Four Corners Property Trust, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. FCPT is a REIT focused on owning and leasing restaurant and retail properties; it also operates six LongHorn Steakhouse restaurants in Texas.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $40.9 million | $39.6 million | $83.4 million | $79.2 million |
| Rental revenue | $38.0 million | $34.4 million | $75.8 million | $68.6 million |
| Restaurant revenue | $2.9 million | $5.2 million | $7.6 million | $10.5 million |
| Net income | $18.5 million | $17.9 million | $37.9 million | $35.5 million |
| Net income available to common shareholders | $18.5 million | $17.9 million | $37.7 million | $35.4 million |
| Diluted EPS | $0.26 | $0.26 | $0.54 | $0.52 |
| FFO per diluted share | $0.36 | $0.36 | $0.74 | $0.70 |
| AFFO per diluted share | $0.34 | $0.34 | $0.70 | $0.68 |
For the first half, operating cash flow was $36.7 million, versus $54.0 million a year earlier. Investing used $71.0 million, mainly for property acquisitions; financing provided $34.3 million. Cash and cash equivalents were $5.1 million at June 30.
At June 30, total assets were $1.512 billion, total liabilities $814.7 million, and equity $697.4 million. Long-term debt, net of financing costs, was $747.3 million. Principal debt comprised $400 million of term loans, $350 million of fixed-rate notes, and $4.5 million drawn on the revolver. Revolver capacity available was $245.5 million. FCPT reported compliance with all debt covenants.
Changes and operating context
- Q2 rental revenue rose 10.5% year over year, primarily reflecting acquisitions; first-half rental revenue increased 10.4%. FCPT acquired 34 properties for $71.5 million in the first half. Its portfolio comprised 733 properties in 46 states, with 99.6% occupancy and a 10.5-year average remaining lease term.
- Restaurant revenue fell 43.8% in Q2 and 27.9% in the first half, primarily from temporary closures and reduced seating caused by COVID-19 restrictions. Restaurant operations recorded a $0.7 million Q2 loss and a $0.8 million first-half loss.
- Interest expense increased to $7.3 million in Q2 and $14.3 million in the first half, reflecting revolver use and $125 million of new senior notes. The notes carry fixed rates of 3.15% and 3.20%, with 2029 and 2030 maturities.
- Dividends declared were $0.305 per common share in Q2, compared with $0.2875 in Q2 2019. Management said it may temporarily reduce the annual dividend rate due to COVID-19, while intending to distribute enough to maintain REIT status.
Outlook, risks and unusual items
- COVID-19 created significant uncertainty for tenant operations, rent collection, cash flows, liquidity, and the ability to access capital. As of July 29, FCPT reported collecting approximately 92% of contractual Q2 base rent; about 3% was deferred and approximately 4% was abated or expected to be abated. It recognized approximately $1.4 million of Q2 rent expected to be abated under lease amendments. The filing reported July rent collections above 99% of portfolio contractual annual base rent, excluding abatements.
- Management anticipated rent-collection impacts through 2020 and said the amount of future concessions or deferrals was unknown. It provided no quantified earnings or revenue guidance.
- Tenant and brand concentration are material: Darden leases represented approximately 69% of scheduled base rent; Olive Garden properties represented approximately 52% of revenue received under leases. FCPT also cited exposure to restaurant demand, tenant credit, renewed restrictions, leasing conditions, and capital-market access.
- Interest-rate swap liabilities rose to $22.0 million from $5.0 million at year-end, contributing to a $26.7 million first-half other comprehensive loss. FCPT terminated two hedges for an approximately $8.4 million loss, to be amortized as interest expense over ten years; management estimated a further $6.4 million would be reclassified to interest expense over the next 12 months.
- Through July 31, FCPT reported $13.4 million of additional acquisitions. It reported no impairment expense in the first half and no material litigation expected to adversely affect its financial position, results, or liquidity.
Investor verification priorities
- Track rent receipts, abatements, deferrals, and tenant financial condition after the reported July collection figures.
- Assess the sustainability of the dividend against AFFO, operating cash flow, and the possibility of a reduction.
- Review Darden and Olive Garden concentration and related tenant-credit exposure.
- Monitor debt maturities, revolver availability, covenant headroom, and derivative valuations and hedge-related interest costs.
- Reconcile reported GAAP earnings with FFO/AFFO and confirm the effects of acquisitions and rent amendments on future results.