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Section 1: 10-Q (10-Q)

eprt-10q_20190331.htm

 

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 March 31, 2019

OR

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 May 8, 2019, the registrant had 57,825,460 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 March 31, 2019 (unaudited) and December 31, 2018

1

 

Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2019 and 2018 (unaudited)

2

 

Consolidated Statements of Stockholders’/Members’ Equity for the three months ended March 31, 2019 and 2018 (unaudited)

3

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (unaudited)

4

 

Notes to Consolidated Financial Statements (unaudited)

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

34

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

54

Item 4.

Controls and Procedures

54

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

55

Item 1A.

Risk Factors

55

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

Item 3.

Defaults Upon Senior Securities

55

Item 4.

Mine Safety Disclosures

55

Item 5.

Other Information

55

Item 6.

Exhibits

55

 

 

 

Signatures

57

 

 

i


 

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)

 

 

March 31, 2019

 

 

December 31, 2018

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Real estate investments, at cost:

 

 

 

 

 

 

 

Land and improvements

$

451,459

 

 

$

420,848

 

Building and improvements

 

956,497

 

 

 

885,656

 

Lease incentives

 

4,794

 

 

 

2,794

 

Construction in progress

 

2,460

 

 

 

1,325

 

Intangible lease assets

 

69,132

 

 

 

66,421

 

Total real estate investments, at cost

 

1,484,342

 

 

 

1,377,044

 

Less: accumulated depreciation and amortization

 

(60,230

)

 

 

(51,855

)

Total real estate investments, net

 

1,424,112

 

 

 

1,325,189

 

Loans and direct financing lease receivables, net

 

11,943

 

 

 

17,505

 

Real estate investments held for sale, net

 

3,765

 

 

 

 

Net investments

 

1,439,820

 

 

 

1,342,694

 

Cash and cash equivalents

 

109,113

 

 

 

4,236

 

Restricted cash

 

4,910

 

 

 

12,003

 

Straight-line rent receivable, net

 

16,615

 

 

 

14,255

 

Prepaid expenses and other assets, net

 

10,072

 

 

 

7,712

 

Total assets (1)

$

1,580,530

 

 

$

1,380,900

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Secured borrowings, net of deferred financing costs

$

504,727

 

 

$

506,116

 

Revolving credit facility

 

 

 

 

34,000

 

Intangible lease liabilities, net

 

10,074

 

 

 

11,616

 

Dividend payable

 

16,145

 

 

 

13,189

 

Accrued liabilities and other payables

 

10,093

 

 

 

4,938

 

Total liabilities (1)

 

541,039

 

 

 

569,859

 

Commitments and contingencies (see Note 11)

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 150,000,000 authorized; none issued and outstanding as of March 31, 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 March 31, 2019 and December 31, 2018, respectively

 

571

 

 

 

431

 

Additional paid-in capital

 

805,139

 

 

 

569,407

 

Distributions in excess of cumulative earnings

 

(13,673

)

 

 

(7,659

)

Total stockholders' equity

 

792,037

 

 

 

562,179

 

Non-controlling interests

 

247,454

 

 

 

248,862

 

Total equity

 

1,039,491

 

 

 

811,041

 

Total liabilities and equity

$

1,580,530

 

 

$

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 5. As of March 31, 2019 and December 31, 2018, with the exception of $12.1 million and $9.2 million, respectively, of dividends payable, all of the assets and liabilities of the Company were held by its operating partnership, a consolidated VIE.

1


 

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

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Operations and Comprehensive Income

(In thousands, except share and per share data)

(Unaudited)

 

 

 

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

Rental revenue

 

$

30,774

 

 

$

20,093

 

Interest on loans and direct financing lease receivables

 

 

326

 

 

 

70

 

Other revenue

 

 

7

 

 

 

4

 

Total revenues

 

 

31,107

 

 

 

20,167

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

Interest (including $2,079 to related parties during the three months ended March 31, 2018)

 

 

7,089

 

 

 

8,276

 

General and administrative

 

 

4,188

 

 

 

3,356

 

Property expenses

 

 

1,247

 

 

 

347

 

Depreciation and amortization

 

 

9,120

 

 

 

6,468

 

Provision for impairment of real estate

 

 

1,440

 

 

 

1,849

 

Total expenses

 

 

23,084

 

 

 

20,296

 

Other operating income:

 

 

 

 

 

 

 

 

Gain on dispositions of real estate, net

 

 

676

 

 

 

1,232

 

Income from operations

 

 

8,699

 

 

 

1,103

 

Other income:

 

 

 

 

 

 

 

 

Interest

 

 

91

 

 

 

36

 

Income before income tax expense

 

 

8,790

 

 

 

1,139

 

Income tax expense

 

 

67

 

 

 

30

 

Net income

 

 

8,723

 

 

 

1,109

 

Net income attributable to non-controlling interests

 

 

(2,594

)

 

 

 

Net income attributable to stockholders and members

 

 

6,129

 

 

 

1,109

 

Comprehensive income attributable to stockholders and members

 

$

6,129

 

 

$

1,109

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

45,240,247

 

 

 

 

 

Basic net income per share

 

$

0.13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

 

64,640,054

 

 

 

 

 

Diluted net income per share

 

$

0.13

 

 

 

 

 

 

 

 

2


 

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

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

3


 

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

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

 

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

8,723

 

 

$

1,109

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

9,120

 

 

 

6,468

 

Amortization of lease incentive

 

 

57

 

 

 

38

 

Amortization of above/below market leases and right of use assets, net

 

 

171

 

 

 

138

 

Amortization of deferred financing costs and other assets

 

 

816

 

 

 

576

 

Provision for impairment of real estate

 

 

1,440

 

 

 

1,849

 

Gain on dispositions of real estate, net

 

 

(676

)

 

 

(1,232

)

Straight-line rent receivable

 

 

(2,903

)

 

 

(1,651

)

Equity-based compensation expense

 

 

1,242

 

 

 

178

 

Adjustment to rental revenue for tenant credit/allowance for doubtful accounts

 

 

4

 

 

 

53

 

Changes in other assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(299

)

 

 

(1,924

)

Accrued liabilities and other payables

 

 

(713

)

 

 

(381

)

Net cash provided by operating activities

 

 

16,982

 

 

 

5,221

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sales of investments, net

 

 

10,481

 

 

 

7,722

 

Principal collections on loans and direct financing lease receivables

 

 

21

 

 

 

18

 

Investments in loans receivable

 

 

(207

)

 

 

 

Deposits for prospective real estate investments

 

 

1,988

 

 

 

36

 

Investment in real estate

 

 

(113,620

)

 

 

(59,071

)

Investment in construction in progress

 

 

(1,135

)

 

 

(5,101

)

Lease incentives paid

 

 

(2,000

)

 

 

 

Capital expenditures

 

 

(1,276

)

 

 

 

Net cash used in investing activities

 

 

(105,748

)

 

 

(56,396

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of notes payable to related parties

 

 

 

 

 

45,000

 

Payments of principal on notes payable to related parties

 

 

 

 

 

(50,000

)

Repayments of secured borrowings

 

 

(1,965

)

 

 

(2,066

)

Borrowings under revolving credit facility

 

 

52,000

 

 

 

 

Repayments under revolving credit facility

 

 

(86,000

)

 

 

 

Deferred financing costs

 

 

 

 

 

(18

)

Capital contributions by members in Predecessor

 

 

 

 

 

50,000

 

Proceeds from issuance of common stock, net

 

 

235,704

 

 

 

 

Dividends paid

 

 

(13,189

)

 

 

 

Net cash provided by financing activities

 

 

186,550

 

 

 

42,916

 

Net increase (decrease) in cash and cash equivalents and restricted cash

 

 

97,784

 

 

 

(8,259

)

Cash and cash equivalents and restricted cash, beginning of period

 

 

16,239

 

 

 

19,430

 

Cash and cash equivalents and restricted cash, end of period

 

$

114,023

 

 

$

11,171

 

Reconciliation of cash and cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

109,113

 

 

$

1,842

 

Restricted cash

 

 

4,910

 

 

 

9,329

 

Cash and cash equivalents and restricted cash, end of period

 

$

114,023

 

 

$

11,171

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

6,299

 

 

$

7,700

 

Cash paid for income taxes

 

 

 

 

 

24

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Reclassification from construction in progress upon project completion

 

$

 

 

$

1,567

 

Non-cash investments in real estate and loan receivable activity

 

 

5,748

 

 

 

 

Lease liabilities arising from the recognition of right of use assets

 

 

4,822

 

 

 

 

Payable and accrued offering costs

 

 

1,066

 

 

 

 

Underwriters discount on capital raised through issuance of common stock

 

 

9,821

 

 

 

 

Payable and accrued deferred financing costs

 

 

67

 

 

 

 

Dividends declared

 

 

16,145

 

 

 

 

 

4


 

Notes to Consolidated Financial Statements

March 31, 2019

1. Organization

Essential Properties Realty Trust, Inc. (“EPRT Inc.” or the “Company”) is an internally managed real estate company that acquires, owns and manages primarily single-tenant properties that are net leased on a long-term basis to middle-market companies operating service-oriented or experience-based businesses. EPRT Inc. has a diversified portfolio that focuses on properties leased to tenants in businesses such as restaurants (including quick service, casual and family dining), car washes, automotive services, medical services, convenience stores, entertainment, early childhood education and health and fitness. EPRT Inc. acquires and leases freestanding, single-tenant commercial real estate facilities where a tenant services its customers and conducts activities that are essential to the generation of the tenant’s sales and profits.

EPRT Inc. was organized on January 12, 2018 as a Maryland corporation and intends to qualify to be taxed as a real estate investment trust (“REIT”) beginning with its taxable year ended December 31, 2018. On June 25, 2018, EPRT Inc. completed its initial public offering (the “IPO”) of 32,500,000 shares of common stock, $0.01 par value per share, at an initial public offering price of $14.00 per share, pursuant to a registration statement on Form S-11 (File No. 333-225215), filed with the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”). On July 24, 2018, EPRT Inc. issued an additional 2,772,191 shares of common stock at the initial public offering price of $14.00 per share pursuant to the partial exercise of an option granted to the underwriters of its IPO. Net proceeds from the IPO and the issuance of shares to underwriters, after deducting underwriting discounts and commissions and other expenses, were $458.7 million. The common stock of EPRT Inc. is listed on the New York Stock Exchange under the ticker symbol “EPRT”.

Prior to the completion of the IPO, a number of formation transactions (the “Formation Transactions”) took place that were designed to facilitate the completion of the IPO. Among other things, on June 20, 2018, Essential Properties Realty Trust LLC (“EPRT LLC”) converted from a Delaware limited liability company into a Delaware limited partnership, changed its name to Essential Properties, L.P. (the “Operating Partnership”) and became the subsidiary through which EPRT Inc. holds substantially all of its assets and conducts its operations. Prior to the completion of the Formation Transactions, EPRT LLC was a wholly owned subsidiary of EPRT Holdings LLC (“EPRT Holdings” and, together with EPRT LLC, the “Predecessor”), and EPRT Holdings received 17,913,592 units of limited partnership interest in the Operating Partnership (“OP Units”) in connection with EPRT LLC’s conversion into a Delaware limited partnership. Essential Properties OP G.P., LLC, a wholly owned subsidiary of EPRT Inc., became the sole general partner of the Operating Partnership. The Formation Transactions were accounted for as a reorganization of entities under common control in the consolidated financial statements and the assets and liabilities of the Predecessor were recorded by EPRT Inc. at their historical carrying amounts.

Concurrent with the completion of the IPO, EPRT Inc. received an additional $125.0 million investment from an affiliate of Eldridge Industries, LLC (“Eldridge”) in private placements (the “Concurrent Private Placement”) of 7,785,611 shares of EPRT Inc.’s common stock and 1,142,960 OP Units. EPRT Inc. contributed the net proceeds from the issuance of the 43,057,802 shares of common stock in its IPO (inclusive of the shares issued pursuant to the partial exercise by the underwriters of their option to purchase additional shares) and the Concurrent Private Placement of common stock to Eldridge to the Operating Partnership in exchange for a like number of OP Units.

On March 18, 2019, EPRT Inc. completed a follow-on offering (the “Follow-On Offering”) of 14,030,000 shares of common stock, $0.01 par value per share, including 1,830,000 shares of common stock purchased by the underwriters pursuant to an option to purchase additional shares, at an offering price of $17.50 per share, pursuant to registration statements on Form S-11 (File Nos. 333-230188 and 333-230252) filed with the SEC under the Securities Act. Net proceeds from the Follow-On Offering, after deducting underwriting discounts and commissions and other expenses, were $234.6 million.

The Predecessor

EPRT LLC was formed on March 30, 2016 as a Delaware limited liability company by its initial sole member, SCF Funding LLC (the “Parent”). EPRT LLC commenced operations on March 30, 2016 and the affairs of EPRT LLC were managed by Stonebriar Finance Holdings LLC (the “Manager”). The Parent and Manager were ultimately wholly owned through a series of Delaware limited liability companies by Eldridge. EPRT LLC’s operating agreement (the “EPRT LLC Operating Agreement”) provided certain limitations on the liability of the Parent and the Manager. These limitations

5


 

included 1) that neither the Parent nor the Manager shall be liable for the debts, obligations, or liabilities of EPRT LLC solely by reason of being a member or manager of EPRT LLC, 2) that neither the Parent nor the Manager shall be liable to EPRT LLC or to any member of EPRT LLC or other person or entity who may become party to the EPRT LLC Operating Agreement for any breach of the EPRT LLC Operating Agreement arising under or in connection with the EPRT LLC Operating Agreement except for any act or omission made in bad faith, and 3) EPRT LLC indemnifies the Parent, Manager and officers from and against all losses, claims, damages, liabilities, costs and expenses except those resulting primarily from bad faith of the indemnitee.

On January 31, 2017, EPRT LLC received additional capital contributions from Stonebriar Holdings LLC (“Stonebriar Holdings”) and members of EPRT LLC’s management (“EPRT Management”), and issued four classes of equity units: Class A, Class B, Class C and Class D. The Class A and Class C units have voting rights while the Class B and D units do not have voting rights. After these equity contributions, the Parent owned approximately 52.3% of EPRT LLC, Stonebriar Holdings owned approximately 45.7% and EPRT Management owned approximately 2.0%.

On December 31, 2017, EPRT LLC reorganized (the “EPRT LLC Reorganization”) and the holders of the Class A, Class B, Class C and Class D units contributed all of their interests in EPRT LLC to EPRT Holdings in exchange for interests in EPRT Holdings with the same rights as the interests they held in EPRT LLC. The EPRT LLC Reorganization lacked economic substance, as the newly issued units of EPRT Holdings have the same rights and privileges as the previously issued units of EPRT LLC and there was no change in ownership percentages of the individual unitholders. As of December 31, 2017, EPRT LLC became a wholly owned subsidiary of EPRT Holdings. The EPRT LLC Reorganization was accounted for as a reorganization of entities under common control in the Predecessor’s consolidated financial statements and the assets and liabilities of EPRT LLC were recorded by EPRT Holdings at their historical carrying amounts.

2. Summary of Significant Accounting Policies

Basis of Accounting

The accompanying unaudited consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the rules and regulations of the SEC. In the opinion of management, all adjustments of a normal recurring nature necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2019 and 2018 are not necessarily indicative of the results for the full year. These unaudited financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as filed with the SEC in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Reclassification

Certain amounts previously reported in the consolidated financial statements have been reclassified in the accompanying consolidated financial statements to conform to the current period’s presentation of gain on dispositions of real estate, net on the consolidated statement of operations and comprehensive income for the three months ended March 31, 2019. The Company has presented gain on dispositions of real estate, net as a component of income from operations in order to present gains and losses on dispositions of properties in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (ASC) 360-10-45-5. This change in presentation was made for the prior period as the SEC has eliminated Rule 3-15(a) of Regulation S-X, which previously had required the Company to present gains and losses on sale of properties outside of continuing operations in the income statement.

Additionally, certain amounts previously reported in the consolidated statements of operations and comprehensive income have been reclassified to conform to the current period’s presentation of rental revenue (due to the adoption of the new lease accounting standard, as discussed further below), interest income and income tax expense.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and subsidiaries in which the Company has a controlling financial interest. All intercompany accounts and transactions have been eliminated in consolidation. As of March 31, 2019 and December 31, 2018, the Company held a 75.2% and 69.7% ownership interest in the Operating Partnership and the consolidated financial statements include the financial statements of the Operating Partnership as of these dates.

6


 

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Real Estate Investments

Investments in real estate are carried at cost less accumulated depreciation and impairment losses, if any. The cost of investments in real estate reflects their purchase price or development cost. The Company evaluates each acquisition transaction to determine whether the acquired asset meets the definition of a business. Under Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, an acquisition does not qualify as a business when there is no substantive process acquired or substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets or the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. Transaction costs related to acquisitions that are asset acquisitions are capitalized as part of the cost basis of the acquired assets, while transaction costs for acquisitions that are deemed to be acquisitions of a business are expensed as incurred. Improvements and replacements are capitalized when they extend the useful life or improve the productive capacity of the asset. Costs of repairs and maintenance are expensed as incurred.

The Company allocates the purchase price of acquired properties accounted for as asset acquisitions to tangible and identifiable intangible assets or liabilities based on their relative fair values. Tangible assets may include land, site improvements and buildings. Intangible assets may include the value of in-place leases and above- and below-market leases and other identifiable intangible assets or liabilities based on lease or property specific characteristics.

The Company incurs various costs in the leasing and development of its properties. Amounts paid to tenants that incentivize them to extend or otherwise amend an existing lease or to sign a new lease agreement are capitalized to lease incentive on the Company’s consolidated balance sheets. Tenant improvements are capitalized to building and improvements within the Company’s consolidated balance sheets. Costs incurred which are directly related to properties under development, which include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs and real estate taxes and insurance, are capitalized during the period of development as construction in progress. After the determination is made to capitalize a cost, it is allocated to the specific component of a project that benefited. Determination of when a development project commences and capitalization begins, and when a development project has reached substantial completion and is available for occupancy and capitalization must cease, involves a degree of judgment. The Company does not engage in speculative real estate development. The Company does, however, opportunistically agree to reimburse certain of its tenants for development costs at its properties in exchange for contractually-specified rent that generally increases proportionally with its funding.

The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases based on the specific characteristics of each tenant’s lease. The Company estimates the cost to execute leases with terms similar to the remaining lease terms of the in-place leases, including leasing commissions, legal and other related expenses. Factors the Company considers in this analysis include an estimate of the carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses, and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from six to 12 months. The fair value of above- or below-market leases is recorded based on the net present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between the contractual amount to be paid pursuant to the in-place lease and the Company’s estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining non-cancelable term of the lease including any below-market fixed rate renewal options for below-market leases.

In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including real estate valuations prepared by independent valuation firms. The Company also considers information and other factors including market conditions, the industry that the tenant operates in, characteristics of the real estate, e.g., location, size, demographics, value and comparative rental rates, tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business. Additionally, the Company considers

7


 

information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. The Company uses the information obtained as a result of its pre-acquisition due diligence as part of its consideration of the accounting standard governing asset retirement obligations and, when necessary, will record an asset retirement obligation as part of the purchase price allocation.

Real estate investments that are intended to be sold are designated as “held for sale” on the consolidated balance sheets at the lesser of carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Real estate investments are no longer depreciated when they are classified as held for sale. If the disposal, or intended disposal, of certain real estate investments represents a strategic shift that has had or will have a major effect on the Company’s operations and financial results, the operations of such real estate investments would be presented as discontinued operations in the consolidated statements of operations and comprehensive income for all applicable periods.

Depreciation and Amortization

Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings and 15 years for site improvements. During the three months ended March 31, 2019 and 2018, the Company recorded $7.7 million and $5.2 million, respectively, of depreciation on its real estate investments.

Lease incentives are amortized on a straight-line basis as a reduction of rental income over the remaining non-cancellable terms of the respective leases. If a tenant terminates its lease, the unamortized portion of the lease incentive is charged to rental revenue.

Construction in progress is not depreciated until the development has reached substantial completion.

Tenant improvements are depreciated over the non-cancellable term of the related lease or their estimated useful life, whichever is shorter.

Capitalized above-market lease values are amortized on a straight-line basis as a reduction of rental revenue over the remaining non-cancellable terms of the respective leases. Capitalized below-market lease values are accreted on a straight-line basis as an increase to rental revenue over the remaining non-cancellable terms of the respective leases including any below-market fixed rate renewal option periods.

Capitalized above-market ground lease values are accreted as a reduction of property expenses over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property expenses over the remaining terms of the respective leases and any expected below-market renewal option periods where renewal is considered probable.

The value of in-place leases, exclusive of the value of above-market and below-market lease intangibles, is amortized to depreciation and amortization expense on a straight-line basis over the remaining periods of the respective leases.

If a tenant terminates its lease, the unamortized portion of each intangible, including in-place lease values, is charged to depreciation and amortization expense, while above- and below-market lease adjustments are recorded within rental revenue in the consolidated statements of operations and comprehensive income.

Loans Receivable

The Company holds its loans receivable for long-term investment. Loans receivable are carried at amortized cost, including related unamortized discounts or premiums, if any. The Company recognizes interest income on loans receivable using the effective-interest method applied on a loan-by-loan basis. Direct costs associated with originating loans are offset against any related fees received and the balance, along with any premium or discount, is deferred and amortized as an adjustment to interest income over the term of the related loan receivable using the effective-interest method.

The Company periodically evaluates the collectability of its loans receivable, including accrued interest, by analyzing the underlying property‑level economics and trends, collateral value and quality and other relevant factors in determining the adequacy of its allowance for loan losses. A loan is determined to be impaired when, in management’s judgment based on current information and events, it is probable that the Company will be unable to collect all amounts due

8


 

according to the contractual terms of the loan agreement. Specific allowances for loan losses are provided for impaired loans on an individual loan basis in the amount by which the carrying value exceeds the estimated fair value of the underlying collateral less disposition costs. As of March 31, 2019 and December 31, 2018, the Company had no allowance for loan losses recorded in its consolidated financial statements.

Direct Financing Lease Receivables

Certain of the Company’s real estate investment transactions are accounted for as direct financing leases. The Company records the direct financing lease receivables at their net investment, determined as the aggregate minimum lease payments and the estimated non-guaranteed residual value of the leased property less unearned income. The unearned income is recognized over the life of the related lease contracts so as to produce a constant rate of return on the net investment in the asset. The Company’s investment in direct financing lease receivables is reduced over the applicable lease term to its non-guaranteed residual value by the portion of rent allocated to the direct financing lease receivables. Subsequent to the adoption of ASC 842, Leases (“ASC 842”), existing direct financing lease receivables will continue to be accounted for in the same manner, unless the underlying contracts are modified.

If and when an investment in direct financing lease receivables is identified for impairment evaluation, the Company will apply the guidance in both ASC 310, Receivables (“ASC 310”) and ASC 840, Leases (“ASC 840”) (prior to January 1, 2019) and ASC 842. Under ASC 310, the lease receivable portion of the net investment in a direct financing lease receivable is evaluated for impairment when it becomes probable the Company, as the lessor, will be unable to collect all rental payments associated with the Company’s investment in the direct financing lease receivable. Under ASC 840 and ASC 842, the Company reviews the estimated non-guaranteed residual value of a leased property at least annually. If the review results in a lower estimate than had been previously established, the Company determines whether the decline in estimated non-guaranteed residual value is other than temporary. If a decline is judged to be other than temporary, the accounting for the transaction is revised using the changed estimate and the resulting reduction in the net investment in direct financing lease receivables is recognized by the Company as a loss in the period in which the estimate is changed. As of March 31, 2019 and December 31, 2018, the Company determined that none of its direct financing lease receivables were impaired.

Impairment of Long-Lived Assets

If circumstances indicate that the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. Impairment assessments have a direct impact on the consolidated statements of operations and comprehensive income because recording an impairment loss results in an immediate negative adjustment to the consolidated statements of operations and comprehensive income. During the three months ended March 31, 2019 and 2018, the Company recorded a provision for impairment of real estate of $1.4 million and $1.8 million, respectively.

Cash and Cash Equivalents

Cash and cash equivalents includes cash in the Company’s bank accounts. The Company considers all cash balances and highly liquid investments with original maturities of three months or less to be cash and cash equivalents. The Company deposits cash with high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to an insurance limit. As of March 31, 2019 and December 31, 2018, the Company had deposits of $109.1 million and $4.2 million, respectively, of which $108.9 million and $4.0 million, respectively, were in excess of the amount insured by the FDIC. Although the Company bears risk to amounts in excess of those insured by the FDIC, it does not anticipate any losses as a result.

Restricted Cash

Restricted cash consists of cash held with the trustee for the Company’s Master Trust Funding Program (as defined in Note 5—Secured Borrowings). This restricted cash is used to make principal and interest payments on the Company’s

9


 

secured borrowings, to pay trust expenses and to acquire future real estate investments which will be pledged as collateral under the Master Trust Funding Program. See Note 5—Secured Borrowings for further discussion.

Adjustment to Rental Revenue for Tenant Credit/Allowance for Doubtful Accounts

The Company continually reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. Prior to January 1, 2019, if the collectability of a receivable was in doubt, the accounts receivable and straight-line rent receivable balances were reduced by an allowance for doubtful accounts on the consolidated balance sheets or a direct write-off of the receivable was recorded in the consolidated statements of operations. The provision for doubtful accounts was included in property expenses in the Company’s consolidated statements of operations and comprehensive income. If the accounts receivable balance or straight-line rent receivable balance was subsequently deemed to be uncollectible, such receivable amounts were written-off to the allowance for doubtful accounts.

As of January 1, 2019, if the assessment of the collectability of substantially all payments due under a lease changes from probable to not probable, any difference between the rental revenue recognized to date and the lease payments that have been collected is recognized as a current period adjustment to rental revenue in the consolidated statements of operations and comprehensive income.

As of March 31, 2019 and December 31, 2018, the Company recorded an allowance for doubtful accounts of $0.2 million related to base rent receivable and recorded no allowance for doubtful accounts related to straight-line rent receivable. For the three months ended March 31, 2019, the Company recognized a current period adjustment to rental revenue of less than $0.1 million.

Deferred Financing Costs

Financing costs related to establishing the Company’s Revolving Credit Facility (as defined below) were deferred and are being amortized as an increase to interest expense in the consolidated statements of operations and comprehensive income over the term of the facility and are reported as a component of prepaid expenses and other assets, net on the consolidated balance sheets.

Financing costs related to the issuance of the Company’s secured borrowings under the Master Trust Funding Program (as defined below) were deferred and are being amortized as an increase to interest expense in the consolidated statements of operations and comprehensive income over the term of the related debt instrument and are reported as a reduction of the related debt balance on the consolidated balance sheets.

Fair Value Measurement

The Company estimates fair value of financial and non-financial assets and liabilities based on the framework established in fair value accounting guidance. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The hierarchy described below prioritizes inputs to the valuation techniques used in measuring the fair value of assets and liabilities. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs to be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1—Quoted prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date.

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

Level 3—Unobservable inputs that reflect the Company’s own assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

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Revenue Recognition

The Company’s rental revenue is primarily rent received from tenants. Rent from tenants is recorded in accordance with the terms of each lease on a straight-line basis over the non-cancellable initial term of the lease from the later of the date of the commencement of the lease or the date of acquisition of the property subject to the lease. Rental revenue recognition begins when the tenant controls the space and continues through the term of the related lease. Because substantially all of the leases provide for rental increases at specified intervals, the Company records a straight-line rent receivable and recognizes revenue on a straight-line basis through the expiration of the non-cancelable term of the lease. The Company takes into account whether the collectability of rents is reasonably assured in determining the amount of straight-line rent to record.

Generally, the Company’s leases provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions provided under the initial lease term, including rent increases. If economic incentives make it reasonably certain that an option period to extend the lease will be exercised, the Company will include these options in determining the non-cancelable term of the lease.

The Company defers rental revenue related to lease payments received from tenants in advance of their due dates. These amounts are presented within accrued liabilities and other payables on the Company’s consolidated balance sheets.

Certain properties in the Company’s investment portfolio are subject to leases that provide for contingent rent based on a percentage of the tenant’s gross sales. For these leases, the Company recognizes contingent rental revenue when the threshold upon which the contingent lease payment is based is actually reached. During the three months ended March 31, 2019 and 2018, the Company recorded contingent rent of $0.3 million and $0.5 million, respectively.

Organizational Costs

Costs related to the initial organization of the Company and its subsidiaries are expensed as they are incurred and are recorded within general and administrative expense in the Company’s consolidated statements of operations and comprehensive income.

Offering Costs

In connection with the IPO and the Follow-On Offering, the Company incurred legal, accounting and other offering-related costs. Such costs have been deducted from the gross proceeds of each of the IPO and Follow-On Offering. As of March 31, 2019 and December 31, 2018, the Company had capitalized a total of $46.0 million and $35.1 million, respectively, of such costs in the Company’s consolidated balance sheets. These costs are presented as a reduction of additional paid-in capital as of March 31, 2019 and December 31, 2018.

Gains and Losses on Dispositions of Real Estate

On January 1, 2018, the Company adopted FASB ASU 2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”), using the modified retrospective transition method. As leasing is the Company’s primary activity, the Company determined that its sales of real estate, which are nonfinancial assets, are sold to noncustomers and fall within the scope of ASC 610-20. The Company recognizes the full gain on the disposition of its real estate investments as the Company (i) has no controlling financial interest in the real estate and (ii) has no continuing interest or obligation with respect to the disposed real estate. The Company re-assessed and determined there were no open contracts or partial sales and, as such, the adoption of ASU 2017-05 (i) did not result in a cumulative adjustment as of January 1, 2018 and (ii) did not have any impact on the Company’s consolidated financial statements.

Income Taxes

EPRT Inc. intends to elect to be taxed as a REIT under sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ended December 31, 2018. REITs are subject to a number of organizational and operational requirements, including a requirement that 90% of ordinary “REIT taxable income” (as determined without regard to the dividends paid deduction or net capital gains) be distributed. As a REIT, the Company will generally not be subject to U.S. federal income tax to the extent that it meets the organizational and operational

11


 

requirements and its distributions equal or exceed REIT taxable income. For the period subsequent to the effective date of our intended REIT election, the Company intends to meet the organizational and operational requirements and expects distributions to exceed net taxable income. Accordingly, no provision has been made for U.S. federal income taxes. Even if the Company qualifies for taxation as a REIT, it may be subject to state and local income and franchise taxes, and to federal income and excise tax on its undistributed income. Franchise taxes and federal excise taxes on the Company’s undistributed income, if any, are included in general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income. Additionally, taxable income from non-REIT activities managed through the Company's taxable REIT subsidiary is subject to federal, state, and local taxes.

The Company analyzes its tax filing positions in all of the U.S. federal, state and local tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in such jurisdictions. The Company follows a two-step process to evaluate uncertain tax positions. Step one, recognition, occurs when an entity concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Step two, measurement, determines the amount of benefit that is more-likely-than-not to be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when the Company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. The use of a valuation allowance as a substitute for derecognition of tax positions is prohibited.

As of March 31, 2019 and December 31, 2018, the Company did not record any accruals for uncertain tax positions. The Company’s policy is to classify interest expense and penalties in general and administrative expense in the consolidated statements of operations and comprehensive income. During the three months ended March 31, 2019 and 2018, the Company did not record any interest or penalties, and there are no interest or penalties accrued at March 31, 2019 and December 31, 2018. The 2018, 2017 and 2016 taxable years remain open to examination by federal and state taxing jurisdictions to which the Company is subject.

Equity-Based Compensation  

In 2019 and 2018, EPRT Inc. granted shares of restricted common stock to its directors, executive officers and other employees that vest over a multi-year period, subject to the recipient’s continued service. In 2019, EPRT Inc. granted performance-based restricted share units (“RSUs”) to its executive officers, the final number of which is determined based off of market and subjective performance conditions and which vest over a multi-year period, subject to the recipient’s continued service. In 2017, the Predecessor granted unit-based compensation awards to certain of its employees and managers, as well as non-employees, consisting of units that vest over a multi-year period, subject to the recipient’s continued service. The Company accounts for the restricted common stock and unit-based compensation in accordance with ASC 718, Compensation – Stock Compensation, which requires that such compensation be recognized in the financial statements based on their estimated grant-date fair value. The value of such awards is recognized as compensation expense in general and administrative expenses in the accompanying consolidated statements of operations over the requisite service periods.

The Company recognizes compensation expense for equity-based compensation using the straight-line method based on the terms of the individual grant.

Variable Interest Entities

The FASB provides guidance for determining whether an entity is a variable interest entity (a “VIE”). VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. A VIE is required to be consolidated by its primary beneficiary, which is the party that (i) has the power to control the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses, or the right to receive benefits, of the VIE that could potentially be significant to the VIE.

Following the completion of the Formation Transactions, the Company concluded that the Operating Partnership is a VIE of which the Company is the primary beneficiary, as the Company has the power to direct the activities that most significantly impact the economic performance of the Operating Partnership. Substantially all of the Company’s assets and liabilities are held by the Operating Partnership. The assets and liabilities of the Operating Partnership are consolidated and reported as assets and liabilities on the Company’s consolidated balance sheet as of March 31, 2019 and December 31, 2018.

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As of December 31, 2018, the Company concluded that an entity which it had provided a $5.7 million mortgage loan receivable was a VIE because the terms of the loan agreement limited the entity’s ability to absorb expected losses or the entity’s right to receive expected residual returns. However, the Company was not the primary beneficiary of the entity, because the Company did not have the power to direct the activities that most significantly impact the entity’s economic performance. As of December 31, 2018, the carrying amount of the Company’s loan receivable with this entity was $5.7 million, and the Company’s maximum exposure to loss in this entity is limited to the carrying amount of its investment. The Company had no liabilities associated with this investment as of December 31, 2018. During the three months ended March 31, 2019, the borrowing entity under this mortgage loan settled the principal amount in full and the Company had no loan receivable from this entity as of March 31, 2019.

Reportable Segments

ASC Topic 280, Segment Reporting, establishes standards for the manner in which enterprises report information about operating segments. Substantially all of the Company’s investments, at acquisition, are comprised of real estate owned that is leased to tenants on a long-term basis. Therefore, the Company aggregates these investments for reporting purposes and operates in one reportable segment.

Net Income per Share

Net income per share has been computed pursuant to the guidance in the FASB ASC Topic 260, Earnings Per Share. The guidance requires the classification of the Company’s unvested restricted common stock, which contain rights to receive non‑forfeitable dividends, as participating securities requiring the two‑class method of computing net income per share. Diluted net income per share of common stock further considers the effect of potentially dilutive shares of common stock outstanding during the period, including the assumed vesting of restricted share units with a market-based vesting condition, where dilutive. The OP Units held by non-controlling interests represent potentially dilutive securities as the OP Units may be redeemed for cash or, at the Company’s election, exchanged for shares of the Company’s common stock on a one-for-one basis.

The following is a reconciliation of the numerator and denominator used in the computation of basic and diluted net income per share (dollars in thousands):

 

(dollar amounts in thousands)

 

Three Months Ended March 31, 2019

 

Numerator for basic and diluted earnings per share:

 

 

 

 

Net income

 

$

8,723

 

Less: net income attributable to non-controlling interests

 

 

(2,594

)

Less: net income allocated to unvested restricted common stock

 

 

(155

)

Net income available for common stockholders: basic

 

 

5,974

 

Net income attributable to non-controlling interests

 

 

2,594

 

Net income available for common stockholders: diluted

 

$

8,568

 

 

 

 

 

 

Denominator for basic and diluted earnings per share:

 

 

 

 

Weighted average common shares outstanding

 

 

45,974,158

 

Less: weighted average number of shares of unvested restricted common stock

 

 

(733,911

)

Weighted average shares outstanding used in basic net income per share

 

 

45,240,247

 

Effects of dilutive securities: (1)

 

 

 

 

OP Units

 

 

19,056,552

 

Unvested restricted common stock and RSUs

 

 

343,255

 

Weighted average shares outstanding used in diluted net income per share

 

 

64,640,054

 

 

(1)

Assumes the most dilutive issuance of potentially issuable shares between the two-class and treasury stock method unless the result would be anti-dilutive.

Recent Accounting Developments

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) to amend the accounting for leases. The new standard requires lessees to classify leases as either finance or operating leases based on certain criteria and record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months, regardless

13


 

of their classification. The new standard requires lessors to account for leases using an approach that is substantially equivalent to the previous guidance for sales-type leases, direct financing leases and operating leases. The standard also eliminates current real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs, lease modifications and lease executory costs for all entities. Certain changes to the guidance pertaining to sale-leaseback transactions may impact the Company. For example, the inclusion of a purchase option in the lease associated with a sale-leaseback transaction will now result in the lessor accounting for such transaction as a financing arrangement.

ASU 2016-02 was effective for the Company on January 1, 2019 and, in accordance with the provisions of ASU 2018-11, Leases (Topic 842), Targeted Improvements, was adopted by the Company using the modified retrospective approach as of the beginning of the period of adoption. There was no impact to retained earnings at the time of adoption and, therefore, no cumulative-effect adjustment was recorded. At the time of adoption, both lessees and lessors are permitted to make an election to apply a package of practical expedients available for implementation under the standard. The Company applied this package of practical expedients and, as such, at the time of adoption did not reassess the classification of existing lease contracts, whether existing or expired contracts contain a lease or whether a portion of initial direct costs for existing leases should have been expensed. In addition, the Company adopted the practical expedient provided in ASU 2018-11 that allows lessors to not separate non-lease components from the related lease components. The Company made this determination as the timing and pattern of transfer for the lease and non-lease components associated with its leases are the same and the lease components, if accounted for separately, would be classified as operating leases in accordance with ASC 842.

The accounting applied by a lessor is largely unchanged under ASU 2016-02; however, the standard requires that lessors expense, on an as-incurred basis, certain initial direct costs that are not incremental in obtaining a lease. Under the previous standards, certain of these costs were capitalizable. Although primarily a lessor, the Company is also a lessee under several ground lease arrangements and under its corporate office and office equipment leases. The Company completed its inventory and evaluation of these leases, calculated a right-of-use asset and a lease liability for the present value of the minimum lease payments and recognized an initial $4.8 million right-of-use asset and lease liability upon adoption. For a portion of the Company’s ground lease arrangements, the sublessees, or the Company’s tenants, are responsible for making payment directly to the ground lessors. Prior to the new standard such amounts were presented on a net basis; however, upon adoption of ASU 2016-02 the expense related to the ground lease obligations, along with the related sublease revenues, is presented on a gross basis in the consolidated statements of income. ASU 2016-02 also requires additional disclosures within the notes accompanying the consolidated financial statements.

Substantially all of the Company’s lease contracts (under which the Company is the lessor) are “triple-net” leases, which means that its tenants are responsible for making payments to third parties for operating expenses such as property taxes and insurance costs associated with the properties the Company leases to them. Under the previous lease accounting guidance, these payments were excluded from rental revenue. In December 2018, the FASB issued ASU 2018-20 Leases (Topic 842), Narrow-Scope Improvements for Lessors. This update requires the Company to exclude from variable lease payments, and therefore revenue and expense, costs paid by its tenants directly to third parties (a net presentation). Costs paid by the Company and reimbursed by its tenants are included in rental revenue and property expenses (a gross presentation) in the Company’s consolidated statements of operations and comprehensive income.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees, with the result of aligning the guidance on share-based payments to nonemployees with that for share-based payments to employees, with certain exceptions, and eliminating the need to re-value awards to nonemployees at each balance sheet date. ASU 2018-07 is effective for annual periods, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted for companies who have previously adopted ASU 2017-09. The Company early adopted ASU 2018-07 effective July 1, 2018 for accounting for its liability-classified non-employee awards that had not vested as of that date. No adjustment to the Company’s retained earnings was required as a result of the adoption of ASU 2018-07.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which changes the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2018-13 on its related disclosures.

In February 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) establishing ASC Topic 326, Financial Instruments - Credit Losses (“ASC 326”), as amended by subsequent ASUs on the topic. ASU 2016-13 changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance replaces the current “incurred

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loss” model with an “expected loss” model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of the financial asset. ASU 2016-13 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.

3. Investments

As of March 31, 2019, the Company had investments in 708 property locations, including six developments in progress and one undeveloped land parcel, and two mortgage loans receivable secured by three additional properties. Of these 708 property locations, 696 represented owned properties (of which five were subject to leases accounted for as direct financing leases) and 12 represented ground lease interests (of which one building was subject to a lease accounted for as a direct financing lease). The Company’s gross investment portfolio totaled $1.5 billion as of March 31, 2019 and consisted of gross acquisition cost of real estate investments (including transaction costs) totaling $1.5 billion, loans and direct financing lease receivables, net, with an aggregate carrying amount of $11.9 million and real estate investments held for sale, net of $3.8 million. As of March 31, 2019, 349 of these investments comprising $611.9 million of net investments were assets of consolidated special purpose entity subsidiaries and were pledged as collateral under the non-recourse obligations of these special purpose entities (See Note 5 – Secured Borrowings).

As of December 31, 2018, the Company had investments in 665 property locations, including four developments in progress and one undeveloped land parcel, and three mortgage loans receivable secured by 12 additional properties. Of these 665 property locations, 652 represented owned properties (of which five were subject to leases accounted for as direct financing leases) and 13 represented ground lease interests (of which one building was subject to a lease accounted for as a direct financing lease). The Company’s gross investment portfolio totaled $1.4 billion as of December 31, 2018 and consisted of gross acquisition cost of real estate investments (including transaction costs) totaling $1.4 billion and loans and direct financing lease receivables, net, with an aggregate carrying amount of $17.5 million. As of December 31, 2018, 347 of these investments comprising $609.2 million of net investments were assets of consolidated special purpose entity subsidiaries and were pledged as collateral under the non-recourse obligations of these special purpose entities (See Note 5 – Secured Borrowings).

Acquisitions in 2019

During the three months ended March 31, 2019, the Company did not have any acquisitions that represented more than 5% of the Company’s total investment activity as of March 31, 2019. The following table presents information about the Company’s acquisition activity during the three months ended March 31, 2019:

 

(Dollar amounts in thousands)

 

Total

Investments

 

Ownership type

 

Fee Interest

 

Number of properties acquired

 

51

 

 

 

 

 

 

Allocation of Purchase Price:

 

 

 

 

Land and improvements

 

$

36,375

 

Building and improvements

 

 

79,291

 

Construction in progress (1)

 

 

1,135

 

Intangible lease assets

 

 

3,818

 

Assets acquired

 

 

120,620

 

 

 

 

 

 

Intangible lease liabilities

 

 

(117

)

Liabilities assumed

 

 

(117

)

Purchase price (including acquisition costs)

 

$

120,503

 

 

(1)

Represents amounts incurred at and subsequent to acquisition and includes approximately $25,000 of capitalized interest expense.

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Acquisitions in 2018

During the three months ended March 31, 2018, the Company did not complete any acquisitions that represented more than 5% of the Company’s total investment activity as of March 31, 2018. The following table presents information about the Company’s acquisition activity during the three months ended March 31, 2018:

(Dollar amounts in thousands)

 

Total

Investments

 

Ownership type

 

Fee Interest

 

Number of properties acquired

 

28

 

 

 

 

 

 

Allocation of Purchase Price:

 

 

 

 

Land and improvements

 

$

18,754

 

Building and improvements

 

 

38,105

 

Construction in progress (1)

 

 

4,533

 

Leasehold improvement

 

 

28

 

Intangible lease assets

 

 

2,679

 

Assets acquired

 

 

64,099

 

 

 

 

 

 

Intangible lease liabilities

 

 

(495

)

Liabilities assumed

 

 

(495

)

Purchase price (including acquisition costs)

 

$

63,604

 

 

(1)

Represents amounts incurred at and subsequent to acquisition and includes $0.1 million of capitalized interest expense.

Gross Investment Activity

During the three months ended March 31, 2019 and 2018, the Company had the following gross investment activity:

 

(Dollar amounts in thousands)

 

Number of

Investment

Locations

 

Dollar

Amount of

Investments

 

Gross investments, January 1, 2018

 

508

 

$

939,072

 

Acquisitions of and additions to real estate investments

 

28

 

 

64,099

 

Sales of investments in real estate

 

(6)

 

 

(7,152

)

Provisions for impairment of real estate (1)

 

 

 

 

(1,861

)

Principal collections on direct financing lease receivables

 

 

 

 

(18

)

Gross investments, March 31, 2018

 

 

 

 

994,140

 

Less: Accumulated depreciation and amortization (2)

 

 

 

 

(31,310

)

Net investments, March 31, 2018

 

530

 

$

962,830

 

 

 

 

 

 

 

 

Gross investments, January 1, 2019

 

677

 

$

1,394,549

 

Acquisitions of and additions to real estate investments (3)

 

51

 

 

123,896

 

Sales of investments in real estate

 

(7)

 

 

(10,651

)

Relinquishment of properties at end of ground lease term

 

(1)

 

 

(241

)

Provisions for impairment of real estate (4)

 

 

 

 

(1,440

)

Investments in loans receivable (5)

 

 

 

 

207

 

Principal collections on and settlements of loans and direct financing lease receivables (3)

 

(9)

 

 

(5,769

)

Other

 

 

 

 

(501

)

Gross investments, March 31, 2019

 

 

 

 

1,500,050

 

Less: Accumulated depreciation and amortization (2)

 

 

 

 

(60,230

)

Net investments, March 31, 2019

 

711

 

$

1,439,820

 

 

(1)

During the three months ended March 31, 2018, the Company identified and recorded provisions for impairment at 3 vacant and 4 tenanted properties. The amount in the table above excludes approximately $12,000 related to intangible lease liabilities for these assets.

(2)

Includes $45.3 million and $20.4 million of accumulated depreciation as of March 31, 2019 and 2018, respectively.

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(3)

During the three months ended March 31, 2019, the Company acquired nine properties that had secured one of its loans receivable for a purchase price of $8.2 million. The loan receivable securing these properties had a carrying value of $5.7 million prior to its settlement.

(4)

During the three months ended March 31, 2019, the Company identified and recorded provisions for impairment at 1 vacant and 3 tenanted properties.

(5)

Relates to financing at one property securing a $3.4 million development construction loan as the land at this location is included in gross investments on January 1, 2019.

Real Estate Investments

The Company’s investment properties are leased to tenants under long-term operating leases that typically include one or more renewal options. See Note 10 – Leases for detailed information about the Company’s leases.

Loans and Direct Financing Lease Receivables

As of March 31, 2019 and December 31, 2018, the Company had three and four loans receivable outstanding, respectively, with an aggregate carrying amount of $9.3 million and $14.9 million as of each date. During the three months ended March 31, 2019, the borrower under one of the Company’s loans receivable, with a carrying value of $5.7 million, settled the loan in full. The Company had no loan receivable activity during the three months ended March 31, 2018.

 

The Company’s loans receivable as of March 31, 2019 and December 31, 2018 are summarized as follows (dollar amounts in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal Outstanding

 

Loan Type

 

Monthly Payment

 

Number of Secured Properties

 

 

Interest Rate

 

 

Maturity Date

 

March 31, 2019

 

 

December 31, 2018

 

Mortgage (1)(2)

 

Interest only

 

 

2

 

 

10.00%

 

 

2021

 

$

2,376

 

 

$

2,376

 

Mortgage (1)

 

Interest only

 

 

9

 

 

7.55%

 

 

2019

 

 

 

 

 

5,748

 

Mortgage (1)(2)

 

Interest only

 

 

1

 

 

5.25%

 

 

2019

 

 

3,500