Four Corners Property Trust, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. FCPT is a publicly traded REIT focused on owning and leasing restaurant properties, primarily under triple-net leases; it also operates six LongHorn Steakhouse restaurants in Texas.
Financial performance and position
- Second-quarter revenue: $33.2 million, up 7.3% year over year. Rental income was $28.3 million, up $2.1 million; restaurant revenue was $4.8 million, up $0.1 million.
- Second-quarter earnings: Net income attributable to common shareholders was $18.3 million, or $0.30 per diluted share, versus $14.8 million, or $0.25, a year earlier. The 2017 quarter included a $3.3 million net gain on a property sale.
- First-half revenue and earnings: Revenue was $65.9 million, up 6.3%. Net income attributable to common shareholders was $33.8 million, or $0.56 per diluted share, versus $109.1 million, or $2.02, in 2016. The prior-year period included an $80.5 million income-tax benefit related mainly to the planned REIT election; this makes the reported earnings comparison unusually tax-driven.
- REIT supplemental measures: Q2 FFO was $20.6 million, or $0.34 per diluted share, versus $19.9 million, or $0.33. AFFO was $19.3 million, or $0.32 per diluted share, versus $18.2 million, or $0.30. First-half FFO was $41.6 million, or $0.69 per diluted share; AFFO was $38.9 million, or $0.64, compared with $39.0 million and $35.7 million, respectively, in 2016. These are non-GAAP measures and are not substitutes for cash flow or net income.
- Cash flow and investment: First-half operating cash flow was $39.2 million, versus $33.3 million in 2016. Investing used $59.1 million, primarily reflecting $64.0 million of fixed-asset purchases. Cash increased by $54.7 million to $81.3 million.
- Balance sheet and liquidity: Total assets were $1.054 billion and total liabilities were $546.2 million at June 30. Notes payable, net of financing costs, were $518.0 million. FCPT had $81.3 million cash and $350 million available under its revolving credit facility, with no revolver borrowings or letters of credit outstanding. The company reported compliance with debt covenants.
- Debt and equity financing: FCPT issued $125 million of unsecured fixed-rate notes in June: $50 million at 4.68% due in seven years and $75 million at 4.93% due in ten years. It also raised $28.9 million net through its at-the-market equity program, with $120 million of gross issuance capacity remaining. Common dividends declared were $0.2425 per share in each quarter, or $0.4850 for the first half.
Material changes and business developments
- FCPT invested $69.8 million, including transaction costs, in 32 restaurant properties across 14 states during the first half. The acquired properties were fully occupied under triple-net leases. The filing gives their weighted-average lease term as 18.3 years in the real estate note and 18.6 years in MD&A.
- At June 30, the wholly owned lease portfolio comprised 506 freestanding properties in 44 states, with 100% occupancy, a 13.4-year weighted-average remaining lease term, and a 1.5% weighted-average annual rent escalator. Management reported 90% investment-grade tenancy based on annual cash rent.
- FCPT sold one Darden-leased property in Q2 for $5.2 million, recognizing a $3.3 million net gain. It expected to complete another unsolicited-offer sale for approximately $5.9 million in Q3, with an estimated $4.2 million gain.
- Rental-income growth reflected acquisitions, including 91 properties acquired and three sold over the year-over-year period cited by management. G&A increased, partly from bringing accounting in-house, one-time recruiting and system implementation costs, and legal costs related to the ATM program. Interest expense also rose with borrowings and the June note issuance.
Outlook, risks, and contingencies
- No quantified earnings, revenue, or acquisition guidance is provided. Management says it intends to continue qualifying as a REIT, pursue acquisitions, and reduce reliance on Darden over time through portfolio growth and diversification.
- Tenant concentration is substantial: Darden leases account for approximately 90% of scheduled base rent. Olive Garden represents approximately 59% of leased properties and 67% of lease revenues. Tenant financial health and restaurant-site performance therefore pose material business risks.
- FCPT identifies interest-rate and liquidity exposure. It uses interest-rate swaps to manage variable-rate debt; $195,000 of accumulated derivative-related amounts was estimated to be reclassified into interest expense over the next 12 months. Two additional $100 million swaps were entered into after quarter-end.
- FCPT’s REIT status depends on satisfying applicable requirements, including distributing at least 90% of REIT taxable income, subject to statutory adjustments. The Kerrow restaurant business is a taxable REIT subsidiary.
- Management described ordinary-course litigation as not expected to have a material adverse effect. The filing reports no material changes to previously disclosed risk factors and no off-balance-sheet arrangements. Disclosure controls were assessed as effective; a new general-ledger system was implemented during Q2.
- After quarter-end, FCPT invested $3.4 million in two Indiana properties, fully occupied under triple-net leases with a 20-year weighted-average term.
Important facts for investors to verify
- How tenant and brand concentration—particularly Darden and Olive Garden—affects rent coverage and FCPT’s diversification plans.
- Acquisition economics, lease terms, and the filing’s differing 18.3-year and 18.6-year weighted-average terms for first-half acquisitions.
- Debt covenant headroom, variable-rate exposure, refinancing needs, and the intended use of note and ATM proceeds.
- Recurring cash available for dividends: compare operating cash flow and AFFO with distributions, while accounting for AFFO’s non-GAAP limitations.
- Whether the anticipated Q3 property sale closed and whether its estimated proceeds and gain were realized.