Four Corners Property Trust, Inc. (FCPT) Q1 2020 Earnings Report, Transcript and Summary

Good day, and welcome to FCPT Announces Earnings for First Quarter 2020 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.I would now like to turn the conference over to Gerry Morgan. Please go ahead.

Thank you, Sarah. 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 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 the call is current as of today, May 7, 2020. In addition, reconciliation to non-GAAP financial measures presented on this call, such as FFO and AFFO can be found on the Company's supplemental report, also available also on our website.And with that, I'll turn the call over to Bill.

Good morning. Thank you for joining us to discuss our first quarter results and ongoing response to COVID-19. First, our best wishes to all of you and your family's health and safety during these uncertain times, and our thanks to all the medical and other service providers, who are working during this time for all of our benefit.I'll begin with a few broad comments about our response to the current environment, before discussing the first quarter results and the second quarter collection results, included in our earnings release.First my sincere thanks and admiration to all the FCPT team, who have continued to perform tirelessly from home over the last two months. A special acknowledgment to our team under Jim Brat and Carol Dilts, within Kerrow LongHorn Group in San Antonio, who have been innovative in achieving to-go business over the past six weeks, approaching 30% of regular levels, with a much reduced team, and this is prior to returning to 25% maximum occupancy in restaurant dining in Texas last week,The last few months have been an unprecedented environment for restaurant operators. But many have shown tenacity in adjusting their operating model. We are starting to see different parts of the country reopen and restaurant traffic will rebound accordingly.Strong operators like Darden and Brinker and others should benefit in the long run from their scale. We believe the strength of our portfolio, which was built on strong locations, well capitalized tenants and benefits from industry-leading rent coverage, will relatively outperform during this time.Now turning to our reported results in the first quarter. Our portfolio performed as expected in the quarter, as we benefited from a full quarter of rent from properties acquired at year-end. We achieved AFFO per share of $0.37, which represents an 8.8 year-over-year increase.During the first quarter, FCPT acquired 23 properties, for a combined purchase price of $36.2 million, at an initial weighted average cash yield of 6.9, prior to our decision in March to extend deadlines on the existing pipeline, in response to COVID-19.Speaking to the quality of the first quarter acquisitions, 19 of the 24 leases are with the brand's corporate operator, and our average basis per property is less than $1.6 million. Further, 14 of the 23 properties are ground leases, were FCPT owns land and the tenant constructed the building, which equates to low rents.With respect to the acquisition environment in general, we have paused our acquisition activities by requesting counterparties to extend deadlines until later in the year. But we believe we will be poised for a great acquisition environment in the near future, as competition for acquisitions will decline, which should improve pricing. We have spent the last four years being disciplined on how we construct and underwrite acquisitions and finance our balance sheet, which will position us well.With regard to second quarter rent collections, rents continue to be received daily for April, and we currently stand at over 89% collected. We are also off to a strong start on May collections, with over 83% collected through May 5, with additional rent payments coming.The team remains engaged in construction rent deferral conversations with tenants. Of course, we will continue to enforce the provisions of the leases in cases where tenants choose not to pay, and we are not discussing rent forgiveness with tenants, nor are lending money to any tenant.We would note that the number of tenants seeking lease modification has decreased in recent weeks. It is also noteworthy, that many of our tenants have raised equity recently. Darden raised $527 million, Brinker announced last night that it raised around $125 million, and BJ's recently raised $70 million, as examples.We are in preliminary discussions with a few of our tenants, to exchange short-term rent performance for concessions, including lease extensions and conversion of five-year bumps into annual rent increases. That approach has been limited in scope, will improve our portfolio and drive long-term value for our shareholders. But it may put the rent collections for May, slightly below April. Regardless, we expect collections to continue to rise in the coming weeks for both periods.Finally, before I turn it over to Gerry to discuss some of the financial results and our liquidity position, a few words on our dividend. I will remind everyone, that we paid or declared first quarter dividend in mid-April. The FCPT Board and I will review the second quarter dividend payment in early June, based on full assessment of the environment. Our dividend payout ratio was approximately 83% in the first quarter, which is a conservative level.Now, Gerry will take you through our financial results. Gerry?

Thanks, Bill. A few quick comments on the first quarter, recognizing it is less of a focus at this point. We generated $35.7 million of cash rental income in the first quarter, after excluding non-cash straight-line rental adjustments. And then on a run rate basis, the current annual cash base rent for leases in place as of March 31 is $142 million.Our weighted average tenure annual cash rent escalator remains at approximately 1.5% and our EBITDAR coverage was 4.7x as measured in the time period prior to the impact of the coronavirus slowdown in forced closures. As Bill mentioned, we've reported $0.37 per share in AFFO, which was a $0.03 increase in quarter or of our quarter results versus the first quarter of 2019.Turning to the balance sheet, two capital offerings to note. First, we entered into agreements on March 31 to issue $125 million of private senior unsecured notes in the second quarter, $75 million of 10-year notes, which funded on April 8, at a fixed interest rate of 3.2% and $50 million of nine-year notes, which are expected to fund on June 9 at a fixed interest rate of 3.15%.These notes were issued at par, and in connection with the offering, we also terminated interest rate swaps at a loss, which will be amortized over the life of the notes and add approximately 67 basis points to the all-in annual interest rate.Second, during the first quarter, FCPT sold approximately 144,000 shares at an average offering price of $30.23 per share, for total net proceeds of approximately $4.3 million after deducting fees and expenses.Turning to our cash and revolver balance, we ended the second quarter with a $178 million revolver balance and over $90 million of cash reserves out of an abundance of caution, given the COVID-19 environment. As disclosed in yesterday's release, we currently stand with a cash reserve of over $150 million, after funding of the first $75 million of the private note. We may utilize some portion of this cash balance to pay down the revolver over the remainder of this quarter, as the environment further stabilizes.Our overall leverage metrics remain quite strong, with a fixed charge coverage of 5.2 in the first quarter, and net debt to adjusted EBITDA of 5.3x at March 31. Our revolver maturity can be extended to November 2022 at our option, which is also the timing of the first term debt maturity of $150 million. We remain committed to maintaining a net debt to leverage target of below 5.5 to 6x.With that, Bill, back to you for closing comments.

Thanks Gerry. In conclusion, we remain very focused on working with our tenants as they reopen, and adjust our business model over the upcoming weeks and months. We've always prided ourselves on transparency in our reporting to shareholders, fact-based investment decision-making and responsiveness in all of our interactions and we will continue to be guided by these principles.With that, we will turn it back over to Sarah for Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Nate Crossett with Berenberg. Please go ahead.

Hey. Good morning, guys.

Good morning, Nate.

Yes. So a question on acquisitions. I know you're on hold at the moment, but how would you kind of characterize the pause deal funnel, if you will? I think last time it was pretty strong. Is there a lot in the queue for when you guys start acquiring again? And then how many of the acquisitions were kind of signed and are now just postponed?

Yes, I think we're in a great place. We have minimal deposits, but the assets are – strong assets that if the world stabilizes, we'd like to buy. A vast majority are under contract with the folks that are willing sellers. So I think it's a prudent thing to pause and see what the world holds. But as our stock has stabilized off sort of panic levels earlier in the year, and we can have better clarity on what's going to happen. I think it won't take much to get us back into acquisition mode.

Yes. But what about the actual just size of the pipeline? Has there been any meaningful changes with all this, or is this – I mean I know everything is on hold, but like in terms of size of the opportunities out there, has that changed?

Not much. I mean, our pipeline is pretty similar to what we've reported in the past. I would simply say that the dynamic for acquisition is more acquirer friendly than it was pre-COVID, just to state the obvious.

Okay. And then just one quick one, on the 17% of rents not yet collected in May, do any of those tenants – are they accessing, any of the Fed programs or PPP, or are they too big for PPP or what are they saying to you?

It's a mixed bag. And I think part of it's just – earnings call is a little bit early in the month. So the collection process is ongoing. But we just wanted to make sure people had the most updated information. But I would say, what we're hearing in recent weeks is, the underlying businesses are reopening, performance is improving across the Board. People have been accessing CARES Act and PPP and we're having discussions, along with collecting rent, sort of every day.

Okay. That's helpful. Thank you.

Yes. Thanks. No problem Nate.

Our next question comes from Collin Mings with Raymond James. Please go ahead.

Thanks, and good morning

Good morning, Collin.

Hey, good morning. First thing I wanted to go back to is just on Nate's question, just in terms of kind of acquisitions. And you touched on your expectations in prepared remarks that you expect pricing will change moving forward. But just more broadly built, longer term, what if anything do you change about your investment strategy? I would assume that inherently creates some dislocation and more opportunities on the restaurant front, but does this actually lead you to maybe accelerate your diversification beyond restaurants moving forward?

I think it's too soon to tell, Colin. I will comment that, a lot of the basic tenants of our acquisition strategy going into this, focusing on national brands that are well capitalized, focusing on low rent properties, being sort of very methodical, has served us really well. So I would think a lot of those tenants will remain the same, coming out of this. I would also comment, we've avoided – Collin, we've avoided many of the property types, like big box retail and quasi strip centers and entertainment-focused net lease, stuff that's more off the run and that served us really well.

Got it. Okay. And then in your comments as well as in the press release, you've outlined, how the company is looking to strike a balance between collecting short-term rent. But then also taking opportunity to explore ways to create long-term value? And again in the prepared remarks, I think you touched on getting maybe some annual rent bumps in exchange for some short-term deferrals, but maybe just can you expand on that thought process a little bit more, and maybe quantify what you've agreed to thus far in terms of short-term deferrals, and kind of what you're getting in exchange for that?

Sure. Well, mostly it's been discussions thus far. We haven't papered much of anything with tenants. But the idea is just to take a long-term shareholder value creation standpoint. Whereas if there is something that we can do for a couple of months that on a long-term basis, was very positive for Four Corners. I think that's what we're here to do.So we're just trying to be flexible, being very communicative with our tenants. We operate six restaurants, so we have a sense of what's going on literally in real time and so we're just trying to be responsive to our tenants, in ways that help them during this short period of dislocation. Taking over the long-term of a 20, 30, 40, 50-year lease, a couple of months is pretty short-term. And trying to do things that when we come out of this, we'll look back and say, well, that really inured to the benefit of Four Corner shareholders. Maybe to be a bit more specific, I mean, the obvious one is having tenants exercise their renewal options early.

Got it. Okay. And then, Bill, going back to the dividend and recognizing there are multiple variables at play and I mean June is still a while away, but maybe just talk a little bit more about how the Board just plans to think about the dividend here, and then, is there a willingness to pay the current distribution, if not fully funded by cash flow in the quarter? If there is a thought that maybe keeping the cash and being able to utilize for acquisitions is better? Just some more thoughts just on the capital allocation front that might be helpful as well?

Sure. I think, Collin, we haven't really even begun those conversations. I think we're simply saying, if you just reflect back of how much more we know now than we knew three weeks ago, right. I don't know the exact number, but our Board meeting is something like five weeks away. We'll know so much more at that time. We have a very strong liquidity position, as Gerry mentioned. We have, I think among the highest collections in the industry.We're in a really good position. So I don't want to speculate what the Board is going to decide, we'll decide in June. The point that we're trying to make is, just think about how much more we will know about how the world looks four or five weeks from now. And so something we're going to discuss, but the company is in great shape.

Okay. I guess maybe asking that a slightly different way, is there the thought that just the dividend is a important part, even if it's not at the same level, dividend is an important part of the kind of the value proposition, if you will for shareholders, as opposed to maybe, even if you have to align that maybe with operating cash flow in the short-term. Is that a fair way to think about it?

Yes. I mean, Collin, dividends are important to REITs. But I'm not going to make further comments.

Fair enough. All right. Thanks Bill. I'll turn it over.

Thanks Collin.

Our next question comes from Rob Stevenson with Janney. Please go ahead.

Good morning, guys. You've talked in the past, Bill about, when Four Corners was formed, that the Darden leases were set at a level where they had some cushion operationally. What sort of ballpark number on a revenue basis relative to pre-COVID that Darden really needs to be at, to comfortably cover your rent?

Going into this, the Darden rents were about 4% to 5% rent to sales that's versus a kind of standard industry level of 8%. So when things reopen, I think we're going to very-very quickly get to a point where our leases are well covered again. Will they be the 5.5x, four wall coverage that they were going into this immediately? No.But if you think about industry standard metrics of 2.5x, our leases would have been 2.5x during the bottom of the 2008, 2009 recession. So I think that will it be immediately that there is the same level of coverage, no. But it won't take that long for them to be very well covered.

Okay. And given that you also operate some assets, how are restaurant tenants viewing the return of restricted in-house dining? Is that person that's now going to come in and eat inside the location, the same as those that were doing takeout from a location?In other words, is the expectation that the in-house dining will cannibalize some of the takeout, and be somewhat limited in terms of the positive impact, especially once you increase expenses for the staffing needed to deal with in-house dining? Or are people viewing that as all additive at this point?

I think it's a fantastic question, and the real answer is no one knows. But it's important to just think for a moment of how dramatic the change in consumer behavior we've seen. We've some casual dining brands have 50% takeout delivery sales that going into this would have been 5%.So what are the factors driving that? One, states like Texas and California allowing – well alcohol sales to go. Two, obviously far less competition from any in-dining experience, and then innovation, and so we've seen brands like Chili's really lead from a technology standpoint at our own restaurants, they've been very innovative, steak as a cuisine type typically doesn't do all that well on delivery.But they've calling Audible. They are selling meal kits, unprepared meal kits. So you can cook at home. Just really great thinking, and I think what's going to be interesting to see is, a year or two from now, that 5% to go and pick up that went to 30%, clearly, it's going to get cannibalized by in-dining.But even if it were to recede by 50% or 70%, it's still multiples of what it was before. And I would also note it's a terrific way to keep key people during this time. It's a terrific way to serve your most loyal customer, and it's quite profitable, certainly as if it's an adjunct to in-dining – in person dining.And so what we've seen in Texas, for example, as they've gone to percent. We had strong business over the weekend. We check on it daily. I think you can anticipate over time, that 25% going to 50% going to 75% going, going back to a full experience that might take some months. But the restaurants didn't operate at 100% capacity previously. I do think it's a long-term positive for branded restaurants, who can combine the technology of ordering, execution and that have relevant cuisine types.

All right. And then you said that in the release that you were 83% on May rents, as of May 5. Where you typically collection wise pre-COVID, five calendar days in the month, I mean is that 83% sort of typical or are you normally at 90% or 95%, given electronic pay, can you give a little perspective where that would be normally?

Yes. We're certainly north of that on a typical basis. But if you think about the COVID update that we provided a couple of weeks ago and how that number has increased, I think 200 basis points or so. Similar sort of thing, that we do have tenants that had withheld April and May rent wanting to have a discussion, as we've had those discussions, folks have sent rent in. So certainly under a normal environment, it's much higher. But we're showing improvement is how I would position it.

All right. And then last one for me. Gerry has anybody follow below the 70% collectability threshold and you've had to move them to cash basis revenue recognition yet? And what are you accruing for 2020 now for bad debt expense?

Yes. The collectability test is done at the end of the quarter. So if you remember back at the end of March, that was really before most of this happen. So we had a minor amount of collectability reserve that we took at the end of March. I think the bigger number for our whole industry and for ourselves will be at the end of the second quarter. So I think the answer is a minor amount at the end of the first quarter and we'll just have to see at the end of the second quarter.

Okay.

Yes, to Bill's point, it was sub 50,000 in terms of reserve for the first quarter, so clearly an immaterial amount. Sorry Rob.

Okay. Thanks guys. Appreciate it.

Our next question comes from Sheila McGrath with Evercore. Please go ahead.

Yes, good morning. On the mall side of things, mall owners are obviously very challenged. I just wondered if you think there is more opportunities when you get to the other side of this kind of pause on acquisitions in that, or do you think you pretty much tapped out that opportunity previously.

It is a terrific question. I think there'll be much more opportunity. The key will be to remain very selective, and I think that's really important to remember. We might buy one out of three properties that we're seeing, that are mall adjacent, and we're also very selective off-mall. But I think it will continue to be an opportunity. What I would say is I think COVID-19 is likely sort of drawing forward, what would have happened in the next five years in malls to happen sort of in 2020.

Okay. And then on the acquisitions in the quarter, could you provide any more detail on those? It was shorter remaining lease term? Were these ground leases or well below market rent or just any additional color?

Yes, let me just get my notes here. The number was, 14 of the 23 were ground leases, an average basis of around of $1.5 million. So quite a bit below replacement cost, and the short lease term is reflected of buying properties from mall owners, and that's not a metric that they manage to.But I'll just point out, this COVID-19 pandemic, provides a really interesting opportunity, if you have low rents to go in and get extensions. And so in the past, where it's been somewhat difficult to get tenants attention to exercise a five-year extension, when they still have five, six years on their lease. We now have a real specific reason to have a conversation, and things we can trade. But I think in the long-term, will really benefit our shareholders.

Great, great and then one last one, Florida and Texas, your two largest states are open. Any idea either what percentage of your portfolio is in states where restaurants aren't open or that reverse – what percent is in states that are currently open?

Right. Well Sheila I would say that I think the vast majority, the vast, vast majority of our properties are open. It's just that they are open in more restricted state. So for QSR, they are open and their revenues generally are flattish to last year because most of their business was through a drive through anyway.And then for Darden, most of them are open, there's just – with limited seating. So it's, state by state. We don't track it that way. Our leases don't contemplate whether the building's operating or not. But as you mentioned, it's great to have our top two states reopening.

Okay. Thank you.

Thanks, Sheila.

Our next question comes from John Massocca with Ladenburg. Please go ahead.

Good morning.

Good morning.

So at the risk maybe parsing your earnings release, like it's a Fed statement, you mentioned that you received short-term rent relief requests most often in the form of rent deferrals. I mean we're in kind of further discussions with basically your entire portfolio, which was the kind of broader language than was in the April COVID update. Can you maybe provide some color on how far along those conversations are? Are they more – some of them more cursory in nature, just any color there would be helpful?

Yes, I mean, John it's almost exactly the same language as we had in our last report. We're talking to our tenants. I don't understand what the expectation would be for us otherwise, that's what we do as landlords. So there is gotcha there.

Okay. I just want to make sure there wasn't like – I mean obviously the obligation of your tenants kind of reach out and ask about potential rent deferral, given the current situation just maybe how far along some of those conversations are, for people that are paying rent in May?

Yes, I mean I would say that we haven't had any material sort of finalized amendments. We're having discussions and trying to figure out what's a mutually beneficial amendment in the release. But we're having a lot of those discussions. There is no different from any other REIT that's responsibly managed.

Understood. And then I guess, in some of those discussions, not necessarily all of them, but just in general and maybe even people who are kind of currently deferring rent, are tenants open to kind of assets for rent swaps, and would that be something you guys are open to?

We're definitely having those conversations.

Okay. That's it from me. Thank you guys very much.

Thanks, John.

Our next question comes from Anthony Paolone with JPMorgan. Please go ahead.

Okay, thank you. So Bill, maybe just following up on that last question, I don't know if it's so much a gotcha, but I guess it's maybe a perception that Darden's 69% of your revenues may be more of a – viewed as a binary kind of situation. So I take your comments basically mean that, this is just a lot more fluid than that and that there is a lot of other things on the table. I mean I guess it's kind of what – kind of thinking about?

Yes, I mean I would say, Darden has roughly $1.5 billion of cash on hand and so they have lots of capability to pay rent, and we're talking to them in all of our other tenants about, what can we do that would be long-term beneficial for Four Corners, but provide them some relief in the short term.But those conversations, depend on the tenant, some are more advanced than others. But all the conversations revolve around deferment, not abatement. All the conversations are short term in nature, because we do view this as being a relatively short-term phenomenon.And I think coming out of this, there will be some really interesting things that we'll be able to point to, where we create value for our shareholders, which is obviously what our job is to do.

And just again, just given the size of Darden in the mix is this something you think will kind of get a sense as to how that plays out, and what you ultimately want to do there in the next few months or do you think that could drag out?

Yes. I would certainly say that, my expectation would be that the environment will feel very different a month from now, as it does feel very different today than a month ago. And frankly, nothing may happen with Darden, nothing may happen with many of our tenants.

Okay. And then just other question I had, with respect to the outparcel deals with the various like mall operators, it sounds like you have your – like you have a lot of control over what you want to do there. Does it give you just the ability to push things out and you have to close or is there any sort of performance requirements that you have or any financial risk there?

Well, we have deposits, but they're pretty minimal. And I think everyone understands, not just Four Corners and mall counterparties. But in real estate in America right now, most transactions are on pause, especially if there isn't a very significant deposit at risk. So we're having discussions with them. They are great assets that we'd like to own. We just want to have a better understanding what the future holds.

Okay, great. Thank you.

[Operator Instructions] Our next question comes from [Michael Clare with Cureton]. Please go ahead.

Hey, thanks for the call. Most of mine have been answered, just curious, are you able to take back any buildings from tenants?

I don't think so. I mean maybe there is one. I don't think so.

Thanks.

Our next question comes from with [indiscernible]. Please go ahead.

Thank you. Good morning, Bill.

Good morning.

I had a quick question. So in terms of collections for May, so you said you all are at 83% and I'm not sure where you all ended up in April, but could you break that that collections number in terms of categories of QSR versus fast casual versus casual dining?

Sure. Well, the prior month, we were at 89%. So I would say, I don't have the exact numbers in front of me, I would say QSR has been a higher percentage because their business hasn't been impacted nearly as much, but that's not universally true. We do have QSR tenants who haven't paid, but I would say that it doesn't really skew as much casual dining, fast casual QSR, as it skews bigger companies versus private equity owned companies.

Interesting, okay. All right, thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Bill Lenehan for any closing remarks.

Great. Thank you, everyone. I appreciate it. We are around if you have questions. Hope all is well.

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