Pure REITs are valuable because a single focus removes distractions while allowing management to hone and refine their skills. This simplicity also makes them easier to value.maybe that is Why Realty Income Corporation (○) to divest Orion Office REIT (online) last year focused more on its retail side.
Which brings me to Four Corners Property Trust (NYSE: FCPT) focused on the retail service space. This article highlights why FCPT seems attractive at current revenue and growth prices, so let’s get started.
Why choose FCPT?
Four Corners Property Trust is a net lease REIT with a portfolio of restaurants leased to major brands such as Olive Garden, Chili’s and Red Robin.Currently, the company has ownership interests in 954 diverse properties in 46 continental U.S. states
It was spun off from Darden Restaurants (DRI) in 2015, and since then its exposure has been reduced from 100% to 68%. As shown in the chart below, FCPT primarily has exposure to well-known brands such as Olive Garden, LongHorn Steakhouse and Chili’s, which together account for 65% of its annual base rent.
A key advantage of FCPT is its triple-net lease, in which tenants are responsible for paying property taxes, insurance and maintenance. This has resulted in higher profit margins for the company compared to other real estate sectors, which is reflected in FCPT’s 75.6% operating margin (plus depreciation) over the trailing 12 months, well above the ~65% range for mall REITs . Over time, I expect FCPT’s operating margin to be in the 80-90% range as it continues to scale.
Meanwhile, FCPT showed solid fundamentals with an occupancy rate of 99.9% and a weighted average remaining lease term of 9.0 years, in line with peers Realty Income Corp. and National Retail Properties (NNN) of about 10 years. It collected 99.7% of its rent in the first quarter, with rental income up 12.9% and 8.1% year-over-year, and FFO per share growth.
This was driven by a combination of internal and external growth through accretive acquisitions, with 18 properties acquired for $42 million in the first quarter, with an average cash yield of 6.7% and a remaining lease term of 7.6 years.
Going forward, FCPT remains flexible enough to continue its growth trajectory. This is reflected in available liquidity of $308 million, of which $58 million is cash and $250 million is undrawn capacity on its revolving credit facility. This is also supported by reasonably low leverage, with a net debt to EBITDA ratio of 5.7x, and it is worth noting that Fitch recently upgraded FCPT by one notch to a solid BBB credit rating.
It’s also encouraging that management is positioning the company in the growing medical retail segment, which now accounts for 33% of its active acquisition pipeline, with the majority of the remainder (51%) made up of casual dining properties.
FCPT’s risks include macroeconomic uncertainty, which may affect its tenants. However, given their low price points, I think the impact, if any, is weak. In addition, higher interest rates may raise the cost of debt for FCPTs. This could also benefit the FCPT as it excludes highly leveraged competitors from the bidding process, as the CEO pointed out during the Q&A session of the recent conference call:
We found some opportunities that I’ll describe as we’ve been wandering around the trade and the seller went with a more leveraged buyer and as the leveraged buyer’s debt repriced and the original buyer pulled out, we If it can recover the attributes, it will rebound.
After the recent decline from the $30 level, I see the current price of FCPT at $26.40. Currently, FCPT is trading at a reasonable forward P/FFO of 16.35, well below the normal P/FFO of 19.5 in recent years. It also has a 5.0% dividend yield, which nicely covers an 83% payout ratio (based on Q1 FFO/share of $0.40).
Sell-side analysts have a consensus Buy rating with an average price target of $30.50. That translates to a potential one-year total return of 21%, including dividends.
FCPT is a premium net lease REIT with a diverse portfolio of well-known tenants. Its strong fundamentals and balanced capital structure provide ample support for future growth, and management has shown a willingness to align its property acquisitions into new categories. I believe the current share price provides an attractive entry point for dividend and value investors.