Good afternoon, and welcome to the Four Corners Property Trust Second Quarter 2016 Financial Results Conference Call. [Operator Instructions] Please also note that this event is being recorded. I would now like to turn the conference over to Gerry Morgan, Chief Financial Officer for Four Corners. Please go ahead. .

Thank you, Andrea. Joining me on the call today is Bill Lenehan as well. First, the disclaimer language. 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 ability to predict. Our assumptions are not a guarantee of future performance, and some will be prove to be incorrect. .

For a more detailed description of potential risks, please refer to our SEC filing, which can be found on the Investor Relations section of our website. All the information presented on this call is current as of today, August 3, 2016.

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, which can be obtained on the Investor Relations section of our website. .

With that, I will turn the call over to Bill. .

Thank you, Gerry. During the second quarter, our portfolio performed as expected. Since we were spun-off approximately 9 months ago, we have experienced a significant change in our cost of capital, really, the implied cost of our equity capital.

We now feel that our equity cost of capital is aligned for us to acquire assets, grow the portfolio, leverage our overhead and increase overall diversification. .

Our first acquisitions were announced subsequent to quarter end, and we have numerous additional properties, similar in many ways to what has been announced, that are in diligence currently. Although forecasting future acquisition activity is always difficult, we feel like we have a robust pipeline of appropriate transactions.

And while our cost of capital has meaningfully improved, meaning that more acquisitions will be accretive to our short- and long-term cost of capital, we will remain disciplined as to price. I would like to thank the team for their hard work and focus. .

From a price perspective, the market for net lease restaurants has been relatively stable, and we believe we can continue to purchase assets at cap rates similar to what we have announced recently.

I would also like to mention that in the current net lease market, we are seeing more transactions that, while price sensibly on their face, have business terms and contractual deal provisions that are not ideal.

For example, a lack of a personal guarantee, where it would normally be appropriate, or very weak properties being included in portfolio deals, or other permutations of quality degradation. We tend not to participate in transactions such as these, and I have been actively pushing back against aggressive terms in negotiations.

This is a trend I have confirmed with our competitors. .

With that, let me turn back to Gerry for a few comments on our Q2 financial results.

Gerry?.

Thank you, Bill. I'm going to highlight a few items in our financial results for the quarter, which were straightforward. Cash rental income on our existing rental portfolio of the initial 418 properties leased to Darden was $23.6 million, after excluding noncash straight-line rental adjustments.

A reminder that rents will increase annually by 1.5% for this set of 418 properties each November, starting November 1 this year. .

With respect to our cash, general and administrative expenses, we continue to feel comfortable with approximately a $10 million target for 2016, after excluding noncash stock compensation and acquisition-related costs that would need to be expensed. .

Cash interest expense was unchanged in Q2 from Q1, given we are fully hedged on our $400 million term facility, and we did not borrow on the revolver in the second quarter. This will change in the third quarter and going forward as we start to use the revolver to fund acquisition activity in addition to retain cash from operations. .

Finally, a reminder to everyone that we are not providing guidance on acquisition levels or FFO and AFFO for the year, which is highly dependent on acquisition levels.

However, we are reconfirming our expectation that the initial portfolio will produce results that lead to approximately $1.18 in AFFO per share for the year, which is consistent with our prior 8-K filings. .

With that, let me turn it back to Andrea to open up the lines for Q&A. .

[Operator Instructions] Our first question comes from Collin Mings of Raymond James. .

I guess first question for me is just on the Wendy's acquisition.

Can you maybe just talk a little bit more about how that is sourced, and just as you continue to build your deal pipeline more generally, where you're having the most success finding transactions that look attractive to you?.

Collin, it's really across the board. We have transactions that we've bid on through brokers. We've had some sole-sourced transactions. It's really across the board. Our current pipeline has a number of properties that weren't fully marketed, but that will change over time.

But we've had -- certainly, given our liquidity position and our speciality in acquiring restaurant assets, I think it's pretty clear, if you're looking to sell a restaurant on a net lease basis, to make sure that we see it. .

Okay. Now I think just -- I think last quarter, Bill, you made reference to the fact that you thought -- the pipeline was primarily composed of nationally branded QSRs.

Has there really been any shift in what you're seeing coming into the pipeline? Or is that how we should still think about what you're seeing coming in as far as deal flow from a composition standpoint?.

Well, we certainly have some properties that are casual dining or fast casual or sort of in between those categorizations, but thus far, QSR has been a sweet spot. And I think from the way we look at acquisitions, one of the key components is the strategic value of the portfolio.

And obviously, QSRs are significantly diversifying as our current portfolio is all casual dining and fine dining. .

Okay. And then just one last question, and I'll turn it over.

Just in terms of the pipeline, you made some reference to this in the prepared remarks, but just thinking about the pipeline, are you seeing anything that you're finding attractive, call it, in a smaller portfolio size, or call it, $50 million to $100 million range? Or is pretty much everything that you're looking at going to be a much smaller scale, more similar to the Pizza Hut transaction you guys announced last month?.

No. I would say you're correct that we're looking at some medium-sized transactions, all the way down to the deal we announced yesterday, sub-$5 million, significantly sub-$5 million. But we're looking at all sorts of different configurations of transactions. .

Our next question comes from Mitch Germain of JMP Securities. .

So just curious about funding the deals, in terms of, a, maybe concerning asset sales, and then b, where your leverage stands today and where you feel comfortable taking it out to. .

Sure. Thus far, we've funded deals with cash on hand. We have an undrawn revolver, as Gerry mentioned. We have been in discussions on OP unit-funded deals, so equity-funded deals in essence. And then our view is that we are long-form eligible starting November to issue equity to make sure our leverage is moderate.

But for now, it's using cash on hand and OP units and then going forward, using our undrawn revolver. We are significantly under the leverage limits that we've talked about of 6x. .

And have you started having any discussions with the rating agencies at this point?.

We have had discussions and follow-up discussions. Correct. .

Great. And then finally, when you look at your deal pipeline, obviously, you said it's a bit skewed to the QSRs.

Is there an ideal portfolio configuration that -- or maybe a target in terms of how much you want to limit that type of asset within the portfolio?.

If you look nationally, Mitch, it's roughly by value we estimated it. It's roughly 50-50 split between QSR and the other categories, with some segments growing quite quickly; fast casual and others growing slowly, family dining, for an example.

As of now, we think we have a tremendous amount of capacity to buy QSRs before we would be concerned that we're hitting any sort of internal limit. .

Our next question comes from Dan Donlan from Ladenburg Thalmann. .

Bill, just curious on portfolios.

Is -- would you be willing to do a portfolio of restaurants if it might -- if it had maybe a Walgreens or CVS, or maybe kind of a non-restaurant property unit that you felt that you could sell in an expeditious manner?.

The REIT rules are challenging to buy -- when you buy assets and immediately sell them. And if it was a very de minimis part of a portfolio, we try to be practical. But we are working on a transaction now with a half dozen QSR assets.

One of them was a shared QSR and a gas station, and we just refused to buy it and thought -- and we'll receive a substitute pure QSR asset. So it would be a very high bar for us to consider that. .

Okay. And then what about working with -- some of your competitors have worked with some smaller-time developers as well as franchisees to build the suits from some of these restaurant concepts.

Is that something that you guys would look into, or just kind of curious your appetite there?.

We would contemplate it. It would be again a high bar. So the circumstance in which we're contemplating one now is in a geography that's hard to penetrate with a brand we really like. And it's not ground-up development, it's reformatting some existing QSRs to another -- a more profitable brand. But again, high bar.

We have one competitor who is very skilled at that, but it takes a lot of internal resources, and frankly, they've been doing it for a long time. So we'd consider it, but it's certainly not the primary focus. .

Okay.

And then just lastly, as you're looking at acquisitions later on this year and into '17, what are -- what is the -- a coverage bar that you're looking at? Is there a certain level that you don't want to go below from an EBITDAR to rent coverage? Or is it just -- kind of just depends upon a -- on the tenant?.

We have different bars for different restaurant types and different tenants and also reflective of our confidence in the operator to improve performance.

Many small-time franchisee operators are not terribly efficient, and so a number of the transactions that we're working on now could thematically be described as partnering with larger best-in-class franchisee groups who are buying assets with significant proved -- planned improvements.

And we are working with them to understand what's a realistic pro forma operating level. And so when we look at coverages and rent-to-sales, we really try to dig in and understand where the trend is going and not just what historical numbers or backward-looking numbers would say. .

Okay. Fair enough. And then as far as the pipeline is also concerned, how much of it is -- can you -- what -- can you quantify the buckets in terms of is it -- some of it's just -- it's marketed deals.

How much of it is working with a franchisee that's looking to grow their business and therefore maybe sell a couple locations? And how much of it is, is working directly with a restaurant or a company-owned type of store?.

Yes. Great question. And thus far, it has skewed more to working on a basis of assets that have not -- where there is not an offering memorandum and they have not been put on LoopNet, for example. But quite often, there is a broker involved in some capacity. That percentage will change over time.

Whether a deal is sole-sourced or marketed, it's frankly irrelevant once the deal is closed and the price is set. So we are opportunistic. We look at all different avenues to get deal flow. .

Okay. And do you think because you're 100% focused on restaurants, have you seen somebody come to you guys and say, you know what, I understand restaurants, I don't understand some of these other retail types. Even though you may not -- you fairly don't have the lowest cost of capital, you have good -- great cost of capital.

But have you seen that as kind of a selling point? Have people started to gravitate toward you guys because of that, even though, again, some of the peers might be able to -- are willing to pay more for something or whatever it may be?.

Yes, I think a lot -- let me try to untangle that question a bit because there is some interesting comments. One, some of our peers do have a lower cost of capital. It doesn't mean they hand that lower cost of capital out freely on acquisitions. So that's less of an issue than I think many people think.

The fact that we specialize in restaurants, I think, is critical in OP unit deals. And I think it also is -- gives a strong sense that we're likely to close. If you look at the Pizza Hut acquisition is a prime example of that, that was Four Corners purchasing real estate, at the same time, as a franchisee purchased the operating business.

And they needed to know that we'd be there, and I think a lot of that confidence comes in our speciality and frankly, the fact that we can give senior management attention to the details of transactions, given our scale. .

Our next question comes from Jason Moment of Route One. .

My question was really around sort of operational improvement potential and specifically, the number of Pokemon Pokey stops that are at your current locations versus the potential to roll that out across the board, and what you think that could do possibly to traffic and how that might ultimately translate possibly into lower cap rates and better execution.

.

I don't know what those are. Operator, next question. .

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Bill for any closing remarks. .

Thank you, everyone, for joining the call. If there's any follow-up questions, both Gerry and I are available. Cheers. .

Thank you. .

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