Four Corners Property Trust Inc (FCPT) 2020 Q4 法說會逐字稿

Good day, and welcome to the FCPT Fourth Quarter 2020 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Gerry Morgan. Please go ahead.

Thank you. During the course of this call, we will make forward-looking statements, which are based on beliefs and assumptions made by us. Our actual results will be affected by known and unknown factors, including uncertainty related to the remaining scope, severity and duration of the COVID-19 pandemic that are beyond our control or ability to predict. Our assumptions are not a guarantee of future performance, and some will prove to be incorrect. For a more detailed description of potential risk, please refer to our SEC filings, which can be found at fcpt.com. All the information presented on this call is current as of today, February 18, 2021.

In addition, reconciliation to non-GAAP financial measures presented on this call, such as FFO and AFFO, can be found in the company's supplemental report also available on our website.

With that, I'll turn the call over to Bill.

Thank you, Gerry. Good morning. Thank you to everyone for joining us to discuss our fourth quarter results, which we are very pleased with in terms of continued strong collections, high acquisition volumes, meaningful equity capital raised and the continued growth of the [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 significant federal support in the restaurant industry as well as the end consumer.

As we have seen with our Kerrow 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 have worked hard engaged with our tenants this year. We continued to see strong collections in this range for 2021 to date. We are working with tenants in 3 locations, representing less than 0.2% of portfolio rents, to either modify their lease or terminate and then re-lease the building. Otherwise, we are not seeing rent deferral requests from our tenants, but instead are spending time with them on potential expansion opportunities in connection with our joint venture.

Our Kerrow subsidiary in San Antonio, which operates 6 Longhorn Steakhouses, continues to also be impacted by COVID restrictions. Kerrow provides a wonderful window and real-time understanding into what our tenants are doing to adapt. The Kerrow team's hard work resulted in 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 Dilts and her team who run these restaurants and have shown this year how skilled and committed they are.

We broke ground in October to construct our seventh Kerrow Longhorn restaurant in the Live Oaks area of San Antonio, which will open early in the second quarter and is located next to a new Olive Garden property that we acquired in July.

We reported fourth quarter AFFO per share of $0.37, which represents $0.01 year-over-year increase. We are set up well for growth in 2021, as much of the $100 million of acquisitions in the quarter occurred toward the end, and we de-levered the balance sheet with $88 million in equity raised via the ATM at an average price of $28.66 per share.

Turning to acquisitions. In the quarter, we acquired 48 properties for a combined purchase price of $103 million and an initial weighted average cash yield of 6.4%. Looking at 2020 in total, we acquired or made investments into 101 properties totaling $233 million, even with the pause in acquisitions for most of the second quarter. Approximately 50% of these properties were sourced out of the outparcel 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 Lubert-Adler 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 have formerly been weak brands is confirmed, and so is tenant interest from 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 are learning a lot about what defines good locations in our tenants' eyes specific to each tenant, and Lubert-Adler has been a great partner so far. They bring a lot to the table.

Just a quick comment on the acquisition environment for leased buildings. 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 we'll 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 Lubert-Adler. Gerry?

Thanks, Bill. We generated $40.1 million of cash rental income in the fourth quarter after excluding $1.6 million of straight-line and other noncash 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 base 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 9 this quarter.

You will also see that we have estimated the rent coverage for the Darden leases in our portfolio at 4.3x 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 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 $0.37 represented a $0.01 per share increase in year-over-year results. Over 70% of the $103.4 million of acquisitions in the quarter were closed in December, much of that toward the end of December, and all of these properties will contribute to AFFO in Q1 for the full quarter.

We ended the quarter with $10 million balance on our revolver and $240 million of availability and $11 million of cash reserves. Our leverage metrics improved in the quarter, given the equity capital raising, with a fixed charge coverage of 5.1x in the fourth quarter and net debt to EBITDA of 5.2x. I would estimate we are closer to 5.0x 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 5.5x to 6x.

Finally, we paid an increased dividend for the quarter of $0.3175 or $1.27 on an annualized basis, which represented a 4% increase over the prior quarter.

And with that, I'll turn it back over to Bill for closing comments before Q&A.

Thanks, Gerry. In conclusion, we are very happy with the fourth quarter results and for the year 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 for Q&A.

(Operator Instructions) The first question comes from Nate Crossett with Berenberg.

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 outparcel agreements that are initiated this year?

Sure. There are significant properties with Brookfield, with Seritage, with Washington Prime, et cetera. But we also have a robust pipeline with one-off deals in other portfolios, a significant mix of non-restaurant as well, so making a ton of progress. We don't give specific pipeline numbers.

But as I said, we've been quite busy and making a lot of progress. And it's very granular, actually, at this point, lots of individual transactions. So that gives us some comfort that we're not resting on a single transaction.

But I guess my question is how much is left on the agreements that you guys have announced in the past?

Yes, it's about $45 million as of the end of the year, of deals that we've announced but not yet closed. Okay.

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, when could we expect that that would get deployed versus kind of your initial expectations? Are things progressing quicker than you initially thought?

Yes. I think we're making a ton of progress. As I said, Lubert-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.

The next question comes from Sheila McGrath with Evercore ISI.

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 outparcels?

Yes, Sheila, great question. I think we said about 45% were ground leases. Many of the other that aren't ground leases have very low rents, so share a lot of the attributes to a ground lease. But yes, the shopping center and mall outparcels are very often ground leases. And it's a lot of work for a small amount of dollars deployed, but very low rents and very sticky tenants. And so when you have a year like we've just had, they tend to pay, which is 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 leases over the last handful of years. And I think, overall, very happy with that strategy over the long term. And we've even seen some that have had lease maturities come up, having rents roll up to higher market levels.

And because you have to do the extra work of often outlining the parcel, or whatever the terminology is, do you limit the competition because it requires a lot more effort on your part?

Yes, 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'd realize how much work it is to complete these deals, and we've taken them on. So again, lots of work, credit to Jim Brat, our Chief Transaction Officer, for being super-organized and having the knowledge to do this. A lot of work upfront, I think a lot of value over time.

And last one. Are the cap rates on those transactions similar to the average that you'll report for all acquisitions?

Yes.

Next question comes from Anthony Paolone with JPMorgan.

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, 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. How are they looking at these?

I think they're attracted by the proceeds and the relative valuation of outparcels versus malls, which malls used to have very high values, now they don't. So the outparcel is accretive to the overall valuation.

And again, proceeds to retire debt, to have cash to fund redevelopment. I think in Seritage's case, it's creating cash to pay for very accretive redevelopment activities that they're pursuing.

Okay. And as you're looking at the pipeline outside of the deals that are 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?

I think it's a great question. It wouldn't surprise me if yields come down slightly, but I would also just point out our cost of debt has declined very, very significantly over time, as well. So the relative yields I would expect to stay relatively flat.

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?

Yes. I think there's a handful of different routes there. One is simple, where rents were super, super low, 1%, 2% rent to sales. We increased the rents and gave them proceeds but still kept rents between 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 any 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 that, typically with a lease extension as part of the bargain.

And then just last detail question. The joint venture, is your $20 million commitment, was that all funded already? Or do you put that in as you go?

Just as you go. As you go.

The next question comes from Rob Stevenson with Janney.

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?

Well, I'd start with about 68% being Darden, and then a good chunk then being Brinker. So those 2 gets you approaching 80%. But basically, everyone's paid that the few exceptions are really oneoff. There's not a commonality. One was a brand that had credit issues and closed down an entire region, so a multistate region. So we had a really good building with low rents that we'll be able to re-lease 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, stuff like that. But it's a handful of buildings out of [800].

And then, you guys are basically essentially fully occupied. The assets, or the couple of assets that you have that are not occupied at this moment, how is the re-leasing of those going? Are they more likely at this point to be sales? You still think that -- keep them and re-tenant them? Help us, give us some color there, if you wouldn't mind.

Sure. Well, we have 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 re-leasing it. We have one building that we will definitely re-lease. We're in advanced discussions with one of our existing large tenants to take the building. I think it's situational, but it's literally a building or 2, and we're making good progress in any case.

And then, last one for me. Gerry, when you guys raised the dividend, how close to minimum REIT payout were you before that increase?

Not close. We're very comfortably over the minimum, even without the increase.

The next question comes from John Massocca with Ladenburg Thalmann.

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 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?

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 outparcel strategy, we found another counterparty or additional properties with our current counterparties. Seeing Seritage, as an example, is active in leasing, and we are doing our best to be their go-to as they've leased up properties. So I think we still have quite a ways to go in this. And where I had defined this opportunity in the early days was way too narrow. And as mall companies engage in transactions, M&A, there's some restructuring, those type of things tend to create across the deals.

So we'll continue to focus on it. I think we've really developed a core competency to be able to get these buildings to be in a situation where we can buy them, and we've proven out the strategy. So I think it's something around $300 million that we've either done or have under contract to do, so it's meaningful for the company.

And 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?

Yes. The big one, obviously, for 2021 will be the convenience store transactions driven by M&A. And so we look at everything. We see all the deals. It really comes down to pricing. And we have some competitors, private competitors who will use 80% financing or structured ABS financing. And I think the values that they play out are not realistic for us.

But that's okay. There's plenty for us to work on. And when people need surety of close, that's where we really shine.

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 on a QSR [basis].

That's correct. Yes. And on the investment-grade side more generally.

(Operator Instructions) The next question comes from Peter Hermann with Baird.

There are multiple reports out there that Steak and Shake is hired restructuring advisers, and it 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.

And then, the next one I have is do you guys expect to continue funding acquisitions with the higher percentage of new equity going forward in 2021, as well?

It's a great question. We try to be price-sensitive when we raise equity, and so it really depends on our stock price, which I can't predict. But we had some interest in our stock price in December 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 of our balance sheet.

This concludes our Q&A session. I would like to turn the conference back over to Bill Lenehan for closing remarks.

Thanks, everyone. 2020 was a difficult year. Our team really responded. Thank you to our Board and to our shareholders. If anyone has any questions, please feel free to reach out.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.