Essential Properties Realty Trust, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 2, 2020. EPRT is an internally managed REIT that owns primarily single-tenant properties leased long term to middle-market businesses.
Business context
At year-end, the portfolio comprised 1,000 property locations across 44 states, 205 tenants, 265 concepts and 16 industries. Annualized base rent was $151.2 million; occupancy was 100%. Service-oriented and experience-based businesses generated 94.4% of annualized base rent. The weighted-average remaining lease term was 14.6 years; 60.3% of rent came from master leases, and 93.5% from triple-net leases.
Financial and operating metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $139.4 million | $96.2 million |
| Rental revenue | $135.7 million | $94.9 million |
| Net income | $48.0 million | $20.6 million |
| Net income attributable to stockholders and members | $41.8 million | $15.6 million |
| Net cash from operating activities | $88.6 million | $45.9 million |
| Investing cash flow | $(607.8) million | $(461.9) million |
| Financing cash flow | $524.4 million | $412.8 million |
| FFO / Core FFO / AFFO | $82.7 / $90.6 / $86.3 million | $51.0 / $51.0 / $48.4 million |
| Cash distributions declared per share | $0.88 | $0.43 |
Revenue increased 44.8% year over year, primarily from portfolio growth; rental revenue increased 42.9%. 2018 includes a partial year of public-company operations, so per-share and distribution comparisons are not fully comparable. Fourth-quarter 2019 revenue was $39.2 million and net income was $14.6 million.
At December 31, 2019, total assets were $2.0 billion, net investments were $1.9 billion and cash and cash equivalents were $8.3 million, with an additional $13.0 million of restricted cash. Total debt was $726.9 million; gross debt including deferred financing costs was $735.1 million, and net debt was $713.8 million. Management reported a 5.0x net-debt-to-annualized-adjusted-EBITDAre ratio for the fourth quarter and targets net debt generally below six times that measure.
Debt included $239.1 million of secured notes at a 4.17% weighted-average rate, $200 million under the April 2019 term loan, $250 million drawn under the November 2019 term loan, and $46 million under the revolving facility. The $400 million revolver had $354 million available. The company reported a 5.2-year weighted-average debt maturity and had interest-rate swaps with $450 million aggregate notional amount covering its term loans.
Material changes and unusual items
- Net investments grew from $1.34 billion to $1.91 billion; property locations increased from 677 to 1,000. During 2019, EPRT invested $592.2 million in 281 property acquisitions and $94.6 million in loans receivable, according to the business highlights.
- General and administrative expense rose 58.0% to $21.7 million, reflecting public-company costs, portfolio growth and higher equity compensation, legal and directors’ costs. Depreciation and amortization rose 36.3% to $42.7 million.
- Interest expense declined 10.4% to $27.0 million, partly reflecting repayment of related-party debt and secured notes, despite new term-loan borrowings. The company recorded a $5.2 million loss on repurchase and retirement of secured borrowings.
- Real estate impairment expense was $2.9 million, compared with $4.5 million in 2018. EPRT sold 37 properties for net proceeds of $66.8 million and recorded $10.9 million in disposition gains.
- EPRT issued 14.03 million shares in a follow-on offering and sold 7.43 million shares through its ATM program for $178.2 million gross proceeds. Eldridge-affiliated selling stockholders completed a secondary sale and exited their remaining investment; EPRT received no proceeds from that secondary offering.
Outlook, risks and contingencies
The filing gives no formal quantitative full-year 2020 earnings or acquisition guidance. Management said cash from operations, cash balances, revolver availability, the November term loan and other potential capital sources should fund operations for the foreseeable future and support existing acquisition commitments. As of February 28, 2020, EPRT had 29 properties under contract for $65.5 million. It also had $30.8 million of remaining tenant construction and reimbursement commitments, expected to be funded by December 31, 2021.
Key risks include tenant defaults or bankruptcies, particularly given reliance on single-tenant and master-lease structures; consumer spending and sector pressures; geographic and industry concentrations; acquisition competition and access to capital; interest-rate and LIBOR-transition risk; debt covenants and refinancing; and REIT qualification and distribution requirements. Texas accounted for 13.2% of annualized base rent, and the South for 56.0%. Captain D’s, the largest tenant, represented 3.4% of rent. Management also cited potential global health emergencies, including COVID-19, as a risk; this filing does not quantify any resulting impact.
Legal proceedings were described as not expected to have a material adverse effect, and the company reported no material environmental claim known to it. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The company adopted lease-accounting standard ASC 842 in 2019; management reported no opening retained-earnings adjustment.
Subsequent events included a January 2020 follow-on offering of 7.935 million shares at $25.20 per share and a February 2020 repayment of $62 million of Series 2017-1 Class A notes. The filing also reports post-year-end property acquisitions and sales.
Most important facts for investors to verify
- Tenant credit and rent coverage—especially for the largest tenants and any tenants facing financial or operating stress; most tenants are unrated and credit assessments rely partly on tenant-provided information.
- Debt and liquidity figures, including the distinction between $726.9 million total debt and $735.1 million gross debt, availability and draw conditions under facilities, and debt-service coverage triggers on the secured-note collateral pool.
- Cash available for distributions versus REIT taxable income and the effect of debt covenants; 2019 distributions were $0.88 per share, while 58.8% was characterized as taxable income and 41.2% as return of capital.
- Reliance on non-GAAP measures such as FFO, AFFO and annualized Adjusted EBITDAre; these are not substitutes for GAAP earnings or operating cash flow.
- Share issuance, dilution and subsequent financing activity, including the ATM sales, January 2020 offering and the reported post-year-end debt repayment.
- Acquisition and loan-portfolio values: the filing presents differing acquisition investment figures in different sections, so investors should confirm the relevant measure and reconciliation in the detailed schedules and notes.