Four Corners Property Trust Inc (FCPT) 2020 Q2 法說會逐字稿

Good day, and welcome to the Four Corners Property Trust Second Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Gerry Morgan, Chief Financial Officer. Please go ahead.

Thank you, Alison. 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 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, July 30, 2020. 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.

And with that, I will turn the call over to Bill.

Thank you, Gerry. Good morning, everyone. Thank you for joining us to discuss our second quarter results, and I hope all of you and your families are staying healthy. We were very pleased with the second quarter results and the strong level of collections we're reporting for that quarter, and as of today, collections are over 99% for July. I'd like to clarify that number for our investors in the plainest terms possible. For all leases in our portfolio, we have already received over 99% of the cash base rent payments for the month of July. Given that we've only agreed to be at approximately $20,000 in rent due in July, and not agreed to any deferrals for the month of July, we believe this is a remarkable achievement for our team and our shareholders, given the ongoing pandemic. This is a testament to both the low rents of the properties in our portfolio and to the strength of our tenants and their tenacity to adjusting their operating models to the current COVID environment.

Let me start with a few additional comments on collections. Our team has worked tirelessly with our tenants to stay abreast of their business operations and to work creatively when applicable on lease modifications. Through this effort, we've collected over 92% of second quarter rent payments. In addition, we have agreed to defer approximately 3% of second quarter rent payments until later this year, and have agreed or expect to shortly agree to abate an incremental 4% of second quarter rents. This leaves only approximately 1% of our rents for Q2 unresolved.

While most retail landlords have observed their tenants requesting relief over this period, FCPT only agreed to a select number of deferral an abatement agreements, in cases where tenants exchanged favorable concessions in lease modifications for those deferments or payments. Importantly, these concessions include lease term extensions, increased financial reporting, guarantor improvement, annual rent bumps, swapping fair market rent adjustments for stable contractual rent, and incremental percentage rent, amongst other terms. Despite the ongoing difficulties in coping with the pandemic, through these difficult negotiations, we have longer contractual lease duration and higher rent growth than we had going into this. I believe we have strengthened our working relationships with many of our tenants.

In essence, the stance, we've taken over the last few months is that FCPT is always willing to listen to and work with our tenants. But we need to make sure that we are capturing value for our shareholders as part of any occasion where we open the lease document. Free rent relief and deferment is not something FCPT has provided to any tenant, and we were careful not to rush in negotiations in the early days of the pandemic when operators where most fearful of the environment. It was very helpful that we've acquired and scored in our investment model all of these properties in the past few years. This proved important in determining where we wanted to focus our efforts in lease modification discussions. Nearly all deferment and abatement was contained within the second quarter, which resulted in our step up for July collections to over 99% of rental payments. We expect the collection trend to continue going forward and that remaining outstanding rent balances for April through June will reach resolution in the very near term. We do note that for a very small number of tenants, we established a minimal credit reserve for the second quarter rents.

Please note that we've included a new slide in our quarterly supplemental entitled COVID-19 rent collections update, which summarizes the rent collection deferral and abatement numbers we've disclosed in tabular form. I think you'll find it very helpful. The reopening of the country and the impact on restaurant traffic will continue to be a fluid situation, and of course is hard to predict. As we've said last quarter, however, we continue to believe that strong operators like Darden, Brinker, Bloomin' Brands, RBI, and others in our portfolio should benefit in the long run from their scale and in the near term from the investment technology, specifically off-premise and to-go capabilities.

It's worth calling out that an environment like this is exactly why FCPT has focused on low-rent properties with strong sales and rent coverage, and on fortified balance sheets. We have served many tenants in the quick service and casual dining sectors returns to sales near 2019 levels by late June. In the case of quick service operators, some even exceeded 2019 sales levels. This is despite one of the most challenging operating periods in restaurant history. And yet, despite these challenges, we believe our portfolio remains very healthy. The coming months will undoubtedly continue to have market volatility, and consumer behavior may shift once again. But we believe in our conservative underwriting we preach here at FCPT distinguishes us in times of turbulence and we'll continue to sort of the portfolio well through the pandemic.

Our Kerrow subsidiary, which I'll remind you is the 6 LongHorn Steakhouses we operate in San Antonio, is very ably manage by Carol Dilts. Because of COVID, the quarterly results were a negative $450,000 versus a positive contribution of our $200,000 in the first quarter. Carol and her team did an extraordinary job, given the circumstances. In addition, Carol provided a real time understanding of what her tenants we're going through and how they're adapting. Kerrow recovered very quickly from the first phase of COVID, and I anticipate them doing well later in this year.

Now, turning to our reported results in the second quarter. We achieved AFFO per share of $0.34, which represents flat year-over-year results. As Gerry will outline in more detail, this included approximately $0.04 per share of dilution from COVID related items. Our AFFO this quarter includes the deferred rents outlined above, which we believe will received by the end of the year, but excludes second quarter rent we expect to be in conjunction with lease modifications.

Turning to acquisitions, we resumed activities in the second half of June, with even greater focus on acquiring only the most stable and creditworthy properties within our pipeline and applying that same stringent filter to any new investments. We acquired 11 properties in the second quarter for a combined purchase price of $32.7 million at an initial weighted average cash yield of 6.3%. In July, we acquired an additional 5 properties for a combined purchase price of $10.3 million with an initial average cash yield of 6.5%. Speaking to the quality of these recent acquisitions, 17 of the 18 leases at these properties or with the brand's corporate operator or guaranteed by the corporate entity, and 11 of the leases are ground leases, where FCPT owns the land and a construct to the building, which typically equates to low rents. While the pricing of these acquisition stayed in line with our historic yield range, we believe the quality of the real estate and tenant credit are strong further improve the quality brand of the overall portfolio. We would expect more of the same in the coming months.

Finally, before I turn it over to Gerry to discuss some of the financial results, one operational update and a recap of where we stand today. On operations, we moved into a new larger office space in our current office building in Mill Valley, and we look forward hosting any of you in the area once (inaudible) resumes. Our team is currently working remotely but remains highly effective. In summary, we have posted rent collections for Q2 that are amongst the strongest in the net lease sector, and we are at a high level of rent collections for July, which we hope and expect to continue going forward. We are once again acquiring properties and are excited to return to growth in building the portfolio.

Now, Gerry will take you through our financial results. Gerry?

Thanks. As Bill mentioned, we want to highlight a couple of points on revenue recognition in the second quarter, AFFO, and also outlined the impact of COVID-19 related variances in our Q2 results. We generated $34.8 million of cash rental income in the first quarter, after excluding $1.9 million of non-cash straight-line rental adjustments and after backing out $1.4 million of rental revenue receivables we expect to abate. Two comments on the accounting this quarter. First, on rent deferrals, AFFO includes $1.1 million of deferred rent, which we are recognizing in Q2 and booking a receivable for. On rent deferrals we have agreed to so far, we expect payment by the end of this year.

Secondly, on the rent abatements, after discussion with our auditors we believe the appropriate GAAP revenue guidance in cases where the Company anticipates abating rent for certain tenants as part of lease amendments that GAAP requires us to recognize the revenue for the abated rent in the current period, despite the expectation of non-payment due to the ongoing lease amendment discussions and agreements. For the second quarter of 2020, this $1.4 million amount is recorded in rental revenue and accounts receivable. The abated rent will then be treated as a lease incentive in Q3 and amortized against rental revenue over the remaining life of the lease, as part of straight-line rent adjustments to arrive at GAAP rental revenue. We deducted the $1.4 million in rent we expect to abate from Q2 in arriving at our AFFO. We did not deduct the to be abated rent from FFO in accordance with the NAREIT definition of FFO. We have provided supplemental disclosure at the bottom of the FFO, AFFO statement in our disclosure so investors are aware of the matter and can make any adjustments you feel warranted. This supplemental disclosure on the FFO statement also shows that we had $1.5 million of uncollected base rent included in revenues as of June 30, in addition to rent that was deferred or expected to be abated. With our announcement of the updated 92% collection result for the second quarter, you can see that much of this receivable has now been collected.

In addition, in performing our quarterly collectability and credit analysis, we recorded a non-material reserve of approximately $100,000 for accounts receivable in the second quarter. On a run rate basis, the current annual cash base rent for leases in place as of June 30, 2020 is $144.1 million. Our weighted average 10-year annual cash rent escalator remains at approximately 1.5%, and virtually all of the rent deferrals and abatements we have agreed to cover second quarter rent. So we believe that $144.1 million is a fair representation of the going forward cash base rent for the portfolio. You will note that we did not disclose our estimate for our tenants' EBITDAR rent coverage for this quarter. This is because much of the financial reporting that we get from tenants still includes time periods prior to the COVID-19 pandemic, and we wanted to be careful not to present a number that may no longer be representative of current tenant operations. It is our expectation that as tenant operations normalize, we will see rent coverage return to our historical levels over time.

The second quarter AFFO per share of $0.34 represents flat year-over-year results and $0.03 per share decline from the first quarter 2020. Results were impacted negatively by $0.04 per share for the following COVID-related variances, which were offset partially by the accretive benefit of first quarter and second quarter acquisitions. Approximately 50% of the impact or $0.02 per share was from the $1.4 million rental abatement in connection with the lease modifications, as we've outlined above. Approximately 25% of the impact, or $0.01 per share, was due to the Kerrow operating loss, given its operations were closed or negatively impacted for much of the quarter. And approximately 25% of the impact or $0.01 per share was due to other COVID-related expenses, including an abandoned deal costs, lease modification costs, the small credit reserve I mentioned, and higher interest expense to fund excess cash reserves that we held in April and May.

Turning to the balance sheet, since our last update, the funding of the final $50 million of nine-year notes of the $125 million private note offering that was announced in March was completed on June 9. Regarding our cash and revolver balance, we ended the second quarter with $4.5 million of a revolver balance and about $5 million of cash reserves, and importantly, $245 million of availability on our revolving line of credit. As a reminder, we paid our full second quarter dividend, which was fully covered by recurring cash flows. Finally, our leverage metrics remain quite strong, with a fixed charge coverage of 4.8 times in the second quarter and net debt to adjusted EBITDAR of 5.6 as of June 30. Our revolver maturity can be extended to November 2020 at our option, which is also the timing of the first $150 million of term debt maturity. We remain committed to maintaining a net debt leverage target below 5.5 times to 6 times.

With that, I'll turn it back over to Bill for closing comments.

Thanks, Gerry. We remain focused on staying nimble in the current environment. We are pleased with the strong rent collection results and have our ear back to the ground on new investment opportunities. We are available to answer any questions on the quarter or the portfolio, so please reach out if you'd like to speak. Finally, a special note of acknowledgment to our colleague, Laura Gatti, who has worked tirelessly this quarter on collection. Laura was born in Colombia, and is the first in our family to integrate to the United States. We are happy to report that she passed through U.S.'s citizenship test yesterday. Way to go, Laura.

Let's turn it back to the operator for Q&A.

(Operator Instructions) Our first question today is from Nate Crossett of Berenberg.

I was wondering if you could kind of just characterize the deal flow today, now that you guys are acquiring again? How would you kind of size the pipeline today versus what it was pre-COVID?

So, I would say the opportunity set -- we haven't seen higher cap rates for the high-quality stuff that we tend to buy. It's has been quite stable. But I would say that it seems like deals are a little easier to come by. Volume remains similar to what it was before, even though we've closed on some assets recently. So, we feel really good, and that we're very well positioned relative to our peers to grow going forward.

Okay. I wanted to get your guys' thoughts on this proposal by Biden to maybe eliminate the 1031 exchange. Would that have any effect on you guys?

I can see how it could be quite positive, as pricing quite often is set for the smaller one-off deals by that market. But we've seen 1031 exchange legislation proposed in the past. So, I don't want to just jump to any judgments. But I guess I would say cautiously optimistic.

And then, just finally on -- how much do you guys have left to close on this Seritage portfolio and some of these other strategic portfolio sales that you guys have done?

I don't think we've disclosed that. But you can back into the math. And essentially, what I would say is some of the properties in those portfolios we've dropped, but in most cases we've replace them with new properties. In fact, in some of the cases, we think that the deal sizes will increase so it's still very substantive.

Okay. Just one quick last one. Do you guys own any Dunkin' Donuts because I saw they're closing 80% of their restaurants today?

I don't believe so. They're typically in line.

Okay.

Our next question today is from Sheila McGrath of Evercore.

Bill, I was wondering if you could give us some insight on how much of the portfolio is open and operating? Do most restaurants still have capacity constraints in place?

I would say to the best of my knowledge, virtually all of its open and operating to some extent. Most are taking diners into the restaurant, those that are operating on curbside. What I would say is we've seen states go from curbside to 25, to 50, to 75, to 100 and then very often back to 75 or 50 in states like Texas and Florida. But generally speaking, almost all the restaurants are open and I think we'll just see it be a fluid situation as time goes on. I would also say that I think a lot of our casual dining restaurants are seeing continued elevated to go sale, which is something I think will be stickier than many had initially predicted. Almost all of the properties are operational.

Okay, great. And then just to clarify, I know you went through a number of lease changes that could be possible, but the abatement part that you mentioned was it most typically that you gave rent abatement if a tenant agreed to a lease extension and if not like what were the other good amendment changes for Four Corners?

Sure. In all the deferment and abatement discussions, I think almost all of them included lease term extensions of between 5 and in some cases 10 years. We added some properties to master leases, we changed renewal terms to be more favorable. In some cases, we changed rent growth that was 10% every 5 years to annual growth, which I think is a little bit more attractive and having consistent income. We had discussions with tenants about purchasing properties off their balance sheet, but as you said, Sheila, the big one is lease extensions. So we were able to negotiate a very significant number of meaningful lease extensions for what we view as quite moderate rent abatement or deferral.

Okay, great. One last one.

Sheila, can I just maybe rephrase that my answer in one way. Another way to think about this is if absent-COVID the tenant had approached us and said, if you are willing to pay this fee now will extend the lease early if that's something that we would have done absent-COVID that's sort of how to think about it. These were exchanges of lease modification for money that we would have done in a normal environment.

Okay, great. One last one. On recent investments, they are many of them shorter lease term. Just what's the appeal there? Do you get better pricing or just want to understand on the lease lengths?

Sure. I think one of the advantages of Four Corners, as it was created we had very quite long lease term so it allows us to layer in some diversity of lease term earlier than the 10-year portfolio average and so as you mentioned, you get better pricing, better credit. We're selecting for properties that have very high level of performance and given that we have very little lease turn in the next several years, it's something that we can do pretty favorably. Of course, during something like the current environment that's the first thing we go to when we open up the lease document is to get more term.

Our next question today is from Rob Stevenson of Janney.

Hi, good morning guys. What percentage of the $144 million of ABR that you talked about earlier is non-restaurant today and then what percentage of that is also ground lease?

A couple of percent is non-restaurant at this point. It's almost entirely restaurant and we don't disclose the ground lease percentage, other than to say a significant number of the out parcel transactions that we're doing are ground lease. But that's not something that we break out.

Okay. And then with acquisition volume returning for you guys, once you use some of the liquidity on the balance sheet today, how are you looking to finance future deals from the equity side with a 24-hour stock price? Are the returns attractive enough that funding via common even if that level makes sense to you? Do you ramp up dispositions to trade in and out issue preferred? How are you guys thinking about equity financing in the current environment?

Certainly making acquisitions with the 24-hour stock price is still accretive. It's not as accretive as it once was but it still is accretive and we are committed to keeping our balance sheet in that 5.5 to 6 times levered place so, not really a huge change, Rob.

Okay. Any plans to sell more assets, especially if the rhetoric on the 10-31 exchanges starts to ramp up even more?

We are always keeping in mind and we have actually in the last couple of months received some really attractive offers to purchase some of our Darden assets. Properties that performed through the pandemic had very strong coverage grade-corporate credit are in high demand. That's something we always consider, but it is interesting over the last couple of months we've had some really attractive inbound interest.

Our next question today is from RJ Milligan of Baird.

Still on the second quarter abatements deferrals, is there a way that you guys can bucket them into -- you came to that form relief due to closings versus a drop. They were open and they just had a drop in revenues versus strong credits that just wanted to extend their term and not pay rent?

I don't think there is a huge theme one way or the other. We just had constructive conversations with the tenants and try to figure out what they were looking for and in turn, what we wanted to get. It was a pre-organic process that happened over a couple of months, but we spent a lot of time on the phone with our tenants trying to figure out ways that we can help them in particularly unusual time but at the same time make sure that our shareholders get a lot for modifying leases. I think we'll be able to evidence more and more that we're getting really attractive terms when we agreed to modify.

Just to clarify one point you made in your opening remarks, no deferrals and only [$20,000] of abatements in July?

Correct. I would really encourage you to check out that new table we put in the supplemental. It really lays it out clearly, the progress we've made.

Okay, thanks. And then the longer term as we move through of this pandemic and the ensuing recession, do you think the cap rates for the types of assets that you guys own typically low rents and a successful track record through this will move lower over time?

I think it's a great question. Too soon to tell, but I have seen offering memorandum for properties that performed really well through this, especially QSR with some cap rates that seem to me to be lower than in the past. That being said, I think our pipeline will carry us through 2020 in really good shape. I do think there'll be some interesting opportunities for those that are well-capitalized. No other industry can move fast. I think there's going to be a lot of change coming over the next year as you've inferred in your question.

Our next question today will come from Nikita Bely of JPMorgan.

Yes, good morning. On the deal pipeline, the acquisition opportunities do you guys look at, how many of those are outside of the more partial agreements that you've talked to us on past?

A number of mall and we're looking at some non-restaurant opportunities as well. So it's a nice diverse group. In addition to some of the mall outparcels that we've announced in the past, we're working on some new ones. Obviously shopping center, strip center, grocery-anchored. All retail landlords are looking for ways to access liquidity and outparcels are a great way to do it. So it's both a mix of non-announced outparcel deals sourced from other and lease owners. It's really diverse and we feel quite good about where we stand.

Is there a way just to look in rough terms to put either a number or in percentage terms the percentage outside of malls?

We don't provide acquisition guidance and a percent obviously would allow you to back into it. So I would simply say I think we're in as good of a place as we've been in our history as far as pipeline and really advantageous things to execute on.

What about the restaurant traffic? Can you just expand a little bit on the traffic trends that you're seeing in the restaurants in your portfolio right now?

I would say that by the end of June, we were back in quite comparable to 2019 QSR at or above 2019 casual dining typically call it down 10 to down 20, maybe if you are more focused on the breakfast daypart, it was a little worse than that. That's been slower to recover so we felt really quite good with additional cases in the last few weeks traffic has slowed but I think we'll see that come back if cases begin to wane again. So I think the notable thing is in the last handful of weeks we haven't had tenants requesting any sort of relief for accommodation, which I think is a quite good sign

Is there a way that you guys know approximately what's the percentage of revenue in the restaurant to make now versus the pre-COVID level, whether it's for Darden or non-Darden, the aggregate level? Do you have a sound system to making $0.90 revenue on the dollar that they used to make before COVID? Is there a way to get a feel for that?

Well, obviously we follow all the public companies, and we're in daily discussions with our tenants on how they're doing. It's very highly dependent on what geography you are in. And then lastly, we operate 6 restaurants in San Antonio so we have that case study literally daily of how they're performing. So we track it feverishly. That being said, our rents and the performance of our leases are not directly tied to traffic or the tenants' revenue. They are contractual and fixed.

(Operator Instructions) Our next question today will come from John Massocca of Ladenburg Thalmann.

To give you a little bit time expanding on some of your earlier comments and apologies if I missed this in the prepared remarks, but could we expect any more these rent for lease modification transactions in the next couple of quarters?

Yes, I would say that we feel it's largely behind us. But it's obviously a fluid situation but as of now, we feel it's largely behind us.

Okay, understood. Then in terms of sourcing the non-restaurant transactions, there were a couple recently. Are those primarily coming from -- how are you sourcing those really? Are those one-off deals, are those maybe deals where you're also looking at restaurant properties from a seller and those are getting put into another portfolio, a basket of transactions you're looking at or are you sourcing this on a one-off basis?

Sure. Most of them have come from the outparcel deals where they were part of a broader portfolio. But we're also looking now at individual properties and small portfolios outside of the outparcel strategy. So it's a mixed bag and we're frankly agnostic as to how the transactions come to us once they're in the portfolio. They're going to perform or not perform on their own, right. But I think we're looking at outparcel transactions, but as we have evidence of the market that we're buying on restaurants, we've seen some C stores, medical uses, things like that.

So are you agnostic and maybe as to whether a transaction is restaurant or non-restaurant or would you favor restaurant properties -- restaurant transaction still?

I think we're looking at the asset level that's too high level to make decisions on. We're looking at the attractiveness of the asset, its location, the creditworthiness where the rents are set, what kind of diversification they provide etcetera.

Okay. Then maybe with regards to leverage, has there been any change in the view on leverage as we come out of a pandemic or maybe even given the ability of rental performance here in the last quarter?

I think we -- 5 years ago chose an appropriate level and I think the pandemic has evidenced that being conservative financially is the right move and it allows you to get through environments like this and then be aggressive when the opportunity set allows.

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Bill Lenehan for any closing remarks.

Great. Thanks, everyone and sorry this call went a couple of minutes longer than typical. We've got a lot to talk about. Gerald and I are here. If you have any questions, please feel free to reach out. We'd love to chat. Thanks so much.

The conference is now concluded. We thank you for attending today's presentation and you may now disconnect your lines.