Essential Properties Realty Trust, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Amounts are in U.S. dollars unless stated otherwise.
Business context
The internally managed REIT acquires and owns primarily single-tenant properties leased long term to middle-market businesses. At June 30, the portfolio comprised 1,742 properties, including properties securing mortgage loans, with $328.7 million of annualized base rent and 99.9% occupancy. It had 360 tenants across 16 industries and 48 states; no tenant contributed more than 3.6% of annualized base rent. The weighted average remaining lease term was 14 years.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $86.5m | $71.4m | $170.2m | $141.6m |
| Net income | $53.0m | $35.8m | $96.1m | $62.6m |
| Net income attributable to stockholders | $52.8m | $35.7m | $95.7m | $62.4m |
| Diluted net income per share | $0.35 | $0.27 | $0.64 | $0.48 |
| Cash NOI | $78.9m | $64.3m | $155.2m | $127.3m |
| AFFO | $61.9m | $50.6m | $120.1m | $99.6m |
For Q2, rental revenue was $81.8 million, up 22% year over year, primarily reflecting portfolio growth and rent escalations. Income from operations was $64.8 million, including a $12.5 million real estate disposition gain. Interest expense rose to $12.1 million from $9.2 million. The filing does not present a conventional operating margin; the NOI and Cash NOI measures are non-GAAP.
For the first half, operating cash flow was $119.1 million versus $102.0 million. Investing activities used $388.8 million, including $447.2 million of real estate investment and capital expenditures, partly offset by $78.9 million of property-sale proceeds. Financing activities provided $212.3 million, including $296.6 million of net common-stock proceeds; dividends paid were $80.6 million.
At June 30, total assets were $4.31 billion, total equity $2.81 billion, and principal debt outstanding $1.43 billion. Net debt was $1.416 billion, compared with $1.359 billion at year-end 2022. Cash and cash equivalents were $14.1 million; the $600 million revolving facility was undrawn. The company reported compliance with debt covenants and no defaults. Debt has maturities of $200 million in 2024, $430 million in 2027, $400 million in 2028 and $400 million in 2031. Management reported a 3.3% weighted average interest rate after swaps and a 4.7-year weighted average debt maturity.
Changes versus prior comparable periods
- Q2 revenue increased to $86.5 million from $71.4 million; net income attributable to stockholders rose to $52.8 million from $35.7 million. Portfolio expansion was the principal revenue driver.
- First-half acquisitions totaled 134 properties at a purchase price of $478.2 million, compared with 85 properties and $360.5 million in the prior-year period. The portfolio grew by 202 rental properties year over year.
- First-half real estate impairment charges declined to $1.5 million from $10.2 million; disposition gains increased to $17.5 million from $11.8 million.
- First-half interest expense rose to $24.2 million from $18.4 million, reflecting higher outstanding debt and interest rates. The 2022 comparison included a $2.1 million debt-extinguishment loss, absent in 2023.
- Shares outstanding increased from 142.4 million at December 31, 2022 to 155.2 million at June 30, 2023, primarily reflecting equity issuance. This expanded the equity funding base but also increased the share count.
Outlook, risks and unusual items
No quantified earnings or investment guidance is provided. Management said cash generated from operations, cash on hand, revolver availability and potential additional capital sources should fund operations and current commitments for the foreseeable future. It targets net debt generally below six times annualized adjusted EBITDAre over time; this is a target, not a guarantee.
The company had $159.1 million remaining in tenant construction financing and reimbursement commitments, which it expected to fund by June 30, 2024. As of July 21, it was under contract to acquire 17 properties for $43.6 million, subject to due diligence and customary closing conditions. The board declared a Q2 dividend of $0.28 per share, payable July 14, 2023.
Key risks include tenant financial deterioration or default, property-market and leasing conditions, access to debt and equity capital, interest-rate and refinancing risk, and the ability to meet investment and tenant-funding commitments. While term-loan debt was variable-rate by contract, swaps effectively fixed rates; the revolving facility remains variable-rate if drawn. The filing reports no material pending legal or regulatory proceedings, no material environmental claim known to the company, and no material changes to the risk factors in its 2022 Form 10-K.
Notable period items include $17.5 million of first-half property disposition gains, $1.5 million of impairment charges, $0.9 million of insurance recovery income included in the non-core FFO reconciliation, and severance and related compensation expense. Management cautions that FFO, Core FFO, AFFO and other non-GAAP measures are not substitutes for GAAP results or operating cash flow.
Important facts for investors to verify
- Tenant rent coverage and credit quality, particularly the portion of annualized rent supported by weaker coverage; portfolio weighted-average rent coverage was 4.1x.
- Execution and funding of the $159.1 million tenant commitment, and the economics and closing status of the 17 contracted acquisitions.
- How the 2024 $200 million term-loan maturity will be refinanced or repaid, and the cost and availability of capital amid changing credit markets.
- Per-share operating growth relative to the increased share count; compare AFFO and cash generation with dividends and future equity issuance.
- Whether high occupancy, tenant reporting and rent escalations continue to support collections and portfolio performance; 98.5% of annualized rent had contractual rent increases averaging 1.6% annually.