Four Corners Property Trust Inc (FCPT) 2016 Q2 法說會逐字稿

Good afternoon and welcome to the Four Corners Property Trust second-quarter 2016 financial results conference call.

(Operator Instructions)

Please also note that this event is being recorded. I would now like to turn the conference over to Gerry Morgan, Chief Financial Officer for Four Corners. Please go ahead.

Thank you, Andrea. Joining me on the call today is Bill Lenehan, as well.

First, the disclaimer language. 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 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 potential risks please refer to our SEC filing which can be found on the Investor Relations section of our website. All the information presented on this call is current as of today, August 3, 2016.

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 on the investor relations section of our website.

With that, I will turn the call over to Bill.

Thank you, Gerry. During the second quarter our portfolio performed as expected. Since we were spun off approximately nine months ago, we have experienced a significant change in our cost to capital, really, the implied cost to our equity capital. We now feel that our equity cost to capital is aligned for us to acquire assets, grow the portfolio, leverage our overhead, and increase overall diversification.

Our first acquisitions were announced subsequent to quarter end, and we have numerous additional properties, similar in many ways to what has been announced, that are in diligence currently. Although forecasting future acquisition activity is always difficult, we feel like we have a robust pipeline of appropriate transactions. And while our cost to capital has meaningfully improved, meaning that more acquisitions will be accretive to our short- and long-term cost to capital, we will remain disciplined as to price. I would like to thank the team for their hard work and focus.

From a price perspective, the market for net lease restaurants has been relatively stable, and we believe we can continue to purchase assets at cap rates similar to what we have announced recently. I would also like to mention that in the current net lease market we're seeing more transactions that, while priced sensibly on their face, have business terms and contractual legal provisions that are not ideal. For example, a lack of a personal guarantee where it would normally be appropriate, or very weak properties being quoted in portfolio deals, or other permutations of quality degradation.

We tend not to participate in transactions such as these and I've been actively pushing back against aggressive terms in negotiations. This is a trend I've confirmed with our competitors.

With that, let me turn back to Gerry for a few comments on our Q2 financial results. Gerry?

Thank you, Bill. I'm going to highlight a few items in our financial results for the quarter, which were straightforward. Cash rental income on our existing rental portfolio of the initial 418 properties leased to Darden was $23.6 million after excluding non-cash straight-line rental adjustments. A reminder that rents will increase annually by 1.5% for this set of 418 properties each November starting November 1 this year.

With respect to our cash general and administrative expenses, we continue to feel comfortable with approximately a $10 million target for 2016 after excluding non-cash stock compensation and acquisition-related costs that would need to be expensed.

Cash interest expense was unchanged in Q2 from Q1, given we are fully hedged on our $400 million term facility and we did not borrow on the revolver in the second quarter. This will change in the third quarter and going forward as we start to use the revolver to fund acquisition activity in addition to retained cash from operations.

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 expectation that the initial portfolio will produce results that lead to approximately $1.18 in AFFO per share for the year, which is consistent with our prior 8-K filings.

With that, let me turn it back to Andrea to open up the lines for Q&A.

(Operator Instructions)

Collin Mings, Raymond James.

Hey, guys. Good morning on the West Coast. The first question for me, just on the Wendy's acquisition. Can you maybe just talk a little bit more about how that has sourced, and as you continue to build your deal pipeline more generally where you are having the most success finding transactions that look attractive to you?

Collin, it's really across the board. We have transactions that we've bid on through brokers. We've had some sole-source transactions. It's really across the board.

Our current pipeline has a number of properties that weren't fully marketed, but that will change over time. Certainly given our liquidity position and our speciality in acquiring restaurant assets, I think it's pretty clear if you're looking to sell a restaurant on a net lease basis to make sure that we see it.

Okay. I think last quarter, Bill, you made reference to the fact that you thought the pipeline was primarily composed of nationally branded QSRs. Has there really been any shift in what you're seeing coming into the pipeline? Or is that how we should still think about what you're seeing coming in as far as deal flow from a composition standpoint?

We certainly have some properties that are casual dining or fast casual or in between those categorizations. But, thus far, QSR has been a sweet spot. And I think, from the way we look at acquisitions, one of the key components is the strategic value of the portfolio, and obviously QSRs are significantly diversifying as our current portfolio is all casual dining and fine dining.

Okay. And then just one last question and I will turn it over. In terms of the pipeline, you made some reference to this in the prepared remarks, but just thinking about the pipeline, are you seeing anything that you're finding attractive, call it in a smaller portfolio size, call it $50 million to $100 million range? Or is pretty much everything that you're looking at going to be at a much smaller scale, more similar to the Pizza Hut transaction you announced last month?

I would say you're correct that we're looking at medium-sized transactions all the way down to the deal we announced yesterday, sub $5 million. Significantly sub $5 million. But we're looking at all sorts of different configurations of transactions.

Okay. I'll turn it over. Thanks, Bill.

Mitch Germain, JMP Securities.

Hey, Bill. Hope you're doing well. Thanks for taking my question. Just curious about funding the deals in terms of, A, maybe considering asset sales, and then, B, where your leverage stands today and where you feel comfortable taking it out there.

Sure. Thus far we've funded deals with cash on hand. We have an undrawn revolver, as Gerry mentioned. We have been in discussions on OP unit-funded deals, so equity funded deals, in essence.

And then our view is that we are long form eligible starting in November to issue equity to make sure our leverage is moderate. But for now, it's using cash on hand and OP units and then going forward using our undrawn revolver. We are significantly under the leverage limits that we've talked about of six times.

And have you started having any discussions with the rating agencies at this point?

We have had discussions and follow-up discussions, correct.

Great. And then, finally, when you look at your deal pipeline, obviously you said it's a bit skewed to the QSRs. Is there an ideal portfolio configuration or maybe a target in terms of how much you want to limit that type of asset within the portfolio?

If you look nationally, Mitch, it's roughly -- by value we estimate it -- it's roughly 50/50 split between QSR and the other categories, with some segments growing quite quickly, fast casual and others growing slowly -- family dining, for an example. As of now we think we have a tremendous amount of capacity to buy QSRs before we would be concerned that we're hitting any internal limit.

Great. Thanks, Bill.

Dan Donlan, Ladenburg Thalmann.

Thank you. And I love the prepared remarks and how quick they are. Bill, just curious on portfolios. Would you be willing to do a portfolio of restaurants if it had maybe a Walgreens or CVS or maybe a non-restaurant property in it that you felt that you could sell in an expeditious manner?

The REIT rules are challenging when you buy assets and immediately sell them if it was a very de minimis part of a portfolio. We try to be practical.

We're working on a transaction now with a half-dozen QSR assets. One of them was a shared QSR and a gas station and we just refused to buy it. We will receive a substitute pure QSR asset. So, it would be a very high bar for us to consider that.

Okay. And then what about working with some of your competitors -- have worked with some smaller-time developers as well as franchisees to do build to suits from some of these restaurant concepts. Is that something that you guys would look into? Or just curious your appetite there.

We would contemplate it. It would be, again, a high bar. The circumstance in which we are contemplating one now is in a geography that's hard to penetrate with a brand we really like. And it's not ground-up development, it's reformatting some existing QSRs to another more profitable brand. But again, high bar.

We have one competitor who is very skilled at that, but it takes a lot of internal resources and, frankly, they've been doing it for a long time. We'd consider it but it's certainly not the primary focus.

Okay. And then, just lastly, as you're looking at the acquisitions later on this year and into 2017, what is a coverage bar that you're looking at? Is there certain levels you don't want to go below from an EBITDAR to rent coverage or does it just depend upon the tenant?

We have different bars for different restaurant types and different tenants, and also reflective of our confidence in the operator to improve performance. Many small-time franchisee operators are not terribly efficient.

So, a number of the transactions that we're working on now could thematically be described as partnering with larger best-in-class franchisee groups who are buying assets with significant planned improvements. And we're working with them to understand what's a realistic pro forma operating level. So, when we look at coverages and rent to sales, we really try to dig in and understand where the trend is going and not just what historical numbers or backward-looking numbers would say.

Okay. Fair enough. And then as far as the pipeline is also concerned, can you quantify the buckets in terms of is it, so much is marketed deals, how much of it is working with a franchisee that's looking to grow their business and therefore maybe sell a couple locations, and how much of it is working directly with the restaurateur or company-owned type of store?

Great question. Thus far it has skewed more to working on a basis of assets where there is not an offering memorandum and they have not been put on LoopNet, for example. But quite often there is a broker involved in some capacity.

That percentage will change over time. Whether a deal is sole sourced or marketed is, frankly, irrelevant once the deal is closed and the price is set. We are opportunistic. We look at all different avenues to get deal flow.

Okay. And do you think because you are 100% focused on restaurants, have you seen somebody come to you guys and say -- I understand restaurants and owners in some of these other retail types, and even though you clearly don't have the lowest cost to capital, you have a great cost to capital. Have you seen that as a selling point? Have people started to gravitate toward you guys because of that even though, again, some of the peers might be willing to pay more for something, or whatever it may?

Let me try to untangle that question a bit because there's some interesting comments. One, some of our peers do have a lower cost to capital. It doesn't mean they hand that lower cost to capital out freely on acquisitions. So, that's less of an issue than I think many people think.

The fact that we specialize in restaurants, I think, is critical in OP unit deals. And I think it also gives a strong sense that we're likely to close.

If you look, the Pizza Hut acquisition is a prime example of that. That was Four Corners purchasing real estate at the same time as a franchisee purchased the operating business. They needed to know that we would be there. And I think a lot of that confidence comes in our speciality, and, frankly, the fact that we can give senior management attention to the details of transactions.

Okay. Appreciate it.

Jason Moment, Route One.

Hey, Bill. Congrats on the solid execution and raise. My question was really around operational improvement potential and specifically the number of Pokemon PokeStops that are at your current locations versus the potential to roll that out across the board, and what you think that could do possibly to traffic and how that might ultimately translate possibly into lower cap rates and better execution? Thanks.

I don't know what those are. Operator, next question.

(Operator instructions)

This concludes the question-and-answer session. I would like to turn the conference back over to Bill for any closing remarks.

Thank you, everyone, for joining the call. If there's any follow-up questions both Gerry and I are available.

Thank you.

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