we own so many of. But I've been surprised, frankly, by tenants that were not payers during COVID have compressed cap rates.
spk05: Okay. I mean, at least right now, there's just a ton of capital out there chasing all sorts of assets. So you would expect the current pricing environment to last for some time longer?
spk07: Yeah, I think that's right, but I wouldn't, you know, overstate that. We're a medium-sized company. We have reasonable acquisition appetite and a good pipeline, so I wouldn't be too negative about it. Okay, that's it for me, guys. Thanks.
spk02: Our next question is a follow-up from Sheila McGrath with Evercore.
spk01: Please go ahead. Hi, Geek. Yes, Bill, I think Jerry quoted 4.1 times coverage ratio and approaching pre-pandemic level. Any idea what percent of your portfolio is open to max capacity versus restricted capacity? And assuming reopening of those restrictions, do you think that the coverage levels could exceed pre-pandemic levels once they're open?
spk07: Yeah, I don't have the – the max capacity because those rules are quite Byzantine. And I'll just use as an example our Cairo facility where the capacity restrictions were not as relevant as the six foot distance restrictions for many months. But we were above 19 levels for some weeks here recently. So I think the coverage could in fact exceed pre-pandemic levels and certainly would expect it to in time. But yeah, the portfolio is in really good shape and average coverage is terrific, but I always worry about the properties that are in the bottom 10% and even those properties are in great shape. We have very, very few concerns.
spk01: Okay. And then, Bill, you mentioned $45 million of out parcels remaining to be closed. Do you think that opportunity is somewhat exhausted or, you know, can we think about you guys uncovering some more opportunities?
spk07: No, I think there'll be more for sure.
spk01: Okay. And last question for me. I was a little low on G&A for the quarter. I apologize. But just wondering if you or Jerry can help us a little bit in terms, because some of that was excess or just elevated comp costs. Just give us some insight on how we should think about that for the balance of the year, maybe the cash part of it.
spk04: Yeah, Sheila, I'll jump in. Notwithstanding the elevated nature of the first quarter, I think it's a decent number to use for the rest of the year if you annualize that to reflect the increase in the staffing. And as Bill said, some of that will be front-loaded versus fees that will be earned maybe over the second half of the year or into next year.
spk01: Okay, great. Thank you.
spk02: This concludes our question and answer session. I would like to turn the conference back over to Bill Lenahan for any closing remarks.
spk07: Great. Thanks, everyone. And if you have questions, please don't hesitate to call. Thank you.
spk02: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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