On Thursday, UBS initiated coverage on Four Corners Property Trust (NYSE:FCPT) stock, a real estate investment trust, with a Buy rating and a price target of $33.00.
The firm highlighted FCPT's advantageous cost of capital and a diversification strategy that moves away from its traditional focus on restaurants as key factors that could contribute to an increase in Adjusted Funds From Operations (AFFO) growth at a favorable valuation.
FCPT has shown a pattern of accelerating investment activity, with acquisitions in the third quarter of 2024 totaling $71 million, a significant increase from the $45 million acquired in the second quarter.
UBS suggests that future acquisitions could be financed either through equity, with an unsettled forward of $100 million, or through debt, with the company's leverage at 4.9 times.
The analyst notes that FCPT's cost of capital positions it well for continued accretive activity, even amidst unpredictable movements in the 10-year treasury yield. The implied capitalization rate by UBS's estimation stands at 5.5%, while the acquisition capitalization rates are at 7.2%. This financial positioning is expected to help FCPT maintain growth even if market conditions change.
UBS also points out that FCPT's proactive portfolio management is likely to mitigate downside risks associated with credit loss in its restaurant portfolio, which currently represents 80% of its Annual Base Rent (ABR).
According to UBS's analysis, Triple Net lease investments, the category to which FCPT belongs, tend to outperform other types of real estate investment trusts in mid-level GDP scenarios, regardless of whether the 10-year treasury yield is increasing or decreasing.
Looking ahead, UBS models a 4% AFFO growth for FCPT in 2025, which surpasses the consensus estimate by approximately 100 basis points. This forecast places FCPT above the average of its peers.
UBS anticipates that such performance could bring FCPT's AFFO multiple in line with that of the sector's high performers, specifically citing Agree Realty Corporation (NYSE:ADC) and Essential Properties Realty Trust (NYSE:EPRT), both trading at approximately 18 times AFFO.
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