Four Corners Property Trust Inc (FCPT) 2019 Q4 法說會逐字稿

Good day, and welcome to the FCPT announces earnings for fourth Quarter 2019 Conference call. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Gerry Morgan. Please go ahead, sir.

Thank you, Chuck. 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 our potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website at fcpt.com.

All the information presented on the call is current as of today, February 13, 2020. 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 also on our website.

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

Thank you, Gerry. Good morning, everyone. And thank you for joining us to discuss our fourth quarter results and outlook as 2020 gets underway. Our portfolio performed as expected in the fourth quarter. We achieved an increase in AFFO to $0.36 per share, and EBITDAR coverage remains strong at 4.7x.

I'd like to draw your attention to the unusually high-volume of properties acquired near the end of the fourth quarter. We will see the full effect of these properties impacting our results in the first quarter of 2020. In the fourth quarter, we acquired 50 properties in 21 separate closings for a combined purchase price of $120.6 million, with over $88 million of these closings in the last week of the quarter alone.

For the year, we acquired 90 properties for a combined purchase price of $199 million. The fourth quarter acquisitions are a great example of the type of quality assets and granular tenant diversity, we continue to add to the portfolio. To support that statement, I offer 2 statistics from the fourth quarter acquisitions: First, with respect to quality, over 80% of the leases on these properties are with -- are guaranteed by the corporate restaurant brand. Second, with respect to diversification, the 50 acquired properties represent 34 different brands, 17 of which are new to our portfolio. Over half of the properties acquired in the quarter were the result of our outparcel strategy with closings from WPG, Brookfield, Seritage and PREIT. These transactions have taken time and perseverance, but have been worth it, given the quality of the assets. We have now announced over $278 million in outparcel transactions. These properties are characterized by strong national brands, lower rents as many are ground leases, and are substantially leased to the brands' corporate or franchisor entity.

Our recent expansion to select adjacent retail outside of restaurants has continued, but we remain highly selective in our approach. The property share similar qualities as our high-quality restaurant locations with comparable buildings or lot sizes and net lease structures. As of the year-end 2019, FCPT owned 10 non-restaurant properties, representing 1% of total rental revenue. If we include the announced outparcel pipeline, FCPT's exposure to non-restaurant/retail is 27 properties, representing 2.7% of total revenue as of the end of the year.

Over the past 4 months, we have made meaningful progress on our pipeline, and started 2020 with approximately $132 million of announced, but not yet closed outparcel transactions, which we expect will close in 2020 in rolling tranches as the properties become available to be conveyed. We look forward to leveraging our deal sourcing and closing for -- to grow both in the restaurant and non-restaurant net lease sectors.

Our tenants overall continue to perform well. This holds true for some of our largest brand exposures. With Olive Garden, LongHorn and Chilli's reporting same-store sales growth in the most recent quarter of 1.5%, 6.7% and 2%, respectively. We were particularly impressed with the growth of digital and ToGo orders at Olive Garden, which now make up 17% of brand sales after another strong quarter of north of 15% growth.

While we would acknowledge some weakness in other restaurant brands, FCPT's portfolio has, by and large, avoided them, and the portfolio remains very, very healthy.

Finally, a couple of comments on the team: First, we continue to be very pleased with the growth of our team, both the maturation of the existing members and the contribution of new team members who are growing in capabilities. We expect to continue to add to the team in 2020. But we've been fortunate enough to do it step-by-step and with a mind towards our team-based culture.

Second, a note of congratulations to Jim Brat, our General Counsel, who was promoted last week to also serve as company's Chief Transaction Officer. Jim's deep real estate and transaction experience has been critical to our acquisition strategy. Thank you, Jim.

Now Gerry will take you through our financial results.

Thanks, Bill. We generated $33.8 million of cash rental income in the fourth 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 December 31, 2019, is $139.4 million. This is a 6.5% increase in our run rate cash rental level versus the third rate -- or excuse me, versus the third quarter and highlights the growth from the fourth quarter acquisitions, many of which closed in December, as Bill highlighted.

Our weighted average 10-year annual cash rent escalator remains at approximately 1.5%. We reported a $0.02 or 5.9% increase in AFFO per share quarter-over-quarter results. In the quarter and for the full year, we reported $2.4 million and $10.3 million, respectively, of cash, general and administrative expenses after excluding stock-based compensation. For 2020, we are setting guidance of approximately $12 million for cash, general and administrative expenses. This increase is a reflection of incremental additions we are making to the investment, asset management and property management teams and supporting systems.

Turning to the balance sheet. In the fourth quarter, we fully settled the forward equity sales agreement we had entered into last April at an average offering price of $28.97 for gross proceeds of $46.5 million. We ended the quarter well capitalized to support our investment activity with our net debt to adjusted EBITDAR, standing at 5.2x including a quarter ending balance of $52 million on a revolver and $98 million remaining on the $250 million facility. We remain committed to maintaining a conservative balance sheet and staying under debt leverage of 5.5 to 6x net debt to EBITDAR.

I'll now turn it back over to Bill for closing remarks.

Operator, can we open it up to Q&A.

(Operator Instructions) And our first question will come from Nate Crossett with Berenberg.

Mr. Crossett, are you there?

Yes, can you hear me?

Yes, you're live, and you can ask your question.

Yes. Just wanted to get a sense of how much is left to acquire from Washington Prime, Brookfield, Seritage and PREIT? You have $132 million closing in 2020, what's left amongst those 4?

The $132 million is the year-end balance from those different outparcel transactions. We've closed a small number to date. But we expect all of those to close in 2020. So it's just shy of that $132 million.

Okay. And then should we expect similar types of agreements to be announced this year? How should we be thinking about these larger kind of transactions?

We're working on different transactions like that all the time.

Okay. What about -- just one on dispositions. I didn't see any dispositions in 2019. Can you just remind us kind of how you think about dispositions?

We do it opportunistically. We get inbound inquiries all the time every week. But we do it opportunistically typically into the 1031 exchange market.

And our next question will come from Sheila McGrath of Evercore ISI.

On the acquisitions in the quarter, the in-place rent was $27 a square foot, well below your portfolio average of $30. Just wondering, is this driven by market location? Are these mostly ground leases? Or would you characterize the in-place rents well below market?

Thanks, Sheila. I would say it's just a mix in the quarter of more ground leases.

Of the portfolio right now, do you disclose what percent of the portfolio is ground leases versus own?

We don't. I guess the color I would provide is 70% of our portfolio is Darden that's well over 5x covered. So very modest rents given the performance, I would argue very akin to the kind of ratios you'd see on a ground lease. And then the outparcel transactions that we've been buying, we don't disclose an exact number, but I would say roughly 70% of them have been ground leases. And it's just a very healthy credit story. It's just hard to deploy capital because the rents that you're applying the cap rate to are so low that the property purchase price is low. And I think you're continuing to see that as we announce more of these transactions.

Okay, great. One last one. If you could just give us an update on the Crystal store locations. Do you expect these leases will be affirmed?

They've communicated to us multiple times that they will. We don't anticipate any change in the rent there. Those stores are very healthy with moderate rent-to-sales -- low rent-to-sales.

And our next question will come from Collin Mings with Raymond James.

Bill, to start, I just wanted to discuss the dual- and multi-tenant properties you've acquired recently. Just curious your thoughts, is the market for some of these multi-tenant assets may be less efficient than the market for, say, single-tenant properties?

I think the pricing tends to be a tad better. Sometimes you don't get net lease on the roof coverage, but that can be warranted or estimated. I would also say, we're typically buying newer properties there. So for example, the Potbelly Verizon, we just bought, was built in '18. And I would also say there's some brand formats that prefer multi-tenant. And so to get exposure to those brands, that's the direction you're going to go. But in almost every case, this is 2 different brands attached to each other. It's not -- it's a far cry from a strip center or anything along those lines. I think the last thing I would say is there tend to be more generic boxes. So the ability to refill these are a lot easier than a bespoke stand-alone building.

That's helpful. And maybe just along those lines, how do you think about coverages? I mean just as you think about underwriting the tenants and the properties, just maybe talk about rent coverages? And I mean is there may be a little bit higher threshold on a coverage -- from a coverage standpoint?

I think the coverages are probably very similar. The one point I'd make, Collin, is there tends to be the used cases like banks and sell stores, where the 4-wall economics is not as clear as a restaurant. So for example, in Olive Garden that covers 5x. You sort of understand what the economic proposition is. A bank branch, for example, it may have significant deposits, but how do you allocate the corporate overhead of JPMorgan to an individual brand store or the subscription service revenue of Verizon to an individual Verizon store. But we've tended to be very cautious and stuck with high-quality national brands.

Okay. And then maybe along these lines, Bill, correct me if I'm wrong, but I don't believe anything with either a dual or multi-tenant thus far has been closed without a restaurant component. Would you be open to looking at some of these type of properties without a restaurant component?

Just looking here, I think, actually, we have 1 that was a U.S. Cellular and Great Clips, but I think at the end of the day, we would look at dual tenants without a restaurant. They very often have a restaurant anchoring them because restaurants drive so much traffic, but we would look at it in any case.

Okay. And then 2 other ones for me here, just in terms of -- first, just curious, I mean, you've had some success. I think there's been maybe 1 deal that's been announced on the OP unit front. I'm just curious kind of, as you think about your acquisition pipeline, as you think about discussions with potential sellers, how much of that is even coming up as a potential source of deal flow?

We talk about it regularly, but the stars sort of have to align for those OP unit deals to work. We have -- and frankly, we have such good access to normal way capital that it's sometimes easier just to raise normal way equity to pay for properties. But we're always looking and in dialogue with people. But as you mentioned, it's a rare that they are successful.

Okay. And one last one for me, and I'll turn it over. Just recognizing it didn't move much, but did notice that the coverage in that other brands, non-Darden bucket, actually increased slightly. And again, there are a lot of properties that are actually added to that bucket in the quarter. Was this uptick reflect any change in terms of tenant health? Or is it just kind of a function of the properties that got added to the pool?

I'd say, it's just the latter. I wouldn't have any grand takeaways from that.

And our next question will come from Anthony Paolone with JP Morgan.

Bill, as you are looking at areas outside of restaurants, can you note any areas that either you're redlining at this point or particularly attracted to right now?

I would say we're openminded. We've tended to not spend much time on big-box net lease and I would say we were attracted to a number of different sectors. Two, I'll just throw out there, would be auto service and medical retail things like dialysis centers, clinics. We've tended to stay away from daycare. We've tended to stay away from some of the, call it, untested new net lease use cases like TopGolf and trampoline parks, things along those lines. Sticking to sort of more tested paradigms.

Can you talk about just the -- as we start the year, the level of deal flow that you're seeing in comparison to, say, like the last few quarters, just generally speaking?

It's still very strong. I guess what I would say is that we had a flurry of activity last fall of signing contracts on large acquisitions. A significant portion of those closed at the end of the year. Our transaction team that Jim leads is very focused on closing the remainder of those. And the acquisition team is very busy working on new acquisitions to make sure the pipeline stays robust, but we're quite busy.

Got it. And then just last question. Your yields have been pretty consistent in the kind of mid-6s. Like when you think about the pipeline on things you're looking at and the variety of industries, what kind of starts to really move that needle up or down the most that you're seeing out there? Like is it lease duration, like, if you want shorter on term, yields would really move up or vice versa? Or is it just credit, still? What are the hot buttons you're seeing?

Honestly, I think it's discipline. And we see a lot of transactions that get prized away from us and we're content to remain disciplined on our pricing and credit. But obviously, other factors like what kind of property sector it's in? What the lease duration? How good the credit is? Where interest rates stand at the moment? How competitive -- the competitive dynamic of the transaction. Whether it's truly triple net, et cetera, et cetera? But the thing that we've been very pleased within these outparcels is, we feel like we're getting a differentiated outcome with reasonable cap rates, very low rents, and in good credit. And actually, the demographics of the outparcel transaction are far better than typical net lease.

And our next question will come from John Massocca with Ladenburg Thalmann.

So the occupancy ticked down slightly. It doesn't sound like that was Crystal's given that it look like they're inclined to affirm the leases, what drove that? I know it's kind of small, but any color there would be helpful.

I think, John, it's mostly timing. I think we expect those buildings to be leased back up here in the medium term.

So was Crystal just temporarily being kind of off rental?

No. It was not Crystal's. But, again, we think those buildings are going to have tenants in them paying rent very shortly.

Understood. And then when I think about one of the more recent acquisitions, the RIE (sic) [REI] Building. Obviously, that was part of one of these outlot deals. I mean would that be a type of asset you'd feel comfortable buying if it didn't kind of come from an outlot parcel -- outlot portfolio transaction and some of the dynamics that kind of come with that?

Yes, the REI that you mentioned is a brand-new build. It's a spectacular looking building, and we're buying it at like 60% of the new build construction costs. So -- and it's a great credit. So that was a terrific one. Yes, it happen to be part of an outparcel transaction, but it's a -- that would be a terrific asset to buy it. Frankly, I wouldn't get anyone's hopes up that we'd be able to replicate that at scale but that one, in particular, we're very proud of.

Makes sense. But to do kind of these bigger box retail, you would need some of those similar dynamics, correct?

Probably to be competitive on the pricing.

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

Thanks, everyone, for joining us on the call today. This is also the first time we've had international callers joining us. So thanks for everyone for the interest. We are able to see many of you recently on a recent non-deal roadshow. Again, thanks for the time and dialogue during those meetings. And with that, we'll conclude the call. Thank you, everyone.

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