Four Corners Property Trust, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. FCPT is a REIT focused on owning and leasing restaurant and retail properties, primarily under triple-net leases; it also operates seven LongHorn Steakhouse restaurants in the San Antonio area.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $56.0m | $50.7m | $165.8m | $146.7m |
| Net income | $24.6m | $21.2m | $75.0m | $62.0m |
| Net income attributable to common shareholders | $24.5m | $21.2m | $74.9m | $61.9m |
| Diluted EPS | $0.30 | $0.28 | $0.92 | $0.81 |
| FFO per diluted share | $0.40 | $0.39 | $1.20 | $1.14 |
| AFFO per diluted share | $0.41 | $0.39 | $1.23 | $1.15 |
For the quarter, rental revenue was $48.7m and restaurant revenue was $7.3m. Interest expense was $9.2m. The company declared dividends of $0.3325 per common share for the quarter. Management attributes rental growth mainly to acquisitions; restaurant revenue growth reflected improved casual-dining trends, customer-service efforts, and, for the year-to-date comparison, the opening of a seventh restaurant in April 2021.
For the first nine months, operating cash flow was $109.3m, versus $94.0m a year earlier. Investing activities used $151.9m, including $171.8m invested in 70 properties, partly offset by $20.4m of property-sale proceeds. Financing activities provided $73.0m. Cash and cash equivalents were $36.7m at quarter-end, up from $6.3m at December 31, 2021.
Balance sheet, debt, and liquidity
At September 30, 2022, total assets were $2.10bn and equity was $1.07bn. Long-term debt, net of financing costs, was $967.0m; gross debt comprised $400m of term loans and $575m of senior fixed-rate notes. The revolver had no borrowings and $250m of available capacity. The company reported a 3.03% weighted-average term-loan rate after hedges and compliance with all debt covenants. Debt increased from $877.6m net at December 31, 2021, principally reflecting $125m of notes issued in March 2022.
FCPT generated $66.3m of net proceeds from ATM equity issuance during the first nine months. It had $93.3m of remaining ATM issuance capacity at quarter-end. The filing reports no off-balance-sheet arrangements.
Material changes and portfolio
- Total revenue increased 10.5% in Q3 and 13.0% for the first nine months year over year; management reported rental revenue growth of 11.6% and 12.7%, respectively.
- At quarter-end, the portfolio comprised 982 properties in 47 states, with 99.9% occupancy, an 8.6-year average remaining lease term, and an average annual rent escalation of 1.44% through 2027.
- FCPT acquired 70 properties for $171.8m in the first nine months; those properties were fully occupied and had a 7.5-year weighted-average remaining lease term. It sold seven properties, recognizing a $7.6m gain, compared with two sales and a $0.4m gain in the 2021 period.
- Accumulated other comprehensive income improved to $32.0m from a $9.8m loss at year-end, principally reflecting fair-value changes in interest-rate derivatives. Derivative assets were $36.4m at quarter-end.
Outlook, commentary, and risks
The filing provides no specific earnings or acquisition guidance. Management expects to fund operating needs, dividends, and debt service primarily from operating cash flow, with acquisitions and other capital needs supported by the revolver and future debt or equity financing. It notes that access to capital markets on acceptable terms cannot be assured. Management says net leases mitigate exposure to rising property operating costs, while interest rates, occupancy, rental rates, and tenant financial condition are more influential to performance.
- FCPT collected 99.9% of contractual base rent for the first nine months of 2022 and reported no rent abatements or deferrals during that period.
- Tenant and brand concentration is significant: Darden represents approximately 56.2% of scheduled base rent; Olive Garden accounts for approximately 42.0% of lease revenue. Texas represented about 10.8% of rental revenue.
- Variable-rate term loans and LIBOR-linked swaps expose the company to interest-rate and benchmark-transition risks. The filing discusses LIBOR cessation and transition uncertainty.
- Subsequent to quarter-end, FCPT invested $16.0m in eight net-lease properties. On October 25, it amended its credit agreement, including conversion from LIBOR to SOFR-based borrowings and a $430m term-loan facility alongside the $250m revolver. Through November 2, it also settled forward sales for $28.0m net proceeds.
- Management reported no material changes to previously disclosed risk factors, no material adverse expected impact from ordinary-course legal matters, and effective disclosure controls.
Important facts for investors to verify
- Tenant credit and rent coverage, particularly Darden’s ability to meet lease obligations and the implications of the company’s tenant and brand concentration.
- Acquisition pricing, yields, occupancy, and the pace and funding of future acquisitions relative to the 7.5-year lease term of recently acquired properties.
- Debt cost and maturity profile following the October credit-agreement amendment, including SOFR transition terms, hedge effectiveness, and covenant headroom.
- Whether AFFO and operating cash flow continue to cover declared dividends and planned capital needs; AFFO is a non-GAAP measure and may not be comparable across REITs.
- Effects of ATM share issuance and outstanding forward-sale settlements on share count, proceeds, and per-share results.