Ladies and gentlemen, welcome to the FCPT Q4 2022 Financial Results Conference Call. My name is Glenn, and I'll be the moderator for today's call. If you would like to ask a question during the presentation, you may do so by pressing star one on your telephone keypad. I'll now hand you over to host, Gerry, to begin. Gerry, please go ahead.
Thank you, Glenn. 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 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 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, February 16, 2023. In addition, reconciliation of non-GAAP financial measures presented on this call such as FFO and AFFO, can be found in the company's supplemental report, also 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 Q4 results. I'm going to make introductory remarks. Patrick will review some details around acquisitions in the pipeline, and then Gerry will discuss the financial and capital-raising results. The existing portfolio continued to perform exceptionally well with 99.9% collections for the year ended December 31 and occupancy remaining at 99.9%. We reported Q4 AFFO $0.41 per share and $1.64 per share for the full year, which represents 5% growth for 2022 over 2021. We grew cash rental revenues 11.4% on a year-over-year basis, including the benefit of rental increases and $286 million of acquisitions in 2022.
This included the acquisition of 42 properties in Q4 for $120 million at an initial cash yield of 6.6%, reflecting rents in place as of December 31. 33 of the 42 acquired properties are corporate operated. We remain highly confident we are aligning our portfolio with best-in-class operators at attractive rent levels. Patrick will discuss the current investment environment in more detail. In Q4, we continued to see acquisition pricing improve in response to the higher cost of capital environment. Q4 acquisition's average cap rate reflected that dynamic at 6.6% versus 6.3% in Q3. The blended Q4 figure included deals priced earlier in the year prior to the shift in cap rates, with more recently priced deals above the average for the quarter.
We note that sale leaseback transactions have more appeal now to operators versus other forms of financing in recent years. Equity capital, term loans, CMBS, all have become more expensive in the last six months. This has led us to more opportunities in discussions with tenants looking to expand operations or monetize their real estate. I wanted to note two very specific but very minor headwinds we experienced in the quarter in regards to FFO. First, our restaurant subsidiary, Kerrow, experienced a much lower EBITDA margin in the quarter. Sales remained strong and in line with prior quarters. Kerrow experienced higher food and beverage, labor, utility, and other services of cost impacted by inflation. Kerrow has already started to see some relief in the increase in beef and other costs. We expect this impact to moderate in the first quarter of this year.
The second minor headwind was higher interest expense. 90% of our just over $1 billion of debt is fixed currently at a rate of 3.39%. However, interest rates on the remaining 10% of our debt are variable, and pricing increased on average by over 145 basis points versus Q3. A reminder to our investors that we think 90% fixed, 10% variable rate debt is appropriate for our business, and we benefit in some quarters, but unfortunately, we're impacted in quarters like last quarter. Our current all-in rate as of the quarter end is 3.6%. In the quarter, we sold one property for a sales price of $4.9 million, representing a gain of $600,000. For the full year of 2022, we sold eight properties for $26 million.
The strong demand for our properties provides us an attractive alternative source of capital while also improving the overall quality of the portfolio. Moving to our tenant's performance. Restaurant operators continue to have strong sales results in the most recent quarter. Although many are experiencing pressure on margins as cost increases in food and labor are not fully passed on to the end consumer. However, as I mentioned earlier while discussing Kerrow, it looks like restaurants are seeing a slowing of commodity cost increases, especially meat prices. Sales continue to hold up as restaurants are operating at approximately 120% of pre-COVID weekly sales levels and at approximately 109% of last year's weekly sales levels, according to Baird's Restaurant Survey, reported February 6.
Our estimated EBITDAR to rent coverage stood at 4x for the 72% of our portfolio that reports this statistic. This is among the strongest coverage within the net lease industry. To reiterate a point we make almost every quarter, focusing on low rent provides a cushion when inflationary input prices impact store levels. Turning to the balance sheet. We raised $72 million of equity in Q4 at an average price of $26.70 per share. We also raised $30 million of incremental debt proceeds as part of extending our credit facility in October. We would also expect to continue to utilize dispositions as another source of capital. Finally, one comment on the team. We were very excited to announce in January the promotion of James Brat to serve as FCPT's Chief Operating Officer.
Jim has been with us since inception. During this time, FCPT has acquired 624 properties, grown its employee base from six to 35, and invested significantly in operations. Jim has been an integral part of all of this in our effort to drive value for our shareholders, given his unique skill set in compensating operations, real estate transactions, and legal judgment. Thank you, Jim. With that, I'll turn it over to Pat.
Thanks, Bill. I'd like to start by discussing the sector mix of the $120 million of closed investments in Q4. For the quarter, restaurants accounted for 40% of new investments. Auto service was 33%. Medical retail was 24%, the remaining 3% consisted of other retail. Amongst others, these investments included a portfolio of four Buffalo Wild Wings properties in Illinois for $14 million at a 7.3% cap rate, a medical retail portfolio in Chicago for $12 million at a 6.8% cap rate, a sale leaseback of five Jiffy Lube properties in Indiana for $8 million at a 6.5% cap rate. As Bill mentioned, the impact of higher interest rates allowed cap rates to trend upward last quarter.
Ultimately, because of how quickly the market moved in the second half of 2022, we did go back to several sellers and discuss price adjustments. I'd also note that deals priced in the latter part of Q4 and now into 2023 have generally been above the 6.6% cap rate average for Q4. We remain highly focused on protecting our positive investment spreads. In 2023, we've observed cap rates give back a bit of the pricing gains we were enjoying as buyers in Q4, but not much. We believe this is a direct result of lower interest rates in 2023 and some net lease investors reentering the market. We continue to bid on properties 50 to 75 basis points above where they priced in the first eight months of last year.
We've also had several sellers that previously refused our pricing in Q4 come back to us with adjusted expectations this year. We remain active on the acquisitions front. We look at our pipeline, we expect to have a busy March with a number of deals closing in the latter half of the quarter. I'd like to remind everyone that Q1 typically ends up being our lowest deal volume quarter for the year. In 2021 and 2022, Q1 was 15% of acquisition volume for those years. Regarding the pipeline, we're seeing some very interesting outparcel and sale leaseback opportunities. We've been able to remain selective on tenant and real estate quality while finding deals that fit in our target yield profile. Momentum on our dispositions efforts has also continued. Bill mentioned we completed the sale of eight properties in 2022 for $26 million.
We've also sold another two Red Lobsters and one Burger King so far in 2023 for $12 million. These stores were specifically selected as disposition candidates based on relative underperformance versus their respective brands. We expect to continue recycling capital opportunistically into new acquisitions, particularly where we can improve portfolio quality. Turning to Gerry for discussion on our portfolio and financial results.
Thanks, Pat. We generated $49.2 million of cash rental income in Q4 after excluding $0.9 million of straight line and other non-cash rental adjustments. We reported 99.7% of collections for Q4 at the end of the year and 99.9% for the full year. There were no material changes to our collectibility or credit reserves nor any balance sheet impairments in the quarter. On a run rate basis, current annual cash base rent for leases in place as of the end of the year is $194.9 million, and our weighted average five-year annual cash rent escalator is 1.42%.
Cash G&A expense excluding stock-based compensation for the quarter was $3.9 million, representing 8% of cash rental income for the quarter, and cash G&A for the year was $15.1 million. For your modeling purposes, we expect cash G&A for 2023 will be approximately $16 million, representing around 6% growth. The increase is tied principally to compensation expense as we focus on retention of our existing team, additional team, and additional team members to bolster our investment and operating prowess. We continue to focus on technology and systems to help us with the increased complexity of the portfolio and improve efficiency. Since inception, we've grown from six team members to 35 today. Turning to the balance sheet, we are well-capitalized to fund growth.
As Bill mentioned, we raised $72 million of equity via our ATM program in Q4 at an average price of $26.70 per share. On December 31, excuse me, we held $26 million of cash and had 2.5 million shares under forward sell agreements with anticipated net proceeds of $68 million upon settlement. Including the $250 million of undrawn revolver capacity, we start the year with over $343 million of capacity. We discussed last quarter, but to remind everyone that in October we announced an amendment to our credit facility, which reduced pricing, extended maturities by five years on $150 million of existing term loans, and raised $30 million of additional proceeds. The facility was converted from LIBOR to SOFR.
Credit margins were improved by five basis points, and our overall leverage remains conservative. Our debt maturities are fully staggered with the first maturity of $50 million not due until June 2024. We have an ongoing programmatic interest rate hedging program where we extend hedges on a regular basis to fix the rate on much of our variable rate term loans. As of the end of the year, we are hedged on $325 million of the 430 million of term loans currently at an average all-in rate of 2.79%. As Bill mentioned, when you add the fixed rate private notes, we are over 90% hedged at a 3.39% rate. With respect to overall leverage, our net debt to Adjusted EBITDA in Q4 was 5.6x .
Our fixed charge coverage ratio remains at a healthy 4.7x .
Pro forma for settling and deploying the remaining equity, our leverage is approximately 5.5x and well below our target of 6x. As we discussed in the earnings press release, as of December 31, we have $75 million of forward starting swaps in place, effectively fixing the 10-year treasury base rate at 2.6% for that portion of our next long-term private note issuance. With that, I'll turn it back over to you, Glenn, for investor questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypad now. When preparing to ask your question, please ensure your phone is unmuted locally. We have our first question coming from Rob Stevenson from Janney. Rob, your line is now open.
Good morning, guys. Bill, I appreciate the color that you guys gave on, you know, the dispositions being some relative underperformers. Anything to the underperformance to Red Lobster specifically, since you've been selling a number of those over the last six, eight months?
You know, over the years, Rob, we've bought 24 Red Lobsters, $75 million-ish. They had long lease term, and we bought them at about a six, seven cap. We've sold three of them, as you mentioned, for just over $14.5 million, so that is a couple million dollar gain. That puts Red Lobster at under 2.5% of our rent. We have five that are on the market, so they may or may not sell, but we've had good luck thus far. That would leave 16 properties. Half of those are in a master lease that has 2x coverage and, you know, 21 years of term. The rest are low rent, ground leases that we bought in our out parcel strategy.
We think those probably have coverage over 5x .
Okay.
Those eight properties, I think this is an important point, the ground leases have just over $100,000 in rent. If we sold those, we'd be under 2%, like just over 1.5% of rent. I think that the two important things to consider on Red Lobsters, of those 16 remaining, they have 40% lower rents than the universe of Red Lobsters that we've underwritten to date, which is, you know, 65 of them. Eleven of the 16 are next to an Olive Garden or a LongHorn, you know, adjacent to, and the remainder are also very well located. We feel pretty comfortable.
Thai Union, who owns Red Lobster, you know, discussed Red Lobster on their call. You know, they've, you know, provided more credit support. They're changing out management. We feel very good about our position there.
Okay. In the restaurant category in general, are you seeing, you know, whether or not it's by price point or by offering between QSRs and limited and full service, anything where, you know, certain people are having more pricing power and able to raise the entree prices to offset some of the higher food input costs and others are struggling with that, or is it fairly even across the board? How should we be thinking about that as long as food input costs remain high?
Yeah. We're seeing some brands raise prices and others, you know, really trying to attack market share and not raise prices as much. I'd also say we're seeing these commodity costs now sort of recede a bit. I think it's across the board. The branded restaurants, the kind of restaurants we own, have dramatically outperformed chef-owned and local restaurants and gained significant share. I'd also say dine out inflation has been more moderate than supermarket or dine-in inflation.
Okay. Last one from me. You guys talked about how the, in the owned, LongHorn portfolio that the expenses was a combination of food input and labor. What was the sort of breakdown? I mean, how much of the additional expenses was the food input costs that may be coming down versus labor costs, which don't appear to be abating in the near term? Anything tenants are able to do technology-wise these days to reduce staffing needs and mitigate some of the labor costs.
Yeah. It's a really small number. I mean, our business is so predictable that, you know, even a, you know, on a $3 billion business, even 100,000 here or there seems to be noticeable, because we're so predictable generally. The delta on Kerrow was staffing up over last year, where we were struggling to find labor. We had a specific training program that increased hours in the quarter, which was sort of a one-off thing, and then beef prices, which are moderating. Kerrow is an exceptionally well-run business. You know, we've had it now for 35 quarters. This is the first quarter that it's had a result that was a little lower than we expected. I don't think there's anything to read into that.
Probably most folks wouldn't even mention it, but we thought it would be worth calling out just because it was $200,000 lower than we thought it would be.
Okay. Then anything on the technology side that either you guys with your own stuff or you're seeing widespread among the tenants, apply to reduce staffing needs?
I mean, in our acquisition effort, we use Dealpath to manage the process. We've actually taken a number of investors through that. We find that that helps efficiency, keeps us very organized. You know, when you buy a building every one and a half days, like we did last quarter, it really you need to be organized, and that helps us. We use Placer.ai to track traffic. I think that's directionally helpful. But those, I think, would be the two call-outs for our business. Then in the restaurant level, I think the big call-out would be QSR becoming, you know, almost an entirely drive-through business. It was already a majority drive-through business, but almost entirely a drive-through business during COVID.
I would imagine over time, it will settle not at the peak of near 100% during COVID, but it'll settle at a higher level of drive-through than pre-COVID.
Okay. Thanks, guys. Appreciate the time.
Yep. Of course.
Thank you, Rob. As a reminder, ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone keypad now. We have our next question comes from Wesley Golladay from Baird. Wes, your line is now open.
Hey. Good morning, everyone. Just got a question on a little follow-up on the Red Lobster. Obviously, some very low ground rents there. I guess, ideally, would you wanna get those back? I guess a broader picture, are you seeing much distress on the restaurant side? Do you still have that JV with Lubert-Adler? Could this all come into play at some point?
You know, we've actually had pretty favorable luck on getting properties back, but the sample size is really small, thankfully. We got back a Ruby Tuesday in Maine and re-leased it to Darden to put an Olive Garden there and had a little bit of a pickup. It's not our strategy. It can be distracting, but you'd much rather be going into those discussions with very low rents, you know, very low rents. I'm not speaking to Red Lobster specifically, I'm just speaking in general. Very low rents are more likely to be reaffirmed in restructuring, all else being equal. We're not seeing a ton of distress in the restaurant space.
As sales are so much higher, rent as a percentage of sales has moderated, and construction costs are so expensive that people are repurposing old buildings, and they don't wanna move out of existing buildings. I think that addresses the question.
Okay. Yeah. Thank you. I think you commented that the pipeline this quarter would be back half loaded, but just curious how much visibility you have into the end of the year. Is it more like a six-month view on the pipeline that you have visibility on? Understanding that some of these deals are large, complex, where you have to do a lot of work on the ground leases and carve and stuff out. Just kind of curious how much visibility you have.
Yeah. We, you know, we have substantial visibility over the next three months, I would say. Then some of the properties, you know, we know we're gonna purchase them, but we know that there are steps that need to take place, and sometimes in the out parcels, that could take one year, or in certain jurisdictions more. So we try not to, you know, be overly fussed with managing the pipeline quarter to quarter. You know, once you, once you own these buildings, you have to live with the consequences of your decision to buy them. The last thing you wanna do is lower your quality expectations in order to even out a quarter.
As Patrick mentioned, it's typically busy at the end of the year as it was last year, and then a little softer in Q1. This is frankly the same dynamic we've had for the last three years.
Got it. Then maybe just one for Gerry. How should we think about timing of a debt deal? Once you get to the line to a certain level, just take down the debt issuance?
Yeah. Great question. You know, sometime this year would be the answer I would give. Obviously, our line of credit with zero balance on that at the end of the year. We've got forwards at the start of the year, we're in great shape. We will also be opportunistic to take advantage of that market when we see margin rates. In the private note market, you can forward fund. That forward funding option has actually extended as the curve is negative now and or insurance companies are more willing to do that. I think we have a lot of optionality around when we do it.
Great. Thanks, everyone.
Yep. Thank you.
Thank you, Wes. As a reminder, ladies and gentlemen, if you would like to ask any further question, please press star followed by one on your telephone keypad now. Our next question comes from John Massocca from B. Riley . John, your line is now open.
Good morning.
Morning.
Just, maybe on the acquisition side of things, as you think about the competitive set, when you're going into kind of, you know, seeking out deals or closing deals, I mean, what's been happening with the 1031 buyer over the last couple of months? Has that, you know, faded away a little bit as the year has ended? Has that strengthened? I should say by 1031 buyer, I mean just, you know, individual buyers, high net worth buyers, et cetera.
Sure. 1031s require what's called a down leg. You know, the asset that they are selling, where the proceeds gets escrowed and then reinvested in assets they're buying. The transaction market for the down leg, which is very often not net leased, it's usually an apartment building, very typically. The transaction volume of those have fallen consequently, with a lag. The amount of 1031 buyers in the market has fallen. That doesn't mean it's not still competitive, but those are often levered buyers and their cost of financing has gone up. There was a dynamic, as Patrick alluded to in his comments, where properties that were on the market over the summer and fall had to readdress their pricing.
Those properties have either been pulled from the market or were actually sold. Now we're in the process of new properties entering the market with different pricing expectations. I would also maybe add on that we were anticipating in 2021, heading into 2022, a large influx of private equity, new private equity vehicles in net lease. Those obviously much more leverage focused, and as cost of financing has gone up, their ability to create attractive yields has declined. We're seeing less competition from private equity funds than we thought we would experience.
That makes sense. Maybe in terms of, either the in-place credit or the credit on potential acquisitions, how are you thinking about franchise versus kind of corporate owned, especially given some of the pricing pressures that are kind of being seen industry-wide? You mentioned kind of if you would see personally in the Kerrow side of your business.
I think we've always been pretty thoughtful and conservative around the kind of credit. Credit is roughly half of our underwriting model. Roughly the remaining half is real estate matters. I wouldn't necessarily draw the line, you know, franchise versus corporate, you know, too literally. There are some very, very large franchise businesses, and there are some very small or levered corporate operated properties. You know, we've never really played in the very small franchisee financing game that some of our peers have. You'll see our cap rates are relatively consistent, adjusted for what's happening in the market. We're not going out the risks curve by any means.
Okay. If you look at kind of either the financials that are being reported to you or financials on new transactions, I mean, what are you seeing in terms of responses to some of these pricing pressures in the casual dining space versus the QSRs? I should probably say rather than responses, more just kind of the impacts of some of those pricing pressures.
Yeah. I think what we felt at Kerrow is pretty consistent in what's happening in the industry. you know, in 2021, in many cases, you couldn't get to the staffing levels you wanted to. I think you're seeing more staffing, you're seeing commodity costs increase. again, both of those factors are moderating in real time. and what's happened is a number of the weaker, brands or over-levered franchisees, have struggled and we don't play in that, sandbox.
That's very helpful. That's it for me. Thank you very much.
Thank you.
Thank you, John. As a reminder, ladies and gentlemen, if you would like to ask any further question, please press star followed by one on telephone keypad now. We have our next question comes from Omotayo Okusanya from Credit Suisse. Tayo, your line is now open.
Tayo. Thank you. Good morning, everyone. Bill, just give me some of your comments around, kind of what's happening with restaurants and generally what's happening with retail. Curious if you guys would consider at any point looking beyond the world of retail for acquisition opportunities?
Yeah. We are always looking at strategies, acquisitions that are adjacent to what we have purchased in the past. We have a formal process with our board where we review adjacencies annually. You know, we started restaurant only. We've now bought obviously a number of medical retail and a number of auto service retail. We continue to try to expand the aperture of our acquisition apparatus thoughtfully. I wouldn't expect, you know, us to buy hotels or apartment buildings or office or anything like that. I think it's more of a natural progression. If you look at some of the older and larger net lease REITs, they've followed that same path over a long period of time, and it's worked quite well for them.
Great. Thank you.
Thank you, Tayo. As a reminder, ladies and gentlemen, if you'd like to ask any further question, please press star followed by one on telephone keypad now. We have no further questions on the line.
Great. Thank you, everyone. Management's available for Q&A if anyone is interested. Thanks again for joining the call.
Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.