Essential Properties(EPRT) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for Essential Properties Realty Trust, Inc. as of June 30, 2023, including balance sheets, statements of operations, and cash flows Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $4,312,822 | $4,000,033 | | Net Investments | $4,133,233 | $3,779,078 | | Cash and cash equivalents | $14,108 | $62,345 | | Total Liabilities | $1,505,562 | $1,503,262 | | Unsecured term loans, net | $1,026,053 | $1,025,492 | | Senior unsecured notes, net | $395,566 | $395,286 | | Total Equity | $2,807,260 | $2,496,771 | Consolidated Statement of Operations Highlights (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $86,516 | $71,446 | $170,204 | $141,567 | | Rental revenue | $81,819 | $67,089 | $159,991 | $133,201 | | Net Income | $53,000 | $35,812 | $96,056 | $62,630 | | Net Income Attributable to Stockholders | $52,802 | $35,653 | $95,698 | $62,352 | | Diluted Net Income Per Share | $0.35 | $0.27 | $0.64 | $0.48 | Consolidated Statement of Cash Flows Highlights (Six months ended June 30, in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $119,086 | $101,987 | | Net cash used in investing activities | ($388,826) | ($325,848) | | Investment in real estate, including capital expenditures | ($447,244) | ($322,707) | | Proceeds from sales of real estate, net | $78,897 | $44,514 | | Net cash provided by financing activities | $212,348 | $190,317 | | Proceeds from issuance of common stock, net | $296,567 | $190,577 | | Dividends paid | ($80,581) | ($66,943) | | Net decrease in cash | ($57,392) | ($33,544) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes the company's financial condition, operations, and liquidity, including business overview and non-GAAP measures Overview The company is an internally managed REIT focused on single-tenant, net-leased properties, with a diversified portfolio Portfolio Snapshot as of June 30, 2023 | Metric | Value | | :--- | :--- | | Properties (incl. mortgage collateral) | 1,742 | | Occupancy | 99.9% | | Annualized Base Rent | $328.7 million | | Tenants | 360 | | Concepts | 560 | | Industries | 16 | | States | 48 | | Weighted Average Lease Term | 14.0 years | | Weighted Average Rent Coverage Ratio | 4.1x | - The company's investment strategy focuses on diversification, with a goal that no single tenant will contribute more than 5% of annualized base rent over time. As of June 30, 2023, the largest tenant contributed 3.6%[217] - A significant portion of investments are sale-leaseback transactions, accounting for approximately 99.1% of investments in Q2 2023[219] Our Business and Growth Strategies The company maximizes stockholder value by growing a diversified portfolio through disciplined underwriting and sale-leaseback transactions - Focus on originating sale-leaseback transactions, which accounted for 89.0% of the portfolio's annualized base rent (excluding the Initial Portfolio) as of June 30, 2023[232] - Emphasize investments in properties leased to tenants in service-oriented or experience-based businesses, such as car washes, quick-service restaurants, and early childhood education, which are considered more insulated from e-commerce pressures[234] - Maintain a prudent balance sheet, targeting a net debt to annualized adjusted EBITDAre ratio of less than six times over time[237] Historical Investment and Disposition Activity This section summarizes investment and disposition activities, highlighting Q2 2023 investment volume of $277.4 million Quarterly Investment Activity (dollars in thousands) | Quarter Ended | Investment Activity | Cash Cap Rate | | :--- | :--- | :--- | | June 30, 2023 | $277,361 | 7.4% | | March 31, 2023 | $207,147 | 7.6% | | December 31, 2022 | $328,370 | 7.5% | | September 30, 2022 | $195,454 | 7.1% | Quarterly Disposition Activity (dollars in thousands) | Quarter Ended | Disposition Volume | Cash Cap Rate (Leased) | | :--- | :--- | :--- | | June 30, 2023 | $41,736 | 6.2% | | March 31, 2023 | $37,161 | 6.1% | | December 31, 2022 | $75,522 | 6.9% | | September 30, 2022 | $35,513 | 6.2% | Liquidity and Capital Resources As of June 30, 2023, the company had $14.1 million cash and $600.0 million available credit, with $159.1 million in future commitments - As of June 30, 2023, the company had $14.1 million of cash and cash equivalents and full availability of $600.0 million under its Revolving Credit Facility[134][244] - The company has a future funding commitment of approximately $159.1 million for tenant construction and development, which it expects to fund by June 30, 2024[246] Contractual Obligations as of June 30, 2023 (in thousands) | Obligation | Total | Due 2024 - 2025 | Due 2026 - 2027 | Thereafter | | :--- | :--- | :--- | :--- | :--- | | Unsecured term loans | $1,030,000 | $200,000 | $430,000 | $400,000 | | Senior unsecured notes | $400,000 | $0 | $0 | $400,000 | | Tenant construction financing | $159,070 | $159,070 | $0 | $0 | | Operating lease obligations | $20,998 | $2,585 | $1,435 | $16,263 | | Total | $1,610,068 | $361,655 | $431,435 | $816,263 | Our Real Estate Investment Portfolio As of June 30, 2023, the diversified portfolio includes 1,742 properties generating $328.7 million in annualized base rent Top 5 Tenants by Annualized Base Rent (as of June 30, 2023) | Tenant | Concept | % of Annualized Base Rent | | :--- | :--- | :--- | | EquipmentShare.com Inc. | EquipmentShare | 3.6% | | Mdsfest, Inc. | Festival Foods | 1.7% | | The Track Holdings, LLC | Five Star | 1.7% | | Captain D's, LLC | Captain D's | 1.7% | | CNP Holdings, LLC | Chicken N Pickle | 1.7% | Top 5 Industries by Annualized Base Rent (as of June 30, 2023) | Tenant Industry | % of Annualized Base Rent | | :--- | :--- | | Car Washes | 15.6% | | Early Childhood Education | 12.0% | | Quick Service | 10.8% | | Medical / Dental | 10.6% | | Automotive Service | 8.2% | - The portfolio has a long-duration lease profile, with a weighted average remaining lease term of 14.0 years. Only 5.2% of annualized base rent is attributable to leases expiring before January 1, 2028[287] Results of Operations Q2 2023 total revenues increased 21.1% to $86.5 million, driven by portfolio growth and reduced impairment Comparison of Q2 2023 vs Q2 2022 (in thousands) | Item | Q2 2023 | Q2 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Rental Revenue | $81,819 | $67,089 | +22.0% | | Total Revenues | $86,516 | $71,446 | +21.1% | | Provision for impairment | $802 | $6,258 | -87.2% | | Interest Expense | $12,071 | $9,190 | +31.3% | | Net Income | $53,000 | $35,812 | +47.9% | Comparison of H1 2023 vs H1 2022 (in thousands) | Item | H1 2023 | H1 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Rental Revenue | $159,991 | $133,201 | +20.1% | | Total Revenues | $170,204 | $141,567 | +20.2% | | Provision for impairment | $1,479 | $10,193 | -85.5% | | Interest Expense | $24,204 | $18,350 | +31.9% | | Net Income | $96,056 | $62,630 | +53.4% | Non-GAAP Financial Measures This section reconciles non-GAAP metrics including FFO, Core FFO, and AFFO, highlighting Q2 2023 AFFO at $61.9 million Reconciliation of Net Income to FFO and AFFO (in thousands) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $53,000 | $35,812 | $96,056 | $62,630 | | FFO | $65,972 | $54,024 | $128,589 | $103,406 | | Core FFO | $66,144 | $54,024 | $127,885 | $105,544 | | AFFO | $61,880 | $50,617 | $120,136 | $99,552 | Reconciliation of Net Income to EBITDAre (in thousands) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $53,000 | $35,812 | $96,056 | $62,630 | | EBITDA | $89,524 | $67,321 | $168,052 | $123,895 | | EBITDAre | $77,779 | $63,485 | $152,070 | $122,336 | - Annualized Adjusted EBITDAre for the three months ended June 30, 2023 was calculated to be $331.7 million[332] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed by matching long-term leases with fixed-rate debt - The company's primary market risk exposure is to interest rate changes[338] - The company has effectively fixed the interest rates on its variable-rate 2024, 2027, and 2028 Term Loans by entering into interest rate swap agreements[340] Fair Value of Fixed-Rate Debt as of June 30, 2023 (in thousands) | Debt Instrument | Carrying Value | Estimated Fair Value | | :--- | :--- | :--- | | Senior unsecured notes | $400,000 | $299,760 | Controls and Procedures Management concluded that disclosure controls were effective as of June 30, 2023, with no material changes in internal control - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[347] - No material changes were identified in the company's internal control over financial reporting during the quarter[348] PART II. OTHER INFORMATION Legal Proceedings The company is subject to ordinary course legal proceedings, not expected to materially affect its business or financial condition - Management does not believe that the resolution of any current legal matters, individually or in the aggregate, will have a material adverse effect on the company[351] Risk Factors No material changes to risk factors from the Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to risk factors from the Annual Report on Form 10-K for the year ended December 31, 2022[352] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[353] Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[354] Mine Safety Disclosures This item is not applicable to the company - Not applicable[355] Other Information The President and CEO adopted a 10b5-1 Stock Trading Plan for the potential sale of approximately 160,000 shares - The President and CEO, Peter M. Mavoides, adopted a 10b5-1 Stock Trading Plan on June 18, 2023, for the potential sale of approximately 160,000 shares of common stock[356] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL documents - Exhibits filed include CEO and CFO certifications (Rule 302 and Section 906) and Inline XBRL data files[358]