Four Corners Property Trust (FCPT -0.17%) is a net-lease real estate investment trust (REIT) focused heavily on restaurant assets. But from the day it went public, management has been looking to create more diversity in the portfolio. There's been a sizable push of late into medical retail. Here's why.
One tenant
REIT Four Corners was created by restaurant giant Darden (DRI -0.28%). It was a way for the owner of Olive Garden and other brands to raise cash, essentially by selling its properties to Four Corners in sale/leaseback deals. Darden retained control of the properties via long-term net leases (net leases require the tenant to pay for most property-level expenses) and Four Corners got a large, reliable tenant. The only problem was that Four Corners effectively had only one tenant.
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Thus, from the start of its life, Four Corners needed to diversify. At first it focused on the niche it knew best -- restaurants. So the basic goal was to reduce the exposure to Darden. However, management decided to start diversifying beyond restaurants. There are a number of different property types in the mix, but one of the most important today is medical retail. That includes things like free-standing walk-in doctor's offices and dental offices, among other properties.
Although still a work in progress, a lot has changed. For example, when the company was created it had just one tenant, Darden. Today it has more than 130 brands in the mix (several of those are Darden businesses, but the diversification has increased materially). Darden is 53% of the rent roll today. Meanwhile, 15% of the portfolio is non-restaurant retail.
A hard push into medical assets
The first quarter, however, had some interesting statistics to offer on the diversification effort. Four Corners inked a sizable deal with Darden, representing 55% of its first-quarter acquisition volume. That's most likely a one-off event that won't repeat every quarter. Restaurants were still the biggest property type being acquired in the first quarter. But a solid second was medical retail at 25% of acquisition volume.
What's interesting is that Four Corners isn't the only net-lease REIT focusing on the sector, with industry giant Realty Income (O -0.17%) also pushing hard to expand in the niche. There are a lot of reasons. For example, between 2020 and 2030 the U.S. population is expected to grow about 0.7% a year, but the over-65 age cohort is projected to grow at an annualized rate of 2.7%. The number of people 85 and older is growing even faster at 3.1% a year. Older people make greater use of healthcare. So it looks like medical retail has a strong tailwind.
Meanwhile, there's a long-term trend toward the use of outpatient care over hospitals for delivery of medical services. That includes walk-in doctor's offices, which saw 8% annual revenue growth between 2019 and 2022, way more than more formal medical offices.
Realty Income estimates that medical retail is a $2 trillion investment opportunity. That's more than enough room for that net-lease giant and Four Corners to continue to find attractive investments. And given the strong demographic trends backing the property niche, it seems likely that the properties that Four Corners adds will help to both diversify its portfolio and drive solid long-term top- and bottom-line growth.
Slow and steady
Four Corners' portfolio is still heavily dependent on Darden, so investors that place a high value on diversification will probably want to stay away. But the REIT is making progress in its efforts to move beyond its former parent. That increasingly includes medical retail, which appears to be a property type that's in demand. More aggressive investors might find the thoughtful portfolio moves here as attractive as Four Corners's market-beating 5.2% dividend yield.
