Four Corners Property Trust, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. FCPT is a REIT focused on owning and leasing restaurant properties, primarily under net leases, and also operates six LongHorn Steakhouse restaurants through its Kerrow business.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $34.7 million | $33.2 million | $69.5 million | $65.9 million |
| Net income available to common shareholders | $27.4 million | $18.3 million | $43.7 million | $33.8 million |
| Diluted EPS | $0.44 | $0.30 | $0.71 | $0.56 |
| FFO per diluted share | $0.35 | $0.34 | $0.70 | $0.69 |
| AFFO per diluted share | $0.34 | $0.32 | $0.68 | $0.64 |
- Rental revenue rose 4.5% in Q2 and 5.5% for the first half, primarily reflecting property acquisitions net of dispositions. Restaurant revenue increased 5.2% in Q2 and 5.4% for the first half.
- Q2 and first-half net income included a $10.9 million gain on the sale of one property; the comparable 2017 periods included a $3.3 million gain. Thus, GAAP earnings growth was materially influenced by property-sale gains.
- For the first six months, operating cash flow was $41.0 million versus $39.2 million in 2017. Investing activities used $22.4 million versus $59.1 million; financing activities provided $0.7 million versus $74.6 million. Cash, cash equivalents and restricted cash ended at $88.6 million.
- At June 30, total assets were $1.123 billion, net real estate investments $984.8 million, and long-term debt net of financing costs $516.4 million. Cash and cash equivalents were $88.4 million, with $250 million of unused revolver capacity. No revolver borrowings or letters of credit were outstanding; the company reported compliance with debt covenants.
- Interest expense was $4.9 million in Q2 and $9.7 million for the first half, up from $4.5 million and $8.6 million, respectively, largely because of the $125 million fixed-rate notes issued in June 2017. The quarterly income statement does not present a company-wide operating margin; segment and restaurant results are disclosed separately.
- Dividends declared were $0.275 per share in Q2 and $0.55 for the first half, compared with $0.2425 and $0.485 in 2017.
Portfolio, changes and management commentary
- During the first half, FCPT acquired 21 properties for $37.9 million; they were fully occupied under net leases, with an 11.1-year weighted-average remaining lease term. The company sold one property for $16.2 million, recognizing the $10.9 million gain.
- At quarter-end, the wholly owned lease portfolio comprised 535 properties across 44 states, with 99.9% occupancy, a 12.5-year weighted-average remaining lease term, 1.5% weighted-average annual rent escalations, and 87% investment-grade tenancy.
- Management said the acquisition strategy is intended to grow and diversify the portfolio and reduce reliance on Darden over time. Darden represented approximately 87% of scheduled base rent; Olive Garden represented approximately 65% of lease revenue.
- FCPT raised $34.6 million net through its at-the-market equity program, issuing about 1.53 million shares at a weighted-average $22.97 per share. $81.3 million of gross issuance capacity remained.
- No quantitative earnings or acquisition guidance was provided. A July 2018 subsequent event was a $3.6 million acquisition of a Buffalo Wild Wings property in Austin, Texas, under a triple-net lease with approximately six years remaining.
Risks, contingencies and unusual items
- Interest-rate exposure is managed with swaps. The $400 million variable-rate term loan was hedged for its full notional through November 9, 2018; swaps covering $300 million were in place from then through the November 2022 loan maturity. Management estimated $2.8 million of accumulated hedge gains would reduce interest expense over the following 12 months.
- Tenant and brand concentration are significant risks, particularly the dependence on Darden. The filing also identifies exposure to interest rates, tenant credit and rent collectability, and REIT qualification requirements.
- Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity. No material changes to previously reported risk factors were identified, and no off-balance-sheet arrangements were reported.
- Adoption of the new revenue-recognition guidance had no material financial-statement impact. FCPT was evaluating the effect of the lease-accounting standard scheduled to become effective in 2019.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring rental and restaurant operations versus property-sale gains; compare GAAP results with FFO and AFFO.
- Whether acquisitions continue to diversify rent sources and reduce Darden and Olive Garden concentration, and how tenant credit and lease coverage evolve.
- Cash available for dividends and acquisitions relative to declared distributions, including the effects of equity issuance and share-count growth.
- Interest expense and hedge coverage after the November 2018 reduction in swap notional, as well as covenant compliance and refinancing needs.