Four Corners Property Trust Inc (FCPT) 2018 Q2 法說會逐字稿

Good morning and welcome to the FCPT Second Quarter 2018 Earnings 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.

Thank you, Danielle.

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 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 a more detailed description of some potential risk, please refer to the -- our SEC filings, which can be found in the IR section of our website at www.fcpt.com. All the information presented on this call is current as of today, July 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 available on our website.

With that, I'll turn the call over to Bill.

Thank you, Gerry.

Good morning. And thanks -- and thank you to everyone for joining us to discuss our second quarter results.

Our focus since the last call continues to be on sourcing quality, one-off and portfolio restaurant acquisitions.

During the second quarter, we purchased 9 restaurants for $16.3 million. This has included an additional 5 properties from the Washington prime transaction. The properties acquired include some great brands such as McDonald's, Starbucks, Olive Garden, Panera Bread, Cheddar's, Buffalo Wild Wings and Popeyes. Average cap rate was 6.3%, reflecting the brand and tenant quality and average term of 13.7 years.

In the quarter, we, in effect, self-funded the acquisitions with the $16.2 million sale of a Darden-leased Bahama Breeze in Orlando for cap rate just over 5%. The lease was one of the select few Darden properties we own without a corporate guarantee, but still commanded a premium valuation. The sale evidenced a strong demand for our assets in the private market. And the diversity -- and we are happy about the diversification of adding 9 restaurants and different brands with the proceeds.

The restaurant industry remains healthy, and we've seen some of our biggest tenants continue to post impressive results. This group includes Darden, which was led by its Olive Garden and LongHorn brands, same-store sales growth of 2.4% in the most recent quarter. We've also seen some brands that have had negative or flat comps in recent years, showed progress and turnaround of that trend over the past 2 quarters benefiting from a strong economy. We note that valuations have stayed strong from restaurant-tenanted real state and cap rates kept near record lows since private market and institutional demand for this sector remains high.

We issued $35.2 million of stock in the quarter via the ATM program at an average price of $23.

We started the third quarter with $88 million of cash and a lowly levered balance sheet with 4.2x net leverage and feel well capitalized to fund acquisition opportunities as they may arise in the future.

As a reminder, while we do not give acquisition guidance, we continue to be very busy on that front, and then we like the way our pipeline is shaping up for the remainder of the year.

Now Gerry will take you through the -- our financial results. Over to you, Gerry.

Thanks, Bill.

We generated $27.3 million of cash rental income in the second quarter after excluding noncash, straight-line rental adjustments. And on a run rate basis, the current annual cash base rent for leases in place as of June 30 is $109.6 million, and our weighted average annual cash rent escalator remains at approximately 1.5%.

Our net income FFO and AFFO per share results were impacted approximately $0.01 per share in the quarter by the short-term dilutive effect of the balance sheet cash, but we are pleased to have the capital available for closing the remaining properties in the Washington Prime transaction and other potential pipeline transactions.

On an AFFO per share basis, which we believe best represents the cash flow generated over -- from the business, we reported 6.3% growth in quarter-over-quarter per share results versus the second quarter of 2017. In the quarter, we reported $2.3 million of cash general and administrative expenses after excluding noncash stock-based compensation, and maintain our guidance for 2018 of an annual run rate of approximately $11 million, again, excluding stock-based compensation and acquisition transaction costs.

Turning back to the balance sheet, as Bill mentioned, we ended the quarter well capitalized for the remainder of 2018 with net debt EBITDA of 4.2, $88 million of cash and full availability on our $250 million revolver.

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

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

First question for me just -- it looks like, obviously, pretty active in the quarter on the ATM, especially relative to kind of deals completed. Bill, can you maybe speak to this? Does this reflect increased confidence in the near-term pipeline of deals, maybe similar to how you are proactive ahead of the Washington Prime deal last year? Or is it just a view of wanting to be kind of opportunistic and push leverage lower just given the bounce back on the stock price?

I wouldn't -- I would say that we remained very confident in our pipeline, but with that calm to stop and not make any sort of acquisition projections. We don't give guidance. We don't project acquisitions. And so we announced transactions when they close or if they're large enough on the signing of a PSA. So we're not going to give a -- much more detail on this call for competitive reasons, but we remain confident in our pipeline.

Okay. Fair enough. And then just last quarter you guys discussed as far as maybe being open to potential portfolio deals that included nonrestaurant properties. Maybe can you just speak to -- again, recognizing the sensitivities of not announcing anything until anything's closed, but just the flow of portfolio opportunities that you're seeing out there right now, Bill?

I think there's 2 parts to your question. I think during the quarter, we've been very focused on restaurants, have not really looked at other property types. And we always remained open to portfolio transactions as well as one-off transactions. So no change there really.

Okay. But as far as the actual flow -- the -- kind of the flow of business or of opportunities, has that changed at all on the portfolio front?

We remained really busy, Collin, I'd say that.

Okay. And then one last one and I'll turn it over. Just, obviously, the time line of getting some of the WPG properties closed is longer than kind of originally anticipated. Can you maybe just talk a little bit about some of the delays there? And just as you look at maybe replicating other opportunities similar to this WPG deal, is there anything maybe you would do differently or other things that you're -- you kind of keep in the back of your mind, just given how this process has taken maybe longer than originally expected?

Yes. I think it's fair to say that some of the properties will take some -- a few months longer than we thought. In the grand scheme of things, not that big of a deal. We're very excited about the properties we're acquiring. We're going to own them for decades, that it took a month or 2 longer to close some or 3 months longer to close 1 isn't that material.

(Operator Instructions) The next question comes from Mitch Germain of JMP Securities.

I think you referenced, Bill, there was no corporate guarantee on the asset that you sold this quarter. How many properties fit that they don't have a corporate guarantee?

I think when we spun, Mitch, it was 7% and now it's in the 5% range, maybe 4%. So it's small. They have a guarantee of an entity that's relatively high in the Darden org structure, but it's not the top entity. So again, I think it's a -- it -- that property is a very strong property. It's very well located. It's a very productive restaurant. We got a very strong price, in our opinion, and it whittles down just chips away at this unique, small portion of our portfolio.

And is that -- when you consider your sale candidates, are those the ones that rise to the top?

We're -- we tend to be very opportunistic, Mitch, in almost well, in every case. It's -- with someone coming to us with an interest to buy properties, typically, they have a second home near one of our properties that's why a lot of them have been in Florida. So we look at a lot of different metrics when we decide to consider one of our properties for exchange. But yes, certainly, it's one of the considerations. The other Bahama Breeze that we sold for a very strong price also had that dynamic.

Got you. The restaurant industry, I know, it's fairly healthy, but we've had Subway announce some closings and a big Applebee's franchisee went bankrupt. Is there anything surfacing that is alarming to you or maybe prevent -- presents an opportunity from you from a pricing perspective?

I would say that we were pretty much on top of the distress in Applebee's. We -- not to say that we wouldn't buy them in the future and there are certainly -- certain select opportunities where it makes sense to buy an Applebee's, but thus far, we haven't bought any or -- and we certainly don't have any RMH exposure, which was the tenant that you referenced. Subway's typically are in line. They're very small, and the franchisee system of Subway are very small. So we haven't really spent much time on Subway. I would say that in -- if anything, as we mentioned in our prepared remarks, some brands that have historically had slightly weaker comps have seemed to stabilized. And many frankly are following a Darden-like turnaround plan with many simplification and increased focus on guest engagement. So we actually feel like the businesses is overall doing quite well and Darden, in particular, is doing very well.

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

Could you give some color on the genesis of the transaction you completed with -- for the Buffalo Wild Wings in South Carolina?

That one -- actually, it's interesting. One of our investors, there's also a shareholder in T. Reed, connected us. And it's taking some time to get that property partialized, but it was actually an introduction by one of our investors, oddly enough.

Could that transaction lead to kind of additional transactions going forward with the landlord and kind of -- would you expect them to be in a one-off type basis?

I think for competitive reasons, John, we'll be mute on that point.

Understood. And then the coverages within the -- kind of your Darden portfolio bounced around a little bit, I think positive at all of Darden, but the -- kind of other Darden properties, the non-LongHorn steakhouse, non-Olive Garden assets, coverage there dropped. How much of that was driven by the Bahama Breeze sale? And was any of it driven potentially by performance that -- kind of the remaining properties in that subset of the portfolio?

John, I don't know in particular, but I would guess that is by removing some of the very high-performing properties that we sold that you get a little bit of mixed shift in that calculation, but we can check that and revert.

Okay. And then kind of lastly, the cap rates you announced in the quarter were a 7.1% and a 6.6%, kind of individual transactions. But you posted a 6.3% for total transactions in 2Q, was either the Washington Prime transaction, the tranche you closed, or either the 2 Cambridge transactions, kind of significantly below that 6.3% cap rate average you quoted?

The Washington Prime deal, I think, you can look at it many different ways. But when we priced the transaction, it really was negotiation based upon a total purchase price and some allocations down to the property level. So we're not closing them in any sort of order related to the allocated purchase price for closing them when they become ready to close, when they've been partialized and we completed due diligence. So I think some of the shift in there is probably the reason. If you look at the brands that we closed on in the Washington Prime transaction, they're very strong brands. In some cases, I'd say, brands that we would struggle to buy one-off in the normal way, single-asset market. But by buying in bulk and going through the process of partialization and other parts of a long closing process, we're able to get some value for our shareholders.

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

Thank you, everyone. Look forward to speaking to our shareholders in the upcoming weeks. And thanks, everyone, for your support.

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