Four Corners Property Trust Inc

NYSE:FCPT

Earnings Call Transcript 2019-Q1

[Operator]

Good day, and welcome to the FCPT Announces Earnings for First Quarter 2019 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Gerry Morgan, Chief Financial Officer. Please go ahead.

[Gerry Morgan, Chief Financial Officer]

Thank you, Chad. Joining me on the call today is Bill Lenehan, our CEO. 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 incorrect.

For a more detailed description of some potential risks, please refer to our SEC filings, which can be found in the investor relations section of our website at fcpt.com. All the information presented on this call is current as of today, April 24, 2019. 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 available on our website.

And with that, I'll turn the call over to Bill.

[Bill Lenehan, Chief Executive Officer]

Thank you, Gerry, and good morning everyone. Thank you for joining us to discuss our first quarter results. Our focus continues to be on sourcing quality one-off and portfolio restaurant opportunities. In the first quarter, we acquired an additional 11 restaurants for a combined purchase price of $19.6 million at a weighted average cash cap rate of 6.7%, six of the eleven are leased to brand’s corporate entities, including McDonald’s, Olive Garden and Buffalo Wild Wings. Nine of the 11 properties were sourced through our previously announced transaction with Washington Prime and all of these properties are structured as ground leases. Given the low rents of these properties, our average basis for acquisitions in Q1 was less than $1.8 million, including the corporate casual dining restaurants.

We remain busy in the acquisition market and the pipeline of activity has picked up over the last 60 days. In a fluctuating interest rate environment, we have seen cap rates basically stay flat, perhaps slightly lower, with some tightening of spreads for properties with longer lease terms. The existing portfolio has continued to perform well and the restaurant industry as a whole continues to report a satisfactory results. Darden has outperformed the industry and was led by its Olive Garden, LongHorn brand, same-store sales growth of 4.3% and 2.8% respectively in the most recent quarter closed in March.

It was also recently announced that Cambridge, a 221 units Burger King, and Popeyes franchisee will be acquired by Carrols Restaurant Group, the largest Burger King franchisee in the system and a publicly-traded company. Cambridge is not only one of our first tenants, but also the fourth largest in our portfolio with 20 properties representing 2.3% of FCPT’s rent. We couldn't be happier for the success of Matt Perelman and Alex Sloane and the rest of the Cambridge team. Congratulations.

Turning to capital sources, through April 1st, we access the equity market through our ATM program to support our growth, while ensuring that we continue to maintain a strong balance sheet with low leverage. This included entering into a forward sale agreement at a weighted average sale price of $29.30 per share for gross proceeds of approximately $47 million based upon the forward price. We expect to settle the forward on one or more dates prior to the end of 2019 to meet capital funding needs, i.e., to meet acquisition funding needs. Finally, we made progress in further building out the team with the addition of an acquisition coordination position and are close to finalizing hires to join the investment and corporate finance team.

Now Gerry will take you through the financial results. Gerry?

[Gerry Morgan, Chief Financial Officer]

Thanks, Bill. We generated $31.9 million of cash rental income in the first quarter after excluding non-cash and straight-line rental adjustments and on a run rate basis the current annual cash base rent for our leases in place as of quarter end is $126.8 million. Our weighted average tenure annual cash rent escalator remains at approximately 1.5% and our sector leading EBITDAR coverage was 4.6 times. On an AFFO per share basis, we reported flat quarter-over-quarter results. Our net income FFO and AFFO per share results were impacted by approximately $0.01 per share in the quarter due to the short term dilutive effect of the balance sheet cash.

In the quarter, we reported $2.7 million of cash general and administrative expenses after excluding non-cash stock-based compensation and maintain our guidance for 2019 of an annual cash G&A rate of approximately $11 million again excluding non-cash stock-based comp and acquisition transaction cost. On January 1st, we adopted the new leasing standard of ASC 842. We've included a slide on Page 17 of our supplemental to outline the result of the adoption, but it had minimal impact to our presentation of results and no net financial impact to FFO or AFFP. The biggest change you will notice that we are now required to record tenant reimbursements on a gross basis. For the quarter, this meant that approximately $200,000 was included in rental revenues for these reimbursements with an offsetting increase in the property expense line.

Turning back to the balance sheet. As Bill mentioned, we ended the quarter well-capitalized to support remaining 2019 investment activity with net debt to EBITDA of 4.6 times, over $60 million of available balance sheet cash after accounting for the dividend that we paid in April and full availability on our $250 million revolver and proven ability to access equity markets through our ATM program. One final accounting note on the equity forward component of our ATM program. Going forward, to the extent is outstanding at the end of the quarter, we will use the treasury stock method to calculate dilution from the forward to the extent that the average market price during the quarter exceeded the adjusted forward sale price at the beginning of the quarter.

And with that, we'll turn it back over Chad for Q&A.

[Operator]

Thank you. We will now being the question-and-answer session. [Operator Instructions] The first question will be from Collin Mings with Raymond James. Please go ahead.

[Collin Mings, Raymond James]

Hey good morning guys.

[Bill Lenehan, Chief Executive Officer]

Good morning Collin.

[Collin Mings, Raymond James]

To start, let's just discuss the decision to access the equity markets in the quarter. Clearly, your stock price is still on the green zone. But maybe just touch on the decision to use the ATM despite the limited acquisition activity in the quarter and just expand upon the forward component on that front as well?

[Bill Lenehan, Chief Executive Officer]

Yes, I think, we just thought we have acquisitions that we have line of sight on. And we wanted to lock in our cost of capital. And forward allows us to do it without current period dilution.

[Collin Mings, Raymond James]

Okay. Maybe going to the prepared comments, in particular, noticing the pickup of activity or potential opportunities call in the last 60 days, anything in particular that's driven that?

[Bill Lenehan, Chief Executive Officer]

I don't think there's anything of particular note. We were always active in the market, and we're very focused on growing the business, diversifying using our cost of capital to manage, et cetera.

[Collin Mings, Raymond James]

Okay. And then maybe tying those two together. I recognize you want to have balance sheet flexibility. But maybe how are you balancing that versus growth? I mean, AFFO per share here was flat year-over-year? So just maybe talk a little bit about how you're trying to strike a balance between the two there.

[Bill Lenehan, Chief Executive Officer]

Right. We don't run the business on 13-week increments. We're looking for creating long-term growth and making sure balance sheet is there when we have acquisitions. So I think it's something that we balance continuously and in real time.

[Collin Mings, Raymond James]

Okay. One other topic I kind of want to touch on and then I'll turn it over. But just given realties announcement earlier this year, Bill have you and your team spent much time considering international opportunities? If so, what was your conclusion? And if not, would it make sense for you to look at some point as you to continue to try to expand that funnel.

[Bill Lenehan, Chief Executive Officer]

Sure. Well, Colin, I think, it's very well trodden path for the restaurant brands to expand internationally. And you can see that with KFC in China or Outback in Brazil. And obviously, there are branded restaurants that have credit on a global basis. But thus far, while we've considered it and thought about it at a strategic theoretical level, we have underwritten properties internationally. And while I would certainly congratulate Sumith on the acquisition, it seems like a well-thought-out transaction. We haven't changed our strategy in the last 48 hours because of it.

[Collin Mings, Raymond James]

Fair enough. Alright I’ll turn it over.

[Bill Lenehan, Chief Executive Officer]

Thanks Collin.

[Operator]

Next question comes from Nate Crossett with Berenberg. Please go ahead.

[Bill Lenehan, Chief Executive Officer]

Good morning Nate.

[Nate Crossett, Berenberg]

Hey good morning. Thanks for taking my question. Maybe you can help us think about how we should view the cash balance levels throughout the year? I know there puts and takes based on the timing of raises and acquisitions. But what's a good level we should assume that kind of stays on the balance sheet for general working capital versus what is deployed?

[Bill Lenehan, Chief Executive Officer]

Sure. Well as Gerry mentioned, we have an undrawn $250 million revolver. And on day-to-day basis, Gerry would probably need $5 million to run the business. But we always want to make sure that we have that capability. And as we see our acquisition pipeline, we tried to make that match with the capital that we have available. And thus, far, we've taken the stance that if we thought our cost of capital was attractive that we would walk in our equity cost of capital by accessing equity markets. But obviously, we don't have to do that. We have our revolver and our leverage is below target.

[Nate Crossett, Berenberg]

Okay. That's helpful. And maybe just one on acquisition levels. How should we – I know you guys don't give formal guidance, but how should we think about the levels this year versus what you did last year versus kind of what's out there right now? Any color you could give would be helpful.

[Bill Lenehan, Chief Executive Officer]

Yes. We don't give guidance, as you mentioned, and we try to be optimistic in our acquisitions and a lot of it depends upon our weighted average cost of capital, which is obviously determined largely by our share price. And I don't have the ability to predict that.

[Nate Crossett, Berenberg]

Okay. And may be just one more, just touching on how Washington Prime is kind of ramping up this year. Can you maybe help us think about the size of these potential opportunities set down the line? Like have you seen an uptick in interests from other retail players for these actual transactions?

[Bill Lenehan, Chief Executive Officer]

We think it’s a large opportunity as you've seen with Washington Prime, it takes a lot of work, a lot of credit on that work goes to Jim Brat, our General Counsel who has very carefully gone through all these acquisitions that again require a lot of heavy lifting to get parcellized and to separate the properties from the mall, but we think it’s large opportunity said, it's larger than we initially anticipated and it's something that we will continue to focus on.

The other thing I would mention as you saw in this quarter, when you're buying ground leases with very low rents, you don't deploy a lot of capital or as much capital as you would when you're buying the building and the ground with higher rents for the same cap rate. So it is hard to deploy a lot of capital but we think it's very safe strategy and we think over the long-term it will prove out to be a good use of our shareholders resources.

[Nate Crossett, Berenberg]

Okay, that's helpful. Thanks guys.

[Bill Lenehan, Chief Executive Officer]

Thank you.

[Operator]

The next question comes from John Massocca with Ladenburg Thalmann. Please go ahead.

[John Massocca, Ladenburg Thalmann]

Good morning.

[Bill Lenehan, Chief Executive Officer]

Hey John.

[John Massocca, Ladenburg Thalmann]

So as you look out over some of the kind of smaller Darden brands that maybe haven't performed as well on a relative basis, in understanding that our ForEx coverage is still very healthy, EBITDA coverage on those assets as well. Is there some cross collateralization you have with the Olive Garden and Longhorn assets that may provide some protection to you in that sense?

[Bill Lenehan, Chief Executive Officer]

No, we have individual leases. I mean if you want to think about having guarantee from Darden as cross collateralization, but I wouldn't really look at it that way. We have individual leases and we have a guarantee from the corporate entity.

[John Massocca, Ladenburg Thalmann]

Great. And are any of those kind of non-Olive Garden, non-Longhorn assets, some of the near term lease expirations or is that kind of middle of the pack?

[Bill Lenehan, Chief Executive Officer]

It's middle of the pack.

[John Massocca, Ladenburg Thalmann]

Okay. And then as you look on the acquisition front, I mean, would you consider potentially targeting C-store properties that have kind of sizable F&B component, whether that be kind of their own branded food or some kind of quick service restaurant attached?

[Bill Lenehan, Chief Executive Officer]

Yes, we certainly would if it was fitting in our underwriting model and was approximate to restaurant properties and the kind of things we normally look at. I don't think it would be necessarily based upon the percentage of food and then the only other thing I would say on that is, it sounds like you're referring to Wawa, which is a great company with a terrific business model. Their properties tend to be quite expensive.

[John Massocca, Ladenburg Thalmann]

Understood. And then lastly, just a little detail one on the forward. How – what's the kind of time you expect on a drawdown and if your shares were to kind of move above the forward price, would you shift to ATM issuance versus maybe kind of ratably drawing down on the forward?

[Gerry Morgan, Chief Financial Officer]

I'll take the first part first. We can't give guidance on when we would take down the ATM without revealing acquisition projections, which we don't give. And then if the stock was over the forward price, we'd have to determine at the top at that time how we would raise the capital and there's many factors at play. So we'd have to wait until that time to make the assessment.

[John Massocca, Ladenburg Thalmann]

Okay. That's it for me. Thank you very much.

[Operator]

[Operator Instructions] The next question is a follow-up from Collin Mings with Raymond James. Please go ahead.

[Collin Mings, Raymond James]

Thanks. Just few follow-up from me. Just picking up on John's question, Bill any further thoughts or updates about maybe expanding beyond just restaurant-focused portfolio or maybe put it in another way, I know there might've been some openness, I'm looking at properties where there's some adjacency, if you will to another concept. Maybe just talk a little bit about that, are some of those opportunities showing up more and more on the pipeline are getting further and further in the diligence process with you?

[Bill Lenehan, Chief Executive Officer]

Yes, I think that's fair to say. I think after purchasing over 200 buildings, we feel confident to look at properties that are adjacent or in outparcel transactions with retailers. Maybe not delete all the properties that were not strictly restaurants, obviously restaurants are our primary focus but I think you'll see in 2019 some additional, some non-restaurant properties hit our property suites.

[Collin Mings, Raymond James]

Okay. That's helpful. And then just be a last one from me. I think it's just one property that's vacant, just looking at kind of the occupancy statistics, I think it is still the same one, but just any thoughts there on jettisoning asset at some point or is there any update on again, kind of the occupancy statistic being so close to 100 does it maybe make sense to jettison asset?

[Bill Lenehan, Chief Executive Officer]

I don't think we would do anything different than an asset because of the optics being 99.9 something occupied versus 100 we're still working on re-tenanting it.

[Collin Mings, Raymond James]

Okay. Understood.

[Bill Lenehan, Chief Executive Officer]

Thanks Collin.

[Operator]

Ladies and gentlemen, this concludes our question and answer session. I like to turn the conference back to Bill for closing remarks.

[Bill Lenehan, Chief Executive Officer]

Thank you everyone. Appreciate the support and if anyone has questions, please feel free to reach out to myself or Gerry. Thank you everyone.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.