Business context and reporting period
Four Corners Property Trust, Inc. (FCPT) filed this Form 10-K for the fiscal year ended December 31, 2018. FCPT is a REIT focused on owning and leasing restaurant properties under predominantly triple-net leases, and also operates six LongHorn Steakhouse restaurants through its Kerrow business.
At year-end, FCPT owned 610 leased properties across 45 states, totaling approximately 4.1 million square feet, plus six Kerrow restaurants. The leased portfolio was 99.9% occupied, with a 12.2-year weighted average remaining lease term and 1.5% average annual rent escalations. Investment-grade tenants represented 77.2% of annualized base rent.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $143.6 million | $133.2 million |
| Rental revenue | $123.7 million | $113.9 million |
| Net income available to common shareholders | $82.4 million | $71.4 million |
| Diluted earnings per share | $1.28 | $1.18 |
| Net cash from operating activities | $80.9 million | $78.9 million |
| FFO | $91.2 million; $1.41 per diluted share | $83.1 million; $1.36 per diluted share |
| AFFO | $87.9 million; $1.36 per diluted share | $78.6 million; $1.29 per diluted share |
At December 31, 2018, cash and cash equivalents were $92.0 million. Debt was $625 million principal: $400 million of term loans and $225 million of senior unsecured notes. The balance-sheet carrying value of debt, net of deferred financing costs, was $615.9 million. The $250 million revolving facility was undrawn, and FCPT reported compliance with its debt covenants.
FCPT declared dividends of $1.1125 per share in 2018, compared with $1.0025 in 2017. The quarterly dividend declared for the fourth quarter was $0.2875 per share.
Material changes versus prior comparable period
- Revenue rose 7.8%; rental revenue increased $9.7 million, reflecting a full year of revenue from prior acquisitions and 97 property acquisitions in 2018, partly offset by two property sales.
- Net income available to common shareholders rose 15.4%. Net gains on property sales increased to $15.3 million from $10.5 million, an important contributor to reported earnings.
- FFO increased 9.8% and AFFO increased 11.8%. Diluted shares outstanding also increased, reflecting equity issuance.
- Operating cash flow increased to $80.9 million. Investing cash outflow increased to $247.0 million, primarily reflecting $268.3 million invested in acquisitions.
- FCPT issued $100 million of additional senior notes in December and extended portions of its term-loan maturities to 2023 and 2024. It also raised approximately $96.3 million net in an August equity offering and $65.5 million net through its ATM program.
Outlook, commentary, risks and unusual items
- Management described continued acquisitions and tenant diversification as strategic priorities, particularly to reduce reliance on Darden. No specific earnings, acquisition-volume, or other quantified guidance was provided.
- For the first quarter of 2019 through February 19, FCPT reported $18.8 million of acquisitions involving 11 restaurant properties, funded with cash and 1031 exchange proceeds.
- Tenant concentration remains a key risk: Darden accounted for approximately 77% of annual cash base rent and Brinker International approximately 9%. Olive Garden alone represented about 58% of leased-portfolio cash base rent.
- Interest-rate, refinancing, tenant credit, restaurant-sector, re-leasing, environmental, insurance, and REIT-qualification risks could affect cash flow, asset values, financing access, or distributions. FCPT hedged $300 million of variable-rate term debt; $100 million remained unhedged at year-end.
- FCPT recorded $1.5 million of impairment expense in 2018 related to a tenant bankruptcy and court-ordered lease termination. It also recorded $15.3 million of net gains on two property sales; proceeds were used for 1031 exchange acquisitions.
- Management said ordinary-course litigation was not expected to materially affect the company. It reported no known environmental or ADA issue expected to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether Darden and Brinker maintain tenant financial strength and rent coverage, and whether FCPT makes measurable progress diversifying rent away from these tenants.
- How much of reported earnings and cash available for distributions is supported by recurring rent and operations versus property-sale gains; review the company’s FFO and AFFO definitions and reconciliations.
- Acquisition pricing, lease terms, tenant credit quality, and the returns earned on the $268.3 million invested in 2018.
- Debt maturity and interest-rate exposure, covenant headroom, and FCPT’s ability to fund acquisitions and dividends without excessive leverage or equity dilution.
- The status and financial impact of the tenant-related impairment, litigation, and any subsequent acquisitions or other material events.