Hello all, and a warm welcome to the FCPT First Quarter 2022 Financial Results Conference Call. My name is Lydia, and I'll be your operator today. If you'd like to ask a question at the end of the presentation, you may do so by pressing star followed by the number one on your telephone keypad. It's my pleasure to now hand you over to our host, Gerry Morgan. Please go ahead.
Thank you, Lydia. During the course of this call, we will be making 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 the uncertainty related to the remaining scope, severity, and duration of the COVID-19 pandemic that are beyond our control. Our assumptions are not a guarantee of future performance, and some will prove to be incorrect. For a more detailed description of 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, April 27, 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.
Thank you, Gerry. Good morning. Thank you for joining us to discuss our first quarter results. I am going to make introductory remarks. Patrick Wernig will review some details around our acquisitions and the pipeline, and then Gerry will discuss the financial results. In summary, we continue to have industry-leading collections at 99.7% for the quarter, and occupancy remained at 99.9%. Our restaurant and other retail tenants are experiencing top-line performance often above 2019 pre-pandemic levels. We also acquired 18 properties in the first quarter characterized by low rents and high-quality tenants, and we remain highly confident we're aligned our portfolio with best-in-class operators at attractive rent levels. We reported first quarter AFFO of $0.41 per share, which represents an 8% increase year-over-year.
Moving on to our tenants' performance, restaurant operators continued to have strong results in the most recent quarter. Quick service restaurants are operating at approximately 122% of 2019 weekly levels, and casual dining is operating at approximately 103%, according to Baird's most recent weekly restaurant survey reported April 25. As mentioned, we acquired 18 properties in the quarter for a combined price of $42 million and an initial cash yield of 6.7%. The acquisitions represent strong tenant credit profiles. Sixteen of the 18 leases are with corporate operators, and seven are ground leases where FCPT owns the land, and the building would revert to FCPT's ownership if the tenant were to vacate. The first quarter's investments include one new brand, bringing us to a total of 113 brands in the portfolio.
Turning to the balance sheet, we have raised over $186 million of capital year to date to support our investment programs. This includes the closing of a $125 million private note that funded in March, but was thankfully priced last December at a 3.1% coupon. We also agreed to issue $61 million of equity via forward sale agreements, which we expect to settle over the remainder of 2022 to fund acquisitions. In March, Fitch announced an upgrade of FCPT's debt rating to triple B flat with a stable outlook. As Gerry will further describe, we expect this will lead to a reduction in interest expense on our existing term loans and credit facility, as well as future private note and bond pricing.
With that, I'll turn it over to Patrick for some additional comments on recent acquisitions and the overall investment environment.
Thanks, Bill. I'd like to start by discussing the cap rate environment and our acquisition mix for Q1. We've spoken in the past about the ever-tightening cap rates we observed in 2021. Those trends in pricing have persisted so far into 2022 as well to the point where compelling returns on quick service properties with national brands in quality markets are less frequently available to us. There's still a few in our 2022 pipeline. But to us, when cap rates for franchisee quick service operators approach government bond yields, it makes sense to focus our efforts in more accretive sectors until those cap rates normalize. We are, of course, glad to see the private market valuing assets that comprise a significant portion of our portfolio at cap rates in the 4%-low 5% range.
I would just quickly note that QSR and fast casual makes up 10% of FCPT's rent roll. Fortunately, due to the wider set of retail subsectors our platform now pursues, we were able to shift our acquisitions team to closing deals within casual dining, medical retail, and auto service. For the quarter, casual dining accounted for 51% of our new investments, and medical retail was 33%. We closed on one auto service property and a handful of outparcel properties leased to other service-oriented retail. Looking at our pipeline for the rest of the year, we built out a stable of properties with high-quality tenants and well-located real estate. Our yields remain consistent with prior acquisitions.
The pipeline sector mix for restaurants, auto services, and medical retail will likely shift a bit from Q1 as we expect auto service to be a greater contributor for the full year, similar to what we saw in 2021. As previously mentioned, the net lease asset pricing we've observed year to date has been consistent with 2021 levels. That said, our view is rising interest rates should be a factor in how sellers price assets. While we are still waiting for that price relief to occur in net lease, in recent weeks, we have started to see early signs of modest movement in cap rates. We will see in time if that dynamic holds or further improves. Regardless, FCPT has been able to maintain price discipline over the past several years and avoided any real cap rate compression.
As a result, our spreads continue to have some cushion in them. As we further build out the pipeline, we'll remain prudent in selecting new opportunities carefully. On our last call, we mentioned that we would take advantage of disposition opportunities, especially where we can simultaneously improve the portfolio. We closed the sale of a Bob Evans property at a 4.5% cap rate earlier this month. The store's sales volumes underperformed the brand average, and so removing it from our portfolio at such attractive pricing was particularly compelling. We have several other properties that should close this quarter at similar pricing or slightly higher cap rates. We recognize the strong demand for our properties provides us an alternative source of capital and validation of our portfolio quality. One final reminder here. Historically, Q1 has been our lowest volume quarter of the year.
For example, in Q1 2021 and 2020, we closed on $34 million and $36 million of acquisitions respectively. Those ended up being 13% and 16% of our full year volumes. Now turning to Gerry for discussion on our portfolio and financial results.
Thanks, Patrick. I'll first start with a couple of the standard comments I make. We generated $45.8 million of cash rental income in the first quarter, after excluding $1.1 million of straight-line and other non-cash rent adjustments. We reported 99.7% collections for the first quarter, and there were no material changes to our collectibility or credit reserves in the quarter, nor any balance sheet impairments. On a run rate basis, current annual cash base rent for leases in place as of the end of the quarter is $178.2 million, and our weighted average 10-year annual cash rent escalator remains at 1.4%. Cash G&A expense excluding stock-based comp for the quarter was $3.8 million.
Consistent with comments on our last call, we continue to expect that cash G&A will be around $15 million for the year. For the first quarter, we estimated 10-tenant rental coverage to be 4.6 times for the 77% of the tenants who report financial results. This compares to 4.4 times in the fourth quarter and continues to highlight how low FCPT rents are. As Bill mentioned, we have sold approximately $61 million of equity based on the initial weighted average forward price of $27.28 per share through forward sale agreements under our ATM program. We expect to draw these funds later in the year as needed to fund acquisitions.
Similar to last quarter, this equity raise is greater than the acquisition volume in the quarter, which lowers our leverage with respect to that activity and sets us up well to maintain our leverage target range of 5.5-6 times. Net debt to EBITDA on the quarter was 5.7 times, and pro forma for the forward equity, we're at approximately 5.3 times. We ended the first quarter with $308 million of liquidity, comprised of $58 million of cash reserves and full availability on our revolver. Finally, we are pleased by the recent rating upgrade from Fitch from BBB- to BBB.
Fitch highlighted in their announcement that the upgrade was due to the quality and performance of our portfolio, including during the pandemic, strength of our financial position, and our commitment to conservative capitalization policies. Pursuant to our credit facility agreement, as Bill mentioned, if we achieve a second investment grade rating from either Moody's or S&P, we will save at least $1 million per year in interest expense on the term loans by switching to a rating-based pricing grid. We also expect to benefit from lower spending on the revolver and on future private note issuances. Thanks. With that, I'll turn it back over to Lydia for Q&A. Lydia?
Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, it's star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question today comes from Nate Crossett of Berenberg. Your line is open.
Hey, good morning, guys.
Good morning.
Morning. I may have a question for Gerry. Where could you guys raise, I guess, 10-year debt today? I know you kind of talked about the recent credit rating. Is there another credit rating from one of the other agencies imminent? Or what's the process at the other ones?
Yeah. I won't comment on current pricing 'cause it varies greatly. You know, treasury rates are up, spreads are up, so it's probably, you know, it's clearly higher than where we were today. We don't comment on ongoing activity, but you're exactly right. The right next step for us would be to get a second rating from either Moody's or S&P. We've been in contact with both agencies since we came into inception in 2015 and know them well.
Okay, that's helpful. The comments on the pipeline, it kind of sounded like I guess you mentioned how Q1 was light in the last two years, so I'm reading that as we should maybe see a ramp in the next two quarters on deal flow. Is that kind of what you guys are signaling by saying that?
I think I would say, Nate, that that's been what's happened historically. Obviously, this is a more volatile environment than most years. We do feel like there's a reasonable chance that the second half of the year provides us with some pretty interesting opportunities, especially in the event that our equity multiple hangs in where it is right now.
Okay. I think there was the comments on cap rates. I mean, obviously it's different depending on what you're buying. I think it was mentioned that you're seeing some evidence of Cap rates moving in maybe relation to rates. Like, is there any way you can kind of quantify that? Or what do we kind of-
Yeah, I would just.
Need to see that maybe moving?
I would just say that in the last couple weeks.
Right
Literally the last couple weeks, Nate, we've found a few opportunities that I would describe as we have been hanging around the hoop on deals where the seller had gone with a more levered buyer. As that levered buyer's debt repriced, you know, the original buyer dropped out, and we were able to pick up properties on a rebound.
Okay. Okay, that's helpful. Thank you.
Yep. Thanks.
Our next question comes from Anthony Paolone of JP Morgan. Please go ahead.
Yeah, thank you. I'll just follow up on the last comment, because I was gonna ask as well, like, what kind of needs to happen to see cap rates start to adjust here? It sounds like, you know, maybe levered buyers, you know, could be part of this. Can you comment on just how prevalent those are in the market, you know, maybe how sensitive they are and just your own deal pipeline, a little bit more color around the types of things you're seeing?
Yes. So depending on what leverage, LTV you assume, Anthony, if you run the math on a 10-year basis, holding the equity IRR constant, and you look at the change in base rates and spreads from November to today, cap rates need to go out 60, 70 plus basis points for you to hold the equity rate of return constant. We're not seeing anything like that. What I would say is, at some point it becomes math. The buyer needs to get debt. You know, the banks reference widely published reference base rates. As Gerry mentioned, and I will concur, credit spreads are out too. You're just either the equity holder needs to accept a much lower rate of return or the asset level pricing must change. We've begun to see that.
I think we've begun to see it, where folks have larger portfolios and they can't close them imminently, that there's been more conservatism in the pricing. Which would be great to see because as Pat mentioned-
Okay. Thanks. Those details.
Yeah, I was gonna say it would be great to see since, as Pat mentioned, it's been very competitive over the last kind of couple years post-COVID.
All right. I remember a couple quarters ago, Bill, you'd mentioned just a lot of ebullience from the restaurant operators looking for new sites and being in expansion mode. Do you feel like that's still the case? How do they feel about their businesses these days and expanding and just what are you seeing on that side?
Yeah. I think it is still the case, Anthony. I would say that the pressures for construction costs and the pressures for labor are mitigants to that enthusiasm. I would still say that brands are looking to grow with those two important caveats, that construction costs are substantially higher than they were two years ago, and labor is expensive and hard to find.
Okay. Last question from me, just on your $42 million of deals in the quarter. The WALT in the 7s seemed a little on the lower side of traditional types of deals. Can you talk about just, you know, how you thought about those? You know, is there a positive mark to market? Did you feel like you got compensated for that? Just any thoughts there?
I would say that we've been incredibly consistent since our first acquisition, that we score all our properties in a very consistent way. We've taken tens of thousands of properties through our scoring methodology. Term has a weighting. In order for us to get comfortable buying a property with less term, other factors in that model need to be strong. I would say that is exactly how we've done it from the beginning. Where you have years where or quarters where term is less, I think you should feel confident that other factors are performing strongly. That's how we look at the world. It's term is an important factor, but it's one factor.
There are other important factors like the level of rent, the strength of the brand, you know, how good the lease terms are, et cetera, et cetera.
Okay, great. Thank you.
Yep. Thank you.
Thank you. As a reminder, if you'd like to ask a question, please press star followed by the number one on your telephone keypad now. Our next question in the queue comes from Wes Golladay of Baird. Wes, your line is open.
Hey. Good morning, guys. I wanna go back to the dispositions. Can you quantify the size of the bucket of the call it the non-core, low cap rate assets? Who is the buyer? Is this 1031 money that needs to be put to work?
Yeah. We don't give acquisition or disposition guidance, but we haven't had dispositions for the last couple of years. The fact that we're talking about it means that we think it will be notable. What I would say is, it's interesting that Bob Evans, we don't exactly know, of course, what the buyer's intentions are. But the low cap rate, which is important. We were able to have significant increase from our purchase price. Overall, since we focus on low rents, the property's purchase price was under $2 million. My presumption is that buyer is gonna redevelop that property into another brand. Now that being said, that speaks to what's happening in construction costs because buying a property and remodeling it is, of course, much less expensive than ground up construction.
Got it. Looking forward, do you have any near-term changes, I guess, in store for the capital structure for funding deals, cost of equity? Much more favorable now for you, and the cost of debt has widened, and there's a little bit more economic uncertainty at the moment, so would you lean in a little bit more on equity going forward?
I think that's a reasonable assumption.
Yes. Thank you.
consistently what we've been actually doing over the last six months too. Kudos to Gerry for pricing a bond deal before rates moved. Lydia?
Thank you. Our next question comes from John Massocca of Ladenburg Thalmann. Please go ahead.
Good morning.
Morning.
Morning.
Maybe following up on your other question on kinda lease term and acquisitions. I mean, you know, holding all the other factors you look at constant, you know, what's kind of the broad cap rate spread for some of these kind of sub 10-year lease term assets versus something, you know, with kind of more of a traditional sale lease back lease duration?
Sure. I would say that it's in the 20-30 basis point range. I would also point out that, you know, what was traditional 10 years ago of non-IG being, you know, 15 to very often 20 years and investment grade, you know, very often being 15 years, but certainly 10, has changed over the last 10 years. I'll note that, you know, Darden, obviously IG, has sold a number of properties recently in the 1031 exchange market with primary lease terms of 5 years. You're just not seeing as many 15-20-year lease terms as you had historically. What was traditional may not be available in the market today. I would say that we feel like we're being well compensated.
You know, it's helpful that we don't have to put property mortgages on individual properties. That makes shorter lease term acquisitions that are very sensible harder to do. They're harder to finance at the property level. I would also say with 1,000 properties and virtually no vacancies, it's a manageable risk for our portfolio.
Okay. Moving on to the balance sheet, how are you thinking about the floating rate portion of some of the term loan debt you have today? Is it kind of an ideal time to maybe swap that out just because of the uncertainty, you know, that could kind of weigh on how people are thinking about that portion of kind of your interest cost, or is it something that you're kind of comfortable with, you know, given the size?
Yeah. John, just to remind us, we're $350 million hedged on the $400 million of term debt this year and next year. You'll see in our supplemental and a footnote, we communicate the hedging that we've done in years after that. We're hedged to some extent all the way out through 2028. We've taken some interest rate risk off the table on those term loans, even though they renew during that time period, since obviously with variable rate bank loans, it's a different process to put the debt in place versus the hedges. We feel like we've done a good job of mitigating risk. Remember, our policies are to be predominantly fixed since our rental income is fixed at 1.4% on average a year. Yeah.
I guess at a one notch higher level, since inception, we've essentially been fully hedged. Yeah.
I mean, you know.
Does that answer your question?
going to 25% of that term. I mean, is there any?
Sorry, what?
No, no, yeah. I mean, I'm just saying, like.
I'm sorry, John.
You know, it is gonna go to 25% unhedged for a short period of time here. I mean, is that something you would look to potentially address near term, or is it, are you just kinda comfortable with that?
Why don't we take this question offline? Because I think we're actually virtually entirely hedged, and as we enter into new swaps as time goes by, we'd expect to be almost entirely hedged going forward.
Okay.
The next question in the queue comes from Sheila McGrath of Evercore. Please go ahead, Sheila.
Yes, good morning. I just wanted to ask you on your comments on the highly levered buyers. Do you think that this will give you more opportunity because interest rates are higher for them, or do you see evidence that the loan to values that they're able to obtain from lenders have reduced at all?
I wouldn't say, Sheila, that the ability to push LTV is down, perhaps slightly. What I would say is, as we were looking at the competitive environment last quarter, and at the end of last year, I was very concerned, that a number of private equity firms were building net lease groups, and they typically use far more leverage than we do. I guess what I would say is, as rates have gone up, they will struggle to make their leverage-driven returns pencil. Either they will be less effective in deploying capital or cap rates need to go up.
Okay. Thank you.
Thanks, Sheila.
As a reminder, if you'd like to ask a question, it's star followed by one on your telephone keypad now. We have no further questions in the queue at this stage, so I will hand the call back over to the management team for closing remarks.
Thank you, Lydia. Thanks everyone for joining us on the call today. To the extent folks have further questions, please let us know. Thanks.
This concludes today's call. Thank you for joining. You may now disconnect your line.