Four Corners Property Trust Inc (FCPT) 2017 Q4 法說會逐字稿

Good day, and welcome to the FCPT Announces Earnings for the Fourth Quarter 2017 Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Gerry Morgan, CFO. Please go ahead.

Thank you, Rachel. 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 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 at www.fcpt.com. All the information presented on this call is current as of today, February 21, 2018. And 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 our CEO, Bill Lenehan. Bill?

Thank you. Thank you, Jerry, and good morning, everyone. Our fourth quarter focus was on diligence in the Washington Prime transaction we announced in September as well as meeting with additional mall and shopping center owners to attempt to scale this strategy. As we mentioned on the last call, we believe we were able to source additional high-quality restaurant outparcels from these parties and made good progress in this regard.

During the fourth quarter, we purchased 5 Red Lobsters, 1 LongHorn Steakhouse and 2 more Burger Kings with Cambridge, a tenant we have a very strong relationship with. The acquisition statistics were in line with prior purchases: good credit, long-term leases and a growing in cap rate of 6.7%. We also sold an Olive Garden at a 4.7% cap rate. We started off the year with 2 Buffalo Wild Wing acquisitions, both run via an existing tenant and 10 of the Washington Prime properties. The rest of the Washington Prime transaction is progressing as planned.

On the restaurant industry overall, not to sound like a broken record, I'd like to repeat 3 observations from last quarter as they are still relevant. Darden continues to execute at a very high level with a conservative financial profile. Many other casual dining companies are not doing as well, and we have avoided these credits. And the quick-service brands that we've been acquiring are stable. I would also highlight that Darden was upgraded by Moody's in late January from Baa3 to Baa2, which matches its ratings of BBB from S&P and Fitch, and is further evidence of Darden's commitment to an investment-grade balance sheet.

Over the last few weeks, we have experienced a volatile interest rate environment. One would expect higher interest rates to equate to higher acquisition yields, if for no other reasons that higher borrowing costs will impact buyer's ability to generate sufficient equity returns, not to mention higher required equity returns themselves. However, we have not yet seen the impact of higher risk free rates being passed on to sellers. Perhaps the structural dynamics of the 1031 market, whereby buyers become lofty and properties they have identified in trade is the cause or whether it's simply too soon to tell, we don't know. This is something we are monitoring closely. We did issue a small amount of stock on our ATM in December, $3.5 million at an average price of $26.56. Our balance sheet is in incredible shape, and we believe we have access to significant capital, both debt and equity.

We are very pleased to announce Nicole Stewart's promotion to Chief Accounting Officer at the beginning of the year; Nicole joined pre-spin and has done an excellent job building a team, achieving Starbucks compliance, internal error accounting, driving meaningful overhead savings and consistently executing at a very high level. Lastly, we are excited to announce that we are going to add an additional acquisition team member starting in May.

Now Gerry will take you through our financial results. Gerry?

Thanks, Bill. First, a few comments on our operating results for the fourth quarter. We generated $26.8 million of cash rental income after excluding noncash, straight-line rental adjustments. On a run rate basis, the current annual cash base rent for leases in place as of the end of the year is $108 million. Our weighted average annual rent escalator remains at approximately 1.5%. Cash interest expense, excluding amortization of deferred financing costs and other noncash interest, was $4.5 million, reflecting a full quarter of lower margins on our $400 million term loan and lower unused fees on our revolver from the recasting of our credit facility in early October. There were no borrowings on our revolving facility during the quarter as we maintained a net cash position, which was $64.4 million at quarter-end. Our net income FFO and AFFO per share results were impacted in the quarter by the short-term dilutive effect of the balance sheet cash, but we were pleased to have the capital available to fund the Washington Prime transaction and other transactions in our pipeline before the movement in interest rates over the past several months.

As we mentioned in the press release, the FFO per share results were impacted by $0.01 due to noncash interest expense in connection with the credit facility recasting in October and a noncash credit that benefited our results in 2016 related to hedge ineffectiveness. On an AFFO per share basis, which we remind everybody we believe best represents the cash flow generated from the business, we reported 6.5% growth in quarter-over-quarter results.

In the quarter, we reported $2.3 million of cash, general and administrative expenses after excluding noncash, stock-based compensation, and $9.6 million for the full year of 2017. This result was comparable to our cash overhead in 2016 even though we've added 5 great new members to the team since we've achieved savings in professional fees and our second year of operations, insurance and other third-party expenses. We are providing guidance for 2018 of an annual cash G&A rate of approximately $11 million, again excluding noncash, stock-based compensation and acquisition transaction costs.

Turning to the balance sheet, and as mentioned by Bill, we ended the quarter well capitalized for 2018 with net debt to EBITDA of 4.6x, $64 million of cash and full availability on our $250 million, 4-year revolving credit facility. We remain committed to maintaining a conservative balance sheet with financial flexibility.

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

(Operator Instructions) The first question comes from Collin Mings with Raymond James.

Just to start, Bill, maybe just how has the change in the stock price impacted your underwriting process, if at all, and especially just given the lag that you alluded to as far as actually seeing any sort of change in cap rate thus far?

Great question, Collin. I think, incrementally, with higher borrowing costs and a less advantageous cost to capital, we still think it's advantageous, just less than it was. I think we're being a little bit more conservative, but I would generally say that we are not overreacting, it's not a knee-jerk type change in philosophy.

Okay. I guess, to that point, do you still see the ATM as a viable tool right now?

I think we've refrained from commenting on that, and I think we're going to continue to refrain from commenting on that.

Fair enough. Going to the outparcel transactions, and again in prepared remarks, you talked about spending a lot of time on that front, are you seeing any more competition for those deals, just maybe given more awareness of those opportunities given the WPG deal you guys executed on?

I think there's always been ample competition in the one-off 1031 exchange markets. But no, I don't think we're seeing much in the way from other folks. It's an awful lot of work as you can -- if you trace the time of the WPG deal, it started approximately this time last year. We worked diligently to get it signed up in September, 41 assets to due diligence. And again, only some have closed so far, the rest will close in the middle of this year. It's an awful lot of work. So I think we're uniquely suited to do it given our specialized nature and the experience we've learned. Learnings we have had from the WPG deal positions us well, and we're putting our back into it to replicate it. Other than the competition that was already there on the one-off sales I don't think we've noticed any change.

Okay. And you've kind of addressed my next question in that response, but just maybe more specifically, especially, the second tranche of WPG property, just as you have gone through that diligence and structuring process. Has there been anything that you've found may be a little bit more cumbersome than you would expect when you originally executed on the deal?

We actually expected that there would be wrinkles and -- anything times 41 is a lot, right? So we knew it going in, I don't think there've been any real meaningful surprises.

Okay. And then just going back to kind of deal flow, just really any shift within any of the franchisees, just -- following tax reform? Any shift, maybe, just given a little bit more visibility on that front and how has that impacted discussions?

I think it's too soon to tell. You would expect the tax rate and the ability to more quickly depreciate improvements to benefit our business. We haven't seen it yet though.

The next question comes from R.J. Milligan with Baird.

Bill, Gerry, just a question on -- following up on Collin's question about ATM issuance. If we say that the company doesn't issue anything on the ATM this year, where would you be willing or comfortable taking leverage in, sort of a end of year '18 number?

We have said consistently 5.5 to 6x is where we view the ceiling. That's been very consistent with our communications with Fitch. We view that as an investment-grade balance sheet, and we feel like we have financial flexibility to close what we have in our near-term sighted and still be within that level.

Okay. But historically, you've run the company significantly lower than that 5.5 to 6x. So you would still be comfortable bringing it up into that range by the end of the year if the equity markets weren't open or not favorable?

I guess, R.J., the distinction I'm making is what's possible mathematically. We've tended to be conservative. We set that target over -- close to 2.5 years ago, and as you mentioned, we haven't gotten there. We think it's really advantageous to maintain low leverage. But we haven't put ourselves in a situation where we're backed into a corner having to raise equity at prices we don't find favorable.

(Operator Instructions) The next question comes from John Massocca with Ladenburg Thalmann.

Just kind of maybe the inverse of the effect that pressure on equity valuation has had. Have you seen more willingness from shopping center and mall operators in REITs to come to the table and negotiate around potential out lot sales given where their equity is treated year-to-date?

I think we have seen some signs of that, John, but it hasn't been a dramatic effect.

Understood. And then given that the 1031 market potentially has remained kind of strong and cap rates haven't quite expanded yet, given interest rate growth. How's -- what's the outlook for the disposition market? I mean, do you still think there is an ability to recycle out of, maybe kind of accelerate that recycling in order to fund future growth?

Well, we have seen a strong interest in our properties, and we've historically done the 1031 exchanges so it's exactly the dynamic you discussed We still see strong interest on the property so that's, obviously, always an option for us with very compelling spreads between the price in which we sell and the price in which we exchange. As you saw recently, we sold an asset at 4.7% and exchanged in properties with a 6.7%. So we've continued to see that sort of dynamic. But as far as accelerating that, I think it's too soon to have a significant change in our strategy. We are monitoring this closely, it's been a couple of weeks.

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

Well, thank you, everyone, for joining. I appreciate the support. And we're always here to answer questions off-line. With that, thank you very much.

Thank you.

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