Four Corners Property Trust Inc

NYSE:FCPT

Earnings Call Transcript 2018-Q1

[Operator]

Good day. And welcome to the FCPT Announces Earnings for the First Quarter 2018 Conference all. All participants will be in listen-only mode [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Gerry Morgan. Please go ahead sir.

[Gerry Morgan, Chief Financial Officer]

Thank you, Denise. Joining me on the call today is Bill Lenehan as well. During the course of this call, we will make forward-looking statements, which are based on beliefs and assumptions made by us and information currently available to us. Our 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 inaccurate.

For more detailed description of these risks or other potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our Web site at fcpt.com. All of the information presented on this call is current as of today, April 26, 2018. 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 Web site.

And with that, I will turn it over to Bill.

[Bill Lenehan, President and Chief Executive Officer]

Thank you, Gerry. Good morning. Our first quarter focus was indulgencing the second tranche of the Washington Prime transaction we announced last year. As we mentioned on the last call, we believe we will be able to source additional high-quality restaurant outparcels from retail landlords, and have made good progress in this regard. We are very excited about our pipeline.

During the first quarter, we purchased just shy of $20.4 million in restaurant outparcels in 12 different assets, three Buffalo Wild Wings and Olive Garden, a Chick-fil-A, McDonald, Starbucks and several other brands. Average term was 9.3 years and the cap rate was 6.8%. There were no dispositions closed in the quarter though we continue to receive regular offers for our properties at very attractive prices. Not much has changed in the restaurant industry in the two months since our last call.

We always monitor our asset pricing very carefully but we have not seen substantial evidence that cap rates have moved, and certainly have not seen move that would be commensurate with the change in long-term government bond rates. We do not issue stock on our ATM in Q1, and we’re in black out for most of the quarter, which is typical for the first quarter of every year. Our balance sheet is in great shape and we believe we have access to significant capital both debt and equity.

Maintaining a low leverage balance is important to us and we understand well that it is important to our investors. Our co-division which operates a handful of Longhorn Steakhouses in San Antonio, Texas continues to perform very well and has exhibited strong revenue growth that is dropping to the bottom line. We will be attending both the ICSE Conference in Las Vegas, as well as the NAREIT Conference in New York City. If you'd like to meet in person, please don’t hesitate to reach out.

Now Gerry will take you through the financials. Gerry?

[Gerry Morgan, Chief Financial Officer]

Thanks, Bill. A few comments on our results for the first quarter; we generated 27.3 million of cash rental income after excluding non-cash straight line rental adjustments; on a run rate basis, the current annual cash base rent for leases in place as of March 31st is $109.4 million; and our weighted average annual rent escalator remains at approximately 1.5%. I'd also add that our sector leading EBITDAR to rent coverage was 4.7 times for the quarter, ticked up slightly from last quarter.

Our net income FFO and AFFO per share results were impacted approximately $0.01 per share in the quarter, because of the short-term dilutive effect of the balance sheet cash that we have. But we are pleased to have that capital available to fund the Washington Prime and other transactions in our pipeline. On an AFFO per share basis, which we believe best represents the cash flow generated from the business, we reported 6.3% growth in quarter-over-quarter per share results.

In the quarter, we reported $2.5 million of cash, general and administrative expenses after excluding non-cash stock-based compensation. We maintain our guidance for 2018 of an annual G&A run rate of approximately $11 million, excluding non-cash stock based comp and acquisition transaction cost. You will note that the amortization of our non-cash stock-based compensation increased in the first quarter, because we are now amortizing awards over three years, and just made our third year's grant to put us at a full run rate of amortization.

Turning back to the balance sheet. We ended the quarter well-capitalized for the remainder of 2018 with net debt to EBITDAR of 4.7 times, $53 million of cash and full availability on our $250 million four year revolver. As Bill said, we remain committed to maintaining a conservative balance sheet with financial flexibility, and we continue to appreciate the support of our investors in the equity, bank debt and private note markets who help capitalize our growth.

And with that, I’ll turn back over to Denise for Q&A.

[Operator]

We will now begin the question-and-answer session [Operator Instructions]. Our first question comes from RJ Milligan from Baird. Please go ahead sir.

[RJ Milligan, Robert W. Baird]

Bill, you had made some progress on additional WPG type of deals. I am curious if you could give us a little bit of color there, and what’s the interest level from some of the other real estate owners that you’ve talked to?

[Bill Lenehan, President and Chief Executive Officer]

We have made progress. The deals are very similar to the Washington Prime deal as far as lots of ground leases, lot’s of corporate tenants, good demographics. Obviously, different sizes depending on what deal you’re talking about we’ll announce from the day they close. We’ve met with almost every major retail landlord in America. We’ve had some perfect reactions from some others, it’s not a focus we continue to plough ahead. We think it’s an attractive avenue for acquisitions.

[RJ Milligan, Robert W. Baird]

Obviously, there’s some concerns out there about some of the trends that we’ve seen in some of the casual dining concepts. Can you talk about that as you’re seeing I guess both from a fundamental standpoint as well as the acquisition opportunities between casual dining versus quick serve?

[Bill Lenehan, President and Chief Executive Officer]

Darden has been in essence in the exception to trends in the casual dining business, which have been not all that positive. It seems to be getting a little bit better in the last quarter. But over the last couple of years, many of the casual dining brands are having a hard time maintaining revenue levels at the same store basis, specifically Applebee's, which is the largest casual dining brand by number has had a difficult performance. Although, it looks like they are making some progress turning it around. Our focus, because of this has been almost entirely on quick service restaurants. And so we feel like where we’ve positioned our acquisitions over the last two and half years has been appropriate.

Obviously, limiting ourselves to quick service makes it difficult, as difficult to grow as fast as you could if you had both casual dining and quick service. Casual dining is a -- the properties are more valuable call it $3 million, to $4 million to $5 million versus quick service, which are typically $1 million to $2 million, maybe in the low $3 million. So obviously you can deploy more capital per property in casual dining. But we've been satisfied thus far and focusing on quick service. Obviously, we started 100% casual and fine dining. And so we think adding quick service adds to diversification as well as aligning ourselves with healthier brands.

[RJ Milligan, Robert W. Baird]

I guess the bigger picture question. Given the competitiveness we’ve seen for restaurants in general in terms of cap rates. Are there any other sectors that look more appealing today from an acquisition standpoint? And what’s Four Corners willingness to invest outside of the restaurant category?

[Bill Lenehan, President and Chief Executive Officer]

In two and half years we haven’t purchased a non-restaurant property. We’ve certainly seen a number of them. Often times they’re in portfolios that we look at. I think when we started, it was prudent to stick to our -- be laser focused on restaurants. I think today when we look at non-restaurant tenants probably more so now than we have in the past, but today we haven’t set an LOI on our non-restaurant, it's just one data point. As we look at other sectors pharmacies and drugstores, carwashes and convenient stores and gas stations, dollar stores, et cetera, we don’t really see a subsector that today looks more attractive than restaurants. Some you could say are about as attractive as restaurants. And we don't see any that have pricing that stand out as being more attractive than restaurants. So certainly restaurants are competitive, but generally retail and that lease is competitive overall. So we’d look at it likely be part of a portfolio. But today we haven’t focused on any specific subsector, if that’s helpful?

[Operator]

The next question is from Collin Mings from Raymond James. Please go ahead sir.

[Collin Mings, Raymond James]

Just first following up on one of RJ’s question, just given some of the challenges on the casual dining front, are you seeing any signs, Bill, that 1031 buyers are differentiating across brands or operators more than they were call it a few months ago or six months ago? Or maybe asking in a different way, are they differentiating across brands or operators as much they should?

[Bill Lenehan, President and Chief Executive Officer]

I would say that we see cap rates, since I mentioned Applebee's before, cap rates on Applebee's have ticked up pretty meaningfully, I don’t think enough but meaningfully. And we’ve seen demands when folks enquire with us about buying our properties the pricing is tick as ever. So I think you do see a difference, and there is a substantial difference in the cap rates but the difference isn’t enticing enough to get us focused on buying casual dining where you have to bet on a rebound in the properties’ performance or brands’ performance, at least not yet.

[Collin Mings, Raymond James]

So maybe a little further up to risk curve. You went a little bit more gaping out in terms of pricing, and maybe some of those with weaker operators or weaker brands?

[Bill Lenehan, President and Chief Executive Officer]

Correct…

[Collin Mings, Raymond James]

Moving on or going really back to the prepared remarks on the acquisition environment, just thinking through that a little bit. Again, as you think about the 1031 buyers out there, have you seen any signs that sellers are more attracted to potential buyers that can offer certainty of close given the potential moving cap rate?

[Bill Lenehan, President and Chief Executive Officer]

It’s a logical question. One would expect that to be the case. I can't speak to a specific example where I’ve seen that, Collin, at least not yet.

[Collin Mings, Raymond James]

Then two other housekeeping ones from me. Just on the second tranche of the Washington Prime deal. It looks like at least in the prepared remarks in the press release, it sounds like that maybe that timeline may have shifted back at least potentially into the third quarter versus more of a by end of 2Q. So maybe just anything that you can comment on that front?

[Bill Lenehan, President and Chief Executive Officer]

I think end of the second quarter, beginning of the third quarter hard to pick a specific month. A lot of these are properties that needed to be parcelized. And you’re relying on local jurisdictions to cooperate in correcting -- and creating a separate tax parcel. So I know Washington Prime is working really hard on it, we’re very supportive of them and appreciative of their hard work. But whether it closes -- whether we have assets closing in June or July, we’re not that fussed about it.

[Collin Mings, Raymond James]

And then just one other small housekeeping one. Just on the other income line, it looked like that was much higher in the quarter than it had been previously or really in the company’s history. So just curious what was that or anything to note there?

[Gerry Morgan, Chief Financial Officer]

We had just over 200,000 of a non-cash gain on an exchange of land parcels with Darden. One post closing item is we had a little parcel that doesn’t impact the value of the property or the parking. And they wanted to switch that. It had, as I said, a slight gain. We backed that out as you’ll see I noted it before getting to FFO and AFFO. Otherwise, other income for us is principally interest on our cash balances.

[Operator]

The next question is from Mitch Germain from JMP Securities. Please go ahead sir.

[Mitch Germain, JMP Securities]

Bill, you mentioned the other sectors that you have looked at. I guess, should we just assume that if there’s any participation in the sector outside of restaurant, it will be part of a bigger portfolio rather than a strategic shift?

[Bill Lenehan, President and Chief Executive Officer]

I think we’re open-minded. Again, it's not something that we spend a lot of time on. I would just maybe characterize it as when we spun, we were laser focused on exclusively buying restaurant properties. We’re not foreshadowing anything here. If something came around now that wasn’t strictly restaurant, we thought it might make sense in the portfolio, we’d consider it. But we certainly would not -- we’re not trying to use the call today to foreshadow some strategic shift in Four Corners. We have been exclusively restaurant since we started, that’s our focus.

[Mitch Germain, JMP Securities]

Seems like pricing environment remains fairly tight. Could that cause you to potentially look at assets a little more risk? Meaning obviously, you’ve got about 13 years of term in your portfolio, maybe look at something that's got a little less term, some leasing risk but the economics might work out.

[Bill Lenehan, President and Chief Executive Officer]

I think if you look at the Washington Prime deal, that’s one way you could characterize it. A lot of these transactions have very low rents but they don't have the typical 20 year lease term. So that’s something that we’re focused on. We think it’s an opportunity and it’s something that’s -- it’s a characteristic of the other deals we’re working with other retail landlords.

[Mitch Germain, JMP Securities]

I think my last question is, ideally I think you’re around give or take about 85%, maybe 83% if you include Washington Prime in terms of -- or 80% in terms of Darden versus other. Is it like ideal percentage in your mind that you’d like to be sitting at in the next call it three years?

[Bill Lenehan, President and Chief Executive Officer]

I don’t think we’ve made that public. I think that you can see us on a consistent basis quarter-by-quarter shifting away. But the Darden portfolio we have is so good that it's hard to feel anxious to dilute that exposure down. And it’s not -- I think our restaurants are very comfortable that the Darden exposure is of extremely high quality, I think five times covered today with high investment grade operator that performed very, very well. So while we like to grow and chip away it at a closure over time and that’s our mandate, we’re in no rush and we’re not anxious.

[Operator]

[Operator Instructions] Our next question is from John Massocca from Ladenburg Thalmannan. Please go ahead sir.

[John Massocca, Ladenburg Thalmannan]

Do you think the timing between the announcement and the expected closing of the WPG transaction is typical of what you expect for in future similar transactions? Or is it somewhat maybe you can build on the experience in WPG or structured transactions differently to maybe shorten closing times?

[Bill Lenehan, President and Chief Executive Officer]

I think it‘s not -- it's all fact and circumstance based, and you will see some be quicker than others. I think that the WPG deal is progressing pretty much how we planned it to progress. This is what happens when you’re purchasing assets that aren’t marking for sale that haven’t been where we don’t have separate tax parcels and the due diligence takes some time to work through. But we think that the view is worth the climb on transactions like this. It’s a lot of work. We feel like we have a lot of capability in our legal expertise to accomplish transactions like this. They take time. We've been working on other transactions like this for many months. And so we feel really good about it.

What's important is once we own the assets so they perform, so being deliberate in how you diligence assets makes a lot of sense. But we feel like it's something for a company of our size to be able to purchase assets that have these brands. As I mentioned in my prepared remarks, Chick-fil-A, Starbucks, McDonald's is a real advantage. While these are assets that take some time to work through, it’s worth the effort.

[John Massocca, Ladenburg Thalmannan]

But I mean that nine month window then you think obviously there is various circumstances and stuff, so that’s going to be pretty typical to the extent you close similar to those…

[Bill Lenehan, President and Chief Executive Officer]

It’s all across the board, John, and we’ve got assets that if it’s on a separate tax parcel and all the information is ready and the leases doesn’t need to be changed at all, we can close as fast as anyone, and we’ve closed some deals in very short period of time. It’s when properties need to go through ROFRs they need to go through separation it takes time. And as I said, we’ve had other transactions we've been working on for many months. So it’s time well spent.

[John Massocca, Ladenburg Thalmannan]

And then you’ve given the diligence that’s required to complete these transactions. You maybe saw a number of them come across get to a point where you can really act on them in a very short period of time. Could that put upward pressure on your cash G&A, especially given how lean you tend to run the organization right now?

[Bill Lenehan, President and Chief Executive Officer]

No, a lot of the transaction related costs can be capitalized. But I would say that we feel like we're well staffed. Our team has a tremendous capacity for workload. So I think we feel like we're in good shape.

[Operator]

And ladies and gentlemen, this would conclude our question-and-answer session. I would like to turn the conference back over to Bill Lenehan for any closing remarks.

[Bill Lenehan, President and Chief Executive Officer]

Thank you, Denise. Again, just to reiterate, we’re very happy with where we’re headed as we round up the first half of the year. And we’re excited about our pipeline and what we intend to accomplish in the second half. To the extent folks who would like to meet at ICSE, NAREIT or during investor call, we’d love to be with you. Thank you very much.

[Operator]

The conference has not concluded. Thank you for attending today’s presentation. You may now disconnect your lines.