Four Corners Property Trust, Inc. — Q1 2022 Form 10-Q
Business context and reporting period
FCPT is a REIT focused primarily on owning and leasing restaurant properties, generally under net leases. It also operates seven LongHorn Steakhouse restaurants in the San Antonio area. This unaudited report covers the three months ended March 31, 2022; comparisons are with Q1 2021. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 / prior period |
|---|---|---|
| Total revenue | $54.4 | $46.7; up 16.4% |
| Rental revenue | $46.9 | $41.5; up 13.0% |
| Restaurant revenue | $7.5 | $5.2; up 43.3% |
| Net income | $22.3 | $20.6; up 8.1% |
| Net income available to common shareholders | $22.3 | $20.6 |
| Diluted EPS | $0.28 | $0.27 |
| Net income margin | 41.0% | 44.1% |
| Operating cash flow | $34.8 | $31.8 |
| Cash and equivalents at quarter-end | $58.1 | $6.3 at Dec. 31, 2021 |
| Long-term debt, net of financing costs | $966.0 | $877.6 at Dec. 31, 2021 |
Operating expenses rose to $23.7 million from $18.9 million, including higher depreciation, property costs and restaurant expenses. Interest expense increased to $8.4 million from $7.6 million. The company declared a quarterly dividend of $0.3325 per common share, up from $0.3175.
Cash used in investing was $43.3 million, primarily for property acquisitions; financing provided $60.3 million. FCPT reported NAREIT FFO of $32.0 million ($0.40 per diluted share) and AFFO of $32.8 million ($0.41 per diluted share), versus $28.4 million and $28.8 million, respectively, in Q1 2021. These are non-GAAP measures and are not substitutes for net income or operating cash flow.
Material changes and operating developments
- FCPT acquired 18 properties for $43.3 million during the quarter. The acquired properties were fully occupied, with a weighted-average remaining lease term of 9.0 years. Management attributed the year-over-year rental revenue increase largely to a net 127 leased-property additions over the preceding 12 months.
- Portfolio occupancy was 99.9%; the portfolio comprised 937 properties across 46 states, with a 9.0-year average remaining lease term and 1.38% average annual rent escalation through 2032.
- FCPT issued $125 million of senior notes in March: $50 million due 2031 at 3.09% and $75 million due 2032 at 3.11%. Gross debt was $975 million at quarter-end, comprising $400 million of term loans and $575 million of fixed-rate notes. There were no revolver borrowings and $250 million of capacity remained available; the company reported compliance with debt covenants.
- Cash increased substantially, supported in part by the new note proceeds and net repayment of $36 million on the revolving facility. Quarter-end cash plus undrawn revolver capacity totaled approximately $308 million.
- After quarter-end through April 28, FCPT invested $12.7 million in five net-lease acquisitions and entered forward sale agreements covering an additional 992,548 shares, for approximately $27.3 million of initial gross proceeds.
Outlook, risks and unusual items
The filing provides no specific earnings, acquisition or other quantitative guidance. Management expects to fund operating needs, dividends and debt service primarily from operating cash flow, and acquisitions and other capital needs through available credit, debt or equity issuance, subject to market conditions. Management stated that net leases mitigate exposure to rising property operating costs, while interest rates, occupancy, rental rates and tenant financial health are more influential factors.
- FCPT collected 99.7% of contractual portfolio base rent in Q1 and reported no rent abatements or deferrals for the quarter. Management continued to monitor COVID-19 and new variants.
- Tenant and brand concentration are material: Darden represented approximately 58.6% of scheduled base rent; Olive Garden represented 43.7% of lease revenue, and LongHorn Steakhouse 12.4%, at quarter-end.
- $350 million of variable-rate debt was hedged with interest-rate swaps. The swaps were indexed to LIBOR; the filing discusses transition risks as LIBOR is expected to cease after June 30, 2023. Management estimated $993,000 of accumulated derivative gains would be reclassified as an increase to interest expense over the following 12 months.
- Q1 comprehensive income included $15.4 million of other comprehensive income, primarily from changes in derivative fair value; this non-cash amount should be distinguished from operating earnings.
- Management reported no impairment expense, no properties held for sale and no off-balance-sheet arrangements. Routine legal matters were not considered material. The company reported no material changes to the risk factors in its 2021 Form 10-K.
Important facts for investors to verify
- Whether rental collections and occupancy remain strong, and whether tenant concentration—particularly Darden—changes over time.
- Acquisition yields, funding costs and the effect of continued property additions on earnings, cash flow and leverage.
- Debt maturities, covenant compliance, revolver availability and exposure to floating rates and the LIBOR transition.
- Dividend coverage using operating cash flow and AFFO, while considering that AFFO is non-GAAP and management-defined.
- Settlement timing and net proceeds from the forward equity sales, including adjustments to the initial forward prices.