Four Corners Property Trust, Inc. — Q1 2016 Form 10-Q
Business context and period. Results cover the three months ended March 31, 2016. Four Corners, spun off from Darden in November 2015, owns and leases restaurant properties, primarily under triple-net leases, and operates six LongHorn Steakhouse restaurants in the San Antonio area. At quarter-end it owned 424 properties; 418 were leased to Darden. The 2015 comparison largely reflects the six-restaurant operating business before the spin-off and is not a like-for-like comparison.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $31.1 million | $4.9 million |
| Rental income | $26.3 million | — |
| Restaurant revenue | $4.9 million | $4.9 million |
| Income before tax | $13.7 million | $0.2 million |
| Net income | $94.3 million | $0.1 million |
| Operating cash flow | $16.1 million | $(0.1) million |
| Cash and equivalents, March 31 | $36.1 million | — |
- Net income included an $80.6 million income tax benefit, principally from reversing deferred tax liabilities in connection with the planned REIT election for 2016. The resulting $1.58 basic and $1.57 diluted EPS are therefore not representative of recurring operating performance.
- NAREIT FFO was $19.1 million, or $0.32 per diluted share; AFFO was $17.6 million, or $0.29 per diluted share. These are non-GAAP measures and are not substitutes for operating cash flow or net income.
- Six-restaurant operations generated $4.9 million revenue and $64,000 net of restaurant expenses, versus $377,000 in Q1 2015. Restaurant expenses rose to 98.7% of revenue from 92.3%; management cited higher consulting and technology costs for establishing independent operations.
- Net real estate investments were $823.5 million. Total assets were $864.7 million, total liabilities $427.5 million, and stockholders’ equity $437.2 million.
- Debt comprised a $400 million term loan, reported net of financing costs at $392.7 million. The $350 million revolver was undrawn. The term loan matures in November 2020; the revolver matures in November 2019. Management reported a 3.5% average term-loan rate including swaps and financing-cost amortization.
- Cash fell by $62.0 million during the quarter, mainly reflecting $78.1 million of cash dividends paid. The quarter also included issuance of 17.1 million shares as part of an earnings-and-profits distribution. A further $14.5 million of dividends was declared but unpaid at quarter-end; dividends declared were $0.2425 per share.
Material changes and management commentary
- Rental income began with the November 2015 spin-off, so there is no rental-revenue comparison for Q1 2015. Management said restaurant sales were pressured by slower industry sales in Texas amid weakness in the oil and gas industry; restaurant revenue declined 0.6% year over year.
- Management’s stated strategy is to pursue opportunistic acquisitions and diversify assets and tenants, while targeting consistent cash dividends and growth in cash flow and the asset base. It expects to fund ordinary needs primarily from operating cash flow and acquisitions or other capital needs through the revolver and future debt or equity financing. No quantitative earnings or acquisition guidance was provided.
- The portfolio is highly concentrated: Darden is the sole tenant for properties representing approximately 99% of the portfolio, and Olive Garden represents approximately 72% of properties and 74% of lease revenue. The 418 leased properties had a 14.3-year weighted-average remaining non-cancelable lease term.
- Interest-rate swaps hedged the $400 million variable-rate loan. Their quarter-end net liability was approximately $7.2 million; the filing estimates another $3.4 million will be reclassified to interest expense during 2016. A default on debt could also trigger a default under the swap agreements.
- The company intends to qualify as a REIT beginning in 2016 and must meet applicable requirements, including distributing at least 90% of REIT taxable income, subject to statutory adjustments. The spin-off’s intended tax-free status also imposes certain limits on transactions, equity issuance, and share repurchases during the two years after the spin-off, subject to exceptions.
- Management said routine legal matters were not expected to have a material adverse effect; no material changes to previously disclosed risk factors, off-balance-sheet arrangements, or contractual obligations were reported. Disclosure controls were judged effective as of March 31, 2016.
Investor verification points
- Verify REIT qualification and the assumptions underlying the $80.6 million deferred-tax-liability reversal; distinguish this nonrecurring benefit from recurring earnings.
- Assess Darden’s ability to meet lease obligations and the implications of tenant and Olive Garden concentration.
- Reconcile the $78.1 million cash dividend payments, $14.5 million payable, and share distribution, and evaluate dividend coverage against AFFO and operating cash flow.
- Review debt covenants, floating-rate exposure and hedge performance, including the reported swap liability and expected 2016 reclassification.
- Consider the limited comparability with Q1 2015 and whether restaurant operating costs and Texas sales conditions improve.