Four Corners Property Trust: A Fat Net Lease Cash COW, But Not A Fat Pitch

Summary

I am a FROG hunter when it comes to REIT investing, but I still appreciate a healthy COW.

COWs are distinguished by their “safe”, above-average dividend Yields, and their slow pace of growth.

A fat COW is a healthy COW that I expect to do fine in the coming year.

Four Corners Property Trust (FCPT) is a fat COW in the Net Lease sector. It is focused on restaurants and offers investors fair value for the money.

This article examines the growth, dividend, balance sheet, and valuation metrics of the company, to help determine whether to Buy, Sell, or Hold.

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Clara Bastian/iStock via Getty Images When it comes to REIT investing, I am a FROG hunter (stands for Fast Rate of Growth), but I still appreciate a healthy COW (Cash Only Wanted REIT).

COWs are distinguished by their “safe”, above-average dividend Yields, and their slow pace of growth. A fat COW is a healthy COW that I expect to do well in the coming year. Four Corners Property Trust ( FCPT ) is a fat COW in the Net Lease sector.

Many investors prefer COWs over FROGs. I have commented in depth on the mindset of COWhands in a previous article . Suffice it to say, COWhand investors are not very interested in total return. The object of the game is to milk the company for its the dividend stream. COWhands seek REITs with above-average dividends and “safe” payout ratios, selling at “bargain” Price/FFO ratios.

Not all COWs are created equal. Healthy (fat) COWs are companies that are still growing, if only slowly. They are unlikely to slash their dividends, making them extra safe bets to out-Yield the market. The COW we will examine today – Four Corners Property Trust – not only weathered the COVID crisis of 2020 without cutting its dividends, the company actually raised its dividends, which is a shining badge of honor in the eyes of a COWhand.

Unhealthy (skinny) COWs are in danger of cutting their dividends, usually due to negative growth or sudden, unexpected market traumas like the COVID pandemic of 2020. If a REIT cuts its dividends, the COWhands immediately sell shares, reducing the stock price along with the dividend stream, thus leaving the investor with the worst of both worlds.

Finally, COWhands are very mindful of the Price/FFO (Funds From Operations) ratio, in evaluating whether the REIT is “expensive,” “cheap,” or “fairly priced.” Generally speaking, if the Price/FFO ratio is below the REIT average (currently about 23.0), or below the company’s historical average, it is considered “cheap,” and perhaps a “bargain.” (This despite the fact that research by Hoya Capital has definitively shown that the “cheaper” a REIT is, the greater the chance it will underperform the market in total return.) Four Corners Property Trust ( FCPT )

Four Corners Property Trust, headquartered in Mill Valley, California, began operations in 2015 as a spin-off from Darden Restaurants Inc. ( DRI ), and focuses on selecting businesses with well-established brands, at locations with high traffic and good visibility. It owns 886 properties across 46 states, and its 101 tenant companies include some of the most widely recognized restaurant brands in the country, including Olive Garden, Kentucky Fried Chicken, Longhorn Steakhouse, and Chili’s. (That list just made my mouth water! How about you?) Source: Justin J. Lee (based on Q2 results)

And the company has recently diversified into automotive service and medical retail, while following the same strategy of signing established brands in locations with high traffic and good visibility. Still, Darden restaurant brands comprise 61% of their portfolio, and the auto and medical sectors make up less than 10%.

With one company accounting for such a large portion of FCPT’s revenue, it is important to examine that company closely. Darden has a balance sheet rating of BBB-. Sales in Olive Garden and Longhorn Steakhouse have recovered to at or above pre-pandemic levels, and DRI’s share price has seen a nice, brisk 17.5% CAGR since 2015. FCPT also has a weighted average lease term of 9.6 years and enjoys an enviable occupancy rate of 99.8%, and an identical rent collection rate of 99.8%. Less than 9% of the company’s annual base rent expires before 2027.

FCPT’s market cap is $2.2 billion, well out of small-cap status, so no longer swimming upstream on cost of capital. It is a lower mid-cap, still needing to […]

source Four Corners Property Trust: A Fat Net Lease Cash COW, But Not A Fat Pitch