Business context and reporting period
Essential Properties Realty Trust, Inc. (NYSE: EPRT) filed this unaudited Form 10-Q for the quarter ended March 31, 2023. The company is a REIT focused primarily on long-term, triple-net leases of single-tenant properties to middle-market businesses. At quarter-end, its portfolio comprised 1,688 properties, including properties securing mortgage loans, with $310.3 million of annualized base rent and 99.8% occupancy.
Financial performance and condition
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Total revenue | $83.7 million | $70.1 million; up 19.3% |
| Net income attributable to stockholders | $42.9 million | $26.7 million; up 60.7% |
| Diluted net income per share | $0.29 | $0.21 |
| FFO / Core FFO / AFFO | $62.6 million / $61.7 million / $58.3 million | $49.4 million / $51.5 million / $48.9 million |
| Cash from operations | $53.7 million | $44.1 million |
| Cash and cash equivalents | $71.0 million | $62.3 million at Dec. 31, 2022 |
| Debt principal / net debt | $1.43 billion / $1.36 billion | $1.43 billion / $1.36 billion at Dec. 31, 2022 |
Operating income was $54.7 million, compared with $38.4 million. Net margin was approximately 51.4%, versus 38.2% a year earlier; this is calculated from reported net income and revenue. Interest expense rose to $12.1 million from $9.2 million. The company reported a 3.3% weighted-average effective debt rate after swaps and a 5.0-year weighted-average debt maturity; $200 million of term debt matures in April 2024. All $1.43 billion of debt was fixed-rate or effectively fixed through hedges. The $600 million revolving facility was undrawn, with $600 million available, and the company reported compliance with debt covenants.
Net cash used in investing was $159.2 million, including $189.0 million of real estate investment and capital expenditures and $14.5 million in construction in progress, partly offset by property-sale proceeds and loan collections. Financing activities provided $105.0 million, mainly from common-stock issuance, offset in part by $39.4 million of dividends paid. The quarterly dividend declared was $0.275 per share, up from $0.26.
Material changes versus the prior comparable period
- Revenue growth primarily reflected acquisitions made during 2022 and early 2023, portfolio rent escalations, and higher average loan balances. The real estate portfolio grew from 1,363 rental properties at March 31, 2022 to 1,538 at March 31, 2023.
- Interest expense increased by $3.0 million, which management attributed mainly to higher debt balances and interest rates. The company also recorded $5.3 million of realized swap gains as a reduction of interest expense.
- Real estate impairment charges declined to $0.7 million from $3.9 million. Gains on property dispositions rose to $4.9 million from $1.7 million; 16 properties were disposed of versus six.
- Q1 2023 other revenue included approximately $0.9 million of insurance recovery income. The prior-year quarter included a $2.1 million loss on debt extinguishment.
- The company issued shares and settled part of its February forward equity offering: 4.43 million shares were physically settled through quarter-end, generating $105.0 million in net proceeds. The remaining forward sale agreements must be settled by February 2024.
Outlook, commentary, risks and contingencies
No specific earnings or investment guidance is provided in the supplied filing text. Management said cash from operations, cash on hand, the revolving facility and potential capital-market and asset-sale proceeds should fund operations and current commitments for the foreseeable future. Its stated long-term leverage objective is net debt generally below six times annualized adjusted EBITDAre; reported net debt of $1.36 billion divided by annualized adjusted EBITDAre of $307.8 million is approximately 4.4 times.
Management reported a diversified portfolio of 348 tenants across 16 industries and 48 states; no tenant accounted for more than 3.0% of annualized base rent. The weighted-average remaining lease term was 13.9 years, 98.3% of rent had contractual escalations averaging 1.6% annually, and the portfolio weighted-average rent coverage ratio was 3.9 times. Management cautioned that tenant defaults, economic and credit-market conditions, interest rates, access to debt and equity capital, lease renewals, property values, and REIT qualification could affect results. It noted that a renewed severe COVID-19 disruption could adversely affect the company and tenants.
At March 31, 2023, the company had $89.9 million of remaining tenant construction-financing and reimbursement commitments, expected to be funded by March 31, 2024; total commitments across 53 properties were $206.1 million, of which $116.3 million had been funded. It was also under contract to acquire 15 properties for $31.9 million, subject to due diligence and customary conditions. The filing reported no material pending legal or regulatory proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the pace and returns of acquisitions, dispositions, and tenant-funded construction commitments, including the expected funding schedule for the remaining $89.9 million.
- Review the April 2024 $200 million term-loan maturity, refinancing options, interest-rate exposure, and continued covenant compliance.
- Assess whether reported earnings and non-GAAP FFO/AFFO growth are sustained; AFFO is a company-defined non-GAAP measure and is not equivalent to operating cash flow.
- Monitor tenant credit and rent coverage, especially lower-coverage exposures, vacancies, and performance in concentrated industries and states.
- Track settlement of the remaining February 2023 forward equity sales, future share issuance and dilution, and the sustainability of distributions relative to cash generation and REIT requirements.