Four Corners Property Trust, Inc. (FCPT) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. FCPT is a REIT focused primarily on owning and leasing restaurant properties, supplemented by six company-operated LongHorn Steakhouse restaurants.
Financial performance and position
- Q2 revenue: $39.6 million, up 14.1% from $34.7 million. Rental revenue rose 16.3% to $34.4 million; restaurant revenue increased to $5.2 million from $5.1 million.
- Q2 earnings: Net income attributable to common shareholders was $17.9 million, or $0.26 per diluted share, versus $27.4 million, or $0.44 per share, a year earlier. Prior-year results included a $10.9 million property-sale gain; Q2 2019 had no property-sale gain. Interest expense increased $1.7 million to $6.6 million, primarily reflecting $100 million of notes issued in December 2018.
- Six-month results: Revenue was $79.2 million versus $69.5 million. Common-shareholder income was $35.4 million, or $0.52 per diluted share, versus $43.7 million, or $0.71, including the prior-year $10.9 million gain.
- REIT operating measures: Q2 FFO was $24.4 million ($0.36 per diluted share), compared with $22.0 million ($0.35); AFFO was $23.5 million ($0.34 per share), compared with $21.1 million ($0.34). For the first half, FFO was $48.4 million and AFFO $46.9 million, each up from the corresponding 2018 totals. These are non-GAAP supplemental measures, not substitutes for GAAP earnings or cash flow.
- Cash flow and dividends: First-half operating cash flow was $54.0 million, up from $41.0 million. Investing activities used $64.4 million, principally for acquisitions; financing activities used $43.6 million, including $39.2 million of shareholder dividends. Cash and cash equivalents were $39.3 million at June 30, down from $92.0 million at year-end. The quarterly dividend declared was $0.2875 per share, versus $0.2750 a year earlier.
- Debt and liquidity: Debt carrying value, net of financing costs, was $616.9 million; principal consisted of $400 million of variable-rate term loans and $225 million of fixed-rate notes. No revolving-credit borrowings were outstanding, leaving $250 million available under the facility. The hedged term-loan rate was 3.17%; the company reported compliance with all debt covenants.
Material changes and operating context
- During the first half, FCPT acquired 32 restaurant properties for $64.6 million; acquired properties were fully leased with a weighted-average remaining lease term of 11.8 years. The comparable 2018 period included 21 acquisitions totaling $37.9 million and one property sale.
- At June 30, the wholly owned lease portfolio comprised 642 properties in 45 states, was 99.9% occupied, and had an 11.8-year average remaining lease term. Approximately 75% of annualized base rent was from investment-grade tenants.
- Revenue and property growth increased depreciation and amortization. The company also reported higher G&A, partly due to compensation, recruiting, and professional fees. Restaurant revenue per location improved, while restaurant expenses rose; the restaurant segment reported a small Q2 loss.
- Adoption of the new lease accounting standard (ASC 842) on January 1, 2019 did not change previously reported financial statements or equity. It resulted in recognition of operating-lease right-of-use assets and liabilities for the company’s ground leases.
Outlook, risks, and contingencies
- Management provided no quantified earnings or acquisition guidance. Its stated strategy is to acquire additional restaurant and retail properties and reduce reliance on Darden over time. Management expects to fund ordinary requirements primarily from operating cash flow and acquisitions through available credit and capital markets, but cautioned that acceptable financing may not always be available.
- Tenant concentration is material: Darden leases represented approximately 75% of scheduled base rent. Olive Garden locations represented approximately 47% of leased properties and 56% of lease revenue. Texas and Florida each contributed more than 10% of rental revenue.
- Interest-rate exposure is partly hedged: swaps covered $300 million of variable-rate debt at period-end. The swaps had a net liability fair value of approximately $4.2 million; management estimated $0.5 million would be reclassified as a reduction of interest expense over the next 12 months.
- Management said routine litigation was not expected to materially affect financial position, results, or liquidity; no material risk-factor changes were reported. FCPT reported no impairment expense in the first half and no off-balance-sheet arrangements.
- Through July 31, 2019, FCPT acquired one Wisconsin net-lease property for $1.4 million, funded with cash on hand; stated investment yield was approximately 6.7%.
Important facts for investors to verify
- Review Darden’s credit and operating performance given its share of FCPT’s rent, and assess Olive Garden and geographic concentration.
- Reconcile reported earnings with FFO/AFFO and operating cash flow, particularly the prior-year property-sale gain and recurring dividend funding.
- Confirm acquisition yields, occupancy, lease terms, and tenant health as the portfolio expands.
- Assess debt refinancing and interest-rate sensitivity, including swap maturities, covenant headroom, and the availability of the revolving facility and equity financing.