Four Corners Property Trust, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The interim financial statements are unaudited.
Business context
FCPT is a REIT that primarily owns and leases restaurant and retail properties under net leases, and also operates six LongHorn Steakhouse restaurants in Texas. At quarter-end, its portfolio comprised 751 properties in 46 states, was 99.6% occupied, and had a 10.5-year average remaining lease term. During the first nine months, FCPT acquired 52 properties for $121.4 million; those properties were fully occupied and had a 7.5-year weighted-average remaining lease term.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $43.0 | $40.2 | $126.3 | $119.4 |
| Rental revenue | $38.9 | $35.2 | $114.6 | $103.8 |
| Restaurant revenue | $4.1 | $5.0 | $11.7 | $15.5 |
| Net income attributable to common shareholders | $19.3 | $18.3 | $57.1 | $53.7 |
| Diluted net income per share | $0.27 | $0.27 | $0.81 | $0.78 |
| FFO per diluted share | $0.38 | $0.36 | $1.11 | $1.07 |
| AFFO per diluted share | $0.37 | $0.35 | $1.07 | $1.03 |
Year over year, Q3 revenue grew 6.9% and common-shareholder net income grew 5.6%; nine-month revenue and common-shareholder net income rose 5.8% and 6.3%, respectively. Rental revenue increased 10.4% in both comparative periods, primarily reflecting property acquisitions. Restaurant revenue fell 17.6% in Q3 and 24.6% for the nine months as COVID-19 restrictions reduced restaurant capacity and operations. Net income margin was approximately 45.1% in Q3, versus 45.6% a year earlier.
- Cash flow: Nine-month operating cash flow was $65.4 million, down from $81.3 million. Investing used $122.4 million, including real estate purchases; financing provided $69.7 million. Cash and cash equivalents were $17.7 million at quarter-end.
- Debt and liquidity: Debt principal totaled $750 million: $400 million of term loans and $350 million of senior notes. The revolving facility had no outstanding borrowings and $250 million of available capacity. Balance-sheet debt, net of deferred financing costs, was $743.3 million. FCPT reported compliance with debt covenants.
- Dividends and equity: The quarterly dividend declared was $0.305 per share, up from $0.2875 in Q3 2019. ATM stock sales generated $65.6 million of net proceeds during the first nine months.
Material changes and unusual items
- FCPT issued $125 million of senior unsecured notes in 2020, with fixed rates of 3.15% and 3.20% and maturities in 2029 and 2030. Interest expense rose to $7.4 million in Q3 from $6.7 million, primarily due to the new notes; nine-month interest expense increased to $21.7 million from $20.0 million.
- FCPT terminated two interest-rate swaps in connection with the note offering, recognizing an approximately $8.4 million loss to be amortized into interest expense over ten years. At September 30, derivative liabilities were $20.9 million, compared with $5.0 million at year-end 2019; nine-month other comprehensive loss was $25.4 million.
- COVID-related rent concessions included approximately $1.6 million of rent abatements for second-quarter rent, recorded as lease incentives and to be amortized as a reduction to rental revenue over amended lease terms. FCPT also reported approximately $1.0 million of second-quarter rent deferrals requiring repayment.
- After quarter-end, FCPT acquired seven net-lease properties for $11.4 million. It also announced a potential joint venture that may invest up to $150 million in vacant-building acquisitions; FCPT’s contribution could reach $20 million. No contribution had been made by October 29, 2020.
Outlook, risks and management commentary
Management provided no specific financial guidance. It said COVID-19’s ultimate effects on tenants, collections, liquidity and results remained uncertain, and anticipated continued rent-collection impacts during 2020. FCPT reported collecting over 92% of contractual base rent for Q2 and over 99% for Q3; as of October 29, it had received approximately 99% of October rent, excluding abatements. Management said further concessions or deferrals might be needed, with their scale and financial impact not yet known. FCPT may temporarily reduce its annual cash dividend, while intending to distribute enough to maintain REIT status.
Tenant and brand exposure is concentrated: Darden leases represented approximately 68% of scheduled base rent, while Olive Garden locations represented approximately 51% of revenue received under leases. The filing identifies pandemic-related risks to tenant ability to pay, lease renewals and re-leasing, property values, access to capital, debt service and distributions. Management reported no impairment expense in the first nine months and no material legal contingencies; it stated that routine claims were not expected to materially affect financial position, results or liquidity.
Important facts for investors to verify
- Whether rent collections and tenant credit quality hold up, particularly given COVID-19 exposure and the concentration in Darden and Olive Garden.
- The terms, duration and revenue impact of rent abatements, deferrals and any additional tenant relief.
- Available revolver capacity, covenant headroom, debt maturities and exposure to variable rates and derivative valuations.
- Whether operating cash flow and AFFO continue to support the dividend and acquisition program; FFO and AFFO are non-GAAP measures and are not substitutes for operating cash flow.
- Progress, funding requirements and accounting treatment of the announced joint venture and subsequent acquisitions.