U.S. Markets closed

Edited Transcript of FCPT earnings conference call or presentation 14-Feb-19 4:00pm GMT

Q4 2018 Four Corners Property Trust Inc Earnings Call

MILL VALLEY Mar 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Four Corners Property Trust Inc earnings conference call or presentation Thursday, February 14, 2019 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Gerald R. Morgan

Four Corners Property Trust, Inc. - CFO

* William Howard Lenehan

Four Corners Property Trust, Inc. - President, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Collin Philip Mings

Raymond James & Associates, Inc., Research Division - Analyst

* John James Massocca

Ladenburg Thalmann & Co. Inc., Research Division - Associate

* Mitchell Bradley Germain

JMP Securities LLC, Research Division - MD and Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the Four Corners Property Trust Fourth Quarter 2018 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Gerald Morgan, Chief Financial Officer. Mr. Morgan, the floor is yours, sir.

--------------------------------------------------------------------------------

Gerald R. Morgan, Four Corners Property Trust, Inc. - CFO [2]

--------------------------------------------------------------------------------

Thank you, Mike. Joining 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 our SEC filings, which can be found on our website at www.fcpt.com.

All the information presented on this call is current as of today, February 14, 2019. 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 Bill.

--------------------------------------------------------------------------------

William Howard Lenehan, Four Corners Property Trust, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Gerry, and good morning. Thank you to everyone for joining us to discuss our fourth quarter results. I know this is very busy morning release-wise and we will be brief as this is a very straightforward quarter.

Our focus since our last call continues to be on sourcing quality one-off in portfolio restaurant opportunities.

In the fourth quarter we purchased an additional 20 restaurants for $50.6 million at an average cash cap rate of 6.8%. 17 of the 20 acquired restaurants are leased to corporate restaurant operators for attractive brands, including Starbucks, Chili’s, Taco Bell and BJ's Brewhouse. Approximately half of the acquisitions are the result of our ongoing outparcel strategy with retail operators, including Brookfield and Washington Prime.

In the quarter we also took advantage of reverse inquiry interest in our properties by selling an Olive Garden in Augusta, Georgia at a cash cap rate of 4.8% to Darden, who exercised their right of first refusal on the property.

Year-to-date, in 2019, we acquired an additional 11 properties, including 8 from Washington Prime for $20 million at an average cash cap rate of 6.7%. We remain very busy in the acquisition market, and I would comment that in a fluctuating interest rate environment we have seen cap rates basically stay flat. The existing portfolio has continued to perform well, and the restaurant industry as a whole continues to report strong results. This included Darden, which was led by its Olive Garden and LongHorn brand same-store sales growth of 3.5% and 2.9%, respectively, in the most recent quarter closed in December.

Turning to the balance sheet. In the fourth quarter, we accessed both the equity and debt capital markets to support our growth while ensuring that we continue to maintain a strong balance sheet with low leverage. Specifically, we issued $19 million of stock throughout the quarter via the ATM program at an average price of $27.03. And on December 20 we issued our second private note offering with $100 million of proceeds split between 8- and 10-year notes.

And with that I'll turn it over to Gerry to take you through our financial results. Gerry?

--------------------------------------------------------------------------------

Gerald R. Morgan, Four Corners Property Trust, Inc. - CFO [4]

--------------------------------------------------------------------------------

Thanks, Bill. We generated $30.8 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-based rent for leases in place as of the end of the year is $125.6 million, and our weighted average 10-year annual cash rent escalator remains at approximately 1.5%.

On an AFFO per share basis, which we believe best represents cash flow generated from the business, we reported 3% growth in quarter-over-quarter results and 5.4% growth for the full year of 2018 compared to 2017.

In the quarter we reported $2.7 million of cash, general and administrator expenses after excluding noncash stock-based compensation. And we are providing guidance for 2019 of an annual cash G&A rate of approximately $11 million. Again, excluding noncash stock-based comp and acquisition transaction costs.

As a reminder, we also increased the dividend in the fourth quarter by 4.5% to an annual run rate of $1.15 per share.

Turning back to the balance sheet. As Bill mentioned, we ended the quarter well-capitalized to support 2019 investment activity with net debt-to-EBITDA of 4.6x and over $90 million of available balance sheet cash and full availability on our $250 million revolver.

In the quarter we also amended our $400 million term loan facility to stagger the maturities from 2022 through 2024, and we were able to reduce the credit spread 10 basis points to 1.25% on the $250 million of the term loan that was extended. We remain committed to maintaining the conservative balance sheet and staying under our stated debt leverage goals of 5.5 to 6x net debt-to-EBITDAre.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And the first question we have will come from Collin Mings of Raymond James.

--------------------------------------------------------------------------------

Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [2]

--------------------------------------------------------------------------------

As always, appreciate the efficiency in the prepared remarks. Just a couple of questions from me. Just to the extent you can, can you maybe expand upon the package acquired from Brookfield during the quarter and then just the runway there for potential additional deals from that relationship?

--------------------------------------------------------------------------------

William Howard Lenehan, Four Corners Property Trust, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Yes, Collin. This is actually a portfolio that we began working on quite some time ago with Rouse and it requires some parcelization. And so it took quite a while to get it closed. We think there's more to do there. Brookfield, obviously, has a large real estate portfolio with a lot of outparcels. They're a great team to work with. So we've been working on that, and I just generally continue to find new outparcel opportunities to work on.

--------------------------------------------------------------------------------

Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [4]

--------------------------------------------------------------------------------

Okay. And should we think about just given -- and I'm recognizing there were some unique characteristics with the Washington Prime deal, but just given the time line involved in getting some of the parcelization process to the finish line, should we think about again maybe versus there being a big announcement of potential deals or a pipeline of deals, if you will, for it to be kind of announced as these deals actually get done and the parcelizations are complete? Is that a fair way to think about it from here on in?

--------------------------------------------------------------------------------

William Howard Lenehan, Four Corners Property Trust, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

It's really facts and circumstance-specific on how we make the announcements. But to the extent that there was a really meaningful portfolio that it would help our investors in The Street model our company, I think we would follow the paradigm of Washington Prime. But it really is specific to the deal.

--------------------------------------------------------------------------------

Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [6]

--------------------------------------------------------------------------------

Okay, fair enough. And then in prepared remarks you highlighted cap rate stable overall, just maybe if you can expand upon those comments, any sort of shift either casual dining versus QSR or kind of a different -- cost-different concepts or credit profile? Anything else from the transaction market that you picked up on? One of your peers earlier this week kind of alluded to the fact that, if anything, maybe cap rates have drifted a little bit down and there might be a little bit of downward pressure there, just kind of your take on the transaction market.

--------------------------------------------------------------------------------

William Howard Lenehan, Four Corners Property Trust, Inc. - President, CEO & Director [7]

--------------------------------------------------------------------------------

Yes. I think we've seen rates move around quite a bit and cap rates quite a bit less so, that's how I would summarize it. Seems to be some downward pressure on cap rates for deals with very long lease term. And I think other than that, it's been surprisingly steady despite a very volatile rate environment, very volatile stock market and some pretty significant moves in the underlying stock prices of our peers. Overall, it's been pretty consistent on a cap rate basis.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

And next we will have Mitch Germain of JMP Securities.

--------------------------------------------------------------------------------

Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [9]

--------------------------------------------------------------------------------

Bill, I know in your investor presentation you have that strike zone. And I'm curious if the strike zone is getting a little bit wider or narrower in terms of kind of your underwriting and what you're seeing out there as a population of assets for sale?

--------------------------------------------------------------------------------

William Howard Lenehan, Four Corners Property Trust, Inc. - President, CEO & Director [10]

--------------------------------------------------------------------------------

I don't think there's been a whole lot of change. We've had in -- our cost of capital allows us to raise equity and deploy it accretively consistently now for quite some time. Our stock price is strong, and that allows us to raise equity and buy safer assets and maintain a similar yield and spread to our underlying cost of capital. So it's been very consistent is how I would describe it.

And I would just further say that, that mental model is very helpful in times like December where stock prices were moving around quite a bit.

--------------------------------------------------------------------------------

Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [11]

--------------------------------------------------------------------------------

Great, that's helpful. And I know the -- one of the thesis was obviously unlocking value through retail landlords, obviously, through restaurant companies, sale leaseback. It seems like franchisee, the larger deals where maybe you could use OP units or something have failed to come about or maybe they have and I just haven't recognized it to the extent that I expected. Is it maybe just an education process with many of them in terms of estate planning and other issues that might be a reluctance for them to transact?

--------------------------------------------------------------------------------

William Howard Lenehan, Four Corners Property Trust, Inc. - President, CEO & Director [12]

--------------------------------------------------------------------------------

I think we've made pretty good progress with the large franchisees and continue to do so. On the OP units' side, I think the thing that typically is the impediment is there aren't a lot of individuals feel comfortable owning $10 million, $20 million, $30 million of a single stock where they're not part of management. But we have done OP unit deals and we have conversations with franchisees on a weekly basis about them. So I think it's just -- we are making progress on the large franchisees, and we will do additional OP units deals, it's just a matter of time.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

(Operator Instructions) Next we have John Massocca of Ladenburg Thalmann.

--------------------------------------------------------------------------------

John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [14]

--------------------------------------------------------------------------------

So if we think about your portfolio, it's kind of a quality bell curve. Where was the Augusta property that you sold on that curve in best estimation?

--------------------------------------------------------------------------------

Gerald R. Morgan, Four Corners Property Trust, Inc. - CFO [15]

--------------------------------------------------------------------------------

It was adjacent to the Augusta National Golf Course.

--------------------------------------------------------------------------------

Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [16]

--------------------------------------------------------------------------------

I'm thinking on the good end of the curve then probably.

--------------------------------------------------------------------------------

Gerald R. Morgan, Four Corners Property Trust, Inc. - CFO [17]

--------------------------------------------------------------------------------

Yes. I mean, the value -- the strategic value of that asset was its adjacency to the golf course.

--------------------------------------------------------------------------------

John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [18]

--------------------------------------------------------------------------------

Okay. And then how much of the original Darden portfolio is subject to ROFR? And how is the kind of cap rate set in the way that ROFRs? I mean, is that something they need to negotiate with you to kind of prevent you selling to a third-party? Or is there a set level that they kind of have as of -- or if they're going to do this, they have to do it at a certain cap rate?

--------------------------------------------------------------------------------

Gerald R. Morgan, Four Corners Property Trust, Inc. - CFO [19]

--------------------------------------------------------------------------------

Right. Well, they -- the Darden portfolio has ROFRs, which is very typical frankly with large investment-grade tenants. We received a offer on the course -- from the golf course -- on the property from the golf course. We brought that to Darden, as we have every other asset that was sold, and in this case, unlike the seven, I believe previously, they felt it was advisable for them to purchase the property.

--------------------------------------------------------------------------------

John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [20]

--------------------------------------------------------------------------------

That make sense. And then for kind of like detail, the provision for impairment, what drove that, the one that's kind of defined out in the FFO adjustment?

--------------------------------------------------------------------------------

William Howard Lenehan, Four Corners Property Trust, Inc. - President, CEO & Director [21]

--------------------------------------------------------------------------------

That was the 1 property that we purchased to date that where the tenant has left. That's the Dairy Queen in Tulsa, Oklahoma. We've had some progress in trying to retenant it with another Dairy Queen franchisee, but out of the abundancy of caution we decided to write it down.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Sir, no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference call back over to management for any closing remarks. Gentlemen?

--------------------------------------------------------------------------------

William Howard Lenehan, Four Corners Property Trust, Inc. - President, CEO & Director [23]

--------------------------------------------------------------------------------

Thank you, Mike. Well, we promised a brief call, it's about 15 minutes in. With that, want to thank all our shareholders and everyone who joined the call today. If you have any questions, we're here and at the ready. Thank you.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

And we thank you, sir, also, for your time today and the rest of the management team. Again, the conference call has now concluded. At this time, you may disconnect your lines. Thank you, everyone. Take care, and have a great day.