Essential Properties Realty Trust, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. The company is a REIT focused primarily on long-term, triple-net leases of single-tenant properties serving middle-market businesses.
Business and portfolio
- At quarter-end, the portfolio included 1,545 properties, including 174 properties securing mortgage loans, and was 100% occupied. Annualized base rent was $257.9 million.
- The company reported 323 tenants across 461 concepts, 16 industries and 46 states. No tenant contributed more than 3.3% of annualized base rent; the weighted-average remaining lease term was 13.9 years.
- Approximately 92.9% of annualized base rent came from service-oriented or experience-based businesses. Some 97.5% of leases provided for future rent increases, averaging 1.5% annually.
Financial results and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $70.1 million | $48.6 million | +44.4% |
| Income from operations | $38.4 million | $23.1 million | +$15.3 million |
| Net income attributable to stockholders | $26.7 million | $15.3 million | +74.6% |
| Diluted EPS | $0.21 | $0.14 | +$0.07 |
| Operating cash flow | $44.1 million | $30.1 million | +$14.0 million |
| Cash NOI (non-GAAP) | $63.0 million | $44.6 million | +41.3% |
| AFFO (non-GAAP; including non-controlling interests) | $48.9 million | $32.5 million | +50.7% |
- Rental revenue rose 45.5% to $66.1 million, principally reflecting properties acquired during 2021 and early 2022, plus contractual rent escalations. Interest income on loans and direct financing leases increased 23.1% to $3.8 million as the loan portfolio grew.
- Cash used in investing was $211.6 million, including $180.3 million of real estate investment and $54.3 million of new loan investments, partly offset by property sale proceeds and loan collections. Financing provided $122.0 million, including $158.3 million of net equity proceeds and net revolving-facility borrowings; dividends paid were $32.6 million.
- Cash and cash equivalents fell to $14.3 million from $59.8 million at year-end 2021. Net debt was $1.163 billion. The company reported $453 million of unused revolving-facility capacity.
- Principal debt outstanding totaled $1.177 billion; the company reported a 2.8% weighted-average interest rate after swaps and a 5.8-year weighted-average maturity. Debt maturities include $200 million in 2024, $147 million on the revolver in 2026, $430 million in 2027 and $400 million in 2031. The company said it complied with financial covenants.
- The board declared a quarterly dividend of $0.26 per share, up from $0.24 in Q1 2021. The filing reports $34.3 million of dividends and distributions payable at quarter-end.
Material changes and unusual items
- Revenue growth reflected portfolio expansion: owned rental properties increased from 1,240 at March 31, 2021 to 1,363 at March 31, 2022. The company made $186.2 million of property acquisitions and additions during the quarter and invested $54.3 million in loans receivable.
- General and administrative expense rose 25.4% to $8.1 million, partly due to higher share-based compensation, salaries and professional fees. Depreciation and amortization increased 29.8% to $20.3 million alongside portfolio growth.
- Real estate impairment charges were $3.9 million, versus $5.7 million a year earlier, involving four properties versus nine. Net gains on property dispositions declined to $1.7 million from $3.8 million.
- The company recorded a $2.1 million debt-extinguishment loss from February amendments to its credit facilities. Those amendments extended or adjusted terms and replaced LIBOR references with SOFR-based rates. The company issued 6.38 million shares through its ATM program for $158.1 million net proceeds, increasing weighted-average shares substantially year over year.
- Unrealized cash-flow hedge gains lifted other comprehensive income; derivative assets were $17.6 million at quarter-end, compared with derivative liabilities of $11.8 million at year-end 2021. The company said swaps hedge its term-loan rate exposure; revolving-facility borrowings remain rate-sensitive.
Outlook, risks and contingencies
- No specific earnings or investment guidance was provided. Management said cash from operations, cash on hand, revolving capacity and potential access to capital should fund operations and current investment commitments for the foreseeable future; it also plans to continue investing in single-tenant properties.
- As of March 31, 2022, the company had $71.5 million of remaining tenant construction, development and reimbursement commitments. It had agreed to fund $140.3 million in total and had funded $68.8 million; management expected to fund the remainder by March 31, 2023. As of April 26, it was also under contract to acquire 12 properties for $24.7 million, subject to due diligence and customary closing conditions.
- Management described the COVID-19 impact as significantly diminished, while warning that new variants, tenant operating weakness, supply disruptions or changed consumer behavior could impair rent collections and deferred-rent recovery. The filing does not quantify remaining deferred rent or its collection status.
- Other risks include tenant credit deterioration or default, refinancing and interest-rate exposure, access to debt and equity capital, real estate valuation and impairment, and maintaining REIT qualification. Management reported no material change to previously disclosed risk factors, no material pending legal or regulatory proceedings, and no material environmental claim known to the company.
Important facts for investors to verify
- Tenant rent collections, credit trends and repayment of pandemic-era deferred rent; also review rent coverage, including the reported 8.0% of rent with coverage below 1.0x.
- Acquisition and tenant-funding commitments, expected investment yields, and whether deployment is supported by durable per-share AFFO growth.
- Available liquidity after investment spending and distributions, ATM share issuance and dilution, and dividend coverage by cash flow.
- Debt maturities, covenant headroom and exposure to rising SOFR and revolving-credit costs; confirm the company’s hedge coverage and refinancing plans.
- Assumptions supporting property impairment values and loan-loss estimates, including the loan portfolio’s reported LTV mix and tenant collateral performance.