Four Corners Property Trust - Q3 2024

Executive Summary

• Steady quarter; revenues and per-share metrics were flat-to-up modestly, while FCPT re-accelerated external growth and fortified liquidity with ~$224M of equity since July, positioning for renewed AFFO growth.
• Q3 revenue rose 3.0% YoY to $66.8M with rental revenue up 3.6% YoY; diluted EPS was $0.27 (flat YoY), FFO/share $0.41 (flat YoY), and AFFO/share $0.43 (+$0.01 YoY).
• Balance sheet and funding optionality improved: net debt/Adj. EBITDAre at 5.3x (4.9x including forward equity), $382M–$393M of liquidity, and no revolver drawn; management turned the “acquisition machine back on” at ~7.2% cap rates.
• Tenants and portfolio quality remained resilient: 99.8% rent collection, 99.6% occupancy, and ~5x rent coverage across the reporting portfolio; Red Lobster emerged from bankruptcy with all 18 FCPT stores affirmed and paying.
• Estimates: S&P Global consensus (EPS/FFO/AFFO/Revenue) was unavailable at the time of analysis; we therefore cannot assess beats/misses for Q3 (consensus estimates unavailable via S&P Global at analysis time).

What Went Well and What Went Wrong

• What Went Well

  • External growth restarted with disciplined, accretive acquisitions: 21 properties for $70.7M at a 7.2% initial cash yield; management emphasized turning acquisitions “back on” as cost of capital improved.
  • Strong operating resilience: 99.8% cash collections, 99.6% occupancy, very limited near-term lease maturities, and continued high rent coverage (~5x for reporting portion).
  • Balance sheet flexibility: ~$224M equity raised since July, ~$393M liquidity (including October issuance), leverage fell to 5.3x (4.9x including forwards), enabling accretive funding of the pipeline.

• What Went Wrong

  • Per-share metrics were broadly flat: FFO/share and EPS held flat YoY, with AFFO/share up only $0.01 YoY, reflecting higher shares outstanding and interest expense headwinds.
  • G&A in Q3 increased modestly YoY ($5.8M vs. $5.5M) with higher stock-based comp; cash G&A 6.9% of cash rental income (improved sequentially but still a watch item as scale grows).
  • Estimates comparison unavailable: inability to benchmark Q3 against S&P Global consensus reduces the near-term “beat/miss” trading signal (consensus unavailable via S&P Global at analysis time).

Transcript

Operator (participant)

Good morning, all, and thank you for joining us for the FCPT Third Quarter 2024 Financial Results Conference Call. My name is Carley, and I'll be coordinating your call today. If you'd like to register a question during the call, you can do so by pressing star followed by one on your telephone keypad, and to remove yourself from the line of questioning, it will be star followed by two. And I'd like to hand over to your host, Patrick Wernig, to begin. The floor is yours.

Patrick Wernig (CFO)

Thank you, Carley. 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, October 31st, 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. With that, I will turn the call over to Bill.

Bill Lenehan (CEO)

Good morning. Thank you for joining us to discuss our third quarter results. I'll make introductory remarks. Josh will comment further on the investment market, and Patrick will discuss our financial results and capital position. I'd like to start today's call on a theme which we've spent a lot of time internally over the past year: investment discipline. When the net lease industry saw its cost of capital rise in 2023, we paused external growth. We focused on accretion and declined to go out on the risk spectrum to make the math pencil at the cost of diluting our portfolio quality. We were patient. We didn't cut team resources, and we were confident when the market shifted back, we'd be ready to return to growth.

This past quarter saw our cost of capital on both the debt and equity side drop, and so we turned the acquisition machine back on with as much vigor as we turned it off. We raised over $224 million in equity, and today we have $100 million in equity forwards, full capacity on the revolver, and the lowest leverage we've had in nearly five years. We are excited about the outlook for Q4 and next year. Now shifting to our in-place portfolio, we continue to perform very well with high rent collections and occupancy. Our rent coverage in the third quarter was five times for the majority of our portfolio that reports this figure. This remains amongst the strongest coverage in the industry. As a reminder, FCPT's casual dining operators are national brands and sector leaders, and they generally outperform the industry.

For example, Brinker recently reported Chili's Same Store sales growth at plus 14% for the quarter ended in September. Similarly, Olive Garden and LongHorn reported Same Store sales growth of plus 1.6% and plus 4.7% for the full year ended May 2024. In the most recent quarter ended August 2024, those figures moderated slightly to a plus 3.7% increase for LongHorn and a 2.9% decline for Olive Garden. As we look forward towards the rest of the year, we know that Q4 is typically our busiest quarter for acquisitions, and we believe that trend will continue in 2024. It will be a busy quarter. The team is seeing real success in sourcing high-quality deals consistent with our quality thresholds. We do not give guidance on the pipeline or our acquisition volume, but we do expect the coming months to be very active.

So please watch out for press releases as we will be following our typical cadence of announcing each deal the day they close. As for portfolio management, we want to remind investors that our portfolio has near zero exposure to problem subsectors such as theaters, pharmacies, big box retail, gyms, dollar stores, car wash, or general merchandise. So while potential softening in consumer spending may ripple through our retail operators, we believe our portfolio is very well positioned. We'd like to provide a final update on Red Lobster. The company exited bankruptcy in early September. All 18 of our stores were affirmed and remain open without any rent cut or disruption of payment. In fact, most of our stores had rent increases over the past few months, and others continue to pay percentage rent.

On a final note, while we continue to recognize that Darden is a strong foundation to our portfolio, we have reached a new milestone in our diversification efforts. We now have 156 brands in the portfolio, with Darden now making up slightly less than half of our portfolio. With that, I'll turn it over to Josh to further discuss the investment environment.

Joshua Zhang (President)

Thank you, Bill. During the quarter, we acquired 21 properties for $71 million at a 7.2% cap rate, in line with last quarter. The acquisitions this quarter were 100% restaurant, with the majority coming from the Bloomin' Brands transaction and the remainder from one-off acquisitions, a Buffalo Wild Wings and a Taco Bell. For the year, our acquisitions have been pretty evenly split between restaurant, auto service, and medical retail. As we stated before, restaurant, auto service, and medical retail are all sectors that are attractive to us, but the actual opportunities we see may vary from quarter to quarter. We still expect that new acquisitions will be roughly evenly split between these categories over the long term. As mentioned, the largest single transaction this quarter was a $66 million portfolio of 20 Bloomin' Brands restaurants comprised of 10 Outback Steakhouses and 10 Carrabba's Italian Grills.

Bloomin' Brands is a strong public operator with over 1,400 restaurants and $4.5 billion in sales. They are now our third-largest tenant at 3.3%, behind only Darden and Brinker. The acquired properties scored very high on our scorecard are under two long-term master leases and leased to corporate Bloomin' Brands entities. The rent coverage is similar to our original spin portfolio and fits in well with our approach to seeking high-quality net lease. As Bill mentioned, we have turned our acquisition machine back on and have been very active pursuing new opportunities, remaining disciplined on our pricing and quality thresholds for new acquisitions. One point I'd emphasize is that we did not spend the first half of the year when deal volume was muted being idle.

Our team has built an extensive network of internal systems to track opportunities, leverage data and analytics for adaptive underwriting, and process transactions in an efficient and organized manner. These systems have, in turn, augmented our sourcing capabilities. Coupled with our established reputation as an attentive, incredible buyer, we have signed up several deals in just the past month as we continue to take full advantage of our improved cost of capital. Our outlook on future additional opportunities also remains positive. Per The Boulder Group's net lease market report, the supply of single-tenant retail properties actively on the market increased to 3,975 overall in Q3, an 8.1% increase over the prior quarter. As transaction volume is still rebounding across the industry, we expect our opportunity set to continue to grow in the near term.

We are getting traction on very attractive deals that were outside of our price range for the past several years, but now, in this landscape, can be purchased accretively. Overall, our portfolio now stands at 1,176 leases, with restaurants at 79%. Automotive is our largest non-restaurant sector at 10%, followed by medical retail at 8%. We will continue our steady approach to diversifying over time. On the disposition front, we did not sell any properties in Q3 of this year. However, we are still frequently receiving reverse inquiries on our properties and continue to consider strategic dispositions, both as an attractive alternative to issuing new capital and as a part of our active portfolio management strategy. Patrick, I'll turn it back over to you.

Patrick Wernig (CFO)

Thanks, Josh. I'm going to start by going through some of our financial highlights for the quarter. We reported Q3 AFFO per share of $0.43, which is up 2.4% from last year. Q3 cash rental income was $58.7 million, representing growth of 4.8% for the quarter compared to last year. This figure benefited from both in-place rental growth and $145 million of acquisitions in the last 12 months. On a run rate basis, current annual cash-based rent for leases in place at a quarter end is $229 million, and our weighted average five-year annual cash rent escalator remains at 1.4%. Cash G&A expense, excluding stock-based compensation, was $4 million, representing 6.9% of cash rental income for the quarter in comparison to 7.2% for the same period last year. We continue to expect cash G&A will be approximately $17 million for 2024.

As a reminder, we take a conservative approach and do not capitalize any of the compensation costs related to our investment team. Portfolio occupancy today is 99.6%, and we have just 0.1% and 1.6% of annual base rent maturing in 2024 and 2025, respectively. We've already made great progress on 2025 lease extensions. We collected 99.8% of base rent for the third quarter, and there were no material changes to our collectibility or credit reserves, nor were there any balance sheet impairments. Our high occupancy in collections is directly tied to the efforts of our asset management and accounting teams. In particular, our company has dedicated resources so that we can remain in tight communications with our tenants and be proactive on future lease maturities. Now, I'd like to spend a few minutes on cost of capital and state of balance sheet.

We've been pleased to see the sector equity multiples improve significantly, including ours. We've also seen some relief in the all-in rates for new debt issuance. So today, our cost of capital is looking much more attractive than last quarter, which supports our new efforts to build out our acquisitions pipeline. We've been very busy in that area and had great success in raising equity via our at-the-market program this quarter. Since July, we raised over $224 million of equity at a weighted average gross price of $27.38. Today, we have $100 million of equity forwards outstanding at a price of $28.23. This capital, which equates to roughly 8% of our market cap, was raised in just a few months and demonstrates how the ATM is not only efficient from a fee perspective but also increasingly viable for raising significant proceeds.

Regarding our outstanding debt, we have a weighted average maturity of four years. We have a $150 million term loan and our underwritten $250 million revolver, both coming due in November 2025. While we won't comment on specific timing or strategy, we are committed to maintaining a conservative balance sheet and laddering our debt maturity profile. The lending market has seen sentiment improve a great deal versus last year, and we are already in communication with our lenders on those Q4 2025 maturities. We expect to address those in time and well in advance of expiration. With respect to overall leverage, our net debt to adjusted EBITDA in Q3 ticked down to 4.9 times, inclusive of outstanding net equity forwards as of September 30th. This is the lowest our leverage has been since 2019 and compares to 5.7 times at the end of Q2.

Our fixed charge coverage ratio is a healthy 4.4 times. We have $393 million of liquidity comprised of $44 million of cash as of 9/30, our fully underwritten revolver, as well as unsettled equity forwards as of October 30th. With that, we will turn it back over to Carley for investor Q&A.

Operator (participant)

Thank you very much. With that, I'd like to open the lines for Q&A. If you would like to raise a question, please press star followed by one on your telephone keypad, and if you'd like to remove yourself from the line of questioning, it will be star followed by two. Our first question comes from Anthony Paolone of J.P. Morgan. Anthony, your line is now open.

Anthony Paolone (VP and Senior Equity Research Analyst – Real Estate Investment Trusts)

Great. Thanks. Good morning. I guess first question is you talked about just your cost of capital being key to just getting back into the acquisition business in more vigor. But what about just in terms of, are you seeing more things come to market as well, or is this just purely you all engaging more because of your capital costs?

Bill Lenehan (CEO)

I think it's both. We had a number of transactions that we've worked on for quite some time where we just couldn't bridge that last 10-15 basis points of acquisition cap rate that we were able to move into the pipeline in the last couple of months. So we're also seeing more liquidity in the market generally.

Anthony Paolone (VP and Senior Equity Research Analyst – Real Estate Investment Trusts)

Is the pipeline and what sounds like it's going to keep you busy the next few months just typical one-off transactions, or are there some larger portfolios in the mix, or how do we think about that?

Bill Lenehan (CEO)

It's a mix. Yeah, I don't think it's much different than what you've seen over the last number of years. Individual properties, small portfolios, the gamut.

Anthony Paolone (VP and Senior Equity Research Analyst – Real Estate Investment Trusts)

Okay. And then, just last one, just can you talk about, as you think about the restaurant space just broadly, where you're seeing growth or where you're seeing contraction or credit risk, either in concepts or size of tenants or whatnot?

Bill Lenehan (CEO)

I think our strategy of focusing on large public companies, very creditworthy entities, has really paid off. We're seeing some credit issues at the sort of bottom end of the range. Then I would say high level, the brands that have been able to provide value to the consumer because their four-wall economics are very strong have really been successful. Chili's is a great example of that. Darden is a great example of that. Our tenants are large. They have proven four-wall economics, and they haven't had to raise prices as much as overall inflation. They provide great value to the consumer.

Anthony Paolone (VP and Senior Equity Research Analyst – Real Estate Investment Trusts)

Okay. Thank you.

Bill Lenehan (CEO)

Thank you, Anthony.

Operator (participant)

Thank you very much. Our next question comes from John Kilichowski of Wells Fargo. John, your line is now open.

John Kilichowski (VP and Equity Research Analyst)

Thank you. Maybe just, Bill, on a comment you made last quarter, that you had made mention that there was a premium the market was putting on certainty of close given the capital markets uncertainty and kind of people trying to push deals to get done before the election. How much do you see the election continuing to be sort of a catalyst for cap rate volatility? And then maybe does that kind of persist into us waiting to see how the candidate's policies actually impact inflation, therefore rates?

Bill Lenehan (CEO)

There's a lot in that question. I would say we saw a concerted period where we were signing up new deals where they wanted to get under purchase and sale agreement prior to the current period, and we took advantage of that. What happens for the remainder of the year, frankly, remains to be seen. I think that that's too difficult to call. Obviously, the election is a very close race. We watch with interest, but honestly, I'd say we have very little competitive advantage in assessing the probability of different outcomes and then, obviously, very little competitive advantage in assessing the second-order effects.

John Kilichowski (VP and Equity Research Analyst)

Okay. And then maybe just jumping to kind of the consumer. I think last quarter, a lot of the focus was on the lower-end consumer and then some data on QSRs coming in mix. That doesn't seem to be very much in the conversation today. I mean, what has changed on the ground level in terms of consumer behavior that you've noticed?

Bill Lenehan (CEO)

I would say that the brands that we have as tenants are performing well. I think at the very high end of luxury, which we have very little exposure to, the inflation in pricing of consumer goods is finding a consumer that's inelastic, which shouldn't be a surprise as luxury good pricing in many cases has gone up 50% in the last five years. But in the more normal way segment of the economy that we play in, Olive Garden, Chili's, medical retail, car washes, tire stores, that's much more necessity-based. It's part of everyday Americans' everyday life. We're seeing pretty decent stability. I will say that the election seems to be distracting consumers over the last couple of weeks, but I think that that's a temporary effect.

John Kilichowski (VP and Equity Research Analyst)

Thank you.

Operator (participant)

Thank you very much. Our next question comes from Mitch Germain of Citizens JMP. Mitch, your line is now open.

Mitch Germain (Managing Director and Real Estate Research Analyst)

Thank you. Fairly active in the capital raising front through August, obviously funding the Bloomin' Brands deal. I'm just curious, obviously, the capital raising continued since then. What happened to the pipeline over the course of that time? Did you see a real sharp acceleration in deal volumes coming to you?

Bill Lenehan (CEO)

So Mitch, I think the answer is in your question, right? We match fund, and we were opportunistic to raise equity. And at the same time, we found a lot of really interesting acquisitions that were high-scoring that were priced creatively. So we didn't sit on our hands.

Mitch Germain (Managing Director and Real Estate Research Analyst)

Gotcha. You mentioned investing with the large public companies. Does that kind of take some of the franchise deals out of your pipeline at this point?

Bill Lenehan (CEO)

We don't overemphasize public versus franchisee. We focus on whether the tenant has strong credit. So there's some small public companies that we've avoided. There's some very large franchisees that we would welcome in the portfolio. So we really look to what's the underlying credit of the tenant. And we've found in the last few months that not only have we been able to get pricing that works well for us, but we've been able to buy some very high-scoring assets.

Mitch Germain (Managing Director and Real Estate Research Analyst)

Gotcha. And then more liquidity in the acquisition markets, does that equate to more competition as well?

Bill Lenehan (CEO)

It's always competitive, Mitch, unfortunately. But I would say that, as Josh very accurately stated, we stayed really busy in working on deals, cultivating these relationships, being active. And when our cost of capital changed, we changed with it. And a number of the transactions that you'll see close over the next few months were things that we started working on very early in the year. We just couldn't get to agreed-to pricing. And in the September, October timeframe, we were able to.

Mitch Germain (Managing Director and Real Estate Research Analyst)

Thank you. Good quarter.

Bill Lenehan (CEO)

Great. Thanks, Mitch.

Operator (participant)

Thank you very much. As a reminder, if you would like to raise a question, please press star followed by one on your telephone keypad. And to remove yourself from the line of questioning, it is star followed by two. Our next question comes from Wesley Golladay, Baird. Wells, your line is now open.

Wesley Golladay (Senior Research Analyst)

Hey, good morning, everyone. Just looking at a potential debt raise with the long end running a bit. Would you prefer a term loan at the moment over an unsecured note or a private placement?

Bill Lenehan (CEO)

Yeah, I think we are assessing term loans, private notes, public bonds, and overleveraging the balance sheet on a daily basis.

Wesley Golladay (Senior Research Analyst)

And maybe a quick follow-up on that. The capital markets have been volatile, and you've got a good cost of equity now. And so I guess, does the historical volatility, I guess, change your view on maybe just taking advantage of this window right now and just kind of building up for a little bit longer runway?

Bill Lenehan (CEO)

I think you've seen that's sort of what we've done as leverage has gone below five. And we were really active in raising equity when the price of our stock was attractive to do so. So I think we've been definitive in how we've acted and market-dependent.

Wesley Golladay (Senior Research Analyst)

Okay. And then looking at that Bloomin' Brands acquisition, I know you said that it had really strong coverage. How is the quality of the assets? Is it like they're upper quartile or just good performers?

Bill Lenehan (CEO)

They would be in the very tippy top of scores of all the acquisitions we've done today.

Wesley Golladay (Senior Research Analyst)

Fantastic, and one last one. Looking at your top 20 tenants, there was a little bit of a shuffling where WellNow is now going from 10 to 19. Did anything change there?

Bill Lenehan (CEO)

No. The way we define tenant is sort of consumer-facing. What would the consumer view as that tenant? And some of their, I think, eight of their properties in Ohio and Indiana and one in Illinois were rebranded from WellNow to another medical retail tenant. We still have WellNow as the guarantor on those leases. So in many ways, that's almost how you define what a tenant is as anything else, but nothing's changed.

Wesley Golladay (Senior Research Analyst)

Fantastic. Thanks for the time.

Bill Lenehan (CEO)

Yeah, of course. Thank you.

Operator (participant)

Thank you. As a final reminder, if you would like to raise a question, please press star followed by one on your telephone keypad. And to remove yourself from that line of questioning, it will be star followed by two. Our next question comes from Jim Kammert of Evercore ISI. Jim, your line is now open.

Jim Kammert (Managing Director and Equity Research Analyst)

Hi, good morning. Thank you. Bill, you sound obviously more optimistic about acquisitions, and you've got the cost of capital to do it. I'm just curious, in your negotiations, how much do sort of annual escalators come into the negotiation and your ambitions? You said the cap rates, 15 basis point improvement, just enough to get over the line. But curious how much you think about escalators and the overall kind of RRR when you're looking at the transactions? Thank you.

Bill Lenehan (CEO)

You know, Jim, I'm an optimistic guy. I would say that the escalators, both the way it's structured, which is, as a reminder, almost always 1.5% per year, very occasionally 10% every five years, very, very few examples other than those two. And also very often, three to five five-year extensions at the end of the lease. Those terms of net lease have remained very, very consistent. I would say the combination of those two terms exists in well more than 90% of what we look at, maybe 95% plus of what we look at, with oddly the only exception being Walgreens, which we don't buy, which had more tenant-favorable terms of flat rent and sometimes 50 one-year extensions. We've avoided that in its entirety. It's interesting. It's a great question.

It's something that we were wondering whether it would come into the negotiation, and it really hasn't, to be honest.

Jim Kammert (Managing Director and Equity Research Analyst)

Okay. That's very helpful. I just didn't know, again, the incremental leverage, if there was any, particularly with some of the privately sponsored or private tenants. But I understand. Thank you. Yeah. Just one final point. Where we see more landlord-favorable terms, very often it's matched with credit that we don't want to touch.

Right. Right.

Bill Lenehan (CEO)

Thank you very much.

Jim Kammert (Managing Director and Equity Research Analyst)

I'm done. Thank you.

Operator (participant)

Thank you very much. Our next question comes from Sean Horsted of Net Lease Observer. Sean, your line is now open.

Sean Hostert (Founder, Editor and Analyst)

Hey, thanks for taking my call. Bill, you guys have always been very long-term thinking when it comes to investing, both on the capital side, raising money, but also where you deploy it. Curious, as you think about the Darden net lease master leases over time and sort of the 2026, I think it is, or 2027, as those start to roll, are those all-or-nothing renewals? Is there anything you can talk about what's related to those leases and how you think about the performance? Obviously, the company is doing well, but just how that plays out over the next 5 to 10 years now that those leases are starting to enter potentially extension periods. Thanks.

Bill Lenehan (CEO)

So those are individual leases. The lease form, you can find, it's public. It's in our original spin documents. But those are individual leases. They cover six times at this point. Olive Garden's LongHorn's are almost all profitable, robust sales. They do 50% higher AUVs than the average casual dining restaurant. So individual leases subject to multiple five-year extensions. I would anticipate a very, very high renewal rate. But it's not all or nothing, and they're not master leases. They're individual leases.

Michael Corkery (Analyst)

Great. Thank you.

Operator (participant)

Thank you very much. We currently have no further questions. So I'd like to hand back to Bill Lenehan for any closing remarks.

Bill Lenehan (CEO)

Great. Thank you, everybody. And we look forward to talking to investors over the next few weeks at Nareit. And we anticipate, again, a very, very busy end of this year. Thanks, everyone.

Operator (participant)

As we conclude today's call, we'd like to thank everyone for joining us. You may now disconnect your lines.