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 five of their brands, and six LongHorn 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.
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
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 in the accompanying Income Statements. We did not record impairment expense during the six months ended June 30, 2022 or 2021.
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. One property was held for sale at June 30, 2022 and none were held for sale at December 31, 2021.
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 in 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:
| | | | | | | | | | | | | | |
| | June 30, | | December 31, |
| (In thousands) | | 2022 | | 2021 |
| Cash and cash equivalents | | $ | 17,714 | | | $ | 6,300 | |
| Restricted cash (included in Other assets) | | 3,900 | | | — | |
| Total Cash, Cash Equivalents, and Restricted Cash | | $ | 21,614 | | | $ | 6,300 | |
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 in the Consolidated Balance Sheets.
See Note 6 - 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 7 - Derivative Financial Instruments for additional information.
Other Assets and Liabilities
Other assets primarily consist of right of use operating lease assets, pre-acquisition costs, restricted cash, 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 8 - Supplemental Detail for Certain Components of Consolidated Balance Sheets for additional information.
Leases
Effective January 1, 2019, the Company adopted FASB Accounting Standards Codification 842, Leases, including effective amendments (“ASC 842”). 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 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 June 30, 2022, 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.
See Note 5 - Leases for additional information.
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 intangible lease assets, net, on our Consolidated Balance Sheets. The Company did not pay any lease incentives to tenants during the six months ended June 30, 2022. During the year ended December 31, 2021, the Company paid lease incentives of $1.2 million to tenants.
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 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. Costs 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 June 30, 2022 and December 31, 2021, credit card receivables, included in other assets, totaled $118 thousand and $116 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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.
Realized Gain on Sale
The Company recognizes gain on sale 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 three and six months ended June 30, 2022, the Company sold three properties, which resulted in a realized gain of $5.8 million. During the three months ended June 30, 2021, the Company did not sell any properties. During the six months ended June 30, 2021, the Company sold two 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 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 one-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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 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. 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 to our consolidated result of operations, financial position and cash flows.
In the first quarter of 2020 the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2020-04 Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During Q1 2020 the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
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 to SOFR. Additionally, banking regulators encouraged 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 three 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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.
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 57.5% 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 June 30, 2022, we had 311 Olive Garden branded locations in our portfolio, which comprise approximately 31.9% of our leased properties and approximately 42.9% of the revenues received under leases. Longhorn Steakhouse branded restaurants comprise approximately 11.8% of our leased properties and approximately 12.2% of the revenues received under leases as of June 30, 2022. Our properties, including the Kerrow Restaurant Operating Business, are located in 47 states, with concentrations of 10% or greater of total rental revenue in two states: Texas (approximately 10.5%) and Florida (approximately 10.1%).
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 June 30, 2022, our exposure to risk related to amounts due to us on our derivative instruments totaled $19.6 million, and the counterparty to such instruments are investment grade financial institutions. Our credit risk exposure with regard to our cash and the $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 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:
| | | | | | | | | | | | | | |
| | June 30, | | December 31, |
| (In thousands) | | 2022 | | 2021 |
| Land | | $ | 1,014,297 | | | $ | 966,565 | |
| Buildings and improvements | | 1,335,884 | | | 1,302,114 | |
| Equipment | | 135,202 | | | 135,726 | |
| Total gross real estate investments | | 2,485,383 | | | 2,404,405 | |
| Less: Accumulated depreciation | | (693,855) | | | (682,430) | |
| Total real estate investments, net | | 1,791,528 | | | 1,721,975 | |
| Intangible lease assets, net | | 105,311 | | | 104,251 | |
| Total Real Estate Investments and Intangible Lease Assets, Net | | $ | 1,896,839 | | | $ | 1,826,226 | |
During the six months ended June 30, 2022, the Company invested $99.4 million, including transaction costs, in 44 properties located in twenty-two states, and allocated the investment as follows: $51.2 million to land, $39.7 million to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
buildings and improvements, and $8.5 million to intangible 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 6.5 years as of June 30, 2022. During the six months ended June 30, 2022, the Company sold three properties with a combined net book value of $6.3 million for a realized gain of $5.8 million.
During the six months ended June 30, 2021, the Company invested $84.4 million, including transaction costs, in 36 properties located in seventeen states, and allocated the investment as follows: $43.0 million to land, $33.4 million to buildings and improvements, $0.9 million to equipment, and $7.1 million to intangible assets. There was no contingent consideration associated with these acquisitions. These properties were 100% occupied under net leases, with a weighted average remaining lease term of 7.9 years as of June 30, 2021. During the six months ended June 30, 2021, the Company sold two properties with a combined net book value of $2.8 million for a realized gain on sale of $431 thousand.
During the three months ended June 30, 2021, the Company exercised its option to purchase one of the properties where the Company was the lessee under the ground lease. This lease was previously accounted for as a finance lease. This purchase resulted in an increase in land and a corresponding decrease in finance lease right-of-use assets of $1.2 million.
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 in our Consolidated Balance Sheets.
The following tables detail intangible lease assets and liabilities.
| | | | | | | | | | | | | | |
| | June 30, | | December 31, |
| (In thousands) | | 2022 | | 2021 |
| Acquired in-place lease intangibles | | $ | 92,079 | | | $ | 83,892 | |
| Above-market leases | | 13,821 | | | 13,821 | |
Finance leases - right of use asset (1) | | 24,383 | | | 24,383 | |
| Lease incentives | | 7,061 | | | 7,061 | |
| Direct lease costs | | 153 | | | 87 | |
| Total | | 137,497 | | | 129,244 | |
| Less: Accumulated amortization | | (32,186) | | | (24,993) | |
| Intangible Lease Assets, Net | | $ | 105,311 | | | $ | 104,251 | |
(1) See Note 5 - Leases for additional information on finance leases - right of use assets.
| | | | | | | | | | | | | | |
| | June 30, | | December 31, |
| (In thousands) | | 2022 | | 2021 |
| Below-market leases | | $ | 2,610 | | | $ | 2,978 | |
| Less: Accumulated amortization | | (1,021) | | | (1,038) | |
| Intangible Lease Liabilities, Net | | $ | 1,589 | | | $ | 1,940 | |
The value of acquired in-place leases amortized and included in depreciation and amortization expense was $3.2 million and $2.3 million for the three months ended June 30, 2022 and 2021, respectively, and $6.1 million and $4.4 million for the six months ended June 30, 2022 and 2021, respectively. The value of above-market and below-market leases amortized as an adjustment to revenue was $388 thousand and $405 thousand for the three months ended June 30, 2022 and 2021, respectively, and $778 thousand and $806 thousand for the six months ended June 30, 2022 and 2021, respectively. For the three months ended June 30, 2022 and 2021, lease incentive amortization was $136 thousand and $81 thousand, respectively, and $271 thousand and $161 thousand for the six months ended June 30, 2022 and 2021, respectively.
At June 30, 2022, the total weighted average amortization period remaining for our intangible lease assets and liabilities was 8.4 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 8.1 years, 7.3 years, 10.3 years and 13.4 years, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 June 30, 2022.
| | | | | | | | |
| | |
| (In thousands) | | June 30, |
| 2022 (six months) | | $ | 7,319 | |
| 2023 | | 12,506 | |
| 2024 | | 10,870 | |
| 2025 | | 9,205 | |
| 2026 | | 8,085 | |
| Thereafter | | 25,083 | |
| Total Future Amortization | | $ | 73,068 | |
NOTE 5 – LEASES
Operating Leases as Lessee
As a lessee we record ROU assets and lease liabilities for the two ground leases at our Kerrow Restaurant Operating Business and a corporate office space, both of which qualified as operating 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 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 June 30, 2022, maturities of operating lease liabilities were as follows:
| | | | | | | | |
(In thousands) | | June 30, |
| 2022 (six months) | | $ | 349 | |
| 2023 | | 705 | |
| 2024 | | 718 | |
| 2025 | | 470 | |
| 2026 | | 310 | |
| Thereafter | | 5,072 | |
| Total Payments | | 7,624 | |
| Less: Interest | | (2,240) | |
| Operating Lease Liability | | $ | 5,384 | |
The weighted-average discount rate for operating leases at June 30, 2022 was 4.19%. The weighted-average remaining lease term was 16.2 years.
Rental expense was $218 thousand and $223 thousand for the three months ended June 30, 2022 and 2021, respectively. Rental expense was $453 thousand and $449 thousand for the six months ended June 30, 2022 and 2021, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 six months ended June 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 | |
| Lease revenue - operating leases | | $ | 46,147 | | | $ | 41,230 | | | 91,490 | | | 81,976 | | |
| Variable lease revenue (tenant reimbursements) | | 1,757 | | | 932 | | | 3,317 | | | 1,701 | | |
| Total Rental Revenue | | $ | 47,904 | | | $ | 42,162 | | | $ | 94,807 | | | $ | 83,677 | | |
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) | | June 30, |
| 2022 (six months) | | $ | 90,988 | |
| 2023 | | 182,915 | |
| 2024 | | 182,558 | |
| 2025 | | 181,180 | |
| 2026 | | 180,379 | |
| Thereafter | | 922,449 | |
| Total Future Minimum Lease Payments | | $ | 1,740,469 | |
Ground Leases as Lessee
As of June 30, 2022 and December 31, 2021, the Company had finance ground lease assets aggregating $24.4 million. These assets are included in intangible lease assets, net in 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 62 years to 98 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 94.1 years at June 30, 2022.
NOTE 6 – LONG-TERM DEBT, NET OF DEFERRED FINANCING COSTS
At June 30, 2022, our long-term debt consisted of (1) $400 million of non-amortizing term loans and (2) $575 million of senior, unsecured, fixed rate notes. At December 31, 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 June 30, 2022 and December 31, 2021, the outstanding borrowings under the revolving credit facility were $0 million and $36 million, respectively, and there were no outstanding letters of credit. At June 30, 2022, we had $250 million of borrowing capacity under the revolving credit facility. The revolving credit facility portion will mature on November 9, 2025 with a six month extension option. The weighted average interest rate on the term loans before consideration of the interest rate hedge described in Note 7 - Derivative Financial Instruments was 2.19% and 1.38% at June 30, 2022 and December 31, 2021, respectively. The weighted average interest rate on the revolving credit facility was 1.40% at December 31, 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table presents the Term Loan balances as of June 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Outstanding Balance |
| | Maturity | | Interest | | June 30, | | December 31, |
(Dollars in thousands) | | Date | | Rate | | 2022 | | 2021 |
Term Loans: | | | | | | | | |
Term loan due 2023 | | Nov 2023 | | 2.19% | (a) | 50,000 | | | 50,000 | |
Term loan due 2024 | | Mar 2024 | | 2.19% | (a) | 100,000 | | | 100,000 | |
Term loan due 2025 | | Nov 2025 | | 2.19% | (a) | 150,000 | | | 150,000 | |
Term loan due 2026 | | Nov 2026 | | 2.19% | (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 of 1.00% at June 30, 2022. |
Note Purchase Agreement
On December 17, 2021, the Company entered into agreements to issue $125 million of senior unsecured notes. The notes consist of $75 million of notes with a ten-year term, which were issued on March 17, 2022 and mature on March 17, 2032, and priced at a fixed interest rate of 3.11%, and $50 million of notes with a nine-year term, which were issued on March 17, 2022, and mature on March 17, 2031, and priced at a fixed interest rate of 3.09%. These notes were issued at par value.
The following table presents the senior unsecured fixed rate notes balance as of June 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Outstanding Balance |
| | Maturity | | Interest | | June 30, | | December 31, |
(Dollars in thousands) | | Date | | Rate | | 2022 | | 2021 |
| 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 | | | 50,000 | |
Senior unsecured fixed rate note, issued April 2021 | | Apr 2031 | | 2.99 | % | | 50,000 | | | 50,000 | |
Senior unsecured fixed rate note, issued March 2022 | | Mar 2031 | | 3.09 | % | | 50,000 | | | — | |
Senior unsecured fixed rate note, issued March 2022 | | Mar 2032 | | 3.11 | % | | 75,000 | | | — | |
Total Notes | | | | | | $ | 575,000 | | | $ | 450,000 | |
Deferred Financing Costs
At June 30, 2022 and December 31, 2021, net unamortized deferred financing costs were approximately $8.5 million and $8.4 million, respectively. During the three months ended June 30, 2022 and 2021, amortization of deferred financing costs was $496 thousand and $890 thousand, respectively. During the six months ended June 30, 2022 and 2021, amortization of deferred financing costs was $964 thousand and $1.4 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 an amendment to the term loan agreement on June 4, 2021.
The Company was in compliance with all debt covenants at June 30, 2022 and December 31, 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 7 – 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 six months ended June 30, 2022 and 2021, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
As of June 30, 2022 and December 31, 2021, $350 million of our variable-rate debt is hedged by swaps with notional values totaling $350 million.
During the six months ended June 30, 2022, we entered into two interest rate swaps to hedge the interest rate variability associated with the term loan portion of our credit facility.
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 $3.4 million will be reclassified to earnings as a reduction to interest expense.
Non-designated Hedges
We do not use derivatives for trading or speculative purposes. During the six months ended June 30, 2022 and 2021, we did not have any derivatives that were not designated as cash flow hedges for accounting purposes.
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 June 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Derivative Assets | | Derivative Liabilities |
| | Balance Sheet Location | | Fair Value at | | Balance Sheet Location | | Fair Value at |
| (Dollars in thousands) | | | June 30, 2022 | | December 31, 2021 | | | June 30, 2022 | | December 31, 2021 |
| Derivatives designated as hedging instruments: | | | | | | | | |
| Interest rate swaps | | Derivative assets | | $ | 19,558 | | | $ | 2,591 | | | Derivative liabilities | | $ | — | | | $ | 7,517 | |
| Total | | | | $ | 19,558 | | | $ | 2,591 | | | | | $ | — | | | $ | 7,517 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 comprehensive income for the three and six months ended June 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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, 2022 | | $ | 8,254 | | | Interest expense | | $ | 1,142 | | | $ | (9,031) | |
Three months ended June 30, 2021 | | (1,167) | | | Interest expense | | 1,740 | | | (8,384) | |
Six months ended June 30, 2022 | | 22,000 | | | Interest expense | | 2,804 | | | (17,406) | |
Six months ended June 30, 2021 | | 5,107 | | | Interest expense | | 3,472 | | | (16,017) | |
Tabular Disclosure Offsetting Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of our derivatives at June 30, 2022 and December 31, 2021. 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, 2022 | | $ | 19,558 | | | $ | — | | | $ | 19,558 | | | $ | — | | | $ | — | | | $ | 19,558 | |
| December 31, 2021 | | 2,591 | | | — | | | 2,591 | | | (1,268) | | | — | | | 1,323 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | |
| (In thousands) | | | | | Financial Instruments | | Cash Collateral Posted | | Net Amount |
June 30, 2022 | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| December 31, 2021 | | 7,517 | | | — | | | 7,517 | | | (1,268) | | | — | | | 6,249 | |
Credit-risk-related Contingent Features
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.
At June 30, 2022 the fair value of derivatives in a net asset position related to these agreements was $19.6 million and at December 31, 2021 the fair value of derivatives in a net liability position related to these agreements was $4.9 million. As of June 30, 2022, we have not posted any collateral related to these agreements. If we or our counterparty had breached any of these provisions at June 30, 2022, we would have been entitled to the termination value of approximately $19.6 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 8 – SUPPLEMENTAL DETAIL FOR CERTAIN COMPONENTS OF CONSOLIDATED BALANCE SHEETS
Other Assets
The components of other assets were as follows:
| | | | | | | | | | | | | | |
| | June 30, | | December 31, |
| (In thousands) | | 2022 | | 2021 |
| Operating lease right-of-use asset | | $ | 4,675 | | | $ | 4,919 | |
| Restricted cash | | 3,900 | | | — | |
| Prepaid acquisition costs and deposits | | 3,698 | | | 3,049 | |
| Accounts receivable | | 1,550 | | | 1,312 | |
| Prepaid assets | | 1,039 | | | 1,375 | |
| Food and beverage inventories | | 262 | | | 252 | |
| Other | | 886 | | | 695 | |
| Total Other Assets | | $ | 16,010 | | | $ | 11,602 | |
Other Liabilities
The components of other liabilities were as follows:
| | | | | | | | | | | | | | |
| | June 30, | | December 31, |
(In thousands) | | 2022 | | 2021 |
Operating lease liability | | $ | 5,384 | | | $ | 5,617 | |
Accrued interest expense | | 3,147 | | | 2,066 | |
Intangible lease liabilities, net | | 1,589 | | | 1,940 | |
Accrued compensation | | 1,540 | | | 2,547 | |
Accrued operating expenses | | 460 | | | 286 | |
Accounts payable | | 241 | | | 550 | |
Other | | 2,846 | | | 3,008 | |
Total Other Liabilities | | $ | 15,207 | | | $ | 16,014 | |
NOTE 9 – 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 stockholders. Accordingly, no provision for federal income taxes has been included in the accompanying consolidated financial statements for the six months ended June 30, 2022 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 June 30, 2022 and 2021, we recorded income tax expense of $144 thousand and $71 thousand, respectively. During the six months ended June 30, 2022 and 2021, we recorded income tax expense of $232 thousand and $134 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 three year cumulative income and the projection of future book and taxable income of the Kerrow Restaurants Operating Business, it was determined that the removal of the valuation allowance on the net deferred tax assets was required as of December 31, 2021. During the three and six months ended June 30, 2022, $61 thousand of the net deferred tax asset was recorded as deferred tax expense related to routine book-tax differences within income tax expense in the Consolidated Statements of Income.
NOTE 10 – EQUITY
Preferred Stock
At June 30, 2022 and December 31, 2021, the Company was authorized to issue 25,000,000 shares, $0.0001 par value per share of preferred stock. There were no shares issued and outstanding at June 30, 2022 and December 31, 2021.
Common Stock
At June 30, 2022 and December 31, 2021, the Company was authorized to issue 500,000,000 shares, $0.0001 par value per share of common stock. At June 30, 2022, there were 80,543,986 shares of the Company's common stock issued and outstanding.
On March 8, 2022, we declared a dividend of $0.3325 per share, which was paid in April 2022 to common stockholders of record as of March 31, 2022.
On June 16, 2022, we declared a dividend of $0.3325 per share, which was paid in July 2022 to common stockholders of record as of June 30, 2022.
Common Stock Issuance Under the At-The-Market Program
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 the prior ATM program to, among other things, increase the maximum sales under ATM offerings to $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 Company’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. 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.
During the three and six months ended June 30, 2022, the Company executed forward sale agreements with financial institutions acting as forward purchasers under the current ATM program to sell 992,548 and 2,236,007 shares of common stock, respectively, at a weighted average sales price of $27.45 and $27.28 per share, respectively, before sales commissions and offering expenses. During the three and six months ended June 30, 2022, the Company physically settled a portion of these forward sale agreements and issued 173,424 shares at a weighted average share price of $26.16 for net proceeds of $4.5 million. The Company currently expects to fully physically settle the remaining forward sale agreements with the forward purchasers on one or more dates specified by the Company on or prior to January 2, 2023, in which case the Company expects to receive aggregate net cash proceeds at settlement equal to the number of shares of common stock multiplied by the relevant forward price per share at such time. The forward price per share that the Company will receive upon physical settlement of the forward sale agreements, will be subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchaser's stock borrowing costs and (iii) scheduled dividends during the term of the forward sale agreements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
During the three months ended June 30, 2021, no shares were issued under the current ATM program. During the six months ended June 30, 2021, the Company issued 161,509 shares under the prior ATM program at a weighted average share price of $29.56 for net proceeds of $4.7 million.
At June 30, 2022, there was $173.4 million available for issuance under the current ATM program.
Noncontrolling Interest
At June 30, 2022, there were 114,559 FCPT Operating Partnership Units (“OP units”) outstanding held by third parties. During the three and six months ended June 30, 2022, FCPT OP did not issue any OP units for consideration in real estate transactions. Generally, OP units participate in net income allocations and distributions and entitle their holder the right, subject to the terms set forth in the partnership agreement, to require FCPT OP to redeem all or a portion of the OP units held by such limited partner. At FCPT OP’s option, it may satisfy this redemption with cash or by exchanging non-registered shares of FCPT common stock on a one-for-one basis. Prior to the redemption of OP units, the limited partners participate in net income allocations and distributions in a manner equivalent to the common stockholders. The redemption value of outstanding non-controlling interest OP units was $3.1 million and $3.4 million as of June 30, 2022 and December 31, 2021, respectively.
At June 30, 2022, FCPT was the owner of approximately 99.86% of FCPT’s OP units. The remaining 0.14%, or 114,559 of FCPT’s OP units were held by unaffiliated limited partners. During the three and six months ended June 30, 2022, FCPT OP distributed $38 thousand and $76 thousand, respectively, to its unaffiliated limited partners.
Earnings Per Share
The following table presents the computation of basic and diluted net earnings per common share for the three and six months ended June 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands except for shares and per share data) | | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Average common shares outstanding – basic | | 80,294,804 | | | 76,058,812 | | | 80,245,247 | | | 76,014,595 | |
| Net effect of dilutive equity awards | | 199,639 | | | 108,653 | | | 200,920 | | | 133,174 | |
| Average common shares outstanding – diluted | | 80,494,443 | | | 76,167,465 | | | 80,446,167 | | | 76,147,769 | |
| Net income available to common shareholders | | $ | 28,130 | | | $ | 20,138 | | | $ | 50,385 | | | $ | 40,717 | |
| Basic net earnings per share | | $ | 0.35 | | | $ | 0.26 | | | $ | 0.63 | | | $ | 0.54 | |
| Diluted net earnings per share | | $ | 0.35 | | | $ | 0.26 | | | $ | 0.63 | | | $ | 0.53 | |
For the three months ended June 30, 2022 and 2021, the number of outstanding equity awards that were anti-dilutive totaled 299,372 and 207,968, respectively. For the six months ended June 30, 2022 and 2021, the number of outstanding equity awards that were anti-dilutive totaled 298,091 and 183,448, respectively.
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 and six months ended June 30, 2022 and 2021 was 114,559 and 159,392, respectively.
NOTE 11 – STOCK-BASED COMPENSATION
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 “2015 Plan”). The 2015 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. On June 10, 2022, the Board of Directors of FCPT adopted, and FCPT’s stockholders approved, the Amended and Restated Four Corners Property Trust, Inc. 2015 Omnibus Incentive Plan (the “Amended Plan”) to, among other things, increase the maximum number of shares of our common stock reserved for issuance under the 2015 Plan by 1,500,000 shares to 3,600,000 shares.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
At June 30, 2022, 2,018,495 shares of common stock were available for award under the Plan. The unamortized compensation cost of awards issued under the Plan totaled approximately $7.8 million at June 30, 2022 as shown in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Restricted Stock Units | | Restricted Stock Awards | | Performance Stock Awards | | Total |
| Unrecognized compensation cost at January 1, 2022 | | $ | 1,820 | | | $ | 1,728 | | | $ | 662 | | | $ | 4,210 | |
| Equity grants | | 2,060 | | | 3,225 | | | 1,236 | | | 6,521 | |
| Equity grant forfeitures | | (200) | | | (112) | | | (56) | | | (368) | |
| Equity compensation expense | | (643) | | | (1,405) | | | (485) | | | (2,533) | |
Unrecognized Compensation Cost at June 30, 2022 | | $ | 3,037 | | | $ | 3,436 | | | $ | 1,357 | | | $ | 7,830 | |
At June 30, 2022, the weighted average amortization period remaining for all of our equity awards was 2.3 years.
Restricted Stock Units
RSUs have been granted at a value equal to the five-day average or day of closing market price of our common stock on the date of grant, and will be settled in stock at the end of their vesting periods, which range between one and five years.
At June 30, 2022 and December 31, 2021, there were 218,060 and 159,524 RSUs outstanding, respectively. During the three months ended June 30, 2022, there were 35,145 shares of restricted stock granted, 9,049 RSUs vested, and 7,527 RSUs were forfeited. During the six months ended June 30, 2022, there were 76,608 shares of restricted stock granted, 10,545 RSUs vested, and 7,527 RSUs were forfeited. Restrictions on these RSUs lapse through 2027.
Restricted Stock Awards
RSAs have been granted at a value equal to the five-day average closing market price of our common stock on the date of grant and will be settled in stock at the end of their vesting periods, which range between one and three years.
At June 30, 2022 and December 31, 2021, there were 157,023 and 113,695 RSAs outstanding, respectively. During the three months ended June 30, 2022, there were 2,441 shares of restricted stock granted, 4,035 shares forfeited, and restrictions on 1,927 RSAs lapsed and were distributed, of which 631 RSAs were designated for tax withholdings. During the six months ended June 30, 2022, there were 119,471 shares of restricted stock granted, 4,035 shares forfeited, and restrictions on 72,105 RSAs lapsed and were distributed, of which 38,082 RSAs were designated for tax withholdings. Restrictions on these RSAs lapse through 2025. The Company expects all RSAs to vest.
Performance-Based Restricted Stock Awards
At June 30, 2022 and December 31, 2021, the target number of PSUs that were unvested was 202,560 and 208,481, respectively. During the three months ended June 30, 2022, no PSU shares were granted or vested and 3,767 shares forfeited. During the six months ended June 30, 2022, PSUs with a target number of 66,369 shares were granted and PSUs with a target number of 68,523 shares vested and 3,767 shares forfeited. The total shareholder return calculated for these PSUs resulted in a distribution of 0% of target shares, resulting in the distribution of no shares.
The performance period of the unvested grants run from January 1, 2022 through December 31, 2024, from January 1, 2021 through December 31, 2023, and from January 1, 2020 through December 31, 2022. Pursuant to the PSU award agreement, each participant is eligible to vest in and receive shares of the Company's common stock based on the initial target number of shares granted multiplied by a percentage range between 0% and 200%. The percentage range is based on the attainment of a combination of relative shareholder return and total shareholder return of the Company compared to certain specified peer groups of companies during the performance period. The grant date fair values of PSUs were determined through Monte-Carlo simulations using the following assumptions: our common stock closing price at the grant date, the average closing price of our common stock price for the 20 trading days prior to the grant date and a range of performance-based vesting based on estimated total stockholder return over a three year performance period. For the 2022 PSU grant, the Company used an implied volatility assumption of 49.5% (based on historical volatility), normalized risk free rate of 2.50%, and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
a 0% dividend yield (the mathematical equivalent to reinvesting the dividends over the three-year performance period as is consistent with the terms of the PSUs), which resulted in a grant date fair value of $1.2 million.
Based on the grant date fair value, the Company expects to recognize $1.4 million in compensation expense on a straight-line basis over the remaining requisite service period associated with the unvested PSU awards.
NOTE 12 – FAIR VALUE MEASUREMENTS
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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the assets and liabilities recorded that are reported at fair value on our Consolidated Balance Sheets on a recurring basis.
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June 30, 2022 | | | | | | | | |
| (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | |
| Derivative assets | | $— | | $19,558 | | $— | | $19,558 |
| Liabilities | | | | | | | | |
| Derivative liabilities | | $— | | $— | | $— | | $— |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | |
| (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | |
| Derivative assets | | $— | | $2,591 | | $— | | $2,591 |
| Liabilities | | | | | | | | |
| Derivative liabilities | | $— | | $7,517 | | $— | | $7,517 |
| | | | | | | | |
Derivative Financial Instruments
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 June 30, 2022, and December 31, 2021 were classified as Level 2 of the fair value hierarchy.
Fair Value of Certain Financial Liabilities
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.
| | | | | | | | | | | | | | |
| | June 30, 2022 |
| (In thousands) | | Carrying Value(1) | | Fair Value |
| Term loan due 2023 | | $ | 50,000 | | | $ | 49,838 | |
| Term loan due 2024 | | 100,000 | | | 99,675 | |
| Term loan due 2025 | | 150,000 | | | 149,794 | |
| Term loan due 2026 | | 100,000 | | | 99,671 | |
| Senior fixed note due June 2024 | | 50,000 | | | 50,479 | |
| Senior fixed note due June 2027 | | 75,000 | | | 76,407 | |
| Senior fixed note due June 2026 | | 50,000 | | | 50,401 | |
| Senior fixed note due June 2028 | | 50,000 | | | 50,501 | |
| Senior fixed note due June 2029 | | 50,000 | | | 45,965 | |
| Senior fixed note due April 2030 | | 75,000 | | | 68,429 | |
| Senior fixed note due April 2029 | | 50,000 | | | 45,115 | |
| Senior fixed note due April 2031 | | 50,000 | | | 44,617 | |
| Senior fixed note due March 2031 | | 50,000 | | | 44,978 | |
| Senior fixed note due March 2032 | | 75,000 | | | 67,291 | |
| Revolving credit facility | | — | | | — | |
| | | | | | | | | | | | | | |
| | December 31, 2021 |
| (In thousands) | | Carrying Value(1) | | Fair Value |
| Term loan due 2023 | | $ | 50,000 | | | $ | 50,237 | |
| Term loan due 2024 | | 100,000 | | | 100,474 | |
| Term loan due 2025 | | 150,000 | | | 151,702 | |
| Term loan due 2026 | | 100,000 | | | 101,262 | |
| Senior fixed note due June 2024 | | 50,000 | | | 53,482 | |
| Senior fixed note due June 2027 | | 75,000 | | | 84,593 | |
| Senior fixed note due June 2026 | | 50,000 | | | 55,468 | |
| Senior fixed note due June 2028 | | 50,000 | | | 56,952 | |
| Senior fixed note due June 2029 | | 50,000 | | | 52,045 | |
| Senior fixed note due April 2030 | | 75,000 | | | 78,246 | |
| Senior fixed note due April 2029 | | 50,000 | | | 50,965 | |
| Senior fixed note due April 2031 | | 50,000 | | | 51,584 | |
| Revolving credit facility | | 36,000 | | | 36,220 | |
(1) Carrying values exclude deferred financing costs
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Litigation
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.
NOTE 14 – SEGMENTS
During the three and six months ended June 30, 2022 and 2021, we operated in two segments: real estate operations and restaurant operations. Our segments are based on our organizational and management structure, which aligns with how our results are monitored and performance is assessed. Expenses incurred at our corporate office are allocated to real estate operations. The accounting policies of the reportable segments are the same as those described in Note 2 - Summary of Significant Accounting Policies.
The following tables present financial information by segment for the three and six months ended June 30, 2022 and 2021.
Three Months Ended June 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Real Estate Operations | | Restaurant Operations | | Intercompany | | Total |
| Revenues: | | | | | | | | |
| Rental revenue | | $ | 47,904 | | | $ | — | | | $ | — | | | $ | 47,904 | |
| Intercompany rental revenue | | 211 | | | — | | | (211) | | | — | |
| Restaurant revenue | | — | | | 7,521 | | | — | | | 7,521 | |
| Total revenues | | 48,115 | | | 7,521 | | | (211) | | | 55,425 | |
| Operating expenses: | | | | | | | | |
| General and administrative | | 4,698 | | | — | | | — | | | 4,698 | |
| Depreciation and amortization | | 9,948 | | | 180 | | | — | | | 10,128 | |
| Property expenses | | 1,987 | | | — | | | — | | | 1,987 | |
| Restaurant expenses | | — | | | 7,263 | | | (211) | | | 7,052 | |
| Total operating expenses | | 16,633 | | | 7,443 | | | (211) | | | 23,865 | |
| Interest expense | | (9,031) | | | — | | | — | | | (9,031) | |
| Other income | | 29 | | | — | | | — | | | 29 | |
| Realized gain on sale | | 5,756 | | | — | | | — | | | 5,756 | |
| Income tax expense | | (44) | | | (100) | | | — | | | (144) | |
| Net Income (Loss) | | $ | 28,192 | | | $ | (22) | | | $ | — | | | $ | 28,170 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Three Months Ended June 30, 2021
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| (In thousands) | | Real Estate Operations | | Restaurant Operations | | Intercompany | | Total |
| Revenues: | | | | | | | | |
| Rental revenue | | $ | 42,162 | | | $ | — | | | $ | — | | | $ | 42,162 | |
| Intercompany rental revenue | | 185 | | | — | | | (185) | | | — | |
| Restaurant revenue | | — | | | 7,110 | | | — | | | 7,110 | |
| Total revenues | | 42,347 | | | 7,110 | | | (185) | | | 49,272 | |
| Operating expenses: | | | | | | | | |
| General and administrative | | 4,465 | | | — | | | — | | | 4,465 | |
| Depreciation and amortization | | 8,174 | | | 214 | | | — | | | 8,388 | |
| Property expenses | | 1,202 | | | — | | | — | | | 1,202 | |
| Restaurant expenses | | — | | | 6,774 | | | (185) | | | 6,589 | |
| Total operating expenses | | 13,841 | | | 6,988 | | | (185) | | | 20,644 | |
| Interest expense | | (8,384) | | | — | | | — | | | (8,384) | |
| Other income | | 7 | | | — | | | — | | | 7 | |
| Realized gain on sale | | — | | | — | | | — | | | — | |
| Income tax expense | | (43) | | | (28) | | | — | | | (71) | |
| Net Income | | $ | 20,086 | | | $ | 94 | | | $ | — | | | $ | 20,180 | |
Six Months Ended June 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Real Estate Operations | | Restaurant Operations | | Intercompany | | Total |
| Revenues: | | | | | | | | |
| Rental revenue | | $ | 94,807 | | | $ | — | | | $ | — | | | $ | 94,807 | |
| Intercompany rental revenue | | 422 | | | — | | | (422) | | | — | |
| Restaurant revenue | | — | | | 15,015 | | | — | | | 15,015 | |
| Total revenues | | 95,229 | | | 15,015 | | | (422) | | | 109,822 | |
| Operating expenses: | | | | | | | | |
| General and administrative | | 9,967 | | | — | | | — | | | 9,967 | |
| Depreciation and amortization | | 19,652 | | | 180 | | | — | | | 19,832 | |
| Property expenses | | 3,836 | | | — | | | — | | | 3,836 | |
| Restaurant expenses | | — | | | 14,357 | | | (422) | | | 13,935 | |
| Total operating expenses | | 33,455 | | | 14,537 | | | (422) | | | 47,570 | |
| Interest expense | | (17,406) | | | — | | | — | | | (17,406) | |
| Other income | | 86 | | | — | | | — | | | 86 | |
| Realized gain on sale | | 5,756 | | | — | | | — | | | 5,756 | |
| Income tax expense | | (92) | | | (140) | | | — | | | (232) | |
| Net Income | | $ | 50,118 | | | $ | 338 | | | $ | — | | | $ | 50,456 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Six Months Ended June 30, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Real Estate Operations | | Restaurant Operations | | Intercompany | | Total |
| Revenues: | | | | | | | | |
| Rental revenue | | $ | 83,677 | | | $ | — | | | $ | — | | | $ | 83,677 | |
| Intercompany rental revenue | | 324 | | | — | | | (324) | | | — | |
| Restaurant revenue | | — | | | 12,341 | | | — | | | 12,341 | |
| Total revenues | | 84,001 | | | 12,341 | | | (324) | | | 96,018 | |
| Operating expenses: | | | | | | | | |
| General and administrative | | 9,228 | | | — | | | — | | | 9,228 | |
| Depreciation and amortization | | 16,410 | | | 214 | | | — | | | 16,624 | |
| Property expenses | | 2,204 | | | — | | | — | | | 2,204 | |
| Restaurant expenses | | — | | | 11,772 | | | (324) | | | 11,448 | |
| Total operating expenses | | 27,842 | | | 11,986 | | | (324) | | | 39,504 | |
| Interest expense | | (16,017) | | | — | | | — | | | (16,017) | |
| Other income | | 8 | | | — | | | — | | | 8 | |
| Realized gain on sale | | 431 | | | — | | | — | | | 431 | |
| Income tax expense | | (82) | | | (52) | | | — | | | (134) | |
| Net Income | | $ | 40,499 | | | $ | 303 | | | $ | — | | | $ | 40,802 | |
The following tables present supplemental information by segment at June 30, 2022 and December 31, 2021.
Supplemental Segment Information at June 30, 2022
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Real Estate Operations | | Restaurant Operations | | Total |
| Total real estate investments | | $ | 2,463,135 | | | $ | 22,248 | | | $ | 2,485,383 | |
| Accumulated depreciation | | (687,288) | | | (6,567) | | | (693,855) | |
| Total real estate investments, net | | 1,775,847 | | | 15,681 | | | 1,791,528 | |
| Cash and cash equivalents | | 16,878 | | | 836 | | | 17,714 | |
| Total assets | | 1,989,095 | | | 21,622 | | | 2,010,717 | |
| Long-term debt, net of deferred financing costs | | 966,493 | | | — | | | 966,493 | |
Supplemental Segment Information at December 31, 2021
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Real Estate Operations | | Restaurant Operations | | Total |
| Total real estate investments | | $ | 2,382,169 | | | $ | 22,236 | | | $ | 2,404,405 | |
| Accumulated depreciation | | (676,183) | | | (6,247) | | | (682,430) | |
| Total real estate investments, net | | 1,705,986 | | | 15,989 | | | 1,721,975 | |
| Cash and cash equivalents | | 4,830 | | | 1,470 | | | 6,300 | |
| Total assets | | 1,880,192 | | | 22,788 | | | 1,902,980 | |
| Long-term debt, net of deferred financing costs | | 877,591 | | | — | | | 877,591 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 15 – SUBSEQUENT EVENTS
The Company reviewed its subsequent events and transactions that have occurred after June 30, 2022, the date of the Consolidated Balance Sheet, through July 28, 2022, and noted the following:
Acquisitions
Through July 28, 2022, the Company invested $20.2 million in the acquisition of six net lease properties with an investment yield of approximately 6.5%, and approximately 11.4 years of lease term remaining. The Company funded the acquisitions with cash on hand and ATM forward settlements. The Company anticipates accounting for these transactions as asset acquisitions in accordance with U.S. GAAP. There were no contingent liabilities associated with these transactions at June 30, 2022.
Capital Resources
Through July 28, 2022, the Company physically settled a portion of the forward sale agreements that were outstanding on the current ATM program and issued 915,532 shares for net proceeds of $24.6 million.