Four Corners Property Trust Inc

NYSE:FCPT

Earnings Call Transcript 2018-Q4

[Operator]

Good day and welcome to the Four Corners Property Trust Fourth Quarter 2018 Earnings Conference Call and Webcast. 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] Please note this event is being recorded.

I would now like to turn the conference call over to Mr. Gerry Morgan, Chief Financial Officer. Mr. Morgan, the floor is yours, sir.

[Gerald Morgan, Chief Financial Officer]

Thank you, Mike. 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 a more detailed description of some potential risks, please refer to our SEC filings, which can be found on our website, at www.FCPT.com.

All the information presented on this call is current as of today, February 14, 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.

[William Lenehan, Chief Executive Officer]

Thank you, Gerry, and good morning. Thank you to everyone for joining us to discuss our fourth quarter results. I know this is a very busy morning release-wise. And we will be brief, as this is a very straightforward quarter.

Our focus since our last call continues to be on sourcing quality, one-off and portfolio restaurant opportunities. In the fourth quarter, we purchased an additional 20 restaurants for $50.6 million, at an average cash cap rate of 6.8%. 17 of the 20 acquired restaurants are leased to corporate restaurant operators for attractive brands including Starbucks, Chili's, Taco Bell, and BJ's Brewhouse.

Approximately half of the acquisitions are the result of our ongoing outparcel strategy with retail operators, including Brookfield and Washington Prime.

In the quarter, we also took advantage of reverse inquiry interest in our properties by selling an Olive Garden in Augusta, Georgia at a cash cap rate of 4.8% to Darden, who exercised their right of first refusal on the property.

Year-to-date in 2019, we've acquired an additional 11 properties including 8 from Washington Prime for $20 million at an average cash cap rate of 6.7%. We remain very busy in the acquisition market. And I would comment that in a fluctuating interest rate environment, we have seen cap rates basically stay flat.

The existing portfolio has continued to perform well. And the restaurant industry as a whole continues to report strong results. This included Darden, which was led by its Olive Garden, LongHorn brands same-store sales growth of 3.5% and 2.9% respectively in the most recent quarter, closed in December.

Turning to the balance sheet, in the fourth quarter we accessed both the equity and debt capital markets to support our growth while ensuring that we continue to maintain a strong balance sheet with low leverage. Specifically, we issued $19 million of stock throughout the quarter via the ATM program, at an average price of $27.03. And on December 20, we issued our second private note offering with $100 million of proceeds split between 8 and 10 year notes.

And with that, I'll turn it over to Gerry to take you through our financial results. Gerry?

[Gerald Morgan, Chief Financial Officer]

Thanks, Bill. We generated $30.8 million of cash rental income in the fourth 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 the end of the year is $125.6 million. And our weighted average 10-year annual cash rent escalator remains at approximately 1.5%.

On an AFFO per share basis, which we believe best represents cash flow generated from the business, we reported 3% growth in quarter-over-quarter results and 5.4% growth for the full year of 2018 compared to 2017.

In the quarter, we reported $2.7 million of cash general and administrative expenses after excluding non-cash stock-based compensation, and we are providing guidance for 2019 of an annual cash G&A rate of approximately $11 million, again excluding noncash stock-based comp and acquisition transaction costs.

As a reminder, we also increased the dividend in the fourth quarter by 4.5% to an annual run rate of $1.15 per share.

Turning back to the balance sheet, as Bill mentioned, we ended the quarter well capitalized to support 2019 investment activity with net debt to EBITDA of 4.6 times and over $90 million of available balance sheet cash and full availability on our $250 million revolver.

In the quarter, we also amended our $400 million term loan facility to stagger the maturities from 2022 through 2024, and we were able to reduce the credit spread 10 basis points to 1.25% on the $250 million of the term loan that was extended. We remain committed to maintaining a conservative balance sheet and staying under our stated debt leverage goals of 5.5 times to 6 times net-debt-to-EBITDAre.

With that, we'll turn it back over to Mike for Q&A.

[Operator]

Okay. Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] And the first question we have will come from Collin Mings of Raymond James. Please go ahead.

[Collin Mings, Raymond James & Associates, Inc.]

Hey, good morning guys.

[William Lenehan, Chief Executive Officer]

Good morning, Collin.

[Collin Mings, Raymond James & Associates, Inc.]

As always, I appreciate the efficiency of the prepared remarks. Just a couple of questions from me, just to the extent you can, can you maybe expand upon the package acquired from Brookfield during the quarter, and then just the runway there for potential additional deals from that relationship?

[William Lenehan, Chief Executive Officer]

Yes, Collin. This is actually a portfolio that we began working on quite some time ago with Rouse. And it requires some parcelization. So it took quite a while to get it closed. We think there's more to do there. Brookfield obviously has a large real estate portfolio with a lot of outparcels. They're a great team to work with.

So we've been working on that. And I just generally continue to find new outparcel opportunities to work on.

[Collin Mings, Raymond James & Associates, Inc.]

Okay. And should we think about just given - and I recognize there are some unique characteristics with the Washington Prime deal. But just given the timeline involved in getting some of the parcelization process to the finish line, should we think about, again, maybe versus there being a big announcement of potential deals or a pipeline of deals, if you will, for it to be kind of announced as these deals actually get done and the parcelizations are complete. Is that a fair way to think about it from here on in?

[William Lenehan, Chief Executive Officer]

It's really facts and circumstance specific on how we make the announcements. But to the extent that there was a really meaningful portfolio that it would help our investors in the Street model our company, I think we would follow the paradigm of Washington Prime. But it really is specific to the deal.

[Collin Mings, Raymond James & Associates, Inc.]

Okay, fair enough. And then in the prepared remarks, you highlighted cap rates stable overall. Just maybe if you can expand upon those comments, any sort of shifts either, casual dining versus QSR or kind of a different - across different concepts or credit profiles, anything else from the transaction market that you picked up on?

One of your peers earlier this week kind of alluded to the fact that if anything maybe cap rates have drifted a little bit down, and there might be a little bit of downward pressure there, just kind of your take on the transaction market?

[William Lenehan, Chief Executive Officer]

Yeah. I think we've seen rates move around quite a bit and cap rates quite a bit less so. It's how I would summarize it. Seems to be some downward pressure on cap rates for deals with very long lease term, and I think other than that, it's been surprisingly steady despite a very volatile rate environment, very volatile stock market and some pretty significant moves in the underlying stock prices of our peers. Overall, it's been pretty consistent on the cap rate basis.

[Collin Mings, Raymond James & Associates, Inc.]

All right. I will turn it over. Thank you.

[William Lenehan, Chief Executive Officer]

Thanks, Collin.

[Operator]

And next we will have Mitch Germain of JMP Securities.

[Mitch Germain, JMP Securities]

Bill, I know in your investor presentation you have that strike zone. And I'm curious if the strike zone is getting a little bit wider or narrower; in terms of kind of your underwriting and what you're seeing out there is the population of assets for sale?

[William Lenehan, Chief Executive Officer]

I don't think there's been a whole lot of change. We've had a - the cost to capital allows us to raise equity and deploy it accretively, consistently now for quite some time. Our stock price is strong and that allows us to raise equity, and buy safer assets, and maintain a similar yield, and spread to our underlying cost of capital.

So it's been very consistent is how I would describe it. And I would just further say that that mental model is very helpful in times like December, where stock prices were moving around quite a bit.

[Mitch Germain, JMP Securities]

Great, that's helpful. And I know that one of the thesis was, obviously, unlocking value through retail landlords, obviously, through restaurant companies, sale leaseback. It seems like franchisee, the larger deals where maybe you could use OP units or something have failed to come about or maybe they have, and I just haven't recognized it to the extent that I expected.

Is it maybe just an education process with many of them in terms of estate planning and other issues that might be a reluctance for them to transact?

[William Lenehan, Chief Executive Officer]

I think we've made pretty good progress with the large franchisees and continue to do so. On the OP unit side, I think the thing that - that typically is the impediment is there aren't a lot of individuals feel comfortable owning $10 million, $20 million, $30 million of a single stock where they're not part of management. But we have done OP unit deals and we have conversations with franchisees on a weekly basis about them.

So I think it's just we are making progress on the large franchisees and we will do additional OP unit deals. It's just a matter of time.

[Mitch Germain, JMP Securities]

Thank you.

[Operator]

[Operator Instructions] Next, we have John Massocca of Ladenburg Thalmann. Please go ahead.

[John Massocca, Ladenburg Thalmann & Co., Inc]

Good morning.

[William Lenehan, Chief Executive Officer]

Good morning, John.

[John Massocca, Ladenburg Thalmann & Co., Inc]

Bill, if we think about your portfolio as kind of a quality bell-curve, where was the Augusta property that you sold on that curve, your best destination?

[William Lenehan, Chief Executive Officer]

It was adjacent to the Augusta National Golf course.

[John Massocca, Ladenburg Thalmann & Co., Inc]

I'm thinking of the good end of the curve then, probably.

[William Lenehan, Chief Executive Officer]

Yeah, I mean, the strategic value of that asset was its adjacency to the golf course.

[John Massocca, Ladenburg Thalmann & Co., Inc]

Okay. And then how much of the original Darden portfolio is subject to ROFRs? And how is the kind of cap rates set in the way that ROFR? I mean, is that something they negotiate with you to kind of prevent you selling to a third party or is there a set level that they kind of have as a - well, if they're going to do this, they have to do it at a certain cap rate?

[William Lenehan, Chief Executive Officer]

Right. Well, the Darden portfolio has ROFRs, which is very typical frankly with large investment-grade tenants. We received an offer on the course - from the golf course, on the property from the golf course, we brought that to Darden, as we have every other asset that we sold. And in this case, unlike the 7 I believe previously, they felt it was advisable for them to purchase the property.

[John Massocca, Ladenburg Thalmann & Co., Inc]

That makes sense. And then, for kind of like detail, the provision for impairment, what drove that, the one that's kind of defined out in the FFO adjustment?

[William Lenehan, Chief Executive Officer]

That was the one property that we purchased to date where the tenant has left. That's the Dairy Queen in Tulsa, Oklahoma. We've had some progress in trying to re-tenant it with another Dairy Queen franchisee, but out of the abundance of caution, we decided to write it down.

[John Massocca, Ladenburg Thalmann & Co., Inc]

It makes sense. That's it from me. Thank you very much.

[William Lenehan, Chief Executive Officer]

Thanks.

[Operator]

Showing no further questions at this time, we will go ahead and conclude our question-and-answer session. I would now like to turn the conference call back over to management for any closing remarks. Gentlemen?

[William Lenehan, Chief Executive Officer]

Thank you, Mike. Well, we promised a brief call, it's about 15 minutes in. With that, I want to thank all our shareholders and everyone who joined the call today. If you have any questions, we're here and at the ready. Thank you.

[Operator]

And we thank you, sir, also for your time today and the rest of the management team. Again, the conference call is now concluded. At this time, you may disconnect your lines. Thank you everyone. Take care. And have a great day.