Four Corners Property Trust, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. FCPT is a REIT focused primarily on owning and leasing restaurant and retail properties, with a small restaurant operating business.
Financial performance
- Q3 revenue: $64.8 million, up 15.8% year over year; rental revenue was $57.2 million, up 17.5%, and restaurant revenue was $7.6 million, up 4.2%.
- Q3 earnings: Net income was $24.2 million versus $24.6 million; diluted EPS was $0.27 versus $0.30. Higher interest and depreciation costs and a smaller property-sale gain offset revenue growth.
- Nine-month results: Revenue was $185.5 million, up 11.8%; net income was $71.0 million versus $75.0 million, and diluted EPS was $0.80 versus $0.92. The prior-year period included larger realized property-sale gains.
- REIT performance measures: Q3 FFO was $37.3 million ($0.41 per diluted share) and AFFO was $38.0 million ($0.42 per diluted share), compared with $33.3 million and $33.8 million, respectively, in Q3 2022. For nine months, FFO was $106.3 million ($1.20 per share) and AFFO was $109.8 million ($1.24 per share). These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- Cash flow: Nine-month operating cash flow was $128.7 million, versus $109.3 million. Investing activities used $304.4 million, principally reflecting $328.5 million invested in real estate. Financing activities provided $165.7 million. Cash and cash equivalents were $5.7 million at quarter-end; a further $10.6 million of restricted cash was reported in other assets.
- Dividends: FCPT declared $0.34 per common share for Q3, versus $0.3325 in Q3 2022. Nine-month declared dividends were $1.02 per share.
Balance sheet, debt and liquidity
- At September 30, 2023, debt was $1.135 billion in principal, or $1.126 billion net of financing costs, compared with $1.005 billion net at year-end 2022. Debt is unsecured and comprises $430 million of term loans, $675 million of senior notes and $30 million drawn on the revolver.
- The company issued $100 million of ten-year senior notes in July at a fixed 6.44% rate. The revolver had $220 million of available capacity and matures in November 2025, with a six-month extension option. FCPT reported compliance with debt covenants.
- Term loans had a 6.38% weighted average rate before hedging; management reported a 3.77% weighted average rate after hedging. Interest-rate swaps hedged $350 million of variable-rate debt.
- FCPT raised $128.2 million net through its at-the-market equity program during the first nine months, issuing 4.8 million shares; $270.6 million remained available under the program.
Portfolio, changes and management commentary
- FCPT acquired 90 properties for $328.5 million during the first nine months; those properties were fully occupied and had a weighted average remaining lease term of 11.9 years. Over the year-over-year period through September 30, the company acquired 131 leased properties and disposed of seven.
- The lease portfolio comprised 1,106 properties in 47 states, with 99.8% occupancy, an average remaining lease term of 8.0 years and average annual rent escalations of 1.4% through 2028. FCPT reported collecting 99.9% of contractual base rent for Q3; 59% of tenancy, weighted by annualized base rent, was investment grade.
- Management attributed rental growth mainly to acquisitions. Restaurant revenue growth reflected higher net pricing and customer-service focus; restaurant expenses rose with food and labor costs. Management stated that net leases mitigate exposure to rising property operating costs and identified interest rates, occupancy, rental rates and tenant financial condition as more influential to performance.
- Concentration risk: Darden leases represented approximately 51.7% of scheduled base rent. Olive Garden accounted for approximately 37.0% of lease revenue; LongHorn Steakhouse accounted for 10.4%. Texas represented approximately 10.1% of rental revenue.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings, acquisition or dividend guidance. Management expects to fund operating needs and distributions primarily from operating cash flow, and acquisitions and other capital needs through the revolver, debt or equity, subject to market access and terms.
- FCPT terminated forward-starting hedges in connection with the July note issuance, realizing an approximately $8.1 million gain; the gain is to be amortized over ten years as a reduction to interest expense. The company estimated a further $11.8 million of derivative-related amounts would be reclassified to earnings over the next twelve months as a reduction to interest expense.
- The company reported no impairment expense in the first nine months of 2023 or 2022. Management said routine litigation was not expected to have a material adverse effect; the filing reported no material change to the risk factors in the 2022 Form 10-K.
- After quarter-end, FCPT acquired one net-lease property for $2.4 million and completed the sale of one property held for sale at quarter-end, above its carrying value.
Important facts for investors to verify
- Whether rent collections, occupancy and tenant credit remain resilient, particularly given Darden and Olive Garden concentration.
- How higher borrowing costs, upcoming debt maturities and the interest-rate hedge schedule affect interest expense and refinancing needs.
- Whether acquisition yields and financing costs support AFFO and dividend coverage as the portfolio grows.
- The impact of ATM share issuance and potential further equity raises on per-share results and dilution.
- How much of reported AFFO is available for distributions after property investment and other cash requirements; AFFO is a non-GAAP measure, not operating cash flow.