Four Corners Property Trust, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. FCPT is a REIT focused primarily on owning and leasing restaurant properties, with a smaller restaurant-operating business. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $36.1 million | $33.5 million | $105.6 million | $99.4 million |
| Net income | $17.6 million | $19.3 million | $61.6 million | $53.4 million |
| Net income available to common shareholders | $17.5 million | $19.2 million | $61.2 million | $53.0 million |
| Diluted EPS | $0.27 | $0.31 | $0.97 | $0.88 |
| FFO per diluted share | $0.35 | $0.34 | $1.05 | $1.02 |
| AFFO per diluted share | $0.34 | $0.32 | $1.02 | $0.96 |
| Dividends declared per common share | $0.2750 | $0.2425 | $0.8250 | $0.7275 |
- Rental revenue grew 8.6% in Q3 and 6.6% year to date, primarily reflecting property acquisitions. Restaurant revenue rose 2.6% and 4.5%, respectively, on a per-restaurant basis.
- Q3 net income declined 8.9%, largely because Q3 2017 included a $4.0 million property-sale gain and Q3 2018 had none. Nine-month net income increased 15.3%, including a $10.9 million gain on a property sale in 2018 versus $7.3 million in 2017. Net income margin was not presented as a company-defined measure; reported earnings include these sale gains.
- Operating cash flow was $65.8 million for the nine months, compared with $60.2 million in 2017. Real estate purchases used $216.3 million, versus $70.4 million; cash and cash equivalents fell to $26.9 million from $64.5 million at year-end 2017.
- Total assets were $1.236 billion and equity was $685.1 million at September 30. Long-term debt, net of financing costs, was $516.9 million, compared with $515.5 million at year-end. The $400 million term loan was hedged; $125 million of senior notes was also outstanding. The $250 million revolver had no balance outstanding, leaving $250 million of capacity. FCPT reported compliance with debt covenants.
- Cash proceeds from equity issuance included $96.4 million net from an August offering and $47.3 million net from the ATM program year to date. The declared quarterly dividend was paid in October.
Material changes and operating context
- FCPT acquired 77 restaurant properties for $216.1 million during the first nine months, including 56 properties for $178.2 million in Q3. Acquired properties were fully occupied under net leases; the year-to-date acquisitions had a 13.6-year weighted-average remaining lease term.
- At quarter-end, the wholly owned lease portfolio comprised 591 properties across 45 states, with 99.9% occupancy, a 12.4-year weighted-average remaining lease term, and 1.6% weighted-average annual rent escalations. Investment-grade tenants represented 79% of annualized cash rent.
- FCPT agreed to issue $100 million of senior unsecured fixed-rate notes, split into $50 million at 4.63% due in 2026 and $50 million at 4.76% due in 2028. Funding was expected December 20, 2018; the notes were not yet funded at quarter-end. Proceeds were intended for acquisitions and general corporate purposes, including reducing credit-facility borrowings.
- Q3 2018 diluted EPS was lower despite revenue growth; nine-month EPS, FFO, and AFFO per share were higher than the comparable 2017 periods. FFO and AFFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Outlook, risks, and unusual items
- The filing provides no specific earnings, acquisition, or dividend guidance. Management describes continued property acquisitions and intends to diversify the portfolio and reduce reliance on Darden over time.
- Tenant and brand concentration remain significant: Darden leases represented about 79% of scheduled base rent; Olive Garden represented about 59% of lease revenue. The filing also identifies dependence on Brinker, whose subsidiaries operated 52 FCPT-owned Chili’s properties.
- FCPT uses interest-rate swaps to manage floating-rate exposure. Swaps covered $400 million of variable-rate debt through November 9, 2018, with $300 million of swap notional thereafter through the loan’s November 2022 maturity. Management estimated $3.0 million would be reclassified from accumulated other comprehensive income as a reduction to interest expense over the next 12 months.
- Management said routine litigation was not expected to materially affect financial position, results, or liquidity. A Florida property damaged by Hurricane Michael in October was temporarily closed; FCPT remained entitled to rent during tenant repairs and expected no material impact.
- October subsequent events included $5.7 million invested in three properties, acquired at a 6.8% yield, and funded with cash on hand. Management reported effective disclosure controls and no material changes in internal control during the quarter.
Important facts for investors to verify
- Track Darden and Brinker tenant credit, rent coverage, and the pace of diversification away from concentrated tenants and brands.
- Assess acquisition yields and occupancy against the cost of equity, debt financing, and the continuing need for external capital.
- Confirm funding and use of proceeds for the $100 million note issuance, and monitor leverage, covenant headroom, and interest-rate exposure.
- Compare AFFO with dividends and operating cash flow when assessing dividend coverage; AFFO is company-calculated and non-GAAP.
- Review the impact of property-sale gains and share issuance on reported earnings and per-share comparisons.