Earnings Call Transcript - FCPT Q3 2025

Operator, Operator

Hello, everyone, and thank you for joining the FCPT Third Quarter 2025 Financial Results Conference Call. My name is Claire, and I will be coordinating your call today. I will now hand over to Patrick Wernig from Four Corners Property Trust to begin. Please go ahead.

Patrick Wernig, CEO

Thank you, Claire. 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 of some 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, October 29, 2025. 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. With that, I will turn the call over to Bill.

William Lenehan, CEO

Good morning. November 9 marks our 10-year anniversary as a public company. We are truly grateful to our shareholders, advisers, counterparties, Board and team members, past and present, for their support, guidance and contributions over the past decade. We are proud of the portfolio we've built and look forward to continuing our mission of creating shareholder value. Reflecting on our 10-year history, the highlights have been starting with thoughtful structuring at the spin-off, including our asset selection, modest well-covered rents, low leverage, and low corporate overhead. Executing an acquisition strategy with clear underwriting standards that has led to $2.2 billion of acquisitions and annual cash rent nearly tripling from $94 million at spin to $256 million at our current run rate. Expanding the investment aperture into new sectors and tenants while conservatively sticking to healthy sectors with mission-critical real estate, taking a shareholder-friendly posture with significant insider ownership, best-in-class disclosure, thoughtful capital allocation, and 10 straight years of top decile governance scores. Building a very capable organization. We began with just 4 employees and a single tenant across 418 properties. Today, we have 44 team members and 170 brands across nearly 1,300 leases. We've had very high retention along the way and heading into 2026, we are fortunate to have a bright, young, and motivated team. We have more capacity than ever across the organization. Now shifting back to the current quarter's results. Following my initial remarks, Josh will comment on our investment activity, and Patrick will discuss financial results and capital position. We acquired $82 million of net lease properties in Q3 at a 6.8% blended cap rate. Over the trailing 12 months, we acquired $355 million, which is amongst our highest volume across 4 consecutive quarters. These acquisitions were funded with equity we raised on the ATM via forward issuance earlier in the year at an average price above $28 a share. We accomplished this year's acquisitions while maintaining what's become core to the FCPT brand, a focus on real estate and creditworthy tenants while avoiding sacrificing quality for volume or spread. At the heart of FCPT is also a commitment to modulating our acquisition pace when the cost of capital becomes weaker as we saw last year and then ramping back up when things improve. Said another way, we believe how you raise capital and the cost of the capital is as important as what you purchase with it. Our ability to modulate acquisitions to protect accretive spreads without weakening our portfolio quality is, in our view, a strong competitive advantage of FCPT. Our in-place portfolio remains very strong with 0 exposure to the problem retailers or sectors such as theaters, pharmacy, high rent car washes, and experiential retail. To that end, we have sidestepped tenant credit issues, including 0 bad debt expense this year. Our rent coverage in Q3 was 5.1x for the majority of our portfolio that reports this figure. This remains amongst the strongest coverage within the net lease industry. Olive Garden, LongHorn, and Chili's continue to be industry leaders, and casual dining has recently seen outperformance versus quick service and fast casual. Most recently, Brinker reported Chili's same-store sales growth of 21% for the quarter ended September 2025, which follows a full fiscal year of over 25% same-store sales. Similarly, Olive Garden and LongHorn reported same-store sales growth of near 6% for the quarter ended August 2025, truly stellar results from our largest tenants and highlights the benefit of being aligned with best-in-class operators. We continue to make meaningful progress on our stated goal of diversification. Olive Garden and LongHorn are now 32% and 9% of our rent today versus a combined 94% at spin-off, while 35% of our rents come from outside of casual dining. This includes automotive service at 13%, quick service restaurants at 11%, and medical retail at 10%. All of our chosen sectors are focused on essential retail and services, creating a prudently defensive portfolio that is also tariff resistant. The question we regularly examine is how can we best enact our strategy in the current environment? Fortunately, we have undrawn forward equity, an encouraging set of opportunities in the pipeline, and below-target leverage. While we don't give formal guidance, we want to provide some context on where we stand today. We believe FCPT is well positioned, and we are encouraged by our pipeline and the opportunities we are seeing on the acquisition side. The debt market has improved substantially in recent months, both with greater lender capacity and falling interest rates. We have circa $270 million in combined dry powder, that is a combination of equity, debt, and retained cash flow to fuel growth before reaching a mid-5x leverage target. That's still below our leverage cap. Because of our granular acquisition strategy, we can react quickly and efficiently to adjust our strategy for any major macro events or positive shifts in the rate environment. Finally, over the past few quarters, the deal-making environment has been characterized by some stops and starts. There's been less of that as of late. And looking at recent successes, we believe that we remain well positioned heading into year-end. Over to you, Josh.

Joshua Zhang, CFO

Thanks, Bill. I'll start with a review of this quarter's activity. We acquired 28 properties in Q3 for $82 million at a blended 6.8% cap rate with a weighted average lease term of 12 years. Over the first 10 months of 2025, we have now acquired 77 properties for $229 million, also at a blended 6.8% cap rate with a weighted average lease term of 13 years. Despite construction costs and overall real estate inflation, we've maintained a low basis of less than $3 million per property in both Q3 and 2025 year-to-date acquisitions. Our selective approach of buying granular properties with fungible retail use, often well below estimated replacement costs, have been a key factor to our company's success over the past 10 years. During the quarter, we had a roughly even spread of investment volume across our primary sectors of restaurants, automotive, and medical retail. Our acquisitions included some of our existing national brands such as LongHorn Steakhouse, VCA, and Mavis. We also welcome new brands such as Doctors Care, as we acquired 6 of their urgent care properties. As mentioned in our transaction press release, these leases are guaranteed by Novant Health, a hospital network with over 900 locations and a AA- credit rating. Lastly, while we did not complete any dispositions in Q3, our team continues to field frequent reverse inquiries and offers on our properties. Now reflecting on our strategy. Over half of our year-to-date investment volume came directly from within our existing tenant base. In particular, we had 2 repeat sale-leasebacks noted in Q3, one with Christian Brothers Automotive and another with Ampler, one of the largest Burger King franchisees with nearly 500 restaurants across the brands. Both of these transactions reiterate the strength of our existing tenant relationships and our reputation as buyers. Per usual, we'll continue to balance sourcing investments via sale-leasebacks with opportunistic acquisitions from institutional and independent sellers. The goal is to buy the best risk-adjusted return opportunities rather than focus on how it was sourced. We have also received questions about increased competition in our sector. As the first 3 quarters of 2025 demonstrate, we are finding ample opportunities. Our platform now has a 10-year history of sourcing and executing granular investments at scale, providing a service to both sellers and our existing tenants. We do not plan to deviate from this strategy. As a reminder, our competition is just as often individual 1031 buyers as it is other institutional buyers. Our platform's focus on execution, reputation, and track record allows us to continue to win deals. Finally, while we do not provide acquisitions guidance, Q4 is generally a busy time for our company. And as Bill noted, we have a positive outlook on recent deal sourcing. We utilize our press release regime to give the investor community real-time updates. So please be sure to watch the tape over the next few months. Patrick, back to you.

Patrick Wernig, CEO

Thanks, Josh. I'll start by talking about capital sourcing and the state of our balance sheet. As of yesterday, we had $100 million of unsettled equity forwards at a price of $28.33. We note that maintaining a forward equity balance at higher SOFR rates largely offsets our carrying costs. We have near full capacity under our $350 million revolver and believe we have the dry powder to continue executing our business plan in Q4 and into 2026 without further accessing the capital markets. With respect to leverage, at the end of Q3, our net debt to adjusted EBITDA was just 4.7x, inclusive of our outstanding net equity forwards. Excluding those equity forwards, our leverage was 5.3x. This is our fifth consecutive quarter of leverage below 5.5x and remains near a 7-year low for us. Historically, we've always guided to a stated leverage range of 5.5x to 6x. We decided to lower that bottom range of leverage target to 5x to 6x to reflect our greater use of optionality, switching between debt and equity funding sources. As Bill mentioned, we have $270 million in dry powder before reaching just the middle of that leverage range, the combined use of equity forwards, debt capacity, and free cash flow. We aim to be opportunistic to achieve the best cost of capital based on market conditions. We layered in 3 additional hedges in Q3, lowering our floating interest rate exposure. We now have 95% of our floating rate debt fixed through November 2027 at 3% versus spot rates today above 4%. Overall, 97% of our debt stack is fully fixed and our blended cash interest rate is 3.9%. I'd also like to provide an update on our credit facility. This past quarter, we removed the LIBOR to SOFR adjustment of an additional 10 basis points on our revolver and term loan interest rate. Our new borrowing rate on term loans is SOFR plus 95 basis points and on the revolver, it's SOFR plus 85 basis points. This will improve AFFO by approximately $600,000 per year. Including extension options, we have no debt maturities until the end of 2026, and our staggered maturity schedule will ensure we do not face a significant maturity wall at any point thereafter. Additionally, our fixed charge coverage ratio remains a very healthy 4.7x. Now turning to some of our financial highlights for Q3. We reported Q3 AFFO of $0.45 per share, which increased 3% from Q3 last year. Q3 cash rental income was $66.1 million, representing growth of 12.6% for the quarter compared to last year. Annualized cash base rent for leases in place as of quarter end is $255.6 million, and our weighted average 5-year annual cash rent escalator remains 1.4%. Cash G&A expense, excluding stock-based compensation, was $4.3 million, representing 6.5% of cash rental income for the quarter compared to 6.9% for the quarter last year. This improved operating leverage illustrates our continued efforts at efficient growth and the benefits of our improving scale. We're still expecting cash G&A will be in our guidance range of $18 million to $18.5 million for 2025. At this point, we're expecting to be towards the bottom end of that range. As we're managing our lease maturity profile, we began with 41 leases expiring in 2025, and our team has made significant progress with 90% of those tenants extending their lease or indicating intent to do so and even better 95% occupied after including 2 properties that are already leased to new tenants. Additionally, we have started to make progress on our 42 leases expiring in 2026, which now represent just 1.8% of ABR, down from 2.6% at the start of 2025. There were no material changes to our collectibility or credit reserves nor any balance sheet impairments. Our portfolio occupancy today remains strong as we have released several sites, improving to 99.5%, and we collected 99.9% of base rent for Q3. Last, we are also excited to share a meaningful new disclosure. We've always focused on transparency. And in that vein, we posted into our website under the Portfolio section, a full list of all of our properties with accompanying data on brand, location, purchase price, square footage, and acreage. We believe this level of transparency will help our investor community to better understand the quality of our portfolio and our exposure to all retail brands. With that, we will turn it back over to Claire for questions.

Operator, Operator

Our first question comes from John Kilichowski from Wells Fargo.

William John Kilichowski, Analyst

Bill, I have a question for you regarding underwriting standards. You've established quite stringent underwriting standards, and we've discussed the process in the past. I understand it's likely a somewhat evolving process as you refine it. As you curate your portfolio today, are there any specific standards or guidelines that you're currently using that you might consider adjusting to broaden your investment opportunities and potentially increase future acquisitions?

William Lenehan, CEO

It's a great question. I don't really foresee us lowering the scores that we pursue. There are always things at the individual brand level that we're following that informs the veracity of the scores, such as Starbucks closing stores, and things like that. But I think we're sticking with having a high-quality portfolio. And really, from our perspective, it's the cost of capital that informs the purchase price, which drives the volume of acquisitions primarily. And as Pat mentioned, because we were active on our forward at a stock price north of $28, we are in a great position there.

William John Kilichowski, Analyst

Okay. Very helpful. And then, Pat, you talked about this earlier, there's about $100 million left on the forward. Given where your cost of equity is today and where cap rates are today, let's say, those were to hold somewhat constant into '26, how would you think about funding your pipeline?

William Lenehan, CEO

Yes, I'll take that question. I think the $100 million, you should add to that. We used the number $270 million twice in our remarks. I would add to the $100 million, $170 million of debt capacity and retained free cash flow. So that gives us a substantial amount of acquisition capacity. And I think we'll probably leave it at that for the comment.

Operator, Operator

Our next question comes from Michael Goldsmith from UBS.

Michael Goldsmith, Analyst

Bill, you said in the prepared remarks that at least you called out the pipeline, you called out acquisition opportunities and improved debt market, dry powder. I guess, can you assess the environment overall? It seems like it's very cooperative and favorable. And what would be your willingness to kind of accelerate activity just given the backdrop that you described?

William Lenehan, CEO

Yes. I think you've got it right. We have a super capable team. Our acquisition team is bigger and more trained up and experienced than we've ever had. They've been very successful sourcing acquisitions. But we want to make sure what we buy is accretive. And so we've modulated our acquisition volume based upon our cost of capital in the past. As I mentioned, we have a long runway before we need to consider that. And it's been very fortunate that we raised a ton of equity when our stock price was attractive to do so, and we didn't originate debt at higher rates. So now we're in a great position where we can use our forward, again, north of $28 a share of forward equity, and we can raise debt in a much more favorable market at a cost of funds that's probably 150 basis points or more below where it could have been had we relied on debt in the past. So in essence, I'd look at our balance sheet as being slightly over-equitized right now, which we can get back into balance and have very accretive acquisitions because of that.

Michael Goldsmith, Analyst

And then my second question relates to Darden. You're calling out the first year of Darden spin-off lease maturities in 2027. And at the same time, you identified that the same-store sales at some of these Darden brands have remained really strong. So does that give you increased confidence in their interest in renewing leases? I'm sure you have conversations with them regularly, but I'm just trying to get a sense of how the temperature of that has evolved through the year and as you start to have those conversations next year in anticipation of these maturities.

William Lenehan, CEO

Sure. Yes, our expectations, as you mentioned, are for very high renewal rates. They're very well-covered leases. These are dramatically higher revenue sites than the average casual dining restaurant. Darden has done an exceptional job navigating increased food prices. And so there's a ton of value in Darden's menu right now. I would argue there's a ton of value in Brinker's menu. And they're taking share not just from casual dining, but they're taking the fast casual and QSR customer because their pricing is now right above where certainly fast casual, but even QSR pricing would be. So there's just a lot of value in their menu. So these sites have been curated at spin to be the sites that they're very committed to. Rents are set very low. Coverage on the Darden assets is twice what you would expect. And many of these buildings have been in operation since the late '80s, early '90s. So they are core locations, irreplaceable locations with low rents. So we would expect very high renewal.

Michael Goldsmith, Analyst

Good luck in the fourth quarter.

Operator, Operator

Our next question comes from Anthony Paolone from JPMorgan.

Anthony Paolone, Analyst

Your 6.8% cap rates have been pretty consistent all year, and you talked about not having any real desire to change your scoring. But just wondering if you wanted to go to, say, 7.25%, what would those deals start to look like versus everything you've been doing all year?

William Lenehan, CEO

I think the distinction between 6.8% and 7.25% is probably too fine. So if you give me permission, I'll answer the question in the 7%, 7.5% range. I think you'd start seeing assets outside of traditional net lease. So things that are either experiential, like pickleball facilities or Topgolf. I think you'd start seeing things like obviously challenged brands like Ponderosa or other brands that haven't been opening new units for a long time. I think you'd see things like manufacturing facilities, medical more office versus the medical retail that we focus on, or you'd see things like it's the tenant that you might see us buy, but it's not a retail use. So maybe it's a storage facility or a corporate office or that sort of thing. So we see tons of things at higher cap rates and obviously, lots of things at cap rates where we're not competitive. And our scoring system really allows us to be just passionate and analytical in how we approach it. And we definitely don't sort of calculate our WACC at a spread and say, Josh, go out and find things at that cap rate, and we'll hold our nose and buy them. By being disciplined, that's why for a decade, our occupancy and collections have been so strong.

Anthony Paolone, Analyst

Okay. And then I think in your comments, Bill, you may have alluded to just looking at lots of different things. And does that suggest that you're considering some stuff outside of auto, restaurants, or medical, or just broadening out kind of within those categories?

William Lenehan, CEO

Yes. We're always looking for other categories to explore. As you look over the last 10 years, our willingness to expand beyond restaurants has allowed us to safely grow faster. We're always looking for new ideas. The world evolves. You have to be willing to consider new things. Nothing to announce on this call, but it's something that we're continually looking at.

Operator, Operator

Our next question comes from Mitch Germain from Citizens.

Mitch Germain, Analyst

Bill, congrats on 10 years. And I think my question is looking back. I mean, obviously, you've diversified revenues, gone into new sectors. But have your core underwriting principles remained somewhat consistent? Or have you been tweaking that as the environment changes?

William Lenehan, CEO

Thanks for the question, Mitch. I think you were the first research analyst to cover us 10 years ago. It's been a great 10 years. I think the answer is our basic premise is very similar from the beginning. We are not volume-driven. We are not trying to scale at all costs. We try to be conservative. We try to be analytical. But I would say that over 10 years, the amount of institutional knowledge that we have has grown substantially. We tend to bring people in the acquisition group now as interns when they're in undergrad; they come to our firm after graduation, and we've instituted a very formal training program. I frankly think it's an exceptional training program. We're bringing people to the firm, training them, giving them exposure to lots of acquisitions, small dollars, but lots of swings of the bat. And I've been very impressed by the quality of people we've been able to attract over the last 10 years. There's no question that I would have no chance of getting an internship at Four Corners today.

Mitch Germain, Analyst

Appreciate that context. Just curious about Starbucks. I mean, in prior issues, some of your tenants have had, you guys seem to be coming out of many of these situations with little disruption. Obviously, that's a tenant of yours, not that big in terms of size, but clearly, they're going through some sort of reorganization plan. Is any of that expected to hit your portfolio?

William Lenehan, CEO

We don't think so. A lot of the things that are closing are Starbucks that don't have drive-thrus and Starbucks that are in urban areas. But as Pat mentioned, we put on our website a list, I think, 31 pages long of every single tenant. So you can follow along at an extremely granular level. But Starbucks is a great example of the idea that you need to think for yourself when investing. I think a lot of people bought Starbucks with very low cap rates. Starbucks often has a kickout in year 5 of their lease. And so while they're marketed as having long lease terms, the tenant has the ability to leave. That's why they're able to do so many of these closures, Mitch. So we have been cautious on Starbucks. We've been cautious on Starbucks that don't have drive-thrus, especially.

Mitch Germain, Analyst

Great. Look forward to the next 10 years.

Operator, Operator

Our next question comes from Rich Hightower from Barclays.

Richard Hightower, Analyst

I apologize, I joined the call a little bit late from another call. But I guess just a follow-up maybe on the Darden upcoming, I guess, renewal option. Where do you sort of peg market rents for those properties? And how do you sort of set the balance in that negotiation coming up between obviously very high coverage, which we're all very comfortable with and maybe getting a little more rent from a higher-performing space?

William Lenehan, CEO

Yes, just to clarify, those leases with Darden are public and outlined in our spin disclosure. They are for 10 years with an option to renew for an additional 5 years at an annual rent increase of 1.5%. Darden must notify us a year in advance if they wish to renew, giving us ample time to find a new tenant if they don’t. The rental rate will increase by 1.5% based on the current rate. The negotiation process is relatively straightforward and not as complicated as discussing rent on a site-by-site basis.

Richard Hightower, Analyst

I appreciate that. In a different scenario or structure, would you think that market rents could be significantly higher considering the revenue growth at those properties? Or am I mistaken in that assumption?

William Lenehan, CEO

No, I think you're right. The rents were set quite reasonably. The locations are extraordinarily strong. And in the last 10 years, replacement cost has gone up very, very substantially. But the tenant has 4 or 5-year extension rates at that 1.5%. So I would just view it as being a very high likelihood that they're going to renew.

Richard Hightower, Analyst

Okay. That's great. I think many of your peers are likely facing the same question this quarter. Could you provide some broader commentary on the level of competition and the various players involved, especially considering the new private capital pools that have been raised targeting net lease specifically? Who are you encountering in deals, and what are your thoughts on this?

William Lenehan, CEO

We've always focused on larger transactions and completed a few over the past decade. However, our business model does not depend on waiting for significant portfolio deals like those worth $150 million or $400 million. We're continuously working on various opportunities, including $3 million one-off acquisitions. It's reassuring that we aren't reliant on larger deals. As you noted, there is increased competition from aggressive private equity firms looking to scale, which is often not a prudent approach in investing. Nonetheless, we are confident in our ability to carry out our business plan and have a broad approach to deal sourcing, ranging from large portfolios to $1 million one-offs. If we were only pursuing portfolio deals, that might raise concerns, but that's not our current position.

Operator, Operator

Our next question comes from Wes Golladay from Baird.

Wesley Golladay, Analyst

With the cost of equity where it is today, I know you have the free cash flow and the debt capacity. But as we look a little further out, would you have any appetite to increase dispositions?

William Lenehan, CEO

We've done very little dispositions. It's something we can think about. Our portfolio is in really good shape. So you'd largely be selling things that are very high quality. So we fortunately don't have the dynamic that you've seen with a lot of REITs that do dispositions, where they're trying to sell assets that are likely to underperform going forward in order to upgrade their portfolio. Our portfolio is all very, very strong. We consider it. We know how to do it. We've done it in the past with very particular circumstances. But I don't think that, that's top of mind for us today.

Wesley Golladay, Analyst

Okay. And I think you pretty much essentially asked my next one. I was trying to see if there's been any change to the watch list of tenants that you're looking at, but it doesn't sound like there's much there of a watch list?

William Lenehan, CEO

There isn't. We're in great shape. And if you know, we've actually increased occupancy, and we have very few unleased buildings, but Justin and the asset management team have done a great job leasing up some of the few ones that are tenanted. So yes, we're in great shape. And actually, because of replacement costs going up so much, tenants are coming to us proactively on opportunities to either re-tenant one of a few vacant properties, but even coming to us and saying, if you could get this lesser tenant out of the space, we'd love to take it, which is a reflection of where, as I mentioned, replacement costs have gone.

Wesley Golladay, Analyst

Are you seeing anything with your existing tenants that have renewals? I know you don't have that many, but maybe look at the pull...

William Lenehan, CEO

You dropped off there at the end. Can you restate the question?

Wesley Golladay, Analyst

I was saying like are you seeing anything where your existing tenants? I know you don't have a lot of tenant renewals coming due, but where the tenant may want to pull forward a renewal just to get prices locked in?

William Lenehan, CEO

Most of the time, their renewal options are contractual. So they have a cadence where they know when they need to renew by, and you typically get it right before the renewal. So they can sort of make that decision internally, but they don't have to notify us typically until a year or 6 months before the lease is up.

Operator, Operator

We have a question from Jim Kammert from Evercore.

James Kammert, Analyst

Bill, speaking to your long tenure with many of these assets and your experience in these 3 main silos, competition is always coming and going. But I think this new property disclosure you provide are interesting. Is there an opportunity for you to densify a number of your locations? I mean it looks like they have a pretty solid acreage relative to the improved size and improved building square footage. Is that not really viable? Just curious.

William Lenehan, CEO

Yes. Its acreage is one of the components of our scorecard. And while obviously, building envelope is important, typically, acreage ties to parking and having highly parked locations greatly increases re-leasing opportunity. What can often happen if you're not careful is you buy a building that is poorly parked or has ambiguous parking, relies on, let's say, a neighbor not enforcing their parking situation. And those become difficult to re-lease. So we do focus on it. It's part of our scorecard, both parking and acreage. That said, I think the opportunity to go to our tenants and say, we'd like to negotiate with you for an additional use is limited. The advantage comes in protecting the downside probably more than upside potential, to be honest about it. But that's exactly the kind of thing that you can do with this additional disclosure. Hopefully, we'll answer questions before they come up. And I think the shareholders that we've talked through it appreciate the level of transparency.

Operator, Operator

We currently have no further questions. So I'll hand back to Bill for closing remarks.

William Lenehan, CEO

Thank you, Claire. In summary, the portfolio remains resilient and unique, small and fungible buildings leased to sophisticated national operators with scale, which have proven resilient in uncertain times. We have evidenced that strong track record through extremely low bad debt expense, strong occupancy, and collection rates. FCPT has shown to be sensitive to our cost of capital by modulating capital raising and investment when necessary. We believe that FCPT is in a very strong position to continue to execute our strategy no matter the near-term market conditions, having over $270 million of dry powder. It has been a productive decade, and we are exceptionally well positioned to continue to execute for our shareholders. Thank you.

Operator, Operator

This concludes today's call. Thank you all for joining. You may now disconnect your lines.