Four Corners Property Trust, Inc. (FCPT) Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to Four Corners Property Trust Third Quarter 2026 Conference Call. [Operator Instructions] I will now hand the conference over to Patrick Wernig, CFO. Please go ahead.

Thank you, Lucas. During the course of this call, we will make forward-looking statements, which are based on our beliefs and assumptions. Actual results will be affected by known and unknown factors that are beyond our control or ability to predict. Our assumptions are not a guarantee of future performance and some will prove to be incorrect. For a more detailed description og some potential risks, please refer to our SEC filings, which can be fouind at fcpt.com. All the information presented on the call is current as of today, October 29, 2026. In addition, reconciliation to non-GAAP financial measures presented on 12:06 pm this call, such as FFO and AFFO, can be found in the company's supplemental report. With that, I'll turn the call over to Bill.

Good morning, and apologies for the technical difficulties. Following my initial remarks on our Q3 results and the state of the market, Patrick will comment on our investment activity for the quarter and current capital position. 2026 has been a banner year for FCPT. Year-to-date, we have acquired a record volume of $410 million of properties at [indiscernible] 6.6% cash cap rate and 7.2% GAAP cap rate. Over the past 12 months, we've acquired $505 million of properties. Despite the record volume for FCPT, we remain highly consistent with the investment characteristics that have long defined FCPT strategy, namely low basis properties, conservative rents strong store level profitability and leading tenant operators. We fully funded the volume this quarter with 2 recently closed term loans that featured coupons in the mid-4% to low 5% range, utilizing our debt capacity, generated spreads of over 200 basis points as compared to historic investment yields. We also updated our dividend policy to monthly payments beginning in August and subsequently increased the dividend by 3.5% for the fourth quarter. Finally, we were excited to announce a few weeks ago that Darden extended 100% of all all Garden and LongHorn leases maturing in 2027, along with the early extension of a handful of 2028 lease maturities. These properties represent [indiscernible] extension decision by Darden since FCPT spin-off back in 2015. We note that the extensions do not require rent reduction or capital contribution from FCPT and Darden rents will continue to increase by 1.5% annually. To clarify, these are individual leases where the tenant made the decision in each and every case to extend under contractual terms. We also note that we've continued to significantly diversify. Darden is now just 40% of cash rent and 42% of our rents come from sectors outside of casual dining. This includes medical retail now at 16%, automotive service at 13% and quick service at 10%. Now turning to the current acquisition environment, which has changed a great deal in recent months. Investors consistently ask us how this will impact our pipeline efforts. Our answer is that since inception, FCPT has been consistent and modulating acquisitions relative to our cost of capital. This happened most recently when rates rose in 2023. At that point, rising rates made it difficult to invest accretively. And so we subsequently stopped nearly all acquisitions and aggressively moderated additions to our pipeline from late '23 through mid-'24. Basically, we didn't buy anything. Once our cost of capital improves, we hit the gas with vigor and subsequently invested nearly $1 billion in new accretive real estate investments from 2024 through today. Capital allocation discipline is built into how we operate. We do not provide acquisition guidance, our team's incentives are not tied to volume. This alignment lets us grow in its accretive and stay patient when it isn't. It's times like these when having parental frameworks designed in nonturbulent times makes all the difference to investors. Other companies may say they will modulate guidance in the face of weakening spreads, but we actually have an established track record of [indiscernible] investments. I said simply and to be clear, FCPT management will not sacrifice our shareholders' interest to simply pursue scale. As for the state of the company in this turbulent environment, we believe that we are very well positioned to weather continued macro headwinds. First, our granular acquisition strategy has created a highly fungible portfolio among the lowest per property value at risk within our industry. Our lease renewal rates were very high. Occupancy remained well over 99%, and our rent cut in Q3 was 5.3x for the majority of our portfolio that reports this bigger. Rent coverage remains the best coverage within our industry and what we believe is a reflection of our conservative and analytical underwriting. Second, our 3 core restaurant brands, Olive Garden, LongHorn and Chili's continue to outperform their peers and grew sales in the most recent quarter by 1%, 6.8% and 10.1%, respectively. The value proposition of these restaurant brands offer their customers is tremendous, and they have shown through consistent historical growth in many from macroeconomic cycles. Additionally, our [ Michigan ] pet health properties have covered levels above 6x. This is the exact type the portfolio you would want a turbulent backdrop. Third, we have very limited credit loss for our 11-year history. That result isn't an accident. We are aligned with leading operators in our chosen sectors and avoid experience net lease sectors and overruns or properties. We try to keep it simple by requiring low basis fundable properties and what we believe are e-commerce resistant sectors. Now the last point I'd like to touch on is yesterday's announcement our inaugural share repurchase program. We have [indiscernible] in detail here on how we're thinking about share purchases. One of our long-term metro models is our [ heme meter ] and the green Yellen red zones. In FCPT's history, there have just been a handful of times of short-lived red zone windows over the last decade at the spin during COVID were the 2 prominent ones where share repurchases would have made a true economic sense. We believe the current landscape presents the best opportunity for FCPT share repurchases since our company was [indiscernible]. As such, our Board has authorized a $100 million share repurchase program and if conditions complete our fresh foods, then we will seek to utilize it. So let me trace the steps of how we think about this, which is influenced by the writing of Michael [indiscernible] on capital allocation. The first decision is whether there are property acquisitions that clearly exceed our cost of capital. It's because we are very analytical in assessing the quality of the properties we buy, we can do this step without quality creep. This is where we have been as a company for a significant or of our existence, but not today. Perhaps cape rates will follow interest with a lag. But as of today, we think internal cap rates are generally too low and in most instances, investment spreads will be thin to negative for investments that meet our high-quality threshold we hold or substitute. We next make sure we are conservatively levered. We want to make sure our balance sheet is a great shape. Pat has done a terrific job here, we have few near-term maturities, a largely fixed rate structure, and we remain within our modest target leverage range. Then we make a determination of whether we believe our stock represents a compelling investment opportunity. By this, I mean, below where we believe in our intrinsic value is. In the final check, we compare the risk-adjusted returns of new acquisitions, debt reduction, liquidity preservation and share repurchases. FCPT has always been price disciplined in where we issue new shares, and this is in the exact same vein, we will seek to be very priced disciplined when we buy back shares. We will run this analysis every time we repurchase stock in the market to confirm these conditions are met. It is also worth noting that our program does not require us to buy a certain number of shares and allows us to suspend or terminate for at any time. i.e., we will be valuation-sensitive. Given the lack of tenant initiatives and our strong confidence in the portfolio, we view FCPT's current stock price is a very compelling investment today. I'd note that it's public that I personally purchased FCP stock recently. This does not affect a theoretical exercise for me. Before handing it back over to Pat, I want to offer sincere gratitude to Josh for his contributions to FCPT. Josh joined us way back in 2016 and was instrumental in building our platform. Josh will be leaving FCPT in Q4 to take a personal sematic before exploring an entrepreneurial opportunity. He remains a big fan of FCPT as we are of him and is another proud member of our [indiscernible] base. We wish him the absolute best I know I speak for myself, Patrick, the rest of the company and the Board when I say it's been a pleasure getting to know him professionally and personally wherever he ends up, they'll be extremely lucky to have him. Over to you, Patrick.

Thanks, Tom. Very well said, I couldn't agree more. Josh has been of his colleagues for a decade and [indiscernible] FCPT. We're very grateful for his meaningful efforts, which helped us evolve from start-up to a seating at lease investment vehicle. Now just a review of the Q3 acquisition activity, but we're touching on our balance sheet. In Q3, we acquired 120 properties with a weighted-average base term of 10 years to $328 million at 16.6% GAAP cap rate or 7.1% GAAP rate. This quarter was related towards medical retail with the previously announced acquisition of 102 Mission Penthouse properties. We also continue to source and execute our regular [indiscernible] investment pipeline, spanning restaurants, automotive service, medical retail and other sectors across 14 distinct transactions in Q3. Those investments included [indiscernible] our platform. with acquisitions of the BMW grocery property and the Drilling Tools International light manufacturing facility. In both cases, we've been monitoring these sectors for years, we've been waiting for the right opportunities with real estate credit and pricing quality with FCPT standards and investment profile. We'll continue to evaluate investments in these subsectors and expect that over time, we'll end our opportunity set as we go main expertise. I know that we did not at [indiscernible] the ample deals this quarter as we got more selective or ran into issues during due diligence that we thought would impact the long-term economics. That resulted in a net yield cost of around $100,000 [indiscernible]. We love doing deals but are more focused on avoiding long-term problems on deals that don't meet our return thresholds. Before I move on from Aquage, I'd like to commend our investment and legal teams as well as our accounting and property [indiscernible]. They're in an effective and efficient diligence process and integrated more properties in Q3 than we had historically done in the full year, really speaks to the strength of the platform and the capacity we've built to FCPT. Now over to the balance sheet. As Bill highlighted, since April, we've closed on a total of $600 million of near-term loans, which represents an incremental $10 million of debt, with nearly 40% of our balance sheet put in place or extended 5 to 7 years, 4% to low 5% coupons. $40 million remains undrawn on the $400 million term loan, which we intend to fund by the end of the year. Additionally, we were able to lower term loan spreads by 5 to 10 basis points annually on $800 million of outstanding loans for annual savings of approximately $450,000. We're fully undrawn on our $350 million revolver on leverage for the Q3 annualized period of 6x. Our stated leverage range remains 5 to 6x and on a run rate basis, remain a bit below that 6 upper balance of the range. On our debt maturity schedule, we just had a [ ] private yield coming due in December, which is down 3% of our total outstanding debt. We plan to repay that with the price at the maturity. We've earmarked upon to do so, principally, we expect to address the maturity of $40 million of remaining undrawn term out and cash one. Excluding this December note, we had to $75 million or less than 5% of our total debt coming due to prior to February 2028. Our staggered debt maturity schedule is specifically designed to avoid facing a significant refinancing law in any given year. Looking at the landscape today, the great benefit to have very minimal refinancing headwinds. At the same day, we have very low floating rate exposure with 85% of our debt balance debt as of 9/30. We included a detailed hedging schedule in our supplemental, that also has the locked rate on our term loan, which is currently 3.1%. Now I'd like to go through the earnings highlights for the quarter. Q3 cash fee income was $75.2 million, representing 13.7% growth versus prior year. Annualized cash base rent for leases in place as of quarter end was $292.8 million, and our weighted average 5-year annual cash flow escalator is 1.6%. Cash G&A expense was $4.7 million for the quarter, representing 6.3% of cash rental income compared to 6.5% for the prior year. This improvement in operating leverage portrays our continued efforts in achieving efficient growth and the benefits of our rising scale. Overall, Q3 FFO per share was $0.46, representing 2.9% growth versus prior year. For the early quarter versus our usual results because of the significant acquisition volume and debt recent asset. We also recognized a onetime cash [indiscernible] from a disputed state tax expect several years ago and debt deal costs from several transactions that we tier quarter. Our fixed charge coverage ratio remains a very healthy 4x as of quarter end. Following our Q3 results, we are affirming our cash G&A guidance for 2026 at $19.2 million to $19.7 million, but nothing we expect to be at the bottom of the range. On the leasing front, the team continues to achieve remarkably strong results. We continue to make progress on the 2026 lease maturities, with 39 of the 43 leases already expended by our option release or amendment. The remaining 4 properties combined for less than 0.2% of ABR. We are actively negotiating with current and prospective tenants on the remaining properties in the normal course of managing our portfolio. Our occupancy remains strong at 99.5% today and collected 99.7% of base rent [indiscernible]. Finally, last quarter, we did not see any material changes to our collectibility or credit reserves. Our best class portfolio represents an opportunity for differentiated source of capital in the form of dispositions in the past had periods where we were more active in dispositions than not inducing years. We are [indiscernible] in our presentation posted yesterday that details our strongest position track record. We use this with another tool to unlock value, not reflected in our [indiscernible] valuation, depending on pricing and execution, dispositions can be another potential capital source. We regularly receive strong reverse inquiry offers for our properties. In this environment, we plan to be more responsive to those opportunities. With that, I'll turn it back over to Lucas for questions.

[Operator Instructions] Your first question comes from the line of Jamie Feldman with Wells Fargo. Jamie?

Great. So congratulations on getting the first tranche of the Darden leases executed 100%. You had mentioned that those were all one-off negotiations or individual leases. Can you just talk about as we think about the future tranches, can you just talk about what kind of the negotiating points were to get all of those done. Is there anything as we think about how that might play out for the next tranches that were sticking points as you're negotiating? Or does this give you confidence that it will go pretty smoothly for the rest?

Yes. I think negotiation is probably too strong of a word, Jamie. We had to help administer the paperwork on the extensions, but they were essentially extended not essentially. They were extended in -- as actually they notified us and it's just working with them. So it doesn't all happen in the last minute, just managing the paperwork. But these are very well-covered leases. These buildings have been in operation since I was a child, by and large. And that's very, very similar to all the rest of our portfolio.

The point we made on the individual leases is that because it's not [indiscernible] lease, Darden had the opportunity to go through and evaluate each property, and so it makes us feel even better than you might think just saying that the each and every 1 of those cases, a firm of the stores or something that they wanted to remain committed to and continue to operate a profit.

Okay. And then with leverage close to the high end of your range, assuming that the cost of capital, at least the equity market doesn't cooperate, anytime soon? How do you think about maybe getting that leverage lower to get yourself back in a position to acquire? Or do you just wait this out? Would you consider asset sales or anything else to raise capital?

Yes. I think Patrick made the comment at the end of his remarks that we have very liquid currency in our buildings. There are a lot of demand for them. We get reverse inquiries on a [indiscernible] a daily basis. So we have that. We have -- we could do a joint venture, free up capital, incremental free cash flow in scale of our business. We have a lot of avenues to great cash to reduce leverage, keep it within the range and still buy back shares.

Well, I guess in terms of like timing, how patient would you be for things to come your way before you start taking action?

By taking actions, you're referring to buying back stock, I think we would be doing that in the near term.

No, sorry, I mentioned third-party [indiscernible].

Yes. I think the process of selling buildings is a pretty well-worn path. We showed you in our presentation, we've done that a number of times. So that can be done in the near term.

Yes. And I think I would just point out that I hope it's not lost that the timing of when we raised that debt capital this summer, it's pretty fortuitous around a 5% or lower coupon rate. that's close to where the U.S. Treasury is today. So I think we timed that well. It was highly accretive at that point. And when we think about the flexibility of having lower leverage, you have to make sure that the pricing of that today still makes sense, right? And so if rates have moved significantly since then, it's to our benefit that we have to do when we did an dehull onto that capacity.

Your next question comes from the line of Spencer Glimcher with Green Street.

Yes. Look, on the transaction front, I know you guys have hit the break just given kind of the current environment and your cost of capital, but can you just talk about the make deals you're seeing in terms of industries or credit looking to transact? And have you seen any capitulation from sellers in terms of just signs of willingness to move cap rates higher?

Yes. We actively managed our pipeline down post the [ Mission Pet Health ] acquisition. We are seeing in the market that buyers are actively retreating in a substantial way. The few remaining assets we had in our pipeline at attractive cap rates. And what we're seeing today is cap rates going up but not nearly as much as rates have moved and cost of debt has moved. So as Pat mentioned, we locked in a very substantial amount of debt before this move, which is very advantageous because incremental investments, if you're funding it with a typical mix of equity and debt, both your equity cost of capital is challenged across our industry as stock prices have gone down and your debt cost is challenged. So we are seeing higher cap rates. There are some selected things to do, which we're very active on. But by and large, it hasn't reacted enough keen to compensate where your sources of capital have repriced.

Okay. And then on the divested front, it sounds like, obviously, you're in the early innings of this process. But can you provide some color on what types of assets would be kind of top of mind to sell? And would this be purely opportunistic? Or would there be any room for portfolio management just keeping in mind of how high rent coverage and how superior tenant health is in the portfolio?

Yes. I think it's primarily driven by how attractive the use of capital is in share repurchase. So that's very price dependent, as you might have be aware. But I think the way we think about Spencer is very similar to a report that Green Street did many years ago, I believe it was in 2014 on the arbitrage between the NAV of your company and the value of assets that you can sell. So I think that you guys wrote the script to that game plan.

Your next question comes from the line of Michael Goldsmith with UBS.

Maybe we can dive a little bit deeper into just how you use what capital you do have, right? We're talking about share repurchases, you mentioned buying down debt. And then also, it sounds like some deals were killed. So it seems like you were also willing to transaction in the market. So can you just talk about at what levels do each of those look attractive and your thought process about approaching each of them?

Yes. So we have seen some acquisitions that are highly strategic where we're adding an asset to already existing master lease or we're getting very attractive pricing because you know a tenant. But by and large, our focus going forward is going to be share repurchase. And for obvious reasons, we're not going to draw a line in the sand of what that value is. But we think where our stock price is right now is very active.

Got it. And then also, you did mention the potential of doing joint venture. So I just wanted to get a sense of what that looks like that selling assets into a venture with someone else? And then freeing up some capital to do activity in the market? Or just trying to get a sense of what you would be looking to get out of a JV arrangement?

Yes, I think you nailed that. We have a very well-developed acquisition apparatus. We are -- we see a lot of deal flow. And there are parties that contact us weekly about partnering with us to buy net lease assets. On the private side, net lease is very, very popular right now and a number of new platforms have started and perhaps have raised more capital than they have acquisition opportunities. So I think our platform is very attractive there, and it's a very efficient way, as we mentioned, to [indiscernible] capital to make accretive share repurchases.

Your next question comes from the line of Wes Golladay with Baird.

Being that you have more liquid assets and equity price is more volatile in the private market. Are you okay having a timing mismatch buying shares first and going a little above your target leverage level?