Four Corners Property Trust, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. FCPT is a REIT focused on owning and leasing restaurant and retail properties, with a small restaurant-operating business. Comparisons are with Q1 2019 unless otherwise stated. Dollar amounts are in millions except per-share data.
Business context and financial performance
- At quarter-end, the portfolio comprised 722 properties in 46 states, with 99.6% occupancy and a 10.8-year average remaining lease term. FCPT acquired 23 properties for $37.6 million; those properties were fully occupied and had a 5.9-year weighted average remaining lease term.
- Revenue was $42.4 million, up 7.1%: rental revenue rose 10.3% to $37.7 million, while restaurant revenue fell 12.8% to $4.7 million. Net income was $19.3 million, up 9.9%; net income available to common shareholders was $19.3 million, or $0.28 basic and $0.27 diluted per share, versus $0.26 basic and diluted.
- Total operating expenses were $16.0 million, versus $15.6 million. Interest expense increased to $7.0 million from $6.7 million. Net income was approximately 45.6% of revenue, versus 44.4% in Q1 2019.
- Operating cash flow was $17.1 million, down from $32.9 million. Investing activities used $37.2 million, principally for property purchases; financing activities provided $105.5 million, including $126.0 million of revolving-facility proceeds. Ending cash was $90.5 million, versus $5.1 million at year-end 2019.
- At March 31, total assets were $1.56 billion and total liabilities were $861.2 million. Long-term debt, net of financing costs, was $796.5 million. Debt included $400 million of term loans, $225 million of fixed-rate notes and, according to the debt note, $178 million drawn on the revolver. The company reported covenant compliance. The filing states $72 million of remaining revolver capacity.
- Quarterly dividends declared were $0.305 per common share, compared with $0.2875. NAREIT FFO was $26.4 million ($0.37 diluted share) and AFFO was $25.8 million ($0.37 diluted share); these are non-GAAP measures and are not substitutes for cash flow or net income.
Material changes and unusual items
- Rental revenue growth primarily reflected 109 properties acquired over the year ended March 31, 2020. The portfolio added 23 properties in Q1, compared with 11 in Q1 2019.
- Restaurant revenue and expenses declined as COVID-19-related restrictions temporarily closed FCPT’s six Kerrow-operated LongHorn Steakhouse restaurants. Restaurant operations recorded a $0.09 million loss, versus $0.14 million income in Q1 2019.
- Comprehensive loss attributable to common shareholders was $5.0 million, versus $13.9 million of comprehensive income, principally due to a $24.5 million derivative fair-value loss recorded in other comprehensive income. Derivative liabilities rose to $19.5 million from $5.0 million.
- FCPT terminated two interest-rate swaps associated with a planned private note issuance, recognizing an approximately $8.4 million loss to be amortized as interest expense over ten years. Management estimated a further $5.4 million of accumulated derivative losses would be reclassified to interest expense over the next 12 months.
- The filing contains an apparent inconsistency on revolver borrowings: the debt note and cash-flow statement indicate $178 million outstanding at March 31, while the MD&A says there were no outstanding revolver borrowings. The stated $72 million availability is consistent with $178 million drawn from a $250 million facility.
Outlook, COVID-19, and risks
- Management provided no specific earnings or acquisition guidance. It warned that the COVID-19 impact on rent collection, operations, liquidity and future results was uncertain and that rent collections could be affected throughout 2020. It generally paused acquisitions and postponed closings while assessing conditions.
- As of May 5, FCPT reported receiving April and May rent payments equal to more than 89% and 83%, respectively, of portfolio contractual annual base rent. It had received short-term rent-relief requests covering substantially all of the portfolio and anticipated possible concessions or deferrals; the financial impact was not yet known. No COVID-related lease concessions had been granted during Q1, and management said no related loss contingency then required recognition.
- Management reported approximately $150 million of cash as of May 5, excluding a further $50 million note funding expected in June, plus $72 million of revolver availability. A $125 million unsecured note offering was arranged: $75 million funded April 8 at 3.20%, and $50 million was expected to fund June 9 at 3.15%. The revolving facility was not due to expire until November 2021, with two six-month extension options.
- Key exposures include tenant defaults or requests for relief, restaurant closures and reduced consumer activity, lease renewals and re-leasing, access to capital markets, covenant compliance, and the ability to sustain dividends. Darden represented about 70% of scheduled base rent; Olive Garden locations represented about 52% of lease revenue. Management said it may temporarily reduce the annual cash dividend rate while intending to distribute enough to maintain REIT status.
- Management reported no material adverse effect expected from routine litigation, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Resolve the filing’s conflicting disclosure on whether $178 million was outstanding under the revolver at March 31, 2020.
- Track actual rent collections, tenant relief agreements and subsequent-quarter revenue recognition, including any impairment or collectability adjustments.
- Confirm funding of the remaining $50 million note issuance and monitor debt covenants, liquidity and the swap-related interest expense impact.
- Assess tenant and brand concentration, particularly Darden’s share of base rent and Olive Garden’s share of lease revenue.
- Compare future dividends with recurring cash generation; FFO and AFFO are supplemental non-GAAP measures, not direct measures of cash available for distribution.