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2019-10-22 11:16:46

Many equity REITs have seen their share prices appreciating greatly in the past month. This leaves very few suitable investment targets still in the “value” range where we like to do the majority of our buying. Since we typically target cash flow-rich tangible real estate properties, potential share price appreciation helps juice our investment theses beyond just collecting dividends. There are still some good buys out there today, notably Jernigan Capital (JCAP), Macerich Co. (MAC), Park Hotels & Resorts (PK) and Preferred Apartment Communities (APTS), but these are admittedly riskier than what most people like to invest their hard-earned money into. I thought I’d try looking for a more defensive equity REIT with some growth, and that led me to Four Corners Property Trust (FCPT).

Image from Finviz

As you can see from the chart, for most of the past year FCPT has seen its share price growth slow down, and has been relatively range-bound between $28 and $29. I think that this is odd for an investment that has continued to grow both earnings and soon (expectedly) its dividend. We’ve also seen relatively little in the way of upward pressure on shares due to the September Fed rate cut and further confirmation that we will be in a low interest rate environment for the time being.

In a world that is pricing over $15 trillion in negative debt, you’d think that we’d see a larger appreciation for stable yields over 4%. Maybe soon we’ll see that happen. In the meantime, we have an opportunity to invest in a rock-solid, defensive REIT play that offers us decent income and growth while we wait.

Portfolio Holdings

Image from Q1 2019 Earnings Slides

FCPT was a spin-off from Darden Restaurants (DRI) in late 2015 and became a REIT on January 1st, 2016. In the original spin-off, it consisted of 424 Darden restaurants like Olive Garden and Longhorn Steakhouse. Since it started trading publicly, it has more than doubled in share price, not to mention the dividends. The portfolio now stands at 642 restaurants in 45 states, and boasts an impressive 99.9% occupancy rate. Since that last-reported number, FCPT has acquired 14 more restaurants and 10 additional non-restaurant properties, which are mainly big-bank branches.

This is just the second time that FCPT has delved into the realm of non-restaurant properties, and there were many questions on the latest call about shifting from the pure-play approach on restaurants. Despite the fact that the company picked up these properties with cap rates in line with its typical transactions (~6.5-6.7%), I find the questions valid. The nice thing about restaurants is that they are very e-commerce resistant to the point of being aided by technology (mobile ordering, delivery services, etc. that drive sales growth). Bank branches, while also recession-resistant, are not a guaranteed part of our future with mobile app banking and electronic check deposits.

Balance Sheet

Image from Q1 2019 Earnings Slides

All that being said, we still find the 99.9% occupied triple-net leased portfolio with a weighted average lease term of 11.8 years with 1.5% annual rent escalators to be incredibly defensive and reliable. Critics may cite the 57% base rent revenues coming from Olive Garden as being way too high for single-tenant risk. The counter-argument to this is that these Olive Gardens have the best tenant EBITDAR coverage at 5.2x. The total portfolio sits at 4.6x coverage, which means that their tenants have no problems making their monthly rent payments and have plenty of breathing room for those annual rent escalators in their contract. Compare this to companies like Omega Healthcare Investors (OHI), which have tenant EBITDAR coverage of 1.31x and deal with bankruptcies all the time.

Another way that this company is conservatively managed and a safe bet in a downturn is with its balance sheet. Debt-to-EBITDA comes in around 4.6x - 4.7x, which is a little low for the triple-net lease sector. Realty Income (O), for example, has a debt-to-EBITDA of 5.2x. FCPT also enjoys a low interest rate on its $625 million of debt, at a 3.8% weighted average, compared to best-in-breed O, which sports a 3.9% weighted average debt interest rate. There is $19.6 million in cash and all of the $250 million left on the revolving credit facility if the company feels the need to deploy capital.

Dividend

FCPT is very predictable with its dividend growth, raising its payout once a year. Management has stated that they target an 80% AFFO payout ratio when determining the dividend. We are due for the next increase very soon:

Image from Seeking Alpha

Since AFFO has come in at around $0.34 per share for the past few quarters, we’re already sitting at an 84.5% AFFO payout ratio, which would make the potential increase very small. We do get the added benefit of acquisitions throwing off rent and potentially boosting our AFFO, but I expect a dividend of about $0.295-0.30 at the very most to be announced. That would push the future yield as of today’s prices to 4.2%, which would be just shy of W. P. Carey’s (WPC) yield of 4.4%.

Valuation

As mentioned before, FCPT has been middling for quite a few months now, which is a result of the company slowing down its rapid growth and somewhat low (albeit super-safe) dividend yield. I think the following graph helps explain my interest in FCPT:

Image from Yahoo Finance

While I understand that Realty Income and W. P. Carey deserve a premium for being the dominant, best-of-breed stocks in the sector, the 1-year outperformance of FCPT by 28% and 33% respectively seems a bit much. As we have shown above, the safety of the portfolio is high, the cost of capital is rather low, and the growth is still impressive. I just find it strange that FCPT has been left behind, while all other companies are seeing their share price run up in this current market environment.

Summary

Four Corners Property Trust is not going to wow you or your portfolio with huge returns. What it will do is provide you with an incredibly reliable, recession-proof income stream that should see some improvement in share price as the world searches for yield and stability. While I don’t normally go looking at lower-yield investments, especially at ones that are yet to become a compelling value play, I am considering adding this defensive-oriented growth REIT to my holdings on any pullback, and would be happy adding below $28.

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Disclosure: I am/we are long JCAP, MAC, APTS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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