FCPT
#Thank you, Gary.
Joining me on the call today as is always is Bill <UNK>.
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 risks, uncertainties and factors that are beyond our control or our 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 risk, 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 this call is current as of today, November 3, 2017.
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, also available on the website.
With that, I'll turn the call over to Bill.
Thank you, Gerry.
Good morning.
Let me first make a couple of comments on our third quarter acquisition activity, which included the announcement reflecting the signing of a purchase and sale agreement of a large transaction with Washington Prime.
We are working very hard to replicate this transaction with other REITs and retail landlords.
We are confident that we'll be able to make real progress on this initiative, as we've had a number of discussions with relevant parties.
Yesterday afternoon, we announced the closing of 5 Red Lobster properties for $19.4 million.
We have looked at a number of these properties as there has been a significant number of trading hands in the last year.
We believe the quality of the real estate, coverage ratios and lower rents differentiate these properties from the others that we have analyzed.
Regarding overall net lease market observations, we are seeing relatively flat cap rates quarter-over-quarter that when you parse the data by brand, higher credit names are trading at perhaps a bit tighter cap rates, while at the lower-quality end of the spectrum cap rates have widened out.
On the restaurant industry, overall, I'd like to repeat 3 observations from last quarter's call as they are still relevant.
Darden continues to execute at a very high level with a conservative financial profile.
Two, many other casual dining companies are not doing so well, and we have avoided these credits.
And three, the quick service brands we've been acquiring are stable.
In the third quarter, the nation endured several weather-related natural disasters.
Our portfolio itself is not adversely affected ---+ impacted.
And where there were minor issues at Darden properties, they were exceptionally responsive.
Unfortunately, one of our tenants, the second-largest Dairy Queen franchisee, has a predominantly Texas portfolio.
Although, the single property we lease to them is in Tulsa, Oklahoma, and was not directly impacted by Hurricane Harvey, the storm did have its very significant impact on their Texas business.
They filed for bankruptcy earlier this week, and we're working diligently to assess our alternatives.
The single property accounts for approximately $170,000 in annual rent or approximately 0.16% of our total annual rent.
On a more positive note, Gerry and Nicole have had a very productive quarter.
The recasting of our credit facility will save us approximately $1.8 million in financing costs next year.
Internalization of our accounting functionality should also allow us to save cost next year.
Not to be nostalgic, but next week is the second anniversary of our spin from Darden.
We are pleased with the progress we have made.
We appreciate that this progress is only possible because of the dedicated hard work of our team members, the guidance of our Board of Directors and the support of our shareholders and financing sources.
Now Gerry will take you through our financial results.
Gerry.
Thanks, Bill.
First, a few comments on our results for the third quarter, before I turn to the balance sheet.
We generated $26.3 million of cash rental income after excluding noncash straight line rental adjustments in the quarter.
On a run rate basis, the current annual cash base rent for leases in place as of September 30 is $105.4 million.
Our weighted average annual rent escalator remains at 1.5%, and the reminder for modeling purposes that all of Darden's cash rents increased by 1.5% on November 1.
Cash interest expense, excluding amortization of deferred financing costs and other noncash interest was $5 million for the quarter, reflecting a full quarter of interest on the $125 million of unsecured notes, which funded in June.
There were no borrowings on our revolving facility during the quarter as we maintained a net positive cash position of approximately $75 million during the quarter.
Our net income FFO and AFFO per share results were impacted in the third quarter by the short-term dilutive effect of the balance sheet cash, but we are pleased to have the capital raised to fund the perspective Washington Prime transaction and other acquisitions like the Red Lobster transaction that Bill mentioned, which was announced yesterday.
We reported $2.2 million of cash, general and administrative expenses after excluding noncash stock-based compensation.
As expected, results were down from the second quarter, which was high due to proxy season costs and some overlap of internal and external accounting costs, which no longer existed in the third quarter.
Turning to the balance sheet, a couple of comments on the recasting of our $650 million bank credit facility, which was announced on October 2.
The terms and covenants for the new facility were standardized and improved to reflect the company's progress since inception, including our investment-grade rating.
In addition, we were able to improve margin pricing by 35 basis points and other fee levels, which we expect will result in $1.8 million in annual cash interest expense, which Bill also mentioned.
The credit facility extension increased our weighted average debt maturity to 5.8 years at quarter-end, and our net debt-to-EBITDA stands at 4.4x at quarter-end, and we remain committed to maintaining that level at or below 5.5x to 6x.
In conjunction with the closing, we extended the cash flow hedging for our term debt, as outlined on Page 9 of our supplemental, to cover the extension period, and we remain 100% hedged on that debt today.
Lastly, you'll see that we revised our supplemental disclosure with the goal of expanding and reorganizing the information to make it easier for investors to digest.
Please let us know if you have any questions regarding the disclosure or don't think we hit that goal of improved disclosure and transparency.
And with that, we'll turn it back over to Gary for Q&A.
Sure.
We've looked at a number of Red Lobster's, both, obviously, varied and Golden Gate and private sellers have been active in that brand this year.
We've looked at a number of them.
These were a handful that after looking at dozens and dozens and dozens seem to make sense.
Pricing was consistent with the prior acquisitions that you've seen us do.
Nothing out of the ordinary there.
They're more than twice as much work.
To ---+ not to be sarcastic about it, but that property, I think, we had a lot of learnings.
It was a good work.
It's a good acquisition with a strong franchisee.
Just it's a lot of work.
So I don't think that's going to be a significant focus of ours.
Really, the focus on the acquisition is, obviously, we're still doing our one-off business and active in the market.
But our day-to-day focus, if you looked at our travel calendar as one proxy for that, is, really focused on replicating the Washington Prime thesis.
On top of, <UNK>, our normal day-to-day business.
Yes, for competitive reasons, <UNK>, I'm not going to go there.
But as I said in the remarks, this is not an isolated event.
No.
Nothing from a watch list or other tenants.
We had one property that was, I think, closed for a day or 2 within Darden, but they were really impressive how they were on it.
But yes, nothing outside of the one Dairy Queen in Tulsa.
I think, it's very significant.
Now that ---+ clearly, these are professional owners of real estate that have had these properties on their books for a long time.
So the onus is on us to convince them as Washington Prime was convinced, that the valuation arbitrage is significant and that they should act on it.
But we do think it's meaningful, especially for a company of our size.
Well, they're actually performing quite well under the Golden Gate tutelage.
And as you know, that brand ---+ that investment was recapitalized with the foreign investor recently.
So we view it as a sort of a very different thing than when Darden sold that brand.
And without getting into the very specifics of the individual properties, I would just say that, they had lower rents basically than most of the other properties that we looked at.
As you may remember, when ARCP purchased that portfolio, rents were quite high.
And so this was really a process of shifting through many, many, many different properties to find ones with rents that we found attractive.
Both.
I think that currently, the mid-priced casual dining business is stressed.
There have been bankruptcies.
I think there will be more.
As you mentioned, we don't own those brands.
There may ---+ this may become an opportunity, but the pricing is not attractive yet.
We don't look at a 50 basis points move in a cap rate for a brand that's under significant negative comparable sales as being enough compensation to be interested.
Yes, I don't think it's a new thing.
There has been supply of these restaurant brands as they increase unit counts.
If you look at the stock price performance of restaurant brands over a long period of time, the highest correlation to stock price performance is unit growth.
So that's been a area of focus for a long time.
I think we're seeing inside the mall and inside the shopping center, a move away from apparel retail to food and beverage, entertainment and fitness, I think that's a well-documented trend.
We think we have a superior position being on outparcels, especially in QSR with drive-throughs with ample parking.
So we think that the outparcel component of food and beverage is preferable, and that's why we haven't gone inside the structure, so to speak.
But I think it's frankly ---+ it's the other side of the coin of restaurants being more defensible against the threat of Internet retail, it's where folks can arrange capital to grow, where they can't in sporting goods or electronics or apparel.
Are you talking about like Chuck E.
Cheese or as far field as (inaudible) TopGolf.
Yes, we've looked at them, but we haven't pursued any ---+ with any seriousness.
I wouldn't completely say we wouldn't buy one, but it hasn't gone that far yet.
The issue with some of these is that frankly, they're not tested within the net lease universe.
And so it'll be interesting to see if there is ---+ if there are defaults with the severity of losses.
And these are pretty specialized buildings and are ---+ as you mentioned, are quite large.
And you do get a bit of a cap rate ---+ more interesting cap rate, but not by a wide margin for sure.
So you'd have to be pretty sure that you have a replacement tenant in mind or sort of a plan B.
But ---+ so we've looked, I wouldn't completely dismiss them perhaps as a part of a portfolio, but it really hasn't been a serious part of our focus.
We've found good uptake from both public and private.
I think the sophisticated private owners understand that the value of their portfolios mimic what's happening in the public market as they're marking to market their portfolio, they have to be cognizant of that.
So it's interesting if you look at some of the shopping center and mall REITs, the valuation differential is actually twice what we calculated.
Our expected value differential to be between Darden and the SpinCo.
So ---+ however, much the SpinCo made sense, we think this thesis makes twice as much the sense, and we're getting good audiences.
Precisely.
And we'll continue to do that where we can get very good pricing on a reverse inquiry basis.
We have a ---+ just a tremendous amount of interest in our assets, and it's managing that interest versus a 1031 exchange process, having to have properties that you're going to ---+ that you know that you're going to buy in the near term.
And frankly, our properties are ---+ our Darden properties are very difficult to replicate.
We've said a couple of things.
One is that 80% is our ---+ roughly our target.
We don't want to be meaningfully above that.
And then I would say over a very long period of time ---+ and no, we did not yet raise it in the fourth quarter.
But over a very long period of time, my view is that people own REITs, and you may underline that people owned real estate in order to get increased distributions over time.
So I understand the capital markets theory or option that you described, but ultimately over a long period of time, people want to see increasing dividends.
And so that's something that we think we'll talk to our board about annually at the end of every year.
Terrific.
Well, I just wanted to just quickly repeat the thank you to the team here over the last couple of years working really hard to get us where we are at, to our Board who's been really supportive of us as a management team and to our investors who really stood by us, we truly appreciate it.
Hope everyone has a great weekend.
Thank you.
