Essential Properties Realty Trust, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The company is an internally managed REIT focused primarily on long-term, net-leased single-tenant properties serving middle-market businesses. Amounts below are in U.S. dollars.
Business context and portfolio
- At year-end, the portfolio comprised 1,181 properties across 43 states, with $184.0 million of annualized base rent and 99.7% occupancy. It included 238 tenants and 336 concepts; no tenant contributed more than 2.8% of annualized base rent.
- Weighted-average remaining lease term was 14.5 years; 61.1% of annualized base rent came from master leases, and 94.1% from triple-net leases. Rent coverage averaged 2.9x.
- Service-oriented and experience-based tenants represented 95.1% of annualized base rent. Car washes, quick-service restaurants, and early-childhood education were the largest industries.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $164.0 million | $139.4 million |
| Rental revenue | $155.8 million | $135.7 million |
| GAAP net income | $42.5 million | $48.0 million |
| Net income attributable to stockholders and members | $42.3 million | $41.8 million |
| Basic and diluted EPS | $0.44 | $0.65 basic; $0.63 diluted |
| Cash from operating activities | $99.4 million | $88.6 million |
| Cash used in investing activities | $545.5 million | $607.8 million |
| Cash from financing activities | $457.8 million | $524.4 million |
| FFO / Core FFO / AFFO (non-GAAP) | $104.4 / $106.7 / $107.0 million | $82.7 / $90.6 / $86.3 million |
- Revenue rose 17.7%, primarily reflecting portfolio expansion and additional loan investments. GAAP net income fell 11.4%; higher depreciation, impairment charges, and interest expense more than offset revenue growth. Stockholder-attributable income increased 1.0%, while EPS declined, in part amid a larger share count.
- Fourth-quarter revenue was $41.1 million versus $39.2 million a year earlier; quarterly net income was $5.7 million versus $14.6 million, and EPS was $0.05 versus $0.18.
- Operating income was $72.8 million. Reported NOI was $160.1 million, or about 97.6% of revenue; NOI is a non-GAAP measure. Real estate impairment expense was $8.4 million versus $2.9 million, and the company recorded a $0.8 million loan-loss provision.
- Year-end cash and cash equivalents were $26.6 million, with $6.4 million of restricted cash. Gross debt was $821.2 million and net debt was $788.2 million. The company reported net debt to annualized Adjusted EBITDAre of 4.8x and $382.0 million of unused capacity under its $400 million revolving facility.
- Debt included $630 million of term loans, $173.2 million of secured Master Trust notes, and $18 million drawn on the revolver. Term loans mature in 2024 and 2026; the revolver matures in 2023. Eight swaps with $630 million aggregate notional hedged the term loans. The company reported compliance with debt covenants and no defaults at year-end.
- Cash distributions declared were $0.93 per common share for 2020, up from $0.88 in 2019. The company raised net proceeds of approximately $375.6 million in two public offerings and $84.1 million net through its ATM program during 2020.
Material changes, outlook, and risks
- Investments totaled $602.8 million in 2020, including $541.5 million for 208 property acquisitions and $61.3 million in newly originated loans secured by 25 properties. The company sold 50 properties for net proceeds of $81.7 million.
- COVID-19 materially disrupted some tenants. By year-end, rent deferrals covered $18.5 million of past and future rent, equivalent to 10% of annualized base rent; $12.4 million of deferred rent was recognized as rental revenue under the company’s accounting election. Management said it collected substantially all of $2.6 million in deferred rent for which repayment was anticipated during 2020. Deferral repayment schedules generally extended up to 24 months.
- Management described improved rent collections and broader economic reopening later in 2020, allowing a less defensive stance, renewed acquisition activity in selected industries, and resumed asset sales. It nevertheless emphasized continuing pandemic uncertainty. No formal earnings or dividend guidance is provided in the supplied filing text.
- Near-term commitments included $16.3 million of remaining tenant construction and reimbursement obligations due in 2021. Separately, the company described a $61.9 million aggregate commitment, of which $45.6 million had been funded by year-end, with the balance expected to be funded by December 31, 2021. It also reported post-year-end acquisitions of 21 properties for $51.9 million.
- Key risks include further tenant distress or bankruptcy, inability to collect deferred rent, prolonged restrictions affecting dining, fitness, entertainment and movie-theater tenants, property impairment, concentration by geography and industry, refinancing and covenant risk, and changes to LIBOR. The five largest tenants contributed 12.3% of rent; Texas contributed 14.9%. The company identified about 20% of rent as tied to industries particularly affected by the pandemic.
- Unusual items included 2020 impairment charges and losses on debt repayment; unrealized swap losses contributed to a $35.4 million comprehensive loss component in other comprehensive income. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and controls.
Most important facts for investors to verify
- Actual collections and repayment performance on the $18.5 million of rent deferrals, and subsequent tenant concessions or defaults.
- Quarterly rent coverage, occupancy, and credit trends in the most pandemic-exposed industries and among the largest tenants.
- Debt maturity and refinancing plans, covenant headroom, revolver availability, and the cash-flow consequences of the LIBOR transition.
- Whether impairment estimates, loan-loss allowances, and property valuations remain supportable as tenant and market conditions change.
- Dividend coverage and per-share operating performance, considering REIT distribution requirements, equity issuance, and dilution.