Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) for Four Corners Property Trust, Inc. (FCPT) and Four Corners Operating Partnership, L.P. at 'BBB', and underlying issuances outstanding at 'BBB'.

The Rating Outlook is Stable.

The affirmation and Stable Outlook reflect the company's strong credit metrics, high tenant rent coverage, and Fitch's expectations that FCPT will maintain stable operating performance over the long term.

Key Rating Drivers

Strong Credit Metrics: Fitch expects FCPT to maintain leverage in the mid-to-high-5x range during the forecast period as the firm continues to fund acquisitions with a largely leverage-neutral mix of debt and equity issuance. The company's strong credit metrics and liquidity profile provide significant flexibility if it needed to manage through a period of extended operating weakness in its tenant base.

FCPT's leverage was 5.7x and fixed-charge coverage was 5.4x for the year-ended Dec. 31, 2022, metrics which are solid for the rating. Fitch estimates FCPT's unencumbered assets to net unsecured debt at 2.1x at 1Q23, using a stressed 9.5% cap rate. A UA/UD ratio of at least 2.0x is appropriate for the 'BBB' category.

Diversifying Large Tenant Concentration: FCPT has significant tenant concentration, with its top 10 tenants accounting for 69.5% of 2Q23 annualized base rent (ABR). The company's largest exposure is to Darden Restaurants, Inc. (BBB/Stable), which represents 51.2% of ABR, though this has decreased from 100% at inception in November 2015 as the firm continues to acquire an outsized proportion of non-restaurant properties, including medical retail, auto repair and supply properties.

In 2022, FCPT acquired 112 properties for $286 million at a 6.5% cap rate, with 62% consisting of non-restaurant exposure, primarily in the auto service and medical retail subsectors. Further mitigating the relatively high tenant concentration risk, Darden has provided a corporate guarantee of the lease obligations for substantially all of the leases at FCPT properties.

High Tenant Rent Coverage: Fitch forecasts FCPT's underlying tenant weighted average EBITDAR coverage will sustain in the mid-4x range for the forecast period. At YE2022, portfolio tenant coverage was 4.0x overall (for its tenants that report financial data representing 72% of cash rent base), which is strong on an absolute basis, and relative to other Fitch-rated triple-net lease REITs, which typically have EBITDAR/rent ratios in the 2.0x-3.0x range.

Geographic Diversification: The company's portfolio benefits from geographic diversity with over 1,000 properties in nearly all 50 states. The top two states, Texas and Florida, contribute 10.2% and 9.3% of ABR, respectively.

Limited Near-Term Lease Maturities Aid Stability: The portfolio has a weighted average lease term of 8.1 years with less than 7.5% of rental income expiring prior to 2027. This extended expiration schedule will minimize the potential for occupancy decreases and rent roll down on expiring leases during periods of economic stress. The portfolio was 99.9% occupied as of Dec. 31, 2022.

Lower Capital Markets Access: The company has yet to access the public bond market. FCPT's debt profile is comprised of $430 million of unsecured term loans (42% of total debt), $575 million of private placement notes (56%) and its $250 million revolving credit facility, of which $15 million is outstanding (2%). Fitch expects FCPT will refinance term loan debt with private placements over the forecast period, though the firm does not have the size required to issue public bonds.

Derivation Summary

FCPT's credit metrics, including leverage in the mid-to-high-5x range, is appropriate for the rating, and comparable to triple-net peers in the 'BBB' category, such as STORE Capital LLC (BBB-/Stable) and Spirit Realty Capital, Inc. (BBB/Stable). FCPT also has strong tenant metrics, including tenant EBITDAR coverage in the mid- to high-4x range and occupancy above 99%. The company's sector and tenant concentrations are the primary considerations balancing solid operating metrics.

FCPT was spun off from Darden Restaurants, Inc. (BBB/Stable) in November 2015. FCPT operates as an autonomous company with no management or ownership ties to Darden. As a result, Fitch does not formally link FCPT's IDR to Darden's. However, FCPT's credit profile is highly dependent on the performance of Darden's Olive Garden (38% of ABR) and Longhorn Steakhouse (11%).

Fitch rates the IDRs of the parent REIT and subsidiary operating partnership on a consolidated basis, using the weak parent/strong subsidiary approach and open access and control factors, based on the entities operating as a single enterprise with strong legal and operational ties.

Key Assumptions

Same-store NOI growth of 1.0%-1.5% annually during the forecast period;

Net acquisitions of $325 million-$425 million per year;

Equity Issuances in the range of $200 million-$250 million per year;

Bond Issuances of $100 million-$200 million per year.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

Material progress in FCPT's tenant diversification, with a reduction in the company's top 10 tenant exposure to less than 50% of annualized base rent (currently 69.5%), while sustaining tenant credit quality;

Fitch's expectation of REIT leverage (net debt/operating EBITDA) sustaining below 5x;

Increased capital access, including public bond issuance;

Fitch's expectation of FCC sustaining above 3.5x.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

Deterioration in Darden's credit profile or in the casual dining restaurant industry;

Fitch's expectation of REIT leverage sustaining above 6x;

Deterioration in the mortgage finance market for restaurant properties;

UA/UD sustaining below 2.0x and/or deterioration in the quality, value and/or ability to finance the unencumbered pool;

Fitch's expectation of FCC sustaining below 2.5x.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Strong Liquidity: Fitch estimates FCPT's liquidity coverage at 5.8x through YE 2024, which is strong for the rating. As of YE 2022, FCPT had $26 million in cash and nothing outstanding under its $250 million revolver. FCPT's debt maturities are well-laddered, with very manageable maturities through 2025. FCPT does not have recurring capex spend due to the triple-net structure of its leases, and its operating strategy does not include (re)development.

Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources include unrestricted cash, availability under unsecured revolving credit facilities, and retained cash flow from operating activities after dividends. Uses include pro rata debt maturities, expected recurring capex and forecast (re)development costs.

Issuer Profile

Four Corners Property Trust (FCPT) is a REIT primarily engaged in the ownership, acquisition and leasing of restaurant and retail properties. The company seeks to grow its portfolio by acquiring additional real estate to lease, on a net basis, for use in the restaurant and retail industries.

Summary of Financial Adjustments

No material non-standard financial adjustments. Stock-based compensation was considered a reduction to SG&A and an addback to EBITDA.

Sources of Information

The principal sources of information used in the analysis are described in the Applicable Criteria.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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