# Four Corners Property Trust, Inc. (FCPT) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Four Corners Property Trust, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1650132/000165013223000038/fcpt-20221231.htm
Accession: 0001650132-23-000038
Filing date: 2023-02-17
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/FCPT/
All MD&A years: /company/FCPT/mda/
Previous year: /company/FCPT/mda/fy2021/ (FY 2021)
Next year: /company/FCPT/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Statements contained in this Annual Report on Form 10-K, 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, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (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”. These 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K. Any references to “FCPT,” “the Company,” “we,” “us,” or “our” refer to Four Corners Property Trust, Inc. 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 operated in conformity with the requirements for qualification and taxation as a REIT for the taxable year ended December 31, 2022, 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. We also generate revenues by operating seven LongHorn Steakhouse restaurants located in the San Antonio, Texas area (the “Kerrow Restaurant Operating Business”) pursuant to franchise agreements with Darden.

In addition to managing our existing properties, our strategy includes investing in additional restaurant and retail properties to grow and diversify our existing portfolio. We expect this acquisition strategy will decrease our reliance on Darden over time. We intend to purchase properties that are well located, occupied by durable 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 operator profitability compared to rent payments and have absolute rent levels that generally reflect market rates.

In 2022, FCPT engaged in various real estate transactions for a total investment of $296.3 million, including capitalized transaction costs. Pursuant to these transactions, we acquired 115 properties and ground leaseholds, aggregating 824 thousand square feet, and representing 52 brands, including Aspen Dental, Caliber Collision, Chili’s Grill & Bar, First Midwest Bank, Jack in the Box, National Tire & Battery, Sonic, Tires Plus, and WellNow Urgent Care.

As of December 31, 2022, our lease portfolio had the following characteristics:

•1,023 properties located in 47 states and representing an aggregate leasable area of 6.8 million square feet;

•99.9% occupancy (based on leasable square footage);

•An average remaining lease term of 8.3 years (weighted by annualized base rent);

•An average annual rent escalation of 1.42% through December 31, 2027 (weighted by annualized base rent); and

•99.9% of the contractual base rent collected for the year ended December 31, 2022.

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Results of Operations

The results of operations for the accompanying consolidated financial statements discussed below are derived from our consolidated statements of comprehensive income (“Comprehensive Income Statement”) found elsewhere in this Annual Report on Form 10-K. The following discussion includes the results of our continuing operations as summarized in the table below.

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[[/GREPCENT_TABLE]]

Analysis of Results of Operations

We operate in two segments, real estate operations and restaurant operations. Our real estate operations generate rental income from leases primarily with restaurant brands, which we recognize on a straight-line basis to include the effect of base rent escalators. Our restaurant operations generate restaurant revenue from operating seven LongHorn Steakhouse restaurants.

In this section, we discuss the results of our operations for the year ended December 31, 2022 compared to the year ended December 31, 2021. For a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021.

Real Estate Operations

Rental Revenue

Rental revenue increased $20.8 million during the year ended December 31, 2022 compared to the year ended December 31, 2021. This increase is due to recognizing a full year of revenue in 2022 from the 122 properties acquired in 2021, and the acquisition of 115 properties and ground leaseholds in 2022. During the year ended December 31, 2022, we recognized costs paid by the lessor and reimbursed by the lessees within rental revenue of $6.6 million, compared to $3.8 million during the year ended December 31, 2021 due to the increase in the number of mall outparcel and multi-tenant property acquisitions. These amounts are also recognized in property expenses.

We recognize rental income on a straight-line basis to include the effect of base rent escalators, and free rent periods, if any. During the year ended December 31, 2022, amortization of above and below market rents, and lease incentives decreased rental revenue by $2.2 million, as compared to $2.1 million for the year ended December 31, 2021.

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General and Administrative Expense

General and administrative expense is comprised of costs associated with personnel, office rent, legal, accounting, information technology and other professional and administrative services in association with our real estate operations, our REIT structure and public company reporting requirements. General and administrative expense increased $2.4 million in the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to an increase in cash compensation-related expenses and non-cash stock compensation expenses stemming from a higher head count and benefits costs related to employees added in 2021 and 2022, as well as an increase in audit and IT fees related to system enhancements.

Depreciation and Amortization Expense

Depreciation and amortization expense represents the depreciation on real estate investments and equipment that have estimated lives ranging from 2 to 55 years. Depreciation and amortization expense increased by approximately $6.6 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to the acquisition of 115 restaurant properties acquired in 2022, and the depreciation on 122 properties acquired in 2021 that incurred a full year of depreciation.

Property Expense

We record all tenant expenses, both reimbursed and non-reimbursed, to property expense. We also record initial direct costs (lease negotiation and other previously capitalizable transaction expenses) as property expenses. Other property expenses consist of expenses incurred on vacant properties, abandoned deal costs, and franchise taxes. During the year ended December 31, 2022, we recorded property expenses of $8.0 million, of which $6.6 million was reimbursed by tenants. During the year ended December 31, 2021, we recorded property expenses of $5.0 million, of which $3.8 million was reimbursed by tenants. The non-reimbursed property expenses relate to abandoned deal costs, lease transaction costs and property-level expenses that were the responsibility of the Company rather than the tenant.

Interest Expense

We incur interest expense on our $430 million of term loans, any outstanding borrowings on our revolving credit facility, interest rate swaps, and our $575 million of senior unsecured fixed rate notes.

Interest expense increased by approximately $3.9 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. This was primarily due to the issuance of $100 million of senior unsecured fixed rate notes issued in April 2021 and the issuance of $125 million of senior fixed notes in March 2022.

Interest expense, excluding deferred financing costs, on the $430 million of term loans and the interest rate swaps we entered into to hedge the variability associated with the term loans was $13.0 million and $12.6 million for the years ended December 31, 2022 and 2021, respectively. This interest expense includes the reclassification of other comprehensive income into interest expense. Interest expense and fees on our revolving credit facility was $0.7 million and $1.0 million for the years ended December 31, 2022 and 2021, respectively. Amortization of deferred financing costs was $2.1 million and $2.4 million for the years ended December 31, 2022 and 2021, respectively.

For additional information on the Company’s debt instruments, see “Liquidity and Financial Condition” below.

Realized Gain on Sale, Net

During the year ended December 31, 2022, the Company sold eight properties with a combined net book value of $16.3 million for a realized gain on sale of $8.1 million. During the year ended December 31, 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.

Income Taxes

During the years ended December 31, 2022 and 2021, income tax expense on real estate operations was $206 thousand and $174 thousand, respectively. Income tax expense on real estate operations consists of state and local income taxes incurred by FCPT on its lease portfolio. As FCPT acquires additional properties in states subject to state income taxes, income tax expense will continue to increase.

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Restaurant Operations

Restaurant revenues increased approximately $3.0 million in the year ended December 31, 2022 compared to the year ended December 31, 2021, due to increased guest traffic and having a full year of revenue from a seventh restaurant which began operations in April 2021.

Total restaurant expenses increased approximately $3.3 million in the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to an increase in cost of goods sold and labor costs and having a full year of restaurant expenses from a seventh restaurant which began operations in April 2021.

During the year ended December 31, 2022, the Company recorded an income tax expense of $31 thousand at the Kerrow Restaurant Operating Business, compared to an income tax benefit of $708 thousand primarily due to the removal of a valuation allowance on net deferred tax assets for the year ended December 31, 2021.

Critical Accounting Policies and Estimates

The preparation of FCPT’s consolidated financial statements in conformance with accounting principles generally accepted in the United States of America requires management to make estimates on assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as other disclosures in the financial statements. On an ongoing basis, management evaluates its estimates and assumptions; however, actual results may differ from these estimates and assumptions, which in turn could have a material impact on our financial statements. Estimates and assumptions include, among other things, subjective judgments regarding the fair values and useful lives of our properties for depreciation and lease classification purposes, and asset impairment analysis.

A summary of FCPT’s accounting policies and procedures are included in Note 2 of our consolidated financial statements, included in Part II, Item 8 of this Annual Report on Form 10-K. Management believes the following critical accounting policies, among others, affect its more significant estimates and assumptions used in the preparation of our consolidated financial statements.

Real Estate Investments, Net

Real estate investments, net are recorded at cost less accumulated depreciation. Building components are depreciated over estimated useful lives using the straight-line method. Leasehold improvements, which are reflected on our Consolidated Balance Sheets as a component of buildings, within land, buildings and equipment, 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 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 (“Income Statement”).

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. 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

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qualify as businesses and are accounted for as asset acquisitions. Related transaction costs are generally capitalized and amortized over the useful lives 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, as-if-vacant, and lease intangibles (if any). In making estimates of fair values for this purpose, the Company uses a third-party specialist that obtains various information about each property, as well as the pre-acquisition due diligence of the Company and prior leasing activities at the site.

Lease Intangibles

Lease intangibles, if any, acquired in conjunction with the purchase of real estate represent the value of in-place leases and above- or below-market leases. For real estate acquired subject to existing lease agreements, acquired lease intangibles are valued based on the Company’s estimates of costs related to tenant acquisition and the asset carrying costs, including lost revenue, that would be incurred during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases at the time of the acquisition. Above-market and below-market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the time of acquisition of the real estate and the Company’s estimate of current market lease rates for the property, measured over a period equal to the remaining initial term of the lease. 

In-place lease intangibles are amortized on a straight-line basis over the remaining initial term of the related lease and included in depreciation and amortization expense. Above-market lease intangibles are amortized over the remaining initial terms of the respective leases as a decrease in rental revenue. Below-market lease intangibles are generally amortized as an increase to rental revenue over the remaining initial term of the respective leases, but may be amortized over the renewal periods if the Company believes it is likely the tenant will exercise the renewal option. Should a lease terminate early, the unamortized portion of any 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.

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 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 Consolidated Income Statements as the original impairment. Provisions for impairment are included in depreciation and amortization expense in the accompanying Consolidated Income Statements.

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

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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.

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 amount 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 Company 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.

New Accounting Standards

A discussion of new accounting standards and the possible effects of these standards on our Consolidated Financial Statements is included in Note 2 of our consolidated financial statements, included in Part II, Item 8 of this Annual Report on Form 10-K.

Liquidity and Financial Condition

At December 31, 2022, we had $26.3 million of cash and cash equivalents and $250 million of borrowing capacity under our revolving credit facility. The revolving credit facility provides for a letter of credit sub-limit of $25 million. As of February 17, 2023, we had $250 million of borrowing capacity under the revolving credit facility.

Debt Instruments

At December 31, 2022, our long-term debt consisted of $430 million of non-amortizing term loans, $0 million in outstanding borrowings under the revolving credit facility, and $575 million aggregate principal amount of senior unsecured fixed rate notes issued by FCPT OP. At December 31, 2021, our long-term debt consisted of $400 million of non-amortizing term loans, $36 million in outstanding borrowings under the revolving credit facility, and $450 million aggregate principal amount of senior unsecured fixed rate notes issued by FCPT OP.

Term Loan and Revolving Credit Facility

The Third Amended and Restated Revolving Credit and Term Loan Agreement, dated as of October 25, 2022, as amended (the “Loan Agreement”), by and among the Company, FCPT OP, the Agent, the Lenders and the other agents party thereto, provides for a revolving credit facility in an aggregate principal amount of $250 million and a term loan facility in an aggregate principal amount of $430 million. The Loan Agreement has an accordion feature allowing the facility to be increased by an additional aggregate amount not to exceed $350 million subject to obtaining lender commitments and other customary conditions. Additionally, the amendment to the Loan Agreement converted the revolving credit facility from LIBOR to SOFR-based borrowings, and the Company and counterparties converted the related interest rate swaps concurrently.

The Loan Agreement provides that $150 million will mature on November 9, 2025, $100 million will mature on November 9, 2026, $90 million will mature on January 9, 2027, and $90 million will mature on January 9, 2028. The revolving credit facility portion will mature on November 9, 2025 with one six-month extension option. The Company intends to exercise the extension option or refinance prior to maturity.

At December 31, 2022 and 2021, the weighted average interest rate on the term loans, after consideration of the interest rate hedges, was 3.42% and 2.93%, respectively. At December 31, 2022 there were no outstanding borrowings under the

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revolving credit facility and no outstanding letters of credit. At December 31, 2021, there were outstanding borrowings of $36 million under the revolving credit facility and no outstanding letters of credit.

We have entered into the following interest rate swaps to hedge the interest rate variability associated with the Loan Agreement as of December 31, 2022. These hedging agreements were entered into to mitigate the interest rate risk inherent in FCPT OP’s variable rate debt and not for trading purposes. These swaps are accounted for as cash flow hedges with all interest income and expense recorded as a component of net income and other valuation changes recorded as a component of other comprehensive income. The following table presents the swaps held as of December 31, 2022.

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[[/GREPCENT_TABLE]]

During the year ended December 31, 2022, we entered into three interest rate swaps to hedge the interest rate variability associated with the term loan portion of our revolving credit facility.

The Company enters into forward-starting interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates from the trade date through the forecasted issuance date of long-term debt. The Company has hedged its exposure to the variability in future cash flows for a forecasted issuance of long-term debt over a maximum period ending February 15, 2033. As of December 31, 2022, these interest rate swaps were valued as an asset of approximately $7.4 million within derivative assets.

The Company has issued the following $575 million of senior unsecured fixed rate notes (together, the “Notes”) in private placements pursuant to note purchase agreements with the various purchasers.

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[[/GREPCENT_TABLE]]

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Capital Resources and Financing Strategy

On a short-term basis, our principal demands for funds will be for operating expenses, distributions to shareholders and interest and principal on current and any future debt financings. We expect to fund our operating expenses and other short-term liquidity requirements, capital expenditures, payment of principal and interest on our outstanding indebtedness, property improvements, re-leasing costs and cash distributions to common shareholders, primarily through cash provided by operating activities. We expect to fund acquisitions, investments, and other capital expenditures, from borrowings under our $250 million revolving credit facility and equity securities. At times the Company may evaluate opportunities to sell certain assets and redeploy the capital into new properties.

We have an effective shelf registration statement on file with the SEC under which we may issue equity financing through the instruments and on the terms most attractive to us at such time. On November 7, 2022, the Company established a new at-the-market equity program (the “current ATM program”) pursuant to which the Company is able to sell from time to time shares of our common stock having an aggregate sales price of up to $450 million. The current ATM program replaces the Company’s prior $350 million ATM program, which was established on February 24, 2021 (the “prior ATM program” and together with the current ATM program, the “ATM programs”), under which the Company had sold shares of its common stock having an aggregate gross sales price of $256.7 million through November 7, 2022. The ATM programs contemplate that, in addition to the issuance and sale by the Company of shares of common stock to or through the agents, the Company may enter into separate forward sale agreements with one of the agents or one of their respective affiliates (in such capacity, each, a “forward purchaser” and, collectively, the “forward purchasers”). When the Company enters into a forward sale agreement with any forward purchaser, we expect that such forward purchaser will attempt to borrow from third parties and sell, through the relevant agent, acting as sales agent for such forward purchaser, shares of our common stock to hedge such forward purchaser's exposure under such forward sale agreement. The Company will not initially receive any proceeds from any sale of shares of our common stock borrowed by a forward purchaser and sold through a forward seller. 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.

We currently expect to fully physically settle any future forward sale agreement with the relevant forward purchaser on one or more dates specified by us on or prior to the maturity date of such forward sale agreement, in which case we expect to receive aggregate net cash proceeds at settlement equal to the number of shares specified in such forward sale agreement multiplied by the relevant forward price per share. However, subject to certain exceptions, we may also elect, in our sole discretion, to cash settle or net share settle all or any portion of our obligations under any forward sale agreement, in which case we may not receive any proceeds (in the case of cash settlement) or will not receive any proceeds (in the case of net share settlement), and we may owe cash (in the case of cash settlement) or shares of our common stock (in the case of net share settlement) to the relevant forward purchaser.

During 2022, we issued 5,253,257 shares under the ATM programs, including physically settled forward sale agreements, at a weighted-average selling price of $27.46 per share, for net proceeds of approximately $141.8 million (after issuance costs). The net proceeds were employed to fund acquisitions and for general corporate purposes. As of December 31, 2022, there was $376.9 million available for issuance under the current ATM program.

On a long-term basis, our principal demands for funds include payment of dividends, financing of property acquisitions, and scheduled debt maturities. We plan to meet our long-term capital needs by issuing debt or equity securities or by obtaining asset level financing, subject to market conditions. In addition, we may issue common stock to permanently finance properties that were financed on an intermediate basis by our revolving credit facility or other indebtedness. In the future, we may also acquire properties by issuing partnership interests of FCPT OP in exchange for property owned by third parties. Our common partnership interests would be redeemable for cash or shares of our common stock, at FCPT’s election.

We continually evaluate alternative financing and believe that we can obtain financing on reasonable terms. However, we cannot be assured that we will have access to the capital markets at times and at terms that are acceptable to us. We expect that our primary uses of capital will be for property and other asset acquisitions and the funding of tenant improvements and other capital expenditures, and debt refinancing.

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Because the properties in our portfolio are generally leased to tenants under net leases, where the tenant is responsible for property operating costs and expenses, our exposure to rising property operating costs due to inflation is mitigated. Interest rates and other factors, such as occupancy, rental rate and the financial condition of our tenants, influence our performance more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. As described above, we currently offer leases that provide for payments of base rent with scheduled annual fixed increases.

Supplemental Financial Measures

The following table presents a reconciliation of GAAP net income to Funds from Operations (“FFO”) and Adjusted Funds from Operations (“AFFO”) for the years ended December 31, 2022, 2021, and 2020.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(In thousands, except share and per share data)","","2022","","2021","","2020"],["Net income","","$","97,908","","","$","85,745","","","$","77,567"],["Depreciation and amortization","","41,342","","","34,715","","","29,351"],["Realized gain on sales of real estate","","(8,139)","","","(431)","","","\u2014"],["Funds from Operations (FFO) (as defined by NAREIT)","","131,111","","","120,029","","","106,918"],["Straight-line rent adjustment","","(6,372)","","","(7,583)","","","(8,588)"],["Recognized rental revenue abated (1)","","\u2014","","","\u2014","","","(1,568)"],["Deferred income tax benefit (2)","","(125)","","","(864)","","","\u2014"],["Stock-based compensation expense","","4,978","","","3,948","","","3,376"],["Non-cash amortization of deferred financing costs","","2,104","","","2,368","","","2,132"],["Non-real estate investment depreciation","","129","","","111","","","82"],["Amortization of above and below market leases, net","","2,151","","","2,119","","","1,296"],["Adjusted Funds from Operations (AFFO)","","$","133,976","","","$","120,128","","","$","103,648"],["Fully diluted shares outstanding (3)","","81,921,624","","","76,986,538","","","71,823,973"],["FFO per diluted share","","$","1.60","","","$","1.56","","","$","1.49"],["AFFO per diluted share","","$","1.64","","","$","1.56","","","$","1.44"],["(1) Amount represents base rent that the Company abated as a result of lease amendments. In 2020, the Company abated $1.57 million of rental revenue recognized in the second and third quarters of 2020. The receivables associated with the abatements were recognized as lease incentives and will be amortized as a reduction to rental revenue over the amended lease terms."],["(2) Amount represents non-cash deferred income tax benefit in 2022 and the removal of a valuation allowance on net deferred tax assets in 2021 at Kerrow Restaurant Operating Business."],["(3) Assumes the issuance of common shares for OP units held by non-controlling interests."]]
[[/GREPCENT_TABLE]]

Non-GAAP Definitions

The certain non-GAAP financial measures included above management believes are helpful in understanding our business, as further described below. Our definition and calculation of non-GAAP financial measures may differ from those of other REITs and therefore may not be comparable. The non-GAAP measures should not be considered an alternative to net income as an indicator of our performance and should be considered only a supplement to net income, and to cash flows from operating, investing or financing activities as a measure of profitability and/or liquidity, computed in accordance with U.S. GAAP.

FFO is a supplemental measure of our performance which should be considered along with, but not as an alternative to, net income and cash provided by operating activities as a measure of operating performance and liquidity. We calculate FFO in accordance with the standards established by the NAREIT. FFO represents net income (loss) computed in accordance with U.S. GAAP, excluding gains (or losses) from sales of property and undepreciated land and impairment write-downs of depreciable real estate, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. We also omit the tax impact of non-FFO producing activities from FFO determined in accordance with the NAREIT definition.

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Our management uses FFO as a supplemental performance measure because, in excluding real estate related depreciation and amortization and gains and losses from property dispositions, it provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We offer this measure because we recognize that FFO will be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our financial condition and results from operations, the utility of FFO as a measure of our performance is limited. FFO is a non-GAAP measure and should not be considered a measure of liquidity including our ability to pay dividends or make distributions. In addition, our calculations of FFO are not necessarily comparable to FFO as calculated by other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us. Investors in our securities should not rely on these measures as a substitute for any U.S. GAAP measure, including net income.

Adjusted Funds from Operations is a non-U.S. GAAP measure that is used as a supplemental operating measure specifically for comparing year-over-year ability to fund dividend distribution from operating activities. AFFO is used by us as a basis to address our ability to fund our dividend payments. We calculate AFFO by adding to or subtracting from FFO:

1.Transaction costs incurred in connection with business combinations

2.Straight-line rent revenue adjustment

3.Stock-based compensation expense

4.Non-cash amortization of deferred financing costs

5.Other non-cash interest expense (income)

6.Non-real estate investment depreciation

7.Merger, restructuring and other related costs

8.Impairment charges

9.Other non-cash revenue adjustments, including amortization of above and below market leases and lease incentives

10.Amortization of capitalized leasing costs

11.Debt extinguishment gains and losses

12.Non-cash expense (income) adjustments related to deferred tax benefits

AFFO is not intended to represent cash flow from operations for the period, and is only intended to provide an additional measure of performance by adjusting the effect of certain items noted above included in FFO. AFFO is a widely reported measure by other REITs; however, other REITs may use different methodologies for calculating AFFO and, accordingly, our AFFO may not be comparable to other REITs.

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