Four Corners Property Trust's Q3 2025: Contradictions Emerge on Acquisition Volume, Darden Renewals, and Portfolio Diversification

Business Commentary:

• Strong Financial Performance:
• Four Corners Property Trust reported Q3 AFFO of $0.45 per share, increasing 3% from Q3 2024.
• Cash rental income grew by 12.6%, achieving $66.1 million compared to last year.

• The growth was attributed to strong acquisitions and high rent coverage, with 5.1x rent coverage for a significant portion of the portfolio.

• Successful Acquisitions and Investment Strategy:

• FCPT acquired $82 million of net lease properties in Q3, with a blended cap rate of 6.8% and a weighted average lease term of 12 years.
• Over the trailing 12 months, acquisitions totaled $355 million, marking the highest volume across four consecutive quarters.

• The company maintained its strict underwriting standards, focusing on creditworthy tenants and low leverage, contributing to a strong, defensive portfolio.

• Debt Management and Financial Health:

• FCPT has $270 million in combined dry powder, including equity, debt, and retained cash flow, with a mid-5x leverage target.
• The company's net debt to adjusted EBITDA was 4.7x at the end of Q3, excluding unsettled equity forwards, compared to a historical range of 5.5x to 6x.

• Effective debt management and hedging strategies have helped maintain a strong financial position, with 97% of the debt stack fixed through November 2027.

• Tenant Performance and Diversification:

• FCPT's largest tenants, such as Olive Garden and LongHorn, have shown strong same-store sales growth, contributing to high rent coverage and portfolio strength.
• Diversification efforts have resulted in Olive Garden and LongHorn now accounting for 32% and 9% of rent, respectively, while 35% of rent comes from beyond casual dining sectors.
• This diversification strategy has led to a more resilient portfolio focused on essential retail and services, enhancing tariff resistance.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly described the portfolio as "resilient" and "well positioned," highlighted Q3 AFFO of $0.45 (up 3% YOY), cash rental income of $66.1M (up 12.6% YOY), occupancy at 99.5% and 99.9% base rent collected, and emphasized $270M of dry powder and improving debt markets supporting accretive acquisitions.

Q&A:

• Question from William John Kilichowski (Wells Fargo Securities, LLC, Research Division): Are there any underwriting standards or guidelines you're willing to adjust to increase acquisitions?
  Response: No—will not lower underwriting scores; acquisition volume is driven by cost of capital and purchase price discipline.

• Question from William John Kilichowski (Wells Fargo Securities, LLC, Research Division): With ~$100M left on the forward, and current cost of equity/cap rates, how would you fund the pipeline into 2026?
  Response: Combine the $100M forward with ~$170M of debt capacity and retained free cash flow to reach roughly $270M of acquisition capacity.

• Question from Michael Goldsmith (UBS Investment Bank, Research Division): How do you assess the current deal environment and would you accelerate activity?
  Response: Environment is favorable; we'll accelerate only where deals are accretive—balance sheet is slightly over-equitized enabling highly accretive, opportunistic buying.

• Question from Michael Goldsmith (UBS Investment Bank, Research Division): Given strong same-store sales at Darden brands, does that increase confidence in lease renewals ahead of 2027 maturities?
  Response: Yes—expect very high renewal rates due to exceptional coverage, low in-place rents, and irreplaceable locations.

• Question from Anthony Paolone (JPMorgan Chase & Co, Research Division): If cap rates moved to ~7–7.25%, what types of deals would you see vs. your current activity?
  Response: Higher cap-rate deals would increasingly include non-traditional net-lease assets (experiential venues, challenged brands, storage, office), not our core retail net-lease focus.

• Question from Anthony Paolone (JPMorgan Chase & Co, Research Division): Does this suggest you're broadening beyond auto, restaurants, or medical?
  Response: We continually explore new categories but remain disciplined; no changes to announce.

• Question from Mitch Germain (Citizens JMP Securities, LLC, Research Division): Have your core underwriting principles changed over time or been tweaked?
  Response: Fundamentals remain consistent—conservative, non-volume-driven underwriting—bolstered by increased institutional knowledge and formal training.

• Question from Mitch Germain (Citizens JMP Securities, LLC, Research Division): Could Starbucks reorg/closures hit your portfolio?
  Response: Unlikely—we've been cautious on non-drive-thru/urban Starbucks and have limited exposure; closures are mostly non-drive-thru urban sites.

• Question from Richard Hightower (Barclays Bank PLC, Research Division): For Darden renewals, where do you peg market rents and how will negotiations balance coverage vs. rent increases?
  Response: Darden's renewal mechanics are public—option to renew five years at 1.5% annual escalator; negotiation is limited and renewals are likely given low in-place rents and strong locations.

• Question from Richard Hightower (Barclays Bank PLC, Research Division): Given revenue growth, would market rents be materially higher for those sites?
  Response: While market rents may be higher, Darden's contractual 1.5% extension and historically low rents make renewal highly probable.

• Question from Richard Hightower (Barclays Bank PLC, Research Division): Who are you encountering on deals and how concerning is competition from new private capital pools?
  Response: More aggressive private equity competitors exist, but our granular sourcing, execution track record and wide aperture (from $1M one-offs to portfolios) keep us competitive.

• Question from Wesley Golladay (Robert W. Baird & Co. Incorporated, Research Division): Any appetite to increase dispositions given current equity levels?
  Response: Dispositions are not top of mind; portfolio quality is high and we'd largely be selling very strong assets, so not planning material dispositions now.

• Question from Wesley Golladay (Robert W. Baird & Co. Incorporated, Research Division): Any change to your tenant watch list?
  Response: No—no meaningful watch-list changes; occupancy has improved and leasing demand is strong.

• Question from Wesley Golladay (Robert W. Baird & Co. Incorporated, Research Division): Are tenants pulling forward renewals to lock in rents?
  Response: Renewal timing is contractual; tenants typically notify 6–12 months before expiry, so no widespread early renewals observed.

• Question from James Kammert (Evercore ISI Institutional Equities, Research Division): Is there opportunity to densify sites given acreage and building sizes?
  Response: Acreage and parking are part of our scorecard; densification opportunities are limited and benefits are more about downside protection than upside yield.

Contradiction Point 1

Acquisition Volume and Capacity

It involves differing assessments of the company's acquisition capacity and the factors influencing its acquisition volume, which are critical for investors and stakeholders regarding the company's growth strategy.

Are there any standards or guidelines you might adjust to expand your investment scope and increase acquisitions? - William John Kilichowski(Wells Fargo Securities, LLC, Research Division)

2025Q3: FCPT maintains high standards for portfolio quality. The cost of capital influences acquisition volume rather than changing scoring standards. The current stock price allows for accretive acquisitions. - William Lenehan(CEO)

Does the current acquisition volume reflect capacity constraints of your team, where expanding it would allow higher volume, or is the team already operating at full efficiency with the available opportunity set? - William John Kilichowski(Wells Fargo)

2025Q2: I would reflect that we run the company pretty bootstrapped. So we definitely don't have excess capacity in acquisitions or other parts of the company, frankly. - William Howard Lenehan(CEO)

Contradiction Point 2

Darden's Renewal Expectations and Lease Maturities

It pertains to the company's expectations regarding Darden's lease renewals and the impact of upcoming lease maturities, which could have implications for company revenue and investor confidence.

Do Darden's 2027 lease expirations increase confidence in lease renewals? How has that evolved this year? - Michael Goldsmith(UBS Investment Bank, Research Division)

2025Q3: Expectations are high for lease renewals due to well-covered rents and strong locations. Darden's menu value and pricing strategy support renewal prospects. - William Lenehan(CEO)

Is there an anticipation to pull some of that forward? - Mitch Germain(Citizens JMP Securities)

2025Q2: The extension options are at Darden's option, and they have a notification of a year to tell us what their intentions are. We're in constant dialogue with them. It's a fantastic relationship. We'll see how that works as time plays out. - William Howard Lenehan(CEO)

Contradiction Point 3

Portfolio Diversification and Darden Exposure

It touches upon the company's strategy for portfolio diversification and its exposure to Darden, which are critical for balanced risk management and growth.

Are there any standards or guidelines you might adjust to expand your investment scope and increase acquisitions? - William John Kilichowski(Wells Fargo Securities, LLC, Research Division)

2025Q3: We've been very confident in our ability to expand our Darden exposure when we find great assets at the right prices. - William Lenehan(CEO)

Did acquiring Olive Gardens indicate you've reached a comfortable Darden exposure level to maintain moving forward? - Michael Goldsmith(UBS Investment Bank)

2025Q2: We've consistently diversified the Darden exposure down, but we haven't hesitated to buy Darden-related assets when we found ones that we really liked and the pricing was great and that played out in this quarter. - William Howard Lenehan(CEO)

Contradiction Point 4

Acquisition Volume and Market Conditions

It involves the company's approach to acquisition volume and market conditions, which directly impacts strategic decision-making and investors' understanding of the company's growth strategy.

Can you assess the current environment and share your willingness to accelerate activity based on it? - Michael Goldsmith (UBS Investment Bank, Research Division)

2025Q3: The environment is cooperative with a capable team, improved debt markets, and dry powder. However, FCPT remains disciplined in acquiring accretive properties without sacrificing quality. - William Lenehan(CEO)

Do you still feel good about being in the green zone and the 2025 acquisition outlook? - Michael Goldsmith (UBS)

2024Q4: We are in the green zone now. We have substantial capital raised when we were well in the green zone, putting us in a good position for acquisitions. - Bill Lenehan(CEO)