Four Corners Property Trust Inc

NYSE:FCPT

Earnings Call Transcript 2017-Q4

[Operator]

Good day and welcome to the FCPT announces earnings for the fourth quarter 2017 conference call. 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, CFO. Please go ahead.

[Gerry Morgan, Chief Financial Officer]

Thank you Rachael. 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 risks, uncertainties and factors that are beyond our control or our ability to predict. Our assumptions are not a guarantee of future performance and some will prove to be inaccurate.

For more detailed description of some potential risks, please refer to our SEC filings, which can be found on the Investor Relations section of our website at ww.fcpt.com. All the information presented on this call is current as of today, February 21, 2018.

And 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 will turn the call over to our CEO, Bill Lenehan. Bill?

[Bill Lenehan, President and Chief Executive Officer]

Thank you, Gerry, and good morning everyone. Our fourth quarter focus was on diligence in the Washington Prime transaction we announced in September, as well as meeting with additional mall and shopping center owners to attempt to scale this strategy. As we mentioned in the last call, we believe we will be able to source additional high-quality restaurant outparcels from these parties and have made good progress in this regard.

During the fourth quarter, we purchased five Red Lobster's, one LongHorn Steakhouse and two more Burger King's with Cambridge, a tenant we have a very strong relationship with. The acquisition statistics were in line with prior purchases, good credit, long-term leases and a going-in cap rate of 6.7. We also sold an Olive Garden at a 4.7 cap rate.

We started off the year with two Buffalo Wild Wings acquisitions, both run by an existing tenant and ten of the Washington Prime properties. The rest of the Washington Prime transaction is progressing as planned.

On the restaurant industry overall, not to sound like a broken record, I would like to repeat three observations from last quarter as they are still relevant. Darden continues to execute at a very high level with a conservative financial profile. Many other casual dining companies are not doing as well and we have avoided these credits. And the quick service brands that we have been acquiring are stable. I would also highlight that Darden was upgraded by Moody's in late January from Baa3 to Baa2 which matches its ratings of BBB from S&P and Fitch and is further evidence of Darden's commitment to an investment-grade balance sheet.

In the last few weeks we have experienced a volatile interest rate environment. One would expect higher interest rates to equate to higher acquisition yields, if for no other reasons that higher borrowing cost will impact buyer's ability to generate sufficient equity returns, not to mention higher required equity returns themselves. However, we have not yet seen the impact of higher risk relays being passed on to sellers. Perhaps the structural dynamics of the 1031 market whereby buyers become locked in to properties they have identified in trade is a cause or whether it's simply too soon to tell, we don't know. This is something we are monitoring closely.

We did issue a small amount of stock on out ATM in December, $3.5 million, at an average price of $26.56. Our balance sheet is in incredible shape and we believe we have access to significant capital, little debt and equity.

We are very pleased to announce Niccole Stewart's promotion to Chief Accounting Officer at the beginning of the year. Niccole joined pre-spin and has done an excellent job building a team, achieving SARBOX compliance, internal accounting, driving meaningful overhead savings and consistently executing at a very high level.

Lastly, we are excited to announce that we are going to add an additional acquisition team member starting in May.

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

[Gerry Morgan, Chief Financial Officer]

Thanks Bill. First, a few comments on our operating results for the fourth quarter. We generated $26.8 million of cash rental income after excluding noncash straight line rental adjustments. On a run rate basis, the current annual cash base rent for leases in place as of the end of the year is $108 million. Our weighted average annual rent escalator remains at approximately 1.5%.

Cash interest expense, excluding amortization of deferred financing costs and other noncash interest, was $4.5 million reflecting a full quarter of lower margins on our $400 million term loan and lower unused fees on a revolver from the recasting of our credit facility in early October. There were no borrowings on our revolving facility during the quarter as we maintained a net cash position, which was $64.4 million at quarter-end.

Our net income FFO and AFFO per share results were impacted in the quarter by the short-term dilutive effect of the balance sheet cash, but we were pleased to have the capital available to fund the Washington Prime transaction and other transactions in our pipeline before the movement in interest rates over the past several months. As we mentioned in the press release, the FFO per share results were impacted by $0.01 due to noncash interest expense in connection with the credit facility recasting in October and a noncash credit that benefited our results in 2016 related to hedge ineffectiveness. On an AFFO per share basis, which we remind everybody we believe best represents the cash flow generated from the business, we reported 6.5% growth in quarter-over-quarter results.

In the quarter, we reported $2.3 million of cash, general and administrative expenses after excluding noncash stock-based compensation and $9.6 million for the full year of 2017. This result was comparable to our cash overhead in 2016 even though we have added five great new members to the team since we have achieve savings in professional fees in our second year of operations, insurance and other third-party expenses. We are providing guidance for 2018 of an annual cash G&A rate of approximately $11 million, again excluding noncash stock-based compensation and acquisition transaction costs.

Turning to the balance sheet and as mentioned by Bill, we ended the quarter well-capitalized for 2018 with net debt to EBITDA of 4.6X, $64 million of cash and full availability on our $250 million four-year revolving credit facility. We remain committed to maintaining a conservative balance sheet with financial flexibility.

With that, we will turn it back over to Rachel for Q&A.

[Operator]

[Operator Instructions]. The first question comes from Collin Mings with Raymond James. Please go ahead.

[Collin Mings, Raymond James]

Thanks. Hi guys. Good morning.

[Bill Lenehan, President and Chief Executive Officer]

Good morning Collin.

[Collin Mings, Raymond James]

Just to start, Bill, maybe just how has the change in the stock price impacted your underwriting process, if at all, especially just given the lag that you alluded to as far as actually seeing any sort of change in cap rate thus far?

[Bill Lenehan, President and Chief Executive Officer]

Great question, Collin. I think incrementally with higher borrowing costs and the less advantageous cost to capital, we still think it's advantageous just less than it was. I think we are being a little bit more conservative. But I would generally say that we are not overreacting. It's not a knee-jerk type of change in philosophy.

[Collin Mings, Raymond James]

Okay. I guess to that point, do you still see the ATM as a viable tool right now?

[Bill Lenehan, President and Chief Executive Officer]

I think we refrain from commenting on that. I think we are going to continue to refrain from commenting on that.

[Collin Mings, Raymond James]

Fair enough. Going to the outparcel transactions and again in the prepared remarks you talked about spending a lot of time on that front. Are you seeing any more competition for those deals, just may be given more awareness of those opportunities given the WPG deal you guys executed on?

[Bill Lenehan, President and Chief Executive Officer]

I think there has always been ample competition in the one-off 1031 exchange market. But no, I don't think we are seeing much in the way from other folks. It's an awful lot of work. If you trace the time on the WPG deal, it started approximately this time last year. We worked diligently to get it signed up in September. 41 assets to due diligence and again only some have closed so far, the rest will close in the middle of this year. It's an awful lot of work. So I think we are uniquely suited to do it given our specialized nature and the experience we learned. The learnings we have had from the WPG deal positions us well and we are putting our back into it to replicate it. But other than the competition that was already there on the one-off sales, I don't think we have noticed any change.

[Collin Mings, Raymond James]

Okay. And you have kind of addressed my next question in that response, but just maybe more specifically. Especially the second tranche of WPG property, just as you have gone through that diligence and structuring process, has there been anything that you found may be a little more cumbersome than you would have expected when you originally executed on the deal?

[Bill Lenehan, President and Chief Executive Officer]

We actually expected that there will be wrinkles and anything times 41 is a lot, right. So we knew it going in, I don't think there's been any real meaningful surprises.

[Collin Mings, Raymond James]

Okay. And then just going back to deal flow, just really any shift with any of the franchisees, just following tax reform, any shift maybe just given a little bit more visibility on that front and how has that impacted discussions?

[Bill Lenehan, President and Chief Executive Officer]

I think it's too soon to talk. You would expect the tax rate and the ability to more quickly depreciate improvements to benefit our business. We haven't seen it yet though.

[Collin Mings, Raymond James]

Okay. I will turn it over. Thanks guys.

[Bill Lenehan, President and Chief Executive Officer]

Thanks Collin.

[Operator]

The next question comes from RJ Milligan with Baird. Please go ahead.

[RJ Milligan, Baird]

Hi. Good morning, guys. Bill, Gerry, just a question on, following up on Collin's question about ATM issuance. If we say that the company doesn't issue anything on the ATM this year, where would you be willing or comfortable taking leverage and sort of end of year 2018 number?

[Gerry Morgan, Chief Financial Officer]

We have said consistently that 5.5 to 6 times is where we view the ceiling. That's been very consistent with our communications with Fitch. We view that as investment-grade balance sheet and we feel like we have financial flexibility to close what we have in our near-term sight and still be within that level.

[RJ Milligan, Baird]

Okay. But historically you have run the company significantly lower than that 5.5 to 6 times. So you would still be comfortable bringing it up into that range by the end of the year, if the equity markets weren't open or not favorable?

[Gerry Morgan, Chief Financial Officer]

I guess, RJ, the statement I am making is what's possible mathematically. We’ve tended to be conservative. We set that target over close to two-and-a-half years ago and as you as mentioned, we haven't gotten there. We think it's really advantageous to maintain low leverage. But we haven't put ourselves in a situation where we are backed into a corner having to raise equity at prices we don't find favorable.

[RJ Milligan, Baird]

Okay. That's it for me, guys. Thanks.

[Gerry Morgan, Chief Financial Officer]

Thanks.

[Operator]

[Operator Instructions]. The next question comes from John Massocca with Ladenburg Thalmann. Please go ahead.

[John Massocca, Ladenburg Thalmann]

Good morning.

[Bill Lenehan, President and Chief Executive Officer]

Good morning John.

[Gerry Morgan, Chief Financial Officer]

Good morning.

[John Massocca, Ladenburg Thalmann]

Just kind of maybe the inverse of the effect that pressure on equity valuations has had. Have you seen more willingness from shopping center and mall operators and REITs to come to the table and negotiate around potential [outlet] [ph] sales given where their equity is traded year-to-date?

[Bill Lenehan, President and Chief Executive Officer]

I think we have seen some signs of that, John, but it hasn't been a dramatic effect.

[John Massocca, Ladenburg Thalmann]

Understood. And then given that the 1031 market potentially has remained strong and cap rates haven't quite expanded yet given interest rate growth. How is the disposition market? I mean, do you still think there is an ability to recycle out of maybe kind of accelerate that recycling in order to fund future growth?

[Bill Lenehan, President and Chief Executive Officer]

Well, we have seen a strong interest in our properties and we have historically done the 1031 exchanges. So it's exactly the dynamic you discussed. We still see strong interest in the properties. So that's obviously always an option for us with very compelling spreads between the price at which we sell and the price at which we exchanges as you saw. Recently we sold an asset at 4.7% and we exchanged it into property of 6.7%. So we continue to see that sort of dynamic. But as far as accelerating that, I think it's too soon to have a significant change in our strategy. We are monitoring this closely. It's been a couple of weeks.

[John Massocca, Ladenburg Thalmann]

Makes sense. That's if for me.

[Bill Lenehan, President and Chief Executive Officer]

Thank you.

[Operator]

This concludes 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]

Well, thank you everyone for joining. I appreciate the support. And we are always here to answer questions offline. With that, thank you very much.

[Gerry Morgan, Chief Financial Officer]

Thank you.

[Operator]

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