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spk03: Welcome to the FCBT First Quarter 2024 Financial Results Conference Call. My name is Carla and I will be coordinating your call today. During the presentation, you can register to ask a question by pressing star followed by 1 on your telephone keypad. If you change your mind, it's by star followed by 2. I will now like to hand you over to Patrick, where I make Patrick, please go ahead.
spk05: Thank you, Carla. During the course of this call, we will make forward-looking statements which are based on our beliefs and assumptions. 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 2nd, 2024. In addition, reconciliation to non-GAAP financial measures presented on this call, such as FFO and AFO, can be found in the company's supplemental report. With that, I'll turn the call over to Bill. Good
spk01: morning.
spk00: Thank
spk01: you for joining us to discuss our first quarter results. I will make introductory remarks and Patrick, Josh, and Jerry will comment further on the acquisition market and our financial results and capital position. We reported first quarter AFO of 43 cents per share, which is 2 cents or .9% up from Q1 last year. Our existing portfolio continues to perform very well with .7% rent collections for the quarter and .6% occupancy at quarter end. Our EBITDA data rent coverage in the first quarter was 4.9 times for the significant majority of our portfolio that reports this figure. This remains amongst the strongest coverage within the net lease industry. According to Baird Research, -over-year sales for the restaurant sector as a whole remain positive in the first quarter in the 4% range after flat results in January, which was impacted by bad weather. Similar to last quarter, casual dining saw small declines off strong levels in the prior year period. Darden reported a .8% decline in same store sales for Olive Garden and a .3% increase for Longhorn for the quarter ending February 25th. Overall, for Darden, restaurant-level EBITDA margin improved 70 basis points to 20.6%, reflecting commodity pricing and productivity improvements. We note that our second largest tenant, Brinker, also announced positive results on Tuesday. Chili's same store sales grew .5% and their restaurant-level EBITDA margin improved 90 basis points to 14.1%. FCPT acquired four properties in the quarter for $15.9 million at a .9% cap rate. All of the properties were in the medical retail sector and we continue to benefit from establishing verticals in addition to restaurants, our historical core area focus. Similar to the fourth quarter of 2023, we slowed down acquisition activity in the quarter to reflect the current cost of capital of equity and debt in comparison to acquisition market pricing. The current capital markets backdrop and seller reticence to accept higher cap rates has made it challenging to deploy capital creatively. In this environment, we remain disciplined allocators of capital. We've stayed in the past several quarters as well. We have established mental models and structured our team incentives to discourage deploying capital just to grow the company's size without also increasing per share metrics of earnings or intrinsic value. Turning to capital sources, we issued $6.9 million of equity early in the first quarter at an average offering price of $25.38. In March, we issued $85 million of term loans utilizing the accordion feature of our credit facility to achieve favorable borrowing costs. $50 million of the offering was used to pay down a private note debt maturity that was due in June of 2024. Our balance sheet is in great shape with our next debt maturity not scheduled until November 2025. The remaining $35 million was used to fund acquisitions. While we normally do not get into detail on individual tenants, we are aware that of the public reports that tiny union is exploring options for red lobster, including selling the brand or restructuring alternatives. Before going into detail, it is important to note that we own a group of stores with below average brand rents and above average brand ePATAR to rent coverage. Now on to specifics. First, I'll start with portfolio management. In 2022, we noticed a few stores beginning to show weaker performance through our monitoring of store level sales and profitability. Over the next 18 months, we sold some of our highest rent and lower performing stores at an average cap rate of .5% in a positive gain. This dropped our exposure from .9% of annual base rent to .7% today. Today we own 18 properties of which 10 are in a master lease with an average rent of $276,000. The remaining eight are low rent ground leases and out parcels with average rent of $117,000. Blended together, this equates to an average rent of $206,000 per property. In both the case of the master lease and the ground leases, we have good rent coverage. Second, it's important to remember that we were highly selective in acquiring Red Lobsters in the first place. Over the years, we passed on a lot of Red Lobster locations where the rent was set very high or the underlying store performance was low. We recently reviewed nearly 200 Red Lobster rent comps to compare to our 18 locations. We found that 15 of our 18 restaurants have rents below the brand median for this comp set and the remaining three were in the ballpark of brand median rent. Well, we hope Red Lobster avoids restructuring. If it does come to that, we feel that we are well positioned to manage the process. More importantly, in March, we announced Jerry's retirement from FCPT and Patrick's promotion to CFO. This transaction has been carefully planned over the last year and a half and will be completed tomorrow. I would like to sincerely thank Jerry for his service and contributions in helping us grow from a spinoff origin in 2015. Jerry was here day one as part of six employees many years ago. Jerry has been a great financial steward and has been instrumental in helping make FCPT what it is today. While Jerry will be around in the interim advisory role to support the team, we wish him all the best in the future. I'm also very excited to have Patrick step up in the CFO role. Patrick was working on the creation of Four Corners at JP Morgan even before Four Corners existed. He was one of our first hires and brings a deep understanding of our capital markets, our acquisition process, and our culture. With that, I'll hand it over to Patrick to further discuss the investment environment.
spk05: Thanks, Bill. Before I get into specifics on investments, I'd also like to just echo your comments about Jerry and his significant contribution to our company culture. I'd be remiss if I also didn't take this moment to thank him personally for over eight years of mentorship and guidance over the last 12 months as we work through the transition process. Now turning to our acquisitions outlook, we're seeing a lot of interesting opportunities that may be added to the pipeline. Said another way, there's no shortage of tenants seeking net lease capital and there are fewer buyers out there pursuing them. What is missing, though, is a stable pricing environment where sellers are comfortable transacting at pricing that makes sense for Four Corners. And while we continue to see increases in seller cap rate expectations as interest rates remain elevated, we've also seen that net lease pricing adjusts more slowly than capital markets. So the bid-ask spread between buyers and sellers while converging still exists. That's resulted in transaction volume being down for the sector overall. It's worth pointing out that net lease can be lumpy and while we had a slow start to the year in 2023, we also had a record acquisition year on the back of strong closings from April through July. Overall, our portfolio now stands at 1,137 leases with Darden at 51% of our annual base rents and restaurants at 80%. Non-restaurant is now 20% of our portfolio with automotive as our largest non-restaurant sector at 9%, followed by medical retail at 8%. On the disposition front, we did not sell any properties in Q1, but we frequently receive reverse inquiries on our properties and continue to consider strategic dispositions as a potential attractive alternative to issuing new debt and equity capital, as well as part of our active portfolio management strategy. We're fortunate that our portfolio continues to attract buyers and we can utilize dispositions for creative capital recycling when needed or in capital markets are less attractive. Josh, I'll turn it over to you.
spk04: Thanks, Patrick. Turning to leasing, we had 13 leases expire in Q1 with all but two tenants renewing. Those 11 leases had positive renewal spreads of 12.5%. We expect positive results on the two sites that did not renew, though we are early in the process there. These results reinforce our underwriting confidence that we are partnering with the right tenants and that the rents are set at attractive levels for the tenants in our portfolio. Portfolio occupancy stands today at 99.6%. It remains well positioned with only .9% and .2% of annual base rent maturing in 2024 and 2025 respectively. This ticked up slightly for the quarter, but we already have strong leads on releasing at several locations. To continue on Bill's statements on Red Lobster, we understand bankruptcy can be a complicated and uncertain process, but if the brand is unable to avoid it, we are prepared to respond. Any offer made for rent reduction would be weighed against what we expect to be strong demand to backfill the properties given the real estate quality. Fortunately, a lot of Red Lobsters are located adjacent to Olive Garden and Longhorn Steakhouse stores, which means at least one of our preferred tenants already knows these sites well. Before turning it over, I'd also like to thank Jerry for the past eight years of mentorship and service to FCPT. Jerry, I'll turn it over back to you.
spk02: Thanks, Josh. For the first quarter, our cash rental revenues grew .9% on a year over year basis, including the benefit of rental increases and 329 million of acquisitions over the last 12 months. We reported 58.0 million of cash rental income in the first quarter after excluding 0.6 million of straight line and other non-cash adjustments. And on a run rate basis, current annual cash base rent for leases in place as of quarter end is 219.6 million and our weighted average five-year annual cash rent escalator remains at 1.4%.
spk00: We
spk02: collected .7% of base rent in the quarter and there were no material changes to our collectability or credit reserves nor any balance sheet impairments. Cash GNA expense excluding stock-based compensation was 4.6 million, representing .9% of cash rental income for the quarter and compares to .4% for the prior year quarter. Overall leverage, our net debt to adjusted EBITDA in the first quarter was 5.6 times and our fixed charge coverage ratio was a very healthy 4.3 times. We have 277 million of liquidity comprised of 27 million of cash and 250 million of full revolver capacity at the beginning of the quarter. We remain committed and I know Patrick and the team will continue to maintain a conservative balance sheet and extend and layer our debt maturities as we can. We issued 85 million a term in March, as we mentioned, and that did take care of our only debt maturity before November 2025. The loan matures in March of 2027 with a 12-month extension exercisable by us. In conjunction with the offering, we entered into 85 million of interest rate swaps to fix the reference rate at .94% through maturity, including the credit margin of 0.95%. Determined by our current investment grade ratings, the effective interest rate is 4.89%. We are very appreciative of the support from our existing bank partners on the loan. As the others mentioned, this is my last quarter and earnings call at Four Corners. I too want to thank all of my colleagues here at Four Corners for their support and collaboration over the last eight plus years and our board, which is an amazing board. FCPT is a special place and I know it is in great hands going forward. And with that, I'll turn it back over to Carla for investor Q&A.
spk03: Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Anthony Palome from JP Morgan.
spk08: Thanks. And first of all, thanks, Jerry, for all the help over the years. So good luck with everything. My first question is on just cost of capital versus yields. And so if we think about just like your blended cost of capital right now seems like maybe a high sixes thereabouts and you've been doing deals at seven. Like, do you think that's enough or where do you think, you know, yields need to be for you to feel like you could lean into transactions more?
spk01: It's a great question, Anthony. It's darn close. You know, we've been able to consistently acquire things with the seven handle, you know, after seven, eight years of six and a half to six, seven cap rates. So it's quite close. We've been a little cautious. It's not super creative where the market is, but, you know, with a slightly higher stock price, a slightly lower 10 year or slightly higher cap rates, it begins to really work. So we're being patient. We're not lowering our credit quality in our acquisitions. We're playing for, you know, for the long term.
spk08: All right. And do you see a sizable pipeline that you like right now so that if your capital costs do line up a bit better, you can you could turn it on a bit faster, more robustly or does the pipeline sort of. That's
spk01: exactly right. And that informs our confidence to be patient that to the extent that the numbers lined up a little bit better, we feel like there's a build up in the market. And that we could be, you know, we could deploy capital creatively again if the numbers were slightly different.
spk08: Okay, thank you.
spk03: Our next question comes from West Godaday from Baird.
spk07: Hey, good morning, everyone, and congrats, Jerry and Patrick. I just want to go back to the comment about the strong demand for the Red Master units in a worst case scenario. Just if you can give us maybe some of your views on how quickly you can turn a unit, maybe where you see the mark to market. And if you would in this situation having to release it, would you look to put in TI's if you had the choice?
spk01: You know, honestly, was I don't think there's a high likelihood that we will be getting these buildings back. I mean, eight of them are ground leases with $12 a foot rents. You know, we get percentage rent from those properties. They're healthy. The master lease is well covered. We sold the weaker properties. So I don't think that that's likely. But to directly answer your question, these are in good locations. As Pat mentioned, they're very often next to a Longhorn or an Olive Garden. Just to remind everyone, Red Lobster was a Darden brand a decade ago. So I think it's unlikely. I think if we get back the ground lease properties, we'd likely make money. I think it's highly unlikely they'd reject the entire master lease. But if they did, I'm not concerned. As far as TI's, you know, TI's on a couple buildings in the context of a $3 billion company, you know, isn't terribly meaningful. It would be part of, you know, the whole, you know, bargain that you'd have with the new tenant. So I don't think we think about it, you know, as a hard no, it would be part of the negotiation. But again, I think it's pretty unlikely. But as Josh mentioned, you know, restructurings, if it comes to that, you know, are uncertain. And, you know, I would just say that we have a lot of experience investing in distressed properties. In my background and Jim's background, we're well equipped to handle it.
spk07: And then we look at the pipeline. What do you see as far as deal volume goes? Is it closing more deals on the medical retail? Is that just because of more realistic pricing? Is the volume just bigger there? And do you see more opportunities for selling? Third party transactions.
spk01: Yeah, it's just that's just sort of lost small numbers and how it happened. We're looking at automotive service. We're looking at medical retail. We're looking at restaurants. I think the only thing that I would note on the acquisition pipeline is there seems to be more larger portfolios being discussed now as it's been, you know, nine, twelve months with a difficult acquisition environment. And, you know, people are starting to face debt maturities. Equity partners are, you know, on private deals, seeing higher cost of capital, just like the public markets. So we're seeing more of that, but nothing that's hit pay dirt yet.
spk07: Okay, and then just last one for me. You know, on the disposition front, you do have a lot of assets that are in high demand in the private market. What type of spread, an initial spread, do you think you can get and redeploy the capital at? And then also another component of the value creation would be the annual escalators and the new properties. Do you think that'll be higher for what you buy versus what you're selling?
spk01: It won't be lower to answer the last question first. It won't be lower. We have seen some higher escalations. We've seen some more discipline on tenant friendly lease extensions. As far as dispositions, you know, we get inquiry, incoming inquiries, you know, almost daily, certainly weekly. You know, very often those are in the mid fives. But, you know, we like our existing portfolio, so to be incentivized to sell something, you know, needs to be compelling. And so, and I would also mention that, you know, very often the buyers, they need to get financing, they're part of a 1031 exchange. And so the closing rates are, you know, 50-50 and that means it's a bunch of work to do. So it's an option, as you say, we have, you know, hundreds of buildings, lease to investment grade tenants that are very desirable, but it hasn't been compelling mathematically for us just yet. Thanks
spk07: for the time, everyone.
spk01: Thank you,
spk03: Us. And our next question comes from R.J. Milligan from Raymond James.
spk06: Hey, good morning, guys. Actually, my questions have been answered, but I just wanted to stay in the queue, congratulate Patrick on the new role, and more importantly, thank you, Jerry, for the relationship over the past eight years. I really appreciate all of your help and congratulations on your retirement.
spk07: Thank you, R.J. Thanks, R.J.
spk03: As a reminder, to ask a question, please press star followed by one on your telephone keypad. Our next question comes from Gene Comert from Evercore.
spk09: Hey, good morning. Thank you. You know, Bill, building on your comment that potentially there are some larger portfolios out there, which makes sense logically, right? Their pressures are magnified, given the scale of what they have to refinance or pay off, etc. But does that mean, how would you think about that from a four-corner's perspective? If there is a $300 million portfolio out there, would you require a bigger, wider spread to your cost of capital at the time than, you know, a pipeline of one-offs because you're maybe precluding yourself from optionality to see the market evolve over time? I'm just curious how you think about a bigger transaction versus the, you know, pretty steady cadence of one-offs.
spk01: Yeah, it's a really great question. The crux of it, though, is is it $300 million of one tenant or is it $300 million of a diversified pool that's, for argument's sake, is analogous to our existing portfolio? What we've seen in the market is that the $300 million of one tenant trades at a discount because you're buying tenant concentration when you buy that, a well-diversified pool less so. So I would look at a well-diversified pool that we're buying as very efficient, so I wouldn't demand a premium. $300 million of a sale leaseback of one tenant in today's market would get a discounted pricing or a premium cap rate, however you want to say it. I think the other thing that we've noticed in the market, yeah, the other thing we've noticed in the market, just to close the loop, is that REITs generally, my feeling is, that if acquisitions require capital raises, there's a higher level of hesitancy because, you know, bank debt capital is more dear, capital markets are more fickle, and most people are a little bit where we are where we're at. They'd like to see their stock price a little higher. So a transaction that requires a capital raise, you know, three, four years ago, that was an advantage. You wanted a reason to go to the capital markets today that causes pause.
spk09: Very good color. And just to close the loop, I know it's a fluid situation, but on those, let's just call them larger portfolios from your perspective, what's kind of dollar value that is in your shadow pipeline today, say versus six or nine months ago? Just ballpark. I'm curious what you're looking at.
spk01: Yeah, these are more, you know, quite large transactions that we're kicking the tires on, but I want to just be very clear. Nothing's imminent or even probable. Just things that we're looking at. We have, we've looked at, we've had large transactions that we've been looking at, you know, since inception, we've done a handful of them with Brinker, you know, with a bank that was selling some net lease a year ago, but nothing is imminent or probable. It's just an observation that they seem to be more probable.
spk09: And that
spk03: was our final question. So we'll hand back over to Bill for final remarks.
spk01: Great. Thank you, everyone. And another efficient conference call. If anyone has any questions, please reach out. Thank you.
spk03: And this concludes today's call. Thank you for joining you. May not disconnect your lines.
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