Four Corners Property Trust, Inc. (FCPT) Q2 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the Four Corners Property Trust Third Quarter 2018 Earnings Conference call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Gerry Morgan, Chief Financial Officer. Please go ahead.

Thank you, Andrew. 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 description of some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website. All of the information presented on this call is current as of today, October 30, 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 will turn the call over to Bill.

Thank you, Gerry. Good morning and thank you to everyone for joining us to discuss our third quarter results. Our focus since our last call continues to be on sourcing quality, one-off and portfolio restaurant opportunities. Our major activity on this front was the $165 million sale leaseback of 51 Chili’s properties completed with Brinker International during the third quarter. The Chili’s portfolio represents attractive, corporate-operated locations with strong initial tax rent coverage of 3.9 times. Brinker now represents our second largest tenant at 8.6% of annual base rent. In addition to the Brinker transaction, in the third quarter, we purchased an additional five restaurants for $11.5 million at an average cap rate of 7.1%. This included an Olive Garden and Taco Bell from the Washington Prime transaction, two Buffalo Wild Wings and an Arby’s. In the quarter, we were able to access both the equity and debt capital markets to support our growth and ensure that we continue to maintain a strong balance sheet with low leverage. In early August, we closed on successful $101 million inaugural secondary equity offering, which was oversubscribed and included new investors to FCPT. During the third quarter, we also issued $13 million of stock via our ATM program at an average offering price of $26.70. In September, we signed on our second private note offering of $100 million of eight-year and 10- year notes, which is expected to close and fund in December. Despite an overall rising interest rate environment, the all-in pricing on these notes is lower than our initial private note issuance in June of 2017 due to improved credit spreads. It was a busy summer. The restaurant industry continues to support strong results and benefit from a strong economy. This included Darden, which was led by Olive Garden and LongHorn brands, same-store sales growth of 5.3% and 3.1%, respectively, in the most recent quarter closed in September. Separately, we have listed the handful of properties for sale, where, we believe, we can achieve attractive cap rates and improved portfolio diversification. Turning to the acquisition market. We are beginning to see preliminary signs of softening cap rates as a reaction to increased interest rates and other factors. These are early days, but this could lead to acquisition opportunities. We start the fourth quarter with a low-levered balance sheet with 4.6 times net leverage and feel well-capitalized to fund acquisition opportunities. We look forward to spending time with many of you at NAREIT. Please let us know if you would like to meet either at the conference or at our home office here in Mill Valley. Now Gerry will take you through the financial results. Gerry?

Thanks, Bill. We generated $29.0 million of cash rental income in the third 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 September 30, is $120.9 million, and our weighted average annual cash rent escalator remains at approximately 1.5%. Our net income FFO and AFFO per share results were all impacted by approximately $0.01 per share in the quarter by the short-term dilutive effect of the balance sheet cash that we started the quarter with and used as part of the funding for the Brinker transaction in August. On an AFFO per share basis, which, we believe, best represents the cash flow generated from the business, we’ve reported 6.3% growth in quarter-over-quarter per share results. In the quarter, we reported $2.3 million of cash, general and administrative expenses, similar to the prior quarter, after excluding noncash stock-based compensation. And maintain our 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 back to the balance sheet. We ended the quarter well-capitalized for the remainder of 2018, with net debt-to-EBITDAre of 4.6x, $26.7 million of cash and full availability on our $250 million revolver. As Bill mentioned, we also signed on a $100 million private note offering, which will close and fund in December 2018. I note that the notes consisted of $50 million of eight-year notes, priced at a fixed interest rate of 4.63%, and $50 million of 10-year notes, priced at a fixed interest rate of 4.76%. Importantly, the investor group was made up of existing investors from our first debt offering last year, and we appreciate the continued support. After funding of the notes, we expect our net debt-to-EBITDAre would be approximately five times. And we remain committed to maintaining a conservative balance sheet and staying under our debt leverage of 5.5 to six times debt-to-EBITDAre. With that we’ll turn it back to Andrew for Q&A

[Operator Instructions]. The first question comes from Collin Mings of Raymond James. Please go ahead.

Hey, good morning.

Good morning, Collin.

Bill, just on the prepared remarks, you made a point that you are seeing some signs of softening as far as cap rates. Can you just, maybe, expand upon that what are some of the – those signals that you are observing right now?

I would just more say that the balance of power between buyers and sellers, which for many quarters now has been tilted in the favor of sellers, just seems to be balancing out a little bit. Property seemed to be on the market a little bit longer. Not to say that we don’t see numerous examples of very, very low cap rates and people being quite aggressive, it just seems as we look now at 5,000 restaurant properties since inception. We get a pretty real-time feedback what’s happening in the market. It just seems to be a little bit more balanced between buyers and sellers than it was, call it, six months ago.

Okay. And maybe, just kind of expanding upon that a little bit more and just – to your point, you’ve looked at a lot of deals, now closing on relatively large transactions. Just broadly, though, Bill, just your stance, is there a portfolio discount on large transactions in the market right now?

I would say that when you get over $50 million, it’s very difficult for folks to transact in the 1031 exchange market. So maybe, it’s more that you go to a different, sort of, set of buyers. But I wouldn’t claim that there’s a large portfolio discount.

Okay. And then just switching a little bit to the Chili’s deals. Recognizing Darden has been and again, will likely continue to be the bulk of revenue for a while, just as you look at sizing, tenant exposure going forward, how are you thinking about what’s likely the appropriate level of exposure to any one concept or tenant, recognizing, obviously, you have a lot of Chili’s and Brinker exposure now.

Yes. I think it’s balancing the credit profile, the attractiveness of the real estate, how durable the concept is and the pricing of the deal. So I think it’s a multi-variable exercise. We had a similar circumstance with Bob Evans last year, where we, sort of, targeted the certain percentage of our portfolio understanding that the portfolio is growing, so we can grow into some of these exposures. So, I would say, it’s art, not science.

Fair enough. One last one from me and I’ll turn it over. Just broadly, Bill, just update us now – again, as you’ve, kind of, proven out your strategy and has been steadily executing on it. Just can you touch, maybe on your latest thoughts about moving in any sort of adjacencies related to food service or distribution, maybe not a complete departure, but maybe something else on the margin you guys might look at or seeing opportunities then?

We continue to look at a whole bunch of different stuff, Collin. But we have yet to put an LOI in – on a non-restaurant property. So very little change. We monitor it. We think that’s a sensible thing to make sure that we understand what’s going on in other net lease asset classes. But to-date, we haven’t been active.

Fair enough. I’ll turn it over to you guys…

With the one exception, Collin, that, as I think, we’ve spoken about widely, we continue to consider properties that, let’s say, have a Starbucks on one hand and the Chipotle on the other and in the middle is a Verizon store. I’ll call it a handful of different tenants, but restaurant anchored. We’ve looked at some of those. But to date, while we’ve acquired some assets that have two restaurants side-by-side, that’s the one place that we’ve also looked.

Okay. Fair enough. Again, thanks for the color, Bill.

No problem, Collin.

[Operator Instructions]. And we have a question from John Massocca of Ladenburg Thalmann. Please go ahead.

Good morning.

Good morning, John.

So maybe just – given maybe the concerns about the overall health of the casual dining segment, would you need to see coverage metrics similar to the ones for the Brinker sale leaseback if you’re going to do another sizable acquisition in the casual dining segment?

So, a couple of comments, I would say that casual dining is doing meaningfully better than it was last year showing a lot of signs of stabilization, a lot of the initiatives that these casual dining companies have implemented to begin to show progress. I don’t think we would need to see coverage like this. It’s obviously, we think, very sensible. I think the market has, in some ways, learned from what Darden did at setting rents at reasonable levels and ensuring that the properties are healthy. It didn’t – it affects the pricing. So we were more aggressive on pricing with the Brinker deal than we had in prior transactions that’s reflective of the structure and the coverage. But I wouldn’t say that it’s a bright line test that you need that kind of coverage to do casual dining.

Okay, makes sense. And then maybe, switching gears to the other large transaction. Is there any possibility in your mind that potentially some assets might fall out of the WPG deal given maybe the time it’s taken to, kind of, close some of the individual assets with partializing in all of that or is it just – it takes as long as it takes and everything still looks good from an individual asset basis?

Yes. I think it takes as long as it takes. It’s possible that assets would fall out. But it’s also possible that assets – that other assets will get added in to replace them. But it just takes a bunch of time. We knew it would take a long time going into this. Have we been surprised by one or two of them taking longer? Yes. But at the end of the day, we’re really happy with the acquisition. And as – obviously, we’re seeking to replicate it with several other parties.

Understood. And then kind of one last question, given the $7.1 million in cash G&A in the first nine months of the year and full-year guidance of $11 million, is there something one-time issue you’re expecting in 4Q or is it just overall conservatism?

The latter.

Okay. That’s it from me. Thank you guys very much.

Thank you, John.

Thank you, John.

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

Thank you everyone and again, if anyone would like to meet with us at the conference or at our home office and meet the team, please don’t hesitate to reach out. Thanks, everyone.

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