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Many real estate investment trusts (REITs) had a difficult time getting through the early days of the pandemic in 2020. Some were forced to cut their dividends. But not Four Corners Property Trust (NYSE: FCPT). This net lease REIT actually increased its dividend last year, and it has already hiked it again in 2021. Before you go any further, however, there's a major risk you need to think about.
REIT Four Corners Property Trust focuses on restaurants, with most falling into the casual-dining category. This was not a particularly great place to be when the government forced non-essential businesses to shut down in an attempt to slow the spread of the coronavirus pandemic in 2020. Lessees like Olive Garden and Longhorn Steakhouse, both of which are owned by Darden Restaurants (NYSE: DRI), and Chili's, owned by Brinker International (NYSE: EAT), had no choice but to drastically change their business models.
Early on, Four Corners moved to ensure it had enough liquidity to continue operating. That proved a good call, as rent collection rates fell into the mid-80% range early on. Rent collections quickly recovered as the year progressed, however, and the REIT was able to hold the line on its dividend. The dividend, notably, was increased at the start of last year and was increased again at the start of 2021. Basically, Four Corners faced a massive stress test of its business model and passed.
There are a couple of issues worth looking at here. First, as a net lease REIT, Four Corners isn't responsible for the costs of the properties it occupies. Most of those expenses fall onto its lessees, so it was basically just collecting rent. There was no material change to its business approach, the lessees were the ones that bore those expenses (for things like extra cleaning) and headaches (figuring out new safety protocols). Second, a good portion of Four Corners' rent comes from large public companies, which were able to muddle through the pandemic in relative stride despite operating in the casual dining segment. But this is where the story gets troubling from a long-term perspective.
Way too focused
Casual dining makes up more than 75% of Four Corners' rent roll. That's a huge exposure to what amounts to a single niche in the restaurant space, itself a subsector of the retail arena. Diversification is good for your portfolio and it tends to be good for REIT portfolios, too, so this issue should worry investors. But the concentration issue doesn't stop here.
Four Corners came public in late 2015 when Darden Restaurants spun off its property holdings to create a REIT. At that point, around six years ago, Four Corners basically had just one main tenant in the casual dining space. It has, since the spin-off, worked to diversify its business relationships, which is good. That said, the Darden connection worked out pretty well in 2020 since the company paid its rents.
But there's still a major risk here related to Darden. Olive Garden alone still accounts for 49% of Four Corners' top line. Longhorn Steakhouse adds another 14%. Add those together and two restaurant brands make up 63% of Four Corners' revenues. Smaller Darden brands contribute another 3%, so as a company, Darden accounts for two-thirds of the REIT's rents. That's a huge diversification problem, and conservative investors would be wise to carefully consider the risk that exposure opens up.
Indeed, it wasn't too long ago that the Olive Garden concept was struggling so badly that Darden had to rejigger its business to get things back on track. The moves there included spinning off its property holdings (which was the genesis of Four Corners) and selling the Red Lobster brand. The big point here being that food concepts go in and out of favor and Four Corners has massive exposure to just a single concept.
A work in progress
The fact that Four Corners was able to get through 2020 in relative stride was impressive. And it continues to add new restaurant properties to its portfolio as it works to diversify away from Darden. However, at this point, it remains highly dependent on just one lessee. That worked out in 2020, but long-term investors should probably think carefully about the concentration risk they are taking on here. That is particularly true when considering that other net lease REITs -- with more diversification and even more impressive dividend histories -- offer yields well higher than Four Corners' 4.5%.
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