ESSENTIAL PROPERTIES REALTY TRUST, INC. (Form: 10-Q, Received: 08/08/2019 06:08:31)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 001-38530

Essential Properties Realty Trust, Inc.

(Exact name of Registrant as specified in its Charter)

Maryland	82-4005693
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

902 Carnegie Center Blvd., Suite 520 Princeton, New Jersey	08540
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (609) 436-0619

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $0.01 par value	EPRT	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

As of August 7, 2019, the registrant had 76,328,165 shares of common stock, $0.01 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018	2
	Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (unaudited)	3
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018 (unaudited)	4
	Consolidated Statements of Stockholders’/Members’ Equity for the three and six months ended June 30, 2019 and 2018 (unaudited)	5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65
Item 4.	Controls and Procedures	65

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	67
Item 1A.	Risk Factors	67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 3.	Defaults Upon Senior Securities	67
Item 4.	Mine Safety Disclosures	67
Item 5.	Other Information	68
Item 6.	Exhibits	68

Signatures		69

ESSENTIAL PROPERTIES REALTY TRUST, INC. AND ESSENTIAL PROPERTIES REALTY TRUST, INC. PREDECESSOR

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets

(In thousands, except share and per share data)

	June 30, 2019			December 31, 2018
	(Unaudited)
ASSETS
Investments:
Real estate investments, at cost:
Land and improvements	$	502,561		$	420,848
Building and improvements		1,038,589			885,656
Lease incentives		4,794			2,794
Construction in progress		7,079			1,325
Intangible lease assets		74,079			66,421
Total real estate investments, at cost		1,627,102			1,377,044
Less: accumulated depreciation and amortization		(69,010	)		(51,855	)
Total real estate investments, net		1,558,092			1,325,189
Loans and direct financing lease receivables, net		30,659			17,505
Real estate investments held for sale, net		2,474			—
Net investments		1,591,225			1,342,694
Cash and cash equivalents		7,816			4,236
Restricted cash		10,128			12,003
Straight-line rent receivable, net		19,610			14,255
Prepaid expenses and other assets, net		14,524			7,712
Total assets ⁽¹⁾	$	1,643,303		$	1,380,900

LIABILITIES AND EQUITY
Secured borrowings, net of deferred financing costs	$	306,553		$	506,116
Unsecured term loan, net of deferred financing costs		199,097			—
Revolving credit facility		67,000			34,000
Intangible lease liabilities, net		9,778			11,616
Dividend payable		16,917			13,189
Accrued liabilities and other payables		13,442			4,938
Total liabilities ⁽¹⁾		612,787			569,859
Commitments and contingencies (see Note 12)		—			—
Stockholders' equity:
Preferred stock, $0.01 par value; 150,000,000 authorized; none issued and outstanding as of June 30, 2019 and December 31, 2018		—			—
Common stock, $0.01 par value; 500,000,000 authorized; 57,825,460 and 43,749,092 issued and outstanding as of June 30, 2019 and December 31, 2018, respectively		578			431
Additional paid-in capital		806,376			569,407
Distributions in excess of cumulative earnings		(18,447	)		(7,659	)
Accumulated other comprehensive loss		(2,913	)		—
Total stockholders' equity		785,594			562,179
Non-controlling interests		244,922			248,862
Total equity		1,030,516			811,041
Total liabilities and equity	$	1,643,303		$	1,380,900

(1)

The consolidated balance sheets of Essential Properties Realty Trust, Inc. include assets and liabilities of consolidated variable interest entities (“VIEs”). See Notes 2 and 6. As of June 30, 2019 and December 31, 2018, with the exception of $12.7 million and $9.2 million, respectively, of dividends payable and $0.2 million of prepaid expenses and other assets, net as of June 30, 2019, all of the assets and liabilities of the Company were held by its operating partnership, a consolidated VIE.

The accompanying notes are an integral part of these consolidated financial statements.

ESSENTIAL PROPERTIES REALTY TRUST, INC. AND ESSENTIAL PROPERTIES REALTY TRUST, INC. PREDECESSOR

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Operations

(Unaudited, in thousands, except share and per share data)

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Revenues:
Rental revenue	$	32,111		$	21,554		$	62,884		$	41,647
Interest on loans and direct financing lease receivables		403			89			729			159
Other revenue, net		241			22			248			25
Total revenues		32,755			21,665			63,861			41,831

Expenses:
Interest (including $2,524 and $4,603 to related parties during the three and six months ended June 30, 2018)		5,779			8,634			12,867			16,911
General and administrative		4,737			2,987			8,925			6,343
Property expenses		645			380			1,892			727
Depreciation and amortization		10,105			7,611			19,225			14,079
Provision for impairment of real estate		481			907			1,921			2,756
Total expenses		21,747			20,519			44,830			40,816
Other operating income:
Gain on dispositions of real estate, net		3,474			2,412			4,150			3,645
Income from operations		14,482			3,558			23,181			4,660
Other (loss)/income:
Loss on repurchase of secured borrowings		(4,353	)		—			(4,353	)		—
Interest		518			28			609			64
Income before income tax expense		10,647			3,586			19,437			4,724
Income tax expense		76			87			143			117
Net income		10,571			3,499			19,294			4,607
Net income attributable to non-controlling interests		(2,620	)		(99	)		(5,214	)		(99	)
Net income attributable to stockholders and members	$	7,951		$	3,400		$	14,080		$	4,508


	Three months ended June 30, 2019			Period from June 25, 2018 to June 30, 2018			Six months ended June 30, 2019			Period from June 25, 2018 to June 30, 2018
Basic weighted average shares outstanding		57,103,676			40,976,901			51,204,733			40,976,901
Basic net income per share	$	0.14		$	0.01		$	0.27		$	0.01

Diluted weighted average shares outstanding		76,665,905			60,033,453			70,686,969			60,033,453
Diluted net income per share	$	0.14		$	0.01		$	0.27		$	0.01

The accompanying notes are an integral part of these consolidated financial statements.

ESSE NTIAL PROPERTIES REALTY TRUST, INC. AND ESSENTIAL PROPERTIES REALTY TRUST, INC. PREDECESSOR

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Net income	$	10,571		$	3,499		$	19,294		$	4,607
Other comprehensive loss:
Unrealized loss on cash flow hedges		(3,774	)		—			(3,774	)		—
Cash flow hedge gains reclassified to interest expense		(99	)		—			(99	)		—
Total other comprehensive loss:		(3,873	)		—			(3,873	)		—
Comprehensive income		6,698			3,499			15,421			4,607
Net income attributable to non-controlling interests		(2,620	)		(99	)		(5,214	)		(99	)
Adjustment for cash flow hedge losses attributable to non-controlling interests		960			—			960			—
Comprehensive income attributable to stockholders and members	$	5,038		$	3,400		$	11,167		$	4,508

The accompanying notes are an integral part of these consolidated financial statements.

ESSENTIAL PROPERTIES REALTY TRUST, INC. AND ESSENTIAL PROPERTIES REALTY TRUST, INC. PREDECESSOR

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Stockholders’/ Members’ Equity

(Unaudited, in thousands, except share data)

	Common Stock
	Number of Shares		Par Value		Additional Paid-In Capital			Distributions in Excess of Cumulative Earnings			Accumulated Other Comprehensive Income (Loss)			Class A Units		Class B Units		Class C Units		Class D Units		Total Stockholders' / Members' Equity			Non-controlling interests			Total Equity
Balance at December 31, 2018		43,749,092	$	431	$	569,407		$	(7,659	)	$	—		$	—	$	—	$	—	$	—	$	562,179		$	248,862		$	811,041
Common stock issued		14,030,000		140		245,385			—			—			—		—		—		—		245,525			—			245,525
Costs related to issuance of common stock		—		—		(10,887	)		—			—			—		—		—		—		(10,887	)		—			(10,887	)
Share-based compensation expense		46,368		—		1,007			—			—			—		—		—		—		1,007			—			1,007
Unit-based compensation expense		—		—		227			—			—			—		—		—		—		227			—			227
Dividends declared on common stock and OP Units		—		—		—			(12,143	)		—			—		—		—		—		(12,143	)		(4,002	)		(16,145	)
Net income		—		—		—			6,129			—			—		—		—		—		6,129			2,594			8,723
Balance at March 31, 2019		57,825,460		571		805,139			(13,673	)		—			—		—		—		—		792,037			247,454			1,039,491
Unrealized losses on cash flow hedges		—		—		—			—			(2,839	)		—		—		—		—		(2,839	)		(935	)		(3,774	)
Cash flow hedge gains reclassified to interest expense		—		—		—			—			(74	)		—		—		—		—		(74	)		(25	)		(99	)
Share-based compensation expense		—		7		1,021			—			—			—		—		—		—		1,028			—			1,028
Unit-based compensation expense		—		—		216			—			—			—		—		—		—		216			—			216
Dividends declared on common stock and OP Units		—		—		—			(12,725	)		—			—		—		—		—		(12,725	)		(4,192	)		(16,917	)
Net income		—		—		—			7,951			—			—		—		—		—		7,951			2,620			10,571
Balance at June 30, 2019		57,825,460	$	578	$	806,376		$	(18,447	)	$	(2,913	)	$	—	$	—	$	—	$	—	$	785,594		$	244,922		$	1,030,516

The accompanying notes are an integral part of these consolidated financial statements.

ESSENTIAL PROPERTIES REALTY TRUST, INC. AND ESSENTIAL PROPERTIES REALTY TRUST, INC. PREDECESSOR

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Stockholders’/ Members’ Equity - Continued

(Unaudited, in thousands, except share data)

	Common Stock
	Number of Shares		Par Value		Additional Paid-In Capital		Distributions in Excess of Cumulative Earnings		Accumulated Other Comprehensive Income (Loss)		Class A Units		Class B Units		Class C Units		Class D Units		Total Stockholders' / Members' Equity		Non-controlling interests		Total Equity
Balance at December 31, 2017		—	$	—	$	—	$	—	$	—	$	86,668	$	574	$	94,064	$	96	$	181,402	$	—	$	181,402
Contributions		—		—		—		—		—		50,000		—		—		—		50,000		—		50,000
Unit-based compensation expense		—		—		—		—		—		—		193		—		49		242		—		242
Net income		—		—		—		—		—		528		—		581		—		1,109		—		1,109
Balance at March 31, 2018		—		—		—		—		—		137,196		767		94,645		145		232,753		—		232,753
Unit-based compensation expense		—		—		—		—		—		—		180		—		21		201		—		201
Net income		—		—		—		—		—		1,886		—		1,290		—		3,176		—		3,176
Balance at June 24, 2018		—		—		—