Four Corners Property Trust, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. FCPT is a REIT that primarily owns and leases restaurant properties under net leases; it also operates six LongHorn Steakhouse restaurants in Texas.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $40.2 million | $36.1 million | $119.4 million | $105.6 million |
| Net income | $18.4 million | $17.6 million | $53.9 million | $61.6 million |
| Net income available to common shareholders | $18.3 million | $17.5 million | $53.7 million | $61.2 million |
| Diluted EPS | $0.27 | $0.27 | $0.78 | $0.97 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $81.3 million | $66.0 million |
| FFO / diluted share | $25.0 million / $0.36 | $23.3 million / $0.35 | $73.4 million / $1.07 | $66.8 million / $1.05 |
| AFFO / diluted share | $24.0 million / $0.35 | $22.5 million / $0.34 | $70.8 million / $1.03 | $64.4 million / $1.02 |
- Q3 revenue rose 11.2% year over year, led by rental revenue growth of 12.4%; nine-month revenue increased 13.0%, with rental revenue up 14.7%.
- Q3 common-shareholder net income increased about 4.8%. Nine-month net income fell about 12.2%, while diluted EPS declined to $0.78 from $0.97.
- Operating cash flow increased about 23% for the nine months. Investing used $81.4 million, primarily for acquisitions; financing used $63.3 million, principally for dividends.
- Quarterly dividends declared were $0.2875 per share, up from $0.2750 in Q3 2018.
Balance sheet, debt and portfolio
- At September 30, 2019, cash and cash equivalents were $29.8 million; total assets were $1.35 billion and equity was $678.5 million.
- Debt principal comprised $400 million in variable-rate term loans and $225 million in fixed-rate notes; reported long-term debt net of financing costs was $617.4 million. The $250 million revolver was undrawn, and FCPT reported compliance with debt covenants.
- Weighted-average term-loan interest rate after hedges was 3.07%. Swaps hedged $300 million of variable-rate debt. Derivatives were a net liability of approximately $7.8 million, compared with a net asset of $6.0 million at year-end 2018.
- The wholly owned lease portfolio had 650 freestanding properties across 45 states, 99.9% occupancy, an 11.5-year average remaining lease term, and 75% investment-grade tenancy. FCPT acquired 40 properties for $81.1 million during the nine months; those assets were fully occupied, with a 10.9-year weighted-average remaining lease term.
Changes, outlook and risks
- Rental growth reflected acquisitions of 60 properties over the year-over-year comparison period, partially offset by one property sale. The 2018 nine-month comparison included a $10.9 million gain on sale; there was no such gain in 2019.
- Interest expense increased $1.7 million in Q3 and $5.3 million year to date, primarily following issuance of $100 million of fixed-rate notes in December 2018. Depreciation and amortization also increased with the larger property portfolio.
- Management provided no specific earnings or acquisition guidance. It described continued property acquisition and portfolio diversification as strategy, with the aim of reducing reliance on Darden over time. Management expects to fund ordinary needs largely from operations and acquisitions through available financing, but notes capital-market access and terms are not assured.
- Tenant concentration is material: Darden leases represented about 74% of scheduled base rent; Olive Garden represented about 46% of leased properties and 56% of lease revenue. Texas and Florida accounted for 12% and 11% of rental revenue, respectively.
- FCPT adopted the new lease accounting standard in January 2019 without a cumulative equity adjustment. It reported no impairment expense, no real estate held for sale, and no material off-balance-sheet arrangements. Routine litigation was not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
- Subsequent to quarter-end, FCPT acquired seven properties for $11.3 million. It also settled 500,000 shares under an ATM forward sale in October for approximately $14.3 million net proceeds.
Investor verification points
- Review tenant credit and concentration exposure, especially Darden and Olive Garden, and assess how effectively future acquisitions diversify rental income.
- Reconcile GAAP earnings with FFO and AFFO, including the prior-year property-sale gain and the non-GAAP adjustments used.
- Monitor debt costs, hedge valuations and maturities, available revolver capacity, and the remaining ATM forward-sale settlement and dilution.
- Assess whether operating cash flow and AFFO support dividends and planned acquisitions, while considering the portfolio’s lease escalators and tenant renewal risk.