Essential Properties Realty Trust, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The company is a REIT focused on long-term, primarily triple-net leases of single-tenant properties to middle-market businesses.
Financial and operating highlights
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $70.7 million | $59.6 million | $212.2 million | $165.2 million |
| Net income | $36.6 million | $27.6 million | $99.2 million | $66.4 million |
| Net income attributable to stockholders | $36.4 million | $27.5 million | $98.8 million | $66.1 million |
| Diluted earnings per share | $0.26 | $0.23 | $0.74 | $0.57 |
| Cash provided by operating activities | Not stated for quarter | Not stated for quarter | $154.6 million | $115.5 million |
| Cash NOI (non-GAAP) | $67.8 million | $53.2 million | $195.1 million | $149.8 million |
| AFFO (non-GAAP) | $53.5 million | $40.2 million | $153.0 million | $112.6 million |
At September 30, the portfolio comprised 1,572 investments, had 99.8% occupancy, $277.3 million of annualized base rent, a 14.0-year weighted-average remaining lease term and a 4.2x weighted-average rent coverage ratio. Portfolio operating margins are not presented as a standard margin measure in the filing.
- Balance sheet and debt: Total assets were $3.85 billion and total equity was $2.50 billion. Principal debt outstanding was $1.28 billion; net debt was $1.14 billion. The effective weighted-average debt rate, after swaps, was 3.1%, and weighted-average debt maturity was 5.5 years. The company reported $136.3 million of cash plus $7.9 million of restricted cash and $600 million of unused revolving-credit capacity.
- Cash flows and investment: Nine-month investing cash outflow was $466.0 million, principally reflecting real estate and loan investments; financing cash inflow was $395.9 million. Operating cash flow was $154.6 million. The company paid $103.0 million in dividends and distributions during the period.
Changes versus comparable periods
- Q3 revenue rose 18.6% and stockholder-attributable net income rose 32.4% year over year. Nine-month revenue increased 28.5% and stockholder-attributable net income increased 49.5%.
- Management attributed rental growth mainly to portfolio expansion and rent escalations. The portfolio grew from 1,231 rental properties at September 2021 to 1,417 at September 2022; the broader investment count, including loan-secured properties, was 1,572 at quarter-end.
- Q3 interest expense increased 10.5% year over year, reflecting higher average debt and interest rates. Nine-month interest expense rose $3.8 million; general and administrative expense also increased, partly due to share-based compensation and salaries.
- Nine-month real estate impairment expense increased to $10.5 million from $6.1 million. Net disposition gains increased to $18.1 million from $8.8 million.
- Principal debt increased from $1.174 billion at year-end 2021 to $1.280 billion at September 2022. The company issued common stock through a follow-on offering and its ATM program; weighted-average diluted shares increased to 139.9 million in Q3 from 120.3 million.
Outlook, risks and unusual items
- No formal earnings or investment guidance is provided. Management said cash from operations, cash balances, revolving-credit availability and potential capital access should be sufficient to fund operations and current commitments for the foreseeable future.
- The company expects to fund the remaining portion of $139.4 million in tenant construction and reimbursement commitments by September 30, 2023. As of October 21, 2022, it was under contract to acquire 14 properties for $49.1 million, subject to customary conditions.
- After quarter-end, the company drew the remaining $150 million available under its 2028 Term Loan, bringing that facility to $400 million. It also reported subsequent investments in 14 properties totaling $56.2 million.
- Key stated risks include tenant defaults or financial deterioration, interest-rate and refinancing exposure, real estate values and vacancies, access to debt and equity capital, economic conditions, and maintaining REIT qualification. COVID-19’s adverse impact had diminished, but its future effects remained uncertain. The company reported no material change to the risk factors in its 2021 Form 10-K.
- Unusual items include $2.1 million of nine-month debt-extinguishment loss, $10.5 million of real estate impairments, and $18.1 million of disposition gains. Interest-rate swaps generated $62.0 million of nine-month other comprehensive income; reported derivative assets were $50.7 million at quarter-end. The filing reports no material pending legal or regulatory proceedings and no defaults on debt covenants.
Investor verification points
- Assess whether acquisition-driven rental growth and tenant rent coverage can support continued occupancy and rent collection.
- Review the impairment properties, disposition gains, and non-GAAP AFFO adjustments when evaluating recurring performance.
- Verify the effects of the October 2022 $150 million term-loan draw, related hedging, future interest costs and debt maturities.
- Evaluate equity issuance and potential dilution against investment returns, dividend requirements and capital needs.
- Monitor tenant credit, construction-funding commitments, acquisition closings and the company’s stated reliance on continued capital-market access.
FFO, Core FFO, AFFO, NOI and Cash NOI are non-GAAP measures; the company cautions that they may not be comparable across REITs and are not substitutes for GAAP earnings or operating cash flow.