Four Corners Property Trust, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. FCPT is a REIT focused on owning and leasing restaurant properties, primarily under triple-net leases, and also operates six LongHorn Steakhouse restaurants. It was spun off from Darden in November 2015; therefore, 2015 comparisons largely reflect only the restaurant business and are not directly comparable to 2016, which includes rental operations.
Financial performance
- Third-quarter revenue: $30.8 million, including $26.4 million rental income and $4.4 million restaurant revenue. Net income was $15.2 million, or $0.25 per diluted share.
- Nine-month revenue: $92.8 million, including $78.8 million rental income and $14.0 million restaurant revenue. Net income was $124.3 million, or $2.09 per diluted share.
- Tax impact: Nine-month net income included an $80.5 million income tax benefit, principally from reversing deferred tax liabilities in connection with the planned REIT election. The benefit materially elevates reported earnings.
- Cash flow: Nine-month operating cash flow was $51.6 million; investing cash outflow was $23.7 million, primarily for fixed-asset purchases; financing cash outflow was $107.1 million, primarily dividends. Cash declined from $98.1 million at year-end 2015 to $18.9 million at September 30, 2016.
- Margins and supplemental measures: The six restaurants generated $38,000 of net operating income in Q3 versus $325,000 in the prior-year quarter; nine-month restaurant net operating income was $112,000 versus $991,000. Management reported Q3 FFO of $20.3 million ($0.34 per diluted share) and AFFO of $18.2 million ($0.30 per diluted share); nine-month FFO was $59.3 million ($1.00 per share) and AFFO was $54.0 million ($0.91 per share). FFO and AFFO are non-GAAP measures.
- Balance sheet and liquidity: Total assets were $866.4 million and stockholders’ equity was $439.4 million. Notes payable were $400.0 million gross, or $393.5 million net of financing costs. No revolver borrowings were outstanding at quarter-end; the facility provided $350 million of revolving capacity. At November 4, FCPT had drawn $30 million on the revolver.
- Interest-rate exposure: Two swaps hedged the $400 million term loan. Management reported a 3.06% fixed gross interest cost from the swaps and an average rate of 3.5% including swap costs and amortization of upfront costs, excluding hedge ineffectiveness.
- Dividends: FCPT declared $0.2425 per common share for the quarter. Nine-month dividends declared totaled $0.7275 per share.
Material changes and operating context
- During Q3, FCPT acquired 16 restaurant properties for approximately $23 million. They were fully leased under triple-net leases, with a 16.2-year weighted-average lease term and a stated average cash lease yield of 6.8%.
- At September 30, FCPT owned 440 properties; 434 were held for investment and leased under triple-net arrangements. The portfolio had a 13.78-year weighted-average remaining non-cancelable lease term. Future minimum lease payments under existing leases totaled approximately $1.48 billion.
- Rental income had no comparable prior-year amount because FCPT’s real estate operations began with the November 2015 spin-off. Restaurant revenue increased 0.7% in Q3 and 0.6% for the nine-month period, while restaurant expenses rose faster; management attributed increases mainly to staffing and costs of operating independently from Darden.
- The company’s cash balance and equity changed amid significant distributions, including the $347 million Pre-Spin Dividend, paid partly in cash and partly in shares. FCPT issued 17.1 million shares in connection with that distribution.
Outlook, risks, and unusual items
- No specific earnings, acquisition, or dividend guidance was provided. Management expects to fund operations, interest, property improvements, and cash distributions primarily from operating cash flow, and acquisitions and other capital needs through the revolving facility and potential debt or equity financing.
- FCPT intends to elect REIT tax treatment for 2016, subject to meeting applicable requirements, including distributing at least 90% of adjusted REIT taxable income. The reported nine-month tax benefit reflects the expected change in tax status; failure to qualify could result in corporate-level taxation.
- Tenant and brand concentration is significant: Darden accounted for approximately 96% of properties; Olive Garden represented approximately 69% of leased properties and 73% of lease revenue. Florida and Texas accounted for 13% and 12% of rental revenue, respectively.
- After quarter-end, FCPT acquired eight properties for $18.4 million, funded with cash and revolver borrowings. It also sold two Darden-leased properties for $24.8 million, recording an $11.8 million gain.
- Interest-rate swaps had a $6.6 million fair-value liability at quarter-end; approximately $2.9 million was expected to be reclassified into interest expense over the next 12 months. Litigation was described as ordinary-course, with no expected material adverse effect. The filing reported no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
- For two years after the spin-off, tax-free treatment restrictions may constrain certain acquisitions, equity issuances, repurchases, or other strategic transactions, subject to stated exceptions.
Key facts for investors to verify
- How much of reported earnings and per-share results is attributable to the one-time $80.5 million tax benefit, and how do recurring AFFO and operating cash flow compare with dividends?
- Whether tenant diversification progresses from the current heavy dependence on Darden and Olive Garden, and how tenant credit quality evolves.
- Whether property acquisitions generate returns consistent with stated cash yields and lease terms, and how the post-quarter property sale affects recurring rental income.
- Current revolver usage, refinancing needs, and the impact of interest-rate changes despite the swaps.
- Whether FCPT completes its REIT election and continues to satisfy distribution and other qualification requirements.