FOUR CORNERS PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2021 | | 2020 |
Cash flows - operating activities | | | | |
Net income | | $ | 40,802 | | | $ | 37,856 | |
Adjustments to reconcile net income to cash provided by operating activities: | | | | |
Depreciation and amortization | | 16,624 | | | 14,148 | |
Gain on disposal of land, building, and equipment | | (431) | | | 0 | |
Non-cash revenue adjustments | | 1,054 | | | 387 | |
Amortization of financing costs | | 1,433 | | | 1,046 | |
Stock-based compensation expense | | 2,247 | | | 1,628 | |
| | | | |
Changes in assets and liabilities: | | | | |
Derivative assets and liabilities | | 2,117 | | | (8,260) | |
Straight-line rent adjustment | | (3,796) | | | (4,270) | |
Rent received in advance | | (1,470) | | | (1,427) | |
Intangible assets (lease incentive payments) | | (426) | | | 0 | |
Other assets and liabilities | | 724 | | | (4,440) | |
Net cash provided by operating activities | | 58,878 | | | 36,668 | |
Cash flows - investing activities | | | | |
Purchases of real estate investments | | (84,303) | | | (71,963) | |
Proceeds from sale of real estate investments | | 3,343 | | | 0 | |
Advance (refunds) deposits on acquisition of operating real estate | | (574) | | | 973 | |
Net cash used in investing activities | | (81,534) | | | (70,990) | |
Cash flows - financing activities | | | | |
Net proceeds from ATM equity issuance | | 4,659 | | | 4,288 | |
| | | | |
Proceeds from issuance of senior notes | | 100,000 | | | 125,000 | |
Payment of deferred financing costs | | (4,605) | | | (1,190) | |
Proceeds from revolving credit facility | | 71,500 | | | 130,500 | |
Repayment of revolving credit facility | | (81,500) | | | (178,000) | |
Payment of dividends to shareholders | | (48,238) | | | (42,745) | |
Distributions to non-controlling interests | | (101) | | | (136) | |
Redemption of non-controlling interests | | 0 | | | (813) | |
Employee shares withheld for taxes | | (3,027) | | | (2,567) | |
Net cash provided by financing activities | | 38,688 | | | 34,337 | |
Net increase in cash and cash equivalents, including restricted cash | | 16,032 | | | 15 | |
Cash and cash equivalents, including restricted cash, at beginning of period | | 11,064 | | | 5,083 | |
Cash and cash equivalents, including restricted cash, at end of period | | $ | 27,096 | | | $ | 5,098 | |
Supplemental disclosures: | | | | |
Interest paid | | $ | 10,637 | | | $ | 12,011 | |
Income taxes paid | | $ | 109 | | | $ | 234 | |
Operating lease payments received (lessor) | | $ | 79,166 | | | $ | 66,782 | |
Operating lease payments remitted (lessee) | | $ | 440 | | | $ | 283 | |
Non-cash activities: | | | | |
Dividends declared but not paid | | $ | 24,157 | | | $ | 21,420 | |
Change in fair value of derivative instruments | | $ | 6,642 | | | $ | (18,465) | |
The accompanying notes are an integral part of this financial statement.
6
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2020 | | 2019 |
Cash flows - operating activities | | | | |
Net income | | $ | 57,260 |
| | $ | 53,946 |
|
Adjustments to reconcile net income to cash provided by operating activities: | | | | |
Depreciation and amortization | | 21,670 |
| | 19,532 |
|
Gain on disposal of land, building, and equipment | | 0 |
| | 0 |
|
Non-cash revenue adjustments | | 799 |
| | 49 |
|
Amortization of financing costs | | 1,589 |
| | 1,539 |
|
Stock-based compensation expense | | 2,496 |
| | 2,792 |
|
Changes in assets and liabilities: | | | | |
Derivative assets and liabilities | | (8,049 | ) | | (5 | ) |
Straight-line rent adjustment | | (6,519 | ) | | (7,008 | ) |
Rent received in advance | | (628 | ) | | 7,222 |
|
Intangible assets (lease incentive payments) | | (4,167 | ) | | 0 |
|
Other assets and liabilities | | 945 |
| | 3,229 |
|
Net cash provided by operating activities | | 65,396 |
| | 81,296 |
|
Cash flows - investing activities | | | | |
Purchases of real estate investments | | (123,466 | ) | | (81,136 | ) |
Advance deposits (refunds) on acquisition of operating real estate | | 1,060 |
| | (282 | ) |
Net cash used in investing activities | | (122,406 | ) | | (81,418 | ) |
Cash flows - financing activities | | | | |
Net proceeds from ATM equity issuance | | 65,599 |
| | 1,652 |
|
Proceeds from issuance of senior notes | | 125,000 |
| | 0 |
|
Payment of deferred financing costs | | (1,194 | ) | | 0 |
|
Proceeds from revolving credit facility | | 158,500 |
| | 0 |
|
Repayment of revolving credit facility | | (210,500 | ) | | 0 |
|
Payment of dividends to shareholders | | (64,166 | ) | | (58,847 | ) |
Distributions to non-controlling interests | | (197 | ) | | (267 | ) |
Redemption of non-controlling interests | | (813 | ) | | (3,167 | ) |
Employee shares withheld for taxes | | (2,567 | ) | | (2,702 | ) |
Net cash provided by (used in) financing activities | | 69,662 |
| | (63,331 | ) |
Net increase decrease in cash and cash equivalents, including restricted cash | | 12,652 |
| | (63,453 | ) |
Cash and cash equivalents, including restricted cash, at beginning of period | | 5,083 |
| | 93,242 |
|
Cash and cash equivalents, including restricted cash, at end of period | | $ | 17,735 |
| | $ | 29,789 |
|
Supplemental disclosures: | | | | |
Interest paid | | $ | 13,861 |
| | $ | 14,075 |
|
Income taxes paid | | $ | 532 |
| | $ | 548 |
|
Operating lease payments received (lessor) | | $ | 104,212 |
| | $ | 96,113 |
|
Operating lease payments remitted (lessee) | | $ | 490 |
| | $ | 312 |
|
Non-cash activities: | | | | |
Dividends declared but not paid | | $ | 22,163 |
| | $ | 19,641 |
|
Change in fair value of derivative instruments | | $ | (17,315 | ) | | $ | (13,794 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – ORGANIZATION
Four Corners Property Trust, Inc. (together with its consolidated subsidiaries, “FCPT”) is an independent, publicly traded, self-administered company, primarily engaged in the ownership, acquisition and leasing of restaurant properties. Substantially all of our business is conducted through Four Corners Operating Partnership, LP (“FCPT OP”), a Delaware limited partnership of which we are the initial and substantial limited partner. Our wholly owned subsidiary, Four Corners GP, LLC (“FCPT GP”), is its sole general partner.
Any references to “the Company,” “we,” “us,” or “our” refer to FCPT as an independent, publicly traded, self-administered company.
FCPT was incorporated as a Maryland corporation on July 2, 2015 as a wholly owned indirect subsidiary of Darden Restaurants, Inc., (together with its consolidated subsidiaries “Darden”), for the purpose of owning, acquiring and leasing properties on a triple-net basis, for use in the restaurant and other retail industries. On November 9, 2015, Darden completed a spin-off of FCPT whereby Darden contributed to us 100% of the equity interest in entities that owned 418 properties in which Darden operates restaurants, representing 5 of their brands, and 6 LongHorn Steakhouse®Steakhouse restaurants located in the San Antonio, Texas area (the “Kerrow Restaurant Operating Business”) along with the underlying properties or interests therein associated with the Kerrow Restaurant Operating Business. In exchange, we issued to Darden all of our common stock and paid to Darden $315.0 million in cash. Subsequently, Darden distributed all of our outstanding shares of common stock pro rata to holders of Darden common stock whereby each Darden shareholder received one share of our common stock for every three shares of Darden common stock held at the close of business on the record date, which was November 2, 2015, as well as cash in lieu of any fractional shares of our common stock which they would have otherwise received (the “Spin-Off”).received.
We believe that we have been organized and have operated in conformity with the requirements for qualification and taxation as a real estate investment trust (a “REIT”) for federal income tax purposes commencing with our taxable year ended December 31, 2016, and we intend to continue to operate in a manner that will enable us to maintain our qualification as a REIT. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our shareholders, subject to certain adjustments and excluding any net capital gain. As a REIT, we will not be subject to federal corporate income tax on that portion of net income that is distributed to our shareholders. However, FCPT’s taxable REIT subsidiaries (“TRS”) will generally be subject to federal, state, and local income taxes. We made our REIT election upon the filing of our 2016 tax return.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements (the “Consolidated Financial Statements”) include the accounts of Four Corners Property Trust, Inc. and its consolidated subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The Consolidated Financial Statements reflect all adjustments which are, in the opinion of management, necessary to a fair presentation of the results for the interim periods presented. These adjustments are considered to be of a normal, recurring nature.
Use of Estimates
The preparation of these Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The estimates and assumptions used in the accompanying Consolidated Financial Statements are based on management’s evaluation of the relevant facts and circumstances. Actual results may differ from the estimates and assumptions used in preparing the accompanying Consolidated Financial Statements, and such differences could be material.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Real Estate Investments, Net
Real estate investments, net are recorded at cost less accumulated depreciation. Building components are depreciated over estimated useful lives ranging from seven to fifty-five years using the straight-line method. Leasehold improvements, which are reflected on our Consolidated Balance Sheets as a component of buildings, equipment, and improvements, net are amortized over the lesser of the non-cancelable lease term or the estimated useful lives of the related assets using the straight-line method. Equipment is depreciated over estimated useful lives ranging from two to fifteen years also using the straight-line method. Real estate development and construction costs for newly constructed restaurants are capitalized in the period in which they are incurred. Gains and losses on the disposal of land, buildings, and equipment are included in realized gain on sale, net, in our accompanying Consolidated Statements of Income (“Income Statements”).
Our accounting policies regarding land, buildings, equipment, and improvements, include our judgments regarding the estimated useful lives of these assets, the residual values to which the assets are depreciated or amortized, the determination of what constitutes a reasonably assured lease term, and the determination as to what constitutes enhancing the value of or increasing the life of existing assets. These judgments and estimates may produce materially different amounts of reported depreciation and amortization expense if different assumptions were used. As discussed further below, these judgments may also impact our need to recognize an impairment charge on the carrying amount of these assets as the cash flows associated with the assets are realized, or as our expectations of estimated future cash flows change.
Acquisition of Real Estate
The Company evaluates acquisitions to determine whether transactions should be accounted for as asset acquisitions or business combinations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2017-01. The Company has determined the land, building, site improvements, and in-places leases (if any) of assets acquired were each single assets as the building and property improvements are attached to the land and cannot be physically removed and used separately from the land without incurring significant costs or reducing their fair value. Additionally, the Company has not acquired a substantive process used to generate outputs. As substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset and there were no processes acquired, the acquisitions do not qualify as a business and are accounted for as asset acquisitions. Related transaction costs are generally capitalized and amortized over the useful life of the acquired assets.
The Company allocates the purchase price (including acquisition and closing costs) of real estate acquisitions to land, building, and improvements based on their relative fair values. The determination of the building fair value is on an ‘as-if-vacant’ basis. Value is allocated to acquired lease intangibles (if any) based on the costs avoided and revenue recognized by acquiring the property subject to lease and avoiding an otherwise ‘dark period’. In making estimates of fair values for this purpose, the Company uses a third-party specialist that obtains various information about each property, as well as the pre-acquisition due diligence of the Company and prior leasing activities at the site.
Lease Intangibles
Lease intangibles, if any, acquired in conjunction with the purchase of real estate represent the value of in-place leases and above- or below-market leases. For real estate acquired subject to existing lease agreements, acquired lease intangibles are valued based on the Company’s estimates of costs related to tenant acquisition and the asset carrying costs, including lost revenue, that would be incurred during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases at the time of the acquisition. Above-market and below-market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the time of acquisition of the real estate and the Company’s estimate of current market lease rates for the property, measured over a period equal to the remaining initial term of the lease.
In-place lease intangibles are amortized on a straight-line basis over the remaining initial term of the related lease and included in depreciation and amortization expense. Above-market lease intangibles are amortized over the remaining initial terms of the respective leases as a decrease in rental revenue. Below-market lease intangibles are generally amortized as an increase to rental revenue over the remaining initial term of the respective leases, but may be amortized over the renewal periods if the Company believes it is likely the tenant will exercise the renewal option. Should a lease terminate early, the unamortized portion of any
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
unamortized portion of any related lease intangible is immediately recognized as an impairment loss included in depreciation and amortization expense. To date, the Company has not had significant early terminations.
Finance ground lease assets are also included in lease intangible assets, net on the Consolidated Balance Sheets. See Leases below for additional information.
Impairment of Long-Lived Assets
Land, buildings and equipment and certain other assets, including definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events and changes may include macroeconomic conditions, including those caused by global pandemics, like the recent coronavirus disease pandemic (“COVID-19”) and restrictions intended to prevent its spread, which may result in property operational disruption and indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets. Identifiable cash flows are measured at the lowest level for which they are largely independent of the cash flows of other groups of assets and liabilities, generally at the restaurant level. If these assets are determined to be impaired, the amount of impairment recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Fair value is generally determined by appraisals or sales prices of comparable assets.
The judgments we make related to the expected useful lives of long-lived assets and our ability to realize undiscounted cash flows in excess of the carrying amounts of these assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, changes in usage or operating performance, desirability of the restaurant sites and other factors, such as our ability to sell our assets held for sale. As we assess the ongoing expected cash flows and carrying amounts of our long-lived assets, significant adverse changes in these factors could cause us to realize a material impairment loss.
Exit or disposal activities include the cost of disposing of the assets and are generally expensed as incurred. Upon disposal of the assets, any gain or loss is recorded in the same caption within our Income Statements as the original impairment. Provisions for impairment are included in depreciation and amortization expense.expense in the accompanying Income Statements. We did 0t record impairment expense during the ninesix months ended SeptemberJune 30, 20202021 or 2019.2020.
Real Estate Held for Sale
Real estate is classified as held for sale when the sale is probable, will be completed within one year, purchase agreements are executed, the buyer has a significant deposit at risk, and no financing contingencies exist which could prevent the transaction from being completed in a timely manner. Restaurant sites and certain other assets to be disposed of are included in assets held for sale when the likelihood of disposing of these assets within one year is probable. Assets whose disposal is not probable within one year remain in land, buildings, equipment and improvements until their disposal within one year is probable. Disposals of assets that have a major effect on our operations and financial results or that represent a strategic shift in our operating businesses meet the requirements to be reported as discontinued operations. Real estate held for sale is reported at the lower of carrying amount or fair value, less estimated costs to sell. There was 0 real estateNaN properties were held for sale at SeptemberJune 30, 2020 or2021. There were 2 properties held for sale at December 31, 2019.2020, which were sold during the six months ended June 30, 2021 for a realized gain of $431 thousand.
Cash, Cash Equivalents, and Restricted Cash
We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents can consist of cash and money market accounts. Restricted cash consists of 1031 tax deferred real estate exchange proceeds and is included in Other assets onin our Consolidated Balance Sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table provides a reconciliation of cash, cash equivalents, and restricted cash in our Consolidated Balance Sheets to the total amount shown in our Consolidated Statements of Cash Flows:
|
| | | | | | | | |
| | September 30, | | December 31, |
(In thousands) | | 2020 | | 2019 |
Cash and cash equivalents | | $ | 17,735 |
| | $ | 5,083 |
|
Restricted cash (included in Other assets) | | 0 |
| | 0 |
|
Total Cash, Cash Equivalents, and Restricted Cash | | $ | 17,735 |
| | $ | 5,083 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
| | | | | | | | | | | | | | |
| | June 30, | | December 31, |
(In thousands) | | 2021 | | 2020 |
Cash and cash equivalents | | $ | 27,096 | | | $ | 11,064 | |
Restricted cash (included in Other assets) | | 0 | | | 0 | |
Total Cash, Cash Equivalents, and Restricted Cash | | $ | 27,096 | | | $ | 11,064 | |
Long-term Debt
Long-term debt is carried at unpaid principal balance, net of deferred financing costs. All of our long-term debt is currently unsecured and interest is paid monthly on our non-amortizing term loans and revolving credit facility and semi-annually on our senior fixed rate notes.
Deferred Financing Costs
Financing costs related to long-term debt are deferred and amortized over the remaining life of the debt using the effective interest method. These costs are presented as a direct deduction from their related liabilities onin the Consolidated Balance Sheets.
See Note 76 - Long-term Debt, Net of Deferred Financing Costs for additional information.
Derivative Instruments and Hedging Activities
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments as required by FASB ASC Topic 815, Derivatives and Hedging, and those utilized as economic hedges. Our use of derivative instruments is currently limited to interest rate hedges. These instruments are generally structured as hedges of the variability of cash flows related to forecasted transactions (cash flow hedges). We do not enter into derivative instruments for trading or speculative purposes, where changes in the cash flows of the derivative are not expected to offset changes in cash flows of the hedged item. All derivatives are recognized on the balance sheet at fair value. For those derivative instruments for which we intend to elect hedge accounting, at the time the derivative contract is entered into, we document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking the various hedge transactions. This process includes linking all derivatives designated as cash flow hedges to specific assets and liabilities on the consolidated balance sheet or to specific forecasted transactions. We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.
To the extent our derivatives are effective in offsetting the variability of the hedged cash flows, and otherwise meet the cash flow hedge accounting criteria in accordance with United States generally accepted accounting principles (“U.S. GAAP”), changes in the derivatives’ fair value are not included in current earnings but are included in accumulated other comprehensive income, net of tax. These changes in fair value will be reclassified into earnings at the time of the forecasted transaction. Ineffectiveness measured in the hedging relationship is recorded in earnings in the period in which it occurs.
See Note 87 - Derivative Financial Instruments for additional information.
Other Assets and Liabilities
Other assets primarily consist of right of use operating lease assets, pre-acquisition costs, prepaid assets, food and beverage inventories for use by our Kerrow operating subsidiary, escrow deposits, and accounts receivable. Other liabilities primarily consist of accrued compensation, accrued interest expense, accrued operating expenses, intangible lease liabilities, and operating lease liabilities.
See Note 68 - Supplemental Detail for Certain Components of Consolidated Balance Sheets for additional information.
Leases
Effective January 1, 2019, the Company adopted ASU 2016-02,FASB Accounting Standards Codification 842, Leases, including effective amendments (“ASC 842”), using the effective date method. Consolidated Financial Statements for reporting periods beginning on or after January 1, 2019, are presented under the new guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance. We elected the package of practical expedients which permits us to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. We did not elect the hindsight practical expedient which permits entities to use hindsight in determining the lease term and assessing impairment. The adoption of the lease standard did not change our previously reported Consolidated Financial Statements and did not result in a cumulative adjustment to equity.
. All significant lease arrangements are generally recognized at lease commencement. For
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
leases where the Company is the lessee upon adoption of ASC 842, operating or finance lease right-of-use (“ROU”) assets and lease liabilities are recognized at commencement based on the present value of lease payments over the lease term. ROU assets represent our right to use an
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
underlying asset during the reasonably certain lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term.
As part of certain real estate investment transactions, the Company may enter into long-term ground leases as a lessee. The Company recognizes a ground lease (or right-of-use) asset and related lease liability for each of these ground leases. Ground lease assets and lease liabilities are recognized based on the present value of the lease payments. The Company uses its estimated incremental borrowing rate, which is the estimated rate at which the Company could borrow on a collateralized basis with similar payments over a similar term, in determining the present value of the lease payments.
For leases where the Company is the lessor, we determine the classification upon commencement. At SeptemberJune 30, 2020,2021, all such leases are classified as operating leases. These operating leases may contain both lease and non-lease components. The Company accounts for lease and non-lease components as a single component. Prior to adoption of ASC 842, lease origination fees were deferred and amortized over the related lease term as an adjustment to depreciation expense. Subsequent to the adoption of ASC 842 on January 1, 2019, the Company expenses certain initial direct costs that are not incremental in obtaining a lease.
See Note 5 - Leases for additional information.
Rent Concessions
In April 2020, the FASB issued a question-and-answer document regarding accounting for lease concessions and other effects of COVID-19. The document clarifies that entities may elect not to evaluate whether lease-related relief that lessors provide to mitigate the economic effects of COVID-19 on lessees is a lease modification under ASC 842. Instead, an entity that elects not to evaluate whether a concession directly related to COVID-19 is a modification can then elect whether to apply the modification guidance (i.e., assume the relief was always contemplated by the contract or assume the relief was not contemplated by the contract).
During the second and third quarterquarters of 2020, the Company agreed to lease concessions with certain tenants in response to COVID-19. These concessions resulted in a substantial increase in our rights as lessor, including receiving additional financial information, agreeing to extend the current term of the lease, enhancing the lease guarantee, or consenting to more favorable rent escalations in the future. As such, the Company will accountaccounted for these concessions as lease modifications under ASC 842. Rent deferrals agreed upon with respect to rent owed for the second quarter of 2020 were for approximately $1.0 million of contractual base rent as of June 30, 2020 and require the full rent amountwere fully repaid prior to be paid back to the Company in the near-term.December 31, 2020. In the third quarter of 2020, the Company has agreed to rent abatements as part of lease amendments for concessions of the type described above and for lease payments due in the second quarter. These agreements for abatements representrepresented approximately $1.6 million of rental revenue recognized in the second quarter of 2020. To date, the Company has 0t abated rent for the third quarter of 2020. During the third quarter of 2020, theThe receivables for these abatements were recorded as lease incentives in Intangibleintangible lease assets, net on our Consolidated Balance Sheets and will be amortized as a reduction of revenue over the amended lease terms. As of August 5, 2021, the Company has 0t abated rent for the fourth quarter of 2020 or the first half of 2021.
Revenue Recognition
Rental Revenue
For those net leases that provide for periodic and determinable increases in base rent, base rental revenue is recognized on a straight-line basis over the applicable lease term when collectability is probable. Recognizing rental revenue on a straight-line basis generally results in recognized revenues during the first half of a lease term exceeding the cash amounts contractually due from our tenants, creating a deferred rent receivable.
In certain circumstances, the Company may offer tenant allowance funds in exchange for increasing rent, extending the term, and including annual sales reporting among other items. These tenant allowance funds are classified as lease incentives upon payment and are amortized as a reduction to revenue over the lease term. Lease incentives are included in Intangibleintangible lease assets, net, on our Consolidated Balance Sheets. During the three and nine monthsyear ended September 30,December 31, 2020, the Company paid lease incentives of $4.2 million to tenants. During the six months ended June 30, 2021, the Company paid tenants $426 thousand for tenant improvements which qualified as lease incentives under U.S. GAAP as the Company was determined not to be the accounting owner of the improvements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
We assess the collectability of our lease receivables, including deferred rents receivable, on several factors, including payment history, the financial strength of the tenant and any guarantors, historical operations and operating trends of the property, and current economic conditions. If our evaluation of these factors indicates it is not probable that we will be able to recover substantially all of the receivable, we derecognize the deferred rent receivable asset and record that revenue as a reduction in rental revenue. If we determine
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
the lease receivable will not be collected due to a credit concern, we reduce the recorded revenue for the period and related accounts receivable.
For those leases that provide for periodic increases in base rent only if certain revenue parameters or other substantive contingencies are met, the increased rental revenue is recognized as the related parameters or contingencies are met, rather than on a straight-line basis over the applicable lease term. Prior to the adoption of ASC 842, lessor costs reimbursed by the lessee were presented on a net basis in our Consolidated Financial Statements. Subsequent to the adoption of ASC 842 on January 1, 2019, costsCosts paid by the lessor and reimbursed by the lessees are included in variable lease payments and presented on a gross basis within rental revenue. Sales taxes collected from lessees and remitted to governmental authorities are presented on a net basis within rental revenue.
Restaurant Revenue
Restaurant revenue represents food, beverage, and other products sold and is presented net of the following discounts: coupons, employee meals, complimentary meals and gift cards. Revenue from restaurant sales, whether received in cash or by credit card, is recognized when food and beverage products are sold. At SeptemberJune 30, 20202021 and December 31, 2019,2020, credit card receivables, included in other assets, totaled $45$90 thousand and $81$68 thousand, respectively. We recognize sales from our gift cards when the gift card is redeemed by the customer. Sales taxes collected from customers and remitted to governmental authorities are presented on a net basis within restaurant revenue on our Consolidated Income Statements.
Restaurant Expenses
Restaurant expenses include restaurant labor, general and administrative expenses, rent expense, and food and beverage costs. Food and beverage costs include inventory, warehousing, related purchasing and distribution costs. Vendor allowances received in connection with the purchase of a vendor’s products are recognized as a reduction of the related food and beverage costs as earned.
Gain on Sale, Net
The Company recognizes gain (loss) on sale, net of real estate in accordance with FASB ASU No. 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” The Company evaluates each transaction to determine if control of the asset, as well as other specified criteria, has been transferred to the buyer to determine proper timing of revenue recognition, as well as transaction price allocation. During the six months ended June 30, 2021, the Company sold 2 properties, which resulted in a realized gain of $431 thousand.
Income Taxes
We believe that we have been organized and have operated in conformity with the requirements for qualification and taxation as a REIT commencing with our taxable year ended December 31, 2016, and we intend to continue to operate in a manner that will enable us to maintain our qualification as a REIT. So long as we qualify as a REIT, we generally will not be subject to federal income tax on our net income that we distribute currently to our shareholders. To maintain our qualification as a REIT, we are required under the Code to distribute at least 90% of our REIT taxable income (without regard to the deduction for dividends paid and excluding net capital gains) to our shareholders and meet certain other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates. Even if we qualify as a REIT, we may also be subject to certain state, local and franchise taxes. Under certain circumstances, federal income and excise taxes may be due on our undistributed taxable income.
The Kerrow Restaurant Operating Business is a TRS and is taxed as a C corporation.
See Note 9 - Income Taxes for additional information.
Earnings Per Share
Basic earnings per share (“EPS”) are computed by dividing net income allocated to common shareholders by the weighted-average number of common shares outstanding for the reporting period. Diluted EPS reflects the potential dilution that could
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
occur if securities or other contracts to issue common stock were exercised or converted into common stock. No effect is shown for any securities that are anti-dilutive. Net income allocated to common shareholders represents net income less income allocated to participating securities and non-controlling interests. None of the Company’s equity awards are participating securities.
See Note 10 - Equity for additional information.
Noncontrolling Interest
Noncontrolling interest represents the aggregate limited partnership interests in FCPT OP held by third parties. In accordance with GAAP, the noncontrolling interest of FCPT OP is shown as a component of equity on our Consolidated Balance Sheets, and the portion of income allocable to third parties is shown as net income attributable to noncontrolling interests in our Income Statements and Consolidated Statements of Comprehensive Income (Loss) (“Comprehensive Income Statement”). The Company follows the guidance issued by the FASB regarding the classification and measurement of redeemable securities. At FCPT OP’s option, it may satisfy this redemption with cash or by exchanging non-registered shares of FCPT common stock on a 1-for-one basis. Accordingly, the Company has determined that the common OP units meet the requirements to be classified as permanent equity. A reconciliation of equity attributable to noncontrolling interest is disclosed in our Consolidated Statements of Changes in Equity.
See Note 10 - Equity for additional information.
Stock-Based Compensation
The Company’s stock-based compensation plan provides for the grant of restricted stock awards (“RSAs”), deferred stock units (“DSUs”), performance-based awards, including performance stock units (“PSUs”), dividend equivalents (“DEUs”), restricted stock units (“RSUs”), and other types of awards to eligible participants. DEUs are earned during the vesting period and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
received upon vesting of award. Upon forfeiture of an award, DEUs earned during the vesting period are also forfeited. We classify stock-based payment awards either as equity awards or liability awards based upon cash settlement options. Equity classified awards are measured based on the fair value on the date of grant. Liability classified awards are remeasured to fair value each reporting period. We recognize costs resulting from the Company’s stock-based compensation awards on a straight-line basis over their vesting periods, which range between one and five years, less estimated forfeitures.years. No compensation cost is recognized for awards for which employees do not render the requisite services.
See Note 11 - Stock-Based Compensation for additional information.
Fair Value of Financial Instruments
We use a fair value approach to value certain assets and liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. We use a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and an entity's own assumptions (unobservable inputs). The hierarchy consists of three levels:
•Level 1 - Quoted market prices in active markets for identical assets or liabilities;
•Level 2 - Inputs other than level one inputs that are either directly or indirectly observable; and
•Level 3 - Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
Application of New Accounting Standards
We consider the applicability and impact of all ASUs issued by the FASB. Other than as disclosed below, ASUs not yet adopted were assessed and determined to be either not applicable or are expected to have minimal impact onto our consolidated result of operations, financial position and cash flows.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform” which provides temporary optional expedients and exceptions to the guidance in US GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
rates to alternative reference rates, such as the Secured Overnight Financing Rate (SOFR). The guidance simplifies the accounting for modifying countless contracts (including those in hedging relationships) that refer to LIBOR and other interbank offered rates. The guidance is effective upon issuance and generally can be applied to contract modifications or existing and new hedge relationships through December 31, 2022. The Company is currently evaluating the impact of this guidance on its cash flow hedges.
On March 5, 2021, the Financial Conduct Authority (“FCA”) announced that U.S. dollar LIBOR will no longer be published after June 30, 2023. This announcement has several implications, including setting the spread that may be used to automatically convert contracts from LIBOR SOFR. Additionally, banking regulators are encouraging banks to discontinue new LIBOR debt issuances by December 31, 2021. The Company anticipates that LIBOR will continue to be available at least until June 30, 2023. Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.
The Company has 4 currently effective interest rate swaps with a total notional amount of $350 million that are indexed to LIBOR. These interest rate swaps mature through 2025, and the Company is monitoring and evaluating the related risks, which include interest on loans or amounts received and paid on derivative instruments. These risks arise in connection with transitioning contracts to an alternative rate, including any resulting value transfer that may occur, and are likely to vary by contract. The value of loans, securities, or derivative instruments tied to LIBOR, as well as interest rates on our current or future indebtedness, may also be impacted if LIBOR is limited or discontinued. For some instruments the method of transitioning to an alternative reference rate may be challenging, especially if we cannot agree with the respective counterparty about how to make the transition.
While we expect LIBOR to be available in substantially its current form until at least the end of June 30, 2023, it is possible that LIBOR will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified.
Alternative rates and other market changes related to the replacement of LIBOR, including the introduction of financial products and changes in market practices, may lead to risk modeling and valuation challenges, such as adjusting interest rate accrual calculations and building a term structure for an alternative rate.
The introduction of an alternative rate also may create additional basis risk and increased volatility as alternative rates are phased in and utilized in parallel with LIBOR.
NOTE 3 – CONCENTRATION OF CREDIT RISK
Our tenant base and the restaurant brands operating our properties are highly concentrated. With respect to our tenant base, Darden leases represent approximately 68%63% of the scheduled base rents from the properties we own. As our revenues predominately consist of rental payments, we are dependent on Darden for a significant portion of our leasing revenues. The audited and unaudited financial statements for Darden are included in its filings with the SEC, which can be found on the SEC’s internet website at www.sec.gov. Reference to Darden’s filings with the SEC is solely for the information of investors. We do not intend this website to be an active link or to otherwise incorporate the information contained on such website (including Darden’s filings with the SEC) into this report or our other filings with the SEC.
We also are subject to concentration risk in terms of the restaurant brands that operate our properties. As of SeptemberJune 30, 2020, FCPT2021, we had 308309 Olive Garden branded locations in our portfolio, which comprise approximately 41%37% of our leased properties and approximately 51%47% of the revenues received under leases. Longhorn Steakhouse branded restaurants comprise approximately 14% of our leased properties and approximately 13% of the revenues received under leases as of June 30, 2021. Our properties, including the Kerrow Restaurant Operating Business, are located in 46 states, with concentrations of 10% or greater of total rental revenue in 2two states: Texas (12%(approximately 11%) and Florida (11%(approximately 11%).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
We are exposed to credit risk with respect to cash held at various financial institutions, access to our credit facility, and amounts due or payable under our derivative contracts. At SeptemberJune 30, 2020,2021, our exposure to risk related to our derivative instruments totaled $20.911.5 million including accrued interest, and the counterparty to such instruments are investment grade financial institutions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Our credit risk exposure with regard to our cash and the $250.0$250.0 million available capacity under the revolver portion of our credit facility is spread among a diversified group of investment grade financial institutions.
NOTE 4 – REAL ESTATE INVESMENTS,INVESTMENTS, NET AND INTANGIBLE ASSETS AND LIABILITIES, NET
Real Estate Investments, Net
Real estate investments, net, which consist of land, buildings and improvements leased to others subject to net operating leases and those utilized in the operations of Kerrow Restaurant Operating Business are summarized as follows:
|
| | | | | | | | |
| | September 30, | | December 31, |
(In thousands) | | 2020 | | 2019 |
Land | | $ | 764,439 |
| | $ | 690,575 |
|
Buildings and improvements | | 1,171,749 |
| | 1,142,275 |
|
Equipment | | 134,976 |
| | 134,884 |
|
Total gross real estate investments | | 2,071,164 |
| | 1,967,734 |
|
Less: Accumulated depreciation | | (652,849 | ) | | (635,630 | ) |
Total real estate investments, net | | 1,418,315 |
| | 1,332,104 |
|
Intangible lease assets, net | | 79,459 |
| | 57,917 |
|
Total Real Estate Investments and Intangible Lease Assets, Net | | $ | 1,497,774 |
| | $ | 1,390,021 |
|
| | | | | | | | | | | | | | |
| | June 30, | | December 31, |
(In thousands) | | 2021 | | 2020 |
Land | | $ | 871,729 | | | $ | 827,502 | |
Buildings and improvements | | 1,226,135 | | | 1,192,722 | |
Equipment | | 135,630 | | | 134,919 | |
Total gross real estate investments | | 2,233,494 | | | 2,155,143 | |
Less: Accumulated depreciation | | (669,644) | | | (657,621) | |
Total real estate investments, net | | 1,563,850 | | | 1,497,522 | |
Intangible lease assets, net | | 96,909 | | | 96,291 | |
Total Real Estate Investments and Intangible Lease Assets, Net | | $ | 1,660,759 | | | $ | 1,593,813 | |
During the ninesix months ended SeptemberJune 30, 2020,2021, the Company invested $121.4$84.4 million, including transaction costs, in 5236 properties located in 2017 states, and allocated the investment as follows: $65.6$43.0 million to land, $29.5$33.4 million to buildings and improvements, $0.1$0.9 million to equipment, and $25.9$7.1 million to intangible assets, including finance ROU assets. There was 0 contingent consideration associated with these acquisitions. These properties are 100% occupied under net leases, with a weighted average remaining lease term of 7.57.9 years as of SeptemberJune 30, 2020. The Company also acquired a plot of land for $2.4 million that it intends to develop. The Company did 0t dispose of any properties during2021. During the ninesix months ended SeptemberJune 30, 2020.2021, the Company sold 2 properties with a combined net book value of $2.8 million for a realized gain on sale of $431 thousand.
During the ninethree months ended SeptemberJune 30, 2020,2021, the Company exercised its option to purchase 31 of the properties where the Company was the lessee under the ground leases. These leases werelease. This lease was previously accounted for as a finance leases. These purchaseslease. This purchase resulted in an in increase in land and a corresponding decrease in finance lease right-of-use assets of $6.0$1.2 million.
During the ninesix months ended SeptemberJune 30, 2019,2020, the Company invested $81.1$71.5 million, including transaction costs, in 40 restaurant34 properties located in 1814 states, and allocated the investment as follows: $39.5$37.1 million to land, $22.6$18.1 million to buildings and improvements, and $19.0$16.3 million to intangible assets, principally related to the value of the in-place leases acquired.including finance ROU assets. There was no contingent consideration associated with these acquisitions. These properties are 100% occupied under net leases, with a weighted average remaining lease term of 6.8 years as of June 30, 2020. The Company did 0tnot dispose of any properties during the ninesix months ended SeptemberJune 30, 2019.2020.
Intangible Lease Assets and Liabilities, Net
Acquired in-place lease intangibles are amortized over the remaining lease term as depreciation and amortization expense. Above-market and below-market leases are amortized over the initial term of the respective leases as an adjustment to rental revenue. Lease incentives are amortized over the initial term of the respective leases as an adjustment to rental revenue. Intangible lease liabilities are included in Other liabilities on our Consolidated Balance Sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following tables detail intangible lease assets and liabilities.
|
| | | | | | | | |
| | September 30, | | December 31, |
(In thousands) | | 2020 | | 2019 |
Acquired in-place lease intangibles | | $ | 54,430 |
| | $ | 38,844 |
|
Above-market leases | | 13,804 |
| | 7,754 |
|
Finance leases - right of use asset (1) | | 15,729 |
| | 16,063 |
|
Lease incentives, net | | 5,774 |
| | 0 |
|
Total | | 89,737 |
| | 62,661 |
|
Less: Accumulated amortization | | (10,278 | ) | | (4,744 | ) |
Intangible Lease Assets, Net | | $ | 79,459 |
| | $ | 57,917 |
|
| | | | | | | | | | | | | | |
| | June 30, | | December 31, |
(In thousands) | | 2021 | | 2020 |
Acquired in-place lease intangibles | | $ | 70,933 | | | $ | 63,848 | |
Above-market leases | | 13,821 | | | 13,821 | |
Finance leases - right of use asset (1) | | 24,383 | | | 25,607 | |
Lease incentives | | 6,272 | | | 5,846 | |
Total | | 115,409 | | | 109,122 | |
Less: Accumulated amortization | | (18,500) | | | (12,831) | |
Intangible Lease Assets, Net | | $ | 96,909 | | | $ | 96,291 | |
(1) See Note 5 - Leases for additional information on finance leases - right of use assets.
|
| | | | | | | | |
| | September 30, | | December 31, |
(In thousands) | | 2020 | | 2019 |
Below-market leases | | $ | 2,978 |
| | $ | 1,923 |
|
Less: Accumulated amortization | | (495 | ) | | (155 | ) |
Intangible Lease Liabilities, Net | | $ | 2,483 |
| | $ | 1,768 |
|
| | | | | | | | | | | | | | |
| | June 30, | | December 31, |
(In thousands) | | 2021 | | 2020 |
Below-market leases | | $ | 2,978 | | | $ | 2,978 | |
Less: Accumulated amortization | | (829) | | | (613) | |
Intangible Lease Liabilities, Net | | $ | 2,149 | | | $ | 2,365 | |
The value of acquired in-place leases amortized and included in depreciation and amortization expense was $1.8$2.3 million and $813 thousand$1.3 million for the three months ended SeptemberJune 30, 2021 and 2020, and 2019, respectively, andand $4.4 million and $2.1$2.6 million for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. The value of above-market and below-market leases amortized as an adjustment to revenue was $363$405 thousand and $25$203 thousand for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, and $750$806 thousand and $49$387 thousand for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. For the three and nine months ended SeptemberJune 30, 2021 and 2020, lease incentive amortization was $48$81 thousand and $0, respectively, and $161 thousand and $49 thousand,$0 for the six months ended June 30, 2021 and 2020, respectively.
At September June 30, 2020,2021, the total weighted average amortization period remaining for our intangible lease assets and liabilities was 10.09.3 years, and the individual weighted average amortization period remaining for acquired in-place lease intangibles, above-market leases, below-market leases and lease incentives was 9.7was 9.1 years, 8.27.8 years, 9.79.6 years and 15.113.7 years, respectively.
Amortization of Lease Intangibles
The following table presents the estimated impact during the next five years and thereafter related to the amortization of in-place lease intangibles, and above-market and below-market lease intangibles for properties held for investment at SeptemberJune 30, 2020.2021.
|
| | | | |
(In thousands) | | September 30, |
2020 (three months) | | $ | 2,251 |
|
2021 | | 8,637 |
|
2022 | | 8,084 |
|
2023 | | 6,486 |
|
2024 | | 5,605 |
|
Thereafter | | 24,462 |
|
Total Future Amortization | | $ | 55,525 |
|
| | | | | | | | |
| | |
(In thousands) | | June 30, 2021 |
2021 (six months) | | $ | 5,521 | |
2022 | | 10,583 | |
2023 | | 8,694 | |
2024 | | 7,540 | |
2025 | | 6,598 | |
Thereafter | | 25,574 | |
Total Future Amortization | | $ | 64,510 | |
NOTE 5 – LEASES
Operating Leases as Lessee
As a lessee we record ROU assets and lease liabilities for the 2 ground leases at our Kerrow Restaurant Operating Business. These ground leases have extension options, which we believe will be exercisedBusiness and are included in the calculation of our lease
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
liabilities and right-of-use assets. During the second quarter of 2020, the Company became the lessee of newa corporate office space, both of which qualified as an operating lease at commencement.leases. In calculating the lease obligations under both the ground leases and office lease, we used discount rates estimated to be equal to what the Company would have to pay to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
borrow on a collateralized basis over a similar term, for an amount equal to the lease payments, in a similar economic environment.
Operating Lease Liability
As of SeptemberJune 30, 2020,2021, maturities of operating lease liabilities were as follows:
|
| | | | |
(In thousands) | | September 30, |
2020 (three months) | | $ | 162 |
|
2021 | | 673 |
|
2022 | | 693 |
|
2023 | | 705 |
|
2024 | | 718 |
|
Thereafter | | 5,851 |
|
Total Payments | | 8,802 |
|
Less: Interest | | (2,642 | ) |
Operating Lease Liability | | $ | 6,160 |
|
| | | | | | | | |
(In thousands) | | June 30, 2021 |
2021 (six months) | | $ | 343 | |
2022 | | 693 | |
2023 | | 705 | |
2024 | | 718 | |
2025 | | 470 | |
Thereafter | | 5,381 | |
Total Payments | | 8,310 | |
Less: Interest | | (2,465) | |
Operating Lease Liability | | $ | 5,845 | |
The weighted-average discount rate for operating leases at SeptemberJune 30, 20202021 was 4.07%4.12%. The weighted-average remaining lease term was 17.116.7 years.
Rental expense was $222$223 thousand and $166$179 thousand for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. Rental expense was $542$449 thousand and $500$320 thousand for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively.
Operating Leases as Lessor
Our leases consist primarily of single-tenant, net leases, in which the tenants are responsible for making payments to third parties for operating expenses such as property taxes, insurance, and other costs associated with the properties leased to them. In leases where costs are paid by the Company and reimbursed by lessees, such payments are considered variable lease payments and recognized in rental revenue.
The following table shows the components of rental revenue for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
(In thousands) | | 2021 | | 2020 | | 2021 | | 2020 | |
Lease revenue - operating leases | | $ | 41,230 | | | $ | 37,379 | | | 81,976 | | | 74,627 | | |
Variable lease revenue (tenant reimbursements) | | 932 | | | 655 | | | 1,701 | | | 1,132 | | |
Total Rental Revenue | | $ | 42,162 | | | $ | 38,034 | | | $ | 83,677 | | | $ | 75,759 | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Lease revenue - operating leases | | $ | 38,271 |
| | $ | 34,993 |
| | $ | 112,899 |
| | $ | 103,252 |
|
Variable lease revenue (tenant reimbursements) | | 600 |
| | 216 |
| | 1,732 |
| | 580 |
|
Total Rental Revenue | | $ | 38,871 |
| | $ | 35,209 |
| | $ | 114,631 |
| | $ | 103,832 |
|
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Future Minimum Lease Payments to be Received
The following table presents the scheduled minimum future contractual rent to be received under the remaining non-cancelable term of the operating leases. The table presents future minimum lease payments due during the initial lease term only as lease renewal periods are exercisable at the option of the lessee.
|
| | | | |
(In thousands) | | September 30, |
2020 (three months) | | $ | 37,249 |
|
2021 | | 149,953 |
|
2022 | | 151,380 |
|
2023 | | 151,680 |
|
2024 | | 152,163 |
|
Thereafter | | 1,079,088 |
|
Total Future Minimum Lease Payments | | $ | 1,721,513 |
|
| | | | | | | | |
(In thousands) | | June 30, |
2021 (six months) | | $ | 81,218 | |
2022 | | 164,000 | |
2023 | | 164,208 | |
2024 | | 164,246 | |
2025 | | 163,855 | |
Thereafter | | 1,000,924 | |
Total Future Minimum Lease Payments | | $ | 1,738,451 | |
Ground Leases as Lessee
As of SeptemberJune 30, 2020,2021, the Company had finance ground lease assets aggregating $15.7$24.4 million. These assets are included in intangible lease assets, net on the Consolidated Balance Sheets. The Company did not recognize a lease liability as no payments are due in the future under the leases. The Company’s ground lease assets have remaining lease terms ranging from 6362 years to 99 years, with options to extend certain of the lease terms for additional ninety-nine year terms, and the option to purchase the assets. The weighted average remaining non-cancelable lease term for the ground leases was 94 years95 years at SeptemberJune 30, 2020.2021.
NOTE 6 – SUPPLEMENTAL DETAIL FOR CERTAIN COMPONENTSLONG-TERM DEBT, NET OF CONSOLIDATED BALANCE SHEETSDEFERRED FINANCING COSTS
Other AssetsAt June 30, 2021, our long-term debt consisted of (1) $400 million of non-amortizing term loans and (2) $450 million of senior, unsecured, fixed rate notes. At December 31, 2020, our long-term debt consisted of (1) $400 million of non-amortizing term loans and (2) $350 million of senior, unsecured, fixed rate notes. At June 30, 2021 and December 31, 2020, the outstanding borrowings under the revolving credit facility were $0 million and $10 million, respectively, and there were 0 outstanding letters of credit. The revolving credit facility portion will mature on November 9, 2025 with a six month extension option.
Revolving Credit and Term Loan Agreement
On June 4, 2021, the Company and its subsidiary, FCPT OP (the “Borrower”), entered into a Second Amended and Restated Revolving Credit and Term Loan Agreement (the “Loan Agreement”), which amended and restated in its entirety an existing Amended and Restated Revolving Credit and Term Loan Agreement dated as of October 2, 2017. Prior to the Loan Agreement, $150 million principal amount outstanding under the Company's term loan facility was scheduled to mature on November 9, 2022; $150 million principal amount outstanding was scheduled to mature on November 9, 2023; $100 million was scheduled to mature on March 9, 2024; and the $250 million revolving credit facility was scheduled to mature on November 9, 2021, with 2 six-month extension options.
The componentsLoan Agreement provides for borrowings of other assets were as follows:up to $650 million and consists of (1) a revolving credit facility in an aggregate principal amount of $250 million and (2) a term loan facility in an aggregate principal amount of $400 million comprised of (i) a $50 million term credit facility with a maturity date of November 9, 2023, (ii) a $100 million term credit facility with a maturity date of March 9, 2024, (iii) a $150 million term credit facility with a maturity date of November 9, 2025, and (iv) a $100 million term credit facility with a maturity date of November 9, 2026. No amortization payments are required on the term loan prior to the maturity date. The Borrower has the option to extend the maturity date of the revolving credit facility for up to six months, subject to the payment of an extension fee of 0.0625% on the aggregate amount of the then-outstanding revolving commitment. The Loan Agreement is a syndicated credit facility that contains an accordion feature allowing the facility to be increased by an additional aggregate amount not to exceed $350 million, subject to certain conditions. Amounts owed under the Loan Agreement may be prepaid at any time without premium or penalty, subject to customary breakage costs in the case of borrowings with respect to which a LIBOR rate election is in effect.
|
| | | | | | | | |
| | September 30, | | December 31, |
(In thousands) | | 2020 | | 2019 |
Operating lease right-of-use asset | | $ | 5,515 |
| | $ | 3,810 |
|
Prepaid acquisition costs and deposits | | 3,018 |
| | 4,219 |
|
Prepaid assets | | 473 |
| | 845 |
|
Accounts receivable | | 1,860 |
| | 380 |
|
Food and beverage inventories | | 126 |
| | 196 |
|
Other | | 1,202 |
| | 715 |
|
Total Other Assets | | $ | 12,194 |
| | $ | 10,165 |
|
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Other LiabilitiesLoans under the Loan Agreement accrue interest at a per annum rate equal to, at the Borrower’s election, either a LIBOR rate plus a margin of 1.25%, or a base rate determined according to a prime rate or federal funds rate plus a margin of 0% to 1.15%. In each case, the margin is determined according to, at the Borrower’s election, either (1) the Company’s total leverage ratio in effect from time to time, or (2) at any time after the Company has received an investment grade rating from either Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Services on its senior, unsecured, long-term indebtedness, the credit rating applicable from time to time with respect to such indebtedness. In the event that all or a portion of the principal amount of any loan borrowed pursuant to the Loan Agreement is not paid when due, interest will accrue at the rate that would otherwise be applicable thereto plus 2.00%. So long as the Company continues to determine pricing according to its total leverage ratio, a facility fee at a rate of 0.15% to 0.30% per annum depending on the Company’s total leverage ratio, applies to the total revolving commitments available under the Loan Agreement.
The componentsLoan Agreement contains customary affirmative and negative covenants that, among other things, require customary reporting obligations, contain obligations to maintain REIT status, and restrict, subject to certain exceptions, incurrence of debt, incurrence of secured debt, the ability of the Borrower and the guarantors to enter into mergers, consolidations, sales of assets and similar transactions, limitations on distributions and other liabilitiesrestricted payments, and limitations on transactions with affiliates. In addition, the Borrower will be subject to the following financial covenants: (1) Total Indebtedness to Consolidated Capitalization Value (each as defined in the Loan Agreement) not to exceed 60%, (2) mortgage-secured leverage ratio not to exceed 40%, (3) total secured recourse indebtedness not to exceed 5% of consolidated capitalization value, (4) minimum fixed charge coverage ratio of 1.50 to 1.00, (5) minimum consolidated tangible net worth, (6) maximum unencumbered leverage ratio not to exceed 60% and (7) minimum unencumbered interest coverage ratio not less than 1.75 to 1.00.
The Loan Agreement contains customary events of default including, among other things, payment defaults, breach of covenants, cross acceleration to material indebtedness, bankruptcy-related defaults, judgment defaults, and the occurrence of certain change of control events. The occurrence of an event of default will limit the ability of the Company and the Borrower to make distributions and may result in the termination of the credit facility, acceleration of repayment obligations and the exercise of remedies by the Lenders with respect to the collateral.
We reviewed the term loan and revolving debt arrangements by lender and accounted for the term loan and revolving credit facility amendment in accordance with U.S. GAAP. This resulted in the capitalization of $3.6 million in new lender fees and third party costs, which will be amortized over the life of the new loans; $123 thousand in third-party fees were recorded to general and administrative expense. Where there were decreases in principal, $365 thousand of unamortized deferred financing costs were written off and recorded as follows:interest expense. The remaining $2.2 million of original unamortized deferred financing costs will be amortized over the life of the new loans.
The following table presents the Term Loan balances as of June 30, 2021 and December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Outstanding Balance |
| | Maturity | | Interest | | June 30, | | December 31, |
(Dollars in thousands) | | Date | | Rate | | 2021 | | 2020 |
Term Loans: | | | | | | | | |
Term loan due 2022 | | Nov 2022 | | N/A | (a) | $ | 0 | | | $ | 150,000 | |
Term loan due 2023 | | Nov 2023 | | 1.33% | (a) | 50,000 | | | 150,000 | |
Term loan due 2024 | | Mar 2024 | | 1.33% | (a) | 100,000 | | | 100,000 | |
Term loan due 2025 | | Nov 2025 | | 1.33% | (a) | 150,000 | | | 0 | |
Term loan due 2026 | | Nov 2026 | | 1.33% | (a) | 100,000 | | | 0 | |
Total Term Loans | | | | | | $ | 400,000 | | | $ | 400,000 | |
(a) Loan is a variable‑rate loan which resets monthly at one-month LIBOR + the applicable credit spread of 1.25% at June 30, 2021. |
Note Purchase Agreement
On February 25, 2021, the Company entered into agreements to issue $100 million of senior unsecured notes. The notes consist of $50 million of notes with an eight-year term, which were issued on April 27, 2021 and mature on April 30, 2029, and
|
| | | | | | | | |
| | September 30, | | December 31, |
(In thousands) | | 2020 | | 2019 |
Operating lease liability | | $ | 6,160 |
| | $ | 4,403 |
|
Accrued interest expense | | 5,566 |
| | 1,572 |
|
Accrued compensation | | 1,628 |
| | 1,913 |
|
Accounts payable | | 367 |
| | 799 |
|
Intangible lease liabilities, net | | 2,483 |
| | 1,768 |
|
Accrued operating expenses | | 249 |
| | 396 |
|
Other | | 2,765 |
| | 1,745 |
|
Total Other Liabilities | | $ | 19,218 |
| | $ | 12,596 |
|
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
priced at a fixed interest rate of 2.74%, and $50 million of notes with a ten-year term, which were issued on April 27, 2021, and mature on April 29, 2031, and priced at a fixed interest rate of 2.99%. These notes were issued at par value.
The following table presents the senior unsecured fixed rate notes balance as of June 30, 2021 and December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Outstanding Balance |
| | Maturity | | Interest | | June 30, | | December 31, |
(Dollars in thousands) | | Date | | Rate | | 2021 | | 2020 |
Notes Payable: | | | | | | | | |
Senior unsecured fixed rate note, issued June 2017 | | Jun 2024 | | 4.68 | % | | $ | 50,000 | | | $ | 50,000 | |
Senior unsecured fixed rate note, issued June 2017 | | Jun 2027 | | 4.93 | % | | 75,000 | | | 75,000 | |
Senior unsecured fixed rate note, issued December 2018 | | Dec 2026 | | 4.63 | % | | 50,000 | | | 50,000 | |
Senior unsecured fixed rate note, issued December 2018 | | Dec 2028 | | 4.76 | % | | 50,000 | | | 50,000 | |
Senior unsecured fixed rate note, issued March 2020 | | Jun 2029 | | 3.15 | % | | 50,000 | | | 50,000 | |
Senior unsecured fixed rate note, issued March 2020 | | Apr 2030 | | 3.20 | % | | 75,000 | | | 75,000 | |
Senior unsecured fixed rate note, issued April 2021 | | Apr 2029 | | 2.74 | % | | 50,000 | | | 0 | |
Senior unsecured fixed rate note, issued April 2021 | | Apr 2031 | | 2.99 | % | | 50,000 | | | 0 | |
Total Notes | | | | | | $ | 450,000 | | | $ | 350,000 | |
Deferred Financing Costs
At June 30, 2021 and December 31, 2020, net unamortized deferred financing costs were approximately $9.3 million and $6.1 million, respectively. During the three months ended June 30, 2021 and 2020, amortization of deferred financing costs was $890 thousand and $534 thousand, respectively. During the six months ended June 30, 2021 and 2020, amortization of deferred financing costs was $1.4 million and $1.0 million, respectively. The amortization of deferred financing costs for the three and six months ended June 30, 2021, includes a one-time charge of $364 thousand for deferred financing costs expensed as a result of the execution of the Loan Agreement on June 4, 2021. The weighted average interest rate on the term loans before consideration of the interest rate hedge described below was 1.33% and 1.44% at June 30, 2021 and December 31, 2020, respectively. The weighted average interest rate on the revolving credit facility was 1.60% at December 31, 2020.
The Company was in compliance with all debt covenants at June 30, 2021.
NOTE 7 – LONG-TERM DEBT, NET OF DEFERRED FINANCING COSTS
At September 30, 2020, our long-term debt consisted of (1) $400 million of non-amortizing term loans and (2) $350 million of senior, unsecured, fixed rate notes. At December 31, 2019 our long-term debt consisted of (1) $400 million of non-amortizing term loans and (2) $225 million of senior, unsecured, fixed rate notes. At September 30, 2020 and December 31, 2019, the outstanding borrowings under the revolving credit facility were $0 million and $52.0 million, respectively, and there were 0 outstanding letters of credit.
The following table presents the Term Loan balances as of September 30, 2020 and December 31, 2019.
|
| | | | | | | | | | | | | |
| | | | | | Outstanding Balance |
| | Maturity | | Interest | | September 30, | | December 31, |
(Dollars in thousands) | | Date | | Rate | | 2020 | | 2019 |
Term Loans: | | | | | | | | |
Term loan due 2022 | | Nov 2022 | | 1.51 | % | (a) | $ | 150,000 |
| | $ | 150,000 |
|
Term loan due 2023 | | Nov 2023 | | 1.41 | % | (a) | 150,000 |
| | 150,000 |
|
Term loan due 2024 | | Mar 2024 | | 1.41 | % | (a) | 100,000 |
| | 100,000 |
|
Total Term Loans | | | | | | $ | 400,000 |
| | $ | 400,000 |
|
(a) Loan is a variable‑rate loan which resets monthly at one-month LIBOR + the applicable credit spread which was 1.25%-1.35% at September 30, 2020. |
The following table presents the senior unsecured fixed rate notes balance as of September 30, 2020 and December 31, 2019.
|
| | | | | | | | | | | | | |
| | | | | | Outstanding Balance |
| | Maturity | | Interest | | September 30, | | December 31, |
(Dollars in thousands) | | Date | | Rate | | 2020 | | 2019 |
Notes Payable: | | | | | | | | |
Senior unsecured fixed rate note, issued June 2017 | | Jun 2024 | | 4.68 | % | | $ | 50,000 |
| | $ | 50,000 |
|
Senior unsecured fixed rate note, issued June 2017 | | Jun 2027 | | 4.93 | % | | 75,000 |
| | 75,000 |
|
Senior unsecured fixed rate note, issued December 2018 | | Dec 2026 | | 4.63 | % | | 50,000 |
| | 50,000 |
|
Senior unsecured fixed rate note, issued December 2018 | | Dec 2028 | | 4.76 | % | | 50,000 |
| | 50,000 |
|
Senior unsecured fixed rate note, issued March 2020 | | Jun 2029 | | 3.15 | % | | 50,000 |
| | 0 |
|
Senior unsecured fixed rate note, issued March 2020 | | Apr 2030 | | 3.20 | % | | 75,000 |
| | 0 |
|
Total Notes | | | | | | $ | 350,000 |
| | $ | 225,000 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
At September 30, 2020, and December 31, 2019, net unamortized deferred financing costs were approximately $6.7 million and $7.1 million, respectively. During the three months ended September 30, 2020 and 2019, amortization of deferred financing costs was $543 thousand and $512 thousand, respectively. During the nine months ended September 30, 2020 and 2019, amortization of deferred financing costs was $1.6 million and $1.5 million, respectively. The weighted average interest rate on the term loans before consideration of the interest rate hedge described below was 1.45% and 3.01% at September 30, 2020 and December 31, 2019, respectively.
The Company was in compliance with all debt covenants at September 30, 2020.
NOTE 8 – DERIVATIVE FINANCIAL INSTRUMENTS
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in our receipt or payment of future cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash payments principally related to our borrowings.
Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The change in the fair value of derivatives designated and that qualify as cash flow hedges is recorded on our consolidated balance sheet in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
As of SeptemberJune 30, 20202021 and December 31, 2019, $3002020, $350 million of our variable-rate debt is hedged by swaps with notional values totaling $300$350 million.
During the first quarter of 2021, we entered into one cash flow hedge in connection with the nine months ended September 30, 2020,issuance of $100 million of notes by the Company in April 2021. The Company terminated 23 cash flow hedges in connection with a $125the $100 million private note offering that was entered into on March 31, 2020.February 25, 2021 and closed in April 2021. The first hedge was an interest rate swap that had a fixed notional value of $25 million entered into on September 29, 2020 with an effective date of May 4, 2021 and a maturity date of May 4, 2031, where the fixed rate paid by the Company was 0.7516% and the variable rate received reset monthly to the three-month LIBOR rate. The second hedge was an interest rate swap that had a fixed notional value of $25 million entered into on October 9, 2020 with an effective date of May 4, 2021 and a maturity date of May 4, 2031, where the fixed rate paid by the Company was 0.8878% and the variable rate received reset monthly to the three-month LIBOR rate. The third hedge was an interest rate swap that had a fixed notional value of $25 million entered into on January 15, 2021 with an effective date of February 16, 2021 and a maturity date of February 15, 2031, where the fixed rate paid by the Company was 1.1165% and the variable rate received reset monthly to the three-month LIBOR rate. The swaps were terminated on March 10, 2020January 29, 2021 for approximately an $8.4a $1.7 million lossgain which will be amortized over the next 10 years as interest expense.
On June 8, 2020, the Company entered into 2 interest rate swaps to hedge the interest rate variability associated with our credit facility. The first interest rate swap has a fixed notional value of $50 million, with an effective date of November 9, 2020 and a maturity date of November 9, 2025, where the fixed rate paid by the Company was 0.5025% and the variable rate received reset monthly to the one-month LIBOR rate. The second interest rate swap has a variable notional value of $50 million to $150 million entered into on June 8, 2020 with an effective date of November 9, 2023 and a maturity date of November 9, 2025, where the fixed rate paid by the Company was 0.8205% and the variable rate received reset monthly to the one-month LIBOR rate.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. We estimate that over the next twelve months an additional $6.8 million will be reclassified to earnings as an increase to interest expense.
Non-designated Hedges
We do not use derivatives for trading or speculative purposes. During the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, we did not have any derivatives that were not designated as cash flow hedges for accounting purposes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheets
The table below presents the fair value of our derivative financial instruments as well as their classification on the consolidated balance sheet as of SeptemberJune 30, 20202021 and December 31, 2019.2020.
|
| | | | | | | | | | | | | | | | | | | | |
| | Derivative Assets | | Derivative Liabilities |
| | Balance Sheet Location | | Fair Value at | | Balance Sheet Location | | Fair Value at |
(Dollars in thousands) | | | September 30, 2020 | | December 31, 2019 | | | September 30, 2020 | | December 31, 2019 |
Derivatives designated as hedging instruments: | | | | | | |
Interest rate swaps | | Derivative assets | | $ | 54 |
| | $ | 1,451 |
| | Derivative liabilities | | $ | 20,923 |
| | $ | 5,005 |
|
Total | | | | $ | 54 |
| | $ | 1,451 |
| | | | $ | 20,923 |
| | $ | 5,005 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Derivative Assets | | Derivative Liabilities |
| | Balance Sheet Location | | Fair Value at | | Balance Sheet Location | | Fair Value at |
(Dollars in thousands) | | | June 30, 2021 | | December 31, 2020 | | | June 30, 2021 | | December 31, 2020 |
Derivatives designated as hedging instruments: | | | | | | |
Interest rate swaps | | Derivative assets | | $ | 1,465 | | | $ | 762 | | | Derivative liabilities | | $ | 12,958 | | | $ | 18,717 | |
Total | | | | $ | 1,465 | | | $ | 762 | | | | | $ | 12,958 | | | $ | 18,717 | |
Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statements of Comprehensive Income (Loss)
The table below presents the effect of our interest rate swaps on the statements of comprehensive income for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) | | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Total Amount of Interest Expense Presented in the Consolidated Statements of Income |
Three months ended June 30, 2021 | | $ | (1,167) | | | Interest expense | | $ | 1,740 | | | $ | (8,384) | |
Three months ended June 30, 2020 | | $ | (3,430) | | | Interest expense | | $ | 1,058 | | | $ | (7,319) | |
Six months ended June 30, 2021 | | $ | 5,107 | | | Interest expense | | $ | 3,472 | | | $ | (16,017) | |
Six months ended June 30, 2020 | | $ | (27,914) | | | Interest expense | | $ | 1,189 | | | $ | (14,322) | |
|
| | | | | | | | | | | | | | |
(Dollars in thousands) | | Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) | | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Total Amount of Interest Expense Presented in the Consolidated Statements of Income |
Three months ended September 30, 2020 | | $ | (19 | ) | | Interest expense | | $ | (1,380 | ) | | $ | (7,410 | ) |
Three months ended September 30, 2019 | | $ | (3,226 | ) | | Interest expense | | $ | (420 | ) | | $ | (6,665 | ) |
Nine months ended September 30, 2020 | | $ | (27,934 | ) | | Interest expense | | $ | (2,569 | ) | | $ | (21,732 | ) |
Nine months ended September 30, 2019 | | $ | (12,189 | ) | | Interest expense | | $ | (1,610 | ) | | $ | (19,969 | ) |
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Tabular Disclosure Offsetting Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of our derivatives at SeptemberJune 30, 20202021 and December 31, 2019.2020. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Offsetting of Derivative Assets | | | | | | | | | | |
| | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Assets Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | |
(In thousands) | | | | | Financial Instruments | | Cash Collateral Received | | Net Amount |
June 30, 2021 | | $ | 1,465 | | | $ | 0 | | | $ | 1,465 | | | $ | (520) | | | $ | 0 | | | $ | 945 | |
December 31, 2020 | | 762 | | | 0 | | | 762 | | | (634) | | | 0 | | | 128 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Offsetting of Derivative Assets | | | | | | | | | | |
| | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Assets Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | |
(In thousands) | | | | | Financial Instruments | | Cash Collateral Received | | Net Amount |
September 30, 2020 | | $ | 54 |
| | $ | 0 |
| | $ | 54 |
| | $ | (54 | ) | | $ | 0 |
| | $ | 0 |
|
December 31, 2019 | | 1,451 |
| | 0 |
| | 1,451 |
| | (1,451 | ) | | 0 |
| | 0 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
| | Offsetting of Derivative Liabilities | Offsetting of Derivative Liabilities | | | | | | | | | | | Offsetting of Derivative Liabilities | |
| | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | | | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet | |
(In thousands) | | Financial Instruments | | Cash Collateral Posted | | Net Amount | (In thousands) | | Financial Instruments | | Cash Collateral Posted | | Net Amount |
September 30, 2020 | | $ | 20,923 |
| | $ | 0 |
| | $ | 20,923 |
| | $ | (54 | ) | | $ | 0 |
| | $ | 20,869 |
| |
December 31, 2019 | | 5,005 |
| | 0 |
| | 5,005 |
| | (1,451 | ) | | 0 |
| | 3,554 |
| |
June 30, 2021 | | June 30, 2021 | | $ | 12,958 | | | $ | 0 | | | $ | 12,958 | | | $ | (520) | | | $ | 0 | | | $ | 12,438 | |
December 31, 2020 | | December 31, 2020 | | 18,717 | | | 0 | | | 18,717 | | | (634) | | | 0 | | | 18,083 | |
The agreement with our derivative counterparty provides that if we default on any of our indebtedness, including default for which repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations.
We believe that we have been organized and have operated in conformity with the requirements for qualification and taxation as a REIT commencing with our taxable year ended December 31, 2016, and we intend to continue to operate in a manner that will enable us to maintain our qualification as a REIT. So long as we qualify as a REIT, we generally will not be subject to federal income tax on our net income that we distribute currently to our stockholders. Accordingly, no provision for federal income taxes has been included in the accompanying consolidated financial statements for the ninesix months ended SeptemberJune 30, 20202021 related to the REIT.
Income tax expense consists of federal, state, and local income taxes incurred by FCPT’s TRS, and state and local income taxes incurred by FCPT on its lease portfolio. During the three months ended SeptemberJune 30, 20202021 and 2019,2020, we recorded income tax expense of $67$71 thousand and $69$64 thousand, respectively. During the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, we recorded income tax expense of $192$134 thousand and $198$125 thousand, respectively.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts for income tax purposes, as well as operating loss and tax credit carryforwards. The Company evaluates the realizability of its deferred tax assets and recognizes a valuation allowance if, based on the available evidence, both positive and negative, it is more likely than not that some portion or all of its deferred tax assets will not be realized. When evaluating the realizability of its deferred tax assets, the Company considers, among other matters, estimates of expected future taxable income, nature of current and cumulative losses, existing and projected book/tax differences, tax planning strategies available, and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires the Company to forecast its business and general economic environment in future periods. Based on an assessment of all factors, including historical losses of the Kerrow Restaurants Operating Business, it was determined that full valuation allowances were required on the net deferred tax assets as of SeptemberJune 30, 2020.2021. Changes in estimates of deferred tax asset realizability are included in "Income tax expense" in the Consolidated Statements of Income.
In December 2016, the Company established an “At-the-Market” (“ATM”) equity issuance program (the “prior ATM program”) under which the Company may, at its discretion, issue and sell its common stock through ATM offerings on the New York Stock Exchange through broker-dealers. On March 22, 2019, the Company amended itsthe prior ATM program and increasedto, among other things, increase the maximum sales under ATM offerings to $210.0$210 million and provide that such sales could be made through the sales agents, as the Company’s agents or, if applicable, as forward sellers for forward purchasers. On February 24, 2021, the Company terminated the prior ATM program and entered into a new ATM program (the “current ATM program” and together with the prior ATM program, the “ATM programs”), which provides for the offer and sale of the shares of the Company’s common stock having an aggregate gross sales price of up to $350 million. In connection with the amendedCompany’s ATM program, the Company may enter into forward sale agreements with certain financial institutions acting as forward purchasers whereby, at the Company's discretion, the forward purchasers may borrow and sell shares of common stock under the amended ATM program.stock. The use of forward sale agreements allows the Company to lock in a share price on the sale of shares of common stock at the time the respective forward sale agreements are executed but defer settling the forward sale agreements and receiving the proceeds from the sale of shares until a later date.
The following table presents the computation of basic and diluted net earnings per common share for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
Exchangeable OP units have been omitted from the denominator for the purpose of computing diluted earnings per share since FCPT OP, at its option, may satisfy a redemption with cash or by exchanging non-registered shares of FCPT common stock. The weighted average exchangeable OP units outstanding for the three months ended SeptemberJune 30, 2021 and 2020 was 159,392 and 2019 was 204,392, and 294,506.respectively. The weighted average exchangeable OP units outstanding for the ninesix months ended SeptemberJune 30, 2021 and 2020 was 159,392 and 2019 was 221,355 and 310,599,230,268, respectively.
On October 20, 2015, the Board of Directors of FCPT adopted, and FCPT’s sole stockholder at such time, Rare Hospitality International, Inc., approved, the Four Corners Property Trust, Inc. 2015 Omnibus Incentive Plan (the “Plan”). The Plan provides for the grant of awards of nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock units, unrestricted stock, dividend equivalent rights, performance shares and other performance-based awards, other equity-based awards, and cash bonus awards to eligible participants. Subject to adjustment, the maximum number of shares of stock reserved for issuance under the Plan is equal to 2,100,000 shares.
The carrying amounts of certain of the Company’s financial instruments including cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value due either to length of maturity or interest rates that approximate prevailing market rates. The carrying value of derivative financial instruments equal fair value in accordance with U.S. GAAP. Determining which category an asset or liability falls within the hierarchy requires significant judgment. We evaluate hierarchy disclosures each reporting period.
The following table presents the assets and liabilities recorded that are reported at fair value on our Consolidated Balance Sheets on a recurring basis.
Currently, we use interest rate swaps to manage our interest rate risk associated with our notes payable. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.
To comply with the provisions of ASC 820, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and our counterparties. We have determined that the significance of the impact of the credit valuation adjustments made to our derivative contracts, which determination was based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of our derivatives held at SeptemberJune 30, 2020,2021, and December 31, 20192020 were classified as Level 2 of the fair value hierarchy.
The following table presents the carrying value and fair value of certain financial liabilities that are recorded on our Consolidated Balance Sheets.
The fair value of the long-term debt (Level 2) is determined using the present value of the contractual cash flows, discounted at the current market cost of debt.
We are subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business from time to time. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employee wage and hour claims and others related to operational issues common to the restaurant industry. We record our best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the lawsuits, proceedings or claims. While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, we believe that the maximum liability related to probable lawsuits, proceedings and claims in which we are currently involved, individually and in the aggregate, will not have a material adverse effect on our financial position, results of operations or liquidity.