Four Corners Property Trust (NYESE: FCPT) did something impressive in 2020 -by muddling through the coronavirus pandemic shutdowns while still managing to increase its annual dividend. That said, there’s a good reason for this success and it speaks to both the inherent opportunity here and the unique risks. Here’s why Four Corners could be a millionaire-maker real estate investment trust (REIT), but only for those that can handle some significant near-term risks.
The big story
Four Corners Property Trust is focused on owning net lease properties in the restaurant space. A net lease requires the tenant to pay for most of the operating expenses of a property, leaving the landlord to, simplifying things greatly, sit back and collect rent. It’s generally considered a low-risk investing approach in the property sector.
The REIT came public in November 2015, having been spun out from Darden Restaurants (NYSE: DRI). At the time, the giant casual dining company was facing headwinds at its largest nameplate, and activist investors were agitating for change. Spinning off some of its property into a REIT was a way to raise cash and assuage angry investors.
The goal from day one at Four Corners was to diversify its portfolio away from Darden’s brands — and along the way, build a large and profitable company that could reward investors via regular, and hopefully increasing, dividend payments. With six consecutive annual dividend hikes under its belt, the company has managed to live up to the dividend goal, helping enrich its shareholders. In fact, if it keeps this up, it could eventually help turn investors into millionaires.
But there’s one small problem that anyone looking at Four Corners has to keep in mind: diversification. Or, in this case, the lack of it.
Still a work in progress
One of the biggest reasons Four Corners was able to raise its dividend in 2020 was because Darden Restaurants accounts for around two-thirds of the REIT’s rent roll. Darden managed to keep paying despite the pandemic headwinds, and that provided a strong foundation for the REIT. From an asset- allocation standpoint, this is more of a lucky coincidence than anything else. Being reliant on one company for so much rent could easily have turned out to be a disaster.
And that highlights the problem here. Four Corners isn’t really a great pick for most investors because it lacks tenant diversification. How bad is it? Darden’s Olive Garden alone makes up 49% of the rent roll. The restaurant chain’s LongHorn Steakhouse adds another 14%, with smaller Darden brands chiming in at 3%. Chili’s, which isn’t owned by Darden, chips in another 8% of rents. Diversification is good for your portfolio, and it is good for a REIT’s portfolio, too, so it’s a problem that Four Corners doesn’t really provide much diversification. As noted, the lack of diversification worked out in 2020, but investors shouldn’t count on that.
But in this risk there is also the inherent long-term opportunity here. When Four Corners came public, it was basically beholden to just one tenant, Darden. Since that point, roughly six years ago, it has shifted its portfolio via acquisitions and dispositions so that roughly one-third of its rents come from other companies. That includes reaching into the fast food space so it wouldn’t be entirely reliant on casual dining. Continuing along this path, which should lead to a growing portfolio and rent roll, could end up being quite profitable for investors over the long term. This is a pretty attractive proposition and might turn Four Corners into a millionaire-maker stock.
The problem is that you have to be able and willing to handle the concentration risk, which makes this a tough fit for most investors. Note, too, that the 4.4% dividend yield doesn’t particularly stand out from the net lease pack, either. (Other, more diversified net lease REITs have higher yields and much longer histories of success behind them.) So investors don’t look like they’re pricing in the inherent risks here. It seems like they’re focusing pretty tightly on the expectation of ongoing success in the company’s efforts to move away from Darden.
Lots of potential, lots of risk
So the final answer here is that Four Corners Property Trust could very well help investors amass a seven- digit portfolio value. But only if you’re willing to own a REIT that’s laser focused on restaurants and that has one single tenant that accounts for 66% of its rent roll. For most investors, that’s probably not a great risk/reward tradeoff. That said, if you’re still intrigued, perhaps consider a small position instead of a “bet the farm” type trade, just in case Darden falters or the restaurant sector hits a downturn.