2023-11-08 00:21:33 ET
Summary
- Shares in Net Lease REIT, Four Corners Property Trust, are down about 18% in the last year and 15% since my last update.
- The negative sentiment is despite an improved outlook for the tenant base and FCPT’s increased sector diversification.
- At current trading levels, shares come paired with a dividend yield in excess of 6%.
- I view shares as a “buy” following a more neutral view in past coverage.
Owner and operator of net leased restaurant and retail properties, Four Corners Property Trust ( FCPT ), is down 18% in the last year and about 15% since my last update in July.
At that time, I viewed shares as a “hold” due to my belief that the stock was fairly valued given the operating environment and its implied cap rate, which was about 6%, a level I found appropriate based on the company's performance.
The current pullback and the lack of movement in the shares over the last month warrant a second look from investors, in my view.
Seeking Alpha - FCPT 1-Mth Share Price Performance
FCPT provides a quarterly dividend that yields over 6% and trades at a modest multiple of funds from operations (“FFO”) of 13.6x. While Seeking Alpha’s (“SA”) Quant and overall analyst community both rate shares as a hold, with low marks on areas such as valuation, Wall Street is more bullish.
Seeking Alpha - Ratings Summary Of FCPT
For income-focused investors seeking double-digit upside potential, FCPT is one net lease REIT likely to recoup its losses in the months ahead.
FCPT Key Portfolio Metrics
FCPT maintains nearly full portfolio occupancy levels. Most recently, the occupied rate stood at 99.8% at the end of Q3. Cash collection also isn’t an issue, with just shy of 100% collected through Q3.
The high collection rate is despite having exposure to some weaker tenants, such as Red Lobster, a top 20 tenant that represents about 1.8% of total annualized base rents (“ABR”).
FCPT’s overall portfolio roster has remained healthy even through a more challenging operating environment. Average EBITDA to rent coverage of their tenants was reported at 4.8x in Q3, unchanged from Q2.
The high coverage was due in part to strong same-store sales growth from some of FCPT’s key tenants. Darden’s Olive Garden and LongHorn, for example, reported growth of 6.1% and 8.1%, respectively. The higher sales were combined with a reprieve in the cost environment, with declining commodity prices and easing labor inflation.
FCPT Recent Results
In Q3, FCPT grew YOY cash rental revenues by 12.3% and reported total adjusted FFO of $0.42/share.
Investment activity hummed along, with 31 more properties purchased during the quarter. In aggregate, FCPT acquired these properties for +$130M, bringing their YTD total to +$322M at a cap rate of 6.7%. The volume represents another record year through nine months of the year, building atop their previous record attained in 2022.
To finance these purchases, FCPT completed a +$100M private note offering and tapped into +$15M in their revolver. In addition, FCPT also sold three Red Lobster properties for +$15M. This enabled FCPT to recycle into higher credit and/or more diversified property classes.
While investment volume has again risen to record levels, leverage has remained within FCPT’s targeted range. At period end, total leverage stood at 5.6x. The company also sported a 4.7x fixed charge coverage ratio with ample cushion against existing debt covenants.
From a liquidity standpoint, FCPT had +$237M available to start the fourth quarter, comprised primarily of +$220M undrawn capacity on the revolving credit facility.
FCPT Dividend Payout
FCPT currently provides a quarterly dividend payout of $0.34/share. At present trading values, this represents an annualized yield of about 6.25%.
In the recent past, FCPT has typically enacted an increase in the final payment of the calendar year. In 2022, the payout was increased 2.25%. In 2021, the increase was 4.7%.
Seeking Alpha - Recent FCPT Dividend Payout History
In my view, FCPT has the capacity to enact another increase this year. Through nine months of the year, FCPT has generated $1.24/share in AFFO. I can, therefore, see full year AFFO at $1.65/share. This would bring the payout ratio to about 82%. While it is above sector averages , coverage isn’t considered strained by any means.
For one, FCPT continues to maintain a modest debt position, with total leverage of 5.6x and no near-term debt maturities. The overall weighted average interest rate is also less than 4%, comfortably below current market rates. And just 10% of the total stack is variable rate, limiting the risks inherent in the volatile rate environment.
As an estimate, I can see FCPT enacting another 2.5% increase in the quarterly payout. This would bring the payout ratio to just under 85%. And it would move the dividend yield up to approximately 6.4%. While not the largest spread over the comparatively risk-free alternative, it would be a nice bonus to any share price appreciation in future periods.
Is FCPT Stock A Buy, Sell, Or Hold?
The pullback in FCPT has provided investors with an attractive entry point, in my view. By my estimates, shares currently trade at an implied cap rate of approximately 6.0%. This is based on expected full-year NOI of +$185M and an implied enterprise value of $3.1B. Though this represents a premium to the acquisition value of recent property purchases, it’s less than the 5.5% implied cap that shares commanded prior to the start of the COVID-19 pandemic.
And at that time, FCPT’s portfolio was less diversified than at present. At the end of Q3, for example, exposure to the auto service and medical retail industries stood at 9% and 7%, respectively. The increased diversification follows YTD acquisition activity that has been weighted more heavily to non-restaurant property classes. Through nine months of the year, FCPT’s total acquisition mix has been 38% to restaurant and 37% and 23% to medical retail and auto service, respectively. The greater exposure to these sectors complements FCPT’s recent efforts to recycle out of weaker performing brands, such as Red Lobster.
Current Wall Street estimates peg shares fairly valued at $26/share, which would represent nearly 20% upside potential. That would fall right around the price at the time of my last publication on FCPT. Then, I rated shares as valued fairly and best left on hold. In my view, the stock does have the potential to regain its recent losses.
A likely dividend hike before year end, continued diversification out of the restaurant sector, and a stabilizing cost environment for FCPT’s tenant base are three factors that could serve as the catalyst for appreciation from current trading levels. I view shares as a “buy” with upside potential of approximately 20%.
For further details see:
Four Corners: Upgrade To Buy On Sector Diversification And Improved Tenant Quality (Ratings Upgrade)