Four Corners Property Trust （FCPT US） | Updated model to reflect strong 2Q deals offset by higher financing costs

We updated our FCPT model in advance of 2Q earnings to reflect announced deal activity during the quarter; recall that FCPT announces its transactions as they occur. Our updated model resulted in minor reductions to our AFFO estimates, despite volume coming in stronger-than-expected so far this year. For 2023, our company-defined AFFO/share estimate goes from $1.68 to $1.67, which puts us in line with Bloomberg consensus. For 2024, our estimate goes from $1.74 to $1.73, which is $0.02 below Bloomberg consensus of $1.75. The offset to higher deal flow in our model is higher capital costs in the form of our assumption of more equity being issued sooner and higher variable rate debt costs this year and next year.

In terms of transaction activity, we assume FCPT purchases $340 million in assets in 2023 at a 6.7% cash yield, followed by $200 million in 2024 at a 6.75% yield. We assume that leverage is maintained going forward in the low-to-mid 5s net debt to EBITDA range. The deal volume announced for the second quarter of 2023 specifically was an impressive $170 million, and we think 3Q should also be strong given its $85 million “Cheddars” acquisition from Darden ($79.5 million already closed).

Our NAV/share estimate is $23.58 ($22.58 prior) after assuming a blended cap rate of 6.7% (6.8% prior). At the current stock price we calculate FCPT to trade at an implied cap rate of 6.4%. Our December 2023 year end price target remains unchanged at $27/share.

As a Neutral-rated stock, key risks to our rating include items that may cause the stock to outperform or underperform our coverage universe. These include 1) a better or worse outcome with regard to tenant credit situations as a result of the economic backdrop; 2) deal volume could exceed / fall short of our forecast; 3) the company may have a better / less attractive cost of capital position, making it more accretive / less accretive to do deals; and 4) interest rates can create upside / downside risk, especially with net lease REITs like FCPT that have long-term leases with tenants.