Four Corners Property Trust, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; financial statements are unaudited. FCPT is a REIT focused primarily on owning and leasing restaurant properties, with a smaller restaurant-operating business.
Business context
At quarter-end, FCPT reported 810 properties in 46 states, 99.7% occupancy, an average remaining lease term of 10 years and average annual rent escalations of 1.43%. During the quarter, it acquired 13 properties for $34.9 million, all leased, with a 9.9-year weighted average remaining lease term, and invested $1.2 million in construction for its Kerrow restaurant business.
Financial results and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Total revenue | $46.7 million | $42.4 million |
| Rental revenue | $41.5 million | $37.7 million |
| Restaurant revenue | $5.2 million | $4.7 million |
| Net income | $20.6 million | $19.3 million |
| Net income available to common shareholders | $20.6 million | $19.3 million |
| Diluted EPS | $0.27 | $0.27 |
| Operating cash flow | $31.8 million | $17.1 million |
| Cash and cash equivalents | $11.5 million | $11.1 million at Dec. 31, 2020 |
| Total assets | $1.70 billion | $1.67 billion at Dec. 31, 2020 |
| Debt, net of financing costs | $778.4 million | $753.9 million at Dec. 31, 2020 |
GAAP operating margin, calculated as revenue less operating expenses divided by revenue, was approximately 59.7%, versus 62.2% a year earlier. Interest expense was $7.6 million, up from $7.0 million. Cash used in investing was $32.9 million; cash provided by financing was $1.5 million. FCPT declared dividends of $0.3175 per common share, compared with $0.3050 a year earlier.
Supplemental non-GAAP measures: FFO was $28.4 million, or $0.37 per diluted share, versus $26.4 million and $0.37; AFFO was $28.8 million, or $0.38 per diluted share, versus $25.8 million and $0.37. These measures are not substitutes for GAAP results or cash flow.
Changes versus the prior comparable period
- Revenue rose 10.2%; rental revenue increased 10.0%, principally reflecting 88 net leased-property additions over the year-over-year period. Restaurant revenue increased 11.2%, which management attributed primarily to improving dining trends as capacity restrictions eased.
- Net income increased 6.7%, while diluted EPS was unchanged; weighted-average diluted shares increased to 76.1 million from 70.3 million.
- Operating cash flow increased to $31.8 million from $17.1 million. Financing activity included $46.0 million of revolving-credit borrowings and $22.0 million of repayments.
- Operating expenses increased to $18.9 million from $16.0 million, including higher depreciation, general and administrative costs and property expenses. The quarter included a $431,000 gain from selling two properties; no properties were sold in Q1 2020.
- Other comprehensive income was $8.0 million, compared with a $24.4 million loss, primarily reflecting changes in interest-rate derivative values.
Liquidity, debt, outlook and risks
At March 31, FCPT had $34 million drawn on its revolving facility and reported $216 million of remaining borrowing capacity. The facility was due November 9, 2021, with extension options; management said it intended to extend or refinance before maturity. The company reported compliance with debt covenants. It also had $400 million of term loans and $350 million of senior fixed-rate notes. Subsequent to quarter-end, it issued $100 million of senior notes: $50 million at 2.74% due 2029 and $50 million at 2.99% due 2031.
Management reported collecting more than 99% of contractual portfolio base rent for the quarter. COVID-19 remained a significant uncertainty for tenants and FCPT’s managed restaurants; management cautioned that tenant operations, rent-paying ability, liquidity and access to capital could be affected. FCPT stated it may temporarily reduce dividends if needed, while intending to distribute enough to maintain REIT status. No formal earnings or acquisition guidance was provided.
Concentration is material: Darden leases represented approximately 65% of scheduled base rent; Olive Garden represented approximately 48% of revenue received under leases. FCPT also disclosed exposure to LIBOR transition risk: six effective swaps totaling $350 million were indexed to LIBOR, and it was monitoring the transition to alternative rates. The filing reported no impairment expense in either comparative quarter and no off-balance-sheet arrangements. Management said routine legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Track Darden and major-brand tenant concentration, rent collections, and tenant credit quality as pandemic conditions evolve.
- Verify the revolving facility extension or refinancing ahead of its stated November 2021 maturity and monitor leverage, covenants and refinancing costs.
- Assess dividend coverage using cash flows and the company’s AFFO methodology; AFFO is a non-GAAP measure and does not equal cash available for distributions.
- Review the LIBOR transition and derivative exposure, including the expected reclassification of $6.8 million from accumulated OCI to interest expense over the next 12 months.
- Reconcile an apparent inconsistency in the filing about terminated interest-rate swaps: the detailed note and subsequent-events disclosure describe an approximately $1.7 million gain, while MD&A describes an approximately $1.7 million loss.