Fitch Affirms Four Corners Property Trust's IDR at 'BBB-'; Rates Sr Unsecured Notes 'BBB-'
(The following statement was released by the rating agency) NEW YORK, April 20 (Fitch) Fitch Ratings has affirmed the credit ratings of Four Corners Property Trust (NYSE: FCPT) including the Issuer Default Rating (IDR) at 'BBB-'. The Rating Outlook is Stable. Fitch has also assigned a 'BBB-' rating to the senior unsecured notes due 2024 and 2027 issued by Four Corners Operating Partnership, L.P. A full list of Fitch's ratings follows at the end of this release. KEY RATING DRIVERS FCPT's ratings are based on expected cash flow stability based on the company's strong tenant credit characteristics, solid tenant EBITDAR coverage of rents, and long-dated triple-net leases. Further, the geographic diversity of the company's portfolio insulates cash flows against regional economic downturns. These credit positives are offset by tenant and industry concentration and unproven access to non-bank unsecured debt capital. STRONG UNDERLYING TENANT CREDIT QUALITY AND EBITDAR COVERAGE As of Dec. 31, 2016, FCPT's largest tenant, Darden Restaurants, Inc. (IDR of 'BBB'), accounted for 93.9% of annual base rent (ABR). FCPT's underlying tenant EBITDAR coverage of 4.2x for its entire portfolio is strong on an absolute basis and relative to other Fitch-rated triple net lease REITs, enabling the company's tenants to incur material declines in 4-wall profitability before potential rent reductions. LONG-DATED TRIPLE NET LEASE MATURITY SCHEDULE FCPT's portfolio has a long weighted average lease term of 13.7 years with less than 1% of cumulative rental income maturing over the next 10 years. Leases generally have 1.5% annual rent escalators, partially insulating the company against inflation increases. GEOGRAPHIC DIVERSITY OFFSET BY TENANT CONCENTRATION The company's portfolio benefits from geographic diversity with properties in 44 states and no single state contributing more than 11.8% of ABR as of Dec. 31, 2016. The top two states, Florida and Texas, contribute 11.8% and 10.8% of ABR, respectively, followed by Georgia (8.4%) and Ohio (6.4%). Offsetting this geographic diversity is FCPT's tenant concentration, with Darden at 93.9% of ABR, with the remainder of rental income derived from fast casual or quick service restaurants. Further concentration occurs with 70.2% of ABR from the Olive Garden restaurant concept and 19.0% coming from the Longhorn Steakhouse restaurant concept. Darden tenant concentration is down from 100% at FCPT's inception in November 2015. GROWTH AND TENANT DIVERSIFICATION AWAY FROM DARDEN Fitch expects FCPT's management team will address portfolio growth and further tenant diversification away from Darden in a measured and disciplined manner. Fitch anticipates that portfolio growth and tenant diversification will occur slowly over time. AMPLE LIQUIDITY PROFILE AND STRONG CASH FLOW GENERATION As of Dec. 31, 2016, FCPT had $305 million of availability on its $350 million revolving credit facility (RCF) that matures in November 2019. The secured revolving credit facility and term loan has been amended to become unsecured upon issuance of the senior unsecured notes. The company has no significant debt maturities until 2019, a reasonable dividend payout ratio, and benefits from the triple net lease structure that allows for strong cash flow generation and limited recurring capital expenditures. In addition, FCPT operates a totally unencumbered portfolio, which could potentially be a source of contingent liquidity. UNENCUMBERED ASSET COVERAGE Fitch expects unencumbered asset coverage in the mid-2x range, which is appropriate for the rating. MODERATE LEVERAGE TARGET FCPT's long-term objective is to maintain a net debt/GAAP EBITDA ratio below 5.5x-6.0x. Fitch projects the company will operate at around the lower end of this leverage range during the 2017-2019 time horizon, but that leverage will migrate towards the midpoint of this range longer term. Reported metrics may be weaker due to the timing effects of acquisitions, dispositions and debt issuance. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Annual same-store base rental income growth of 1.5%, reflective of contractual rent escalations; --Leverage sustaining below 5.5x in the near term and migrating towards the mid-5.0x range over the longer term. RATING SENSITIVITIES While near-term positive momentum is unlikely, the following could result in positive momentum in the ratings and/or Outlook: --Fitch's expectation of leverage (net debt/recurring GAAP EBITDA) sustaining below 5.5x (while Fitch projects leverage to sustain below this level in the near term, we expect this ratio to migrate toward the mid-5.0x range over the longer term); --Material progress in FCPT's tenant diversification; --Lengthening of debt maturity profile. The following could result in negative momentum in the ratings and/or Outlook: --Fitch's expectation of leverage sustaining above 6.5x; --Deterioration in Darden's operations and credit profile and/or deterioration in the broader casual dining and quick-serve restaurant industry; --If FCPT is unable or unwilling to refinance or rebalance its capitalization via public or private placement debt issuances; --Initiation of shareholder-friendly corporate actions. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Four Corners Property Trust, Inc.: --IDR at 'BBB-'. Four Corners Operating Partnership, L.P.: --Senior unsecured RCF at 'BBB-'; --Senior unsecured term loan at 'BBB-'. Fitch has assigned the following rating: Four Corners Operating Partnership, L.P.: --Senior unsecured notes 'BBB-'. The Rating Outlook is Stable. Contact: Primary Analyst Steven Marks Managing Director +1-212-908-9161 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Ronald Nirenberg Director +1-212-612-7747 Committee Chairperson Jack Kranefuss Senior Director +1-212-908-0791 Summary of Financial Statement Adjustments - None. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. 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