Four Corners Property Trust, Inc. Q1 FY2025 earnings call

• The start of 2025 continued momentum from the second half of 2024, with Q1 being the highest acquisition volume for a first quarter in the company's history. • Closed $70 million of acquisitions in Q1 at a blended 6.7% cap rate, with 269 million in acquisitions closed over the past eight months since late August 2024. • Continued to build significant liquidity while de-levering, using equity sales via ATM program to raise $475 million in equity since July 2024. • In-place portfolio performs well with high rent collections and occupancy; rent coverage in Q1 was 4.9x for most of the portfolio. • Portfolio has diversified from 418 properties at inception to 1,236 leases, with Darden's rent roll dropping from 100% to 47%. • Top five brands make up 55% of annual base revenue. • No material tenancy issues or impacts from inflation/tariffs currently, and well-positioned with rent coverage cushion to weather potential recessions.

FCPT's portfolio has sector diversification with 67% of annual base rent from casual dining, 11% from quick service, 11% from automotive service, and 9% from medical retail. In Q1, the company acquired 23 properties for $57 million at a blended 6.7% cap rate. To date in 2025, $70 million of acquisitions have been closed at a blended 6.7% cap rate, and over the past eight months since late August 2024, 269 million in acquisitions have been closed.

• Continuing to add to the pipeline and seeing opportunities consistent with quality thresholds and pricing standards. • No near-term debt maturities, strong liquidity position with approximately $617 million available for funding acquisitions. • Expect to continue executing strategy with discipline, targeting opportunities that meet underwriting criteria.

• Potential macroeconomic uncertainties that could impact the portfolio. • Franchisee-specific issues, such as the recent bankruptcy of a large Burger King franchisee (specific to that franchisee). • Uncertainty in the tariff environment, though restaurants are expected to be least affected among sectors.

Q: Maybe just on a little bit of slight yield compression in the quarter. Is that due to the fact that there's maybe more competition in your sector for these assets given the insulation from tariffs?

A: Hard to say. I would say the vast majority is related to the high percentage of QSR restaurant acquisitions in the quarter.

Q: And then maybe just on the pipeline more generally. You have a big fourth quarter followed up with a very strong first quarter. What's your governor on growth? And maybe just color around what your pipeline looks like. I'm curious, Patrick, you talked about smart capital raising. I'm curious if that's it or if it's just the amount of deals or if it's the size of your team. I'm curious what keeps you from maybe taking up a step further from here?

A: Sure. And John, maybe just to more completely answer your first question. I think if we were targeting sectors that were very exposed to tariffs, we would have a much higher cap rate, obviously. As far as governors to growth, that's a much longer answer. But I think the kind of acquisitions that we're working on is what largely determines how much we buy in a quarter. So whether it's sale leasebacks, which were prominent in this quarter and are much more efficient. Individual one-off deals, it becomes challenging to have that many balls in the air on $2 million acquisitions, $3 million acquisitions to put up larger volumes. But we really don't look at it that way. We're trying to score assets and buy assets that have sufficient quality and then making sure that we raise the money the right way. And I think we feel particularly proud over the last couple of years that when the environment was sufficient for acquisitions, but our cost of capital wasn't there. We responsibly paused. But then when there was alignment where there was acquisitions to do and our cost of capital was there, we acted with emphasis.

Q: My first just looking at the volume that you achieved in 1Q. So last year, the acquisition sort of ramped up through the year. Can you provide any color on what you’re expecting as far as the cadence for this year, especially starting at such a higher base?

A: Yes. Q4 has historically been a very strong quarter for us. And I’m not sure why, Catherine, to be honest with you. There’s a dynamic where people want to get things done in a fiscal year perhaps. But we have a very good pipeline right now. Deals typically have 60 to 90-day sort of life cycles, 60 would be a minimum. So we really don't have a lot of visibility on the second half of the year. And certainly, with all the macro uncertainty, it's very hard to tell. But we are staffed and capitalized and very focused and organized in executing the rest of the year, but we don't give guidance because really, we want to make sure that we have the best sort of decision making hygiene and making the acquisitions.

Q: You acquired several Burger Kings in this past quarter, and I'm sure you saw there was recently a large franchisee who filed for bankruptcy. Is your sense that this is sort of a franchisee-specific issue? Or has anything changed as far as how you monitor the health of your Burger King tenants?

A: Very much of a specific issue to that franchisee.

Q: I know this may not be completely apples-to-apples because I understand the skew towards QSRs with your cap rates. But we do see some of the other net lease names doing deals in the 7s. And so I was wondering if you can maybe give us some sense as to maybe how you see the difference between going from like, say, high 6s into the low mid-7s and what the give and take might be there?

A: We certainly see things that are for sale that are -- let's not draw too fine a point on it, call it, 7.5 caps and north. And they typically have -- they're either in subsectors that we don't like, like pharmacy or experiential or we haven't historically been involved with or the credit isn't very good or the rents are really high. And so all those factors show up in our scorecard to scores that are insufficient for us to proceed. Now that doesn't mean that there isn't one transaction where you feel like you're getting a great price or another transaction where you see real strategic reasons to lean in by 20 basis points or something like that. But on average, what we have seen is that cap rates that are higher enough from what we're posting to matter involve measurably more risk. And I would say that one of the things that's, I think, very helpful about our reporting regime is you know what we're buying for that cap rate. And what we see some of our peers do is pursue what I would call barbell strategies where they disclose tenants that shareholders are happy that they're buying, but disclose a cap rate that involves a bunch of tenants that they don't talk about. And so I think our straightforward, very transparent strategy should give you comfort that what we're buying is thoughtfully selected and not to hit some metric for our quarterly disclosure.

Q: Can you talk about how you underwrite the smaller franchisees. I think you mentioned you do get a corporate guarantee, but how small are some of these franchisees?

A: Yes. So our small franchisees, I think, would be considered very large for our peers. We don't have a ton of franchisee exposure and the franchisee exposure we have tends to be with franchise times 100 type size franchisees. So we got financials, we do a typical credit underwriting, but franchisee credit is not a big part of our business. And I would say the dynamic where some of our peers will sort of put people into business by buying real estate for them. We're developing real estate for them. And by definition, that's a very, very small sort of individual sized business entity, it's not something we do.

Q: Where is the range of EBITDAre coverage ratios for recent acquisitions? And is there any difference between restaurant and non-restaurant segments there?

A: Yes, we don't disclose on a quarterly basis coverage ratios. Obviously, we have to sign confidentiality agreements to get financials. And so I don't think we're going to be in a position to disclose those on a quarterly basis. I would say on a -- I think the credit metrics are fairly similar across the different industries. Although I would say within medical, it's a little bit harder to define 4-wall because you might have a patient who's visiting our retail outpatient center, for example, but also as part of their care going to the hospital system that it's associated with. So saying that, that 4 wall is x is a little bit more ambiguous. But the credit is very similar on a corporate leverage basis, being in the mid-single digits and 4-wall coverage being typically 3-plus times.

Q: At what point would you guys consider lease too conservative where there's potential opportunity cost in the form of lost rents? And then on the flip side, at what point would you feel uncomfortable underwriting a new lease in terms of coverage? Just trying to get a range in how you guys think about that.

A: Yes. So if I understood your question is, could we take more risk and still be in a safe position. That's the gist of it?

Q: Yes, exactly. And then the upper limit too conservative of the coverage ratio, like at what point is that? Is that 6x, 6.5x?

A: Sure. So Well, I guess that make two reflections. To back test are we being too conservative. We do go back and look at things that we looked at and didn't do. And -- it's very clear to us that the outcomes of the things that we passed on are far less favorable than what we've done, okay? And that's both in taking buildings that to the naked eye, it's a brand -- it's a business that we bought. It's a brand that we bought. But what you can't see is the leases too short or the rents are too high or the tenant has bad financials that very frequently, things that we've looked at and passed on have turned out to be unfortunate outcomes. So that's one. Two, I would observe that rents on that lease are relatively random. And so you may have a Burger King that has $70,000 worth of rent and 1 that has $107,000 worth of rent and one that has $170,000 worth of rent, and they look exactly the same other than the rent number. And -- so the coverage would obviously be way different on the $70,000 worth of rent than the $170,000. And so I think a big part of our job is searching for properties that have great performance but reasonable rents. And so I don't think that there's an upper limit of what we would consider. Now obviously, when that lease matures, which is usually very far into the future, given the extension options, we have some rent upside, and we have experienced some positive outcomes there. The last thing I'd point out, maybe a different answer to your question. Having gone through the financial crisis earlier in my career, the dot-com bust very early in my career; COVID, more recently, there's a dynamic where when there's substantial uncertainty and you have the ability to be on offense. There's enormous advantage to that. And so we go into this current environment with the lowest leverage we've had in a long time. We have more liquidity from undrawn forwards than we've had in a long time, and we have a portfolio that's in fantastic shape. So if the issue is we might be a little bit too conservative, historically, I'll take that in order to be in a position to be aggressive if opportunities knock.

Q: Bill, you talked about running leverage at the lowest level it's been in quite some time, if not ever. I'm just curious, given the fact that your cost of capital is attractive here, how do you think about potentially further delevering or loading up the balance sheet for opportunities that might arise later?

A: Yes. So -- it's a great question. And I think the interesting dynamic is, as Pat mentioned, when SOFR is 4%. And so you pay your dividend in essence on the forward and you receive SOFR and there's some fees involved, but that's the basic building blocks. The cost of having this liquidity is very low. When rates were zero and you're paying a 5% dividend, well, shocks, it gets expensive if you have too much of it forward and you're not using it in a timely manner. So we felt that the opportunity cost of having substantial liquidity was very minimal. And we are opportunistic because of the fee structure of the ATM and just -- so everyone's clear, ATM has been the technology we've used to raise equity almost exclusively for something like the last 7 or 8 years, has a very advantaged fee and discount structure. And so when that capital was available because the opportunity cost of holding that forward position was minimal, we took advantage of it. And I think that puts us in a really good position. When I say it's volatile out there, it's not sort of my opinion. You can look at the VIX and it's a quite volatile environment. But we're -- we love being very liquid when there's stress in the streets.

Q: Rent collections ticked up a bit this quarter, and they're still strong, but I'm just wondering what types of tenants are not paying now and if you're working on anything at those properties to increase the collection numbers further?

A: Yes. It's basically 1 tenant. We have a personal guarantee from that tenant that we're pursuing, and we've made substantial progress releasing the buildings. So it's very, very small -- sort of one-off thing?

Q: And what kind of re-leasing spreads, I mean, you've gotten on trade outs like that historically?

A: Yes, it's just a couple of buildings. I think we'll be in a good spot, but we're not going to comment on ongoing negotiations when it's only a couple of buildings.

Q: Kind of a bigger picture question, Bill. You mentioned you're building acquisition staff and have then you've the balance sheet in a great position. Are you adding other sort of capabilities or data sets to your underwriting I know you've been pleased with like deal path technology, et cetera, to date, but I'm just curious how you're setting up for the next phase of growth. And if that entails any other incremental steps that you're doing to further enhance the underwriting.

A: That's a really good question. I think like every company, we're trying to figure out how AI will make us more efficient. I think we have just more people to work on projects and to explore potential new industries. We've built more substantially more muscle in our asset management group with some really exciting hires there that are getting up to speed. Historically, we didn't need much of that function. But as we have added several hundred buildings, it's become our portfolio is in fantastic shape, but there's more to do. But I'm really excited, as I said, about the new folks that are joining, they'll be able to use the technology that we have, we'll be able to put more emphasis on automating things that can be automated. But there's a lot that we can do with the existing technology that we have. And as you mentioned, deal path is an integral part of running our business. And we've done a number of investor sessions where we take people through our underwriting and deal path if there are those who would like to do that, we'd be more than happy to do it. I think investors have almost universally founded a valuable 45 minutes of their time.