Four Corners Property Trust, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. FCPT is a publicly traded REIT focused on owning and leasing restaurant properties, primarily under triple-net leases, and also operates six LongHorn Steakhouse restaurants.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $32.7 million | $31.1 million |
| Rental income | $27.8 million | $26.2 million |
| Net income | $15.6 million | $94.3 million |
| Net income attributable to common shareholders | $15.5 million | $94.3 million |
| Diluted EPS | $0.26 | $1.61 |
| Operating cash flow | $19.0 million | $16.1 million |
| FFO / AFFO | $21.0 million / $19.6 million | $19.1 million / $17.6 million |
| Cash and cash equivalents, March 31 | $18.1 million | $26.6 million at Dec. 31, 2016 |
| Debt, gross principal | $445.0 million | $445.0 million at Dec. 31, 2016 |
Revenue increased about 5% year over year, reflecting property acquisitions, partly offset by property sales. Expenses totaled $17.0 million, down from $17.4 million. Interest expense was $4.1 million. The filing does not provide a clear gross or operating margin measure. GAAP net income comparisons are heavily affected by the $80.6 million tax benefit recorded in Q1 2016 following the planned REIT election; Q1 2017 included $45,000 of tax expense, primarily from the taxable restaurant subsidiary. FFO and AFFO are non-GAAP measures and are not substitutes for GAAP results or cash flow.
Financial position and operating developments
- Net real estate investments were $904.1 million. FCPT invested $17.5 million, including transaction costs, in nine properties during the quarter; the acquired properties were fully occupied with a 13.5-year weighted-average lease term.
- At March 31, debt comprised a $400 million term loan and $45 million drawn on the $350 million revolving facility. The company reported $305 million of remaining borrowing capacity and no letters of credit. The term loan matures in November 2020; the revolver expires in November 2019.
- Operating cash flow was $19.0 million; purchases of fixed assets used $11.7 million. Cash declined by $8.6 million during the quarter, including $14.5 million of dividend payments and $2.3 million of debt repayment.
- The company declared a quarterly dividend of $0.2425 per share, unchanged from Q1 2016. The March-quarter dividend was paid in April.
- FCPT reported 484 wholly owned lease properties in 44 states, 100% occupancy, a 13.5-year weighted-average remaining lease term, a 1.5% weighted-average annual rent escalator, and 93% investment-grade tenancy, based on annual base rent.
Outlook, risks, and notable items
- Management says its acquisition strategy is intended to grow and diversify the portfolio and reduce reliance on Darden over time; no quantified earnings or acquisition guidance is provided.
- Tenant concentration is material: Darden represented approximately 93% of scheduled base rent. Olive Garden represented about 62% of leased properties and 69% of lease revenue. Florida and Texas each represented at least 10% of rental revenue.
- After quarter-end through May 4, FCPT borrowed an additional $36 million on the revolver and acquired 16 restaurant properties for $35.1 million. The company reported $81 million drawn on the revolver as of May 4.
- FCPT agreed to issue $125 million of senior unsecured notes, subject to closing conditions and expected to fund June 7, 2017: $50 million due in seven years at 4.68% and $75 million due in ten years at 4.93%. Proceeds were intended for revolver repayment, acquisitions, and general corporate purposes.
- The company expected to sell one Darden-leased property in Q2 for $5.2 million following an unsolicited offer, with an anticipated $3.5 million gain.
- FCPT intends to maintain REIT status, which generally requires distributing at least 90% of REIT taxable income. Failure to qualify could result in corporate-level taxation. Management reported no material change in risk factors, no material off-balance-sheet arrangements, and no litigation expected to materially affect financial position, results, or liquidity. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the post-quarter acquisitions and $125 million note issuance closed on the expected terms, and the resulting debt, interest expense, and liquidity.
- How quickly FCPT can diversify away from Darden and manage the substantial tenant and brand concentration.
- Whether AFFO and operating cash flow adequately support the $0.2425 quarterly dividend after acquisitions and capital spending; AFFO is a company-defined non-GAAP measure.
- The status and realized proceeds or gain from the anticipated property sale, and continued compliance with REIT qualification and distribution requirements.