PART I
Forward-Looking Statements
Statements contained in this Annual Report on Form 10-K, including the documents that are incorporated by reference, that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Also, when Four Corners Property Trust, Inc. uses any of the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” or similar expressions, Four Corners Property Trust, Inc. is making forward-looking statements. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, actual results could differ materially from those set forth in the forward-looking statements. Certain factors that could cause actual results or events to differ materially from those anticipated or projected are described in “Item 1A. Risk Factors.” of this Annual Report on Form 10-K.
Given these uncertainties, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Annual Report on Form 10-K or any document incorporated herein by reference. Four Corners Property Trust, Inc. undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this Annual Report on Form 10-K.
Item 1. Business.
Unless the context indicates otherwise, all references to “Four Corners,” the “Company,” “we,” “our” or “us” include Four Corners Property Trust, Inc. and all of its consolidated subsidiaries.
General Development of Business
We were incorporated as a Maryland corporation on July 2, 2015 as a wholly owned indirect subsidiary of Darden Restaurants, Inc., (together with its consolidated subsidiaries “Darden”), for the purpose of owning, acquiring and leasing properties on a triple-net basis, primarily for use in the restaurant industry. On November 9, 2015, Darden completed a spin-off of Four Corners whereby Darden contributed to us 100% of the equity interest in entities that own 418 properties (the “Properties” or “Property”) in which Darden operates restaurants, representing five of their brands, and six LongHorn Steakhouse® restaurants located in the San Antonio, Texas area (the “Kerrow Restaurant Operating Business”) along with the underlying properties or interests therein associated with the Kerrow Restaurant Operating Business. In exchange, we issued to Darden all of our common stock and paid a $315.0 million cash dividend to Darden. Subsequently, Darden distributed all of our outstanding shares of common stock pro rata to holders of Darden common stock whereby each Darden shareholder received one share of our common stock for every three shares of Darden common stock held at the close of business on the record date, which was November 2, 2015, as well as cash in lieu of any fractional shares of our common stock which they would have otherwise received (the “Spin-Off”). The Spin-Off is intended to qualify as tax-free to Darden shareholders for U. S. federal income tax purposes, except for cash paid in lieu of fractional shares. We intend to qualify as a real estate investment trust (“REIT,”) for U.S. federal income tax purposes with the taxable year beginning January 1, 2016.
Following completion of the Spin-Off, we became an independent, publicly traded, self-administered company, primarily engaged in the ownership, acquisition and leasing of restaurant properties. Substantially all of our business is conducted through Four Corners Operating Partnership, LP (“Four Corners OP”), a Delaware limited partnership of which we are the initial limited partner and our wholly owned subsidiary, Four Corners GP, LLC (“Four Corners GP”), is its sole general partner and our wholly owned subsidiary.
Our shares of common stock are listed on the New York Stock Exchange under the ticker symbol “FCPT”.
Our executive offices are located at 501 Redwood Highway, Suite 1150, Mill Valley, California 94941, and our telephone number is (415) 965-8030.
At March 16, 2016 we employed 334 individuals.
Overview of our Business
As of December 31, 2015, we owned 424 properties, all within the continental United States. Our revenues from our leasing operations segment are primarily generated by leasing the Properties to Darden and additional properties to other tenants through triple-net lease arrangements (the “Leases” or “Lease”) under which Darden is primarily responsible for ongoing costs relating to the Properties, including utilities, property taxes, insurance, common area maintenance charges, and maintenance and repair costs. For more information about our two segments, see “Segments” below.
We also generate revenues by operating the Kerrow Restaurant Operating Business through our restaurants operations segment pursuant to franchise agreements with Darden (the “Franchise Agreements”). Of the six LongHorn SteakHouse® restaurant properties located in the San Antonio area, three are properties that we lease to our wholly owned indirect subsidiary, Kerrow Holdings, LLC (together with its subsidiaries “Kerrow”), and three are owned by Kerrow, subject to ground leases. Kerrow is our taxable REIT subsidiary (“TRS”). During 2015, we operated our business in two segments: real estate operations and restaurant operations.
In addition to managing our existing properties, our strategy includes investing in additional restaurant and food service real estate properties to grow and diversify our existing restaurant portfolio. We intend to purchase properties that are well located, occupied by durable restaurant concepts, with creditworthy tenants whose operating cash flow are expected to meaningfully exceed their lease payments to us. We seek to improve the probability of successful tenant renewal at the end of initial lease terms by acquiring demographically favored properties that have high levels of restaurant operator profitability compared to rent payments and have absolute rent levels that are consistent with, or below, market rates.
We operate in two segments, real estate operations and restaurant operations. Our segments are based on our organizational and management structure, which aligns with how our results are monitored and performance is assessed.
Our real estate operations segment consists of rental revenues primarily generated by leasing restaurant properties to tenants through triple-net lease arrangements under which the tenant is primarily responsible for ongoing costs relating to the properties. It also includes expenses associated with continuing efforts to invest in additional restaurant and food service real estate properties and our corporate operating expenses. Our real estate operations are funded by a $750 million credit agreement consisting of a 5-year term loan facility of $400 million and a currently undrawn 4-year revolving credit facility of $350 million. Interest expense associated with this agreement is included in real estate operations.
Our restaurant operations segment is conducted through our TRS and consists of our Kerrow Restaurant Operating Business. The associated sales revenues, restaurant expenses and overhead, and depreciation on the six buildings and equipment are components of restaurant operations.
Competitive Advantage
We believe that we have significant competitive advantages that support our core business of owning and leasing restaurant and retail properties as further outlined below.
Leading Nationwide REIT Focused on Restaurant Properties
We are focused on the ownership of properties used in the restaurant industry and have tailored our business strategy to address the needs of restaurant operators. We believe our scale, national reach, restaurant operations experience, and efficient lease structuring will help us achieve operational efficiencies and support future growth opportunities. In contrast to the majority of existing net-lease REITs that are diversified by retail industry and property type, we believe that our focus and expertise in the restaurant space will generate data and understanding to better support effective investment and leasing decisions.
Large Addressable Market Potential in US Food Service Industry
As a whole, the restaurant industry has been able to achieve healthy same-restaurant and restaurant-count growth recently. According to Nation’s Restaurant News 2015 Top 100, the top 100 restaurant chains (the “Top 100”) achieved aggregate sales of more than $230 billion in 2014, an increase of 4.6% over 2013. While improving same-restaurant sales support the credit worthiness
of restaurant companies and stand-alone restaurants, we believe the net additions of nearly 4,000 restaurants by the top 100 restaurant chains, an increase in the restaurant count of 2.1%, has driven the demand for external investment in restaurant real estate. By virtue of its large scale, we believe that the U.S. restaurant industry offers a sizable pool of attractive property acquisition targets across different types of restaurant properties, including quick service, take-out, casual dining, fast casual, and fine dining, to enable diversified growth for us. Furthermore, continuing strong unit growth trends could create opportunities for us to partner with both restaurant companies and franchisees.
According to Nation’s Restaurant News 2015 Top 100, franchisees operate over 80% of the Top 100’s new restaurants opened in 2014 and over 75% of the Top 100’s aggregate units, representing more than 144,000 restaurants and growing as restaurant companies migrate increasingly to an “asset light” strategy. As restaurant companies implement “asset light” strategies, external capital is required by franchisees and landlords to finance individual restaurant operations and real estate, respectively. Franchisees, which often lease the restaurants that they operate, are potential future partners for us.
Furthermore, implementation of “asset light” strategies by restaurant companies may provide landlords like us an opportunity to enter into sale-leaseback transactions with the parent company of corporate-operated restaurants for their existing properties and to finance future restaurant development by these restaurant companies.
We also believe there may be other attractive opportunities for growth outside the traditional restaurant sector. This may include one or more of the following: food service distribution facilities, and cold storage facilities.
Uniquely Positioned to Capitalize on Expansion Opportunities
We believe there is a large market opportunity to acquire additional restaurant properties and that a number of restaurant operators would like the opportunity to monetize their real estate holdings while continuing to operate their existing core businesses. We believe that a number of restaurant operators would be willing to enter into transactions designed to monetize their real estate assets through sale-leaseback transactions with an unrelated party not perceived to be a competitor, such as us. These restaurant operators could use the proceeds from the sale of their real estate assets for several different business purposes, including (i) reducing bank loans and lines of credit, (ii) reinvestment in existing operations, or (iii) for new business initiatives including opening new locations or pursuing acquisitions. Sale-leaseback transactions can provide an attractive means for both mature operators as well as fast-growing businesses to repatriate capital into more attractive opportunities. We may also provide such restaurant and retail operators with expansion opportunities that they may not otherwise be in a position to pursue by providing them with capital to expand and enhance their operations at rates that provide both an attractive risk-adjusted return to us and are more attractive to the restaurant or retail operators than they may be able to receive through traditional debt financing arrangements.
Geographically Diverse Asset Portfolio
The Properties are located in 44 different states across the continental United States. The Properties in any one state do not account for more than 11% of the Properties and no more than 14% of our total rental revenue. We believe this geographic diversification will limit the effect of changes in any one market on our overall performance.