Four Corners Property Trust, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures are as of March 31, 2018. Comparisons are with Q1 2017 unless stated otherwise. Amounts are U.S. dollars.
Business context
FCPT is a REIT that primarily owns and leases restaurant properties, generally under net leases in which tenants bear most property operating costs. It also operates six LongHorn Steakhouse restaurants in the San Antonio area. At quarter-end, its wholly owned lease portfolio comprised 527 properties in 44 states, with 99.9% occupancy, a 12.7-year weighted-average remaining lease term, and 1.5% weighted-average annual rent escalations.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior period |
|---|---|---|
| Total revenue | $34.8 million | $32.7 million; up 6.4% |
| Rental revenue | $29.6 million | $27.8 million; up 6.6% |
| Restaurant revenue | $5.2 million | $4.9 million; up 5.5% |
| Net income | $16.4 million | $15.6 million |
| Net income available to common shareholders | $16.3 million; diluted EPS $0.26 | $15.5 million; diluted EPS $0.26 |
| FFO / diluted share | $21.3 million / $0.35 | $21.0 million / $0.35 |
| AFFO / diluted share | $20.8 million / $0.34 | $19.6 million / $0.32 |
| Operating cash flow | $21.8 million | $19.0 million |
| Cash used in investing | $21.1 million | $11.7 million |
| Cash and cash equivalents | $53.1 million | $64.5 million at December 31, 2017 |
| Total debt, net of financing costs | $516.0 million | $515.5 million at December 31, 2017 |
| Dividends declared per common share | $0.275 | $0.2425 |
Q1 2018 expenses were $18.7 million, including $4.9 million of interest expense. Interest expense rose about $0.8 million year over year, principally reflecting the $125 million of fixed-rate notes issued in June 2017. General and administrative expense increased $0.8 million, primarily due to higher noncash stock compensation. The filing does not provide a headline operating-margin measure.
FCPT acquired 12 restaurant properties in four states for $21.0 million, including transaction costs. The properties were fully occupied, with a 9.3-year weighted-average remaining lease term. Net income included $0.36 million of other income, including a $0.23 million noncash gain on an exchange of nonfinancial assets. Other comprehensive income was $5.1 million, largely reflecting changes in interest-rate swap fair value; it should not be confused with operating earnings or cash flow.
Material changes and liquidity
- Rental revenue growth reflected acquisitions of 46 properties, net of three property sales, over the year-over-year period, as well as Q1 acquisitions.
- Cash declined from $64.5 million at year-end to $53.1 million. Operating cash flow of $21.8 million was below $21.1 million of investing outflows plus $17.0 million of financing outflows, principally dividends and distributions.
- Debt consisted of a $400 million unsecured, non-amortizing term loan and $125 million of unsecured fixed-rate notes. The term loan’s stated weighted-average rate before hedging was 3.07%. Notes carry fixed rates of 4.68% and 4.93%, maturing in 2024 and 2027.
- No revolving-facility balance or letters of credit were outstanding. FCPT reported $250 million of available revolver capacity, with maturity in November 2021 and two six-month extension options. The company was in compliance with debt covenants.
- At-the-market equity issuance capacity remaining was $116.5 million; no shares were sold under the program during the quarter.
Outlook, risks, and contingencies
The filing provides no specific earnings or acquisition guidance. Management said its acquisition strategy is intended to diversify the portfolio and reduce reliance on Darden over time. It cited property acquisitions and capital expenditures, dividends, and debt refinancing as principal capital needs, and expects to use debt, equity, or other financing as market conditions permit. It cautioned that acceptable capital-market access cannot be assured.
- Tenant concentration is significant: Darden leases represented about 87% of scheduled base rent. Olive Garden represented about 56% of leased properties and 65% of lease revenue.
- Interest-rate exposure is partly hedged: swaps covered $400 million of variable-rate debt through November 2018, with $300 million hedged thereafter through the November 2022 loan maturity. Management estimated $2.3 million of accumulated hedge gains would be reclassified as a reduction of interest expense over the next 12 months.
- Maintaining REIT qualification requires meeting statutory and operational requirements, including generally distributing at least 90% of REIT taxable income. The filing notes loss of REIT status could result in corporate-level taxation.
- Ordinary-course litigation was not expected by management to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and no material subsequent events through April 26, 2018.
- FCPT adopted several accounting updates in 2018, including hedge-accounting and revenue-recognition standards; management reported no material financial-statement impact from the revenue standard. Lease-accounting changes effective in 2019 were still under evaluation.
Important facts for investors to verify
- Whether Darden and Olive Garden concentration is changing, and how tenant credit quality and lease coverage support rent payments.
- Acquisition pricing, lease terms, tenant diversification, and the returns on the 12 properties purchased during the quarter.
- Debt cost and maturity exposure, covenant headroom, and the impact of interest rates after the current hedges expire or step down.
- Cash available for dividends and acquisitions; FFO and AFFO are non-GAAP supplemental measures, are not cash-flow measures, and may not be comparable with other REITs.
- Future REIT qualification, the Kerrow restaurant business’s tax position, and any material developments in litigation or property impairment risks.