Four Corners Property Trust, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. FCPT is a REIT focused on owning and leasing restaurant and retail properties; it also operates seven LongHorn Steakhouse restaurants in Texas.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $60.7 million | $55.4 million | $120.6 million | $109.8 million |
| Net income | $23.7 million | $28.2 million | $46.8 million | $50.5 million |
| Net income available to common shareholders | $23.6 million | $28.1 million | $46.7 million | $50.4 million |
| Diluted EPS | $0.27 | $0.35 | $0.54 | $0.63 |
| FFO per diluted share | $0.40 | $0.40 | $0.79 | $0.80 |
| AFFO per diluted share | $0.42 | $0.41 | $0.83 | $0.82 |
- Q2 revenue rose about 9.5% year over year, primarily from acquired properties. Rental revenue increased 10.3%; restaurant revenue increased 4.3%. For the first half, revenue rose about 9.8%.
- Net income and diluted EPS declined in both periods. A key comparison was the prior-year property-sale gain: $5.8 million in Q2 2022 versus $0.2 million in Q2 2023, and $5.8 million in the first half of 2022 versus $1.7 million in 2023. Higher interest expense and depreciation also weighed on results.
- First-half operating cash flow was $85.6 million, versus $65.2 million a year earlier. Investing cash outflow was $183.3 million, mainly reflecting property acquisitions; financing cash inflow was $82.6 million, including $128.2 million of net ATM equity proceeds. Cash and cash equivalents were $11.2 million at quarter-end, down from $26.3 million at year-end.
- At June 30, principal debt was $1.020 billion: $430 million of term loans, $15 million drawn on the revolver, and $575 million of senior notes. The revolver had $235 million of available capacity. FCPT reported compliance with debt covenants. The weighted-average term-loan rate was 6.13% before hedges and 3.64% after hedges, per management.
- Quarterly dividends declared were $0.34 per share, up from $0.3325 a year earlier. Total assets were $2.338 billion and total equity was $1.255 billion at June 30, 2023.
Portfolio, changes, and outlook
- FCPT acquired 59 properties for $195.0 million in the first half; these were fully occupied and had a 12.1-year weighted-average remaining lease term. At quarter-end, the broader portfolio comprised 1,077 properties in 47 states, with 99.9% occupancy and an 8.1-year average remaining lease term.
- Management cited 1.4% average annual rent escalations through 2028 and 99.7% contractual base rent collection in Q2. Investment-grade tenancy represented 59% of annualized base rent.
- Tenant and brand concentration is material: Darden leases represented about 51.2% of scheduled base rent; Olive Garden represented about 38.2% of lease revenue. Texas accounted for about 10.2% of rental revenue.
- After quarter-end through August 2, FCPT invested $111.0 million in 26 net-lease properties, at an approximately 6.4% investment yield and 12.4 years of remaining lease term. On July 12, it issued $100 million of 10-year senior notes at a fixed 6.44% rate. A related $8.1 million hedge-termination gain is expected to reduce interest expense over ten years.
- The filing gives no numeric earnings or acquisition guidance. Management described continued acquisition-led diversification as strategy and expects to fund operations and distributions primarily from operating cash flow, with debt or equity financing for acquisitions and longer-term needs. It cautioned that acceptable capital-market access is not assured.
Risks, contingencies, and unusual items
- Variable-rate debt creates interest-rate exposure; swaps hedged $350 million of variable-rate debt at June 30. Unhedged borrowing costs and refinancing needs remain relevant.
- The company depends significantly on a concentrated tenant and brand base. Although net leases shift many property costs to tenants, tenant credit and operating performance can affect rent collection and renewals.
- Routine litigation and claims arise in the ordinary course; management did not expect them to have a material adverse effect. No material risk-factor changes were reported, and no impairment expense was recorded in the first half.
- FCPT issued approximately 4.8 million shares under its ATM program in the first half for $128.3 million net proceeds, increasing shares outstanding and providing acquisition capital.
Investor verification priorities
- Review rent collections, tenant credit quality, and Darden/Olive Garden concentration.
- Assess the impact of higher interest rates, hedge expirations, and upcoming debt maturities, including $50 million due in 2024 and $150 million in 2025.
- Compare acquisition yields and lease terms with financing costs, and track the subsequent $111 million of acquisitions and July note issuance.
- Reconcile GAAP net income and EPS with FFO/AFFO, including the effects of property-sale gains, equity issuance, and non-cash adjustments.
- Monitor dividend coverage and liquidity; AFFO is a non-GAAP measure and is not equivalent to cash available for distributions.