Four Corners Property Trust Inc (FCPT) 2017 Q2 法說會逐字稿

Good day, and welcome to FCPT Announces Earnings for Second Quarter 2017 Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would like to turn the conference over to Gerry Morgan, Chief Financial Officer.

Thank you. 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 risk, uncertainties and factors that are beyond our control or ability to predict. Our assumptions are not a guarantee of future performance, and some will be inaccurate. For more detailed description of potential risk, please refer to our SEC filings, which can be found in the Investor Relations section of our website at www.fcpt.com. All the information presented on this call is current as of today, August 3. In addition, reconciliation to non-GAAP financial measures presented on this call, such as FFO and AFFO, can be found in the company supplemental report, also on our website. With that, I'll turn the call over to Bill.

Thank you, Gerry, and good morning, everyone. Let me first make a couple of comments on our second quarter acquisition activity, which included a meaningful transaction with Bob Evans and a repeat Burger King business with a large franchisee operating over 115 restaurants. The metrics of these transactions evidenced both healthy credit and strong unit level performance. Pricing on a blended basis was a 7 cap, slightly higher than previous quarters, but basically in line. During the quarter, we also closed the sale of 1 Olive Garden site in Lakeland, Florida at a 5.1 cap rate, demonstrating the private market continues to have strong demand for Darden brand of properties. As highlighted in the press release, we just passed the first anniversary of having our acquisition team in place. Over that period, we've closed on over a $160 million of acquisitions across 91 properties, a great result for our first year and the success we will continue to build on.

Regarding the net lease market overall, we are seeing slightly higher cap rates and more balanced dynamic between buyer and seller. This is a trend we discussed on prior calls, and at a recent net lease conference there was consensus that cap rates are trending up slightly, but certainly not dramatically.

On the restaurant industry, I'd like to make 3 observations. One, Darden continues to execute at a very high level with a conservative financial profile. Two, many other casual dining companies are not doing well, and we've been avoiding these credits. And three, quick service brands have been -- we've been acquiring have been very stable. I would also add a further point on Darden. As you'll know, we have updated our overall EBITDAR lease coverage and this statistic is for the entire company, including acquisitions post spin with coverage from 4.1 at spin to 4.7x today. This was driven by updated metrics from Darden, where coverage has strengthened given improved operations and sales growth overall since 2015. I'm very pleased with the success of our capital markets activity for the quarter. Gerry will provide more details in his comments, but we proved in Q2 that we have access to capital to grow our profitability per share as well as diversify our tenancy, all the while maintaining significant financial flexibility and a conservative capitalization.

The operations of our business are on very strong footing. Nicole, along with Gerry, runs our accounting function, has overseen the smooth internalization of all of our accounting functions, and which we anticipate will shorten our monthly closing process, increase our control over our reporting and save us money over the long term. As part of this initiative, we have added to our internal accounting and legal teams with some great new hires. We're making sure our portfolio, now consisting of 23 different tenants, does not outpace our internal resources. As an example, we've reached agreements to extend 2 short-term leases that were set to expire this fall, that were acquired as part of a portfolio last year. As a result, our portfolio remains 100% occupied with no maturities until 2020. We're accomplishing these additional scope within our previously communicated overhead estimates. Now, Gerry will take you through the financial results. Gerry?

Thanks. First, a few comments on our results for the second quarter. We generated $25.9 million of cash, rental income after excluding noncash, straight line rental adjustments. As shown on Page 8 of our supplemental package and for purposes of modeling, the current cash base rent for leases in place as of June 30, 2017 is $105.2 million. I would highlight for everybody that in prior quarters we were listing on this page in the supplemental, the estimated calendar year cash rent, including rent increases during that year. Starting this quarter, we are instead showing the current in-place cash rents as of quarter-end, from which investors can add estimated future rent escalators as they would like. As a reminder, the average annual rent escalator for our portfolio is approximately 1.5%, and all the Darden property cash rents increased by 1.5% each year on November 1.

Cash interest expense, excluding amortization of deferred financing costs and other noncash interest, was $4.1 million for the quarter. Interest was higher than Q1 given increased borrowing on the revolving credit facility to fund acquisitions, and $125 million unsecured note offering, which funded on June 7. There was no outstanding balance on our $350 million revolving credit facility at quarter end. We reported $2.8 million of cash, general and administrative expenses after excluding noncash stock-based compensation. As expected, results were slightly higher than Q1, mainly due to the overlap of internal and external accounting costs, as we completed the internalization of those systems, as Bill mentioned. The conversion was completed in July, and we expect to achieve meaningful expense savings going forward. We reiterate our previous guidance for 2017 of an annual G&A run rate cost of approximately $11 million, again, excluding noncash stock-based comp and acquisition transaction cost. In addition to the 7-year and 10-year note offering, as Bill mentioned, FCPT also issued $28.3 million of equity in the second quarter at a weighted average share price of $24.29 via the ATM program and ended the quarter with just over $80 million of cash. These transactions are consistent with our focus, not just on the quantity, but also the quality of earnings. We estimate the net effect of these 2 capital events of about $0.05 of dilution to Q2 AFFO per share given the cash balance and the higher cost of interest expense on the fixed notes versus variable financing on our revolver. However, in the long run, we like the dry powder to fund future acquisitions and accessing the capital markets from a position of strength.

Two final comments on our balance sheet. First, we welcome the group of 11 top tier insurance companies who participated in our inaugural note offering. We look forward to working with these investors and our existing credit facility banks to continue prudently capitalizing our business. Second, the notes brought our average debt maturity to 4.6 years at quarter-end and represent an important expansion of our access to diverse and cost-effective sources of capital. Our net debt to EBITDA stands at 4.4x at quarter-end, and we remain committed to maintaining that debt-to-EBITDA levels at or below 5.5% to 6%. With that, I'll turn it back over to the operator for Q&A.

(Operator Instructions) Your first question comes from Collin Mings of Raymond James.

First question for me just as far as leverage. Net debt to EBITDA of 4.4x is what you finished the quarter with. Is 5.5 to 6x still the right target for you guys going forward? And how do you think about maybe maintaining a kind of a lower leverage levels and the potential benefit that could mean for your evaluation as far as the stock price?

Well, Collin, it certainly seems like conservative financial position and low leverage correlates highly to AFFO multiple in overall valuation. And that's one of the reasons we raised equity in the quarter preemptively. We still think long-term 5.5 to 6x is quite conservative and is consistent with what we've communicated to the rating agencies, but we're in no hurry to get there.

Okay, understood. So we should continue to anticipate some level of maybe match finding or some opportunistic ATM issuance or given the cash balance that you guys currently have following the debt offering as the runway maybe a little bit longer before you go back and issue stock to the ATM?

I think it's something that we assess in real-time, but I think you have a good flavor of where our head is at.

Understood. And then just one last one from me. I'll turn it over. Just as far as the deal pipeline, you did touch on maybe some upward pressure on cap rates, but just in terms of volume and then, in particular, for you guys, how are you looking at, again, it's been a little bit more of these smaller portfolios that you guys have closed one versus one-off opportunities? How much time or what does the current deal pipeline look like as far as maybe just single one-off or 1 or 2 assets versus, call it, smaller portfolios out there right now for you?

Sure. It continues to be a mixed bag, and I think it's very hard to read into any trends quarter-to-quarter. But I think you'll see us continue to announce individual properties. We closed a 2 unit Taco Bell deal recently with a great franchisee. You'll continue to see us do all 3 originated sale-leasebacks, larger portfolios and one-off deals, and the mix will change quarter-to-quarter really without any observable trend would be my guess. I would say the individual property market, which is predominantly 1031 exchange buyers, remains very competitive, and that's where we tend to find that our -- the LOIs that we're submitting are most off from the asking price, if that helps with the commentary. But it will continue to be a mixed bag, and we are really agnostic to what sort of channel the assets come from as long as they are operated by strong franchisees with good brands and good real estate.

Next question comes from Dan Donlan of Ladenburg Thalmann.

Just want to go back to Collin's question on the acquisitions. Given how price agnostic sometimes these 1031 buyers are, what is in it to -- for some of these franchisees to work with you given maybe you're paying a slightly higher cap rate than some of these 1031 investors?

Sure. I think the first premise to start with is that 1031 exchange buyers, and we see this because we occasionally sell properties into this market, do not provide much surety of close. They are allowed to identify 2x, what they're seeking to exchange and then, of course, there is the risk of what -- of their underlying property sale falling through. So they tend to close far less than half the time. So when there is a desire for certainty, we are the certain counterparty. And I would also add, you saw the recent [KeyMac] transaction. That was a transaction where Josh and Pat exhibited a lot of creativity in identifying a property with very short-lease term and with a need for a remodel, and we came to a price on the -- with the seller and then went back to the franchisee, negotiated a slightly different rental rate and a much longer term, where we will end up having a refreshed asset at a very acceptable price. That's something that the typical 1031 exchange buyer is just not interested in putting the legwork to do things like that. So -- but to be clear, we submit a very large number of LOIs, where we are 50, 75 or 100 basis points off on price and quite often we get the call after their aspirations to sell into the 1031 exchange market have been foiled 1 or 2 or 3x.

Understood. Appreciate that. And then, sorry if I missed this, but the terms of the leases that you extended out, did you have to lower rent and touch there? Or any type of concessions you gave there? Or is that kind of what you discussed with remodeling?

On these transactions, we lowered rent a very minor amount and we provided a subsidy to help remodel the store. But we knew the economics of both that remodel and the different rent going into it. So felt very, very good that we purchased the assets at a price that was well in the money.

Okay. And then as far as the asset sale in the quarter, I think it's the third one you sold since being a publicly traded company. I think all 3 have been in Florida. Is there any trend to look into there? And then just kind of curious on the cap rates. You achieved 4.75 on the first 2 last year and then you got a 5.1 here. Is that kind of a general range in what you're seeing as you're getting potential unsolicited interest and/or kind of putting stuff out there maybe just to see where you can price some of your Olive Gardens, LongHorns, things like that?

Yes, let me make a couple of comments. Florida is a market -- underlying the 1031 exchange market, if you were to really simplify it, quite often it's people who are selling apartment buildings in the Northeast and exchanging them into net lease assets, in -- where they retire to. That's just a common trend. I think it was the case in all 3 of these sales that we've made. That's one. Two, Florida is one of 7 tax-free states, which is not very relevant to us as a REIT, but as an individual it is a -- it just makes the economics a little bit better versus buying in a state that we have to pay income taxes. And as to cap rates, yes, I think you'll see very consistent cap rates within a 25, 40 basis point range on where we see people having interest in our portfolio.

Okay, appreciate that. And then just...

The 1031 inquiries, reverse inquiries at least once a week, if not more, and we really are pursuing it very aggressively, but we think it's a nice twist to our overall strategy, helps the diversification. It allows us to risk-manage in certain circumstances. So you'll see us continue to do it in the normal course.

Okay. That provides lots of visibility on valuation, I think, too. And then just lastly, on the acquisition side. Some of the fast food chains that I've visited recently have moved to electronic cashiers. Is that something that you're looking for in future acquisitions? Is it something that maybe you're providing capital to some of your existing fast food concepts to switch over to? How should we think about that?

I would say that it's part of an overall trend and we have some material in a presentation we put on our website last week on this. An overall trend of the larger brands being more technology focused and older franchisees selling assets to growing franchisees, who have more interest in maintaining the space and increasing the amount of technology that's available as they operate the restaurants. And that technology can be, as you mentioned, electronic ordering boards, in-store kiosks where you don't have to wait in the line, you can do it at a kiosk, more technology in the drive-through, mobile and web-enabled ordering and delivery. So it's something -- we do think it's a trend. It's another reason that we focus our efforts on large well-capitalized brands who have the resources to invest in technology. And Dan, I would agree with you that the time that we spent in restaurants, you're seeing much more technology in what many people would think of as a nontechnology industry.

And of course, Darden was a leader in this in putting Ziosk tablets on all the tables in Olive Garden with strong results from that.

The next question comes from Mitch Germain of JMP Securities.

Just curious, there's been a push for some of the larger retailers, the department stores to maybe monetize their real estate. Is this a trend you're seeing across the restaurant industry as well?

I think it's largely a trend that's already played out over the years. And so there are some exceptions to that. Darden was an exception to that. Brinker and Blumen have all sold a lot of their real estate, and most of the quick-service brands have been asset-light for a long period of time. So I think that's well-trodden ground in the stand-alone net leasable restaurant business.

Got you. And then the last one from me. I know you spent a lot of your time before and post-spin with franchisees. Just to gain credibility and such, and I'm curious about where that efforts stand. Is that still really a big focus to get out and talk to these individuals? Or do you think a lot of that effort has already been done and now it's just really a function of time before you can get some of those transactions with those individuals?

I think, well, if you were to roughly define the addressable universe as the franchise times 200, I think we've had a very strong start. But that's a large universe to address and we think we have a lot of runway there. But we're pleased with the progress we've made. We found that the franchisees that we've done business with, many of them have come back and we've done repeat business, which is, obviously, easier on both sides. And as we support these franchisees and they grow, it helps the underlying credit in the first place. So I think Mitch, we've got a good start going, but there is still lots of work to do.

The next question comes from Peter Abramowitz of Canaccord Genuity.

This is (inaudible) on for Ryan. Collin actually sort of hit all my questions regarding some of your acquisitions. So I'll hop in the queue.

Operator, are there any additional questions?

The last question comes from R.J. Milligan of Baird.

This is Will Harman on for R.J. Just wanted to go back to your comments, Bill, about cap rates moving a little higher recently and just want to dig into this a little deeper. What do you think are some of the factors that are driving the movement upward? And are their sectors where you're seeing rates move higher than others?

Sure. Well, obviously, interest rates are higher. Then they are low. They come a little bit. So I think that has some impact. Last summer, it's sort of hard to imagine things getting more aggressive. So this is maybe more of a reversion to a more reasonable mean. And then, what I would say is within our space, clearly cap rates on Applebee's and some of the other casual dining brands have gone up in some cases, meaningfully. In the QSR business, again, very slight changes, maybe 10, 15 basis points type range. Then net lease, more broadly, obviously, all real estate that is concluded to have some impact on Amazon, or Amazon could have an impact on whatever kind of real estate it is -- has traded off slightly, restaurants probably the least of the different property types. Hopefully, that's helpful.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Bill Lenehan for any closing remarks.

Great. Thank you. As we're coming up on 25 minutes, I'll keep my closing remarks brief. Again, thank you so much for your support as shareholders and analysts. We're always willing to take the time to answer questions, if you have follow-up questions. With that, thank you, and we'll conclude the call. Thank you.

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