Essential Properties Realty Trust, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The company is an internally managed REIT focused on long-term net leases of primarily single-tenant properties serving middle-market businesses. Comparisons with Q1 2018 include the Predecessor and may not be fully comparable following the company’s 2018 IPO.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 | Change or context |
|---|---|---|---|
| Total revenue | $31.1 million | $20.2 million | Up 54.3%; rental revenue rose 53.2%, primarily from property acquisitions. |
| Operating income | $8.7 million | $1.1 million | Operating margin was approximately 28.0% versus 5.5%; includes impairment charges and disposition gains. |
| Net income | $8.7 million | $1.1 million | Net income attributable to stockholders and members was $6.1 million versus $1.1 million. Q1 2019 diluted and basic EPS were each $0.13. |
| FFO / AFFO | $18.6 million / $17.9 million | $8.2 million / $7.4 million | Non-GAAP measures; not substitutes for GAAP earnings or operating cash flow. |
| Operating cash flow | $17.0 million | $5.2 million | Investing used $105.7 million; financing provided $186.6 million. |
| Debt and net debt | $513.2 million secured principal; $399.1 million net debt | $540.1 million total debt | No revolving borrowings at quarter-end; net debt reflects cash and restricted cash. |
| Cash and liquidity | $109.1 million cash; $4.9 million restricted cash | $4.2 million cash; $12.0 million restricted cash at Dec. 31, 2018 | $300 million unused revolving capacity at March 31. |
| Dividend | $0.21 per common share declared | — | $13.2 million paid during the quarter; $16.1 million declared and payable at quarter-end, including OP Unit distributions. |
Portfolio and balance sheet
- Management reported 711 property locations, $115.1 million in annualized base rent, 99.9% occupancy and a 14.5-year weighted-average remaining lease term.
- Approximately 91.1% of annualized base rent came from triple-net leases. Rent increases applied to leases representing 97.1% of base rent, averaging 1.5% annually.
- Total assets were $1.58 billion and total equity was $1.04 billion at March 31, 2019. The company acquired 51 properties for approximately $120.5 million during the quarter.
- Investment and financing activity drove the quarter’s cash increase: the March follow-on offering raised $234.6 million net, and proceeds were used in part to repay revolving borrowings.
Material changes versus the prior comparable period
- Revenue increased mainly because of acquisitions made from April 2018 through March 2019. Depreciation and amortization rose 41% to $9.1 million, also largely reflecting portfolio growth.
- Interest expense declined 14.3% to $7.1 million, principally because related-party warehouse notes had been repaid in 2018; this was partly offset by revolving-facility costs.
- General and administrative expense increased 24.8% to $4.2 million, including higher public-company, legal, director and equity-compensation costs. Property expense rose to $1.2 million, primarily due to reimbursable costs.
- Net cash from operations increased to $17.0 million, while real estate investment outflows increased to $113.6 million. Q1 2019 financing also included the follow-on offering; Q1 2018 financing included predecessor capital contributions and related-party notes.
- The company adopted ASC 842 lease accounting on January 1, 2019, recording $4.8 million of right-of-use assets and lease liabilities at adoption. Certain ground-lease costs and related sublease revenues shifted from net to gross presentation, affecting period-to-period expense and revenue comparability.
Outlook, risks, contingencies and unusual items
- Guidance: The filing gives no specific earnings or investment guidance. Management said available cash, operating cash flow and financing sources were expected to fund operations and current commitments for the foreseeable future.
- As of May 3, the company was under contract to acquire 43 properties for $78.7 million, subject to due diligence and customary closing conditions. It expected to fund the remaining portion of $38.9 million in tenant construction and renovation commitments by December 31, 2019; $15.8 million had been funded by March 31.
- On April 12, after quarter-end, the company amended its credit agreement to provide a $400 million revolving facility and permit up to $200 million in term loans. The term loans had to be drawn before November 22, 2019; the filing does not say they had been drawn.
- The largest scheduled debt event is the Series 2016-1 notes’ anticipated repayment date in November 2021, with a stated balloon payment of approximately $259.5 million. Failure to meet anticipated repayment schedules can trigger higher interest costs. The company reported $513.2 million of secured notes, with a 4.35% weighted-average fixed rate, and no revolving borrowings at quarter-end.
- Master Trust Funding Program coverage was 1.55x for the quarter. At specified lower coverage thresholds, cash may be reserved or used for early amortization, reducing funds available for distributions.
- Key disclosed risks include tenant default or bankruptcy, property illiquidity, acquisition competition and availability, access to capital, interest-rate changes, REIT qualification, and environmental or natural-disaster exposure. Management reported no material pending legal or regulatory proceedings and no material changes to the risk factors in the 2018 Form 10-K.
- The company recorded $1.4 million of real estate impairment charges in Q1 2019, affecting four investments. It also reported $23.9 million of remaining tenant funding commitments in contractual obligations.
Most important facts for investors to verify
- Whether the contracted acquisitions and remaining tenant funding commitments close or are funded on expected terms and timing.
- The status and terms of the amended credit facilities, including whether term loans are drawn, resulting borrowing costs and covenant headroom.
- Plans and capacity to refinance or repay the approximately $259.5 million anticipated balloon in November 2021, and subsequent 2024 anticipated repayment obligations.
- Portfolio occupancy, tenant rent coverage and credit quality, especially exposure to the largest tenants and service-oriented industries.
- How the ASC 842 gross presentation and the predecessor-to-public-company comparison affect interpretation of revenue, expenses and growth.
- Whether operating cash flow and Master Trust coverage remain sufficient to support debt service, acquisitions and distributions.