A 4% dividend yield is hard to come by, and many real estate investment trusts (REITs) are on shaky ground in 2020 due to poor tenant health. However, Four Corners Property Trust (FCPT 0.40%) not only has an attractive dividend yield, but the dividend is safe and likely to grow.
What Is Four Corners Property Trust?
Four Corners Property Trust is a REIT that primarily focuses on the acquisition and leasing of restaurant properties. The company was founded in 2015 when it was spun off from Darden Restaurants, the company that operates restaurant chains including Olive Garden, LongHorn Steakhouse, and Yard House.
When Four Corners first became public, it primarily owned properties associated with Darden. While remaining focused on the restaurant industry, the company has slowly diversified its asset mix to include additional tenants. Today, Four Corners owns a portfolio of 751 properties across 74 restaurants and retail brands.
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Attractive dividend with solid financial backing
Even during the onset of the COVID-19 pandemic, Four Corners was able to navigate the turbulence its business experienced as restaurants shut down due to stay-at-home orders. This year, the company actually raised its quarterly dividend to $0.305 per share from $0.288 per share. This implies dividends of $1.22 per year, which is a yield of roughly 4.6% at Wednesday's closing price.
The natural question investors have been asking is whether the dividend is safe given the economic environment. All signs from the company point to yes.
Based on the company's reported adjusted funds from operations, a metric for cash flow before capital investments, Four Corners has more than enough cash flow to cover its dividend payments and then some.
| Metrics | 2017 | 2018 | 2019 | First 3 Quarters of 2020 |
|---|---|---|---|---|
| Adjusted funds from operations | $78.6 million | $87.9 million | $95.8 million | $75.7 million |
| Total dividends paid | $58.7 million | $69.5 million | $78.5 million | $64.4 million |
Data source: Four Corners Property Trust financial reports.
It is worth noting that Four Corners Property Trust has a good chunk of debt on its balance sheet -- $750 million. So investors should be aware that if the company's cash flow declines, it may not be able to fully service its debt. However, the company maintains an investment-grade credit rating of BBB- from Fitch, and has debt maturities spread out over 10 years. As it currently stands, the company's debt load appears to be in control.
Taking these factors into account should give investors some comfort that the dividend is in good hands for now.
Investment-grade tenants
The reason for the company's financial resiliency is the quality of its tenants. Approximately 77% of the company's property portfolio is leased by either Darden Restaurants or Brinker International -- two publicly traded companies with strong financial backing.
Darden makes up the lion's share of Four Corners' tenant base. Four Corners leases 51% of its properties to Olive Garden locations, 14% to LongHorn Steakhouse, and 3% to other Darden concepts. Darden is a national restaurant chain that is publicly traded and maintains an investment-grade credit rating. In other words, it'd geographically diversified and has ample access to capital -- it is not likely to default on its leases.
Four Corners also leases 9% of its properties to Chili's restaurants owned by Brinker International. Like Darden, Brinker is a national operator with ample access to capital -- although Brinker's credit rating is slightly below investment grade at B+.
Four Corners' remaining tenant base is highly diversified among 228 units and 43 different brands. These operators tend to be local and regional franchisors of national concepts. On average they are good tenants but do not have the same access to capital that a public company would.
A quick recovery
COVID-19 most certainly curtailed the company's rent payments during the year. In the months of April, May, and June, rent payments were approximately 95%, 90%, and 91%, respectively. That equated to approximately 92% rent collection for the second quarter. However, from July and onward, the company collected 99% of its rent, which implies that its business has effectively recovered to near pre-COVID levels.
The pandemic has clearly demonstrated the strength of Four Corners' tenant base. Not only has the business recovered, but it is now back to growth. In the third quarter of 2020, rental revenue increased 10.6% compared to the third quarter of 2019.
Another demonstration of the company's confidence is that it has resumed property acquisitions, picking up 18 new locations for a total of $48 million, financed through a combination of equity and debt. Four Corners hasn't had much of a problem raising capital either -- it raised $62.5 million from equity offerings in the quarter and its stock price is nearly back to where it started the year.
Taking a step back to view the whole picture, Four Corners Property Trust is an attractive dividend stock. It offers a compelling yield well over 4% and has demonstrated financial strength during an economically challenging period.
