Essential Properties Realty Trust, Inc. — Q2 2019 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2019. Essential Properties is a REIT-focused owner and operator of predominantly single-tenant, long-term net-leased commercial properties serving middle-market businesses. The financial statements include the company and its operating partnership; comparisons with 2018 reflect a recently completed IPO and substantial portfolio growth.
At June 30, the portfolio comprised 789 investment locations, including an undeveloped parcel and properties securing mortgage loans; annualized base rent was $126.2 million and occupancy was 100%. The 788 developed properties were leased to 184 tenants across 45 states. Weighted average lease term was 14.5 years, and 92.4% of annualized base rent came from triple-net leases.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $32.8 million, up 51% year over year | $63.9 million, up 53% |
| Net income | $10.6 million vs. $3.5 million | $19.3 million vs. $4.6 million |
| Net income attributable to stockholders and members | $8.0 million vs. $3.4 million | $14.1 million vs. $4.5 million |
| Diluted net income per share | $0.14 vs. $0.01 | $0.27 vs. $0.01 |
| Operating income | $14.5 million | $23.2 million |
| Operating cash flow | Not presented quarterly | $35.8 million vs. $13.6 million |
Q2 rental revenue was $32.1 million, primarily reflecting acquisitions; management attributed $11.4 million of the increase to properties acquired between April 2018 and June 2019. Q2 interest expense fell 33% to $5.8 million, while general and administrative expense rose 59% to $4.7 million, largely due to public-company costs, compensation and portfolio growth. Depreciation and amortization increased 33% to $10.1 million. Reported operating income included a $3.5 million gain on property dispositions; the filing does not provide a GAAP operating margin excluding that gain.
For Q2, FFO was $17.7 million, Core FFO $22.0 million and AFFO $21.1 million. For the first half, FFO was $36.2 million, Core FFO $40.6 million and AFFO $39.1 million. These are non-GAAP measures and should not be treated as substitutes for net income or operating cash flow.
First-half investing cash outflow was $265.2 million, including $272.4 million invested in real estate, $23.6 million in loans and $5.8 million in construction in progress, partly offset by $32.2 million of net investment-sale proceeds. Financing cash inflow was $231.0 million; it included $235.7 million net proceeds from the March follow-on equity offering and $200.0 million of term-loan borrowings, offset in part by the $201.4 million note repurchase and $29.3 million of dividends paid.
Debt, liquidity and capital
At June 30, total debt was $572.7 million, compared with $540.1 million at year-end 2018; net debt was $560.8 million versus $532.9 million. Debt included $311.7 million of secured notes, $200.0 million under the term loan and $67.0 million drawn on the revolving facility. Cash and cash equivalents were $7.8 million, with a further $10.1 million restricted. Revolver capacity available was $333.0 million.
In May, the company borrowed $200.0 million under its term loan and used the proceeds to repurchase $200.0 million face value of secured notes for $201.4 million, recognizing a $4.4 million extinguishment loss. The term loan’s floating rate was fixed at 3.26% through swaps; the $67.0 million revolver balance remained floating-rate. Management reported compliance with credit-facility covenants. A $68.5 million balloon payment on Series 2016-1 notes is due in November 2021; the notes carry additional-interest provisions if not repaid by their anticipated repayment date.
Stockholders’ equity rose to $785.6 million from $562.2 million at year-end, principally reflecting the follow-on offering. The company declared $0.43 per common share in dividends for the first half. The July secondary offering by existing holders generated no proceeds for the company.
Changes, outlook, risks and unusual items
- Revenue growth principally reflected acquisitions: the company acquired 137 properties in the first half of 2019 versus 112 in the comparable 2018 period. Growth in expenses also reflected the larger portfolio; depreciation and amortization rose 37% for the half and G&A rose 41%.
- The company adopted the new lease accounting standard on January 1, 2019, recording $4.8 million of right-of-use assets and lease liabilities initially, with no retained-earnings adjustment. Certain ground-lease costs and related reimbursements shifted from net to gross presentation, affecting comparability.
- No formal earnings guidance is stated. Management said cash from operations, cash balances, revolving capacity and potential capital sources should fund operations and current commitments for the foreseeable future. As of August 5, the company was under contract to acquire 29 properties for $41.1 million, subject to due diligence and customary closing conditions.
- Tenant development and construction funding commitments totaled $54.5 million, of which $28.6 million had been funded; management expected to fund the balance by year-end 2019. Separately, the contractual-obligations disclosure lists $25.8 million of remaining tenant construction and reimbursement commitments.
- Key risks include tenant defaults or bankruptcies, the ability to acquire and re-lease properties, access to debt and equity markets, interest-rate changes, refinancing needs, environmental exposure and maintaining REIT qualification. The master-trust cash-flow structure can restrict cash availability if debt-service coverage falls below specified thresholds. No material legal or regulatory proceedings were reported; management identified no material adverse environmental matter.
- Following the July 22 secondary offering, Eldridge-affiliated selling holders no longer held company shares or OP Units, and related nomination and approval rights under the stockholders agreement terminated. The company stated it would cease to be an emerging growth company at year-end 2019, potentially increasing compliance costs.
Important facts for investors to verify
- Whether acquisition-led revenue and AFFO growth translate into sustainable same-property performance and cash available for distributions.
- Tenant credit quality, rent coverage and concentration: the top ten tenants generated 27.8% of annualized base rent; no individual tenant exceeded 4.0%.
- Funding and timing of the $25.8 million remaining commitments disclosed in contractual obligations, and the broader $54.5 million tenant-development program.
- Liquidity, covenant headroom and refinancing plans for the November 2021 anticipated repayment date, as well as exposure to variable-rate revolver borrowings.
- How the new lease-accounting presentation and the unusually short 2018 public-company comparison period affect year-over-year interpretation.