Four Corners Property Trust Inc

NYSE:FCPT

Earnings Call Transcript 2019-Q3

[Operator]

Good morning and welcome to the FCPT Announces Earnings for Third Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions].

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

[Gerald Morgan, Chief Financial Officer]

Thank you, Chad. Joining me on the call today is Bill Lenehan. 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 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 www.fcpt.com.

All the information presented on this call is current as of today, October 30, 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 the website.

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

[William Lenehan, President and Chief Executive Officer]

Thank you, Gerry. And good morning. Thank you to everyone for joining us to discuss our third quarter results and recent announcements. As we approach the fourth anniversary of FCPT's formation, we are very proud of the progress we've made in building the team and growing and diversifying our high quality portfolio.

Our portfolio performed as expected in the third quarter. We achieved an increase in AFFO to $0.35 per share and EBITDAR coverage remains strong at 4.8 times.

Turning to our investment activity, we closed on the acquisition of eight restaurant properties for $16.1 million. Most of these were as a result of an outparcel strategy, with seven of the eight properties leased to corporate tenants operating strong brands including Texas Roadhouse, Olive Garden, McDonald's, Buffalo Wild Wings and Outback Steakhouse.

The average price for our acquisitions was $2 million, representing a low basis entry point.

During the month of October, we have closed on another seven properties, including two restaurant outparcels from Brookfield and two bank outparcels from Washington Prime for a total of $13.1 million.

The Citibank and PNC branches were the first non-restaurant properties acquired by FCPT, although we note that we have additional properties in various retail sub sectors in our announced pipeline.

Over the past three months, we have also made significant progress on solidifying our pipeline with the signing of two definitive purchase agreement to acquire an additional 20 outparcel properties, a second transaction from Washington Prime and to acquire 24 properties from Brookfield Properties.

In total, these two announced transactions represent a combined purchase price of approximately $84 million. These are excellent partners with whom to grow our portfolio and closings will occur in rolling tranches as the properties become available to be conveyed, including four of these properties that have closed since mid-September.

I wanted to note a couple of important characteristics of these properties from the combined portfolios of these two recently announced deals. Rents reflect low in-place leases, the vast majority of which are ground leases.

The outparcel portfolios in these two transactions represent 33 high-quality and nationally recognized brands. Additionally, most of these properties are leased to the brand's corporate or franchisor entity. This is granular diversification with strong credit tenants at scale.

The properties are located in attractive retail corridors with strong population growth and traffic figures that compare favorably to the demographics of the original spin portfolio.

We'd like to take a moment to address the retail properties in these two portfolios that fall outside of the restaurant sub sector. 18 of the combined 44 properties are with non-restaurant retail brands. And as mentioned earlier, we have already officially closed on the first two properties in this group earlier this month.

We're excited that our initial expansion outside of the restaurant net lease space is through these unique outparcel portfolios alongside acquiring restaurants in great locations as well.

These non-restaurant leases share similar qualities as our restaurant locations with comparable building sizes and net lease structures. Additionally, they have great tenant credit as 13 of the 18 leases are with investment grade tenants. We look forward to leveraging our deal sourcing and closing infrastructure to grow in both the restaurant and non-restaurant net lease sectors.

Stepping back, the restaurant industry as a whole is reporting solid Q3 results and performing in line with the S&P. This includes Darden, which was led by its Olive Garden and LongHorn brands, same-store sales growth of 2.2% and 2.6% respectively in the most recent fiscal year, closed in August.

Brinker also performed well in its most recent quarter with same-store sales at corporate operated Chili's locations growing nearly 2% versus the prior year.

Now, Gerry will take you through our financial results. Gerry?

[Gerald Morgan, Chief Financial Officer]

Thanks, Bill. We generated $32.8 million of cash rental income in the third quarter after excluding non-cash straight-line rental adjustments. And on a run rate basis, the current annual cash base rent for leases in place as of September 30, 2019 is $130.9 million.

Our weighted average 10-year annual cash rent escalator remains at approximately 1.5% and our EBITDAR coverage was 4.8 times.

We reported a 3% increase in AFFO per share, as Bill mentioned previously, on a quarter-over-quarter basis.

In the quarter, we reported $2.6 million of cash, general and administrative expenses after excluding stock-based compensation and maintain our guidance for 2019 of an annual cash G&A rate of approximately $11 million excluding stock-based compensation and acquisition transaction costs.

Turning to the balance sheet, we ended the quarter well capitalized to support investment activity. Our net debt to adjusted EBITDAre stood at 4.8 times and we have full availability on our $250 million revolver.

In addition, as we have discussed previously, we intend to settle the forward equity sales agreement we entered into in April during the fourth quarter which will generate net proceeds of approximately $46 million. As referenced in the earnings release, we settled the first 500,000 shares of the forward in October at a sales price of $28.94 per share for net proceeds of just over $14 million.

With that, I'll turn it back over to Bill.

[William Lenehan, President and Chief Executive Officer]

Operator, I think we're now ready for questions.

[Operator]

Certainly. [Operator Instructions]. Our first question comes from Nate Crossett with Berenberg. Please go ahead.

[Nate Crossett, Berenberg Capital Markets]

Hey, good morning guys.

[William Lenehan, President and Chief Executive Officer]

Good morning, Nate.

[Nate Crossett, Berenberg Capital Markets]

Thanks. I was wondering if there was any color you can give us on when all of these Washington Prime and Brookfield acquisitions will be kind of fully acquired. And then, just on Brookfield, it looks like in the release earlier this month, you said you've done transactions with them in the past, kind of, just can you give us more color on how this larger transaction came about? Will there be more transactions like this going forward?

[William Lenehan, President and Chief Executive Officer]

Sure. There will be some properties that close before year-end. Those are the properties that are already parcelized. We'd imagine most of the properties will close in the first half of next year. And I would imagine there would be some stragglers, but not very many by dollar amount that will close in the second half, especially those that are in states that are difficult to parse like Florida, but we're working really hard to try to get a number of them closed in 2019.

So, with Brookfield, we've known the management teams at Rouse and at GGP for a long time, hold them in high respect. And when the company was purchased by Brookfield, it opened up an opportunity to reengage with them on a broader portfolio, especially as our mandate to acquire non-restaurant properties was in place. So, I think it was both a change of control, new ownership structure on their side and the increased mandate to go non-restaurant on ours.

[Nate Crossett, Berenberg Capital Markets]

So, if I could just, like, what's kind of the total addressable market from Brookfield like in the next few years? I guess, is there any guidepost where we could kind of – should we look to Washington Prime or what – is there any sense of, like, what this could be going forward, I guess?

[William Lenehan, President and Chief Executive Officer]

Sure. Well, I wouldn't be surprised if we did more with Brookfield. But I don't want to put any guidepost around it and I would also simply say that there is a number of other retail landlords where we can continue to take advantage of that opportunity. Stay tuned.

[Nate Crossett, Berenberg Capital Markets]

Okay. And then maybe just a little one last one. Outside of these larger transactions, how has the deal flow been the last 90 days? Can you remind us the size of the sales team? Just may be a little color there.

[William Lenehan, President and Chief Executive Officer]

Sure. Well, our acquisition team has been very busy. The pipeline is sizable. We are as busy as we've ever been.

[Nate Crossett, Berenberg Capital Markets]

Okay, thank you.

[Operator]

The next question comes from Collin Mings with Raymond James. Please go ahead.

[Collin Mings, Raymond James]

Thank you. Good morning, guys.

[William Lenehan, President and Chief Executive Officer]

Good Morning, Collin.

[Collin Mings, Raymond James]

First question for me, just recognizing the change was very minimal, but can you maybe just touch on the downtick in the EBITDAR coverage in the other brand, non-Darden bucket quarter-over-quarter?

And then, just more broadly, can you just expand on your prepared comments as it relates to the trends you're seeing from your restaurant tenants?

[William Lenehan, President and Chief Executive Officer]

I don't think we've seen anything meaningful in the change of coverage. I think we just have a little bit different mix. But, yeah, the existing portfolio is doing fine. Outside of our portfolio, there are some restaurant tenants that we don't own that are struggling. I think that's been well reported, but I think it's a testament to our thorough process and focus on high quality operators that has our portfolio in pretty good shape at the moment. Very good shape.

[Collin Mings, Raymond James]

And then, switching gears to the Brookfield deal, just going through the list of non-restaurant exposure there, there appears to be a hotel. Can you maybe just touch on that and how that fit into your criteria and provide a little bit more detail?

[William Lenehan, President and Chief Executive Officer]

Sure. The hotel – our basis in that hotel, I think, would be something like $30,000 a key, which is extremely low. It's very – it's a relatively new property that was recently renovated and our basis is super low ground lease, very low rent. So, we feel very comfortable given those dynamics.

I don't think hotels is a sub-sector that we're specifically targeting, but if it makes the parcelization process easier, it's adjacent to other properties we own and the basis is super low, we feel comfortable doing it.

[Collin Mings, Raymond James]

Got it. And then, maybe just to remind us – and I recognize you did talk a little bit about this last quarter – but just given your broader mandate of kind of non-restaurant properties, the willingness – again, obviously, recognizing one deal doesn't necessarily make a trend here. But beyond just the hotel property, other potentially, whether it be office, industrial other areas you might...

[William Lenehan, President and Chief Executive Officer]

I think you said it, Collin. One deal does not make a trend. So, we're very focused on keeping our acquisition criteria logical and adjacent to the restaurants that we purchase. This was one where it facilitated making the deal better. And frankly, at the cap rate that we got it and the low rent, it's a terrific deal.

[Collin Mings, Raymond James]

Got it, okay. And then, I do want to also bring back up again, in context of Brookfield deal, just bank exposure here, I know, again, it was talked a little bit about last quarter, but I think the Brookfield deal consisted of five banks, maybe just talk about your comfort level of exposure to that sector. And then, just more broadly, Bill, if you can comment on, as you look to diversify here, any sort of exposure limits on other non-restaurant sectors you might look to target as you go forward.

[William Lenehan, President and Chief Executive Officer]

Yeah, we've been pretty cautious on banks, excluded far more than we've put under contract. Probably not our favorite sub sector on a sort of macro trend basis, but good credit, very good real estate. These individual deals are very well-located. And, again, the rents are really low and the deposit bases are very high. So, we've been very selective.

[Collin Mings, Raymond James]

Okay. And then just, as you think about – again more broadly, just non-restaurant sector exposure, just maybe if you can touch on any sort of guidepost or limit as you think about diversifying the portfolio, maybe having to try to limit how much exposure you want to any of these other areas?

[William Lenehan, President and Chief Executive Officer]

Yeah, I think we're a long way away from putting sort of portfolio limits in place when we're talking about not having more than a handful of any particular non-restaurant exposure at this point, but point taken. We've been very conservative and expect to continue to be so.

[Collin Mings, Raymond James]

Okay. And, I guess, just to that point – the last one and I'll turn it over – so, along those lines, you referenced there certain sectors of non-restaurants you see more opportunity in. Can you maybe just high-level – don't have to provide obviously specific tenants, but just high level some of the sectors that, as you look at non-restaurant properties that you have, you see the most favorable kind of macro wins.

[William Lenehan, President and Chief Executive Officer]

I think auto services is pretty advantaged. And then, I would also say, we're looking at some, I'll call it, restaurant-anchored multi-tenant. So, that might be a Chipotle and a Starbucks with a Verizon store in the middle sort of thing.

[Collin Mings, Raymond James]

Got it. Thank you. I'll turn it over.

[Operator]

The next question comes from Jason Moment with Route One. Please go ahead.

[Jason Moment, Route One Investment Company]

Thank you, guys. And I want to first congratulate you on an excellent quarter under extremely challenging circumstances. I doubt most people on the call understand what you're up against with these fires and I don't even know how you run a public company without access to electricity. That would be my first question.

But I appreciate your conservatism and this diversification strategy. I just wanted to relay a little story and maybe inspire you to think a little bigger, which is, a few years ago, I invested in a little company with a big dream. Their dream was to build a beautiful shared community office space, a place where me becomes we. I think you know where I'm going with this. Suffice to say, that company grew to become a behemoth, worth about $47 billion when I last checked my statement. And in the process changed a lot of people's lives, my pocketbook included.

My question to you is this, have you thought about doing something similar in the restaurant space, something in the shared environment where maybe different chefs would compete over the burners, the stoves, et cetera, to create eclectic cuisine for customers? And I just want to encourage you to – I know you're conservative, but to think outside of the four corners of your offices and to think bigger and think about a dream and how we can create that kind of a community environment in the restaurant area. Thank you.

[William Lenehan, President and Chief Executive Officer]

Well, thanks, Jason. I think there's kind of two parts to that question. The first is running the company without electricity. It's not ideal, Jason. Electricity is important to our acquisition process at FCPT as I imagine it would be for our peers, but we got through it. After a week, our lights are back on. I think getting our earnings release out a little late is the only implication. But we won't make a habit of that.

And as to your second question, I think I'd encourage you to check your account statement. Operator, any more questions

[Operator]

Yes, we do. We have another question. And it's from John Massocca with Ladenburg Thalmann. Please go ahead.

[John Massocca, Ladenburg Thalmann & Co.]

Good morning.

[William Lenehan, President and Chief Executive Officer]

Hey, John.

[John Massocca, Ladenburg Thalmann & Co.]

I think the prior caller explained the late earnings release pretty well. But with the Brookfield deal that closed in October, specifically, you mentioned that that was part of a six-property transaction that occurred in 2018. Is there more to that transaction? And I'm guessing it's separate from the kind of existing out-lot transaction, we've already kind of talked about a little bit. That was announced…

[William Lenehan, President and Chief Executive Officer]

John, we've got three more in that transaction to close.

[John Massocca, Ladenburg Thalmann & Co.]

Okay. So, it's fairly de minimis, with less in out-lot. Okay. And then, outside of kind of out-lot transactions, as you look out on the portfolio, the pipeline kind of going forward, what mix of that is kind of a single individual assets and how much is maybe kind of more larger sale leasebacks?

[William Lenehan, President and Chief Executive Officer]

There is both, John. On the individual transactions, the market is very aggressive pricing-wise. So, we do screen a lot of properties. We send out a lot of LOIs. And we pick up some, but it's pretty situational specific. Typically, it's a seller who's been under contract with a 1031 exchange buyer on a few occasions and is frustrated and wants certainty of close, which we can provide.

And then the portfolios, they just are episodic. They don't happen with much – with the same level of frequency. So, it's a mix. But, again, we're quite busy.

[John Massocca, Ladenburg Thalmann & Co.]

Okay.

[William Lenehan, President and Chief Executive Officer]

I would also say that this is a period of the year where, if folks want to accomplish the sale in 2019, they need to be making that decision this week or next week kind of thing.

[John Massocca, Ladenburg Thalmann & Co.]

Okay. The color is very helpful. Thank you very much.

[William Lenehan, President and Chief Executive Officer]

Thanks.

[Operator]

[Operator Instructions]. At this time, I'm showing no further questions. So, I'd like to turn the conference back over to Bill Lenehan for any closing remarks.

[William Lenehan, President and Chief Executive Officer]

I just want to thank everyone for a terrific four years. We've built a great team and added substantively to the portfolio. The portfolio remains in great shape and we're really excited about the future. Thanks, everyone.

[Operator]

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