Four Corners Property Trust (FCPT) is offering investors a roughly 5% dividend yield. The dividend payment has been increased each year since the real estate investment trust (REIT) entered the public sphere at the tail end of 2015. There’s room for more growth ahead, as well, as the company continues to expand its property portfolio. There’s just one lingering problem that harkens all the way back to its founding.
The birth of a REIT
Four Corners was born from Darden Restaurants (DRI -1.42%). Basically, the restaurant company, which owns chains like Olive Garden and Longhorn Steakhouse, was looking to enhance shareholder returns and decided that “selling” its restaurant properties, while still operating the restaurants, would be a good path forward. And, thus, it created the Four Corners REIT to effectively buy much of its property portfolio.
So, at its start, all of Four Corners’ properties were restaurants. And all of its 418 leases had Darden as their counterparty. You know how important diversification can be for your portfolio; well, it is just as important for REITs, which basically oversee portfolios of properties. If something material had gone wrong with Darden’s business, Four Corners would have been in a tough position.
It’s worth thinking about the risk here for just a bit. The worst-case scenario would have been that Darden stopped paying rent, which would likely have pushed Four Corners into bankruptcy court. A slightly less bad outcome would have been that its only tenant demanded lease concessions, which Four Corners would have been in no position to refuse. From day one management knew it had to do something about its reliance on Darden and, to its credit, has been working on that effort.
A long way, but there’s still more to do
Today, Four Corners has nearly 1,050 leases and conducts businesses with 131 different brands (just five of which are tied to Darden). Without question, the risk posed by having so much exposure to Darden has been reduced materially even as the REIT has managed to grow. Notably, its rent roll has roughly doubled since it was created.
And yet conservative investors shouldn’t rush in just yet. Darden has fallen from 100% of the REIT’s leases to around 50% or so. That’s a vast improvement, to be sure, but Four Corners would still be hard-pressed to refuse any demand that Darden made given its still-large size in the portfolio.
Meanwhile, restaurants make up around 85% of the company’s leases. You can argue that it has a specialized business approach, but that’s still a lot of exposure to just one sector. Management has been working on this, too, looking to retail properties outside of the food space. But, at roughly 15% of the company’s leases, nonrestaurant properties only offer a modest level of diversification at this point.
FCPT Dividend Per Share (Quarterly) data by YCharts
Four Corners is probably not appropriate for conservative dividend investors. There are other REITs that focus on the retail space that have much broader portfolio diversification. That said, more aggressive investors might find the REIT’s ongoing diversification an attractive theme, noting that it has come with a side helping of rapid business growth. For example, Four Corners’ dividend has grown roughly 23% over the past five years while peer National Retail Properties, an old hand in the retail property space, has only increased its dividend by around 15%.
How’s your glass?
How you view Four Corners will probably fall back to whether you are a glass-half-empty or a glass-half-full type of investor. From a conservative point of view, the company just isn’t diversified enough yet to make it worth owning given its still-large exposure to restaurants and, more specifically, Darden. If you are a bit more aggressive, however, you might appreciate the diversification that has been achieved and the growth that has come with it. And that might make this 5% yielder worth a deeper dive as long as you understand the material diversification issues at play here.