Four Corners Property Trust, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Amounts are in millions unless otherwise noted.
Business context
FCPT is a publicly traded REIT focused on owning and leasing restaurant properties, primarily under triple-net leases. It also operates six LongHorn Steakhouse restaurants in the San Antonio area. At quarter-end, its wholly owned lease portfolio comprised 508 properties in 44 states, at 100% occupancy, with a 13.2-year weighted average remaining lease term and 1.5% weighted average annual rent escalators.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $33.5 | $30.8 | $99.4 | $92.8 |
| Net income | $19.3 | $15.2 | $53.4 | $124.3 |
| Net income available to common shareholders | $19.2 | $15.2 | $53.0 | $124.3 |
| Diluted EPS | $0.31 | $0.25 | $0.88 | $2.09 |
| FFO per diluted share | $0.34 | $0.34 | $1.02 | $1.00 |
| AFFO per diluted share | $0.32 | $0.30 | $0.96 | $0.91 |
- Q3 rental revenue was $28.8 million, up from $26.4 million; restaurant revenue was $4.7 million, up from $4.4 million.
- Q3 interest expense rose to $5.5 million from $3.5 million, primarily reflecting the 2017 senior notes. Nine-month interest expense was $14.1 million versus $11.6 million.
- Nine-month operating cash flow was $60.2 million, compared with $51.6 million. Investing activities used $63.4 million; financing activities provided $59.5 million. Cash ended the period at $82.9 million.
- At September 30, notes payable were $518.4 million net of financing costs; principal debt comprised a $400 million term loan and $125 million of senior notes. No revolver borrowings were outstanding, and $350 million of revolver capacity was available.
- Total assets were $1.062 billion and total equity was $513.7 million at quarter-end. Dividends declared were $0.2425 per share for the quarter.
- The filing does not present a conventional operating-margin measure. AFFO and FFO are non-GAAP supplemental measures, not substitutes for GAAP earnings or cash flow.
Material changes versus prior comparable periods
- Q3 revenue increased about 8.8% year over year, principally from property acquisitions; common-shareholder net income rose to $19.2 million from $15.2 million.
- Nine-month revenue increased to $99.4 million from $92.8 million. Nine-month net income fell sharply from 2016 because the prior-year period included an $80.5 million income-tax benefit associated with the REIT election; 2017 recorded $0.1 million of tax expense. FFO per diluted share increased to $1.02 from $1.00, and AFFO per diluted share to $0.96 from $0.91.
- FCPT acquired 35 restaurant properties in 14 states for $76.1 million, including transaction costs. The acquired properties were fully occupied under triple-net leases with a 17.8-year weighted average remaining lease term.
- FCPT issued $125 million of fixed-rate senior notes in June: $50 million at 4.68% due in seven years and $75 million at 4.93% due in ten years. It also raised $28.8 million net through its ATM equity program.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or FFO guidance. Management describes acquisitions and portfolio diversification as strategic priorities, aiming over time to reduce reliance on Darden.
- Tenant concentration remains significant: Darden represented approximately 89% of scheduled base rents; Olive Garden represented about 58% of leased properties and 67% of lease revenue. Management notes diversification could increase exposure to tenants less creditworthy than Darden.
- FCPT reported compliance with debt covenants and no off-balance-sheet arrangements. Management said ordinary-course litigation was not expected to materially affect financial position, results, or liquidity; the filing reports no material change in risk factors.
- Interest-rate exposure is managed with swaps. The $400 million variable-rate term loan was hedged for its full notional amount through November 2018 and $300 million thereafter through November 2022.
- Two Darden-leased properties were sold during the first nine months for $11.1 million gross consideration, producing a $7.3 million net gain. FCPT expected another property sale in Q4 for approximately $5.1 million, with an estimated $3.3 million gain.
- Subsequent to quarter-end, FCPT amended and restated its credit agreement on October 2, extending the revolving facility maturity to November 2021, with extension options, and the term-loan maturity to November 2022. On November 2, it acquired five properties for $19.4 million, funded with 1031 exchange proceeds and cash.
Most important facts for investors to verify
- Tenant and brand concentration, including Darden’s share of rents and tenant credit quality.
- Acquisition performance and whether newly acquired properties diversify rent sources without weakening portfolio quality.
- Debt costs, covenant headroom, floating-rate exposure, and terms of the October 2017 amended credit agreement.
- Dividend coverage using operating cash flow and AFFO, bearing in mind AFFO is a company-defined non-GAAP measure.
- Whether the expected Q4 property sale closed and whether its estimated proceeds and gain were realized.
- The basis for comparing nine-month 2017 earnings with 2016, especially the prior-year REIT-related tax benefit.