Four Corners Property Trust, Inc.

Good morning all and thank you for joining us for the FCPT fourth quarter 2024 financial results conference call. My name is Carly and I'll be coordinating the call today. If you'd like to register or to question during the call, you can do so by pressing star followed by one on your telephone keypad and to remove yourself that line of questioning will be star followed by two. I'd like to hand over to your host, Patrick Wining, CFO. The floor is yours.

Thank you, Carly. 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, February 13, 2025. In addition, reconciliation to non-GAAP financial measures presented on this call, such as FFO and AFFO, can be found in the company supplemental report. With that, I will turn the call over to Bill.

Good morning. Following our typical cadence, I will make introductory remarks, Josh will comment further on the investment market, and Patrick will discuss our financial results and capital position. In its totality, 2024 was a strong year for us. The first half of the year was very similar to the second half of 2023. Rising interest rates created a challenging backdrop for net lease companies and acquisition volume was down for the sector as a whole. FCPT largely paused incremental acquisitions and waited for improved investment spreads. We refused to loosen our credit underwriting criteria. We said, We remain committed to our strike zone of small box net lease with strong brands, quality credit, and attractive real estate. Fortunately, by early Q3, our cost of capital had improved, and we found more seller willingness to transact at appropriate pricing. As we returned to the green zone, we immediately turned the acquisition machine back on with vigor. We ended the year with $265 million of acquisitions at a blended 7.1 cap rate. As we look forward to the new year, we've built up significant liquidity to fund new growth. While we do not give guidance, we are continuing to see opportunities that are consistent with our quality thresholds. We expect to add to our pipeline the same steady and sustainable manner that is the core of our investment approach. As far as cap rate volatility, we have not seen much movement in deals we've priced recently. While it's early in the year, we expect to be at or near the same cap rate we captured in 2024. To that end, We will also be continuing to build our investment team in 2025 and look forward to increasing our capabilities with some fantastic new hires that are starting in the coming months. Shifting to our in-place portfolio, we continue to perform very well with high collections and occupancy. Our rent coverage in the fourth quarter was 4.9 times for the majority of our portfolio that reports this figure. This remains amongst the strongest coverage in the net lease industry. As a reminder, FCPT's core tenants are nationally branded casual dining operators and sector leaders that generally outperform the industry. For example, Brinker recently reported Chile's same-store sales growth grew an astounding 31% for the quarter ended December 2024. Similarly, Olive Garden Longhorn reported same-store sales growth of 2% and 7.5% for the three months ended November 2024. Consistent with past performance, FCPT's casual dining tenants have proven to be stronger than high-end fine dining or local mom-and-pop-run restaurants. Our tenants are well-capitalized, high-performing operators servicing a wide variety of consumers and price points. As for portfolio management, we are not yet experiencing any material tenancy issues in the portfolio or signs that inflation or labor issues will impact our rent payments. We want to remind investors that our portfolio has zero or near zero exposure to problem at least subsectors, such as theaters, pharmacy, high-rank car washes, and big box retail. On the very, very, very few occasions where we have bought properties in these sectors, it is because they've passed very strict underwriting criteria to balance out the risk. We also have no exposure to the string of recent high-profile retail bankruptcies, including Zips Car Wash, Big Lots, Joann's, Party City, TGR Fridays, Rubio's, or Kahn's Home Plus. For the avoidance of doubt, we also don't have any properties leased to government agencies. Further, I would note that our business model does not directly rely on new construction. If tariffs were to cause inflation of business building materials such as steel, we do not anticipate that would have a direct negative impact. If anything, higher replacement costs should benefit tenant renewal rates. We would also like to continue to highlight our diversification efforts. Our three largest brands of Olive Garden, Longhorn, and Chili's now make up 34%, 10%, and 7% of our base brand, respectively. Darden is now 40%, 48% of our portfolio on a combined basis across all its brands. Over to you, Josh.

Thanks, Bill. During the fourth quarter, FCPT acquired 45 properties for $133 million at a 7% cap rate. While we are pleased with 2024's $265 million acquisition volume, we are especially proud of the momentum we achieved in the second half of the year as our cost of capital improved. In the second half of 2024, our team acquired $203 million across 66 properties, representing over 75% of our annual volume. In Q4, we acquired over 50% of our annual volume, including $87 million invested in the last few weeks of December alone. We are not compromising on the quality of our assets to meet yield or reach volume targets, as you can see in our press releases for each investment that many are with brands and operators we have worked with in the past. Conversely, we are being patient and organized while seeking to offer sellers superior execution. The investments this quarter were pretty evenly split between restaurant, medical, retail, and auto service sectors. As for the full year 2024, restaurants made up approximately 42% of our acquisitions, with medical retail at 30% and auto service at 28%. We do not plan our investments to have any specific thresholds or quotas across the three sectors, so the investment volume may vary from quarter to quarter based on opportunities we find attractive. However, we expect the new investments will be roughly even split between these categories over the long term. As such, we are seeing success compound in our newer automotive and medical retail sectors as we continue to develop relationships herein. For example, in Q4, we executed a $25 million sale leaseback with a top automobile service operator for six newly built sites. We also completed a portfolio acquisition of nine primary and urgent care clinics for $21 million, as well as a $14 million sale leaseback with a leading investment-grade healthcare system for two of their retail outpatient centers. The acquired properties all scored highly on our underwriting scorecard and released to top corporate operators in their respective industries. Further, these investments were all with new tenant relationships for FCBT as our team continues to establish our reputation in both sectors as a reliable real estate partner. On the disposition front, we did not sell any properties in 2024. However, we are still receiving inquiries on our properties on a weekly basis and continue to contemplate strategic dispositions. both as an alternative to issuing new capital and as part of our active portfolio management strategy. For our portfolio as a whole, at year end, we have 1,220 leases with 68% of our annual base rent coming from casual dining operators and 9% from quick service restaurants. Outside of restaurants, automotive is our largest sector at 11% of AVR, followed by medical retail at 9% of AVR. We expect to continue our steady approach to diversifying over time. Looking forward, we can continue to see an expanding opportunity set for further investments. For the Boulder Group's net lease market report, there are 3,929 single-tenant retail properties on the market overall in Q4, representing a 26.6% increase year-over-year. With transaction volumes still recovering across the industry, we anticipate the pool of opportunities will expand accordingly in 2025. Although Q1 is typically our slowest quarter historically, We are expecting momentum for a fourth quarter. Continue and encourage everyone to follow our press releases as we disclose every acquisition the day we close. Patrick, back over to you.

Thanks, Josh. I'll start by talking about capital sourcing and the state of our balance sheet. At FCBT, we are highly focused on efficient capital raising. In the second half of the year, we were very active on our at-the-market equity program. In total, we raised over $318 million of equity during the year and $102 million in Q4 alone. That activity was heavily weighted to a few months, which demonstrates our ability to utilize the product at scale. Today, we still have $102 million of unsettled equity forwards. Our fixed charge coverage ratio is now 4.5 times. With respect to overall leverage, our net debt to adjusted EBITDA and Q4 remain 4.9 times inclusive of outstanding net equity forwards as of December 31st. Additionally, as announced two weeks ago, we extended and upsized our credit facility in January. This increased our revolver capacity to 300 $35 million in incremental term loan, which is fully hedged at a 4.6% all-in interest rate. Importantly, we also added a one-year extension option to our November 2026 term loan, taking care of all debt maturities for nearly two years. This facility recast provides FCBT with more liquidity for future acquisitions, all while maintaining conservative pro forma net leverage for 5.1 times, including unsettled equity for us. Following the facility refinancing, we now have approximately $500 million in liquidity between cash, unsettled equity forwards, and underground revolver capacity. Assuming no further equity issuance, we have an approximate $370 million of available capital before reaching six times net leverage. While markets remain volatile and treasury rates are elevated, we continue to diversify our capital sources and be thoughtful around when and how we raise capital. You can expect us to continue that disciplined approach. Now turning to some of our financial highlights for Q4 and the year. We reported Q4 AFO bill of 44 cents per share, which is up 2.3% from Q4 last year. Our full year 2024 AFO per share of $1.73 is up 3.6% from 2023. Q4 cash rental income was $60.8 million, representing growth of 6.6% for the quarter compared to last year. Our full year 2024 cash rent of $235.4 million increased 8.8% versus 2023. On a run rate basis, current annual cash-based rent for leases in place as of quarter end is $240.2 million, and our weighted average five-year annual cash rent escalator remains 1.4%. Cash G&A expense, excluding stock-based compensation, is $3.9 million, representing 6.5% of cash rental income for the quarter. The full-year cash G&A was $16.8 million, or 7.1% of cash rental income, versus 7.6% in 2023 and 8% in 2022. This progress illustrates our continued efforts at efficient growth and the benefits of our improving scale. We are expecting cash G&A will be in the range of $18 to $18.5 million for 2025. As a reminder, we take conservative approach and do not capitalize any of the compensation costs related to our investment team. As for managing our lease maturity profile, our team successfully renewed or re-tenanted 95% of FCPT's properties that had 2024 lease expirations. We've also made significant progress on 2025 lease renewals with 63% of those tenants already extending their lease or indicating intent to do so. At the start of 2024, 2025 lease maturities represented 2.2% of our annual base rent, but as of year end 2024, it's down to just 1.1% of ABR. Our portfolio occupancy today is 99.6% and we collected 99.4% of base rent for the fourth quarter. There were no material changes to our collectability or credit reserves nor any balance sheet impairments. With that, we will turn it back over to Carly for questions.

Thank you very much. We now open the lines for Q&A. If you'd like to raise a question, please press star followed by 1 on your telephone keypad, and to remove your slap button on the question will be star followed by 2. Our first question comes from Anthony Piloni of JPMorgan. Anthony, your line is now open.

Great. Thank you, and good morning. Appreciate the comments about the coverage and the credit quality in the portfolio. And it sounds like, you know, rents aren't particularly at risk here. But even if they aren't, just curious if you can talk a bit more about which areas underlying are just seeing better or worse trends at the margin, even if rents aren't necessarily at risk.

I don't think that there's a notable standout in what we have in our portfolio, Chili's being the obvious exception, but that's pretty particular to that brand. But our casual dining brands are growing. Our QSR exposure is predominantly to Burger King, which is doing well. And the other sectors that we're in are pretty defensive, and we've avoided a number of the places where our competitors are having to turn their attention and play defense. So we feel that it allows us to be very offense-oriented.

Okay. I just had one other.

From, for example, the COVID period where – quick service with drive-throughs was dramatically outperforming restaurants that you had to go inside and sit down. All those trends have normalized, so it's very consistent across all our different exposures.

Okay, thank you. And then just the only other item I had was you did obviously work on the balance sheet with the facility and so forth, so you're in good shape there, but Just how should we think about how far off you might be from being like a public bond issuer at this point?

Well, it's something we're going to spend a lot of time working on. The upsides of our revolver was anticipation of having that as an option. So we borrowed in the private note market historically. That's been very supportive of us. But at the moment, public bonds have more attractive pricing. But as Patrick evidenced, we also have capacity to raise term loans at very attractive pricing as well. So we feel like we have a buffet of options on the debt side. But it's something that we'll be spending a lot of time on in 2025 in anticipation of being ready.

Okay, thank you.

Thank you very much. Our next question comes from Kyle Katzenick of Jani Montgomery. Kyle, your line is now open.

Hey, good morning, guys. Exposure in non-restaurant retail segment grew roughly 4% to 5% a year over the last few years as percent of the overall portfolio. And I think you mentioned around 60% of acquisitions last year were split between medical retail and auto service, roughly. Should we expect a similar cadence going forward? And is this more a function of current cap rates? Thanks.

As Josh says, we don't plan it out that way, but I wouldn't be surprised if the trend that we've established continues. QSR is very competitive, and the price points are a bit smaller. Casual dining, we have exposures with the exact brands that you'd want to have exposure to. And then medical retail, the buildings tend to be a little bit bigger, so it's a little bit easier to get capital deployed into that sector. So I don't think we're trying to fill up buckets per se or hit, you know, thresholds that we preordain. But I could imagine it being similar to in the past. And obviously, we're always looking for new sectors that we find interesting. So we're constantly doing a lot of research on that.

Okay, thank you. And then from a waste role perspective, 25 and 26 are pretty light. But starting in 27, you have significant rollover from the initial Darden transaction. Today, where's the escalated pricing on those leases versus the market? Do you expect to get any locations back and any other changes to those lease structures anticipated?

Yeah, the tenant has multiple extension options to their benefit, typically four or five five year extension options with one and a half percent rent growth. So I would anticipate and this is an anticipation, not a but I would anticipate the vast, vast majority of those will renew because the tenant has coverage that's approaching six times. OK, thanks guys. Appreciate it. Of course, thank you.

Thank you very much. As a reminder, if you'd like to raise a question, please press star followed by one on your telephone keypad now and to remove yourself at the end of questioning will be star followed by two. Our next question comes from Michael Goldsmith of UBS. Michael, your line is now open.

Good morning. Thanks a lot for taking my question. You talked about returning to the green zone in the third quarter of last year and the acquisitions that followed. Given the movement in interest rates, do you still feel good about being in the green zone and feeling good about the acquisition outlook for 2025?

Yeah, I think we are in the green zone now, but perhaps even more importantly, we have substantial capital that we raised when we were well in the green zone to use for acquisitions. So call it $250 million of capital to be at the low end of our range and $350 million to be at the high end of our leverage range. So given what we've done in the last couple of years, we are in really good shape for having funded 25 acquisitions. And I think that frankly puts us in a pretty rare category compared to our peers.

I appreciate that. And then just in the presentation, it looked like rent collected declined sequentially or decelerated sequentially by 40 basis points. Can you talk a little bit about what's driving that?

I don't think there's anything material. Some of that's just timing on We've acquired a lot of assets in December in the last couple weeks, and so sometimes it takes a month to get rents shifted over to a new address, but there's no big read through there.

Thank you very much. Good luck in 2025.

Thank you. Thank you very much. Our next question comes from John Kilowski. John, your line is now open from Wells Fargo.

Thank you.

Good morning.

Um, maybe just to follow up on that last question on the, the acquisition pipeline and just the market in general. Um, you know, I want to make sure I'm getting the right read through from your comments, but it sounds very positive. Like you're seeing heightened deal flow. You're expanding your team underwritings in gray. I'm just kind of curious here. Coverage is picking up. You know, we're hearing anecdotally that. That competition is really coming back to the market on the private side. What's allowing you to source so many deals and maybe keep this acquisition cadence elevated from last quarter.

um given the influx of capital that's coming in and competing on deals or maybe are you competing in a different environment you're not really seeing as much yeah there certainly has been a lot of talk about a handful of very large transactions where there was a lot of attention um you know deals that were worth of a few hundred million dollars so it's a very sizable we certainly look at all of those but we are we're heads down on one, you know, individual properties, small portfolios, I think people understand that we have capital that was raised that where we can buy things that are creative. And we don't use leverage when we buy things. So the movements in the 10 year make levered buyers less reliable. And we're not using leverage when we acquire things we borrow at the corporate level. And I would say Josh has done a fantastic job of being super organized. And as this market has sort of whipsawed around being in constant contact, even when we have a disagreement with a seller on price and hanging around the hoop has really paid off. The acquisitions we closed in Q4, some of them we've been working on for two years. And we just couldn't get there on price. And, you know, the conditions were such that we could lean in a little bit and ask for them to give up 15, 20 basis points on cap rate. And we got a lot of deals done. So I think it's, you know, we're accessing a more broad environment for acquisition transactions than simply waiting for very, very large sale leasebacks to happen. And that's proven very valuable.

And then maybe just jumping to a different area here, and I'm sure we're a bit early for this, but have you seen or heard anything from your tenants that they've been impacted at all on the labor side by any of the policies by the new administration?

We haven't, but it's an interesting question. We operate seven stake houses in San Antonio. And we've been in constant contact with the woman who runs that business. She's an exceptional business leader. We have not yet seen impact there. And more broadly, we're monitoring all sorts of things that could be impacting the economy or our businesses because of the changes in political strategy in the country, and we haven't really found anything that would be a particularly standout to mention in the call.

Thank you.

Thank you very much. As a further reminder, if you'd like to raise a question, please. Any more questions? Yes, there is. As a further reminder, if you'd like to raise a question, please press star followed by one on your telephone keypad, and to review yourself that line of questioning will be star followed by two. Our next question comes from Rich Hightower of Barclays. Rich, your line is now open.

Hey, good morning, guys. You're making me sweat a little bit thinking I didn't hit star one, but I think we're good. I think, you know, Bill, just to flesh out maybe the last question there, you know, you did mention also that you're constantly exploring you know, new industry verticals, you know, for investment. And I guess just to be clear, as far as that goes, would you say that any policy changes, you know, that have been announced in the last few months or, you know, prospectively kind of, you know, in the future, how is that affecting underwriting? How is that affecting risk assessment? Or would you sort of reiterate that, you know, at least in the way you think about it currently, not much has changed?

Yeah, we haven't seen a ton change yet, but the pace of change in Washington is obviously far greater than most people have been used to, so we're monitoring it closely. But I don't see any particular, anything that we've seen particularly in the last few months change our acquisition scorecard, what we're trying to source, etc. You know, I can give you many examples of real estate subsectors that might be significantly impacted, but they're not part of our historical strategy. So I don't see them impacting FCPT, but we're keeping our ears to the ground for sure.

Got it. Okay. and then you know forgive me if you guys have spelled this out on prior calls um but you know as far as the decision maybe not to give forward guidance i mean would you say that's more contingent on the sourcing of capital side or the uses of capital side or what what maybe informs that philosophy at this point in the company's um you know history sure well i would say i think it's you know our company is very very simple and

purpose built to be simple. So modeling out the earnings of the company is not an onerous task. We're certainly not a black box. And the street has done a very good job of being relatively accurate. And because we announce our acquisitions and dispositions when they close, it gives the street the ability and our investors the ability to forecast our cash flows. But I think the bigger reason is perhaps core to our strategy and what i think differentiates four corners than most of our peers which is our intention is to modulate our acquisition volume with our cost of capital and because our business is essentially issuing equity uh turning it into cash for a short period of time and then buying buildings it's quite important whether our stock is um 22 or or 28 when we do that. And so because I can't forecast what my stock price is going to be throughout a year and, you know, individual stocks tend to trade at wide bands, it's very, very difficult for me to both stick to that policy of modulating our acquisition volume and provide meaningful.

Understood. Thanks, Bill.

Thank you very much. Our next question comes from . Alec, your line is now open.

Hi, good morning, and thank you for taking our questions. So the first one for me would be on GNA. Should we expect the platform to continue to scale in 2025 as you ramp up new employees and maybe any other put and takes on the GNA side?

Sure. I think one, thing that we probably don't get as much attention as we should is just the absolute low dollar amount of DNA that this company has. And it's been the case for 10 years. But given the size of our company, the dollar amount of our DNA is very low. And we continue to increase capacity. We started with six people. We're now at 40. we have the largest incoming acquisition class that we've ever had and they are incredibly impressive young people but because we grow by hiring and developing young people and and not typically doing much lateral hiring and because we're very lean at this c-suite level uh our overall cash overhead is is quite moderate but yes our intention is if we have the cost of capital to grow credibly, that we will continue to grow the business as we have in the last several years.

All right. And speaking on the pipeline, you mentioned that some negotiations have gone your way with sellers. And can you maybe speak about how large of a pipeline of deals that you've been hanging around the hoop with? And and those sellers have not capitulated yet on price?

Yeah, we don't typically give guidance on pipeline. Q1 is typically a slower quarter. Q4 is typically the busiest quarter. I think Q1 is shaping up to be a good one this year, but again, usually Q1 is a little shorter. And I don't know, you know, there's a vast amount of acquisitions that we could do if we were simply to drop our price 50 or 100 basis points, you know, an enormous amount. But that delta is what changes acquisitions from being accretive to the owners of the business to simply growing to grow without any per share accretion. So I'm not sure it's something that we focus on because we're not going to do it.

All right, thank you.

Thank you very much. As a reminder, if you would like to raise a question, please press star followed by 1 on your telephone keypad. And to remove yourself, that line of questioning will be star followed by 2. Our next question comes from Mitch Germain of JMP. Mitch, your line is now open.

Thanks for taking my question. Bill, you've talked about, or Josh mentioned it in his comments, the underwriting scorecard. And I'm curious about the inputs and how often you look at them, you audit them, and you modify or change, you know, the different variables that you're considering over time.

So we've changed the scorecard minimally. The scorecard is relatively balanced, so you could change individual components slightly. I'm not sure you'd get different answers. The language that surrounds the scorecard is culturally ingrained in the company, so we know as a team – what it means when we say this Burger King is a 78 or this tire store is a 63, and having some consistency around that really helps. So there isn't a ton of change. Obviously, the scorecard's not the end-all, be-all of our acquisition effort. It's a way to get aligned and communicate efficiently on what we're spending our time on, and we found that it is pretty darn accurate as far as, you know, we've had very, very, very little credit issues in this portfolio. But when we go back and look at deals that scored poorly and we didn't buy them, there tends to be a negative result as we survey things that we passed on. That doesn't mean that every once in a blue moon something doesn't come out that the scorecard wouldn't capture. But, you know, that's, one property with a reason of X and another property of a weird reason of Y. And you can't have a scorecard that captures every possible outcome, but it's a grounding exercise that keeps us organized and it helps us avoid a lot of, you know, sort of sloppy decision-making. And I think it modestly helps in making sure that we're pricing things appropriately because you have a standard of quality that you can put against a standard of value.

Great. That's super helpful. Good luck in 2025. Thank you.

Thank you very much. Our next question comes from Jim Kennett of Epicor. Jim, your line is not open.

Good morning. Thank you. I realize that the vast preponderance of your leasing or renewals is coming from the extension options, but if you think about 24, can you share what maybe were the representative recovery rates where you did actually have a replacement tenant?

Yeah, it's been really positive, Jim. And we basically, you know, covered the rents that when we had to replace a tenant. I think that that's largely due to heightened replacement costs and the fact that we focused on low rents. But I wouldn't get over your skis on that. You know, the historical dynamic in net leases, if you lose a tenant, you'd struggle to replace the rents. And so I think we've done a great job of replacing the rents. We've brought more resources into the company to get ahead of these things. But I wouldn't lull yourself to sleep to think that you lose a net lease tenant and it's no big deal, you just find another one at the same rent. We've been fortunate that that's been the case, but the sample size is really small and we're in a very favorable market environment for leasing.

Fair enough. Thinking about visibility of the transaction or investment pipeline, if you think about 24, what proportion of the deals that you closed would you say were widely marketed? Let's say six or 10 competitors in there bidding with four corners versus maybe more relationship where you're one or two or three folks inside the tent.

Yeah, it's interesting. There isn't a dynamic that we see very often on the size of deals that we're working on like you might see with a multiple $100 million deal, where there's a dynamic where on the 10th of the month, there's call for offers. On the 12th of the month, there's best and final. On the 14th of the month, there's best and final again. And 15 bidders becomes five, becomes three, becomes one. Very often for us, it's, Here's a property. There may or may not be a broker involved, but there may not even be marketing materials. They know the kind of things we like to buy or the seller directly may know what we like to buy. And it's sort of a look. We'll take this out to market and fully flog it. But if you can get to this price, which is. you know, slightly more attractive than what a marketed price would be, we'll just cut to the chase and deal with you. That's the typical flavor. That doesn't mean that every once in a while we'll have a larger portfolio where there's a more formal process, but a lot of them are price agreed and transact before formal marketing materials have been put together.

That's interesting. I appreciate the color. Thank you.

Thank you very much. We currently have no further questions, so I'd like to hand back to Bill Lenahan for any closing remarks.

Well, thank you, everyone. I'll note that the 13 minutes of prepared remarks was overwhelmed by a substantive Q&A session. Thank you for the interest. Just bottom line, we're in a great position to start off 25, very strong Q4, below target leverage. We have substantial capital that was raised at very attractive pricing and a pipeline that will keep us very busy and a team that's growing with exceptional young talent. So we're really excited about 25, and please reach out if you have any questions.

As we conclude today's call, we'd like to thank everyone for joining. You may now disconnect your lines.