Four Corners Property Trust Is Shucking $15 Million Of Lobsters

To improve balance sheets, there has been a scramble lately among various real estate investment trusts (REITs) to sell off properties that are either at risk of poor future performance or have already been struggling financially. REITs may also sell properties with smaller cap rates to acquire new ones with higher cap rates.

Take a look at one diversified REIT, with a history of aggressive acquisitions that is now selling off some of its higher-risk properties at an opportune time.

Four Corners Property Trust Inc. FCPT is a Mill Valley, California-based diversified REIT, with a focus on owning restaurants, healthcare and other retail properties in the U.S. Sun Belt. Four Corners was created in November 2015 with 418 restaurants spun out from Darden Restaurants Inc. DRI. As time has progressed, many of the Darden properties were sold, but Olive Garden and LongHorn Steakhouse restaurants still make up about 51% of Four Corners' total rents.

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On Oct. 3, Four Corners announced it disposed of a Red Lobster property in Kentucky for $3.8 million. The corporate-operated restaurant had a triple-net lease, meaning that Red Lobster was responsible for all common property expenses, including taxes, insurance and repairs/improvements.

This was the second such announcement in five days. On Sept. 28, Four Corners also announced the sale of a Delaware Red Lobster property for $5.3 million. It also was corporate-operated and under a triple-net lease.

On Sept. 1, Four Corners announced it was disposing of another corporate-owned, triple-net leased Red Lobster in Minnesota for $5.9 million. The three Red Lobster sales together produced $15 million.

Four Corners uses 1031 tax-deferred property exchanges whenever possible to avoid paying taxes on the properties it sells. In a 1031 tax-deferred exchange, the net proceeds of a sale are held in escrow, usually by an attorney or 1031 company, and then transferred into the next property acquired by the individual or company. 

The new property to be purchased must be announced within 45 days and close within 180 days of the closing date of the previous property sold. If this does not occur, the 1031 is canceled, and the original sale is subject to normal capital gains taxes.

What makes these Red Lobster sales newsworthy is that over the past seven years, Four Corners has done nothing but steadily acquire properties. Its most recent portfolio included 1,098 long-term leased properties with 143 tenants across 47 states. Four Corners' occupancy rate was a strong 99.9%, and its weighted average lease term (WALT) is eight years. Year to date through July, it closed on 75 acquisitions for $301 million.

The purchases have paid off. Four Corners has increased its revenue for 12 consecutive quarters as it continues its massive acquisition spree. Its main strategy is to secure properties with a cap rate ranging from 6% to 7%.

Four Corners' strategy is to diversify the large percentage of restaurants in the portfolio and include a growing number of properties leased to Aspen Dental Management Inc., WellNow Urgent Care, Jiffy Lube International Inc. and Tire Discounters. It recently acquired three newly constructed buildings in Michigan for $5.2 million that it intends to lease to Aspen Dental, Starbucks Corp. and WellNow Urgent Care.

On Sept. 21, Wells Fargo analyst Heather Bellini initiated coverage of Four Corners Properties with an Overweight rating and announced a price target of $18.

On Aug. 1, Four Corners Property Trust reported its second-quarter operating results. Funds from operations (FFO) of $0.42 per share was in line with estimates and a penny above $0.41 FFO in the second quarter of 2022. Revenue of $60.69 million missed the estimates of $61.21 million but was 9.5% above revenue of $55.43 million in the second quarter of 2022.

Four Corners' total portfolio is still mainly restaurant properties. It owns 312 Olive Gardens, 115 LongHorn Steakhouses and 82 Chili's restaurants. Another 308 properties are made up of other assorted eateries. About 85% of Four Corners' total annual base rent (ABR) is from its restaurant portfolio.

But Front Corners has apparently decided to throw the "lobsters" out of its portfolio, and this could be an astute business decision as many of the 653 Red Lobsters have begun closing their doors after more than 30 years in business. Rising labor and food costs have made it difficult for Red Lobster to stay afloat, and Red Lobster has reported millions of dollars of losses over the last three quarters. More than 10 Red Lobster restaurants in eight states have recently shuttered.

Reducing risk is of paramount importance to REITs right now, and Four Corners' recent push to acquire healthcare and automotive properties while ridding itself of $15 million in Red Lobsters is an excellent step in that direction.

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