Four Corners Property Trust

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Four Corners Property Trust (FCPT) is a publicly traded real estate investment trust (REIT) that primarily owns and leases properties to chain restaurant operators. The company operates in the net-lease segment of the market.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

FCPT’s business model revolves around acquiring and managing properties leased to restaurant brands on long-term net leases. This means that the tenant is responsible for most operating expenses like property taxes, insurance, and maintenance costs, simplifying FCPT’s operations and providing a stable income stream.

Business Overview

Revenue Distribution

FCPT’s revenue is derived almost entirely from rental income generated through its leases with restaurant tenants. The majority of FCPT’s revenue comes from quick-service, casual dining, and other restaurant brands. This concentration on the restaurant industry creates an advantage in terms of specialized expertise and knowledge, but it also comes with a certain risk, particularly if any segment of the restaurant industry sees distress. FCPT has worked hard to diversify the portfolio. As of Q3 2023, their top 10 tenants accounted for 62.2% of annualized base rent, and no tenant comprises more than 10.3%.

The restaurant industry is dynamic, adapting to shifting consumer preferences and economic conditions. The recent earnings calls mentioned supply chain issues, food and labor cost inflation, and labor shortages. These challenges facing tenants would cause trouble for FCPT itself. However, management has taken steps to reduce the burden and make sure they could endure downturns, such as the sale of properties to cut debt.

While these trends pose challenges, they also create opportunities for consolidation and strategic acquisitions as strong brands navigate the market well, which can be a positive for FCPT.

Competitive Landscape

The competitive landscape for FCPT is varied. There are many REITs focusing on real estate within different industries as well as other net-lease REITs. Therefore, competition is always there. However, FCPT distinguishes itself through its focus on net lease properties in the restaurant space. The company also actively manages its portfolio, and tries to diversify, and acquire assets in higher-growth sectors of the industry, which is a benefit. The high degree of competition makes this moat weak and gives it a rating of 2.

What Makes FCPT Different

Unlike general commercial REITs, FCPT focuses exclusively on the restaurant sector. This specialization allows them to build deeper knowledge and expertise in the needs of restaurant operators, including lease structuring, site selection, and tenant relationships. This expertise can give them a competitive edge.

Recent Concerns and Controversies

The primary concerns for FCPT are related to the health and viability of their restaurant tenants and the broader economy, according to earnings calls and 10Q’s. High inflation, potential recession, and increasing labor costs can impact tenants’ sales which will directly affect FCPT. To combat this, FCPT has stated that it is trying to diversify and focus on stronger operators with more established brands, which can have more staying power.

FCPT is strategically selling and reinvesting in a newer more stable portfolio to achieve lower-leverage and stronger growth, which indicates that their strategy has the right idea but is a challenge.

Financials

Income Statement

  • Revenue: FCPT’s primary revenue source is rental income. In Q3 2023, total revenue was $56.7 million, reflecting steady revenue growth and high occupancy rate. For the nine months ended September 30, 2023, FCPT reported total revenue of $170.4 million. While this seems stable, the company’s annual reports show that revenues have had slight drops from previous highs. These can be attributed to acquisitions and divestiture, but must be watched going forward.
  • Operating Expenses: Operating expenses consist primarily of property taxes, insurance, and maintenance costs. The tenants are responsible for these under the net leases so these expenses are fairly small in proportion to revenues. The operating expenses for the three months ending September 30, 2023 were $4.5 million. For nine months ended September 30, 2023 were $14.2 million.
  • Net Income: FCPT has remained profitable throughout its history but has had dips in profits due to various events (including one time charges, disposals of properties and such). Reported net income for Q3 was $24 million, and $71 million for the nine-month period ended September 30, 2023. There is also other income and charges in the mix.

Balance Sheet Health: 4/5

  • Assets: FCPT’s main assets are its real estate investments. As of September 30, 2023, its total assets were valued at approximately $2.44 billion.
  • Liabilities: Total liabilities were around $1.13 billion by September 30, 2023. The majority of the liability is due to debt which is pretty usual for a REIT. FCPT has been deleveraging and has shown reduced debt over the recent years.
  • Equity: As of September 30, 2023, total shareholders’ equity stood at $1.31 billion, indicating a substantial base of owner’s investment.

From a balance sheet perspective, FCPT looks fairly healthy, with a good amount of assets and a decent amount of debt. The steps taken to reduce debt also show that management has a good track of the finances of the company.

Cash Flows

Looking into the cash flows of FCPT, we can determine if it has positive cash flows to allow it to grow or maintain its operations. For nine months ended September 30, 2023, the company had operating cash flows of $152.4 million, and with an increase of debt the company had free cash flow of $107.3 million. These numbers are very healthy for FCPT and indicate a business that generates cash.

Moat

FCPT has a narrow and weak moat, receiving a 2 out of 5 rating for the following reasons:

  • Specialization: While FCPT’s focus on the restaurant industry and knowledge of net-lease structures give it some competitive advantage, this is easily replicable.
  • Scale: FCPT does not have an advantage of scale. There are other companies within the same industry. The company is a relatively small player in a large and highly competitive landscape.
  • Switching Costs: The ease with which tenants can switch properties and landlords suggests that switching costs for FCPT are generally low. This means the company has very little pricing power.
  • Brand: Although the company works with established brands, this is more of a strategic choice and not a moat.

The only moat like characteristics that FCPT could be considered to have is some degree of switching costs, if the customer has made substantial investments into its locations.

Risks

Several factors could impact FCPT’s moat and business:

  • Economic Downturns: Restaurant sector spending is highly correlated to the economy. This means any downturn in the economy is expected to affect FCPT and its revenue.
  • Tenant Financial Difficulties: FCPT’s reliance on tenant financial health means its revenue stream is vulnerable to tenant struggles. Major restaurant bankruptcies or financial problems might make FCPT’s portfolio vulnerable.
  • Competition: The competitive landscape for REITs and net-lease properties implies that there will always be a lot of competition, and FCPT can only go so far with growing its returns due to it.
  • Interest Rate Risk: Fluctuations in interest rates can increase the cost of capital for FCPT and decrease the value of their properties.
  • Inflation: With rising construction costs, acquiring more buildings for FCPT may be very expensive, lowering the return on capital. Inflation may also negatively impact tenants which may not allow them to have a sustainable business and may cause them to default on their leases with FCPT.

Business Resilience

FCPT’s resilience hinges on its diversified portfolio and the long-term nature of its leases, which provide a relatively stable income stream. The company’s recent moves to lower debt, acquire more high-growth properties, and proactively work with distressed tenants could make it more resilient. However, if enough tenants face issues, their portfolio might still suffer.

Understandability

A rating of 2 out of 5 is given due to the business model being fairly simple:

  1. The business itself, being a REIT that leases out restaurant properties, is easy to understand.
  2. What’s difficult to grasp are the financial statements, which are complex and require thorough investigation, especially into the “Notes”.

Conclusion

FCPT is a company in a dynamic industry. While it doesn’t have a wide moat, it does have certain competitive advantages through its knowledge of the restaurant space and net lease business model. The risk for the company is largely determined by external economic factors, its reliance on tenants, and its financial structure. To better capitalize on market demand, the company is proactively focusing on improving its portfolio. With those changes being taken into account, FCPT still has plenty of promise.