Essential Properties Realty Trust, Inc. — Q1 2021 10-Q
Reporting period: Three months ended March 31, 2021. The company is a REIT focused primarily on long-term, triple-net leases of single-tenant properties to middle-market businesses, particularly service- and experience-based operators.
Business context and portfolio
- At quarter-end, the portfolio comprised 1,240 properties across 43 states, with annualized base rent of $193.5 million and occupancy of 99.1%. It included 1,227 leased properties and 11 vacant properties, as well as two undeveloped parcels and properties securing mortgage loans.
- There were 259 tenants across 17 industries; no tenant represented more than 2.6% of annualized base rent. Weighted-average remaining lease term was 14.3 years, and weighted-average rent coverage was 3.0x.
- During the quarter, the company acquired 63 properties and invested $171.6 million in acquisitions, and sold 16 properties. Approximately 85% of quarterly investments were sale-leasebacks.
Financial results and material changes
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $48.6 million | $41.5 million | +17.0% |
| Net income attributable to stockholders | $15.3 million | $14.0 million | +9.6% |
| Diluted earnings per share | $0.14 | $0.15 | Down $0.01 |
| Cash provided by operating activities | $30.1 million | $26.3 million | +$3.8 million |
| Cash NOI (non-GAAP) | $44.6 million | $38.4 million | +16.3% |
| AFFO (non-GAAP; company and non-controlling interests) | $32.5 million | $26.6 million | +22.0% |
- Rental revenue grew 14.9% to $45.4 million, principally from portfolio expansion; interest on loans and direct financing lease receivables rose 60.2% to $3.1 million.
- Net income increased, but diluted EPS declined as weighted-average diluted shares rose to 108.1 million from 91.3 million, reflecting equity issuance and other share changes.
- Real estate impairment expense increased to $5.7 million from $0.4 million, covering nine properties versus two in the prior-year quarter. Property expenses also rose by $1.0 million, while general and administrative expense fell by $1.1 million.
- Investing activities used $175.3 million, chiefly for real estate investment; financing activities provided $157.0 million, including $64.9 million of net ATM equity proceeds and $120.0 million of revolver borrowings.
Debt, liquidity and distributions
- Quarter-end principal debt was $940.2 million, up from $821.2 million at year-end 2020; net debt was $895.4 million. Cash and cash equivalents were $42.8 million, with $2.0 million of restricted cash. The revolver had $138.0 million drawn and $262.0 million of unused capacity.
- Management reported covenant compliance and no debt defaults. The company said cash from operations, cash balances, borrowing availability and potential capital-market access should fund operations and planned commitments for the foreseeable future. Its long-term debt was fixed-rate or effectively fixed through swaps; weighted-average debt maturity was 4.1 years.
- The board declared a quarterly dividend of $0.24 per share, up from $0.23 in Q1 2020. The company paid $25.7 million in distributions during the quarter.
- After quarter-end, the company issued 8.2 million shares at $23.50 per share and used part of the proceeds to repay the $138.0 million revolver balance outstanding at March 31. It also invested $45.6 million in 19 properties after quarter-end.
Outlook, risks and unusual items
- No quantified earnings or investment guidance was provided. Management described a cautious investment posture during the pandemic, while noting it had begun accelerating investment activity. As of April 30, the company was under contract to acquire 49 properties for $115.0 million, subject to due diligence and customary conditions.
- COVID-19 remained a key uncertainty: tenant operations, rent and deferred-rent collection, occupancy, property values, capital access and demand for service- and experience-based businesses could be adversely affected. Industries identified as particularly affected accounted for 32.6% of annualized base rent. Prior tenant rent deferrals generally allowed repayment schedules extending up to 24 months.
- Other risks include tenant defaults or bankruptcies, lease renewals and re-leasing, interest rates and refinancing, access to capital, property impairments, and maintaining REIT qualification. The company had $14.8 million of remaining tenant development and construction funding commitments; it expected to fund the balance of broader $36.5 million commitments by year-end 2021.
- Cash flow hedge fair-value movements produced $18.0 million of other comprehensive income in Q1, versus a $38.1 million loss in Q1 2020; these movements were not operating earnings. The company estimated $9.8 million of hedge losses would be reclassified to interest expense over the next 12 months. No material legal or regulatory proceedings were reported, and management said there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether tenant rent and deferred-rent collections remain resilient, especially in pandemic-affected industries, and whether any further concessions or impairments are needed.
- Whether the sharp increase in impairment charges reflects isolated assets or broader portfolio credit and valuation pressure.
- How post-quarter equity issuance, revolver repayment, acquisitions and the contracted pipeline affect per-share growth, leverage and liquidity.
- Whether acquisition returns, rent escalations and tenant coverage support the company’s growth and distribution commitments; non-GAAP measures such as AFFO and Cash NOI are not substitutes for GAAP earnings or operating cash flow.