Business context and reporting period
Essential Properties Realty Trust, Inc. (NYSE: EPRT) filed this unaudited Form 10-Q for the quarter ended September 30, 2019. The company owns and manages primarily single-tenant, long-term net-leased properties serving middle-market businesses. Its portfolio included 917 locations across 45 states, was 100% occupied, and had a 14.4-year weighted-average remaining lease term. The prior-year comparison spans a period when the company’s public-company structure and portfolio were still developing.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $36.3 million | $25.7 million | $100.2 million | $67.6 million |
| Net income | $14.1 million | $7.7 million | $33.4 million | $12.3 million |
| Net income attributable to stockholders and members | $13.2 million | $5.3 million | $27.3 million | $9.8 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $60.9 million | $28.8 million |
| FFO / Core FFO / AFFO | $21.1 / $23.9 / $22.8 million | $15.8 / $15.8 / $15.6 million | $57.4 / $64.5 / $61.8 million | $33.6 / $33.6 / $31.5 million |
Q3 diluted EPS was $0.18; nine-month diluted EPS was $0.45. Nine-month operating NOI was $97.8 million and Cash NOI was $89.7 million. These non-GAAP measures are not substitutes for GAAP earnings or cash flow.
At September 30, 2019, total assets were $1.81 billion and total equity was $1.10 billion. Debt, net of deferred financing costs, totaled $659.8 million: $305.7 million secured, $199.1 million term loan, and $155.0 million revolving credit borrowings. Net debt was $639.3 million. Cash and cash equivalents were $23.4 million, with $2.8 million restricted cash; unused revolver capacity was $245 million. The company reported compliance with credit-facility and secured-debt covenants.
For the first nine months, investing activities used $425.4 million, principally for real estate investment; financing activities provided $374.5 million. The company paid $46.3 million in distributions and declared $0.65 per share for the period. Remaining tenant construction and reimbursement commitments were $23.5 million.
Material changes versus prior comparable period
- Revenue rose 40% in Q3 and 48% for the nine months, mainly reflecting portfolio expansion; the portfolio grew to 917 locations from 665 at year-end 2018.
- Nine-month attributable income increased to $27.3 million from $9.8 million. Growth included higher rental revenue and disposition gains; Q3 general and administrative expense more than doubled to $7.5 million, reflecting public-company, portfolio, compensation, legal, and director costs.
- Nine-month interest expense fell $3.4 million, while Q3 interest expense rose $0.6 million. The company borrowed $200 million under its term facility and used the proceeds to repurchase $200 million face value of secured notes, recording a $4.4 million extinguishment loss.
- The company completed a $234.6 million net follow-on equity offering and raised $73.5 million net through its ATM program by quarter-end. A secondary offering by existing holders was not a company capital raise.
Outlook, risks, contingencies, and unusual items
No specific earnings or acquisition guidance is provided. Management said cash from operations, cash on hand, the revolver, and potential capital sources should fund operations and current investment commitments for the foreseeable future. It reported $64.5 million of agreed tenant development funding, of which $41.0 million had been funded, with the balance expected by December 31, 2020. After quarter-end, the company reported $69.3 million of property investments and $4.8 million of additional development funding, and sold three properties for $2.1 million gross.
Key disclosed risks include tenant defaults or bankruptcies, economic and credit-market conditions, acquisition and capital-market access, interest-rate changes, refinancing, property re-leasing, and maintaining REIT qualification. The $155 million revolving balance is floating-rate debt; the $200 million term loan was fixed at 3.26% through swaps. A 100-basis-point adverse rate change was estimated to affect variable-rate borrowing exposure by $1.6 million. The secured notes have anticipated repayment dates, including a 2021 balloon payment; failure to meet repayment schedules can increase interest costs. Management reported no material pending legal or regulatory proceedings and no known environmental matters expected to materially affect results. The company expects to lose emerging-growth-company status at year-end 2019, increasing compliance costs. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether acquisition-driven revenue and non-GAAP FFO/AFFO growth translate into durable per-share cash generation after equity issuance and higher overhead.
- Tenant credit quality and concentration: the top ten tenants generated 25.5% of annualized base rent; quick-service restaurants, early-childhood education, and convenience stores were the largest industries.
- Debt maturities, covenant headroom, and the ability to refinance or repay secured notes, particularly around the 2021 anticipated repayment date.
- Actual funding and returns on the $23.5 million remaining tenant commitments and subsequent property investments; confirm the impact of post-quarter ATM issuance and dilution.
- Dividend coverage against recurring cash flow, distinguishing reported earnings and non-GAAP measures from cash available for distribution.