Q4 2023 Four Corners Property Trust Inc Earnings Call
Participants
Gerald Morgan; Chief Financial Officer; Four Corners Property Trust Inc
William Lenehan; President, Chief Executive Officer, Director; Four Corners Property Trust Inc
Patrick Wernig; Managing Director of Acquisitions; Four Corners Property Trust Inc
Joshua Zhang; Director of Acquisitions; Four Corners Property Trust Inc
Anthony Paolone; Analyst; JPMorgan
Connor Siversky; Analyst; Wells Fargo
Presentation
Operator
Hello, and welcome to the FCPT fourth-quarter 2023 financial results conference call. My name is Elliott, and I will be coordinating your call today. (Operator Instructions)
I would now like to hand over to Gerry Morgan. The floor is yours. Please go ahead.
Gerald Morgan
Thank you, Elliott. 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 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 potential risks, please refer to our SEC filings which can be found on our website. All of the information presented on this call is current as of today, February 15, 2024. 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.
And with that, I'll turn the call over to Bill.
William Lenehan
Thank you, Jerry, and good morning. Thank you for joining us to discuss our fourth quarter results. I will make introductory remarks, Patrick and Josh will comment further on the acquisition market, and Gerry will conclude the discussion of our financial results and capital position.
We reported fourth quarter FFO of $0.43 per share, which is up $0.02 or 4.9% from Q4 last year. Our existing portfolio is performing exceptionally well with 99.8% rent collections for the quarter and 99.8% occupancy at quarter end. FCPT. had a record acquisitions year with 333 million of capital deployed in 2023. That was up 16% from a full year 2022, which was also a previous record acquisition year. We are benefiting from establishing verticals in medical retail, auto services and other retail, in addition to restaurants are historical core area of focus. These transactions were primarily funded with equity raised in late 2022 and early 23 at an average price of about $27 per share. And with our June debt offering, where we benefited from hedge gains to lock in a 5.4% yield to maturity. After utilizing these funds, we slowed down acquisition activity in the second half of the year to reflect the impact of higher interest rates on equity and debt sources of capital. I would also highlight that an impact of purposely slowed down. Acquisition activities in 2023 was an elevated level of broken deal costs, which increased property expenses by approximately 250,000 versus the 220 22 level. While these impacted 2023 FFO, it was the right decision to terminate transactions. If they were no longer accretive year over year for the restaurant sector as a whole remain positive in the fourth quarter in the 4% range according to Baird Research, although the casual dining sector is seeing small declines off strong levels in the prior year period. Darden was start a standout from that trend, reporting same-store sales growth of 4.1% and 4.9% for Olive Garden and LongHorn, respectively. For the quarters ending November 26th and Chile saw same-store sales rise 5% for the most recent quarter ended December 27th, all three brands saw margins expand as well as commodity and labor inflation easing. Our EBITDA rent coverage in the fourth quarter was 4.9 times for the significant majority of our portfolio reports this figure. This remains amongst the strongest coverage within the net lease industry.
Turning to capital sources, we issued $25.4 million of equity in the fourth quarter at an average price of $25.34. We start the first quarter of 2024 with 234 million of available capacity on our revolving credit facility, very minimal near term debt maturities and highly attractive properties to sell to 1031 buyers. If we choose to access that source of liquidity. As we look ahead, the current capital market environment is making it challenging to deploy capital accretively. I want to restate something I said last quarter in this environment, we remain disciplined allocators of capital. Since our inception in 2015, we have established mental models and structure team incentives to discover to discourage deploying capital just to grow the Company's overall size without also increasing per-share metrics of earnings or intrinsic value. Our investment team does not work on commissions and their goal is not tied to acquisition volumes as we have never given acquisition or earnings guidance. Finally, we benefit from low absolute and relative overhead and can be nimble and modulate our investment activities up and down without negatively impacting the organization or employee morale. With all that said, the team is laser focused on building an accretive pipeline while minimizing risk cap rates have widened. And we have found interesting investment opportunities that Pat will elaborate on. We believe that we are prepared to operate successfully in today's environment and expect to ratchet up activity when we believe it is accretive to do so.
With that, I'll turn it over to Patrick to further discuss the investment environment.
Patrick Wernig
Thanks, Bill.
As Bill mentioned, our cost of capital rose in 2023 and while market cap rates did improve the ship was not commensurate with the movement in interest rates. As such, we moderated our acquisitions volume down in Q4 despite the last few months historically being our busiest time of the year. In total, we closed on 12.8 million across six properties for the quarter. We spent years building on our platform and team and our continued progress in outpacing prior year's volume reflects our growing capacity. Additionally, while it's not reflected directly in the numbers, the quality of these properties was also particularly strong in 2023 versus prior years, given the reduced number of active net lease buyers in the market to add STBT. to be very selective, our overall cap rate for the year was 20 bps higher than our previous year's acquisitions despite a large long term investment grade transaction with Darden as the tenant.
We'd also like to note that our average initial lease term for the acquired properties this year was four years longer at 12 years compared to eight years last year. It's worth pointing out that the cap rates for Q4 were higher than our full year figure. And today, we're pricing acquisitions above a 7% cap rate. Most of 2020 three's volume was closed in Q2 and early Q3 of this year and priced two to three months. Prior to that for the year, our acquisitions have been roughly split between restaurant at 39%, medical retail 36% and auto service at 23%. We continue to monitor the market and expect to have more favorable opportunities and more attractive pricing in 2024 compared to 2023. However, we note that the bid-ask spread between buyers and sellers while converging still exists. As mentioned earlier, though, we believe that our team is entirely equipped to transact where it meets our underwriting criteria and is still accretive. The macro backdrop continues to be uncertain. We focused on what we know purchasing accretive and high-quality real estate leased to credit-worthy tenants, operating service base retail businesses.
Josh, I'll turn it over to you to discuss dispositions, re-leasing, and our portfolio.
Joshua Zhang
We sold one Red Lobster property in October of Q4 last year that was underperforming versus Brent average for 3.8 million, representing a small gain. Over the course of the past 14 months, we have sold six of our weakest Red Lobster properties at a weighted average cap rate of 6.5% and have reduced our exposure from 2.9% of annual base rent last year, down to less than 1.7% today. Currently most of our Red Lobsters are master leased and the ones that are not in the master lease are reporting rent coverage in line or better than the rest of our portfolio. We are fortunate that even our weakest performing stores are able to be sold at attractive cap rates and recycled into our investments. Accretively reminds us that even if the capital markets continue to be challenging. Our portfolio has immense value that can be unlocked through selective dispositions.
Turning to leasing, we had five leases expire in Q4 with all five renewing above the current rent levels. This reinforces our confidence that rents are set at attractive levels for the tenants in our portfolio.
Our portfolio today stands at 99.8% occupancy and remains well positioned with only 1.3% and 2.2% of annual base rent maturing in 2024 and 2025, respectively.
And with that, Jerry, I'll turn it back over to you.
Gerald Morgan
Thanks, Josh. For the fourth quarter, our cash rental revenues grew 15.8% on a year-over-year basis, including the benefit of rental increases and the 333 million of acquisitions that were closed in the last 12 months. We reported 57 million of cash rental income for the fourth quarter. After excluding 0.6 million of straight-line and other noncash rental adjustments. And on a run rate basis, our current annual cash base rent for leases in place as of December 31st, is $218.2 million, and our weighted average 5-year annual cash rent escalator remains at 1.4%. As Bill mentioned, we collected 99.8% of base rent in the fourth quarter, and there were no material changes to our collectability or credit reserves nor any balance sheet impairments.
Cash G&A expense, excluding stock-based compensation, was $4.1 million, representing 7.1% of cash rental income for the quarter down and compared to 8% for Q4 2022. For your modeling purposes, we expect cash G&A will be approximately 17 million for 2024. As a reminder, we take a conservative approach to G&A and expense, 100% of costs associated with our internal investment team.
With respect to the balance sheet, at quarter end, we had 259 million of liquidity comprised of 60 million of unrestricted cash, 8 million of 1031 proceeds available to redeploy and $236 million of undrawn revolver capacity.
With respect to overall leverage, our net debt to adjusted EBITDA in the fourth quarter was 5.5 times and our fixed-charge coverage ratio was a healthy 4.4 times. Our only near-term debt maturity is a $50 million private note due in June of 2024. Otherwise, our next debt obligation is 150 million of bank term debt due in November of 2025. While we won't comment on specific timing or strategy. We expect to address this small maturity well prior to its expiration in June. And based on our strong credit profile and recent conversations with multiple banks in our lender group. We expect that the bank market remains open to us at an attractive cost of capital amongst the many options we have available.
When thinking about this maturity. We remain committed to layering and using conservatism in our debt maturity stacking.
And with that, I'll turn it back over to Elliot for investor Q&A.
Question and Answer Session
Operator
(Operator Instructions) Anthony Paolone, JPMorgan.
Anthony Paolone
Yes, thanks.
Good morning.
I'm just wondering if you could talk a bit about just like what what you think is a good deal today, whether it's just a higher yield or what's maybe the lease length or real estate basis, like how you're sizing up the things that you like, I'm versus not doing anything?
William Lenehan
I didn't break the question. I look at net lease more of them, but having selection bias, excluding attributes. So we're now very focused on having truly triple-net leases even in industries where it's not always the case like medical and auto service, it's being focused on having longer lease term higher credit tenants. And we're still getting pricing in north of a seven cap. So on, we've always been quite selective. As Pat mentioned, the more recent environment allows us to be even more shelf. So it really is being able to very quickly ignore properties that we still see every once in a while that are priced very aggressively or have very high rents or have small unproven tenants. I that's the way I would look at it. You're seeing more of investment grade triple-net, new construction, medical retail in our pipeline would be one example.
No.
Anthony Paolone
And you mentioned in the sevens, like is that I think the couple of deals you've done so far this year. I think we're I guess six nine, and you talk to sevens, do you think that's out is good enough versus like where you think your capital costs are right now? Or do you think there should be some more movement upwards or how should we think about that?
William Lenehan
I think the trends seems to be in our direction. Obviously, the recent Fed commentary has sent the market up and down seemingly on a daily basis. But I would say that the cap rates we're seeing good stuff to do in the low sevens and that that kind of works with our current cost of capital, certainly would be a lot more obvious if we had a couple more books on our stockprice.
Anthony Paolone
Okay.
Patrick Wernig
Thank you.
Gerald Morgan
Thanks.
Operator
Connor Siversky, Wells Fargo.
Connor Siversky
Good morning.
Thank you for the time. In the opening remarks you mentioned the elevated level of broken deal costs that impacted acquisition volumes. So I'm just curious maybe if you could extrapolate on that point a little bit. Is that just due to pricing dislocations between SCPT. and the seller? Or are there any other factors to consider in those broken deals?
William Lenehan
Yes, I would just I mean, maybe to get one level more detailed is not that we're walking away from deposits. We haven't been doing that.
Is that when you're working on an LOI. or you have legal costs, perhaps you even gave some third party experts to silicon environmental or to analyze a structural issue with the building. And historically, that's part of our business. If we're going to buy, you know, north of 100 buildings a year there are times when you get down the road with a building and then you find somebody that that would dissuade you from buying it just in this environment, we're making sure that we don't get wed to a property and and make bad long-term decisions to avoid deal costs. So it was notable in 23. It wasn't really notable in years past. I thought it was worth mentioning.
Connor Siversky
Okay, that's good color. Appreciate the context there. And then just quickly on the watch list. I mean, appreciate the work in getting out of some of those Red Lobster assets. Is there is there anything else in the portfolio that you have eyes on right now or maybe in the context of the choppy macro environment? Are you are you considering changing any of the criteria and to put something on a watch list?
William Lenehan
No, I think that's a definitive.
No.
Maybe to add to my comments and Segue this to Anthony's previous question, we were very happy that we didn't do novel net lease in the last handful of years. And what do I mean by novel net lease is $9 million car washes, bowling alleys, things like that, that you could get higher yields and we could certainly be doing those right now with an eight handle on it. But credit is much more tenuous than than what we've been doing. So one of the that important factors is having a consistent model, but that airs on being conservative is when you have choppy macro, your portfolio hangs in there better than than your peers.
Patrick Wernig
Okay.
Gerald Morgan
I'll leave it there.
Connor Siversky
Thank you for the time.
Operator
(Operator Instructions) Alex Fagan, Baird.
Hey, good morning. Thank you for taking my question first one as well. What is the investment pipeline look like?
William Lenehan
How likely will is will we see an even higher percentage of medical and auto service assets as part of that investment total 2024 hard to predict of full year volumes because you'll still be sourcing deals for seven, eight more months before, you know exactly what's going to happen in 24 on. I would imagine that the percentages, absent of chunky portfolio will remain relatively consistent with what we've done in the past. The pipeline is quite decent. I would say that we look at the pipeline in it in the green yellow, orange red color coded way, green being deals that we intend to close in the near term, yellow that we're negotiating otherwise orange being on the radar read being out there in the ether. We don't know whether they're going to happen, but they're certainly not close. I would say we've got a lot of things in the orange pipeline right now that if we had a little bit of better cost of capital and could lean into, we think would have actually pretty sensible ROEs associated with them are unlevered IRRs. However, you want to look at it, it's just funding with the current equity and debt capital markets, make it a little bit harder. So it's really as much a function of the sources of capital as it is what we could deploy and deploy that capital for.
Gerald Morgan
And thanks for the color. And actually on the potential for any big portfolio deals? Are there any ones that are interesting?
Four Corners is currently looking?
William Lenehan
We're always you know, we're always looking at deals of various sizes and you'll see you've seen throughout our history, there's been well, I don't know, a half dozen deals, whether it's the original Chili's portfolio or a patch shutters deal last summer or large outparcel transactions. We're always working on something, but this is a as we mentioned in the remarks, this is a market where buyers and sellers are. It's 30, 40 basis points apart on where they're willing to transact. And so we're seeing more deals where the seller pulls their assets from the market than we have in the past.
Gerald Morgan
Got it. That's it for me. Thank you.
Operator
This concludes our Q&A. I will now hand back to Bill Lenehan for final remarks.
William Lenehan
Thank you, Elliott. Well, I'm pleased to have the call concluded in about the 20-minute mark, as we were able to accomplish in our early days. Hopefully we can get back to that. Thank you, everyone. And if you have questions, please don't hesitate to reach out. Thank you.
Operator
Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.
