Good morning or good afternoon all, and welcome to today's Four Corners Property Trust fourth quarter 2021 financials conference call. My name is Adam, and I'll be your operator today. If you'd like to ask a question during the Q&A portion of today's call, you may do so by pressing star one on your telephone keypad. I will now hand you over to Gerry Morgan to begin. Gerry, please go ahead when you are ready.
Thank you, Adam. During the course of this call, we will make forward-looking statements which are based on beliefs and assumptions made by us. Our actual results will be affected by known and unknown factors, including uncertainty related to the remaining scope, severity, and duration of the COVID-19 pandemic 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, February 17th, 2022 . 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, also available on the website.
With that, I'll turn the call over to Bill.
Good morning. Thank you for joining us to discuss our fourth quarter results. I'm going to make introductory remarks. Patrick Wernig will review some details around acquisitions and the pipeline. Then back to Gerry and Niccole Stewart, our Chief Accounting Officer, to discuss the financial results. In summary, we continue to have industry-leading collections at 99.8% for the quarter, and occupancy improved to 99.9%. Our restaurant and other retail tenants are experiencing top-line performance often above pre-pandemic levels. We also acquired 33 properties in the fourth quarter, characterized by low rents and high-quality tenants. We reported fourth quarter AFFO of $0.41 per share, which represents a 10% increase year- over- year. Full year 2021 AFFO per share was $1.56, or an 8% increase compared to 2020.
One item I do want to point out here is that those AFFO figures included the impact of Kerrow Restaurants, our LongHorn Steakhouse operating business in San Antonio. Kerrow had a weaker 2020 due to the impact of dining restrictions in the early days of the pandemic. The business fully rebounded last year with a strong result of $2 million of positive EBITDA. We're very excited about their results and outlook for 2020, but we understand many investors focus on our core contractual recurring rent revenue. If we remove the impact of Kerrow on our AFFO growth for both 2020 and 2021, and instead just focus on our core real estate operations, AFFO grew by 8.1% in Q4 and 6.3% for the full year as compared to 2020. We thought this nuance was worth highlighting.
Moving on to our tenants' performance. Restaurant operators continue to have strong results in the most recent quarter. Quick service restaurants are operating at approximately 118% of 2019 weekly levels, and casual dining is operating in line with 2019 levels, even with the recent cold weather in much of the country. Our two largest tenants, Darden Restaurants and Brinker International, announced their earnings publicly in the past two months. Those were highlighted by strong sales comps versus last year and pre-pandemic periods. As compared to the same quarter two years ago, average store sales at Olive Garden, LongHorn, and Chili's have increased by 5.2%, 22.3%, and 5% respectively.
Combined, these brands represent approximately 66% of our rental revenue and are just a sample of the positive performance we're seeing among our portfolio's restaurant tenants. We remain highly confident we've aligned our portfolio with best-in-class operators, and the results are continuing to speak for themselves. Turning to investments, which Patrick will detail in a moment, we acquired 33 properties in the quarter for a combined price of $70.5 million, and an initial cash yield of 6.4%. The acquisitions represent strong tenant credit profiles. The group includes three dual tenant properties, and 34 of the 36 leases are with corporate operators. The fourth quarter's investments include 10 new brands, bringing us to a total of 112 brands in the portfolio. In total for 2021, we acquired $257 million across 122 properties.
Taking a step back, to put that $257 million figure of new investments into perspective, it compares to $223 million in 2020 and $199 million in 2019. This represents average growth of 14% in acquisition volume in the last two years and demonstrates how our investment platform and widening segment exposure has allowed us to consistently increase our volumes. With that, I'll turn it over to Patrick for some additional comments on recent acquisitions in the overall investment environment.
Thanks, Bill. I'd like to start by touching on our ongoing efforts in diversification. Darden now makes up 59% of our rental revenue, and restaurant properties overall are 90%, with non-restaurant properties at 10%. We remain anchored to Darden in the restaurant sector, but we're now seeing meaningful portfolio exposure in other areas of service-oriented retail as well. For the year, restaurants accounted for 39% of our new investments, and auto service was 36%. Medical retail was 18%, and the remaining 7% was other service-oriented retail. We've been pleased with the opportunity set we're seeing, and while these categories remain our primary focus for new acquisitions, we'll continue to evaluate investing in adjacent retail categories as well. Our core competency is finding value in strong real estate with quality operators, and this focus will continue regardless of the subsector.
Pricing for assets in 2022 year to date has been consistent with 2021 levels. The rising interest rates and volatility we've seen in public equity markets recently has not yet translated to private market cap rates. Generally, private market cap rates tend to lag the public market by several months. We may see some relief on cap rates later this year if current expectations for rate hikes and a pullback in Fed stimulus hold. In the interim, though, we're just being prudent to select opportunities carefully. We're also planning to take advantage of the seller's market with a few select disposition transactions. We do not anticipate selling more than a handful of properties over the course of the year. As compared to recent years, you may see us be more opportunistic with dispositions as an alternative source of capital.
Turning to our pipeline, we remain active in building a stable of deals for 2022. Despite the pricing headwind, we've still been able to build out the pipeline in the mid-six cap rate area with high-quality tenants and retail real estate. Our pipeline sector mix for restaurants, auto services, and medical is similar to what we did in 2021. One final reminder, historically, Q1 has been our low volume quarter for acquisitions. For example, in Q1 2021 and 2020, we closed $34 million and $36 million respectively. Those ended up being 13% and 16% of our full-year volumes. Now back to Gerry for discussion of our portfolio and financial results.
Thanks, Patrick. A couple of numbers as we typically quote in the quarter. We generated $44.2 million of cash rental income for the fourth quarter after excluding $1.3 million of straight line and other non-cash rental adjustments. As Bill highlighted, we reported 99.8% of collections for the fourth quarter and 99.9% for the year in total. No material changes to our collectibility or credit reserves in the quarter, nor any balance sheet impairments. On a run rate basis, our current annual cash base rent for leases in place as of the end of the year is $175.2 million, and our weighted average 10-year annual cash rent escalator remains at 1.4%.
Cash G&A expense, excluding stock-based compensation for the quarter ending December 31, was $3.3 million, representing 7.5% of cash rental income. Cash G&A for all of 2021 was $13.7 million. For your forecasting purposes, we expect cash G&A for 2022 will be under $15 million, representing approximately 7% growth. The increase is tied principally to compensation expense as we focus on retention of our existing team and additional team members to bolster our investment and operating prowess. We continue to invest into technology and systems that improve the efficiency of the team, as Niccole will expand on. Turning to the portfolio, we estimate the rent coverage to be at 4.4 times for the fourth quarter, which is on par with pre-pandemic levels. I'll add two other statistics to underline the quality of our portfolio.
First, we estimate a 5% rent to sales level for the original Darden portfolio, where rents were set at low levels similar to ground leases. It is common to see restaurants with 8%-10% of rent to sales figures. Secondly, we note that a full 10% of the portfolio now consists of ground leases, where rent levels were set low, tied to the value of the land since the tenant typically constructed the building. Overall, the low rents in our portfolio, as we have reminded you before, should lead to higher lease renewal probability and give FCPT the ability to invest further into properties if needed to support tenant upgrades or re-tenanting.
Turning quickly to the balance sheet, in the quarter we issued $86.1 million of common stock on our ATM program at a weighted average price of $28.36 per share. This equity raise was greater than the acquisition volume in the quarter, which meant we delevered our net debt to EBITDA in the quarter from 5.8 to 5.4x . In December, we entered into agreements to issue $125 million of nine- and 10-year senior unsecured notes, which are scheduled to fund on or before March 17th this quarter. The notes priced at 3.10%, and we feel fortunate for fixing the rate in December, given the recent increased rates and spread environment.
We ended the fourth quarter with $220 million of liquidity, comprised of $6 million of cash and $214 million of availability on a revolver. Our fixed charge coverage for the quarter is 5.2, and as we mentioned earlier, our net debt to EBITDA is 5.4x , which is below our targeted range of 5.5-6. We paid a dividend in the quarter of $0.3325, which was an increase of 4.7% over the previous quarter. With that, turn it over to Niccole for a few comments on accounting matters.
Thank you, Gerry. In our fourth quarter financials, we recognized a one-time $864,000 non-cash tax benefit that arose from the removal of a valuation allowance on net deferred tax assets at the Kerrow Restaurant operating business, now that Kerrow has achieved a three-year cumulative positive taxable income position, among other factors. These tax benefits are largely tax credits, like FICA tip credits and charitable food contributions, that can be used to reduce taxes in the future for Kerrow. In accordance with the Nareit definition of funds from operations, the tax benefit is included in FFO, but we backed it out in the calculation of adjusted funds from operations. We highlight this point in case any investor wants to similarly reflect this non-cash item in their calculation of FFO.
I also wanted to comment that FCPT has been busy in 2021 implementing MRI Software for accounting and financial reporting. As noted in our investor presentation uploaded to the website yesterday, the size of our portfolio has more than doubled since its inception, and the number of tenants has gone from one to over 150. This has also been true in other areas, such as accounts payable, where we have seen a significant increase in volume. In the past two years, we have added two senior accounting team members as well as staff-level accountants to address the increased complexity and size of our portfolio.
With this increase in staffing and through the use of technology and increased process efficiencies, the accounting and finance team is now set up for future growth of the portfolio. Thanks. With that, we'll turn it back over to Adam for Q&A.
Thank you. As a reminder, if you'd like to ask a question today, please press star followed by one on your telephone keypad now. If you're preparing to ask a question, please ensure your headset is fully plugged in and unmuted locally. That's star one to ask a question. Our first question today comes from Anthony Paolone from JP Morgan. Anthony, please go ahead.
Great. Thanks. Good morning. My first question relates to the balance sheet and I would be interested in getting your thoughts on how you think about how much runway you want as a smaller company in terms of capacity. Because if you think about, like, the equity you did in the quarter, you can move the needle pretty quickly on net debt to EBITDA, and you could do an overnight deal and just really reduce leverage quickly. I guess that could also go the other way if we have, you know, equity market volatility and you get cut out of the equity market. Like, what do you think is the right sort of runway on the balance sheet, you know, to be able to continue your deal flow?
It's a terrific question, Anthony. Thank you. I think we try to be opportunistic. You know, heading into the end of the year, we had strong acquisition volumes. We knew we were gonna end the year with a flurry of acquisitions. You know, our stock price was at an elevated level compared to today, and we took advantage of it. You just don't wanna get behind the eight ball as far as your leverage metrics, and we just try to keep the balance sheet in prudent shape. I think the other thing that's in the back of our minds is we're in our minds due for an upgrade in our ratings, so wanting to make sure that we keep those metrics in good shape as well.
Do you think, like
Uh-
'Cause if you didn't do equity and you kept your acquisition pace for the next two, three quarters, it would seemingly, you know, move your leverage up, you know, maybe to six or something like that. Is that something you feel comfortable with or do you you know, again, just given your size, like, it can move in both directions quickly.
For sure. You know, we've stated our leverage target of being 5.5-6x . You know, I don't have an exact figure off the top of my head, but I would say we've been below that 80% of our existence plus. We try to make sure that we have room. We don't think 6x is elevated. If we went there, that would be okay, but we haven't needed to date.
Yeah. I would just remember, you know, we talked about the low rents, the high coverage we have. That also translates into very high interest rate coverage. Our coverage today is over five times. I agree with you, Bill. Five to six is a metric, a target. We've been below that much of the time. There could be short periods of time where we're above it, but the quality of the cash flow that's supporting that interest expense is strong.
I would also just wholeheartedly agree with you, Anthony, that you know, demand for our shares has been you know, strong, and a number of our shareholders have expressed interest in you know, acquiring our shares in an offering. Thus far, the ATM has been a more efficient way, less expensive way for us to tap the equity markets.
Got it. Okay. Just a second question on the idea of reinvesting in the portfolio, which you mentioned and also had talked about in previous calls. Just any sense as to, like, how much of your pipeline are those types of transactions that you're just harvesting from the existing assets?
It's been de minimis to date, but we're always working on the edges to find creative things to do. You know, just yesterday, for example, Patrick showed me an opportunity to buy some adjacent land to one of our Olive Garden properties, you know, doing something helpful to our tenants and economically advantageous for ourselves. You know, we have nearly 1,000 properties, so those opportunities are more apparent today than they were at inception.
Okay, great. Thanks for the time.
Thanks.
Thank you.
The next question comes from Sheila McGrath of Evercore. Sheila, your line is open. Please go ahead.
Hi. Yes, good morning. 2021 was an active acquisition year. Just wondering about the programmatic opportunities like you had with the mall landlords. Are there more opportunities in that vein, or was that just because of a distressed time? Just wondering.
You know, actually it's interesting, Sheila. We have a number of those kinds of transactions in sort of the pipeline today. So you'll hear more about that in next quarter, would be my guess. It's an ongoing process. We really like those properties. You know, liquidity, providing liquidity to folks who are, you know, in the mall space or acquiring shopping centers has been, you know, a good deal for them, a good deal for us. The properties are well suited for our portfolio and have performed well and performed exceptionally well during COVID.
Okay, great. To highlight, I think Gerry mentioned that you're now 10% ground leases. That's an interesting addition to the disclosures.
Okay.
Just curious, are you sourcing those opportunities from the same acquisition pools or do you have to?
Mm-hmm
Search those opportunities elsewhere? If when you aggregate a bunch of ground leases like that, just curious, like if you were to sell a portfolio, what the cap rate would be in your opinion versus where you're buying the ground leases?
Yeah. Sheila, most of those are sourced in the out parcel strategy. I mean, the way I look at it, our Darden leases, you know, they're ground leases, but for the fact they don't say the word ground at the top of the lease, right? They have very low rents, very high coverage, you know, very low rent to sales. As far as the exit cap rate, you know, I'm probably not gonna speculate on that, but you know, we do think we're buying these you know, smartly, and they're very safe. We're very happy. They're hard to do, Sheila. I mean, I'll give Jim Brat, our Chief Transaction Officer, a ton of credit. They're just hard to do.
It's a lot of work to put out $1 million-$2 million, but over the long- term, it'll serve us really well.
The coverages, Bill, on those would be more similar to the Darden coverages. Is that right?
I would suspect it'd be very similar. Just very low rents, very low rent to sales, very high EBITDA coverage, and you know, tenants that are you know, heavily invested 'cause they've built the building.
Okay. Last question on the restaurant. Just curious what you're observing, 'cause everybody talks about the labor challenges, but you turned pretty positive. Just wondering, you know, how your operation is managing the labor challenges.
You know, it's almost unfair. Our Kerrow subsidiary is run by Carol Dilts. She is an exceptional businessperson and does a tremendous job. We are feeling it like everyone else, but she does a tremendous job running that division. We're now up to seven restaurants operating in a very strong manner. Definitely labor, food inflation are very real. Steak as a subcategory of casual dining has been affected more than average, but she is doing an incredible job. You'll note a large tick up in profitability year-over-year.
Okay. Thank you.
The next question comes from Rob Stevenson of Janney. Rob, please go ahead.
Good morning. Bill, more than 60% of your 2021 acquisitions were non-restaurants, and they were at 30-40 basis points higher cap rates. When you look in 2022 and forward, what's the right mix in terms of restaurant acquisitions going forward? What's sort of driving you to restaurant deals at this point? What's the overriding factor that you wanna do more of those today versus higher cap rate acquisitions that diversify the portfolio?
Great question. We have a long history and deep relationships in the restaurant business. We feel like the restaurant acquisitions we're doing are very high quality, and we wanna be there for our tenants as they grow. I think you will see that a number of the acquisitions we made in 2021 in the restaurant space were with existing relationships that we've nurtured over the years. As far as non-restaurant acquisitions, we are glad we made the decision pre-COVID to expand our aperture, specifically to medical retail and auto service, especially auto service that does not involve the combustion engine. We're always looking for other sectors that we find attractive.
We keep detailed lists and review them quarterly with our board to try to have as sensible and wide of an aperture as we can. The cap rates for non-restaurant properties that are slightly higher are in our view fairly deserved. We're taking different sorts of risks and those cap rates are appropriate. We don't feel like we're getting a free lunch there. I would also comment, and I'm trying to keep my comments brief, that the run-of-the-mill medium quality QSR cap rate today is very low, and that cap rates even for casual dining, and I would add even casual dining that did not have a consistent payment record during COVID, is similarly very low.
You will see us sell some properties this year, and we would expect the cap rates to be quite accretive to our trading cap rate.
Okay, 'cause that was my next question. In terms of the acquisitions that you guys talked about sort of teeing up for the year, are those offense or are those defense? It sounds like more, you know, you're taking the low cap rate bid more so than finding, you know, tenants that you don't wanna be in business with going forward. Is that accurate, or is it a mix?
Uh-
What's the overriding characteristic of the dispositions that you're gonna do in 2022?
It's a mix. You know, and in some cases, it's both.
Okay.
It's a very low cap rate.
All right, guys. Thanks
on a property.
Appreciate the time.
Yep, thank you.
As a reminder, if you'd like to ask a question, that's star one on your telephone keypad. Our next question comes from John Massocca from Ladenburg Thalmann. John, please go ahead. Your line is open.
Good morning.
Morning, John.
I do appreciate the new disclosure that was given on kinda cap rates kind of bifurcated amongst the restaurant and non-restaurant. Thinking of maybe both categories as we look out to 2022, I mean, is that cap rate that you kinda were able to achieve on the 2021 acquisitions in both buckets gonna be relatively stable in your mind, you know, going forward, at least in the near- term this year? Or is it? You know, have we seen kind of even further cap rate compression either in restaurants specifically or in both categories?
I think you probably see cap rates go down a little bit, John, but not a ton. You know, some of our competitors, you're seeing a lot of cap rates in the mid fives, and we haven't been interested in doing that. I think cap rates will come down a small amount. You know, for us, every basis points is like twisting our arm, you know, half a turn. That being said, you know, we wanna remain competitive, and it is still quite accretive for us to acquire at the cap rates that we're acquiring assets at. Slightly lower would be.
Okay
My general guess. I mean, I think Pat made a very, very interesting comment in his prepared remarks, which is what will the second half of the year look like? I don't know nor does anyone else. If you look at what's happened with the risk-free rate, one would presume that the second half of the year may have a different cap rate regime than the current.
A question kind of related to what we've been talking about, you know, specifically because you tend to buy more granular assets. I mean, have you seen any change in demand from the 1031 market over the last, say, six to nine months, given some of the lack of changes, let's say, in legislation out there?
Not really. There's been way more in the you know the trade rags than what we've been feeling on the ground.
You mean there's been more pressure from 1031 buyers, or maybe more meant more in the trade rag?
They're just more pressed about regulatory. Yeah, just more press around regulatory change and that really didn't come to be. If anything, if you're looking for a macro trend, what we're hearing is you know, some fatigue among older franchisees and older business operators, given the complexity of the COVID operating environment, and high multiples have led to franchisees who were staring down generational ownership transfer to simply sell. We're seeing some deal flow from that dynamic.
Okay. Very helpful. That's it for me. Thank you.
Thanks.
Thanks, John.
Nothing further in the queue at present, but as a reminder, that's star one on your telephone keypad to ask a question. As we have no further questions, I'll hand back to the management team for any closing remarks.
Well, thank you everyone for attending an astoundingly long 29-minute Four Corners conference call. We won't let that become our practice. We are here for questions if anyone would like follow-up. Thank you for attending.
This concludes today's call. Thank you very much for your attendance. You may now disconnect your line.