Essential Properties Realty Trust, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The company owns primarily single-tenant, long-term net-leased properties serving middle-market businesses.
Business context and portfolio
- At September 30, the portfolio comprised 1,096 investment locations, including properties securing mortgage loans, with $2.2 billion of net investments and $167.7 million of annualized base rent. Occupancy was 99.4%; the weighted-average remaining lease term was 14.6 years.
- 94.1% of annualized base rent was from triple-net leases. No tenant represented more than 3.0% of annualized base rent; the ten largest tenants represented 22.6%.
- The portfolio expanded from 917 locations and $1.7 billion of net real estate investments at September 30, 2019. The company acquired 123 properties in the first nine months of 2020, versus 205 in the comparable 2019 period.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $42.9 | $36.3 | $122.9 | $100.2 |
| Income from operations | $12.3 | $14.1 | $37.5 | $37.2 |
| Net income | $12.3 | $14.1 | $36.8 | $33.4 |
| Net income attributable to stockholders | $12.3 | $13.2 | $36.6 | $27.3 |
| Diluted earnings per share | $0.13 | $0.18 | $0.39 | $0.45 |
| Cash provided by operating activities | Not separately reported | Not separately reported | $68.8 | $60.9 |
- Q3 revenue grew 18.2%, principally from portfolio acquisitions and, to a lesser extent, contractual rent increases. Nine-month revenue grew 22.7%. Interest income from loans and direct financing leases also increased as those investments grew.
- Despite revenue growth, Q3 operating income declined year over year, reflecting higher depreciation, impairment charges, and lower gains on property sales. Nine-month operating income was nearly unchanged as higher portfolio-related expenses offset revenue growth.
- Q3 impairment expense was $3.2 million; nine-month impairment expense was $5.1 million, compared with $1.9 million in 2019. Nine-month rental revenue included $5.7 million of tenant-credit reductions, versus $25,000 in 2019. The loan-loss provision was $0.5 million year to date, and the allowance for loan losses was $0.7 million at quarter-end.
- Nine-month FFO was $78.3 million, Core FFO $80.5 million, and AFFO $78.2 million, versus $57.4 million, $64.5 million, and $61.8 million, respectively, in 2019. These are non-GAAP measures and should not be treated as cash flow or substitutes for GAAP results.
Cash, debt, and liquidity
- At September 30, cash and cash equivalents were $183.8 million and restricted cash was $5.6 million, compared with $8.3 million and $13.0 million, respectively, at year-end 2019. Nine-month operating cash flow was $68.8 million; investing activities used $332.7 million and financing activities provided $432.0 million.
- Total debt principal was $804.2 million, up from $735.1 million at year-end 2019. This included $630.0 million of unsecured term loans and $174.2 million of secured notes; the $400 million revolving facility had no outstanding balance and $400 million of unused capacity. Reported net debt was $616.5 million, down from $713.8 million at year-end, largely reflecting increased cash.
- Weighted-average debt maturity was 5.0 years. Management reported compliance with debt covenants and stated that cash, operating cash flow, revolver availability, and potential capital sources should fund operations and committed investments for the foreseeable future. The company generally targets net debt below six times annualized adjusted EBITDA.
- The company raised net proceeds of $191.5 million in a January follow-on offering and $184.1 million in a September offering, in addition to ATM issuance. Nine-month common-stock issuance proceeds were $426.7 million. The quarterly dividend was $0.23 per share; $62.2 million of distributions were paid in the first nine months.
COVID-19, outlook, and risks
- As of October 31, tenants representing approximately 99.0% of annualized base rent were operating in full or limited capacity, and approximately 91.0% of October contractual base rent had been collected. These are management’s estimates as of that date, not a forecast of future collections.
- By October 31, the company had granted tenant-requested rent deferrals of approximately $18.1 million, equal to 10.8% of September annualized base rent. Agreements generally defer second- and third-quarter rent for repayment over as long as 24 months. The company recognized $11.4 million of deferred contractual rent as revenue during the first nine months; deferrals delay cash receipts and may not be fully recovered.
- Management adopted a more cautious investment approach during the pandemic, emphasizing liquidity and financial flexibility. It warned that renewed restrictions, prolonged recession, tenant failures, further concessions, increased vacancy, or lasting changes in consumer behavior could impair rent collections, property values, liquidity, access to capital, debt covenant compliance, and distributions.
- COVID-sensitive industries—including early childhood education, dining, entertainment and movie theaters, health and fitness, and home furnishings—represented approximately 34.2% of annualized base rent. Texas and Georgia accounted for 13.1% and 10.1%, respectively.
- Interest-rate swaps had a $43.5 million balance-sheet liability at quarter-end; the company estimated $45.7 million of termination value. Approximately $9.8 million was expected to be reclassified from accumulated other comprehensive loss to interest expense over the next 12 months.
- Remaining tenant development and construction funding commitments were approximately $19.5 million, expected to be funded by December 31, 2021. At November 3, the company was under contract to acquire 32 properties for $49.9 million. After quarter-end, it acquired 32 properties for $71.0 million and sold eight properties for gross proceeds of $17.1 million.
- No material legal or regulatory proceedings were reported as pending; management stated there were no material environmental matters known to it. No specific earnings or dividend guidance was provided.
Most important facts for investors to verify
- Actual collection and repayment performance on the $18.1 million of rent deferrals, and whether October’s reported collection rate persisted.
- Tenant credit trends, occupancy, and further impairment or credit-loss provisions, particularly in pandemic-affected industries and regions.
- Debt covenant headroom, refinancing and interest-rate exposure, and the effect of swap liabilities and future hedge-cost reclassifications.
- Cash generation and dividend coverage, given REIT distribution requirements, continued external investment needs, and reliance on equity and debt capital.
- Execution, funding, and returns on committed tenant projects and pending acquisitions, alongside property dispositions.