Gerry Morgan – Chief Financial Officer Bill Lenehan – Chief Executive Officer.

Collin Mings – Raymond James R.J. Milligan – Baird Mitch Germain – JMP Securities.

Good day, ladies and gentlemen, and welcome to the FCPT Earnings Announcement for the First Quarter of 2017 Conference Call. [Operator Instructions] Please also note that this conference call is being recorded. I would now like to turn the conference over to the CFO, Gerry Morgan. Please go ahead..

Thank you, Chris. Joining me 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 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 prove to be incorrect.

For a more detailed discussion of some potential risk, please refer to our SEC fillings which can be found on our website. All the information presented on this call is current as of today, May 4, 2017.

In addition, reconciliations to non-GAAP measures, including FFO and AFFO, can be found in the company’s supplemental report which also can be found on our website. With that, I’ll on the call over to Bill..

Thank you, Gerry. As we do every call, first, a few comments on the acquisition environment. We spoke during our last quarterly conference call about seeing in real-time slightly higher cap rates and a lull in acquisition activity. We now feel that cap rates have stabilized and volumes appear to be coming back.

Little has changed on the competition front. The acquisition of Bob Evans Restaurants’ properties is the most significant recent news.

As outlined in our press release earlier this week, that transaction consists of 16 properties, a 20-year true master lease with all-or-nothing renewals at maturity and an additional overall rent coverage of 2.8x, which we expect to improve further under Golden Gate’s management.

As many of you know, Golden Gate Capital is an experienced operator in the restaurant space with experience with Red Lobster, California Pizza Kitchen and others. Overall, we continue to be very pleased with how our acquisition process is working, and that we are busier now than we have been in months.

Darden continues to post very strong results and announced the closing of a large acquisition this quarter, Cheddar’s Scratch Kitchen, adding a 165 locations to their stable. No real estate was included in this acquisition, however.

As part of the transaction announcement, Darden reconfirmed their commitment to a investment-grade balance sheet and debt to EBITDA below 2.5x. Our estimate is that it’s below 1x currently. Darden remains a bright spot in an otherwise tepid environment for casual dining restaurants.

We are pleased that our acquisition activity has been primarily focused on stronger QSR brands to date and we have a largely avoided the weaker concepts within the casual dining space. Gerry’s going to review the details of our recent investment-grade bond offering.

But overall, we are very pleased with the execution and particularly how the funding fits, timing-wise, with the Bob Evans transaction. The funding will occur around June 7.

The appetite in the private placement bond market for companies like FCPT is very strong, which provides an efficient way to fund our long-term strategy with long-term, very reasonably-priced debt. We have made very strong progress in internalizing our accounting function. Thank you, Niccole.

And have added two great folks to the accounting team and a paralegal to our legal team. Operationally, we’re on very strong footing. Now Gerry will take you through the financial results.

Gerry?.

Great. Thanks, Bill. Just a couple of comments for our results in the first quarter. We generated $24.6 million of cash rental income after excluding noncash straight line rental adjustments.

And as shown on Page 8 of our supplemental package and for your purposes in modeling 2017 results, the annual cash base rent for leases in place as of the end of the first quarter is $102.1 million.

Cash interest expense was $3.6 million, which was consistent with last quarter, including interest from borrowing on the revolving credit facility which was used to fund acquisitions. The revolver had a balance of $45 million at quarter end and $305 million of remaining capacity.

As of today, including funding for the Bob Evans transaction Bill referenced and which we announced earlier this week, our revolving line balance is $81 million. That will get paid down with the long-term offering funds on June 7, as Bill mentioned.

We reported $2.4 million of cash, general and administrative expenses after excluding noncash stock-based compensation. This is consistent with our previous guidance for 2017 of an annual G&A run rate of approximately $11 million.

A reminder to everybody that, that not only excludes the noncash stock-based conversation but also acquisition transaction cost. Turning to the balance sheet. As Bill referenced, but maybe a little bit more detail. We entered into an agreement to issue $125 million of senior unsecured notes.

This consisted of $50 million of 7-year notes at a fixed interest rate of 4.68%, $75 million of 10-year notes at a fixed interest rate of 4.93%.

Pro forma for this offering and including our existing $400 million bank term loan, our fixed-rate all-in cash interest rate is now just under 3.5%, and the average debt maturity is 4.8 years, excluding borrowings under our revolving credit facility.

The notes were rated BBB- by Fitch and were issued to 11 insurance companies active in the private placement market. We were really pleased and appreciative of the continued support of our existing bank group and the strong demand to our inaugural offering from private placement investors.

As a reminder, this financing is an important step in our efforts to expand our access to lower-cost, unsecured sources of capital as we begin to ladder our debt maturities while maintaining conservative and flexible capital structure.

We remain committed to a conservative capitalization strategy with targeted debt-to-EBITDA levels at or below 5.5 to 6x. With that, let me turn it back to Bill for some concluding comments..

Thank you for taking the time to being on the call today. I will be in Chicago, Milwaukee, Minneapolis, Cincinnati, Salt Lake City and Las Vegas over the next couple of weeks. If you’d like to meet, please let us know. Otherwise, we look forward to seeing everyone at NAREIT next month. And with that, let’s open it up for Q&A..

Thank you very much, sir. [Operator Instructions] Our first question comes from Collin Mings of Raymond James..

Hey, good morning guys..

Good morning, Collin.

How are you?.

Good.

Just maybe to start, can you guys provide just maybe a little bit more color on the how the Bob Evans deal came together?.

Sure. We’ve been working on it for quite some time. It was – the acquisition was publicly announced, obviously. Bob Evans is a public company selling a division. And we were approached by an advisor to Golden Gate to consider looking at various portions of the real estate.

And we pushed strongly for a size that we felt comfortable with and an edited list of assets that we felt comfortable with. Joshua and Pat did a terrific job.

We visited a number of the properties, firstly, all the properties in our pool that we ended up buying, including some others, to make sure that we had a strong representative group of real estate. But – so it started in – right after the turn of the year, commencing the closing co-terminus terms with their acquisition of the business..

And I would say, Bill, it’s a great brand in the family dining business. We’ve known Golden Gate for some time. We believe in their abilities in terms of performing. And it just felt like a nice addition to our portfolio..

And the timing around the bond deal was quite elegant, not having – being able to match sources and uses of capital is important in pricing. And then not having negative drag on the bond deals, hopefully, as well..

Okay, no. Appreciate the efficiency, if you will, the timing there. Next question. Just as far as – obviously, in the context of the current environment, a lot of emphasis out there, a lot of concerns about tenant health. And you guys have made a point of being very transparent about what you’re buying.

Maybe can you just highlight though, particularly given some of the – again, the concerns about tenant health on some of the metrics that you’re paying particular attention to as you’re trying to underwrite some of these operators.

And again, maybe put that also in context in, it looked like during the quarter, the EBITDAR coverage was 2.2 on what you bought, again, just the three transactions, well below kind of the portfolio average..

Yes. So a couple of comments. One, I think the 2.2 is sort of an anomaly. Those were assets largely that were part of transactions that we closed part of in Q4, and part of in Q1. And so had they closed – at the same time as the ones that closed in Q4, you’d feel very comfortable with the coverage.

And also, we almost always have unit-level information, but there were some that closed in Q1 where we didn’t. We know that they’re really strong. If we had that information, we think it would be higher than the 2.2. But let me take a step back and address your question at a, I think, more important level than a handful of properties.

The first is, I think some people feel that our process of announcing deals as we close them is goofy. And certainly, we’ve gotten some needling from our peers around that process. What I would say is that is the – this is environment, the exact environment why we do this.

When times are great, disclosure can be meager; when times are difficult, people are grasping for information about these companies. And the fact that we provide information on every single acquisition, essentially the day it closes, allows you to go back to our website and track every property we’ve bought.

So when you’re wondering, do they own this brand that’s in bankruptcy? Or do they own this brand that we see a negative news story about? Or this company that just whiffed on earnings? You can go back to our website and very quickly understand that we don’t own those brands. So that’s the first important point in this.

By the way, we will have credit issues at some point. Every company does if they’re active in buying properties. It’s part of life, but thus far, we’ve been very fortunate. The second is, I would address the sort of the calibration of the risk-reward that we’re seeking, which is manifested in the pricing of high 6s to low 7s.

And this is meaningfully inside some of our peers. We’re buying assets in the high 7s, low 8s. We think that, that was the prudent call. The assets we’re buying are much larger franchisees, they’re more houseful brands, they’re healthier financially. I think the last point, Collin, is that there’s nothing fancy about what we do.

We don’t rely on some third-party service or some magic metric. It is simply going through and understanding the financial health of the tenants that we’re doing business with.

And that’s something that happens on every property we buy and it’s why we brought on very strong, very numerate people to help us internally screen these acquisitions and understand the health of the tenants. But we’re simply shopping in a area of these sort of high 6, low 7 cap rates where the overall credit tends to be better..

I think in – so I think everyone, Bill, today, appreciates the transparency you’re offering in terms of your portfolio. Just one last one and I’ll turn it over. Just clearly upbeat in both the press release and the prepared remarks about the acquisition pipeline.

Cost of equity is still favorable for you guys to continue to grow, cost of capital on the debt side favorable. Just curious if you could put a little bit more color on the composition of the pipeline. I mean, clearly, you’ve done both kind of one deal – one-property deals, and now you’ve done some portfolio transactions as well.

So maybe any color on how that pipeline is looking? And clearly been a mix towards the QSR front.

Any shift there?.

We’re agnostic as to how deals are sourced, and that’s simply based on the reality that once we own them, it doesn’t matter. So we look at individual properties. We look at portfolios. We always have some larger strategic idea that we’re fooling around with.

To date, those larger strategic ideas have yet to close, as we would have announced them the moment they closed. So not a lot change there. As far as QSR goes versus casual dining, I think you should expect more of the same. Some of the larger portfolios that we’ve contemplated and have been kicking around have casual dining.

But we’re being selective to make sure that we’re only doing stuff in casual dining that we think is pretty safe. So we get asked daily about whether we’re involved in distressed casual dining or financing to take private or public casual dining companies. It’s something that, to date, we’ve shied away from.

And I think if you were to think about our orientation around having an advantaged cost of capital, it’s that we can do transactions that are safer and more sensible, not that we can do far more transactions or to risk your transactions at a larger spread.

And I think that, that’s something that our investors in this environment are very much behind..

I’ll turn it over. I’m going to appreciate the color, congrats on the transaction announcement prior this week..

Thanks, Collin..

Thank you very much. Our next question comes from R.J. Milligan of Baird..

Hey guys, can you hear me?.

Yes..

Yes, perfect. Loud and clear..

Bill, I think if I recall, you guys have a decent number of your properties that are in out-parcels of malls.

And I’m just curious, how do you think about those properties? Or what percentage of your properties are in mall out-lots? And how do you think about those and holding them long term, given some of the issues that we’re seeing in the mall space?.

Yes. We see very – so with the caveat that as long as the property is well located at the front of the mall, not at the back of the mall on a ring road, of which we have virtually nil. An exception to that would be the Bahama Breeze on – in the back of Sawgrass, but that’s one of the best malls in the world.

With the caveats that the property is on the front of the mall, near a major ingress/egress point and has ample parking, okay, which is the vast preponderance of our properties, we see a surprisingly low correlation to the – of the performance of the restaurants to the performance of the mall.

And so we do not think that when you just look at the store performance and you look at the traffic in-store, it’s not something we’re seeing a big correlation..

And so there’s no difference between. And so you’re not looking at it in terms A malls versus B and C malls, in terms of the properties you want to hold on to..

We’ve done – no, no. That’s not true. We’ve done the work to screen the properties and look at each individual property. And occasionally, when we contemplate a sale, someone’s interested in a property, of course, our preference is to look at properties next to weaker malls, especially when we’re talking about cap rates in the low 5s.

But we have not seen the correlation presumed in your question, that properties next to beaker malls are performing poorly. We’re just not seeing it. And I would also say that the vast preponderance of the stuff we buy has longer lease term. And it’s not clear to us that the malls are driving traffic to the restaurants.

And so as those malls get repurposed – and I’m certainly sanguine about the positions of lower-quality malls in this country. As those malls get repurposed, we actually think that in some cases, there might be upside..

Thank you very much..

[Operator Instructions] Our next question is from Mitch Germain of JMP Securities. Please go ahead..

Good morning, guys. Is amazing how the tone of questions change on a daily today. So just curious about – as you’re gaining scale, you’re growing you’re obviously increasing your credibility in the brokerage community and in the sector itself.

Are you seeing any difference in the types of deals that are being shopped to you today?.

No. I don’t think – it’s very similar from the get-go. It’s just a question of cost of capital, having the people to – we’ve refined, I think, our process. I think we certainly have a more sophisticated view on restaurants than we did on November 10, 2015. But I think we had access to deal flow from the beginning.

I guess the one place I would say is just that we are working on a number of things that are repeat business with folks that we closed deals with last year, beginning of this year. So maybe in that respect, but it was kind of good from the start, to be honest..

And I say when you’re at a franchisee conference now for the second time, there’s people you’re meeting a second time. And maybe it’ll be more business. But I agree with you, Bill, that in general, the pipeline and the sourcing looks very similar to what it did a year ago..

Let me add one comment to that, which is we closed some deals at the very end of last year and the very beginning of this year, that in one case, it was a deal had priced in June of ‘15, okay? And so the interest rate environment was different. And we could’ve repriced those deals, we could have walked from those deals, and we didn’t.

The dollar amounts were small, so it made it a little easier. But I think that, that helps. I think the brokers and franchisees would give us a good recommendation internally. So building that credibility does help. And sometimes, that means making sure you’re a consistent participant in the market..

Are there any trends or changes you’re seeing in the 1031 market that could affect you positive or negative?.

Only that it did seem like, as we talked about on the last call, some folks were focused on this Obamacare tax and there was a presumption that, that would go away day 1. And now we don’t hear people talking about that anymore. They know is uncertain and might take months, years to resolve, if ever.

Understanding there’s a vote later today on Obamacare, so – but I think people viewed that it might take time. And so it really just seemed to be less of a focus. So that’s all we’re seeing. It’s more there was this – as Nick Pell at Gramercy said on this call, a bit of a election hangover. And we seem to be on the other side of that today..

But not anything where capital is moving out of apartment and you’re up against more in retail/restaurant?.

I don’t feel – no, I don’t think so..

Great. Thanks guys..

So if there’s any more questions, we’re getting up to our 20-minute average call time. So any more questions, we’d love to hear it. We’ll take any more, but we’d love to wrap it up. I know everyone’s really busy..

No more questions in the queue at the moment, sir..

Okay, terrific. Thank you, everybody. And just to repeat, I’m going to be in Chicago, Milwaukee, Minneapolis, Cincinnati, Salt Lake and Vegas over the next couple of weeks. If there are shareholders that would love to get together, we certainly be more than happy to make time to meet with them. So thank you, everyone, for being on the call. Cheers..

Thank you very much, sir. Ladies and gentlemen, this conference call has now concluded. Thank you for your attention today. And you may now disconnect your lines..