FCPT - NYSE

Hello and welcome everyone to the FCPT First Quarter 2025 Financial Results Conference call. My name is Becky, and I'll be your operator today. [Operator Instructions] I'll now hand over to your host, Patrick Wernig, Chief Financial Officer to begin. Please go ahead.

Thank you, Becky. 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, May 1st, 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. With that, I'll turn the call over to Bill.

Good morning. Following our typical cadence, after my introductory remarks, Josh will comment further on the investment market and Patrick will discuss our financial results and capital position. The start of 2025 continued the momentum we had in the second half of 2024. We took advantage of our sustained strong cost to capital and added to the pipeline finding deals that both met our quality standards and with pricing that made sense. This led to a Q1 being the highest acquisition volume for a first quarter in the company's history, which similarly followed our highest Q4 volume. So far this year, we've closed $70 million of acquisitions at a blended 6.7% cap rate. Looking back to when we fully turned the acquisition machine back on in late August, we have closed 269 million of acquisitions over the past eight months. While we do not give acquisition guidance, we are continuing to add toward the pipeline and are seeing opportunities that are consistent with our quality thresholds and within our pricing standards. We note that we have not seen much change in cap rates for recently priced deals. We've continued to build significant liquidity while de-levering to preserve optionality on funding new opportunities as they arise. This includes leaning in on the equity sales via our ATM program, which we have used to raise $475 million in equity since July of last year. Including our unsettled equity forwards, we now have our lowest leverage levels in the last seven years. Simply put well positioned for uncertainty. Shifting to our in-place portfolio. We continue to perform well with high rent collections and occupancy. Our rent coverage in the first quarter was 4.9x for the majority of our portfolio that reports this figure. This remains amongst the strongest coverage within our industry. FCPTs largest tenants are nationally branded restaurant operators, namely Olive Garden, Longhorn, and Chili's. They are leaders for their sectors and generally outperform the industry peers as well as fine dining or local mom and pop brands. Most recently, Brinker reported Chili same store sales grew 31.6% for the quarter ended March ‘25. Similarly, Olive Garden and Longhorn reported same sales growth of just shy of 1% and 2.6% year-over-year for the three months ended February, 2025 respectively. While these brands remain core to our portfolio and strategy as we approach 10 years as a public company, we would also highlight our diversification progress over that period. We've grown from 418 properties at inception to 1,236 leases today. Darden has dropped from 100% our rent roll to now 47% combined across all of their brands. This improvement is despite acquiring 47 Darden properties post spin. Our top five brands make up 55% of our annual base revenue. On sector diversification, 67% of our annual base rent comes from casual dining and 11% from quick service. Outside of restaurants, automotive service is our largest sector at 11% of ABR, followed by medical retail at 9% of ABR. As for portfolio management, we are not yet experiencing any material tenancy issues in the portfolio and no current indicators that inflation or tariff issues will impact our rent payments. Further, while the current tariff environment remains uncertain, we expect restaurants to be one of the least tariff affected sectors. Similarly, our other service-based tenants should fare better than average retail operators given their low exposure to imported goods as part of their operations. While we would expect in a recession that we would see some pullback in our tenant performance, we believe that we are well positioned with cushion on our rent coverage to weather any potential issues. Turning to the materials we published last night. We would like to highlight a few new slides in our investor presentation that point to what we believe is FCPT being a calm port in the storm. Our portfolio was built brick by brick to be resilient, and we’ve paired that with a prudent capital management. We have significant liquidity, no near-term debt maturities, granular low basis properties, high rent collections, and low overhead. FCPT’s portfolio is made up of well capitalized sophisticated operators who we believe will be able to navigate and gain share in this challenging macro environment. We pride ourselves on transparency and best-in-class disclosure. So in addition to our press release regime on new acquisitions, this quarter we decided to further break out our portfolio to the top 35 brands, which make up more than 80% of our ABR. Our goal is for our investors to understand our tenant exposures and have confidence that we’ll stay disciplined on meeting quality expectations for the properties we buy. To that end, you will see in our filings, we have zero or near zero exposure to the problem net lease sectors such as theaters, pharmacy, high rent car washes and big box retail. Over to you, Josh.

Thank you, Bill. During the first quarter, we acquired 23 properties for $57 million at a blended 6.7% cap rate with a weighted average lease term of 17 years. We did not sell any properties in the quarter. While Q1 is typically our slowest quarter, we continue to deliver on the strong investment momentum we achieved in the second half of 2024. As a result, we believe that we stand very well positioned at the end of the first four months in 2025, having both come off a record Q1 to start the year right after a record Q4 last year as we continue to build out the pipeline. We are achieving this without compromising on the quality of our asset selection or the credit standards to meet yield or volume targets. Our disclosure regime is particularly helpful in times like these where investors can read through our frequent press releases to see how our acquisitions and the brands we work with are highly consistent with past years. Our team is being patient and organized, tracking our opportunity sets for both on and off market investments and including robust analytics to help us identify the best opportunities. In other words, we are not chasing deals, but rather selecting the best ones that fit our portfolio even if that means leaning in slightly on cap rate to capture these higher quality deals, all while still protecting accretion. Reflecting back on Q1, 83% of our investment volume was via COE spec as operators continue to seek stable financing solutions in this current market. As such, our weighted average lease term this year was much higher at 17 years. In particular, we have 3 sale leasebacks of note with QSR operators. One, with Burger King Corporate and other with a large multiunit Burger King franchisee and lastly with the Whataburger franchisee. The 2 Burger King deals were both part of M&A transactions, while the Whataburger deal was for their newly built stores. It's worth noting that similar QSR properties typically command very aggressive cap rates in the upper 5% to low 6% cap rate range when sold piecemeal. Individual investors favor the small price points per property and the fungibility of the real estate. However, our team was able to achieve accretive pricing here by offering a portfolio solution and efficient execution for operating partners. All 3 transactions were negotiated off-market and a product of use of relationship cultivation from our investment team. Looking forward, we will continue to target similar opportunities, nationally recognized brands operated by best-in-class operators with appropriate basis. While this quarter ended up having more quick service restaurants, some automotive and no medical retail investments, we remind everyone that our team does not specifically allocate target buckets or quotas across our investment sectors. Rather, we make investments when opportunities meet our underwriting criteria. That being said, we still expect these sectors to be roughly even split between these 3 target categories of ours over the long term. Looking forward, FCPT's opportunity set continues to grow despite a volatile macro environment. We have a steady pipeline build out for Q2 and aims to continue to execute on our strategy with discipline. Patrick, back over to you.

Thanks, Josh. I'll start by talking about capital sourcing and the state of our balance sheet. At FCPT, we are highly focused on efficient capital raising. We raised over $169 million in 2025 to date on top of the $318 million equity in 2024. Today, we have $254 million of unsettled equity forwards. The ability to raise forward ATM quickly and at scale has allowed us to match sources and uses more effectively. Furthermore, the high SOFR rate has allowed for a minimum drag of our forward balance given we receive interest income on the balance of over 4%. With respect to overall leverage, our net debt to adjusted EBITDAre in Q1 continued to move lower to 4.4x inclusive of outstanding net equity forwards as of March 31. This leverage is at a 7-year low and provides capacity for us to continue to execute our business plan even if the current volatility persists or we are unable to raise additional capital for the rest of the year. We've also layered in additional hedges to our floating rate exposure, raising us to over 95% fixed through Q3 2027. Our revolver is fully available at $350 million and we have with extension options, essentially no debt maturities for nearly 2 years. Additionally, our fixed charge coverage ratio is a healthy 4.4x. Altogether, this puts us in a great liquidity position. We have approximately $617 million available for funding acquisitions between cash, unsettled forward equity and undrawn revolver capacity. Assuming no further equity issuance, we have an approximate $565 million of available capital we're reaching 6x net leverage. Now turning to some of our financial highlights for Q1. We reported Q1 AFFO of $0.44 per share, which is up 2.3% from Q1 last year. Q1 cash rental income was $63.2 million, representing growth of 9.1% for the quarter compared to last year. On a run rate basis, current annual cash base rent for leases in place as of quarter end is $243.9 million, and our weighted average 5-year annual cash rent escalator remains 1.4%. Cash G&A expense, excluding stock-based compensation was $4.9 million, representing 7.7% of cash rental income for the quarter compared to 7.9% for the quarter last year. This progress illustrates our continued efforts and efficient growth in the benefits of improving scale. We're still expecting cash G&A will be in the range of $18 million to $18.5 million for 2025. As a reminder, we take a conservative approach and do not capitalize any of the compensation costs related to our investment team. As we're managing our lease maturity profile, our team has made significant progress on 2025 maturities with 88% of those tenants already extending their leases or indicating an intent to do so. As of quarter end expirations represent just 0.5% of ABR in 2026 is 2.3%. Our portfolio occupancy today is 99.4%, and we collected 99.5% of baseline for the first quarter. There are no material changes to our collectibility or credit reserves or any balance sheet impairments. With that, we'll turn it back over to Becky for questions.

[Operator Instructions] Our first question comes from John Kilichowski from Wells Fargo.

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?

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

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.

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. But as the great research you've published recently, we have very low tariff exposure in our portfolio. 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.

Our next question comes from Michael Goldsmith from UBS.

This is Catherine Graves on for Michael. So 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?

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.

Fair enough. And then my second question, 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?

Very much of a specific issue to that franchisee.

Our next question comes from Anthony Paolone from JPMorgan.

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?

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.

Okay. And then just on the pipeline, are there any larger type transactions that you see in the mix? Or is it pretty much all the one by ones?

It's a mix. We're always working on larger transactions. We have a handful in the hopper. I would reflect that we haven't really seen a dynamic where there's portfolio discounts. In fact, in some cases, we found that the larger transactions have more competition. And I think we saw that clearly in a large transaction that one of our peers did last winter. So -- it's a mix, Anthony, but I also wouldn't say that large transactions come at bargain prices by any means.

Our next question comes from Wes Golladay from Baird.

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?

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.

Okay. And then you have been building up the team, developing a lot of new relationships over the last few years. Just curious how much the new deal flow is from these new relationships?

There's some of that, but a lot of it is, frankly, deals that we have been tracking for years and now have an advantaged cost of capital and sellers are more willing to meet us on price because of the overall macro uncertainty. So I don't think it's -- the algorithm isn't something like new acquisition person at 6 months, has 4 relationships and the 12 months of 8. Therefore, you can count on deal flow from that. We have been doing more outreach recently. And as you mentioned, we've expanded our acquisition team. We have the largest acquisition class coming in the summer, 3 folks out of underground and 2 interns, and we're really excited to get them up to speed. I think they'll make a real impact.

Our next question comes from Kyle Katorincek from Janney.

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

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.

And then 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.

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?

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

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.

[Operator Instructions] our next question comes from R.J. Milligan from Raymond James.

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?

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.

Okay. And so Bill, you had given some same-store stats on some of the tenants at the beginning of the call. Obviously, concerns out there that we might head into a recession downturn, obviously, the data has been pretty mixed. But if we were to see a downturn or a recession, how do you think that might change the pipeline whether it be volume, competition or pricing.

We went through COVID and our portfolio performed extremely well, but I wouldn't say there were bargains to be had on any sustained basis during that time. This is a different scenario. I think our portfolio will perform very well. We're essentially 100% occupied. So I can't promise that it would improve because it's about as full as it can be. But I think we'd be in a really good position. Do we then have interesting opportunities to deploy capital in acquisitions -- unclear. To an earlier question, we tend to target sectors that have less targeted tariff exposure. There's been two Wall Street research reports on the net lease industry and tariff exposure. I think we were sort of the most favorable of the industry in both of those. I encourage you to track them down. But will we get this situation where we have really interesting investment opportunities. I can't say for sure. I can say that we have the money for it. We have the people for it. We are focused on it, but we need the market to come to us to find high-quality deals that we can buy at better than historic prices.

Our next question comes from Jason Wayne from Barclays.

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?

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?

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

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.

Our next question comes from James Kammert from Evercore.

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.

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.