Joshua Zhang is the director of investments at Four Corners Property Trust (NYSE:FCPT), a net lease REIT primarily focused on restaurant and retail properties, while also expanding into additional asset classes. He joined FCPT in 2016—the first investment professional to be hired shortly after the REIT’s founding—and was tasked with diversifying and growing the portfolio. Prior to joining FCPT, Zhang was an investment banker at Goldman Sachs in their real estate group.
How would you describe the transaction market in which FCPT is operating today, and where are you finding your best opportunities?
Today’s market is much more favorable to buyers when compared to recent history. We are finding much less competition and are increasingly finding that we are the only buyer at the negotiation table as we do not need financing for each transaction. Sellers are more accommodating, both on price and terms, and are more engaged with working through the process. In other words, the market is shifting from capital chasing transactions to transactions chasing capital.
Our investment thesis is largely the same and we’re focused on opportunistically partnering with sellers who value our execution, commitment to get the deal closed, and ability to tackle complexity rather than those that are waiting for the absolute highest price. Through the first seven months of the year, we have already put up a record year on acquisition volume.
What are some of the key elements of the FCPT acquisition process?
Our team uses the same assessment frameworks for every property we buy and sell, which is important since we have bought about 700 buildings in the last several years. These frameworks were essentially established at our company’s inception, have been applied to every single property we’ve acquired, and have allowed us to gather great data insights on both our portfolio and the market in general.
Our underwriting “scorecard” includes over 20 criteria we believe are critical in making a net lease investment decision. At FCPT, we talk about our deals in terms of numbers (e.g., “that BJ’s Brewhouse is an 87 out of 100”) rather than focusing on a singular merit or issue. This allows us to be objective as we evaluate properties and makes our assessment as dispassionate as possible.
Another key framework is the “heat meter.” This tracks our cost of capital and determines if a transaction is accretive on a per share basis. The model guides our overall strategy decisions: should we issue shares and buy properties, do nothing, or should we sell properties and buy back shares?
Lastly, no matter what, we write an investment memo for each and every transaction that goes to our board. While this discipline takes time, we believe the fulsome review of each opportunity through multiple hands has allowed us to maintain the integrity of our portfolio.
To what extent is technology playing a role in FCPT’s ongoing investment activities?
We’ve been focusing on technologies that create efficiencies in our human decision-making process. These include mapping software, a deal management platform called Dealpath, collaboration tools, CRMs, and data platforms that provide predictive analytics. We have also leveraged data platforms for loan and ownership details to direct our sourcing efforts.
Technology has enabled us to have a wealth of information at our fingertips and to stay connected as a team to make cohesive, real-time decisions. That being said, despite the wide array of technologies at use, the ability to think for ourselves has been the primary driver of success in our roughly 700 investments to date. We have yet to come across an AI service that has been able to beat human decision-making after reading the lease, visiting the property, and interviewing the operator yourself.
Looking ahead, are there new asset classes that FCPT might consider in order to diversify its portfolio?
Absolutely. We’re always considering adjacent strategies that overlap with our existing expertise, fit within our current portfolio, and also provide accretive risk-adjusted returns. When FCPT first started in 2015, we had a pure-play restaurant strategy that has since evolved as we’ve diversified into a variety of other asset classes. Most notably, we’ve found the medical retail and automotive service sectors to fit within our investment framework.
More specifically, we’ve been seeing a rising trend of medical services moving out of the hospital and into outpatient clinics with many healthcare operators expanding a more convenience-focused retail footprint. We similarly are seeing strong fundamentals in automotive service and focusing on sub-sectors that are both recession resilient and not solely reliant on combustion engines. Even self-driving electric vehicles will need their tires changed.
While our team is always adapting to new information and market trends, we’re glad to maintain the same, core investment strategy: fungible buildings located in strong corridors and leased to the best-in-class operators in the space.