Four Corners Property Trust Inc (FCPT) 2016 Q1 法說會逐字稿

Good day and welcome to Four Corners Property Trust Q1 2016 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded.

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

Thank you, Andrew.

Joining me on the call today is Bill Lenehan, our Chief Executive Officer. Let me get the required language out of the way.

During the course of this call we will make forward-looking statements, which are based on beliefs and assumptions made by information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and 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 a 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.

All of the information presented on this call is current as of today, May 9. 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, which can be obtained also on the Investor Relations section of our website.

With that, I turn the call over to Bill.

Thank you, Gerry.

And thank you for joining the call today. The existing portfolio performed as planned during the quarter, notably Darden was upgraded by all three rating agencies recently and is now rated BBB flat, BBB flat and Ba3.

Our focus in the first quarter of the year was refining our investment strategy and building out our investment team. We made significant progress on both fronts. One acquisition team member on-boarded recently and a second is joining in a few weeks. We are exceptionally pleased with the individuals we are bringing on.

Josh, who is with us today, joined us a few weeks ago from Goldman Sachs' Investment Banking Real Estate team and before that, Harvard. Patrick, the individual who is joining in a few weeks, was the primary mid-level Investment Banker at JP Morgan who worked on the spinoff transaction. He knows Four Corners inside and out and we have had a great working relationship for a year and a half.

While we have not closed any acquisitions to date, we have been very active in building a pipeline and screening deals. We have a number of properties under a letter of intent to purchase and still more under negotiation. We will announce acquisitions, even individual property purchases, soon after they close. For competitive reasons, we'd prefer not to do so before that.

All of these transactions will be very consistent to the strategy we have laid out in our investor presentation and in numerous investor meetings. The market for single tenant net lease remains competitive, but we are seeing some sensible investments. Obviously as our cost of capital has improved, we are seeing more transactions that are quality credit and real estate, and are accretive to our long-term cost of capital. Let me now turn it over to Gerry for a few comments on the first-quarter financial results.

Thank you, Bill. I have a couple of comments on the results.

First, cash rental income without rent leveling on our existing rental portfolio of 418 properties leased to Darden was $23.7 million for the quarter. I remind everybody that rents will increase annually by 1.5% for all 418 properties, each November starting this year.

Second, in accordance with GAAP, the weighted average share calculation reflects the incremental 17.1 million shares that we issued to shareholders as part of the earnings and profits distribution in March, as if they had been outstanding for the entire first quarter. Total common shares outstanding are now 59.8 million shares, including the 17.1 million shares distributed.

Third, as we have discussed before, we had a non-cash $80 million gain from the reversal of a deferred tax liability now that we are operating as a REIT and have completed our pre-REIT earnings and profit distribution. The gain was backed out in our reported funds from operation, in line with NAREIT guidance.

With respect to our cash G&A expenses, we continue to feel comfortable with approximately a $10 million target for 2016 G&A expenses, after excluding non-cash stock compensation. As outlined in our earnings release, our results were higher than this run rate in the first quarter given one-time costs related to launching operations and reporting for the Company, including the special distribution and other expenses like our 2015 audit fee, which while expected couldn't be expensed until 2016 when the services were provided.

On interest expense, I would point out that we recognized $380,000 in non-cash interest expense that was principally due to the portion of the mark-to-market losses on our hedging instruments deemed ineffective, and resulting from the flattening of the short-term forward curve rate in the first quarter. We adjust for these type of non-cash gains and losses when computing our cash AFFO earnings.

On a related note, our coverage ratios remained strong with cash interest coverage of 6 times, and net debt to cash EBITDA at quarter end of 4.9 times. While our current low leverage will increase as we begin to draw on our four-year $350 million revolver to initially finance acquisitions, our philosophy remains to maintain a ratio of less than six times debt to EBITDA.

Finally, a reminder to everyone that we are not providing guidance on acquisition levels or FFO and AFFO for the year, which is highly dependent on acquisition levels. However, we are reconfirming our belief that our current portfolio will produce approximately $1.18 in AFFO per share, consistent with prior 8-K filings. With that, let me turn it back to Andrew to open up the lines for Q&A.

(Operator Instructions)

The first question comes from R.J. Milligan of Robert W. Baird.

Hi, good morning out there guys. Bill, I'm curious what types of assets you're seeing out there. You commented that you're seeing some opportunity to make quality acquisitions in terms of real estate and make it accretive. I'm just curious what types of assets are you seeing out there in the market that fit those parameters and who is the competition that you're competing against?

Sure. Great question, R.J. Without getting too specific on our current pipeline for competitive reasons, I don't view a transaction closed until it's closed. We're looking at one acquisition where a franchisee is selling his business and real estate to another franchisee, and we're stepping in coterminous with the closing of the business sale, that was an off-market transaction.

We're seeing some individual properties that have been marketed where trade buyers have fallen out of contract and we are coming in at pricing that isn't as attractive but has a higher level [of surety] of close. And these are primarily QSR, nationally known QSR brands.

Got it. You've talked about this on the road and in the press release as this first quarter you refined your acquisition criteria. Can you just talk about that in a little more detail, that process that you guys are implementing and whether or not there's an investment committee and who sits on that and just spend a couple minutes talking about that?

Sure. Well I'll take the last question first, investment committee includes four out of the five Board members. We've had a couple of investment committee meetings.

As far as screening, we've just built a simple module to screen properties quickly on criteria related to credit. That's things like rent to sales, the guarantor's financials and real estate, things like location and reuse potential. So nothing overly complex but just taking the time to make sure that our initial investments are sensible and on message.

Great, thanks guys.

Thanks, R.J.

(Operator Instructions)

The next question comes from Collin Mings of Raymond James.

Hi, Bill. Hi, Gerry.

Thanks, Collin.

I guess first question for me, just beyond the two hires that you talked about in the prepared remarks any additional hires you're looking to make to the team as you continue to build out the acquisition effort, or anyone else on the finance side?

Perhaps by the end of the year, but for now we are pretty focused on on-boarding these folks effectively and I think we're pretty good for now.

Okay, and then maybe going back to just the comments you made about having some properties under LOI, and I recognize you don't want to get too specific at this point. But maybe just big picture, I know you said it that weighted a little bit more towards QSR, but can you talk about, maybe quantify the size of that pipeline or what pricing range most of the deals are clearing the market at right now, that you'd be competing for?

I'm not going to get into the size of the pipeline but I would say that our pricing is in the mid 6s to low 7s. And that's a cash divided by the purchase price. And as far as brands, these are nationally known brands that have decade long histories.

Okay. And then one last one for me and I'll turn it over, but curious just any sort of read-throughs in particular given the [Kerrow] holdings exposure. Just any sort of read-throughs as it relates to the health of restaurants, tenants, anything you're seeing as far as the consumer, particularly given they are located in San Antonio in Texas. Any read-throughs from that you can offer us?

Yes, I think it's clear that Texas is a relatively challenging operating environment and I think it's clear that San Antonio is outperforming meaningfully more oil dependent areas of Texas.

Okay, thanks.

The next question comes from Dan Donlan of Ladenburg Thalmann.

Thanks, it's really tough to come up with questions for you guys sometimes.

We try to keep it simple.

Was just kind of curious on why you guys did the share count the way you did. Is that something that's required by GAAP or just something you wanted to do in order to give everybody a correct run rate, or what's the thought process there?

Very simply, it's as required by GAAP. Because of the size of the distribution we had to deem it as if it was a stock split and that requires us to count the shares as outstanding for the entire quarter, which is quite frankly the right way to look at it anyway.

Right, okay. And then Bill just curious, what was the source of maybe kind of what you have under LOI? Has it come from something that's unusual, are OP units maybe driving this? I know it's something that you really wanted to try to use, how did these transactions come about, or potential transactions come about?

One, OP units is a meaningful driver, another was a franchisee that I have a relationship with going back several months. Others are simply fully marketed properties, so it's all across-the-board. We're a much smaller company than our competitors and so individual transactions, even if they're not very significant, will have a more -- a larger impact and so we sort of take transactions from all different angles. Many properties, there is a broker involved and we think that's fine. Just there can be different levels of how much of our property is marketed.

Okay, makes sense. And then do you think once you get like an OP unit deal or you actually put something up on the board, does that get the ball rolling so to speak? Do you think you start to pick up steam once these things happen, or just kind of curious your thoughts?

You know, I would look at it a different way, which is we have a pretty specific understanding of how much we can acquire within our stated leverage limits. And given that, we wanted to make sure that we had a very sensible investment strategy and was well organized. And if that took us a couple extra months to do that, to bring on the right people so we can diligence assets effectively, then we were willing to spend that time. Now we've brought some folks on board, we're training them, so clearly the second half of the year given our cost of capital and the market being constant, I think you'll see more activity.

Okay. And then as far as the rent increase comes, the contractual rent increase, does that hit on like beginning of November, mid November, end of November, just trying to figure out how much we should take?

Beginning of November, November 1.

Okay, all right that's it for me.

Thanks.

The next question comes from Jason Moment of Route One Investments.

Great, thank you very much, Bill. Really just one question which is, now that it looks like Trump is going to be the nominee, I'm curious if a potential Trump presidency has any implications in your high-level strategy.

I have no comment in that regard. Operator, next question.

This concludes our question and answer session. I'll turn the conference back over to Bill for any closing remarks.

Thank you, everyone. Look forward to any follow-up questions that you may have. Thank you.

Thanks, everyone.

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