Four Corners Property Trust - Earnings Call - Q2 2025

Transcript

Operator (participant)

Hello everyone and thank you for your patience on today's FCPT second quarter 2025 financial results. During today's call, there will be some prepared remarks followed by a Q&A session. If you would like to register for a question, please press star followed by one on your telephone keypad, and to withdraw your question, it's star followed by two. We will start the call in approximately one minute.

Hello everyone and thank you for joining us on today's FCPT second quarter 2025 financial results. My name is Drew and I'll be the operator on today's call. During the call, we will have some prepared remarks followed by a Q&A session. If you would like to register a question today, please press star followed by one on your telephone keypad, and to withdraw your question, it's star followed by two. It's now my pleasure to hand over to Patrick Wernig to begin. Please go ahead with your ready.

Patrick Wernig (CFO)

Thank you, Drew, 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 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 this call is current as of today, July 30th, 2025. 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. I'll turn the call over to Bill.

Bill Lenehan (CEO)

Good morning. After my remarks, Josh will comment on the investment market and Patrick will discuss financial results and capital position. The first half of 2025 continued the momentum we had in the second half of 2024. We acquired additional properties that fit our high quality standards while keeping our pricing consistent. We were able to fund these deals with our strong cost of capital equity we raised on the ATM via forward issuance over the last year. $84 million in acquisitions in Q2 at a 6.7% blended cap rate. Over the last 12 months we've acquired $344 million of properties, which is among our highest volumes across four consecutive quarters. We have momentum and are reaching these milestones in a uniquely FCPT way.

One, we focused on real estate and creditworthy tenants, never sacrificing quality for volume or spread, and two, we remain committed to modulating acquisitions when our cost of capital weakened and then returned with vigor when we re-entered the green zone. Our ability to fluctuate acquisitions to protect spread without weakening our portfolio quality is, in our view, a strong competitive advantage for FCPT. Our rent coverage in Q2 was five times for the majority of our portfolio that reports this figure. This remains amongst the strongest coverage within the net lease industry. Olive Garden, LongHorn, and Chili's are industry leaders and generally outperform the national peers as well as fine dining or local brands. Most recently, Brinker reported Chili's same store sales grew 3.2% for the quarter ended March 2025.

Olive Garden and LongHorn reported same store sales growth of near 7% for the quarter ended May 2025. While casual dining is 66% of our rents, we also want to highlight the progress we've made on diversification. We've grown from 418 properties across five brands in 2015 at spin to 1,260 leases across 165 brands ten years later. Olive Garden and LongHorn are now 33% and 9% of our rent today versus a combined 94% at spin off. 34% of our portfolio rent is now outside of casual dining, including quick service at 11%, automotive service at 12%, and medical retail at 9%. All of our chosen sectors are focused on essential retail and services, creating what we view as a very defensive portfolio and quite tariff resistant.

While we are still waiting for the tariff impact to completely settle, we expect restaurants and service industry to be less impacted due to their largely domestic supply chains. We would expect a pullback in consumer spending from any recession or high inflation environment, but we feel that we are well positioned with low rents to provide significant cushion. Our portfolio remains in fantastic shape with no exposure to the problem retailers or sectors that have been recently struggling, such as theaters, pharmacy, high ranked car washes, and experiential retail. We aim for best in class disclosure. In addition to our press release of every acquisition, we also now disclose our top 35 brands in the supplemental, which represents 83% of our rents. The net lease industry peer group typically discloses 20%-50% of rents.

While we have not provided information on bad debt expense historically because there hasn't been much to report, going back to 2016, we've had a total of $1.76 million in bad debt excluding recoveries from releasing versus $1.5 billion of rent collected over the same period. I'll repeat those figures: $1.76 million of bad debt versus $1.5 billion in rent collected. That's an average of 12 basis points, or $176,000 per year, including zero in 2025. To put this in context, most of our peers have stated a track record or expectations of 25 to 75 basis points annually. I'd also like to note that in these mirror credit events, our recovery rates for new leases have been very high, with an average above 90% of prior rent and are often above 100% of prior rent when we replace the tenant. Over to you, Josh.

Josh Zhang (CIO)

Thanks Bill. During Q2 we acquired 24 properties for $84 million at a blended 6.7% cap rate with a weighted average lease term of 13 years. For the first half of the year, we have acquired 47 properties for $141 million at a blended 6.7% cap rate. Next, sharing some statistics for the quarter. First, 68% of our total volume was in the automotive sector, including established tenants such as Caliber Collision, Christian Brothers and Express Oil, a brand owned by Mavis, and Tires Plus, a subsidiary of Bridgestone. Second, 1/3 of our investment volume was from sale leasebacks with creditworthy operators looking to grow. Of note, we completed one with Christian Brothers Automotive and another with VIVE Collision. The Christian Brothers opportunity was a repeat relationship from Q4.

Their team now operates over 310 locations across the country and notably has never closed a store due to poor business in their 43-year operating history. VIVE, a Northeast-based collision repair operator, is a new tenant for us, though we've been following their progress for several years. We acquired two locations via sale leaseback and are excited to continue assisting their growth. Overall, this quarter highlighted how automotive service remains one of our core targeted industries. Specifically, the sector is both e-commerce and recession resistant while benefiting from tailwinds, especially as the average age of passenger vehicles in the U.S. is now at a record 14 years. As demand for vehicle service continues to increase, we expect that operators of scale will continue to consolidate the market. Further, automotive service properties require special zoning and use permitting that is not always easily attainable from their respective municipalities.

This creates a stickier tenant base that regularly renews versus relocating. Moving on to dispositions, while we did not have any this quarter, our team continues to field frequent reverse inquiries and offers on our properties. Looking forward, The Boulder Group's most recent report showed flattening cap rates and a flight to credit quality, which could indicate coming pressure on net lease cap rates. However, we are continuing to find attractive opportunities that are both consistent with our quality thresholds and within pricing standards similar to what we have seen earlier in the year. Lastly, and as a reminder, we do not provide acquisitions guidance. We will remain disciplined in our pricing as we continue to seek out deals that meet our dual quality return thresholds. Patrick, back to you.

Patrick Wernig (CFO)

Thanks Josh. I'll start by talking about capital sourcing and the state of our balance sheet. In Q2 we raised $24 million in equity. That is in addition to the $149 million that we raised in Q1. Over the last 12 months we've raised nearly half a billion dollars of equity, which has allowed us significant capacity to match fund our acquisitions. As of yesterday, we have $146 million of unsettled equity forward at a price of $28.30. We've become increasingly comfortable maintaining a forward equity balance as higher SOFR rates largely offset the carrying costs. With respect to overall leverage, our net debt to adjusted EBITDA is 4.5x inclusive of outstanding net equity forwards. As of June 30th, excluding our forward equity balance, our leverage was 5.4x.

This is our fourth consecutive quarter of leverage below our stated guidance of 5.5x-6x and remains near a seven-year low. We still have full capacity under our $350 million revolver and have liquidity to continue executing our business plan this year without further accessing capital markets. We layered in two additional hedges after June 30th, which has further lowered our floating rate interest exposure. We now have 95% of our term debt fixed through November 2027 at 3% versus spot rates today near 4.35%, including our fixed rate private notes. We are 97% hedged including extension options. We have near zero debt maturities for nearly two years and our staggered maturity schedule will ensure we do not face a significant fall at any point thereafter. Additionally, our fixed charge cover ratio is a healthy 4.5x altogether.

This puts us in a great liquidity position with approximately $500 million of available capital for funding acquisitions. As of today, assuming no further equity issuance, we have approximately $470 million of capacity before reaching six times net leverage. Now turning to some of the financial highlights for Q2, we reported AFFO per share of $0.44, which is up 2.8% from Q2 last year. Rental income, cash rental income, was $64.5 million, representing growth of over 11% for the quarter compared to last year. Annualized cash-based rent for leases in place as of quarter end is $249.8 million and our weighted average five-year annual cash rent escalator remains 1.4%. Cash G&A expense excluding stock-based compensation is $4.4 million, representing 6.9% of cash rental income for the quarter, compared to 7.4% for the quarter last year.

This improving operating leverage illustrates our continued efforts at efficient growth and the benefits of our improving scale. We are still expecting G&A will be in the range of $18 million-$18.5 million for 2025, as we're managing our lease maturity profile. We have 41 leases expiring in 2025, and our team has made significant progress with more than 85% of those tenants already extending their lease or indicating intent to do so. 2025 remaining expirations now represent just 0.4% of ABR, and we are beginning work on next year's expiration. For reference, we had 44 leases expire last year with 40 renewing. Two of those non-renewals are already released and the other two are in active negotiations. There were no material changes to our collectability or credit reserves, nor any balance sheet impairments.

Our portfolio occupancy today remains strong at 99.4%, and we collected 99.8% of base rent for Q2. With that, we'll turn it back over to Drew for questions.

Operator (participant)

Thank you. We'll now begin today's Q&A session. If you would like to register a question, please press star followed by one on your telephone keypad. To withdraw your question, it's star followed by two. We'll now take our first question from John Kilichowski from Wells Fargo. Your line is now open. Please go ahead.

John Kilichowski (VP of Equity Research)

Good morning. Thank you, Bill. On previous calls, you've made mention about building out your acquisition team. I'm curious, when you look at the volumes that you've done, is that a product of, you know, we're fully worked, this is the most that we could possibly do. Extending our team would allow us to do more volume or do you think that at this point your team is fully functioning, you don't need to really add scale, and this is just the opportunity set that's available that you're winning?

Bill Lenehan (CEO)

Yeah, it's a terrific question. I mean, I would reflect that we run the company pretty bootstrapped, so we definitely don't have excess capacity in acquisitions or other parts of the company, frankly. Really it's a function of recruiting folks out of college, training them in the business or the way we see the business working.

I would say we are appropriately staffed. We definitely have the capacity to do more acquisitions to the extent that we find more favorable pricing. Really, the thing that sets where our acquisition volume is today is the availability of well priced assets in the marketplace. We're finding things that score high enough. It's just the pricing has not been terribly attractive. It's sufficient, but not terribly attractive.

John Kilichowski (VP of Equity Research)

Understood. I guess if I were doing a sensitivity analysis and cap rates were to move, let's say 10 or 20 bps in your direction, you kept your cost of capital where it is, how much do you think that that would move the opportunity set for you? If you're doing a couple hundred million dollars of investments in a quarter, where do you think that that could move that needle to? I'm just trying to sort of sensitize this.

Bill Lenehan (CEO)

Yeah, I'd first look at the forward that we have, which is already priced at north of $28, where we raise that capital. To take your question, maybe 25 basis points would be substantial, would be, you know, $100 million-$200 million.

John Kilichowski (VP of Equity Research)

Got it.

Bill Lenehan (CEO)

Thank you.

Operator (participant)

Our next question today comes from Michael Goldsmith from UBS. Your line's now open. Please go ahead.

Michael Goldsmith (US REITs Analyst)

Good morning.

Thanks a lot for taking my question. You acquired some Olive Gardens in the quarter, and I know you're also looking to diversify the portfolio. Does this imply that you kind of reached the comfortable level of Darden exposure that you're interested in maintaining going forward?

Bill Lenehan (CEO)

You know, we've consistently diversified the Darden exposure down, but we haven't hesitated to buy Darden-related assets when we found ones that we really liked and the pricing was great. That played out in this quarter. Very often the ones that we're buying are out parcels where the rents are really low. Darden is doing fantastic. It has an equity market cap over $25 billion. Its credit default swaps are in line with the U.S. government's CDS. It's not something that we shy away from doing if we find buildings that we think are well located and the pricing is right.

Michael Goldsmith (US REITs Analyst)

Got it. Thanks for that, Bill. As a follow-up, you've been an active acquirer in the first half of the year. Last year's acquisition activity was pretty back weighted. Recognizing that you don't provide guidance, should we expect a similar acceleration in acquisition activity in the back half of this year?

Bill Lenehan (CEO)

I think it really comes down to cost of capital and what the markets brings us, but we're certainly quite busy. Your observation that Q4 tends to be our largest quarter, I think that has been true over most of our tenure, but it's too soon to see what would close in Q4. Those would be assets that would typically be sourced and underwritten in the August, September, early October timeframe. It's a little too soon to tell. I'll have more detail on that next call.

Michael Goldsmith (US REITs Analyst)

Thanks again.

Good luck in the back half.

Bill Lenehan (CEO)

Thank you.

Operator (participant)

Our next question comes from the line of Anthony Paolone from JPMorgan. Your line is now open. Please proceed.

Anthony Paolone (Executive Director)

Thank you.

You had a lot of transactions skewed to auto services in the quarter.

Was wondering if that was just where the deal flow happened to be, or if that was a bit more intentional than usual?

Bill Lenehan (CEO)

Just where the deal flow happened to be. Precisely.

Anthony Paolone (Executive Director)

Okay. Going back to the earlier. Question in the math around maybe picking up 25 basis points, like, if we kind of just do the math on our side, it seems like where you've raised capital and where your yields have.

It's, I don't know, 50, 75 basis points of blended spread. Should we look at that as if, you know, if you were to do something a little bit closer to a 7, given that you've locked a lot of your financing costs right now or your equity costs.

That would kind of open up the deal volume or just trying to think about how that would work.

Bill Lenehan (CEO)

I was just trying to make a comment that if our historical acquisitions have been in between 6.7 and 7, if you lowered that range by 25 or 50 basis points, there's a lot more to do. We want to make sure that we are accretive when we acquire things and that we feel like we're paying a fair price for the real estate. I think if you look at our history, we haven't. On one hand, when rates were very low, we weren't buying things in the mid fives. When our peers had impaired stock prices, they were acquiring things at mid high sevens, but they were dipping down in quality. The point that we're trying to make is we try to stay very consistent on quality and price.

When the stock market gives us the opportunity to raise equity at favorable pricing, we're not bashful.

Anthony Paolone (Executive Director)

Okay, understood. Thanks, Bill.

Operator (participant)

Our next question today comes from Kyle Katorincek from Janney. Your line's now open. Please go ahead.

Kyle Katorincek (VP of Equity Research)

Hey, good morning, guys.

Shares remaining to be settled under forwards. You have now around $150 million, down from $250 million last quarter.

Is this a reason for the existing pipeline over the next 60 to 90 days, that you're seeing less opportunities in your strike zone, or is it more? function of your stock prices? Currently.

Bill Lenehan (CEO)

It's probably more the latter.

Kyle Katorincek (VP of Equity Research)

All right, thank you.

Operator (participant)

Our next question comes from Alec Feygin from Baird. Your line is now open. Please proceed.

Alec Feygin (Equity Research Associate)

Hi. Thanks for taking our question. First one for me is, is deal flow picking up, and has the competitive landscape been changing at all?

Bill Lenehan (CEO)

I think the deal flow has been quite consistent, and we're always looking at everything from very substantial portfolios down to $1 million buildings. I would say it's been pretty consistent. The pricing's been acceptable for what we're buying, but certainly the pricing isn't, you know, super attractive. We're trying to pick our spots. As mentioned, we have capital that was raised at good prices on our ATM that provides some runway.

Alec Feygin (Equity Research Associate)

All right, between the credit and real estate criteria, what has been the stronger filter and not getting deals done so far in 2025?

Bill Lenehan (CEO)

I don't really think there's been much change in scoring. It's really more to do with pricing. We're certainly finding sufficient volume of things that meet our quality criteria. It's just when you put that next filter on, making sure the pricing is accretive for our shareholders, that becomes a governor on how much you can do.

Alec Feygin (Equity Research Associate)

All right, that's it for me. Thank you.

Bill Lenehan (CEO)

I would also point out that we are operating the business at record levels of acquisition despite not having large portfolios in that mix, which is how in prior years, we had elevated acquisition volume.

Alec Feygin (Equity Research Associate)

Got it.

Operator (participant)

Our next question today comes from Mitch Germain from Citizens Capital. Your line is now open. Please go ahead.

Mitch Germain (Managing Director of Real Estate Research)

Thanks, Bill. Looks like 2027 you start to get the Darden spin assets beginning to roll. Obviously, you're already working on 2026 roll now, so is there an anticipation and maybe start to pull some of that forward here?

Bill Lenehan (CEO)

The extension options are at Darden's option, and they have a notification of a year to tell us what their intentions are. We're in constant dialogue with them. It's a fantastic relationship. We'll see how that works as time plays out. Frankly, they are very, very highly covered, so it's a bit of a different situation than in most net lease. These are properties that are highly productive with rents that are very reasonable.

Mitch Germain (Managing Director of Real Estate Research)

Great. That's super helpful. You may have been asked this in the past. I apologize if you were, but Bahama Breeze obviously facing some store closures. Anything of note?

I think you have 10 properties exposed to that tenant. Is there any sort of proact, anything proactive that you guys are doing on your end there?

Bill Lenehan (CEO)

We had one that was closed, only one property on the closure list. They're paying rent for the next handful of years on that property. It's located at Sawgrass Mills, which is a mall I know really well, was part of an acquisition that I did when I was at Farallon with Simon Property Group. It's one of the best malls in America. I think we've already had tenant interest to take over that property. It's again, you know, on a ring road of one of the best malls in the country. Other than that, we had pruned our Bahama Breeze exposure right after spin and what we're left with are very strong properties with, you know, very reasonable rents. I don't think there's any concern. In fact, there may be some opportunity there.

Mitch Germain (Managing Director of Real Estate Research)

Great. Thank you so much.

Bill Lenehan (CEO)

Thanks, Mitch.

Operator (participant)

As a final reminder, if you would like to ask a question today, it's star followed by one on your telephone keypad, and to withdraw your question, star followed by two. Our next question comes from Jason Waynne from Barclays. Your line is now open. Please go ahead.

Jason Wayne (VP, Equity Research Analyst, and US REITs)

Hi, yes, most of my questions are asked, but I saw your recent acquisition announcement of veterinarian retail property. Pretty small deal, but the cap rate was above kind of recent levels. Can you just walk through your outlook for that industry and what makes you more comfortable with more deals there?

Bill Lenehan (CEO)

Yeah, you know, vet falls underneath our medical retail efforts. The vet industry is changing. It's probably a longer subject than for this call, but you know, we think it's an interesting space. We're a little bit wary of private equity in that industry, but overall, reasonable basis, decent returns, and something you should expect to see us do more of going forward.

Jason Wayne (VP, Equity Research Analyst, and US REITs)

Got it. Thanks.

Operator (participant)

Thank you. We have no further questions in the queue at this time. That does conclude the Q&A portion of today's call. I'll hand back over to Bill Lenehan for some closing comments.

Bill Lenehan (CEO)

Great, thank you, Drew. Just some final thoughts. The portfolio remains resilient. Small and fungible buildings leased to large national operators, which are resilient in uncertain times. We evidenced a strong track record with an ultra low bad debt expense and strong releasing results. We have a 10-year track record of being extra sensitive to our cost of capital by modulating capital raising and investment when necessary. We invest when it's accretive for our shareholders. We believe that FCPT is in a strong position to continue to execute our strategy no matter the near-term market conditions, having over $144 million in unsettled forwards, full revolver capacity, and no near-term debt maturities. Thank you for your time, everyone.

Operator (participant)

That concludes today's call. You may now disconnect your line.