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Operator: Good morning, all and thank you for joining us for the FCPT Second Quarter 2024 Financial Results Conference Call. My name is Carly, and I’ll be the call coordinator for today. [Operator Instructions] I’ll now hand over to Patrick Wernig to begin. Please go ahead.

Patrick Wernig: Thank you, Carly. 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, August 1, 2024. 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.

Bill Lenehan: Good morning. Thank you for joining us to discuss our second quarter results. I will make introductory remarks. Josh will comment further on the investment market, and Patrick will discuss our financial results and capital position. We reported second quarter AFFO of $0.43 per share, which is up $0.01 or 2.4% from Q2 last year. Our existing portfolio continues to perform very well with higher rent collections and occupancy. Our EBITDAR to rent coverage in the second quarter was 4.9x for the majority of our portfolio that reports this figure. This remains amongst the strongest coverage within the industry. As an update on the restaurant industry performance, we are seeing overall positive performance. According to Baird Research, year-over-year sales for the restaurant sector as a whole improved in the second quarter in the 5% range after 2% results in the first quarter.

Similar to last quarter, casual dining saw small, but improving declines of strong levels from the prior year. We note this broad view on the industry includes local restaurants and small regional chains. FCPT’s casual dining operators are national brands and sector leaders that generally outperform the industry. For example, Darden reported a 4% increase for LongHorn and a modest 1.5% decline in same-store sales for Olive Garden for the quarter ending May 26, with an overall increase of 1.6% for fiscal year 2024. Overall, for Darden operated brands, restaurant level EBITDA margins improved 20 basis points to 20.9%, reflecting commodity pricing and productivity improvements. Our second largest tenant, Brinker, reported Chili’s same-store growth of 3.5%, and their restaurant level EBITDA margin improved 90 basis points to 14.1% for their latest quarter ended March 27.

We also note Darden continues to see external growth opportunities. The company recently announced the acquisition of casual dining Tex-Mex brand, Chuy’s. Chuy’s has 101 locations and will be the 10th brand under the Darden umbrella. I would imagine the key intent would be to grow this brand store count in the near term. Importantly, we remain disciplined allocators of capital. As we’ve stated in the past several quarters, we have established mental models and structured our team incentives to discourage deploying capital just to grow the company’s size without also increasing per share metrics of earnings or intrinsic value. Our investment team compensation goals are not tied to acquisition volumes and we’ve never given acquisitions or earnings guidance.

These mental models and team structure have allowed us to remain nimble, and we believe that we have operated successfully through today’s environment. As such, we are seeing a lot of interesting opportunities that fit both our quality guidelines and are priced in a manner that makes sense for FCPT, by which I mean accretive. We will continue to look to add to the pipeline in a meaningful way in the second half of the year while maintaining our quality standards. Regarding Red Lobster, we have been in communication with the management, fortress and external advisers since they entered into bankruptcy. As we stated last quarter, our 18 stores are well covered and profitable. And after reviewing the store’s latest updated financials as of May, they continue to be.

Importantly, our conversations with Red Lobster have also confirmed our belief that our stores are performing well and in strong locations. While negotiations and proceedings are ongoing, we expect all of our Red Lobster locations to remain open for there to be very minimal or no disruption from a rent perspective. We think this speaks to the quality of FCPT’s underwriting and asset selection process. That said, we note that the bankruptcy process is still ongoing. And we, along with our other landlords, are awaiting official confirmation. We expect them to exit the restructuring process before the end of Q3. On the issue of potential credit issues, we wanted to remind investors that FCPT’s medical retail portfolio specifically avoids all pharmacy and medical office buildings.

We have a great advantage in that our portfolio was formed after the advent of the cell phone, online shopping and other new trends. We take a cautious approach to general retail merchandise, dollar stores, car wash and large box retail, including theater and gyms. While a potential softening in consumer spending through the entire economy, we believe our portfolio is very well positioned. With that, I’ll turn it over to Josh to further discuss the investment environment.

Josh Zhang: Thank you, Bill. During the quarter, FCPT acquired 17 properties for $45.5 million at a 7.2% cap rate, roughly 30 basis point improvement from last quarter. The acquisitions this quarter were roughly split between auto service and medical retail properties at 49% and 47% of our volume, respectively, the balance being a single casual dining restaurant. For the year, we’ve been more weighted to medical retail with 61% of our volume coming in that category. As we stated before, these sectors all have similar pricing and quality, but the opportunities we close can vary from quarter-to-quarter. We still expect that we will be roughly even between these categories over the long-term. Our largest single transaction this quarter was a $20 million sale-leaseback of eight properties with Mavis Tire.

Mavis is a large consolidator in the auto service space with over 1,800 locations nationally. We had acquired some properties of Mavis from other landlords in the past, but this was our first direct sale leaseback with them. This is a case where we have been interested in this brand for some time, and has to wait for pricing to meet our return thresholds. Mavis has a long-running program of selling sites one at a time at tighter cap rates, but there’s a niche for FCPT to provide optionality to tenants like Mavis to also utilize midsized portfolio sales. As Bill mentioned, we are remaining disciplined on pricing and consistent with our established quality thresholds for new acquisitions. As a higher for longer rate dynamic continues, we are seeing the bid-ask spread between buyers and sellers narrow.

The supply of net lease inventory continues to build up, and our team is well positioned to take advantage of these opportunities. Increasingly, we are finding attractive opportunities over a 7% cap rate with quality tenants and real estate. We also note that all acquisitions this quarter were with investment grade or large corporate tenants and a weighted average lease term of 13 years. We have momentum in the pipeline building today, and we expect that will continue into Q3. Overall, our portfolio now stands at 1,154 leases in Darden now at 51% of our annual base rent and restaurants at 79%. Non-restaurants is now 21% of our portfolio, with automotive as our largest non-restaurant sector at 10%, followed by medical retail at 8%. On the disposition front, we did not sell any properties in Q2 of this year.

However, we frequently receive reverse inquiries on our properties and continue to consider strategic dispositions, both as a potential alternative to issue new capital and as part of our active portfolio management strategy. We are fortunate that our portfolio continues to attract buyers and we can utilize dispositions for accretive capital recycling when needed or when capital markets are less attractive. Turning to leasing. We had 45 leases come due between January and December 2024. Almost all of these are now resulted with a very strong result of 95% being renewed or swapped for new brands. These results reinforce our underwriting confidence that we are partnering with the right tenants, and that rents are set at appropriate levels for the tenants in our portfolio.

Patrick, I’ll turn it back over to you.

Patrick Wernig: Thanks, Josh. For Q2, our cash rental revenues grew 11.4% on a year-over-year basis, including the benefit of rental increases and $204 million of acquisitions in the last 12 months. We reported $57.9 million of cash rental income in the second quarter after excluding $0.6 million of straight-line and other non-cash rental adjustments. On a run rate basis, current annual cash base rent for the leases in place as of June 30, 2024, is $223.6 million, and our weighted average 5-year annual cash rent escalator remains at 1.4%. Portfolio occupancy stands today at 99.6%, and remains well positioned with only 0.7% and 2% to annual base rent maturing in 2024 and 2025, respectively. As mentioned earlier, most of these 2024 lease maturities have already confirmed their extension.

We collected 99.8% of base rent for the second quarter, and there were no material changes to our collectibility or credit reserves nor any balance sheet impairments. Our high occupancy and collection is directly tied to the efforts of our asset management and accounting teams. In particular, FCPT has dedicated resources so that we can remain in tight communication with our tenants and be proactive on upcoming lease maturities. Cash G&A expense, excluding stock-based compensation, was $4.3 million, representing 7.4% of cash rental income for the quarter and compares to 7.8% for Q2 2023. We continue to expect cash G&A will be approximately $17 million for 2024. As a reminder, we take a conservative approach and do not capitalize any of the compensation costs related to our investment team.

Turning to capital sources. We issued $2.4 million of equity in the second quarter at an average offering price of $25.14. As a reminder, in March, we issued $85 million of term loans under our existing credit facility to refinance a June 2024 debt maturity. With respect to overall leverage, our net debt to adjusted EBITDAre in the second quarter was 5.7x and our fixed charge coverage ratio was a healthy 4.3x. We have $240 million of liquidity, comprised of $17 million of cash and $223 million of undrawn revolver capacity. We are committed to maintaining a conservative balance sheet and laddering our debt maturity profile. Our balance sheet remains in great shape today with our next debt maturity not scheduled until November 2025. Taking a step back to think about our overall cost of capital, we’ve been pleased to see sector equity multiples improve, including FCPTs. We’ve also seen some relief in treasury yields and the all-in rates for new debt issuance.

Today, our cost of capital is looking much more attractive than last quarter, which gives us some good optionality for match funding new acquisitions. That said, we have liquidity and revolver capacity to meet our needs without new external capital. With that, I’ll turn it back over to Carly for investor Q&A.

Operator: Thank you. [Operator Instructions] Our first question comes from Anthony Paolone. Your line is now open.

Anthony Paolone: Thank you. So I guess just first one, just wanted to confirm on the Red Lobster point. I guess they had just put out a bunch of new closures. And I guess you guys didn’t have anything on that list either.

Bill Lenehan: Yes, we’re not aware of any of our stores are going to close. And our conversations with them have been very productive. The stores are doing well.

Anthony Paolone: Okay. Thanks. And then the other credit that has come up is, I guess, one of the larger Pizza Hut franchisees went bankrupt, EYM, I think. And do you all have any exposure there that we should be thinking about?

Bill Lenehan: Yes. We have a couple of stores. That’s my knowledge, they’re paying, and we have a personal guarantee from the founder of the company.

Anthony Paolone: Okay. Thanks. And then just last one for me. In terms of the cap rates have been pretty steady here in the low 7s. And it seems like, if anything, interest rates are stabilizing and there’s some expectations of rates starting to come down. Do you think we’ve seen sort of the end of cap rates backing up? Or how should we think about where the pipeline looks like today?

Bill Lenehan: Hard to tell. There was obviously a substantial 6 to 9-month delay in cap rates going up. Hard to know what will happen going forward. Our focus has really been high-grading our pipeline to make sure we have very high-quality properties that we’re closing on.

Anthony Paolone: Okay, thank you.

Bill Lenehan: Yes, thanks.

Operator: Our next question comes from John Kilichowski of Wells Fargo. John, your line is now open.

John Kilichowski: Thank you. I guess first, could you talk about what drove the increased acquisitions quarter-over-quarter, was that a result of an improving cost of capital or just greater seller willingness?

Bill Lenehan: Yes. I think really for the second half of the year, it will be a combination of both. Our equity cost of capital has improved, rates have come down, credit spreads have narrowed. So, our sources of funds are much more attractive, and there is still a buildup in supply in the market, which we can take advantage of. And so we have been thoughtfully conservative when our cost of capital wasn’t there. And now we are very much in the green zone and looking to grow.

John Kilichowski: Got it. And then an interesting question here. Just kind of looking forward, as I look at your lease maturity schedule, obviously, it inflects from ‘27 through ‘33. Is there any desire on your part to have conversations with those tenants about amending those leases and maybe flattening that role, or do you see that as an opportunity to re-price?

Bill Lenehan: I would expect the vast, vast majority of those leases, which are predominantly the Darden leases from spin that are 5.5x, 6x covered that those will be extended according to their contractual terms. So, very, very well covered, not something that’s a big concern for us at all.

John Kilichowski: Got it. Thank you.

Bill Lenehan: Yes. Thanks.

Operator: Our next question comes from Mitch Germain of Citizens JMP. Your line is now open. [Technical Difficulty] Sorry, Mitch, your line is not very clear. Yes, maybe on Mitch’s line. Mitch, if I could ask you to raise a question again to see if that improves the line, that would be great. We will move on to the next question. Our next question comes from Alex Vegan [ph] of Baird. Your line is now open.

Unidentified Analyst: Hi. Good morning and thank you for taking our questions. So, to go back on the franchises with some large franchises going bankrupt, maybe provide some details about the health of franchises in the Four Corners portfolio as well as the percentage of the restaurant exposure is from franchises versus corporates.

Bill Lenehan: Yes. We have very little franchise exposure overall, and that portfolio is 99.8% occupied. So, we are in terrific shape there. And again, we are talking about a couple of properties on 1,150 property portfolio.

Unidentified Analyst: Got it. And overall, how is the watch list looking like? You talked about Red Lobster, anything else that we should – that you are aware of, any changes?

Bill Lenehan: No.

Unidentified Analyst: Got it. And last one for me is, have you looked at Chuy’s and/or talked with Darden about potentially targeting up for a sale leaseback or a different way to grow their store count?

Bill Lenehan: Yes. They don’t have a lot of owned real estate on their books. But we are in constant conversation with Darden and a number of other tenants all the time about supporting their growth. But I think that brand has a really strong brand proposition and a lot of white space to grow. If you think about Darden’s other brands that are several hundred properties that would be a multiple of the 100 or so properties in the Chuy’s brand today.

Unidentified Analyst: Got it. That’s all for me. Thank you.

Operator: Our next question comes from Jim Kammert of Evercore. Jim, your line is now open.

Jim Kammert: Thank you. Good morning. Both Josh and Patrick touched on the strong sort of re-leasing or addressing all the lease exposure for 2024. I am curious, can you share anything about the economics? Let’s say, I am sure a fair bit were maybe fixed option exercise and whatnot. But what sort of recapture rates, I guess did you get on more rents that move to market, if you will?

Bill Lenehan: Yes, it was positive, but I would really caution that it’s a very small sample size because the vast majority took down their contractual options, which is typically 1.5% per year. Occasionally, it’s a 10% every 5 years, but economically think about as 1.5% per year, but the vast majority were the contractual extensions, due to very small sale size, but a positive number if you were to look at that very small sample size.

Jim Kammert: Okay. But then thinking about – obviously, it builds as we talked about most of its Darden in the out years, but is that pretty representative and build, most of your deals have that fixed 1.5% type increment in the new lease rent from the prior expiring rent?

Bill Lenehan: Yes. There is….

Jim Kammert: Okay. Helpful. Thank you.

Operator: [Operator Instructions] Our next question comes from RJ Milligan of Raymond James. RJ, your line is now open.

RJ Milligan: Thanks and good morning guys. Bill, you gave some restaurant same-store sales numbers at the beginning of the call. And I am just curious if we do see or start to see a down trend in those numbers, does that create more buying opportunity? Does that reduce the buyer pool for those types of assets?

Bill Lenehan: I don’t think that, that will happen would be my guess. The performance of restaurant net lease at a high level has been very strong, especially the kind of brands that we focus on, the large public companies. Hopefully, it will provide an opportunity, but I don’t think I would count on that.

RJ Milligan: Okay. That was it for me guys. Appreciate it.

Bill Lenehan: Sure. Thanks RJ.

Operator: Thank you. Our next question comes from Mitch Germain of Citizens JMP. Mitch, your line is now open.

Mitch Germain: I will try this again. How does the math of a one-off Mavis look versus the portfolio? I know that Josh indicated pricing was a little bit tighter.

Bill Lenehan: Josh?

Patrick Wernig: Yes. Well, this is Patrick. I would say that there might be a 75 basis point portfolio discount. The cap rates throughout net lease have moved significantly in the last 12 months, but you are seeing the return of a portfolio discount for buyers like ourselves that can take down more than one at a time.

Bill Lenehan: Yes. Mitch, just to elaborate. For a number of years, there wasn’t a sort of a – there wasn’t a ton of value in providing certainty of being a professional buyer of assets. Folks understood that if a 1031 exchange fell out, they would be able to put it back under contract in no time potentially at a tighter cap rate. Now, because of the capital markets uncertainty, like the trend that we are seeing is perhaps people trying to get deals closed before the election, a little bit more value in being a large established professional buyer of buildings.

Mitch Germain: That’s super helpful. But to that point though, you are not seeing any buyers – sorry, sellers pulled back to wait for the potential rate cut to see if that changes the pricing dynamic?

Bill Lenehan: We had seen some portfolios that have been on the market, call it, late last year, early this year, not transact. And so always hard to read the minds of sellers, but I think that, that was a dynamic. But as the forward SOFR curve would be a place that I would look for data indicates rates will be relatively elevated for the next 12 months, 18 months, that’s the borrowing reference rate that a lot of sellers have a floating rate debt that’s more flexible for prepayment.

Mitch Germain: That’s super helpful. Last one for me. Obviously, deal flow was centered away from the restaurant sector this quarter, was that by choice, or was that just a function of the assets that were available that met your underwriting criteria?

Bill Lenehan: The latter for sure. The latter, 13 weeks is too short of a time to draw any conclusions other than we are excited to be buying assets in the auto service and medical sector. But we are always looking at restaurants, there is plenty in our pipeline. You will see that percentage go up and down by quarter.

Mitch Germain: Thank you. Have good rest in the summer.

Bill Lenehan: Great. Thanks Mitch.

Operator: Thank you. We currently have no further questions. So, I will hand back to Bill Lenehan.

Bill Lenehan: Terrific. Well, exciting quarter. We are very excited for the second half of the year. Again, the combination of lower borrowing costs, a higher stock price and an attractive acquisition market bodes well for the next six months. Thanks everyone.

Operator: This concludes today’s call. Thank you to everyone for joining. You may disconnect your lines.