10-Q 1 fcptq2201810-q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 1-37538
Four Corners Property Trust, Inc.
(Exact name of registrant as specified in its charter)
 
Maryland
 
47-4456296
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
591 Redwood Highway, Suite 1150
Mill Valley, California
 
94941
(Address of principal executive offices)
 
(Zip Code)
(415) 965-8030
(Registrant’s telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨ (do not check if a smaller reporting company)
Smaller reporting company ¨
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨Yes x No
Number of shares of common stock outstanding as of July 25, 2018: [62,930,370]



FOUR CORNERS PROPERTY TRUST, INC.
FORM 10 - Q
THREE AND SIX MONTHS ENDED JUNE 30, 2018
TABLE OF CONTENTS
 
 
Page
Part I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements:
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Part II
OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
 
 
 





PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FOUR CORNERS PROPERTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

 
 
 June 30, 2018
(Unaudited)
 
December 31, 2017
ASSETS
 
 
 
 
Real estate investments:
 
 
 
 
Land
 
$
471,870

 
$
449,331

Buildings, equipment and improvements
 
1,118,348

 
1,115,624

Total real estate investments
 
1,590,218

 
1,564,955

Less: Accumulated depreciation
 
(605,407
)
 
(598,846
)
Total real estate investments, net
 
984,811

 
966,109

Cash and cash equivalents
 
88,371

 
64,466

Straight-line rent adjustment
 
25,505

 
21,130

Derivative assets
 
12,284

 
4,997

Other assets
 
11,903

 
11,957

Total Assets
 
$
1,122,874

 
$
1,068,659

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Long-term debt, net of deferred financing costs
 
$
516,449

 
$
515,539

Dividends payable
 
17,278

 
16,843

Rent received in advance
 
8,461

 
8,295

Derivative liabilities
 

 
8

Other liabilities
 
4,946

 
5,706

Total liabilities
 
547,134

 
546,391

 
 
 
 
 
Equity:
 
 
 
 
Preferred stock, par value $0.0001 per share; 25,000,000 authorized, zero shares issued and outstanding
 

 

Common stock, par value $0.0001 per share; 500,000,000 shares authorized, 62,930,370 and 61,329,489 shares issued and outstanding, respectively
 
6

 
6

Additional paid-in capital
 
510,235

 
473,685

Retained earnings
 
45,418

 
36,318

Accumulated other comprehensive income
 
12,185

 
4,478

Noncontrolling interest
 
7,896

 
7,781

Total equity
 
575,740

 
522,268

Total Liabilities and Equity
 
$
1,122,874

 
$
1,068,659



The accompanying notes are an integral part of this financial statement.
1


FOUR CORNERS PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(Unaudited)


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
29,596

 
$
28,327

 
$
59,186

 
$
56,091

Restaurant revenue
 
5,079

 
4,826

 
10,293

 
9,766

Total revenues
 
34,675

 
33,153

 
69,479

 
65,857

Expenses:
 
 
 
 
 
 
 
 
General and administrative
 
3,204

 
3,459

 
6,873

 
6,316

Depreciation and amortization
 
5,225

 
5,426

 
10,569

 
10,829

Restaurant expenses
 
4,786

 
4,583

 
9,656

 
9,251

Interest expense
 
4,877

 
4,508

 
9,733

 
8,604

Total expenses
 
18,092

 
17,976

 
36,831

 
35,000

Other income
 
231

 
34

 
588

 
39

Realized gain on sale, net
 
10,879

 
3,291

 
10,879

 
3,291

Income before income taxes
 
27,693

 
18,502

 
44,115

 
34,187

Income tax expense
 
(66
)
 
(61
)
 
(125
)
 
(106
)
Net income
 
27,627

 
18,441

 
43,990

 
34,081

Net income attributable to noncontrolling interest
 
(182
)
 
(128
)
 
(291
)
 
(245
)
Net Income Available to Common Shareholders
 
$
27,445

 
$
18,313

 
$
43,699

 
$
33,836

 
 
 
 
 
 
 
 
 
Basic net income per share:
 
$
0.44

 
$
0.30

 
$
0.71

 
$
0.56

Diluted net income per share:
 
$
0.44

 
$
0.30

 
$
0.71

 
$
0.56

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
61,751,530

 
60,319,521

 
61,511,183

 
60,125,477

Diluted
 
61,911,699

 
60,438,606

 
61,661,560

 
60,215,050

Dividends declared per common share
 
$
0.2750

 
$
0.2425

 
$
0.5500

 
$
0.4850









The accompanying notes are an integral part of this financial statement.
2


FOUR CORNERS PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except for share and per share data)
(Unaudited)

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
27,627

 
$
18,441

 
$
43,990

 
$
34,081

Other comprehensive income:
 
 
 
 
 
 
 
 
Effective portion of change in fair value of derivative instruments:
 
 
 
 
 
 
 
 
Effective portion of change in fair value of derivative instruments
 
2,719

 
(839
)
 
8,102

 
(179
)
Reclassification adjustment of derivative instruments included in net income
 
(575
)
 
409

 
(814
)
 
1,034

Other comprehensive income
 
2,144

 
(430
)
 
7,288

 
855

Comprehensive income
 
29,771

 
18,011

 
51,278

 
34,936

Less: comprehensive income attributable to noncontrolling interest
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interest
 
182

 
128

 
291

 
245

Other comprehensive income attributable to noncontrolling interest
 
14

 
(7
)
 
48

 
3

Comprehensive income attributable to noncontrolling interest
 
196

 
121

 
339

 
248

Comprehensive Income Attributable to Common Shareholders
 
$
29,575

 
$
17,890

 
$
50,939

 
$
34,688



The accompanying notes are an integral part of this financial statement.
3


FOUR CORNERS PROPERTY TRUST, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In thousands, except share data)
(Unaudited)


 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Noncontrolling Interest
 
Total

 
Shares
 
Par Value
Balance at December 31, 2017
 
61,329,489

 
$
6

 
$
473,685

 
$
36,318

 
$
4,478

 
$
7,781

 
$
522,268

ASU 2017-12 cumulative effect adjustment
 

 

 

 
(467
)
 
467

 

 

Net income
 

 

 

 
43,699

 

 
291

 
43,990

Other comprehensive income
 

 

 

 

 
7,240

 
48

 
7,288

ATM proceeds, net of issuance costs
 
1,533,932

 

 
34,609

 

 

 

 
34,609

Dividends and distributions to equity holders
 

 

 

 
(34,132
)
 

 
(224
)
 
(34,356
)
Stock-based compensation, net
 
66,949

 

 
1,941

 

 

 

 
1,941

Balance at June 30, 2018
 
62,930,370

 
$
6

 
$
510,235

 
$
45,418

 
$
12,185

 
$
7,896


$
575,740




The accompanying notes are an integral part of this financial statement.
4


FOUR CORNERS PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended June 30,
 
 
2018
 
2017
Cash flows - operating activities
 
 
 
 
Net income
 
$
43,990

 
$
34,081

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
10,569

 
10,829

Gain on disposal of land, building, and equipment
 
(10,879
)
 
(3,291
)
Gain on exchange of nonfinancial assets
 
(228
)
 

Amortization of financing costs
 
910

 
813

Stock-based compensation expense
 
2,107

 
1,198

Deferred income taxes
 

 
(39
)
Changes in assets and liabilities:
 
 
 
 
Derivative assets and liabilities
 
(8
)
 
62

Straight-line rent adjustment
 
(4,563
)
 
(4,795
)
Rent received in advance
 
166

 
254

Other assets and liabilities
 
(1,077
)
 
122

Net cash provided by operating activities
 
40,987

 
39,234

Cash flows - investing activities
 
 
 
 
Purchases of real estate investments
 
(37,989
)
 
(64,013
)
Proceeds from sale of real estate investments
 
15,714

 
5,001

Advance deposits on acquisition of operating real estate
 
(122
)
 
(122
)
Cash used in investing activities
 
(22,397
)
 
(59,134
)
Cash flows - financing activities
 
 
 
 
Net proceeds from equity issuance
 
34,609

 
28,871

Proceeds from issuance of senior notes
 

 
125,000

Payment of deferred financing costs
 

 
(1,690
)
Proceeds from revolving credit facility
 

 
36,000

Repayment of revolving credit facility
 

 
(81,000
)
Payment of dividend to shareholders
 
(33,697
)
 
(29,054
)
Distribution to non-controlling interests
 
(224
)
 
(249
)
Redemption of non-controlling interests
 

 
(988
)
Repayment of debt assumed in purchase of real estate investments
 

 
(2,305
)
Net cash used in financing activities
 
688

 
74,585

Net increase in cash and cash equivalents
 
19,278

 
54,685

Cash and cash equivalents, including restricted cash, at beginning of period
 
69,371

 
26,643

Cash and cash equivalents, including restricted cash, at end of period
 
$
88,649

 
$
81,328

Supplemental disclosures:
 
 
 
 
Interest paid
 
$
8,908

 
$
7,724

Income taxes paid
 
$
410

 
$
333

Non-cash investing and financing activities:
 
 
 
 
Dividends declared but not paid
 
$
17,278

 
$
14,820

Debt assumed in acquisition of real estate investments
 
$

 
$
2,305

Change in fair value of derivative instruments
 
$
7,287

 
$
793

Operating partnership units issued in exchange for real estate investments
 
$

 
$
3,608


The accompanying notes are an integral part of this financial statement.
5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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.
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 related food service 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 as well as cash in lieu of any fractional shares of our common stock which they would have otherwise received (the “Spin-Off”). The Spin-Off is intended to qualify as tax-free to Darden shareholders for U.S. federal income tax purposes, except for cash paid in lieu of fractional shares.
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 U.S. 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 adjusted taxable income to our shareholders, subject to certain adjustments and excluding any net capital gain. As a REIT, we will not be subject to U.S. 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 U.S. federal, state, and local income taxes. We made our REIT election upon the filing of our 2016 tax return.
Any references to “the Company,” “we,” “us,” or “our” refer to FCPT as an independent, publicly traded, self-administered company.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying 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.
Reclassifications
Certain amounts previously reported under specific financial statement captions have been reclassified to be consistent with the current period presentation.
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 sales and expenses during the reporting period. The estimates and assumptions used in the

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

accompanying consolidated financial statements are based on management’s evaluation of the relevant facts and circumstances as of the date of the combination. Actual results may differ from the estimates and assumptions used in preparing the accompanying consolidated financial statements, and such differences could be material.
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 balance sheets as a component of buildings, equipment and improvements 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. Other equipment is generally 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 our accompanying Consolidated Statements of Income and Comprehensive Income.
Our accounting policies regarding land, buildings and equipment, including leasehold 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. Since adoption in the fourth quarter of 2016, the Company has determined the land, building, site improvements, and in-places leases (if any) of assets acquired were a single asset 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. 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, in-place lease intangibles are valued based on the Company’s estimates of costs related to tenant acquisition and the asset carrying costs 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

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

believes it is likely the tenant will exercise the renewal option. Should a lease terminate early, the unamortized portion of any related lease intangible is immediately recognized as an impairment loss in depreciation and amortization expense.
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. 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 or lease our assets. 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 Consolidated Statements of Income and Comprehensive Income as the original impairment, if any.
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. 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 no real estate held for sale at June 30, 2018.
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 includes escrow deposits and is included in Other Assets on our Consolidated Balance Sheets.
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)
 
2018
 
2017
Cash and cash equivalents
 
$
88,371

 
$
64,466

Restricted cash (included in Other assets)
 
278

 
4,905

Total Cash, Cash Equivalents, and Restricted Cash
 
$
88,649

 
$
69,371

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 loan and revolving credit facility and semi-annually on our senior fixed rate notes.
See Note 6 - Long-term Debt, Net of Deferred Financing Costs for additional information.
Deferred Financing Costs

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 on 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 principals (“U.S. GAAP”), changes in the derivatives’ fair value are not included in current earnings but are included in accumulated other comprehensive income (loss), 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.
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 is intended to simplify hedge accounting by better aligning an entity’s financial reporting for hedging relationships with its risk management activities. We adopted ASU 2017-12 in January 2018, and as a result recorded a cumulative effect adjustment of $467 thousand to retained earnings and other comprehensive income.
See Note 7 - Derivative Financial Instruments for additional information.
Other Assets and Liabilities
Other assets primarily consist of intangible lease assets described above, pre-acquisition costs, prepaid assets, food and beverage inventories, restricted cash (escrow deposits), lease origination fees, and accounts receivable. Other liabilities primarily consist of accrued compensation, accrued interest, accrued operating expenses, intangible lease liabilities, and deferred rent obligations on certain operating leases.
Revenue Recognition
Effective January 1, 2018, the Company adopted FASB ASU No. 2014-09, “Revenue from Contracts with Customers” using the modified retrospective method. The standard outlines a single comprehensive revenue recognition model for entities to follow in accounting for revenue from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to receive for those goods or services. Effective January 1, 2018, the Company also adopted FASB ASU No. 2017-15, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” Through the evaluation and implementation process, we have determined FCPT’s key revenue stream that could be impacted by FASB ASU No. 2014-09, as amended by FASB ASU No. 2017-05, is the gain on disposition of real estate reported on the Consolidated Statements of Income and Comprehensive Income. We previously recognized revenue from asset sales at the time of closing (i.e., transfer of asset). After adoption of FASB No. ASU 2014-09, as amended by FASB ASU No. 2017-05, we will evaluate the transaction to determine if control has been transferred to the buyer to determine proper timing of revenue recognition, as well as transaction price allocation. Adoption of this guidance did not have a material impact on our consolidated financial statements or related disclosures.

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Refer to the Restaurant Revenue section below for details of the impact of FASB ASU No. 2014-09 on the Kerrow Restaurant Operating Business.
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 reasonably assured. Recognizing rental income 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. Lease origination fees are deferred and amortized over the related lease term as an adjustment to rental revenue. Taxes collected from lessees and remitted to governmental authorities are presented on a net basis within rental revenue in our Consolidated Statements of Income and Comprehensive Income.
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.
We assess the collectability of our lease receivables, including deferred rent receivables. We base our assessment of the collectability of rent receivables (other than deferred rent receivables) on several factors, including payment history, the financial strength of the tenant and any guarantors, the value of the underlying collateral, if any, and current economic conditions. If our evaluation of these factors indicates it is probable that we will be unable to recover the full value of the receivable, we provide a reserve against the portion of the receivable that we estimate may not be recovered. We also base our assessment of the collectability of deferred rent receivables on several factors, including among other things, the financial strength of the tenant and any guarantors, the historical operations and operating trends of the property, the historical payment pattern of the tenant and the type of property. If our evaluation of these factors indicates it is probable that we will be unable to receive the rent payments due in the future, we provide a reserve against the recognized deferred rent receivable asset for the portion, up to its full value, that we estimate may not be recovered. If we change our assumptions or estimates regarding the collectability of future rent payments required by a lease, we may adjust our reserve or reduce the rental revenue recognized in the period we make such change in our assumptions or estimates.
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, 2018, and December 31, 2017, credit card receivables totaled $86 thousand and $90 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 statements of income.
Restaurant Expenses
Restaurant expenses include restaurant labor, general and administrative expenses, 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.
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 U.S. 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 U.S. 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, U.S. federal income and excise taxes may be due on our undistributed taxable income.

10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Kerrow Restaurant Operating Business is a TRS and is taxed as a C corporation.
We provide for U.S. federal and state income taxes currently payable as well as for those deferred because of temporary differences between reporting income and expenses for financial statement purposes versus tax purposes. U.S. federal income tax credits are recorded as a reduction of income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. Interest recognized on reserves for uncertain tax positions is included in interest, net in our Consolidated Statements of Comprehensive Income. A corresponding liability for accrued interest is included as a component of other liabilities on our Consolidated Balance Sheets. Penalties, when incurred, are recognized in general and administrative expenses.
We estimate certain components of our provision for income taxes. These estimates include, among other items, depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as taxes paid on reported employee tip income, effective rates for state and local income taxes and the valuation and tax deductibility of certain other items. We adjust our annual effective income tax rate as additional information on outcomes or events becomes available.
We base our estimates on the best available information at the time that we prepare the provision. We will generally file our annual income tax returns several months after our year end. Income tax returns are subject to audit by state and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws. The major jurisdictions in which we will file income tax returns are the U.S. federal jurisdiction and all states in the U.S. in which we own properties that have an income tax.
U.S. GAAP requires that a position taken or expected to be taken in a tax return be recognized (or derecognized) in the financial statements when it is more likely than not (i.e., a likelihood of more than 50 percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. We include within our current tax provision the balance of unrecognized tax benefits related to tax positions for which it is reasonably possible that the total amounts could change during the next 12 months based on the outcome of examinations.
See Note 8 - 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 9 - 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”), forfeitable dividend equivalent units (“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 three years, less estimated forfeitures. No compensation cost is recognized for awards for which employees do not render the requisite services.
Effective January 1, 2018, the Company adopted FASB ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in this ASU provide guidance about which changes to the terms or

11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

conditions of a share-based payment award require the application of modification accounting in Topic 718. The Company’s adoption of this guidance did not have a material impact on our consolidated financial statements or related disclosures.
See Note 10 - 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
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which supersedes the existing guidance for lease accounting, Leases (Topic 840). FASB ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. FASB ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. We are currently evaluating the impact of adopting this guidance.
Effective January 1, 2018, the Company adopted FASB ASU No. 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments.” FASB ASU 2016-15 provides guidance on certain specific cash flow issues, including, but not limited to, debt prepayment or extinguishment costs, contingent consideration payments made after a business combination and distributions received from equity method investees. The Company’s adoption of this guidance did not have a material impact on our consolidated financial statements or related disclosures.
Effective January 1, 2018, the Company adopted FASB ASU No. 2016-18, “Statement of Cash Flows - Restricted Cash.” FASB No. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. This adoption did not have a material impact on our financial statements and as a result of adoption, restricted cash is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Consolidated Statement of Cash Flows.
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 87% 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 financial statements for Darden can be found in the Investor Relations section at www.darden.com. We are providing this website address solely for the information of our stockholders. We do not intend this website to be an active link or to otherwise incorporate the information contained on such website 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. With 298 locations in our portfolio, Olive Garden branded restaurants comprise approximately 56% of our leased properties and approximately 65% of the revenues received under leases. Our properties, including the Kerrow Restaurant Operating Business, are located in 44 states, with concentrations of 10% or greater of total rental revenue in two states: Texas (10.7%) and Florida (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, 2018, our exposure to risk related to our derivative instruments totaled

12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

$12.3 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 INVESMENTS, 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)
 
2018
 
2017
Land
 
$
471,870

 
$
449,331

Buildings and improvements
 
981,313

 
977,783

Equipment
 
137,035

 
137,841

Total gross real estate investments
 
1,590,218

 
1,564,955

Less: accumulated depreciation
 
(605,407
)
 
(598,846
)
Total Real Estate Investments, Net
 
$
984,811

 
$
966,109

During the six months ended June 30, 2018, the Company invested $37.9 million, including transaction costs, in 21 restaurant properties located in ten states, and allocated the investment as follows: $24.7 million to land, $8.7 million to buildings and improvements, and $4.5 million to intangible assets principally related to the value of the in-place leases acquired. 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 11.1 years as of June 30, 2018. During the six months ended June 30, 2018, the Company sold one property with a net book value of $4.6 million for a realized gain on sale of $10.9 million.
Operating Leases
The following table presents the scheduled minimum future contractual rent to be received under the remaining non-cancelable term of the operating leases, and because lease renewal periods are exercisable at the option of the lessee, the table presents future minimum lease payments due during the initial lease term only.
 
 
June 30,
(In thousands)
 
2018
2018 (six months)
 
$
55,068

2019
 
111,467

2020
 
113,009

2021
 
114,436

2022
 
116,060

2023
 
117,432

Thereafter
 
890,583

Total Future Minimum Lease Payments
 
$
1,518,055


13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5 – 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)
 
2018
 
2017
Intangible lease assets, net
 
$
8,273

 
$
3,914

Prepaid acquisition costs
 
1,755

 
1,385

Prepaid assets
 
449

 
383

Accounts receivable
 
431

 
616

Restricted cash
 
278

 
4,905

Food and beverage inventories
 
156

 
186

Other
 
561

 
568

Total Other Assets
 
$
11,903

 
$
11,957

Other Liabilities
The components of other liabilities were as follows:
 
 
June 30,
 
December 31,
(In thousands)
 
2018
 
2017
Accrued interest expense
 
$
1,331

 
$
1,290

Accounts payable
 
707

 
1,055

Deferred lease liability
 
691

 
663

Accrued compensation
 
1,164

 
1,543

Accrued operating expenses
 
369

 
488

Intangible lease liabilities, net
 
101

 

Other
 
583

 
667

Total Other Liabilities
 
$
4,946

 
$
5,706

Intangible Lease Assets and Liabilities, Net
The following tables detail intangible lease assets and liabilities which are included in Other Assets and Other Liabilities, respectively, on our Consolidated Balance Sheets. Acquired in-place lease intangibles are amortized as depreciation and amortization expense. Above-market and below-market leases and lease incentives are amortized over the initial term of the respective leases as an adjustment to rental revenue.
 
 
June 30,
 
December 31,
(In thousands)
 
2018
 
2017
Acquired in-place lease intangibles
 
$
8,054

 
$
4,209

Above-market leases
 
804

 

Lease incentives
 
40

 
40

Total
 
8,898

 
4,249

Less: Accumulated amortization
 
(625
)
 
(335
)
Intangible Lease Assets, Net
 
$
8,273

 
$
3,914


14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
 
June 30,
 
December 31,
(In thousands)
 
2018
 
2017
Below-market leases
 
$
115

 
$

Less: Accumulated amortization
 
(14
)
 

Intangible Lease Liabilities, Net
 
$
101

 
$

The value of acquired in-place leases amortized and included in depreciation and amortization expense was $123 thousand and $80 thousand for the three months ended June 30, 2018 and 2017, and $245 thousand and $160 thousand for the six months ended June 30, 2018 and 2017, respectively. The value of above-market and below-market leases and lease incentives amortized as an adjustment to revenue was $15 thousand and $31 thousand for the three and six months ended June 30, 2018. There was no amortization for adjustments to revenue for the six months ended June 30, 2017.
At June 30, 2018, the total weighted average amortization period remaining for our intangible lease assets and liabilities was 14.7 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 14.7 years, 12.5 years, 4.3 years, and 19.1 years, respectively.
The following table presents the estimated impact during the next five years and thereafter related to the amortization of in-place lease intangibles, above-market and below-market lease intangibles, and lease incentives for properties held for investment at June 30, 2018.
(In thousands)
 
June 30, 2018
2018 (six months)
 
$
370

2019
 
739

2020
 
738

2021
 
707

2022
 
628

2023
 
557

Thereafter
 
4,433

Total Future Amortization
 
$
8,172

NOTE 6 – LONG-TERM DEBT, NET OF DEFERRED FINANCING COSTS
At June 30, 2018, and December 31, 2017, our long-term debt consisted of (1) a $400 million, non-amortizing term loan and (2) $125 million of senior, unsecured, fixed rate notes.
At June 30, 2018 and December 31, 2017, net unamortized deferred financing costs were approximately $8.6 million and $9.5 million, respectively. During the three months ended June 30, 2018 and 2017, amortization of deferred financing costs was $455 thousand and $415 thousand, respectively. During the six months ended June 30, 2018 and June 30, 2017, amortization of deferred financing costs was $910 thousand and $813 thousand, respectively. The weighted average interest rate on the term loan before consideration of the interest rate hedge described below was 3.40% and 2.79% at June 30, 2018 and December 31, 2017, respectively.
At both June 30, 2018, and December 31, 2017, there was no balance outstanding under the $250 million revolving credit facility nor any outstanding letters of credit. The Company was in compliance with all debt covenants at June 30, 2018.
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

15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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, 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
As of June 30, 2018, our variable-rate debt of $400 million is hedged by swaps with notional values totaling $400 million through November 9, 2018. From November 9, 2018, through the loan maturity date of the variable-rate debt, November 9, 2022, there are swaps in place with notional amounts totaling $300 million.
After the Company’s adoption of ASU 2017-12 in January 2018, it no longer separately measures and reports hedge ineffectiveness prospectively. For the three months and six months ended June 30, 2018, we recorded approximately $40 thousand and $36 thousand of income, respectively, related to hedge ineffectiveness in earnings. The hedge ineffectiveness was attributable to zero-percent floor and rounding mismatches in the hedging relationships.
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 $2.8 million will be reclassified to earnings as a decrease to interest expense.
Non-designated Hedges
We do not use derivatives for trading or speculative purposes. During the six months ended June 30, 2018 and 2017, 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, 2018 and December 31, 2017.
 
 
Derivative Assets
 
Derivative Liabilities
 
 
Balance Sheet Location
 
Fair Value at
 
Balance Sheet Location
 
Fair Value at
(Dollars in thousands)
 
 
June 30, 2018
 
December 31, 2017
 
 
June 30, 2018
 
December 31, 2017
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest rate swaps
 
Derivative assets
 
$
12,284

 
$
4,997

 
Derivative liabilities
 
$

 
$
8

Total
 
 
 
$
12,284

 
$
4,997

 
 
 
$

 
$
8


16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Tabular Disclosure of the Effect of Derivative Instruments on the Statements of Comprehensive Income
The table below presents the effect of our interest rate swaps on the statements of comprehensive income for the three and six months ended June 30, 2018 and 2017.
(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, 2018
 
$
2,719

 
Interest expense
 
$
575

 
$
4,877

Three months ended June 30, 2017
 
$
(839
)
 
Interest expense
 
$
(409
)
 
$
4,508

Six months ended June 30, 2018
 
$
8,102

 
Interest expense
 
$
814

 
$
9,733

Six months ended June 30, 2017
 
$
(179
)
 
Interest expense
 
$
(1,034
)
 
$
8,604

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, 2018 and December 31, 2017. 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, 2018
 
$
12,284

 
$

 
$
12,284

 
$

 
$

 
$
12,284

December 31, 2017
 
4,997

 

 
4,997

 
(8
)
 

 
4,989

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, 2018
 
$

 
$

 
$

 
$

 
$

 
$

December 31, 2017
 
8

 

 
8

 
(8
)
 

 

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, 2018 and December 31, 2017, the fair value of derivatives in a net asset position related to these agreements was approximately $12.3 million and $5.0 million, respectively. As of June 30, 2018, we have not posted any collateral related to these agreements. If we or our counterparty had breached any of these provisions at June 30, 2018, we would have been entitled to the termination value of $12.3 million.

17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8 – 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 U.S. federal income tax on our net income that we distribute currently to our stockholders. Accordingly, no provision for U.S. federal income taxes has been included in the accompanying consolidated financial statements for the six months ended June 30, 2018 related to the REIT. 
FCPT’s TRSs will generally be subject to U.S. federal, state, and local income taxes. During the three months ended June 30, 2018 and 2017, our income tax provision was $66 thousand and $61 thousand, respectively. During the six months ended June 30, 2018 and 2017, our income tax provision was $125 thousand and $106 thousand, respectively.
In December 2017, the Tax Cuts and Jobs Act lowered the U.S. federal income tax rate on corporations to 21% effective for taxable years after December 31, 2017. Due to FCPT’s REIT status and the nominal taxable income at our Kerrow Restaurant Operating Business, there was not a significant impact to our reported results resulting from this change.
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 June 30, 2018. Changes in estimates of deferred tax asset realizability are included in "Income tax expense" in the Consolidated Statements of Income.
NOTE 9 – EQUITY
Preferred Stock
At June 30, 2018 and December 31, 2017, 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, 2018 or December 31, 2017.
Common Stock
At June 30, 2018 and December 31, 2017, the Company was authorized to issue 500,000,000 shares, $0.0001 par value per share, of common stock.
In June 2018, we declared a dividend of $0.275 per share, which was paid in July 2018 to common stockholders of record as of June 29, 2018.
At June 30, 2018, there were 62,930,370 shares of the Company's common stock issued and outstanding.
Common Stock Issuance Under the At-The-Market Program
In December 2016, the Company established an “At-the-Market” (“ATM”) equity issuance program under which the Company may, at its discretion, issue and sell its common stock with a sales value of up to a maximum of $150.0 million through ATM offerings on the New York Stock Exchange through broker-dealers. During the three and six months ended June 30, 2018, we sold 1,533,932 shares under the ATM program at a weighted-average selling price of $22.97 per share, for net proceeds of approximately $34.6 million. At June 30, 2018, there was $81.3 million available for issuance under the ATM program.

18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Noncontrolling Interest
At June 30, 2018, there were 409,320 FCPT Operating Partnership Units (“OP units”) outstanding held by third parties. During the six months ended June 30, 2018, 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 the Operating Partnership 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 stock holders. The redemption value of outstanding non-controlling interest OP units was $9.8 million and $10.6 million as of June 30, 2018 and December 31, 2017, respectively.
At June 30, 2018, FCPT is the owner of approximately 99.34% of FCPT’s OP units. The remaining 0.66%, or 409,320 of FCPT’s OP units are held by unaffiliated limited partners. During the six months ended June 30, 2018, FCPT OP distributed $224 thousand to 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, 2018 and 2017.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands except for shares and per share data)
 
2018
 
2017
 
2018
 
2017
Average common shares outstanding – basic
 
61,751,530

 
60,319,521

 
61,511,183

 
60,125,477

Net effect of dilutive equity awards
 
160,169

 
119,085

 
150,377

 
89,573

Average common shares outstanding – diluted
 
61,911,699

 
60,438,606

 
61,661,560

 
60,215,050

Net income available to common shareholders
 
$
27,445

 
$
18,313

 
$
43,699

 
$
33,836

Basic net earnings per share
 
$
0.44

 
$
0.30

 
$
0.71

 
$
0.56

Diluted net earnings per share
 
$
0.44

 
$
0.30

 
$
0.71

 
$
0.56

For the three months ended June 30, 2018 and 2017, the number of outstanding equity awards that were anti-dilutive totaled 314,050 and 305,221, respectively. For the six months ended June 30, 2018 and 2017, the number of outstanding equity awards that were anti-dilutive totaled 317,313 and 272,269, 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 six months ended June 30, 2018 and 2017 was 409,320 and 434,070, respectively.
NOTE 10 – 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 “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.

19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

At June 30, 2018, 1,634,657 shares of common stock were available for award under the Plan. The unamortized compensation cost of awards issued under the Incentive Plan totaled approximately $5.0 million at June 30, 2018 as shown in the following table.
(In thousands)
 
Restricted Stock Units
 
Restricted Stock Awards
 
Performance Stock Awards
 
Total
Unrecognized compensation cost at January 1, 2018
 
$
524

 
$
1,052

 
$
2,302

 
$
3,878

Equity grants
 
414

 
1,612

 
1,180

 
3,206

Equity grant forfeitures
 

 
(5
)
 

 
(5
)
Equity compensation expense
 
(371
)
 
(826
)
 
(910
)
 
(2,107
)
Unrecognized Compensation Cost at June 30, 2018
 
$
567

 
$
1,833

 
$
2,572

 
$
4,972

 
 
 
 
 
 
 
 
 
At June 30, 2018, the weighted average amortization period remaining for all of our equity awards was 1.6 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 three years.
At June 30, 2018 and December 31, 2017, there were 78,791 and 64,983 RSUs outstanding, respectively. During the six months ended June 30, 2018, there were 17,896 shares of restricted stock granted, 4,088 restrictions on RSUs lapsed and those shares distributed, and no RSUs were forfeited. Restrictions on these shares lapse through 2019.
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, 2018 and December 31, 2017, there were 102,254 and 81,909 RSAs outstanding, respectively. During the six months ended June 30, 2018 there were 67,845 shares of restricted stock granted, restrictions on 47,292 RSAs lapsed and those shares were distributed, and 7,126 RSAs were designated for tax withholdings. Restrictions on these shares lapse through 2021.
Performance-Based Restricted Stock Awards
During the six months ended June 30, 2018, PSUs with a target number of 68,490 shares were granted. At June 30, 2018 and December 31, 2017, the target number of PSUs that were unvested was 204,068 and 135,578, respectively. The performance period of the grants run from January 1, 2018 through December 31, 2020, from January 1, 2017 through December 31, 2019, and from January 1, 2016 through December 31, 2018. Pursuant to the performance share 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 total shareholder return of the Company compared to certain specified peer groups of companies during the performance period. The fair value of the performance shares was estimated on the date of grant using a Monte Carlo Simulation model. Based on the grant date fair value, the Company expects to recognize $2.6 million in compensation expense on a straight-line basis over the remaining requisite service period associated with these awards.
NOTE 11 –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. The following table presents the assets and liabilities recorded that are reported at fair value on

20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

our Consolidated Balance Sheets on a recurring basis.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
June 30, 2018
 
 
 
 
 
 
 
 
(In thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Derivative assets
 
$

 
$
12,284

 
$

 
$
12,284

December 31, 2017
 
 
 
 
 
 
 
 
(In thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Derivative assets
 
$

 
$
4,997

 
$

 
$
4,997

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Derivative liabilities
 
$

 
$
8

 
$

 
$
8

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.
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, 2018 and December 31, 2017 were classified as Level 2 of the fair value hierarchy.

21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table presents the carrying value and fair value of certain financial liabilities that are recorded on our consolidated balance sheets.
Fair Value of Certain Financial Liabilities
June 30, 2018
 
 
 
 
(In thousands)
 
Carrying Value
 
Fair Value
Liabilities
 
 
 
 
Term loan, excluding deferred financing costs
 
$
400,000

 
$
400,435

Senior fixed note - 7 year, excluding deferred financing costs
 
$
50,000

 
$
48,820

Senior fixed note - 10 year, excluding deferred financing costs
 
$
75,000

 
$
72,726

December 31, 2017
 
 
 
 
(In thousands)
 
Carrying Value
 
Fair Value
Liabilities
 
 
 
 
Term loan and revolver balance, excluding deferred financing costs
 
$
400,000

 
$
406,637

Senior fixed note - 7 year, excluding deferred financing costs
 
$
50,000

 
$
50,043

Senior fixed note - 10 year, excluding deferred financing costs
 
$
75,000

 
$
75,184

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.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Rentals
The annual future lease commitments under non-cancelable operating leases for the five years subsequent to June 30, 2018 and thereafter is as follows:
(In thousands)
 
June 30, 2018
2018 (six months)
 
$
295

2019
 
550

2020
 
400

2021
 
103

Thereafter
 

Total Future Lease Commitments
 
$
1,348

Rental expense was $178 thousand and $156 thousand for the three months ended June 30, 2018 and 2017, and $354 thousand and $313 thousand for the six months ended June 30, 2018 and 2017, respectively.
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.

22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13 – SEGMENTS
During the three and six months ended June 30, 2018 and 2017, 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, 2018 and 2017.
Three Months Ended June 30, 2018
(In thousands)
 
Real Estate Operations
 
Restaurant Operations
 
Intercompany
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
29,596

 
$

 
$

 
$
29,596

Intercompany rental revenue
 
100

 

 
(100
)
 

Restaurant revenue
 

 
5,079

 

 
5,079

Total revenues
 
29,696

 
5,079

 
(100
)
 
34,675

Expenses:
 
 
 
 
 
 
 
 
General and administrative
 
3,204

 

 

 
3,204

Depreciation and amortization
 
5,100

 
125

 

 
5,225

Restaurant expenses
 

 
4,886

 
(100
)
 
4,786

Interest expense
 
4,877

 

 

 
4,877

Total expenses
 
13,181

 
5,011

 
(100
)
 
18,092

Other income
 
231

 

 

 
231

Realized gain on sale, net
 
10,879

 

 

 
10,879

Income before income taxes
 
27,625

 
68

 

 
27,693

Income tax expense
 
(31
)
 
(35
)
 

 
(66
)
Net Income
 
$
27,594

 
$
33

 
$

 
$
27,627


23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Three Months Ended June 30, 2017
(In thousands)
 
Real Estate Operations
 
Restaurant Operations
 
Intercompany
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
28,327

 
$

 
$

 
$
28,327

Intercompany rental revenue
 
99

 

 
(99
)
 

Restaurant revenue
 

 
4,826

 

 
4,826

Total revenues
 
28,426

 
4,826

 
(99
)
 
33,153

Expenses:
 
 
 
 
 
 
 
 
General and administrative
 
3,459

 

 

 
3,459

Depreciation and amortization
 
5,312

 
114

 

 
5,426

Restaurant expenses
 

 
4,682

 
(99
)
 
4,583

Interest expense
 
4,508

 

 

 
4,508

Total expenses
 
13,279

 
4,796

 
(99
)
 
17,976

Other income
 
34

 

 

 
34

Realized gain on sale, net
 
3,291

 

 

 
3,291

Income before income taxes
 
18,472

 
30

 

 
18,502

Income tax expense
 
(28
)
 
(61
)
 

 
(89
)
Net Income (Loss)
 
$
18,444

 
$
(31
)
 
$

 
$
18,413

Six Months Ended June 30, 2018
(In thousands)
 
Real Estate Operations
 
Restaurant Operations
 
Intercompany
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
59,186

 
$

 
$

 
$
59,186

Intercompany rental revenue
 
200

 

 
(200
)
 

Restaurant revenue
 

 
10,293

 

 
10,293

Total revenues
 
59,386

 
10,293

 
(200
)
 
69,479

Expenses:
 
 
 
 
 
 
 
 
General and administrative
 
6,873

 

 

 
6,873

Depreciation and amortization
 
10,317

 
252

 

 
10,569

Restaurant expenses
 

 
9,856

 
(200
)
 
9,656

Interest expense
 
9,733

 

 

 
9,733

Total expenses
 
26,923

 
10,108

 
(200
)
 
36,831

Other income
 
588

 

 

 
588

Realized gain on sale, net
 
10,879

 

 

 
10,879

Income before income taxes
 
43,930

 
185

 

 
44,115

Income tax expense
 
(62
)
 
(63
)
 

 
(125
)
Net Income
 
$
43,868

 
$
122

 
$

 
$
43,990


24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Six Months Ended June 30, 2017
(In thousands)
 
Real Estate Operations
 
Restaurant Operations
 
Intercompany
 
Total
Revenues:
 
 
 
 
 
 
 
 
Rental revenue
 
$
56,091

 
$

 
$

 
$
56,091

Intercompany rental revenue
 
197

 

 
(197
)
 

Restaurant revenue
 

 
9,766

 

 
9,766

Total revenues
 
56,288

 
9,766

 
(197
)
 
65,857

Expenses:
 
 
 
 
 
 
 
 
General and administrative
 
6,316

 

 

 
6,316

Depreciation and amortization
 
10,594

 
235

 

 
10,829

Restaurant expenses
 

 
9,448

 
(197
)
 
9,251

Interest expense
 
8,604

 

 

 
8,604

Total expenses
 
25,514

 
9,683

 
(197
)
 
35,000

Other income
 
39

 

 

 
39

Realized gain on sale, net
 
3,291

 

 

 
3,291

Income before income taxes
 
34,104

 
83

 

 
34,187

Income tax expense
 
(56
)
 
(50
)
 

 
(106
)
Net Income (Loss)
 
$
34,048

 
$
33

 
$

 
$
34,081

The following tables present supplemental information by segment at June 30, 2018 and December 31, 2017.
Supplemental Segment Information at June 30, 2018
(In thousands)
 
Real Estate Operations
 
Restaurant Operations
 
Total
Gross real estate investments
 
$
1,573,515

 
$
16,703

 
$
1,590,218

Accumulated depreciation
 
(598,858
)
 
(6,549
)
 
(605,407
)
Total real estate investments, net
 
$
974,657

 
$
10,154

 
$
984,811

Cash and cash equivalents
 
$
86,625

 
$
1,746

 
$
88,371

Total assets
 
$
1,110,422

 
$
12,452

 
$
1,122,874

Long-term debt, net of deferred financing costs
 
$
516,449

 
$

 
$
516,449

Supplemental Segment Information at December 31, 2017
(In thousands)
 
Real Estate Operations
 
Restaurant Operations
 
Total
Gross real estate investments
 
$
1,548,259

 
$
16,696

 
$
1,564,955

Accumulated depreciation
 
(592,293
)
 
(6,553
)
 
(598,846
)
Total real estate investments, net
 
$
955,966

 
$
10,143

 
$
966,109

Cash and cash equivalents
 
$
63,229

 
$
1,237

 
$
64,466

Total assets
 
$
1,056,500

 
$
12,159

 
$
1,068,659

Long-term debt, net of deferred financing costs
 
$
515,539

 
$

 
$
515,539

NOTE 14 – SUBSEQUENT EVENTS
The Company reviewed its subsequent events and transactions that have occurred after June 30, 2018, the date of the consolidated balance sheet, through July 26, 2018 and noted the following:

25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

On July 16, 2018, the Company invested $3.6 million in the acquisition of one property located in Austin, Texas. The property is occupied by Buffalo Wild Wings under a triple-net lease with an approximate remaining lease term of 6 years. The Company funded the acquisition with Section 1031 exchange proceeds and cash on hand. The Company anticipates accounting for this transaction as an asset acquisition in accordance with U.S. GAAP. There were no contingent liabilities associated with this transaction at June 30, 2018.
There were no other material subsequent events or transactions.

26


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q, including the documents that are incorporated by reference, that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Also, when Four Corners Property Trust, Inc. uses any of the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” or similar expressions, Four Corners Property Trust, Inc. is making forward-looking statements. Although management believes that the expectations reflected in such forward-looking statements are based upon present expectations and reasonable assumptions, actual results could differ materially from those set forth in the forward-looking statements. Certain factors that could cause actual results or events to differ materially from those anticipated or projected are described in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, as such factors may be updated from time to time in our periodic filings with the Securities and Exchange Commission.
Given these uncertainties, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q or any document incorporated herein by reference. Four Corners Property Trust, Inc. undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report on Form 10-K of Four Corners Property Trust, Inc. for the year ended December 31, 2017. Any references to “the Company,” “we,” “us,” or “our” refer to FCPT as an independent, publicly traded, self-administered company.
Overview
We are a Maryland corporation and a real estate investment trust (“REIT”) which owns, acquires and leases properties for use in the restaurant and food-service related industries. Substantially all of our business is conducted through Four Corners Operating Partnership, LP (“FCPT OP”), a Delaware limited partnership of which we are a majority limited partner and our wholly owned subsidiary, Four Corners GP, LLC (“FCPT GP”), is its sole general partner. 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.
Our revenues are primarily generated by leasing properties to tenants through net lease arrangements under which the tenants are primarily responsible for ongoing costs relating to the properties, including utilities, property taxes, insurance, common area maintenance charges, and maintenance and repair costs. We focus on income producing properties leased to high quality tenants in major markets across the United States.
In addition to managing our existing properties, our strategy includes investing in additional restaurant and food service real estate properties to grow and diversify our existing restaurant portfolio. We expect this acquisition strategy will decrease that reliance on Darden over time. We intend to purchase properties that are well located and occupied by durable restaurant concepts, with creditworthy tenants whose operating cash flows are expected to meaningfully exceed their lease payments to us. We seek to improve the probability of successful tenant renewal at the end of initial lease terms by acquiring properties that have high levels of restaurant operator profitability compared to rent payments and have absolute rent levels that are not artificially higher than market rates. We also generate revenues by operating six LongHorn Steakhouse® restaurants located in the San Antonio, Texas area (the “Kerrow Restaurant Operating Business”) pursuant to franchise agreements with Darden.
During the three months ended June 30, 2018, FCPT acquired nine restaurant properties for a total investment value of $16.9 million, including transaction cost. These properties are 100% occupied under net leases with a weighted average lease term of 13.7 years. During the six months ended June 30, 2018, FCPT acquired 21 restaurant properties in nine states for a total investment of $37.9 million, including transaction costs. These properties are 100% occupied under net leases with a weighted average lease term of 11.1 years.

27


At June 30, 2018, our wholly-owned lease portfolio had the following characteristics:
535 free-standing properties located in 44 states and representing an aggregate leasable area of 3.7 million square feet;
99.9% occupancy (based on square feet);
A weighted average remaining lease term of 12.5 years (based on annualized cash rent);
Weighted average annual rent escalation of 1.5% (based on annualized cash rent); and
87% investment grade tenancy (based on annualized cash rent).
Results of Operations
The following discussion includes the results of our operations for the three months and six months ended June 30, 2018 and 2017 as summarized in the table below:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
(In thousands)
 
2018
 
2017
 
2018
 
2017
 
Revenues:
 
 
 
 
 
 
 
 
 
Rental revenue
 
$
29,596

 
$
28,327

 
$
59,186

 
$
56,091

 
Restaurant revenue
 
5,079

 
4,826

 
10,293

 
9,766

 
Total revenues
 
34,675


33,153

 
69,479

 
65,857

 
Expenses:
 
 
 
 
 
 
 
 
 
General and administrative
 
3,204

 
3,459

 
6,873

 
6,316

 
Depreciation and amortization
 
5,225

 
5,426

 
10,569

 
10,829

 
Restaurant expenses
 
4,786

 
4,583

 
9,656

 
9,251

 
Interest expense
 
4,877

 
4,508

 
9,733

 
8,604

 
Total expenses
 
18,092

 
17,976

 
36,831

 
35,000

 
Other income
 
231

 
34

 
588

 
39

 
Realized gain on sale, net
 
10,879

 
3,291

 
10,879

 
3,291

 
Income before provision for income taxes
 
27,693

 
18,502

 
44,115

 
34,187