Four Corners Property Trust, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also provides unaudited fourth-quarter results. FCPT is a REIT focused on owning and leasing restaurant properties; it also operates six LongHorn Steakhouse restaurants in Texas through its Kerrow subsidiary.
Business context and portfolio
At year-end, FCPT owned 521 properties: 515 leased properties across 44 states and six restaurants operated by Kerrow. The leased portfolio totaled 3.6 million square feet, was 99.8% occupied, had a 13.0-year weighted-average remaining lease term and a 1.5% weighted-average annual rent escalator. Tenants responsible for most property-level costs under net leases.
FCPT remained highly reliant on Darden, which represented approximately 88% of annualized base rent. Olive Garden represented 296 properties and 65.9% of leased-portfolio base rent. Tenant EBITDAR coverage was 4.6x overall, based on tenant data that FCPT says it does not independently verify.
Key financial results
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total revenue | $133.2 million | $124.0 million |
| Rental revenue | $113.9 million | $105.6 million |
| Net income available to common shareholders | $71.4 million | $156.8 million |
| Diluted EPS | $1.18 | $2.63 |
| Operating cash flow | $78.9 million | $70.9 million |
| FFO per diluted share | $1.36 | $1.35 |
| AFFO per diluted share | $1.29 | $1.22 |
| Dividends declared per common share | $1.0025 | $0.9700 |
Revenue increased 7.4%, mainly reflecting a full year of contributions from prior acquisitions and the net addition of 2017 properties. Net income fell substantially because FY 2016 included an $80.4 million deferred-tax benefit tied principally to the REIT election; FY 2017’s tax benefit was only $18,000. FY 2017 also included $10.5 million of gains on property sales, versus $16.6 million in 2016. Thus, reported earnings comparisons are affected by significant tax and sale-gain items.
In the fourth quarter of 2017, revenue was $33.8 million, income before income taxes was $18.3 million, and basic and diluted EPS were each $0.30. Quarterly distributions declared were $0.275 per share.
Liquidity, debt and capital activity
At December 31, 2017, cash and cash equivalents were $64.5 million; the $250 million revolving facility was undrawn. Debt comprised a $400 million term loan and $125 million of senior unsecured notes, with reported long-term debt net of deferred financing costs of $515.5 million. The term loan matures in November 2022; the revolver matures in November 2021, with extension options. The notes mature in June 2024 and June 2027 and bear fixed rates of 4.68% and 4.93%.
Interest-rate swaps hedged the $400 million variable-rate term loan through November 2018 and 75% thereafter through its maturity; the company reported a 2.71% effective gross rate at year-end. FCPT reported compliance with debt covenants. During 2017 it issued $32.2 million net through its ATM equity program and $125 million of notes. Operating cash flow was $78.9 million, investing cash outflow was $85.3 million, and financing cash inflow was $44.2 million.
Material changes, outlook and risks
- FCPT acquired 43 properties in 10 transactions for approximately $97.0 million net of transaction costs, and sold three properties for $16.1 million. Sale proceeds were used for 1031-exchange acquisitions.
- Management intends to grow and diversify the portfolio, including adding QSR and other third-party tenants to reduce Darden concentration. The filing gives no quantified earnings, revenue or acquisition guidance and states there is no fixed acquisition schedule.
- Through February 23, 2018, FCPT had invested $20.3 million in 12 additional restaurant properties, all leased, with a 9.5-year weighted-average lease term.
- Key risks include dependence on Darden’s ability and willingness to meet lease and franchise obligations; Olive Garden and restaurant-sector concentration; tenant failures, lease renewals and re-leasing risk; competition for acquisitions; interest-rate and refinancing risk; and environmental, casualty, regulatory and REIT-qualification risks.
- FCPT recorded a $228,000 impairment of an in-place lease intangible after a tenant’s bankruptcy and court-ordered lease termination. Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity. No off-balance-sheet arrangements were reported.
- The board determines future dividends at its discretion. The stated current annual dividend rate was $1.10 per share; the filing does not assure future dividend levels.
Most important facts to verify
- Whether Darden’s operating performance and lease guarantees support continued rent payments, given its approximately 88% share of annualized base rent.
- Tenant and brand concentration, tenant EBITDAR coverage calculations and the underlying, unverified tenant data.
- Recurring cash earnings and dividend coverage, separating operating performance from the 2016 REIT tax benefit and property-sale gains.
- Debt covenant headroom, swap coverage after November 2018, interest costs and refinancing options at upcoming maturities.
- The performance and lease terms of acquired third-party properties, and whether diversification reduces Darden dependence without weakening credit quality.
- Potential costs or liabilities from tenant defaults, property re-leasing, environmental matters, insurance gaps, litigation and maintaining REIT status.