Four Corners Property Trust Inc (FCPT) 2018 Q1 法說會逐字稿

Good day, and welcome to the FCPT announces earnings for the first quarter 2018 conference call. (Operator Instructions) Please note, this event is being recorded.

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

Thank you, Denise. Joining me on the call today is Bill Lenehan as well. 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 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 more detailed descriptions of these risks or other potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website at fcpt.com. All of the information presented on this call is current as of today, April 26, 2018. 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, also available on our website.

With that, I'll turn it over to Bill.

Thank you, Gerry. Good morning. Our first quarter focus was on diligencing the second tranche of the Washington Prime transaction we announced last year. As we mentioned on the last call, we believe we'll be able to source additional high-quality restaurant outparcels from retail landlords and have made good progress in this regard. We are very excited about our pipeline.

During the first quarter, we purchased just shy of $20.4 million in restaurant outparcels in 12 different assets: 3 Buffalo Wild Wings, an Olive Garden, a Chick-Fil-A, McDonald's and Starbucks and several other brands. Average term was 9.3 years, and the cap rate was 6.8%.

There were no dispositions closed in this quarter, though we continue to receive regular offers for our properties at very attractive prices. Not much has changed in the restaurant industry in the 2 months since our last call. We always monitor asset pricing very carefully, but we have not seen substantial evidence that cap rates have moved and certainly have not seen a move that will be commensurate with the change in long-term government bond rates. We did not issue stock on our ATM in Q1 and were in blackout for much of the quarter, which is typical for the first quarter of every year. Our balance sheet is in great shape, and we believe we have access to significant capital, both debt and equity.

Maintaining a low leveraged balance sheet is important to us, and we understand well that it is important to our investors. Our Kerrow division, which operates a handful of LongHorn Steakhouses in San Antonio, Texas, continues to perform very well and has exhibited strong revenue growth that is dropping to the bottom line. We'll be attending both the ICSC conference in Las Vegas as well as the NAREIT conference in New York City. If you would like to meet in person, please don't hesitate to reach out.

Now Gerry will take you through the financials. Gerry?

Thanks, Bill. A few comments on our results for the first quarter. We generated $27.3 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 March 31 is $109.4 million. And our weighted average annual rent escalator remains at approximately 1.5%. I'd also add that our sector-leading EBITDAR-to-rent coverage was 4.7x for the quarter, ticked up slightly from last quarter.

Our net income FFO and AFFO per share results were impacted approximately $0.01 per share in the quarter because of the short-term dilutive effect of the balance sheet cash that we have. But we are pleased to have that capital available to fund the Washington Prime and other transactions in our pipeline. On an AFFO per share basis, which we believe best represents the cash flow generated from the business, we reported 6.3% growth in quarter-over-quarter per share results.

In the quarter, we reported $2.5 million of cash, general and administrative expenses after excluding noncash, stock-based compensation. We maintained our guidance for 2018 of an annual G&A run rate of approximately $11 million, excluding noncash stock-based comp and acquisition transaction cost. You will note that the amortization of our noncash stock-based compensation increased in the first quarter because we are now amortizing awards over 3 years and just made our third year's grant to put us at a full run rate of amortization.

Turning back to the balance sheet, we ended the quarter well capitalized for the remainder of 2018 with net debt to EBITDA of 4.7x, $53 million of cash and full availability on our $250 million, 4-year revolver. As Bill said, we remain committed to maintaining a conservative balance sheet with financial flexibility, and we continue to appreciate support of our investors in the equity, bank debt and private note markets who help capitalize our growth.

And with that, I'll turn it back over to Denise for Q&A.

(Operator Instructions) Our first question comes from R.J. Milligan from Baird.

Bill, you had made some progress on additional WPG-type deals. I was just curious if you could give us a little bit of color there and what's the interest level from some of the other real estate owners that you've talked to?

Sure. Thank you for the question, R.J. We have made progress. The deals are very similar to the Washington Prime deal as far as premier -- lots of ground leases, lots of corporate tenants, good demographics, obviously different sizes depending on which deals you're talking about. We'll announce them the day they close. We've met with almost every retail -- major retail landlord in America. We've had some terrific reactions from some. Others it's not a focus. We continue to plow ahead. We think it's an attractive avenue for acquisitions.

Okay, that's helpful. Obviously, there is some concerns out there about some of the trends that we've seen in some of the casual dining concepts. Can you talk about the differences you're seeing, I guess, both from a fundamental standpoint as well as the acquisition opportunities between casual dining versus quick serve?

Sure. Garden has been, in essence, the exception to trends in the casual dining business, which have been not all that positive. It seems to be getting a little bit better in the last quarter, but over the last couple of years, many of the casual dining brands are having a hard time maintaining revenue levels at the same-store basis. Specifically, Applebee's, which is the largest casual dining brand by number, has had difficult performance, although it looks like they are making some progress turning it around. Our focus because of this has been almost entirely on quick service restaurants, and so we feel like where we've positioned our acquisitions over the last 2.5 years has been appropriate. Obviously, limiting ourselves to quick service, makes it difficult -- as difficult to grow as fast as you could if you had both casual dining and quick service. Casual dining is -- the properties are more valuable, call it $3 million to $4 million, $5 million, versus quick service, which are typically $1 million to $2 million, maybe in the low $3 million. So obviously, you can deploy more capital per property in casual dining, but we've been satisfied thus far in focusing on quick service. Obviously, we started life 100% casual and fine dining. And so we think adding quick service adds to diversification as well as aligning ourselves with healthier brands.

And I guess a bigger picture question. Given the competitiveness we've seen for restaurants in general in terms of cap rates, are there any other sectors that look more appealing today from acquisitions standpoint? And what's Four Corners' willingness to invest outside of the restaurant category?

Sure. Well, in 2.5 years we haven't purchased a restaurant -- a nonrestaurant property. We've certainly seen a number of them. Oftentimes, they're in portfolios that we look at. I think when we started it was prudent to stick to our -- be laser focused on restaurants. I think today would we look at nonrestaurant tenants? Probably more so now than we have in the past. But to date, we haven't set an LOI on a nonrestaurant, as just one data point. As we look at other sectors, pharmacies and drug stores, car washers and convenience stores and gas stations, dollar stores, et cetera, we don't really see a subsector that today looks more attractive than restaurants. Some, you could say, are about as attractive as restaurants, and we don't see any that have pricing that stand out as being more attractive than restaurants. So certainly, restaurants are competitive, but generally retail and net lease is competitive overall. So we'd look at it, it likely be part of a portfolio. But to date, we haven't focused on any specific subsector, if that's helpful.

The next question is from Collin Mings from Raymond James.

Just first following up on one of R.J.'s questions. Just given some of the challenges on the casual dining front, are you seeing any signs, Bill, that 1031 buyers are differentiating across brands or operators more than they were, call it, a few months ago or 6 months ago? Or maybe asking that in a different way, are they differentiating across brands or operators as much as they should?

Two 2 great questions, Collin. I would say that we see cap rates similar to Applebee's before. Cap rates on Applebee's have picked up pretty meaningfully. I don't think enough, but meaningfully. And we've seen demands when folks inquire with us about buying our properties, the pricing is good as ever. So I think you do see a difference, and there's a substantial difference in the cap rates, but I'm -- the difference isn't enticing enough to get us focused on buying casual dining where you have to bet on a rebound in a properties performance or brand's performance. At least, not yet.

Got it. So [pre] to kind of go maybe a little further up the risk curve, you would want a little bit more gapping out in terms of pricing on maybe some of the weaker operators or weaker brands?

Correct. Well said.

Moving on -- or going really kind of back to prepared remarks, on the acquisition environment. Just thinking through that a little bit more, have -- again, as you think about the 1031 buyers out there, have you seen any signs that sellers are more attracted to potential buyers that can offer certainty of close, given the potential move in cap rates?

It's a logical question. One would expect that to be the case. I can't speak to a specific example where I have seen that, Colin, at least, not yet.

Okay. Then 2 other housekeeping ones for me. Just on the second tranche of the Washington Prime deal. It looks like, at least in the prepared remarks and the press release, it sounded like that maybe that time line may have shifted back at least potentially into the third quarter versus more of a by end of 2Q. So maybe just anything that you can comment on, on that front?

Yes, it's I think end of the second quarter, beginning of the third quarter, hard to pick a specific month. A lot of these are properties that needed to be parcelized, and you're relying on local jurisdictions to cooperate in creating a separate tax parcel. So I know Washington Prime is working really hard on it. We're very supportive of them and appreciative of their hard work. But whether it closes -- whether we have assets closing in June or July, we're not that fussed about it.

Got you. Okay. And then just one other small housekeeping one. Just on the other income line, it looked like that was much higher in the quarter than it had been previously or really in the company's history. So just curious what was that or anything to note there?

Collin, Gerry here. We have just over $200,000 of a noncash gain on an exchange of land parcels with Darden. One kind of postclosing items is we had a little parcel that doesn't impact the value of the property or the parking, and they had wanted to switch that. It had a, as I said, a slight gain. We backed that out, as you'll see, and noted it before getting to FFO and AFFO. Otherwise, other income for us is principally the interest on our cash balances.

Your next question is from Mitch Germain from JMP Securities.

Bill, I just -- you mentioned the other sectors that you have looked at, I guess. Should we just assume that if there's any participation in the sector outside of restaurant it will be part of a bigger portfolio rather than a strategic shift?

I think we're open-minded. Again, it's not something that we spend a lot of time on. I would just maybe characterize it as when we spun we were laser focused on exclusively buying restaurant properties. We're not foreshadowing anything here. If something came around now that wasn't strictly restaurant and we thought it might make sense in the portfolio, we'd consider it. But we certainly would not -- we're not trying to use the call today to foreshadow some strategic shift in Four Corners. We have been exclusively restaurant since we started. That's our focus.

Got you. Seems like pricing environment remains fairly tight. Could that cause you to potentially look at assets with a little more risk, meaning obviously you've got about 13 years of term in your portfolio maybe look at something that's got a little less term, some leasing risk but the economics might work out?

Yes, I think if you look at the Washington Prime deal that's one way you could characterize it. A lot of these transactions have very low rents, but they don't have the typical 20-year lease term. So that's something that we're very focused on. We think it's an opportunity, and it's something that's -- it's a characteristic of the other deals we're working with, with other retail landlords.

Got you. My last question is, ideally, you're around, give or take, about 85%, maybe 83% if you include Washington Prime, in terms of -- or 80% in terms of Darden versus other. Is there like an ideal percentage in your mind that you'd like to be sitting at in the next, call it, 3 years?

I don't think we've made that public. I think that you can see us on a consistent basis quarter-by-quarter chipping away. But the Darden portfolio that we have is so good that it's hard to feel anxious to dilute that exposure down. And it's not -- it's -- I think our restaurants are very comfortable that the Darden exposures of extremely high quality, I think, 5x covered today with a high-investment grade operator that's performed very, very well. So while we like to grow and chip away at that exposure over time, and that's our mandate, we're in no rush, and we're not anxious.

(Operator Instructions) Our next question is from John Massocca from Ladenburg Thalmann.

Do you think that the timing between the announcement and the expected closing of the WPG transaction is typical of what you'd expect for any kind of future similar transactions? Or is there kind of some way maybe you can build on the experience from WPG or structure transactions differently to maybe shorten closing times?

Yes, I think it's not -- it's all facts and circumstance based. And you'll see some be quicker than others. I think that the WPG deal is progressing pretty much how we planned it to progress. This is what happens when you're purchasing assets that aren't [marking] for sale that haven't been -- where you don't have separate tax parcels and the due diligence takes some time to work through. But we think that the view is worth the climb on transactions like this. It's a lot of work. We feel like we have a lot of capability in our legal expertise to accomplish transactions like this. They take time. We've been working on other transactions like this for many months. And so we feel really good about it. What's important is once we own the assets do they perform. So being deliberate in how you diligence assets makes a lot of sense. But we feel like it's something for a company of our size to be able to purchase assets that have these brands, as I mentioned in my prepared remarks, Chick-Fil-A, Starbucks, McDonald's, is a real advantage. And while these are assets that take some time to work through, it's worth the effort.

Certainly, but I mean kind of that 9-month window then you think -- obviously, there's various circumstances (inaudible) close similar deals?

It's all across the board, John. And we've got assets that if it's on a separate tax parcel and all the information is ready and the leases doesn't need to be changed at all, we can close as fast as anyone, and we've closed some deals in very short periods of time. It's when properties need to go through [rolefers], they need to go through separation, it takes time. And as I said, we've got other transactions we've been working on for many months. So it's time well spent.

Understood. And then given the diligence that's required to complete these kind of transactions, I mean, if you saw a number of them kind of come across, kind of get to a point where you can really act on them in a very short period of time, I mean, could that put upward pressure on your cash G&A, especially given how kind of lean you tend to run the organization right now?

Well, a lot of the transaction-related costs can be capitalized, but I would say that we feel like we're well staffed. We've -- our team has a tremendous capacity for workload. So I think we feel like we're in good shape.

Ladies and gentlemen, this would conclude our question-and-answer session. I would like to turn the conference back over to Bill Lenehan for any closing remarks.

Thank you, Denise. Again, to reiterate, we're very happy with where we're headed as we round out the first half of the year. And we're excited about our pipeline and what we intend to accomplish in the second half. To the extent folks would like to meet at ICSC, NAREIT or do an investor call, we'd love to meet with you. Thank you very much.

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