Essential Properties Realty Trust, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company is a REIT focused primarily on long-term, triple-net leases of single-tenant properties to middle-market businesses. Unless noted otherwise, comparisons are with Q1 2019.
Key financial results
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $41.5 million | $31.1 million; up 33.4% |
| Rental revenue | $39.5 million | $30.8 million; up 28.5% |
| Net income attributable to stockholders | $14.0 million | $6.1 million |
| Diluted EPS | $0.15 | $0.13 |
| Net cash from operating activities | $26.3 million | $17.0 million |
| Cash used in investing activities | $148.2 million | $105.7 million |
| Cash from financing activities | $314.6 million | $186.6 million |
| Cash and cash equivalents | $192.6 million | $8.3 million at Dec. 31, 2019 |
| Restricted cash | $21.5 million | $13.0 million at Dec. 31, 2019 |
| Total debt, net of deferred financing costs | $864.2 million | $726.9 million at Dec. 31, 2019 |
| Net debt, company-defined | $657.1 million | $713.8 million at Dec. 31, 2019 |
Revenue growth primarily reflected portfolio expansion and, to a lesser extent, contractual rent increases. The portfolio comprised 1,050 properties, was 99.5% occupied, and generated $161.1 million of annualized base rent. Weighted-average remaining lease term was 14.6 years. The company reported $27.1 million of Core FFO and $26.6 million of AFFO attributable to stockholders and non-controlling interests; these are non-GAAP measures, not cash-flow substitutes.
Material changes and unusual items
- The company acquired 61 properties for $152.7 million and invested $8.0 million in loans during the quarter. It raised $191.5 million net in a January follow-on stock offering and $6.2 million net through its at-the-market program.
- Share count rose to 91.95 million from 83.76 million at year-end 2019. The substantial increase in weighted-average shares affects comparisons of per-share results.
- New term-loan borrowings of $180 million brought the November 2019 term loan to its full $430 million commitment. The company also repaid $62.3 million of secured notes. A $0.9 million loss on repayment was recorded, primarily from writing off deferred financing costs.
- General and administrative expense increased 79.9% to $7.5 million, attributed mainly to the larger portfolio, equity compensation, legal fees, and directors’ fees. Depreciation and amortization increased 42.7% to $13.0 million.
- Adoption of the expected-credit-loss standard resulted in a $0.2 million opening allowance; the quarter-end loan-loss allowance was $0.7 million, including a $0.5 million provision reflecting revised macroeconomic assumptions related to COVID-19.
- Unrealized cash-flow hedge losses were $38.4 million, producing comprehensive loss attributable to stockholders of $23.9 million despite positive net income. The swaps’ reported fair-value liability was $41.0 million; potential termination value was $42.6 million.
COVID-19, outlook, liquidity, and risks
Through May 7, the company had collected 60.9% of April contractual base rent and entered deferral agreements covering another 32.7%. Deferrals totaled approximately $16.1 million of future rent, or 10.0% of March 31 annualized base rent; repayment schedules may extend up to 24 months. Properties representing approximately 51.7% of annualized base rent were closed or operating at reduced capacity. Management cautioned that April collections do not predict future collections and said the pandemic’s effects remain highly uncertain.
Management stated that cash, operating cash flow, $335 million of unused revolver capacity, and potential capital sources were expected to support operations for the foreseeable future. This assessment is subject to uncertainty around tenant collections, further concessions, financing access, and economic conditions. The company slowed investment activity but stated its intention to grow over the long term. It provided no specific earnings or operating guidance in the supplied filing text.
Debt includes $630 million of unsecured term loans, $65 million drawn on a $400 million revolver, and $176.1 million of secured Master Trust notes. The company reported a 5.3-year weighted-average debt maturity and said long-term debt was fixed-rate or effectively fixed through swaps. It was in compliance with debt covenants at quarter-end. Risks include tenant defaults, potential covenant pressure, constrained capital access, and Master Trust cash-trapping or early-amortization triggers if specified debt-service coverage thresholds are breached. The Trust’s Master Trust coverage ratio was 3.86 to 1 for the quarter.
Sector exposure includes restaurants, early childhood education, medical/dental, fitness, entertainment, and movie theaters. No tenant accounted for 10% or more of quarterly rental revenue, but COVID-19 could materially impair tenants’ ability to pay rent, increase vacancies, and lead to property impairments. The company also disclosed $22.1 million of remaining tenant development and reimbursement commitments and no material pending legal proceedings.
Most important facts for investors to verify
- Subsequent rent collections, deferrals, repayment performance, and tenant defaults by industry.
- Changes in occupancy, property values, impairment charges, and credit-loss reserves as pandemic effects develop.
- Debt covenant headroom, revolver availability, refinancing requirements, and any Master Trust cash-trapping triggers.
- The duration and economic impact of interest-rate swaps, including hedge losses and potential termination obligations.
- Whether operating cash flow and distributions remain sustainable after considering deferred rent, investment commitments, and the REIT distribution requirement.