Hello, and welcome to the FCPT third quarter 2021 financial results conference call. My name is Charlie, and I will be coordinating your call today. If you would like to ask a question during the presentation, you may register to do so by pressing star, followed by one on your telephone keypad. I will now hand you over to your host, Gerald Morgan, Chief Financial Officer, to begin. Jerry, please go ahead.
Thank you, Charlie. 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 remaining scope, severity and duration of 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 the SEC filings, which can be found at our website, fcpt.com. All the information presented on this call is current as of today, October 27th, 2021. 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 on our website.
With that, I'll turn the call over to Bill.
Good morning. Thank you for joining us to discuss our third quarter results. I'm going to make introductory remarks, then Patrick Wernig, our Director of Acquisitions, will review some details around acquisitions in the pipeline, and then back to Jerry to discuss financial results. In summary, we continued to have industry-leading collections at 99.8% for the quarter, and occupancy improved to 99.8% as well. Our restaurant and other retail tenants are experiencing top line performance often above 2019 pre-pandemic levels. We also acquired 53 great properties this quarter, characterized by low rents and high-quality tenants. We reported third quarter AFFO of $0.39 per share, which represents a $0.02 year-over-year increase. We are pleased to see restaurant operators strong performance in the third quarter.
Quick service restaurants are operating at 118% of 2019 weekly levels, and casual dining is operating at 107% of 2019 levels, according to Baird's most recent weekly restaurant survey. Turning to investments. We acquired 53 properties in the quarter for a combined price of $107.4 million and an initial cash yield of 6.4%. The acquisitions represent strong tenant credit profiles. The group includes two dual-tenant properties, and 44 of the 55 leases are with corporate operators. The third quarter's investments include 6 new brands, bringing us to a total of 101 brands in the portfolio.
In addition, we have closed an incremental $9 million of properties in the fourth quarter to date, bringing us to $196 million closed in total so far in 2021. Taking a step back to put that $196 million dollar figure of new investments in perspective, it compares to $132 million for the same ten-month period in 2020 and $94 million in 2019. We're heading into the last months of the year very well-positioned and with a robust pipeline. For the quarter, restaurants and auto service each represented approximately 40%, 44% of the total investment volume, and medical and other retail made up the balance. For the year overall, medical and other retail have comprised approximately 20% of total volume. We've been pleased with the opportunity set, and we're seeing with.
While restaurants remain our primary focus for new acquisitions, we are taking advantage of the flexibility to invest in other sectors as well. As I mentioned, our pipeline continues to be very strong. I'd reiterate what I said in the second quarter, that we are pleased with the pipeline for the remainder of the year. With that, I'll turn it over to Pat for some additional comments on recent acquisitions and overall investment in the overall investment environment. Pat.
Thanks, Bill. As you mentioned, our third quarter was quite strong in terms of new acquisitions and building out the pipeline. Reflecting on recent deal volume, it's worth noting that this was our biggest quarterly investment volume since the fourth quarter of 2019, right before the pandemic. It's also one of the highest volume quarters in our company's 6-year history. We believe that success has been due in part to our investment platform maturing and expanding. The universe of properties we're going after is much broader than in the past, and so if pricing shifts against us in one sector, where there are fewer restaurant opportunities in any given three-month period, we can now find opportunities in other sectors and make our volume less choppy quarter to quarter.
Case in point, we noted on our last earnings call that the pricing environment was very competitive for restaurants and retail net lease in general. Despite that pricing headwind, we've still been able to build out the pipeline in the mid-6 cap rate area with high-quality tenants and real estate. Our pipeline sector mix for restaurants, auto services and medical is similar to what we've seen so far this year. As we look towards new opportunities for Q4 and into 2022, you can expect us to stick with the same formula that made Q3 a success. First, we're actively engaging our existing tenant roster for new direct sale leaseback deals. In Q3, we benefited from several of these transactions, including a $21 million Chili's deal and others with restaurant operators that have been repeat sellers to Four Corners.
The fact that these operators are coming back to Four Corners demonstrates the positive relationship and deeper ties that came out of our tenant interactions during the pandemic. Second, we continue to explore new subsectors in retail and adjacent services. There's still principally auto services and repair, convenience stores and medical retail, but it may further diversify in the future. Finally, we're focused on quality operators and being flexible to lean in slightly for strong brands and credit profiles. Just to expand on that for a second, we still believe every deal needs to stand on its own merits and economics. We achieved a 6.4% average cash yield for the quarter and stand at 6.6% for the year, which we think is a great outcome, particularly given the asset quality we've added to the portfolio.
Now I'll turn it back over to Jerry.
Thanks, Pat. Just to recap of a couple of the financials we reported. We generated $42.2 million of cash rental income in the third quarter, after excluding $1.4 million of straight line adjustments. As Bill highlighted, we reported 99.8% of collections for the third quarter. No material changes to collectibility or credit reserves in the quarter and no balance sheet impairments. On a run rate basis, our current annual cash base rent for leases in place as of the end of the quarter is $168.8 million. Our weighted average 10-year annual cash rent escalator is 1.4%. To remind everybody, that number was $94 million when we started in late 2015, so nice progress.
We estimated the portfolio rent coverage is 4.6x for the third quarter, which is on par with pre-pandemic levels. That includes coverage for the Darden properties of approximately 5.5x , using the latest reported sales results from Darden on our portfolio and their brand average margins for the quarter ending August 2021. Additionally, non-Darden restaurant coverage is estimated at approximately 3x , also approaching or passing, in some cases, pre-pandemic levels. We note that while not all of our tenants report financials to us, rental coverage at these levels would translate often to rent-to-sales values of 5%-8% for restaurant operators in the portfolio, which is lower than typical levels and shows both the strength of our tenants' operations and the low rents that are in place.
Turning to the balance sheet, in the quarter, we issued $27.7 million of common stock on our ATM program at a weighted average price of $27.67 per share. We ended the third quarter with $204.8 million of liquidity, which included $197 million of availability on the revolving line of credit. Our fixed charge coverage for the quarter was 4.9x , and our quarter end net debt to EBITDA is 5.8x . Finally, we paid a dividend for the quarter of $0.3175 per share. With that, I'll turn it back to Bill for closing comments.
In conclusion, we're very happy with the results for the third quarter. We look forward to speaking with many of you at the upcoming Nareit. Now we'll open it up to questions.
Our first question comes from RJ Milligan of Raymond James. Your line is open. Please go ahead.
Hey, good morning, guys. Bill, there's a lot of capital out there chasing restaurants. We're seeing improving fundamentals, as you pointed out, and it seems like cap rates are gonna continue to compress. I'm just curious, you know, if you see anything out there that sort of pauses that cap rate compression or if you expect that cap rate compression to continue. Secondly, you know, Pat, you mentioned that the pipeline is pretty similar in terms of mix between restaurants and non-restaurants. I'm just curious how you guys view that trending as we move into 2022, if you expect to do a greater percentage of non-restaurants versus 2021.
To your first point, about cap rate compression on restaurants, you know, we own over $2.5 billion worth of restaurants, so that's not a bad thing for our portfolio. Overall, I don't have any specific call-outs, RJ, on what would change cap rates other than obviously interest rates moving around. The brands continue to do well, and it's a dynamic where the strong brands continue to get stronger, so that you know is beneficial to our portfolio and strategy since our existing portfolio is with industry-leading brands, and we tend to focus on the higher end of the credit spectrum. As far as the mix of the pipeline, I think it will, you know, as Pat mentioned, remain relatively consistent with what we have closed to date.
Okay. My second question is, still have some out parcel closings left for the transactions already announced. I'm just curious if there's any opportunity out there or what you're seeing in terms of, you know, either off market opportunities similar to what you did with the out parcel strategy or if pricing is slightly better for maybe a portfolio of assets versus individual one-off assets.
Yeah, we do have a number of out parcel portfolios in the pipeline, and you know, we do think the pricing's a little advantaged. RJ, that's you know often becomes because out parcels come with a lot of work. In some ways, you're getting paid for labor. Once it's in the portfolio, you know, they're very strong properties with again low rents, typically corporate operators and the vast majority are ground leases.
My final question is, third quarter volume, obviously pretty big relative to the first half of this year. I think traditionally, we've seen quite a bit of activity as sellers look to sell before the end of the year. I'm just curious if you anticipate, you know, another rush as we head into the end of the year.
Yeah, I think it's gonna be relatively busy, RJ. I don't think there's anything, you know, in particular that I would note. I would anticipate the fourth quarter being busy as we said in our prepared remarks, for sure.
Thanks, guys.
Thanks, RJ.
Thanks.
Our next question is from Sheila McGrath of Evercore. Your line is open. Please go ahead.
Yes, good morning. Bill, you mentioned broadening the opportunity set
Has helped in acquisition volume. I just wondered, if you could remind us how big your acquisition team is currently, and how does that compare to a year ago, and do you plan on, you know, growing that team at any point in the future?
Yeah, Sheila, it's a great question. In addition to myself, there's six members, I believe, on the acquisition team. That's very much in line with last year. We've had very good retention and, you know, it's nice to see, you know, you're hearing now Pat on the calls. You know, Pat and Josh Balgi now have some real significant number of reps under their belt. The team is stable and has really now acquired over $1 billion worth of property. They're very well accustomed to the market. To answer your question about recruiting, we are always looking for talented driven people to join the team.
Okay, great.
I would say, Sheila, to add to that.
Go ahead.
No lack of competition for talented and focused acquisition people in the market. I think as we've gotten larger, we have more confidence that we can recruit people earlier on in their career and train them to think through the acquisition process consistent with how we've done it in the past.
Okay, great. Just curious on deals when you know, are targeting the corporate guarantee or also on the bigger portfolio, the $21 million that you mentioned. Are pricing the initial yields on those transactions lower than, you know, non-corporate guarantee? Just how does that pricing end for the portfolio?
Sure. You know, corporate guarantee, having a corporate guarantee is an important part of the credit underwriting. As you know, we view credit as about half of what we look at, the other half being real estate. You know, maybe in your question, is there a portfolio premium or discount? I would say if anything, there's a portfolio premium today, but in the two chunkier portfolios that we had, we did in the Q3, both of them had a time compressed timeline component to them. In both cases, they were repeat tenants, so we had already negotiated a lease, so that portfolio premium was perhaps less than it would be if it was a fully marketed transaction.
Okay, great. Last question, just curious on your insights, given that you owned some restaurants, your big picture thoughts on current labor challenges and food cost challenges to the restaurant industry?
Yeah, Sheila, great question. We benefit in our Carroll subsidiary in San Antonio, which to remind people are seven LongHorn Steakhouses that we operate as a franchisee to Darden. We benefit in that business that the management team that runs that subsidiary is superb. So Carol, who is the leader of that business on a day-to-day basis, is just an exceptional people leader and understands the business very well and is extremely driven. But I would say that Carol, if she were on the call, would say that very much there's a labor shortage, and in fact, that the curtailing factor in the restaurant business now is the availability of labor and not demand from the consumer. I think you could say that for many retail subsectors, Sheila.
As far as food costs, it's a factor. It's perhaps less of a factor than you're seeing in the supply chain of other retail subsectors, but the lack of labor is very real.
Okay, thank you.
Thanks, Sheila.
Our next question comes from Nate Crossett of Berenberg Capital Markets. Your line is open. Please go ahead.
Hey, good morning, guys.
Good morning.
I was wondering if you could potentially put some figures on just, you know, what is the actual size of the pipeline right now. You know, maybe just related to that, if you could give us an update on the Lubert-Adler JV and what you're seeing come out of that so far.
Sure. We don't provide guidance on pipeline or acquisition volumes. You know, on the other hand, we announce transactions the day they close. As far as Lubert-Adler, we have not seen much activity there. I think, you know, Gene Lee on Darden's conference call referenced the level of speculation in vacant properties and unbuilt sites. We just have not been able to find properties at the right price point such that you could redevelop them and earn a reasonable profit. It speaks to the supply demand dynamic and that these brands are growing, but we have not been able to find vacant properties at bargain prices.
Okay. As it relates to kind of the outparcel strategy, you know, obviously what you're disclosing, there's not a lot left on that. So how should we think about those relationships, I guess, going into 2022, in terms of like the total addressable market of those outparcel relationships? Is there anything to note there?
Yeah, I think you'll see some close in Q4, Q1. We have some in our pipeline. We continue to think that it's an opportunity set. We've, you know, been aggressive. I think we've bought nearly $300 million worth of outparcels. They've performed exceptionally well through COVID. So I would certainly not say that opportunity set is over, but obviously we've made very good progress thus far in addressing that unique avenue for acquiring properties. I would also say that, you know, there are folks now who are trying to imitate that strategy. I think they're finding it very labor-intensive, as we have.
You know, like many things, when you have figured out a good idea and begin to implement it, sometimes people follow in your footsteps.
Okay. Maybe just one last one. Like on the dispo side, is there anything that you'd be looking to prune? Or is there anything on the watch list that we should be aware of?
You know, we occasionally think about selling properties. We regularly get inbound inquiries for properties, but nothing notable.
Okay, thanks.
a disposition watch list.
Okay, thanks.
Thanks, Nate. Operator, any more questions?
Yes, the next question comes from Wes Golladay of Baird. Your line is open. Please go ahead.
Hey, good morning, guys. I just had a quick question on the drivers of the acquisition closing this quarter. Is it primarily deal flow or are you having a higher close rate now?
Oh, it's deal flow.
Okay. When you look at that, is it just sector going into verticals?
Yeah, no notable change in selectivity is how I would describe it. It's just, you know, happenstance on timing of when things occur.
Okay. You have built up the team over the last year. I guess, has that deal flow been ramping throughout the year?
I think there is a dynamic of that. The team is relatively stable year over year, certainly the senior members of the team. I think it's just, you know, acquisitions are lumpy to us.
Okay. When we look at leverage, can you remind us of your targeted leverage? I guess how would you fund the future pipeline? Would dispositions be part of the mix?
Thanks, Wes. This is Jerry. Just to remind everybody, our targeted leverage is 5.5x to 6x net debt to EBITDA. We're at 5.8x right now. We'll continue to fund our investments through a combination of both equity and you know, private notes and using our revolver in the interim. Dispositions is always a great card to have and one we could always pull if you know, if those other markets weren't cooperating. As of now, it really hasn't been to date.
Okay. Thanks, guys.
Thanks.
Our next question is from John Massocca of Ladenburg Thalmann. Your line is open. Please go ahead.
Good morning, everyone.
Morning.
With regards to the mix on non-restaurant acquisitions, is the focus that kind of seemed to be out there in 3Q on auto service, tire, you know, veterinary health, et cetera, is that being driven by underwriting, you know, and how you view that real estate in those tenant industries as potentially maybe being undervalued? Or is that just where deal flow is today? Just trying to think of why those tenant industries versus maybe car washes, off-price retail, home decor, et cetera.
Yeah, we haven't done much off-price retail or home decor or dollar stores. When you think about it, I think, as you said, it's when we look at the different net lease subsectors, the sectors that we like as much as restaurants, where pricing is as good or more favorable than restaurants, tend to be those auto services uses and medical retail, broadly defined, you know, human and pet.
I mean, is any of that driven by just kind of your thoughts on the size of the footprint? I mean, obviously, some of those categories you haven't invested in are larger footprint. I mean, is that a focus going forward?
Do you mean footprint, property leasable area?
Yes, yes. Total square footage.
Yeah. I don't think that's a driver, John . They're, you know, very often the same square footage as a casual dining restaurant, as an example. I don't think that's the real driver. You know, we focus on low rents, so you know, our average purchase price has been highly consistent.
Okay. You know, how is pricing trending for portfolios versus one-off transactions? If I look at the 3Q transaction activity, you did a Sonic portfolio that was on the lower end of kind of cap rates, but it was also QSR. I mean, is there any pricing premium or discount there if you do kind of, you know, either these midsize ones that are eight, nine, 10 assets or even maybe larger than that?
Yeah. I would say that, what we're seeing in the market, especially for larger, well-marketed portfolios, is a portfolio premium, if anything.
And, um-
You know, those the two Sonic and Chili's transaction that we spoke to earlier both had, as I mentioned, a timing component to them, so we were able to get them at pretty good prices. Yeah, if anything, the market's quite strong and our competitors are really volume-focused, is our view. Portfolios tend to be, you know, well bid.
Okay. That's it for me. Thank you very much.
Thanks so much.
The next question is from Anthony Paolone of J.P. Morgan. Your line is open. Please go ahead.
Okay, thanks. Not much left here, but just on yields, like if we go back to the outset of the year, it seemed like cap rates compressed, you know, particularly in restaurants, but seemed to be across the board in net lease. Do you think they're now stabilized over the last, say, quarter or so? Or have they moved up at all because of interest rates? Or, you know, is this kind of where things have settled?
It's a great question. I think we sort of have a little bit of a stabilization. They have not increased because of interest rates by any means, but seem to be quite stable. If anything, I would anticipate compression, continued compression. As of today, we've been, you know, pretty consistent in the low- to mid-6s, as what we've been looking at to acquire.
Okay. Yeah, it seemed as if, you know, earlier in the year, like maybe we were gonna head into the fives in terms of your deal flow, but it sounds like, you know, you think you could hold here in with the six handle. Is that fair?
I think that that's fair. You know, certainly, lots of properties that we're seeing are in that, you know, high fives, mid-fives cap rate range. Some of our competitors have gone aggressively into that area, but we've tried to, you know, have sufficient deal flows, you know, strong deal flow, but a low to mid-six cap rate.
Okay. Just, I think following up on prior question about just the type of things you're looking at as you look at other areas. Any plans to go into things like industrial or product where just the average ticket size, you know, could go up meaningfully from like a smaller box retailer or restaurant or, you know, auto type service?
You know, it's something we're constantly testing, you know, in the acquisition group with our board. I think our philosophy thus far has been to feel very comfortable with what we're acquiring, versus just migrating to asset types that will allow us to deploy more capital, and perhaps regret it later. We're always testing that open-minded. For thus far, I think you should expect to see a continuation of the kinds of properties we've bought historically.
Great. Thanks.
Thanks.
As a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad now. We have a follow-up question from Sheila McGrath. Your line is open. Please go ahead.
Yes, Bill, the last couple years you've announced a dividend increase in November. I was just wondering if you could give us, remind us your dividend policy. Are you looking at managing to a certain AFFO payout ratio?
Yeah. Sheila, we address it with the board annually. It's always been in the late fall, early winter. We've said that we wanted a payout ratio in and around 80%. I don't think any of that's changed overall, but it's a decision we bring to the board in our November meeting.
Okay. Thank you.
Thanks, Sheila.
There are no further questions on the lines at this time.
Thank you, Charlie. Thank you for a robust set of questions. We're here if anyone would like to talk. Again, thank you. We feel great about the quarter and the pipeline for the remainder of the year. Thank you, everybody.
This concludes today's call. Thank you for joining. You may now disconnect your line.