Four Corners Property Trust, Inc. quarterly report, Q3 FY2015

Business context and reporting period

Four Corners Property Trust, Inc. (FCPT) filed this Form 10-Q for the quarter ended September 30, 2015. The period precedes its November 9, 2015 spin-off from Darden Restaurants, so FCPT had no material assets or operations at quarter-end. The filing combines FCPT’s formation balance sheet with historical information for the six-restaurant LongHorn San Antonio Business and the 418 Four Corners Properties. The property portfolio was not operated as a stand-alone business and has no historical operating results in this filing; predecessor results may not represent FCPT’s post-spin-off performance.

Financial results and position

Unless noted otherwise, LongHorn San Antonio figures below are in thousands of dollars. The restaurant business operated six locations in both comparison periods.

For the nine-month period, total costs and expenses rose 1.4%, slower than sales growth; expenses declined to 97.2% of sales from 99.9%. Food and beverage costs increased to 40.5% of sales from 39.8%, primarily reflecting beef-cost inflation, while restaurant expenses and SG&A declined as a share of sales. In the third quarter, expenses were 97.4% of sales versus 100.4% a year earlier. Management attributed improved net income in both comparisons mainly to sales growth and lower restaurant expenses and SG&A as a share of sales.

At September 30, the Four Corners Properties had $822.967 million of net property, plant and equipment and $78.453 million of deferred tax liabilities; these were historical carrying values, not a post-spin-off operating balance sheet. The LongHorn business had $11.460 million of assets, $2.819 million of liabilities and $7,000 of cash. Its current liabilities of $1.185 million exceeded current assets of $264,000, reflecting Darden’s centralized cash management and nightly cash sweeps. FCPT’s own formation balance sheet showed $1,000 of cash and equity and no operations.

Material changes and post-spin-off financing

On November 9, 2015, Darden transferred the 418-property portfolio, the six LongHorn restaurants and related property interests to FCPT in exchange for 42,741,995 FCPT shares and $315 million cash. Darden distributed the shares to its shareholders at one FCPT share for every three Darden shares. The properties were leased to Darden under long-term triple-net leases; Darden is generally responsible for property taxes, insurance, maintenance and other property costs. FCPT also operates the LongHorn business through a subsidiary under franchise agreements with Darden.

To fund the transaction, FCPT drew the full $400 million non-amortizing term loan under a credit agreement that also provides a $350 million revolving facility. The term loan matures in 2020; the revolver matures in 2019. The term-loan effective rate at draw was 1.93%. Two swaps entered November 10 hedge $200 million each, at fixed rates of 1.16% through 2018 and 1.56% through 2020. As of December 4, the revolver had no borrowings or letters of credit. The credit agreement includes leverage, coverage and other covenants, and defaults can restrict distributions or accelerate repayment.

Outlook, risks and unusual items

• Management intends to elect REIT status beginning in 2016 and expects to make regular quarterly dividends, subject to board authorization, available cash and debt service. REIT rules generally require annual distribution of at least 90% of REIT taxable income.
• FCPT expected a 2016 purging distribution of approximately $300 million to $400 million, mostly in stock, with cash comprising at least 20%; it expected to declare and pay it as soon as practicable in 2016 and no later than January 31, 2017.
• Management said operating cash flow and available liquidity were expected to cover operating needs, interest, dividends and growth. It plans opportunistic acquisitions and tenant diversification, but provided no fixed acquisition target or quantified earnings guidance.
• Concentration is substantial: Darden was to be the sole tenant of the Four Corners Properties, representing over 99% of the portfolio. Olive Garden represented about 72% of those properties and an estimated 74% of lease revenue. Darden’s financial health and lease performance are therefore key risks.
• For two years after the spin-off, tax-preservation agreements may restrict certain equity issuances, repurchases, mergers and other transactions unless specified approvals or exceptions apply. These restrictions could limit strategic flexibility.
• Other risks include interest-rate exposure, refinancing and acquisition-funding access, tenant renewal or replacement, REIT qualification, real-estate illiquidity, and seasonality in restaurant sales. The filing states restaurant sales are typically lowest in fall. No material legal proceedings or material risk-factor changes were reported.
• Pre-spin-off restaurant costs include Darden corporate expense allocations, which management cautioned may not reflect stand-alone costs. Historical restaurant cash flows also exclude interest on Darden’s general corporate debt.

Important facts for investors to verify

• Confirm the executed lease terms, rent schedule, guarantees and Darden’s capacity to meet its obligations; the filing gives no post-spin-off rental revenue history.
• Track actual debt balances, interest expense, swap effectiveness and compliance with the credit facility covenants.
• Verify the amount, timing, cash component and tax treatment of the purging distribution, and subsequent quarterly dividend declarations.
• Assess whether acquisition activity reduces tenant and brand concentration without weakening leverage or liquidity.
• Compare post-spin-off operating costs with the predecessor results, including costs previously allocated by Darden and transitional service expenses.