ESSENTIAL PROPERTIES REALTY TRUST, INC. annual report, FY2022

Business context and reporting period

Essential Properties Realty Trust, Inc. (NYSE: EPRT) filed its Form 10-K for the fiscal year ended December 31, 2022. The internally managed REIT primarily owns single-tenant properties leased on a long-term, net-lease basis to middle-market businesses in service-oriented and experience-based industries.

At year-end, the portfolio included 1,653 property locations, 350 tenants, 538 concepts, 16 industries and 48 states. Occupancy was 99.9%; the weighted average remaining lease term was 13.9 years. Annualized base rent was $297.2 million.

Financial and operating metrics

• Revenue comprised $269.8 million of rental revenue and $15.5 million of interest on loans and direct financing leases. Management attributed the revenue increase primarily to portfolio growth.
• Net income included a $30.6 million net gain on real estate dispositions and $20.2 million of real estate impairment charges. EBITDAre was $251.4 million; AFFO was $208.8 million. These are non-GAAP measures and may not be comparable across REITs.
• Cash and cash equivalents were $62.3 million, with another $9.2 million of restricted cash. Net debt was $1.36 billion; net debt to annualized Adjusted EBITDAre was 4.6x. The company reported $1.43 billion of gross debt, a 3.3% weighted average interest rate after swaps and a 5.2-year weighted average maturity.
• No balance was outstanding on the $600 million revolving credit facility at year-end. The company reported covenant compliance and no off-balance-sheet arrangements.
• The company declared distributions of $1.075 per common share for 2022. Cash distributions paid to common stockholders and OP Unit holders totaled $141.7 million.

Material changes versus the prior comparable period

• Total revenue rose 24.4% and net income rose 49.3% from 2021. Net income attributable to stockholders increased 49.6%; diluted earnings per share rose from $0.82 to $0.99.
• Operating cash flow increased $43.6 million, mainly due to the larger investment portfolio. Net investing outflow decreased by $123.6 million, primarily reflecting higher proceeds from investment sales.
• Real estate impairment charges increased to $20.2 million from $6.1 million. The company recorded impairments on 13 investments in 2022, versus 18 in 2021.
• Interest expense increased $6.8 million to $40.4 million, attributed primarily to higher debt balances and interest rates. Gross debt rose to $1.43 billion from $1.17 billion, including $400 million drawn under a new 2028 term loan.
• The company completed $937.4 million of investments during 2022, including $793.3 million in property acquisitions and $144.0 million in newly originated loans. It sold 54 real estate properties, reporting net disposition gains of $30.6 million versus $9.3 million in 2021.
• Equity issuance provided $403.9 million of net cash in 2022. This included an August follow-on offering with $192.6 million of net proceeds and ATM sales. Share issuance increases the share base and may dilute existing holders.

Outlook, commentary, risks and unusual items

The filing provides no specific earnings, investment-volume or dividend guidance. Management said it expects operating cash flow, cash on hand, revolver availability and potential access to capital to fund operations and existing commitments for the foreseeable future. Its strategy is to continue investing in net-leased properties, particularly through sale-leaseback transactions, while generally targeting net debt below six times annualized Adjusted EBITDAre.

• Management said the adverse impact of COVID-19 had diminished significantly in 2022, but future effects remain uncertain. Entertainment, casual and family dining, health and fitness, movie theaters and home furnishings together represented 22.6% of annualized base rent.
• Management highlighted inflation and higher interest rates as risks: fixed rent escalators averaged 1.6% annually and may not keep pace with inflation, while tenant cost pressure could affect rent-paying capacity. Most term-loan exposure was hedged; the filing estimated a 100-basis-point rate movement would change annual interest costs by approximately $10.3 million on unsecured term borrowings.
• Key business risks include tenant default or bankruptcy, exposure to consumer spending, geographic and industry concentrations, acquisition competition, access to capital, refinancing and debt covenants, and property impairment. Most tenants are unrated, so credit assessments rely substantially on tenant-provided information and internal models.
• Unusual items included increased impairment charges, higher disposition gains and $2.1 million of debt-extinguishment loss related to financing amendments. Impairment and acquisition fair-value estimates involved significant judgment; these were identified as critical audit matters. The auditor issued unqualified opinions on the financial statements and internal controls.
• At year-end, the company had $34.6 million of remaining tenant construction and reimbursement commitments, expected to be funded during 2023. It reported no material pending legal or regulatory proceedings.

Important facts for investors to verify

• Review the reconciliation and assumptions for AFFO, EBITDAre, annualized Adjusted EBITDAre and the 4.6x net-debt ratio; these are non-GAAP measures.
• Assess the increase in impairment charges and the assumptions used for recoverability, leasing prospects and property valuations.
• Review tenant and industry exposure, rent coverage, lease maturities, and whether unrated tenants’ reported financial data supports management’s credit assessments.
• Check debt maturity and refinancing exposure, floating-rate terms, swap coverage, covenant headroom and the availability and cost of future capital.
• Evaluate dividend coverage against recurring cash generation and the company’s REIT distribution obligations; declared distributions are subject to Board discretion and financing restrictions.
• Consider the effect of follow-on and ATM share issuance on per-share measures, and verify the status of remaining equity offering capacity and construction commitments.