Four Corners Property Trust, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report; selected Q4 figures are included below. The company was spun off from Darden on November 9, 2015, so year-over-year comparisons are not fully comparable.
Business context
FCPT is a publicly traded REIT that primarily owns and leases restaurant properties under triple-net leases, and also operates six LongHorn Steakhouse restaurants through its Kerrow business. At year-end it owned 475 leased properties and six operated restaurants. The leased portfolio was 100% occupied, had a 13.7-year weighted-average remaining lease term and a 1.5% average annual rent escalator. Darden represented approximately 95% of annual base rent; Olive Garden represented about 70%.
Financial performance and position
| Metric | 2016 | Comparable information |
|---|---|---|
| Total revenue | $124.0 million | $33.5 million in 2015; 2015 includes only post-spin-off real estate results |
| Rental revenue | $105.6 million | $15.1 million in 2015 |
| Restaurant revenue | $18.4 million | $18.3 million in 2015; Kerrow restaurant expenses rose to $18.2 million from $17.0 million |
| Net income attributable to common shareholders | $156.8 million | $5.7 million in 2015 |
| Basic / diluted EPS | $2.75 / $2.63 | Includes material non-operating and tax effects |
| Operating cash flow | $70.9 million | $21.7 million in 2015 |
| Cash and cash equivalents | $26.6 million | $98.1 million at year-end 2015 |
| Debt | $445.0 million principal; $438.9 million net of financing costs | $400 million term loan and $45 million revolver draw |
| FFO / AFFO | $1.35 / $1.22 per diluted share | Non-GAAP measures; AFFO was $72.8 million |
Net income included an $80.3 million income tax benefit, principally related to the REIT election, and a $16.6 million gain on real estate sales. These items materially elevate GAAP earnings relative to recurring property operations. Interest expense was $14.8 million. The company reported $305 million of remaining revolver capacity at year-end and compliance with its financial covenants.
For Q4 2016, revenue was $31.3 million, including $26.9 million rental revenue and $4.4 million restaurant revenue. The quarter included the $16.6 million property-sale gain; reported basic and diluted EPS were each $0.54.
Changes and notable items
- FCPT acquired 59 properties in 13 transactions for $94.1 million at a blended acquisition cap rate of 6.6%, and sold two properties for $24.8 million. Sale proceeds were used in subsequent 1031-exchange acquisitions.
- Reported rental revenue benefited from a full year of the initial Darden portfolio; 2015 had only a partial year after the spin-off. The filing says this makes real estate segment comparisons with earlier periods not meaningful.
- Kerrow revenue was nearly flat year over year. Average guest counts fell 5.6%, partly offset by a 4.8% increase in average check; restaurant expenses increased, and segment net income declined to $0.2 million from $1.3 million.
- Cash declined by $71.4 million during 2016. Financing cash flow included $121.6 million of dividend payments, partly offset by a $45 million revolver draw.
- The company paid large one-time REIT conversion/purging distributions in 2016. Regular quarterly dividends declared were $0.2425 per share, or $0.97 annualized.
Outlook, risks and contingencies
Management described continued acquisitions and tenant diversification as strategic priorities but provided no quantified earnings or acquisition guidance. It reported $14.8 million of restaurant-property acquisitions in the first quarter of 2017 through February 27, funded with cash and OP units, and an investment-grade BBB- rating from Fitch in January 2017. The company also amended its credit agreement in February 2017 to permit additional unsecured debt, with related covenant changes upon incurrence.
- Tenant concentration: Darden provides approximately 95% of annual base rent. Darden’s operating or credit deterioration, nonpayment, or nonrenewal could materially affect cash flow, debt service and dividends.
- Portfolio concentration: Olive Garden represents about 70% of annualized base rent. Restaurant-sector weakness, brand performance, or difficulty re-leasing specialized properties are material risks.
- Financing and rates: Debt covenants, refinancing access and interest-rate changes may constrain acquisitions, liquidity or distributions. $400 million of term debt was hedged through swaps; the revolver was variable-rate.
- REIT and spin-off taxes: Qualification as a REIT and tax-free treatment of the spin-off involve continuing requirements and potential tax liabilities. A tax protection agreement also restricts taxable dispositions of ten acquired properties through November 2023.
- Other exposures: Environmental, ADA, casualty/insurance, litigation, restaurant operating, and acquisition risks are disclosed. Management said ordinary-course legal matters were not expected to have a material adverse effect; no material environmental or ADA issue was identified as of February 24, 2017.
Most important facts for investors to verify
- Whether Darden remains able and willing to meet lease and guarantee obligations, and whether FCPT reduces its roughly 95% rent concentration.
- Recurring operating performance excluding the REIT-related tax benefit and property-sale gain; reconcile GAAP earnings with FFO/AFFO and cash flow.
- Dividend coverage using recurring cash generation, including the distinction between the $0.97 annualized regular dividend and 2016’s exceptional purging distributions.
- Debt terms, covenant headroom, swap coverage and costs, and the effect of any additional unsecured borrowing under the 2017 amendment.
- Acquisition underwriting and tenant credit quality, including how the new properties affect portfolio diversification and lease-term profile.