Four Corners Property Trust, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. FCPT is a REIT focused primarily on owning and leasing restaurant properties, with a smaller restaurant operating business.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $39.6 million | $34.8 million | +13.8% |
| Rental revenue | $34.2 million | $29.6 million | +15.6% |
| Net operating income | $24.0 million | $20.9 million | +14.7% |
| Net income | $17.6 million | $16.4 million | +7.6% |
| Net income available to common shareholders | $17.5 million | $16.3 million | +7.7% |
| Basic / diluted earnings per share | $0.26 / $0.26 | $0.27 / $0.26 | Basic down; diluted unchanged |
| Operating cash flow | $32.9 million | $21.8 million | +51.3% |
| FFO / AFFO | $23.9 / $23.3 million | $21.5 / $20.8 million | +11.6% / +12.0% |
NOI margin was approximately 60.6% of revenue, versus 60.1% in Q1 2018; net income margin was approximately 44.4%, versus 47.0%. Interest expense rose to $6.7 million from $4.9 million, primarily reflecting $100 million of senior notes issued in December 2018. Restaurant revenue increased 3.4% per location, which management attributed to customer service, marketing, to-go and catering orders, and casual dining trends; restaurant costs also rose with sales, labor, and property taxes.
Balance sheet, liquidity, and capital
- At March 31, 2019, cash and cash equivalents were $81.0 million, down from $92.0 million at year-end 2018. Operating cash flow was $32.9 million; investing outflow was $20.3 million and financing outflow was $24.9 million.
- Debt was $625 million gross principal, reported at $616.4 million net of deferred financing costs. It comprised $400 million of term loans and $225 million of unsecured fixed-rate notes. The $250 million revolver was undrawn, leaving $250 million available; FCPT reported compliance with debt covenants.
- Term-loan weighted-average interest rate after hedges was 3.18%. Interest-rate swaps hedged $300 million of variable-rate debt. The filing estimates $2.1 million of derivative amounts will be reclassified as a reduction of interest expense over the next 12 months.
- Q1 acquisitions totaled $20.3 million for 11 properties, all occupied under net leases, with a weighted-average remaining lease term of 10.8 years. The company declared a quarterly dividend of $0.2875 per share; AFFO was $0.34 per diluted share.
- The ATM program was expanded to $210 million in March. At quarter-end, $209.2 million of capacity remained. Subsequent to quarter-end through April 24, FCPT reported approximately $48 million of gross proceeds from ATM sales and forward sales.
Portfolio, changes, and outlook
- The wholly owned lease portfolio comprised 621 properties in 45 states, with 99.9% occupancy, a 12.0-year average remaining lease term, 1.5% average annual rent escalations through 2029, and 77% investment-grade tenancy, each weighted by annualized base rent.
- Rental revenue growth reflected acquisitions of 97 properties, less two dispositions, during the year-over-year period described by management. Q1 2019 acquisitions were 11 properties, compared with 12 in Q1 2018.
- Tenant and brand concentration remain significant: Darden represented approximately 76% of scheduled base rent; Olive Garden represented approximately 48% of leased properties and 57% of lease revenue. Management says acquisitions are intended to reduce reliance on Darden over time.
- Management expects to fund ordinary operating needs, debt service, and distributions primarily with operating cash flow; acquisitions and longer-term capital needs may be funded with revolver borrowings and debt or equity issuance, depending on market conditions. The filing provides no specific earnings or acquisition guidance.
- FCPT adopted the new lease accounting standard on January 1, 2019. Adoption did not change previously reported results or produce a cumulative equity adjustment; it recognized operating lease right-of-use assets and liabilities for ground leases.
Risks, contingencies, and unusual items
- Tenant concentration exposes rental income to Darden and Olive Garden performance. Management also cautions that access to capital markets on acceptable terms is not assured; interest rates and tenant financial condition affect results.
- Q1 other comprehensive income included a $3.6 million loss, primarily from changes in the fair value of interest-rate derivatives; this reduced comprehensive income attributable to common shareholders despite higher net income.
- No impairment expense or real estate held for sale was reported. Ordinary-course litigation was described as not expected to have a material adverse effect; the company reported no material change to its previously disclosed risk factors and no off-balance-sheet arrangements.
Investor verification priorities
- Track Darden and Olive Garden concentration and tenant credit, occupancy, and rent coverage as FCPT pursues portfolio diversification.
- Reconcile AFFO and dividends, including the company’s non-GAAP adjustments and whether recurring capital and leasing costs are adequately reflected.
- Review debt maturities, floating-rate exposure, hedge effectiveness, covenant headroom, and the potential effect of interest rates on interest expense.
- Assess acquisition yields and funding, including dilution and forward-sale terms under the expanded ATM program.
- Monitor the Kerrow restaurant segment’s operating performance and related tax valuation allowances, as well as REIT qualification and distribution requirements.