Four Corners Property Trust Inc (FCPT) 2016 Q3 法說會逐字稿

Good day and welcome to the Four Corners Property Trust third quarter 2016 financial results conference call. All participants will be in listen only mode. 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, Chief Financial Officer. Please go ahead.

Thank you, Nicole. Joining me on the call today is Bill Lenehan, our CEO.

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 some of our potential risks please refer to the SEC filings which can be found on the IR section of our website. All the of information presented on this call is current as of today, November 3, 2016.

In addition, reconciliation to non-GAAP financial measures presented on this call, such as funds from operation and AFFO, can be found in the Company's supplemental report which also can be obtained on the IR section of our website. With that I'll turn the call over to Bill.

Thank you, Gerry. I wanted to start off with some thoughts on the acquisition environment. Cap rates appear to be basically flat since last quarter's call. Competition for transactions, especially the small portfolios and one-off deals that we typically look at, continues to be primarily from 1031 exchange buyers.

We have not seen any change in the property market despite the recent change in the 10-year and in REIT valuations. We are following this dynamic closely. Specific to FCPT, we are really pleased with our acquisition processes working. From the strong contribution of Pat and Josh, to the awareness we've developed in the franchisee community and amongst net lease brokers, to a very booked schedule at the annual restaurant finance and development conference in a few weeks. We are excited where we are one year into it.

Updated totals for 2016 year-to-date acquisition announcements to date include 22 restaurants purchased for $37.2 million with a 17-year average lease term, and going in cap rates between 6.5% and 7.2%. Please remember these transactions were originated over the late spring and summer and are following the normal deal process to closing. It's important to note we have closed a couple sale leasebacks to date, which amounted to 57% of the total acquisition volume thus far.

As we recently announced, we have successfully sold two properties, an Olive Garden and Bahama Breeze, in Florida, generating $25 million in proceeds at a 4.75% cash cap rate. I think the key takeaways from these sales are as follows: We are willing to sell and exchange properties via the 1031 exchange market when we can obtain strong pricing, recycling of 1031 proceeds from these sales began less than one week after closing, and that overall, we focus on NAV as well as AFFO growth.

Going forward, we are very pleased with the pipeline both in terms of quantity, but most importantly, quality and consistency with our strategy. Operationally, we are on strong footing and I'm very pleased with how the business itself is running. With that I'll turn it over to you, Gerry.

Thank you, Bill. A couple of comments on our financial results. Cash rental income for the portfolio of the initial 418 properties leased to Darden, and the 16 properties acquired during the third quarter, was 23.8 million for the quarter after excluding non-cash straight line rental adjustments. The cash rents on 100% of the 418 properties leased to Darden increased 1.5% on November 1, for the months of November and going forward, representing an increase on the annual cash rents received from Darden from $94.4 million to $95.8 million.

Our industry leading EBITDAR to rent coverage on the portfolio remained at 4.2 times in the third quarter. Cash interest expense was unchanged in Q3 from prior quarters given we are fully hedged on our $400 million term facility, and did not begin borrowing on the $350 million revolver to fund acquisitions until early in the fourth quarter. The Company's net debt to EBITDA in Q3 was 4.3 times, comfortably below our long term stated range of 5.5 to 6 times net debt to EBITDA.

With respect to our cash general and administrated expenses, we continue to feel comfortable with approximately a $10 million target for 2016 after excluding non-cash stock compensation and acquisition related costs. As we now are approaching our first year anniversary as an SEC reporting entity at the end of November, we expect to file an S3 registration statement to include an at the market, or ATM, equity issuance program. We believe our smaller and more frequent typical acquisition size meshes well with an ATM program, which represents a cost effective method to raise equity, we believe, for the Company.

Finally, a reminder to everyone that we are not providing guidance on acquisition levels or FFO and AFFO for the year, or for 2017, which is highly dependent on acquisition levels; however, we are reconfirming our expectations that the initial portfolio will produce approximately $1.18 to $1.19 in AFFO per share, consistent with our prior filings, and that AFFO per share could increase nominally above this level based on the pace of Q4 acquisition activity, which should be accretive to AFFO.

With that, Nicole let's turn it over to you for questions.

Thank you.

(Operator Instructions)

Our first question comes from Collin Mings of Raymond James.

Thanks. Hi, Bill, Gerry.

Hi, Collin.

First question for me, can you provide us an update on the possibility of one or more OP unit transactions just as it relates to the current acquisition pipeline you're working through?

Stay tuned.

Fair enough. And then as you think about the two asset sales here in Florida, you indicated in the press release that those were completed following, really an unsolicited offer. Any other potential asset sales in the work that you can talk about that could close before year-end?

None in the works at this point. We do receive reverse inquiry constantly on our assets, but we tend to be very selective in doing that both to time purchases with 1031 exchange sales, but also because the assets in our existing portfolio are very high quality, have very strong performance, and so it's very difficult to replace that quality of income. But when the right deal comes around, we're willing to act on it.

Okay. And then just in context of some of the broader concerns out there about restaurants recently. Can you just update us on what you're hearing from -- now your tenants or your perspective tenants, as you're having conversations with some of the franchisees out there?

I think Darden is doing quite well. Our San Antonio business is running quite efficiently, especially given the softness in Texas overall. But certainly some of the lower quality brands had credit issues and I think it just reaffirms our strategy to stay with the safer brands and not venture too far out the risk curve. But, certainly, the summer was soft, but in the kind of assets we look at, the brands are performing quite well.

Okay. And then just one last one for me. Just as you think about the G&A, I think a little different than what we've modeled for the quarter, but just as you look forward, can you speak to the ability to leverage the current team and anything you might change on that front as far as either new hires or anything else as we think about the G&A? Thanks.

Yes, I mean, I think our consistent message has been cash G&A of $10 million, which we reaffirmed today. And then adding to that, non-cash comp, which is certainly a real expense, but it fluctuates depending on our relative performance to a benchmark of other net lease companies, so that's something that we can't control and makes difficult to forecast. It's a real expense, but it's hard to model.

And then transaction costs, which occur when we buy things and because we don't provide acquisition guidance, derivatively we don't provide transaction cost guidance. So that we feel like is perfectly in line with what we've communicated.

Going forward, we'll see where next year comes. We probably will add a few people, but overall I wouldn't expect the cost to be significant, certainly in the context of the Company. We do think there's some efficiencies that we can drive in our G&A. They're, again, very minor.

And lastly, this was our first year of operations. There were some extra costs, essentially startup costs, that, again, weren't very large, but they hopefully won't be recurring. So I would expect a largely consistent G&A line, maybe increasing ever so slightly, but overall, Collin, I think our ethos here as that you can do more with less. We have probably the lowest number of people in the industry in home office, and the lowest cash expense, and we think we can continue that.

Thank, Bill. I'll turn it over.

Our next question comes from R.J. Milligan with Robert W. Baird.

Hi, guys.

Hi, RJ.

Bill, so you guys have been doing this for a year now and I'm curious what your thoughts are in terms of portfolio diversification? Has your philosophy changed over the past year? Is that still a goal of yours? And what is meaningful diversification, and how long do you think it takes to get there?

Sure. No, I don't think our thought process has changed. I think it's very clear that our existing portfolio is of extremely high quality and so we definitely want to diversify. That's why we built a team to make acquisitions. The sales also, obviously, help diversification. You get to work with both sides of the fraction.

I think we've pretty consistently said we aren't doing this to take Darden exposure from 99% to 90%. We're doing it to truly create a diversified portfolio. And that will take a few years to do, but we want to make sure when we get there we're really happy with the assets we purchased. So I think really very little has changed in that outlook.

Is there a targeted volume of acquisitions that you'd like to make over the next, say three years, to get to a different diversification level?

We have a significant capacity to do sensible transactions, so to the extent that we can do sensible transactions, we have a significant appetite. But we don't set either for comp purposes or internal planning purposes, or communicating to our investors, a stated number per annum. The market is too fluid to do that sensibly in my view.

And speaking of sensible deals, the deals that you guys have closed year-to-date, obviously, a lot of competition in the 1031 market. How are you avoiding the overheated 1031 market in the deals that you're doing?

Sure. We turn over a lot of rocks. So we've looked at over 2,000 transactions year-to-date and we have a very streamlined ability to model them.

And as I mentioned in the call, we've done some originated sale leasebacks. That's where we close the day the franchisee is buying a business most typically, and where our scale helps. But it's a competitive market and we try to be selective. And I think that's more important than hitting an artificial, contrived number of acquisition guidance.

All right. Thanks, guys.

Thanks, R.J.

Our next question comes from Mitch Germain of JMP Securities.

Good afternoon, how are you?

Hi, Mitch.

Just curious, underwriting philosophy, Bill. 2,000 transactions that you've looked at. I know every deal is different and distinct, but maybe order of importance, is it customer, is it lease term, is it location, is it coverage? How do you weigh all of them when you're underwriting these transactions?

Sure. The first step is strategic value. Obviously, if it's not a restaurant, it drops off at that point. And then we just look, for example, a steakhouse in Atlanta would have less strategic value to us than a quick service restaurant in Utah because we already have a number of steakhouses in the Georgia market.

So then from there it's roughly split 50/50 between credit metrics, things like guarantor credit and durability of the brand in question, and then 50% real estate, that's things like lease term or lease growth rate, things related to rent, et cetera. So without giving away trade secrets, we have a scorecard that is roughly predicated on a 50/50 balance between credit and real estate.

Got you. And then maybe just split between the deals that you've announced so far as to direct versus fully marketed?

I think the way most people would define it, most of these transactions have been direct, but in today's market people are sophisticated. Usually there's a broker involved in some aspect of many of these transactions, so I think if you were to calculate a percentage, it would be very high, quote unquote, direct, but I think I don't put a ton of differentiation in that. Not nearly as much as some of our competitors do.

Great. Congrats on a fantastic first year.

Great. Thanks, Mitch. Appreciate it.

Our next question comes from Daniel Donlan of Ladenburg Thalmann.

It's actually John Massocca on for Dan.

How are you?

Not bad. Just quickly, when you look at the two Darden properties you sold in the fourth quarter, where were they on a quality basis compared to the rest of the Darden portfolio? Maybe from an EBITDAR coverage basis and also just in general?

They were very high quality. Both in terms of performance, location, Florida is a good market for net lease, generally. All of our properties are in very good physical condition and are well located, but they were very good properties.

But you wouldn't expect like a randomly selected Darden asset in your portfolio to sell at the same kind of cash cap rate that those properties sold at?

No, I would not.

Okay.

I think it would be slightly higher.

Okay. And then from an acquisition basis, everything you bought so far has been -- is operated by franchisees. Is there any opportunity do you think to acquire corporate owned assets or are those just too costly given the strength of the 1031 market and the appeal of a corporate credit?

No, we certainly looked at a number of corporate deals. I wouldn't read too much into these initial transactions from that perspective. We certainly will be acquiring corporately operated stores in the near term.

Okay. Understood. And is there any kind of spread on a cap rate basis between corporate versus franchisee assets?

Not when it's properly adjusted for credit.

Okay, it's just -- makes sense. That's it for me.

(Operator Instructions)

Our next question comes from Jason Moment of Route One Investment Company.

Thanks, Bill. Congratulations on a great quarter. My question was, I had an opportunity to stop by the Stonestown Galleria Olive Garden the other night and tried out the new bread stick sandwich, which was, I thought, phenomenal. It was very tasty and at a good price point. And I've noticed they've done a lot of marketing push on their website. My question is, have you factored that into your perspective guidance as far as traffic at your stores in the following year?

Sure. I would just point out that the Stonestown Galleria property is not one of the properties in the Four Corners Property Trust portfolio. Thank you for the question. Operator, anymore questions?

We have no questions at this time.

Excellent. Since we're getting close to the 20 minute mark here, I want to thank everyone for joining the call. Look forward to the future. We're very excited. Thank you.

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