Four Corners (FCPT 0.40%) is a relatively young net lease real estate investment trust (REIT) but it does well enough to increase its dividend annually since it was spun off from Darden Restaurants (DRI -0.45%) in late 2015. There's no particular reason to believe that the management game plan used to build that record is about to change or that it won't see similar success in the future.
Diversification was the plan from the get-go
When Four Corners was spun off from restaurant giant Darden it was basically a way for Darden to create value from its real estate. Four Corners, which uses the net lease approach (tenants are responsible for most property operating expenses), started life with a single lessee across all of its 418 properties. That's a lot of tenant concentration for a REIT and management started almost instantly to deal with the problem.
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To be fair, Darden is a pretty good tenant, with strong brands like Olive Garden and Longhorn Steakhouse. So there wasn't, and still isn't, any rush to get out from under Darden. It is more a desire to diversify the tenant base. This was largely achieved via acquisition. At the end of the third quarter of 2022 Darden still accounted for 56% of Four Corners' rent roll, but that's really a huge improvement when you think about it. The portfolio, meanwhile, more than doubled in size to around 980 properties.
This is, without a doubt, the correct path. And it is important to reiterate that having Darden as a tenant is not a negative in and of itself. The negative is that Darden is such a disproportionately large tenant. But that, too, is a net benefit in some ways, because it means that Four Corners can take its time as it builds a more diverse portfolio in the restaurant, retail, and medical property spaces (think rapid care medical clinics).
Growth leads to growth for Four Corners
The good news for investors is that Four Corners' portfolio growth was accompanied by growth in the REIT's total rent roll. Average annualized base rent growth came in at around 11% since the company's separation. That's allowed adjusted funds from operations (FFO) to increase from $0.29 per share in the first quarter of 2016 (the company's first full quarter as a stand-alone entity) to $0.41 per share in the third quarter of 2022.
That, in turn, supported annual dividend increases. The dividend grew from $0.2425 per share per quarter in 2016 to $0.34 per share based on the most recent dividend declaration, which will be paid to shareholders in early 2023. Four Corners proved to be a reliable dividend stock despite the added risk that comes with a highly concentrated portfolio. The current dividend yield, meanwhile, is a generous 5% or so.
No change of plan for Four Corners
Conservative investors who place a value on diversification in their portfolios and investments should probably continue to avoid Four Corners because of the material exposure to a single tenant. However, those willing to take on just a little more risk should probably pay close attention to the REIT's history because management is going to keep doing what it has been doing. Growing via acquisition worked out well so far and there's no reason to think it won't continue to do so. It is reasonable to expect that to lead to more dividend growth in the future.
