Four Corners Property Trust, Inc. (NYSE:FCPT)
Q4 2015 Earnings Conference Call
March 10, 2016, 2:00 PM ET
William Lenehan - Chief Executive Officer
Gerald Morgan - Chief Financial Officer
RJ Milligan - Baird
Dan Donlan - Ladenburg Thalmann
Jason Moment - Route One Investments
Good and welcome to the Four Corners Property Trust’s 2015 Year-End Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Jerry Morgan, Chief Financial Officer of Four Corners. Please go ahead sir.
Thank you, Denise. Joining me on the call today is Bill Lenehan, our Chief Executive Officer.
First a couple of words on forward-looking statements. During the course of this call, we will make forward-looking statement, those statements are based on beliefs and assumptions made by us and the information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or our ability to predict. Although, we believe that our assumptions are reasonable there and not a guarantee of future performance and some will prove to be inaccurate and incorrect. For a more detailed description of some potential risks, please refer to our SEC filing, which can be found in the Investor Relations Section of our website.
All the information presented on this call is current as of today March 10, 2016. Four Corners does not intend and undertakes no duty to update these forward-looking statements unless required by law. In addition, reconciliation to non-GAAP financial measures presented on this call including FFO and AFFO can be found in the Company’s supplemental report which can be obtained on the Investor Relations Section of our website.
With that I’d like to turn the call over to Bill to start. Bill?
Thank you, Jerry. Thank you for taking time to attend Four Corners inaugural year-end earnings conference call. Since we’ve spun off from Darden in early November, we’ve been working on the following items: we have completed the separation from Darden and after only a short transition period the Shared Services Agreement concluded in February. We have begun to operate as a REIT. Our E&P distribution has been announced, shareholder elections have been made and the resulting dividend has been paid, thus clearing the way for re-election.
After significant investor outreach, we have a shareholder roster that I am particularly proud of. In addition, on February 29th we were added to the RMZ index. We’ve hired a great team of senior operating and financial colleagues. We believe we are running the company efficiently and are focused on establishing systems and processes that can scale. All of our board members and senior management are meaningfully invested in this business.
There have been no notable changes to our real-estate portfolios since we were spun off a few months ago. The performance of the underlying restaurants has been as expected and the guarantor on the vast majority of our leases remains an incredibly well run and conservatively capitalized business. We recently upped their earnings guidance.
On the acquisition front, we have analyzed hundreds of restaurants and real-estate properties since our inceptions, both portfolios and one-off. We have made offers on a handful of properties and in each case our offers were rejected as insufficient. We intend to remain very cost sensitive and invest with an eye to our cost of capital. I would specifically point out that the individual property 1031 exchange market continues to be very strong, appears to dismiss the larger market uncertainties overall and has been accepting of investment returns that are quite low. We believe that opportunities will improve, we seem to see more opportunities as of late and therefore we are content to be disciplined in our acquisition program. Organizationally, we’ve done the process to carefully build out that investment team and we’ve interviewed a number of highly qualified candidates.
Of note, our restaurant operating subsidiary, Kerrow Holdings, has made the transition to a standalone entity and its operations have been performed in line with expectations, although we are closely monitoring the impact of the Texas economy downturn on their operations.
In conclusion, we are grateful for the support that our shareholders have given us the last few formative months. Thank you.
With that I’ll turn it back to Jerry to review the stub period of the seven weeks that we are publically listed in 2015. After Jerry’s remarks, we will open up for Q&A. Jerry?
Thank you Bill. As Bill summarized above, our financial results were on plan and consistent with our previous communications with shareholders. However, I’d like to make a few comments with regard to our fourth quarter results and our annual results, as they require three key adjustments to comprise run-rate levels. Number one, the income and FFO and AFFO statements represent 52 days of lease rental income and REIT level activity since the spin-out date of November 9th through the year-end, but represent 12 months of our Kerrow restaurant operations, which is consistent with GAAP accounting for this type of spin-out transaction.
Second, the weighted average shares recorded is calculated over the entire year, although outstanding for only 52 days. The share count is also not adjusted for the 17.1 million shares that we distributed on March 2nd in connection with the E&P dividend, which increased the common shares outstanding by approximately 40% to 59.8 million common shares.
Third, the results include a $2.9 million provision for income taxes consistent with our status as a taxable C-Corp in 2015 and before we began to operate as a REIT as of January 1, 2016.
Of this GAAP provision, we expect to pay approximately $1.7 million in Federal and state taxes for 2015, the cash for which we’ve already set aside on our balance sheet.
Turning to our general and administrative expenses, we continue to feel comfortable with a $10 to $11 million range for 2016, depending on the timing of further staffing on the investment side, as Bill highlighted.
I would point out that we incurred in Q4, 2015 approximately $600,000 of one time and start up G&A expenses to pay for legal cost, for consulting services provided by third party vendors and Darden, who were engaged under the transition services agreement, and for IT cost for the Kerrow restaurant operations all of which provided us help in launching the operations.
With respect to the year end 2015 balance sheet, two comments: first, the cash balance of $98 million was reduced in the first quarter by $78 million to fund the cash portion of the two EMP purging distributions I have referenced earlier. The cash balance also includes a prefunding by Darden in the December of its January lease payment of approximately $8 million.
After adjusting for these two items, our year-end cash balance was approximately 12 million. Secondly, a reminder that as of year end we have a $80.9 million deferred tax liability on our books related to book tax differences and depreciation and other expenses. We will reverse this $81 million tax liability in this first quarter 2016, now that we have completed the EMP distribution required to elect REIT status. This reversal will result in a gain that flows through our GAAP income statement in Q1, but we will not include it in our reported funds from operation.
Now, turning to 2016 FFO and AFFO, a reminder to everyone that we are not providing guidance on acquisition levels or AFFO and FFO for the year at this time, as they are highly dependent on acquisition levels. However, consistent with information that we have provided before, including in the February version of our investor presentation, which is on our website and available via 8K, we believe our current portfolio will produce approximately $1.33 in FFO per share and $1.19 in AFFO per share based on our current share account of 98.8 million.
Further, we continue to expect our current annual dividend rate will be approximately $0.97 per share, which is consistent with the dividend rate we paid in January for the Q4 stub period. With respect to the $8.12 per share E&P distribution that we completed on March 2, I would just highlight that 75% of the shareholders approximately elected cash with the remaining 25% electing stock which was consistent with our expectations. Because we capped the cash distribution at 20% of the overall distribution, this election outcome resulted in a 26.7% cash proration for cash electors with the remaining distribution paid in stock. Shares were distributed to all shareholders based on a value of $16.24 per share, as previous communicated.
Secondly, a reminder to all taxable shareholders that 100% of both the stock and cash components of the $8.12 per share distribution are fully taxable at the qualified federal tax rate. The stock portion of the distribution will increase the tax bases for all investors. Finally, two comments on our debt capitalization. Consistent with our conservative debt policies in the fourth quarter we fixed the interest rate on our $400 million term loan with 50% fixed for three years and 50% fixed for five years, leading to an all-end fixed rate of just under 3.1%.
Secondly, while we expect our current low leverage to increase as we draw on our four year $350 million revolver to initially finance acquisitions, our philosophy remains to be conservatively leveraged and maintain a ratio of less than six times debt to EBITDA. The revolver currently remains undrawn. With that, let me turn it back to Bill and we can open the lines for Q&A. Bill?
Denise, would you like to open up the lines for Q&A?
Certainly sir. Thank you. We will now begin the question-and-answer session. [Operator Instructions] At this time we will pause momentarily to assemble our roster.
And our first question will come from RJ Milligan of Baird. Please go ahead.
Hi, good afternoon guys. Bill, a couple of question in terms of acquisitions, you said that you’ve made a couple of offers on some properties, I was wondering if you could give any more color in terms of the type of properties that they were, the average term, credit and coverage?
Great question RJ. They were branded quick service restaurant properties, one branded casual dining property, these assets happen to have long terms, 15 to 20-year terms, although that is certainly not a requirement for our acquisition program. But these were household name properties sold one-off, half of them, roughly, were marketed properties, half we had pre-empted the marketing process, but as I mentioned in every case thus far, we have been outbid by other parties.
Any indication in terms of a cap rate or basis points how far off you were for some of those properties that did close?
We were reasonably close, RJ, it wasn’t a 200-basis point difference, but I am not privy to where they finally settled, out but I would estimate 50 to 60 basis points.
Okay, and how do you think about the trade-off going forward as you look at more assets to potentially acquire, how do you think about the trade-off given the high coverage that the portfolio currently has, the long lease durations and of course all investment grade, so how do you think about the trade-off between growth and diluting the portfolio?
I think it’s a terrific question, there’s no question that going forward, it’s unlikely that we will acquire assets that have the same coverage of over four times; we certainly won’t be able to get greater than a 100% investment grade in 15-year terms is quite long. So I think we have to be very careful in our acquisition program to make sure we are being price conscious and that we reap the benefit of that additional diversity in our portfolio carefully to what is quite likely to be, on some metrics, dilutive to quality.
Thanks guys, I’ll get back in the queue.
Sure, and the next question will come from Mitch Germain of JMP. Please go ahead.
Good afternoon and congrats on the first call, guys.
Great, thanks Mitch.
I know you said that you’ve been interviewing some acquisition candidates for that role. Where is the team itself in terms of how many people are in the office and how many more roles do you have left to hire?
Great question Mitch. So, as many people know, we have a highly outsourced model where our accounting function is outsourced to Atlanta; that’s working very well. So in our California office, it’s the senior executives and what will be an acquisition team. I would imagine that team, Mitch, would be in the early days here two to three people. We are close on one, we believe, and I’ve interviewed a couple of dozen folks.
Great. If I think about some of these acquisitions that you’ve underwritten, maybe some that you’ve made offers on, are you looking at specific geographies and then also on top of that, is there a lease term, how important and critical is that in terms of what you are going to accept for a transaction?
So the way we look at it, Mitch, is we’ve developed a simple model that has about a dozen variables: location, reuse potential, rent to sales, durability of the brand, a number of different factors that anyone looking at triple net possibly would use. We don’t have much in the way of constraints geographically, although I would say that we have a little bit of a concentration today in Atlanta and we have less properties than you would expect in the Western States, but location is a huge component.
Lease term, as I said, we have got no leases that mature for 12 years so certainly some leases that mature before that if we can acquire them at attractive prices where we believe in the real estate and we think the rents are artificially inflated, I think that offers good value as well. So I certainly wouldn’t be surprised to see properties that we feel like the real estate’s good and the rents are reasonable with less than 10 years of term.
Great. I know Peter’s got one for you. Hold on.
Hi guys. Just maybe a little more granular as you look at acquisitions. Where’s your comfort level towards QSR, quick server casual dining, how comfortable do you feel with the mix that you are seeing in the market today?
I feel like it’s a nonentity, we are seeing really good deal flow across the spectrum, I think our view is that from a diversifications perspective, buying casual dining, Italian or casual dining steak provides less diversification benefit but we factored that into our model to understand how important that is, plus or minus, on every asset, versus other factors like term and rent growth, things like that.
And we have our next question from Daniel Donlan of Ladenburg Thalmann. Please go ahead.
Thank you and good afternoon. We’ve got to get used to the length of these calls. Bill, just wanted to talk a little bit about the leaseback market, how is that looking to you guys? It sounds like what you’re looking at has been mostly in-place leases, but I’m curious, given your specialty focus in restaurants, is that opening up a different leaseback market to you than maybe some of your peers?
So, I would say that the sale leaseback market was very confusing to me in the early part of the year as the stock market and the credit markets were significantly weak and the sale leaseback market, the retail market and sale leaseback market was very strong. Interestingly it feels like, and this is very anecdotal, in the last two weeks we’ve seen some weakness in the property market; maybe it’s catching up to Wall Street, but it’s definitely too soon to tell. And then, as far as the properties we’ve been looking at, some of them actually were build-to-suit properties or significant renovations, so I would say that we are seeing both sides.
Okay. And so, is build-to-suit something that you guys are willing to do and how would that look, would it be just some type of forward takeout in terms of…
Yes, these were properties that were well on their way to completion and we were attempting to pre-empt a forward marketing process, but they were months away from CLR.
Okay. And then, as far as it seems like you guys have plenty of that capital to make acquisitions, but should we expect any potential asset sales to happen this year in order to fund a portion of some acquisitions if it makes sense, just curious as to how you think about the existing portfolio….
Yes, it’s a great question, we’ve considered a handful of assets, swap transactions, that’s something that we would certainly consider doing but as you mentioned we have plenty of dry powder that’s flexible and reasonably priced to make acquisitions. But if we can do some asset swaps that are strategic that’s something that we can certainly consider and we’ve looked at a few of them.
Okay. And then, what do you seen on the portfolio side, is there anything you think that can happen there? It seems to be quite a few operators that still own a lot of their own real estate and was curious if you think you can be competitive on the portfolio front versus some of the other larger net lease REITs, some of which have actually stayed away from casual dining. Was curious how, if there is an ability to do maybe a club deal or something like that, how have your discussions gone there?
In December that would have been a very easy question to answer because our cost of capital obviously wasn’t competitive. Today it’s getting much closer, but to your point, a number of these portfolios are large by definition, single tenant or just a few concepts like with one guarantor. So we have had discussions with other REITs about taking some portfolios and breaking them down to component parts and sharing properties. I think that that’s very doable. It’s interesting to note that one of the large restaurant players who had a lot of real estate on balance sheet has decided to sell assets one by one. I think that they are acknowledging the price difference of the value of these assets in the 1031 exchange market today versus what’s available in corporate sale leaseback but as you know, those dynamics can turn on the dime.
Sure, sure. And then, lastly, how about OP unit issuance? Are you guys set up to do that quite yet, it’s not…
We are, we’re very interested in that, we have had incoming inquires. Those deals take a lot longer to germinate than buying a marketed property, but it's something that is a terrific and efficient way to issue capital if you feel like your cost of capital is appropriate, and they are very sticky shareholders.
Okay. I would agree. Okay. Thank you. I appreciate it.
I appreciate it. Denise, do we have any more questions?
[Operator Instructions] And at this time I am showing no additional questions, so we’ll conclude the question-and-answer session. Mr. Lenehan, I’ll hand it back to you for your closing thoughts.
Great, thanks, Denise. Well, Jerry and I really thank everyone for joining the call. We are available for questions. Thanks for everyone for taking the time. Thanks so much.
Ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.
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