Essential Properties Realty Trust, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; financial statements are unaudited. The company is a REIT focused on long-term, primarily triple-net leases of single-tenant properties serving middle-market businesses.
Business context and portfolio
- At June 30, the portfolio comprised 1,060 property locations and $2.1 billion of net investments, with annualized base rent of approximately $160.9 million and 99.6% occupancy. Weighted-average remaining lease term was 14.6 years.
- 93.8% of annualized base rent was from triple-net leases. Service businesses represented 83.0% and experience-based businesses 13.3% of annualized base rent.
- Portfolio growth was supported by 73 property acquisitions in the first half, at a purchase price of $190.3 million, compared with 137 acquisitions costing $287.5 million in the first half of 2019.
Key financial results
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Total revenue | $38.5 million | $32.8 million | $80.0 million | $63.9 million |
| Net income | $10.4 million | $10.6 million | $24.5 million | $19.3 million |
| Net income attributable to stockholders | $10.4 million | $8.0 million | $24.3 million | $14.1 million |
| Diluted earnings per share | $0.11 | $0.14 | $0.26 | $0.27 |
| Cash flow from operations | Not separately stated | Not separately stated | $36.5 million | $35.8 million |
- Q2 revenue rose 17.5% year over year, largely reflecting portfolio growth and higher loan interest income; H1 revenue rose 25.3%. Rental revenue included $9.8 million of rent deferrals recognized during the quarter and half year, while tenant-credit adjustments reduced rental revenue by $4.8 million in Q2 and $5.5 million in H1.
- Q2 net income attributable to stockholders increased year over year, but diluted EPS declined amid a substantially larger share count. For H1, stockholder-attributable income increased while diluted EPS was slightly lower.
- H1 Core FFO was $51.9 million versus $40.6 million; AFFO was $51.9 million versus $39.1 million. These are non-GAAP measures and are not substitutes for GAAP income or operating cash flow.
- H1 operating cash flow was $36.5 million; investing activities used $192.4 million, principally for property investment; financing activities provided $244.1 million, including equity and term-loan proceeds.
Debt and liquidity
- June 30 cash and cash equivalents were $100.8 million, with $8.7 million of restricted cash. Net debt, as defined by the company, was $695.7 million, compared with $713.8 million at year-end 2019.
- Debt carrying amounts included $172.7 million of secured borrowings and $625.9 million of unsecured term loans; the revolving facility had no outstanding balance and $400 million of unused capacity. Gross principal outstanding under the term loans was $630 million.
- Management said cash, operating cash flow, revolver availability and potential capital sources should fund operations and current investment commitments for the foreseeable future, while emphasizing uncertainty from the pandemic. The company reported compliance with debt covenants at June 30.
- Interest-rate swap liabilities were $46.0 million at quarter-end, versus $4.1 million at year-end. First-half other comprehensive loss included $43.1 million of cash-flow hedge losses; the company estimated $9.7 million would be reclassified to interest expense over the next 12 months.
Material changes, outlook and risks
- COVID-19 disrupted tenants’ operations and collections. By July 31, approximately 87% of July contractual base rent due had been collected; properties representing about 20% of annualized base rent were closed or operating at reduced capacity. Tenant deferrals granted by that date totaled $18.1 million, or 11.3% of annualized base rent, generally repayable over up to 24 months. Management cautioned that July collections do not predict future collections.
- Tenant-credit adjustments, loan-loss provisions and operating expenses increased: Q2 included a $4.8 million rental-revenue credit adjustment; H1 included a $0.5 million loan-loss provision, reflecting expected-credit-loss assumptions that incorporated COVID-related macroeconomic factors. Real-estate impairment charges were $1.5 million in Q2 and $1.9 million in H1.
- H1 general and administrative expense rose 54.5%, partly due to the larger business, equity compensation, legal and directors’ fees, and one-time severance costs. H1 also included a $0.9 million loss related to repayment of secured debt.
- No numeric earnings or investment guidance was provided. Management said investment activity had slowed because of the pandemic but described a long-term intention to grow the portfolio. Risks include further rent nonpayment or concessions, vacancies, capital-market constraints, covenant pressure, and impacts on service- and experience-based tenants.
- Other notable items: the company declared a $0.23 per-share quarterly dividend; it had $23.8 million of reported future tenant construction and reimbursement obligations. Subsequent to quarter-end, it reported $23.3 million of acquisitions and was under contract as of August 4 to acquire 23 properties for $55.4 million, subject to closing conditions.
- Management reported no material pending legal or regulatory proceedings and no material change in internal control over financial reporting.
Important facts for investors to verify
- Subsequent rent collections, repayment of the $18.1 million in granted deferrals, and whether further concessions or tenant-credit adjustments are needed.
- Tenant financial health and exposure to vulnerable categories, particularly restaurants, early childhood education, fitness, entertainment and movie theaters, as well as geographic exposure to states with rising COVID-19 cases.
- Liquidity, covenant headroom, refinancing needs and the effects of interest-rate swaps, including the timing and earnings impact of hedge-loss reclassifications.
- Whether reported GAAP results and non-GAAP FFO/AFFO remain supported by collected cash rents, and the assumptions underlying expected credit losses and property impairments.
- Funding requirements for tenant commitments, the acquisition pipeline, dividend sustainability and any further equity issuance under the $250 million at-the-market program.