Four Corners Property Trust (FCPT -1.02%) has a unique focus in the real estate investment trust (REIT) sector. It primarily owns properties leased to well-known restaurant brands. That strategy has paid big dividends for the REIT's investors.
The landlord of the restaurant industry
Four Corners Property Trust currently owns 937 properties across 46 states. It leases 90% of those properties to restaurants, with the other 10% leased to non-restaurant retail companies. Its top tenants are Darden Restaurants' (DRI -1.37%) brands Olive Garden (44% of its annual base rent), Longhorn Steakhouse (12%), and other Darden brands (3%). Brinker International (EAT -4.95%) brand Chili's is also a major tenant (9%).
The outsize exposure to Darden comes from that restaurant operator's having spun off its real estate to form the REIT in 2016. Four Corners has been steadily diversifying its portfolio away from that one tenant by acquiring additional restaurant and retail properties. It added a large portfolio of Chili's restaurants in 2018 via a sale-leaseback transaction with Brinker International for some of its corporate-operated locations.
The REIT has also acquired other restaurant properties to reduce its exposure to Darden. It also started diversifying into non-restaurant retail in 2019, focusing on properties leased to companies in the auto service industry (5% of its rental income), medical retail industry (2%), and other retail (3%). These moves have expanded the REIT's tenant base to 113 brands, dropping its reliance on Darden to 56% of its rental income.
Four Corners Property Trust has found a great niche. Darden and other restaurant brands are increasingly realizing that they don't need to own the real estate they operate to be successful. They can free up that capital by selling it to a third party like Four Corners, giving them the funds to expand their core restaurant operations.
An appetizing income stream
Four Corners leases its properties to Darden and other restaurant and retail brands either under triple net leases (NNN) or ground leases. Both lease structures provide the REIT with very stable rental income. NNN leases make the tenant responsible for maintenance, building insurance, and real estate taxes. Meanwhile, ground leases are on the underlying land. Both tend to generate bond-like income streams that rise each year under fixed annual escalation clauses. This stable rental income helps support the REIT's appetizing dividend.
Four Corners further supports its dividend with a solid financial profile. It typically pays out about 80% of its funds from operations in dividends each year, a reasonable level for a REIT. That gives it some cushion while allowing the company to retain cash to finance growth. On top of that, Four Corners has a solid investment-grade balance sheet. That provides it with additional debt capacity to finance its expansion.
The REIT has spent an average of around $190 million annually expanding its portfolio since its spin-off from Darden. These deals have grown its property count by a 14% compound annual rate while increasing its cash base rent by an 11% compound annual rate. That growing rental income has enabled the REIT to steadily increase its dividend, including by 4.7% over the past year. With a solid balance sheet, Four Corners should be able to continue gobbling up restaurant real estate so that it can keep growing its shareholder payout in the coming years.
A tasty option for collecting passive income
Four Corners serves up a delicious dividend that yields nearly 5% backed by restaurant real estate. The REIT has done an excellent job putting that payout on a more sustainable foundation by acquiring additional restaurants and other retail properties to grow its rental income and diversify its tenant base. That makes it an appetizing option for investors seeking to add another passive income stream to their portfolios.