Hello 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. 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 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 our website. And 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 performances 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 in aligning 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 onto our tenants' performance. Restaurant operators continue 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. 16 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 program. This includes the closing of a $125 million private note that funded in March, but was fortunately 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 BBB 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 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 and quality markets are less frequently available to us. There are 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 and 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% to low 5% range. I would just quickly note that QSR and fast casual make up 10% of FCPT's. 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've 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, other 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 that rising interest rates should be a factor in how sellers price assets. While we are still waiting for that price relief in the current net lease and in recent weeks, we have started to see early signs of modest movement in cap rates. We will see in time if that dynamic 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. As we further build out the pipeline, we will 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 the Bob Evans property at a 4.5% cap rate earlier this month. The store sales volumes underperform the brand average, so we're moving 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. It ended up being 13% and 16% of our full year volumes. Now turning to Gerry for discussion on our portfolio and financial results.

Thanks, Pat. 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 collectability 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 compensation for the quarter was $3.8 million and consistent with comments on our last call, we continue to expect the cash G&A will be around $15 million for the year. For the first quarter, we estimated 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 and 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 times to 6 times. Net debt to EBITDA in the quarter was 5.7 times and pro forma for the forward equity were 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 minus to BBB flat. 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. And with that, I'll turn it back over to Lydia for Q&A.

Thank you. Our first question today comes from Nate Crossett of Berenberg. Your line is open.

Hey. Good morning, guys.

Good morning.

Maybe a question for Gerry, where could you guys raise, I guess, 10-year debt today? I know you kind of talked about their recent credit rating. And 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 because it varies greatly, but treasury rates are up, spreads are up. So it's probably, 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 comment on the pipeline it kind of sounds alike, and I guess you mentioned how Q1 was late in the last two years. So I'm reading that as we should maybe see a ramp in the next few quarters on deal flow, is that kind of what you guys are signaling by saying that?

I think, I would say, Nate, that has been what's happened historically. Obviously, this is a more volatile environment than most years, but we do feel like there is 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 holds where it is right now.

Okay. I think the comment on cap rates is important because it varies depending on what you're purchasing. It was noted that there is some evidence of cap rates changing, possibly in relation to rates. Can you quantify that or explain what we might expect in terms of movement?

I would just say that in the last couple of weeks and literally the last couple of weeks, Nate, we 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 and as that levered buyer's debt repriced the original buyer dropped out, and we were able to pick up properties on the rebound.

Okay. That's helpful. Thank you.

Yeah. Thanks.

Our next question comes from Anthony Paolone of JPMorgan. Please go ahead.

Thank you. I'll just follow up on the last comment because I was going to ask as well like what kind of needs to happen to see cap rates start to adjust here. And it sounds like maybe the levered buyers, it could be part of this. Can you comment on just how prevalent those are in the market, maybe how sensitive they are and just your own deal pipeline, a little bit more, more color around the types of things you're saying?

Yes. So depending on what leverage LTV you assume, Anthony, if you run the math on our 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. But what I would say is, at some point, it becomes math that the buyer needs to get debt, the bank's reference widely published reference base rates. And as Gerry mentioned and I will concur, credit spreads are out too. So you're just either the equity holder needs to accept a much lower rate of return or the asset level pricing must change. And so 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 has been more conservatism in the pricing, which would be great to see.

All right. And then I remember a couple of quarters ago you had mentioned just a lot of 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, but 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. And then last question for me, just on your $42 million of deals in the quarter. The walt in the sevens seemed a little on the lower side of traditional types of deals. Can you talk about just how you thought about those? Is there a positive mark-to-market? Did you feel like you got compensated for that? Just any thoughts there.

Yeah. So 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 and term has a weighting. And so in order for us to get comfortable buying a property with less term, other factors in that model need to be strong. And I would say that is exactly how we've done it from the beginning. So where you have quarters where term is less, I think you should feel confident that other factors are performing strongly and that's how we look at the world. Term is an important factor, but it's one factor and there are other important factors like the level of rent, the strength of the brand, how good the lease terms are, etc.

Okay. Great. Thank you.

Thank you.

Thank you. Our next question in the queue comes from Wes Golladay of Baird. Wes, your line is open.

Hey. Good morning, guys. I want to go back to the dispositions. Can you quantify the size of the bucket of the, call it, the non-core low cap rate assets and who is the buyers? 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. So the fact that we're talking about it means that we think it will be notable. And what I would say is, it's interesting that Bob Evans, we don't exactly know, of course, what the buyers' intentions are, but the low cap rate is important. We would be able to have significant accretion from our purchase price. But overall, since we focus on low rents, the property's purchase price was under $2 million. So my presumption is that buyer is going to 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 is of course, much less expensive than ground-up construction.

Got it. And then, looking forward, do you have any near-term changes, I guess, in store for the capital structure for funding deals, cost of equities and much more favorable now for you and the cost of debt as widened, and there is a little bit more economic uncertainty at the moment. So would you mean a little bit warrant equity going forward?

I think that's a reasonable assumption. And this is what we've actually been doing over the last six months too. And kudos to Gerry for pricing a bond deal before rates moved.

Thank you. Our next question comes from John Massocca of Ladenburg Thalmann. Please go ahead.

Good morning.

Good morning.

So maybe following up on your other question on kind of lease term and acquisitions, holding all the other factors constant, what's kind of the broad cap rate spread for some of these kind of sub-10-year lease term assets versus something that was kind of a more traditional sale-leaseback, lease duration?

Sure. I would estimate that it's in the range of 20 to 30 basis points. However, I want to highlight that what used to be the norm a decade ago, where non-investment grade leases lasted 15 to often 20 years and investment grade leases typically lasted around 15 years, with some at 10 years, has changed over the past decade. Notably, Darden, being an investment grade entity, has recently sold several properties in the 1031 exchange market with primary lease terms of five years. Therefore, there are fewer 15 to 20-year lease terms being offered compared to historical trends. Nonetheless, we believe we are adequately compensated for these changes. It’s beneficial that we do not need to place mortgages on individual properties, as this complicates the financing of shorter lease term acquisitions. Given that we have 1,000 properties with almost no vacancies, this poses a manageable risk for our portfolio.

Okay. And then moving onto 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 idle time than we swapped that out just because of the uncertainty that can 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 given the size?

Yeah. John, just remind us we’re 350 hedged on the $400 million of term debt this year and next year. You'll see in our supplemental in 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. So 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. So 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 one notch higher level since inception, we've essentially been fully hedged.

Yeah.

I mean that answered your question.

Okay.

The next question in the queue comes from Sheila McGrath of Evercore. Please go ahead, Sheila.

Yes. Good morning. I wanted to ask about your comments regarding highly levered buyers. Do you think that higher interest rates will provide more opportunities for them, or have you seen any evidence that the loan-to-values they're securing from lenders have decreased?

I wouldn't say that the ability to push LTV is down, perhaps slightly. Instead, as we assessed the competitive environment last quarter and at the end of last year, I was quite concerned about several private equity firms expanding their lease groups, as they tend to use much more leverage than we do. This raised my concerns about potential competitive dynamics. While it does enhance the value of our existing assets, it could make acquisitions somewhat more challenging. With rising rates, these firms may find it difficult to achieve their leverage-driven returns. Consequently, they might be less effective at deploying capital, or cap rates may need to rise.

Okay. Thank you.

Thanks, Sheila.

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, and 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 lines.