Essential Properties Realty Trust, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Financial statements are unaudited. The company is a REIT focused primarily on long-term, single-tenant net-leased properties serving middle-market businesses.
Financial and operating highlights
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $57.1 million | $38.5 million | $105.6 million | $80.0 million |
| Net income | $23.4 million | $10.4 million | $38.8 million | $24.5 million |
| Net income attributable to stockholders | $23.3 million | $10.4 million | $38.6 million | $24.3 million |
| Diluted net income per share | $0.20 | $0.11 | $0.34 | $0.26 |
| Operating cash flow | Not separately stated for the quarter | $69.3 million | $36.5 million | |
| FFO attributable to stockholders and non-controlling interests | $37.2 million | $24.3 million | $70.2 million | $49.8 million |
| AFFO attributable to stockholders and non-controlling interests | $39.9 million | $25.2 million | $72.4 million | $51.9 million |
- Portfolio: 1,325 properties, including 159 securing mortgage loans; 99.8% occupied; annualized base rent of $209.3 million. Weighted-average remaining lease term was 14.0 years and weighted-average rent coverage was 3.2x.
- Balance sheet at June 30: Total assets were $2.95 billion and total equity was $1.84 billion. Cash and cash equivalents were $126.5 million, with $3.2 million of restricted cash.
- Debt and liquidity: Principal debt outstanding was $1.03 billion; net debt was $900.3 million. The $400 million revolving facility was undrawn, providing $400 million of stated unused capacity. Management reported compliance with debt covenants and no defaults. Weighted-average debt maturity was 6.7 years; long-term debt was fixed-rate or effectively fixed through hedges.
- Cash flows, six months: Investing activities used $385.2 million, including $339.3 million for real estate investment and $85.4 million for loans. Financing activities provided $412.6 million. Dividends paid were $52.1 million.
- Non-GAAP property measures, Q2: NOI was $55.9 million and Cash NOI was $52.0 million. The company cautions that these measures are not GAAP measures and may not be comparable across REITs.
Material changes versus prior comparable periods
- Q2 revenue rose 48.2% year over year, mainly from portfolio growth; rental revenue increased 45.8% and interest on loans and direct financing leases increased 90.4%.
- Q2 net income attributable to stockholders more than doubled, to $23.3 million from $10.4 million. For the first half, it increased to $38.6 million from $24.3 million. Results reflect higher revenues and gains on property dispositions, partly offset by higher depreciation and interest expense.
- First-half real estate impairment expense increased to $6.1 million from $1.9 million; impairments affected two vacant and 16 tenanted properties. First-half property disposition gains increased to $7.5 million from $3.0 million.
- In June, the company issued $400 million of 2.95% senior notes due 2031, receiving $396.6 million net, and repaid the remaining $171.2 million of secured Series 2017-1 notes. The repayment generated a $4.5 million loss, including a make-whole premium and financing-cost write-off.
- Equity issuance supported growth: an April follow-on offering generated $185.1 million net, and first-half ATM sales generated $78.6 million net. Common shares outstanding increased to 118.0 million at quarter-end from 106.4 million at year-end 2020.
- The quarterly dividend declared rose to $0.25 per share from $0.23 in the comparable 2020 quarter. A $0.25 dividend was declared in May, payable July 15, 2021.
Outlook, commentary and risks
- The filing gives no formal earnings or investment guidance. Management said available cash, operating cash flow, the undrawn revolver and potential capital-market access should fund operations and current commitments for the foreseeable future.
- As of July 23, the company was under contract to acquire 48 properties for $102.4 million, subject to due diligence and customary closing conditions. After quarter-end, it invested $53.0 million in 20 properties and sold or transferred nine properties for gross proceeds of $6.3 million.
- Management described tenant operations as largely returned to pre-pandemic levels but warned that COVID-19 variants, renewed restrictions, supply disruptions or changes in consumer behavior could weaken tenants’ ability to pay rent or repay deferred rent. Rent deferrals had reduced operating cash flow and cash available for distributions.
- Other principal risks include tenant credit deterioration or default, property impairment and vacancy, access to debt and equity capital, interest-rate movements, refinancing, acquisition competition, and continued REIT qualification. The company reported $6.1 million of first-half property impairments and an $890,000 allowance for loan and direct financing lease losses.
- Interest-rate swaps had a $23.2 million fair-value liability at quarter-end. The filing estimates that a 100-basis-point change in rates would change annual interest costs on unsecured term loans by approximately $0.6 million in either direction.
- The company had $18.4 million of remaining tenant construction and reimbursement commitments, expected to be funded by year-end 2021. It reported no material pending legal or regulatory proceedings, no off-balance-sheet arrangements, and no material changes to previously disclosed risk factors.
Investor facts to verify
- Whether acquired-property revenue growth, occupancy and tenant rent coverage persist, and whether deferred rents are collected.
- Impairment drivers and tenant performance at the properties impaired, particularly the 16 tenanted properties noted for the first half.
- Returns and financing costs on the substantial acquisition and loan investment program, along with dilution from equity issuance.
- Debt covenant headroom, the stated net-debt target of generally less than six times annualized adjusted EBITDAre, and exposure to refinancing or changing rates.
- Cash available for dividends after investment spending, tenant commitments and debt service; FFO and AFFO are non-GAAP measures, not substitutes for operating cash flow.