Four Corners Property Trust, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. FCPT is a REIT that primarily owns and leases restaurant and retail properties under net leases; it also operates LongHorn Steakhouse restaurants through its Kerrow subsidiary. This unaudited filing covers the three and nine months ended September 30, 2021, compared with the same 2020 periods. Unless stated otherwise, dollar amounts are in millions.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $50.7 | $43.0 | $146.7 | $126.3 |
| Net income | $21.2 | $19.4 | $62.0 | $57.3 |
| Net income available to common shareholders | $21.2 | $19.3 | $61.9 | $57.1 |
| Diluted EPS | $0.28 | $0.27 | $0.81 | $0.81 |
| Dividends declared per common share | $0.3175 | $0.3050 | $0.9525 | $0.9150 |
| FFO per diluted share | $0.39 | $0.38 | $1.14 | $1.11 |
| AFFO per diluted share | $0.39 | $0.37 | $1.15 | $1.07 |
Rental revenue was $43.7 million in Q3, up 12.4%, and $127.4 million for the nine months, up 11.1%. Restaurant revenue rose 71.7% in Q3 and 65.6% for the nine months, largely reflecting improved dining trends and the seventh Kerrow LongHorn restaurant, opened in April 2021. GAAP net income margin, calculated as net income divided by total revenue, was approximately 41.8% in Q3 2021 versus 45.2% in Q3 2020; higher restaurant revenue and related expenses changed the revenue mix. Diluted EPS was flat for the nine-month comparison despite higher net income, alongside increased weighted-average shares.
Cash flow and liquidity. For the first nine months, operating cash flow was $94.0 million (versus $65.4 million); investing cash outflow was $191.9 million (versus $122.4 million), principally reflecting acquisitions; and financing cash flow was $94.6 million (versus $69.7 million). Cash and equivalents were $7.8 million at September 30, 2021. FCPT reported $197 million of available revolver capacity, with $53 million drawn.
Debt and balance sheet. Long-term debt, net of deferred financing costs, was $894.2 million, compared with $753.9 million at December 31, 2020. Principal debt consisted of $400 million in term loans, $450 million in senior unsecured notes, and $53 million drawn on the revolver. The company issued $100 million of fixed-rate notes in April at 2.74% and 2.99%, and amended its credit facility in June. After hedges, the weighted-average interest rate on term loans and the revolver was 2.74%. FCPT reported compliance with all debt covenants.
Material changes and operating developments
- FCPT invested $195.1 million, including transaction costs, in 89 properties during the first nine months of 2021; the acquired properties were fully occupied and had a 9.3-year weighted-average remaining lease term. The overall portfolio included 886 properties in 46 states, with 99.8% occupancy and a 9.6-year average remaining lease term.
- Rental revenue growth primarily reflected a net increase of 135 leased properties over the year-over-year period. Interest expense rose $0.9 million in Q3 and $2.6 million over nine months, primarily due to the 2021 note issuance and financing-related costs.
- FCPT sold two properties during the nine-month period, recognizing a $0.4 million gain. No impairment expense was recorded in either nine-month period.
- The company issued 1.16 million shares under its ATM program for $31.8 million net proceeds during the first nine months; $322.3 million remained available under the program at quarter-end.
Outlook, risks, and unusual items
- No quantified earnings or acquisition guidance is provided. Management describes acquisitions as a continuing strategy to grow and diversify the portfolio and reduce reliance on Darden over time. Subsequent to quarter-end through October 28, FCPT invested $10.7 million in five net-lease properties, at an indicated investment yield of approximately 6.4% and with approximately 16.8 years of lease term remaining.
- Management reported collecting over 99% of contractual base rent for the first nine months of 2021. It said COVID-19 could continue to affect tenants, managed restaurants, rent collection, leasing, liquidity, and access to capital; future effects remain uncertain. FCPT had not agreed to rent deferrals during Q4 2020 or the first nine months of 2021.
- Tenant and brand concentration are significant: Darden leases represented approximately 61% of scheduled base rent; Olive Garden locations represented approximately 45% of lease revenue. Texas and Florida each contributed at least 10% of rental revenue.
- $350 million of variable-rate debt was hedged by interest-rate swaps. The swaps reference LIBOR, creating transition and valuation risks as LIBOR is phased out. Management estimated $6.9 million would be reclassified from accumulated other comprehensive income to interest expense over the next 12 months.
- FCPT noted routine legal claims and proceedings, but management did not expect them to have a material adverse effect. It reported no material changes to the risk factors in its 2020 Form 10-K and no off-balance-sheet arrangements. The filing states disclosure controls were effective.
Key facts for investors to verify
- Whether rent collections, tenant credit quality, and restaurant operating trends remain resilient, particularly for Darden and Olive Garden exposure.
- Whether acquisition yields and lease terms support returns after financing costs, and how the acquisition pace affects debt and share dilution.
- Whether operating cash flow and AFFO continue to support the dividend; AFFO is a company-defined non-GAAP measure and is not equivalent to cash flow.
- Revolver availability, covenant headroom, debt maturities, and the effects of interest-rate and LIBOR transition risks.
- The ongoing impact of COVID-19 on tenant performance, occupancy, renewals, and FCPT’s managed restaurants.