UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 September 30, 2018

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.)
47 Hulfish Street, Suite 210, Princeton, New Jersey	08542
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (609) 306-8676

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 November 5, 2018, the registrant had 43,749,092 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 September 30, 2018 (unaudited) and December 31, 2017	1
	Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2018 and 2017 (unaudited)	2
	Consolidated Statements of Stockholders’/Members’ Equity for the nine months ended September 30, 2018 and 2017 (unaudited)	3
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited)	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 4.	Controls and Procedures	56
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	58
Item 1A.	Risk Factors	58
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.	Defaults Upon Senior Securities	58
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	59
Item 6.	Exhibits	59
Signatures		60

i

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

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets

(In thousands, except share, per share, unit and per unit data)

	September 30, 2018			December 31, 2017
	(Unaudited)
ASSETS
Investments:
Real estate investments, at cost:
Land and improvements	$	392,831		$	278,985
Building and improvements		828,944			584,385
Lease incentive		2,544			2,275
Construction in progress		3,932			4,076
Intangible lease assets		64,542			62,453
Total real estate investments, at cost		1,292,793			932,174
Less: accumulated depreciation and amortization		(43,630	)		(24,825	)
Total real estate investments, net		1,249,163			907,349
Loans and direct financing lease receivables, net		13,049			2,725
Real estate investments held for sale, net		1,407			4,173
Net investments		1,263,619			914,247
Cash and cash equivalents		73,271			7,250
Restricted cash		809			12,180
Straight-line rent receivable, net		11,213			5,498
Prepaid expenses and other assets, net		6,048			3,045
Total assets (1)	$	1,354,960		$	942,220
LIABILITIES AND EQUITY
Secured borrowings, net of deferred financing costs	$	507,481		$	511,646
Notes payable to related party		—			230,000
Intangible lease liabilities, net		11,885			12,321
Intangible lease liabilities held for sale, net		—			129
Dividend payable		14,068			—
Accrued liabilities and other payables (including $324 due to a related party as of December 31, 2017)		6,634			6,722
Total liabilities (1)		540,068			760,818
Commitments and contingencies (see Note 10)		—			—
Stockholders' equity:
Preferred stock, $0.01 par value; 150,000,000 authorized; none issued and outstanding as of September 30, 2018		—			—
Common stock, $0.01 par value; 500,000,000 authorized; 43,749,092 issued and outstanding as of September 30, 2018		431			—
Additional paid-in capital		568,369			—
Distributions in excess of cumulative earnings		(4,253	)		—
Members' equity:
Class A units, $1,000 per unit, 83,700 issued and outstanding as of December 31, 2017		—			86,668
Class B units, 8,550 issued, 1,610 vested and outstanding as of December 31, 2017		—			574
Class C units, $1,000 per unit, 91,450 issued and outstanding as of December 31, 2017		—			94,064
Class D Units, 3,000 issued, 600 vested and outstanding as of December 31, 2017		—			96
Total stockholders'/members' equity		564,547			181,402
Non-controlling interests		250,345			—
Total equity		814,892			181,402
Total liabilities and equity	$	1,354,960		$	942,220

(1) The consolidated balance sheets of Essential Properties Realty Trust, Inc. and Essential Properties Realty Trust, Inc. Predecessor include assets and liabilities of consolidated variable interest entities (“VIEs”). See Notes 2 and 5. As of September 30, 2018, with the exception of $100 of cash and cash equivalents, $9.8 million of dividends payable and $3.1 million of accrued liabilities and other payables, all of the assets and liabilities of the Company were held by its operating partnership, a consolidated VIE. As of December 31, 2017, the consolidated balance sheets included the following amounts related to the Company’s consolidated VIEs: $191.7 million of land and improvements, $391.3 million of building and improvements, $2.1 million of lease incentive, $49.7 million of intangible lease assets, $21.4 million of accumulated depreciation and amortization, $2.4 million of direct financing lease receivables, net, $4.2 million of real estate investments held for sale, net, $5.0 million of straight-line rent receivable, $511.6 million of secured borrowings, net of deferred financing costs, $10.8 million of intangible lease liabilities, net, and $0.1 million of intangible lease liabilities held for sale, net.

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 September 30,						Nine months ended September 30,
	2018			2017			2018			2017
Revenues:
Rental revenue	$	25,496		$	13,427		$	67,119		$	36,105
Interest income on loans and direct financing lease receivables		220			65			379			230
Other revenue		26			88			75			648
Total revenues		25,742			13,580			67,573			36,983
Expenses:
Interest (including $0, $438, $4,603 and $2,361 to related parties during the three and nine months ended September 30, 2018 and 2017, respectively)		6,563			6,317			23,474			15,192
General and administrative		3,529			2,336			9,872			6,612
Property expenses		494			389			1,221			1,077
Depreciation and amortization		8,763			5,154			22,842			13,241
Provision for impairment of real estate		770			857			3,526			1,436
Total expenses		20,119			15,053			60,935			37,558
Other operating income:
Gain on dispositions of real estate, net		1,455			1,974			5,100			3,736
Income from operations		7,078			501			11,738			3,161
Other income:
Interest		655			12			719			23
Income (loss) before income tax expense (benefit)		7,733			513			12,457			3,184
Income tax expense (benefit)		26			(9	)		143			33
Net income		7,707			522			12,314			3,151
Net income attributable to non-controlling interests		(2,383	)		—			(2,482	)		—
Net income attributable to stockholders and members		5,324			522			9,832			3,151
Comprehensive income attributable to stockholders and members	$	5,324		$	522		$	9,832		$	3,151
	Three months ended September 30, 2018						Period from June 25, 2018 to September 30, 2018
Basic weighted-average shares outstanding		42,364,754						42,237,460
Basic net income per share	$	0.12					$	0.13
Diluted weighted-average shares outstanding		61,472,675						61,342,278
Diluted net income per share	$	0.12					$	0.13
Cash dividends declared per share	$	0.22					$	0.22

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			SCF Funding LLC			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, 2016		—	$	—	$	—		$	—		$	174,650		$	—		$	—		$	—		$	—		$	—		$	—		$	174,650
Contributions		—		—		—			—			17,308			83,700			—			—			—			—			—			101,008
Distributions		—		—		—			—			(101,222	)		—			—			—			—			—			—			(101,222	)
Conversion of equity resulting from issuance of units		—		—		—			—			(90,823	)		—			—			90,823			—			—			—			—
Unit compensation expense		—		—		—			—			—			—			417			—			82			—			—			499
Net income		—		—		—			—			87			1,464			—			1,600			—			—			—			3,151
Balance at September 30, 2017		—	$	—	$	—		$	—		$	—		$	85,164		$	417		$	92,423		$	82		$	—		$	—		$	178,086
Balance at December 31, 2017		—	$	—	$	—		$	—		$	—		$	86,668		$	574		$	94,064		$	96		$	181,402		$	—		$	181,402
Contributions		—		—		—			—			—			50,000			—			—			—			50,000			—			50,000
Unit compensation expense		—		—		—			—			—			—			373			—			70			443			—			443
Net income		—		—		—			—			—			2,414			—			1,871			—			4,285			—			4,285
Balance at June 24, 2018		—		—		—			—			—			139,082			947			95,935			166			236,130			—			236,130
Contribution of Predecessor equity in exchange for OP Units		—		—		—			—			—			(139,082	)		(947	)		(95,935	)		(166	)		(236,130	)		236,130			—
Initial public offering		35,272,191		353		493,458			—			—			—			—			—			—			493,811			—			493,811
Concurrent private placement of common stock		7,785,611		78		108,921			—			—			—			—			—			—			108,999			—			108,999
Concurrent private placement of OP Units		—		—		—			—			—			—			—			—			—			—			16,001			16,001
Costs related to initial public offering		—		—		(35,107	)		—			—			—			—			—			—			(35,107	)		—			(35,107	)
Share-based compensation expense		691,290		—		869			—			—			—			—			—			—			869			—			869
Unit-based compensation expense		—		—		228			—			—			—			—			—			—			228			—			228
Dividends declared on common stock and OP Units		—		—		—			(9,800	)		—			—			—			—			—			(9,800	)		(4,268	)		(14,068	)
Net income		—		—		—			5,547			—			—			—			—			—			5,547			2,482			8,029
Balance at September 30, 2018		43,749,092	$	431	$	568,369		$	(4,253	)	$	—		$	—		$	—		$	—		$	—		$	564,547		$	250,345		$	814,892

3

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

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

	Nine months ended September 30,
	2018			2017
Cash flows from operating activities:
Net income	$	12,314		$	3,151
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and lease intangible amortization		22,843			13,241
Amortization of lease incentive		116			101
Amortization of above/below market leases		283			727
Amortization of deferred financing costs		1,982			1,310
Provision for impairment of real estate		3,526			1,436
Gain on dispositions of investments, net		(5,100	)		(3,736	)
Straight-line rent receivable		(5,770	)		(3,076	)
Equity-based compensation expense		1,398			581
Allowance for doubtful accounts		311			21
Changes in other assets and liabilities:
Prepaid expenses and other assets		179			(440	)
Accrued liabilities and other payables		(3,300	)		2,979
Net cash provided by operating activities		28,782			16,295
Cash flows from investing activities:
Proceeds from sales of investments, net		40,906			35,828
Principal collections on direct financing lease receivables		55			61
Investments in loans receivable		(10,379	)		—
Deposits for prospective real estate investments		(150	)		(297	)
Investment in real estate		(386,836	)		(353,332	)
Investment in construction in progress		(14,307	)		(4,026	)
Lease incentives paid		(269	)		—
Capital expenditures		(759	)		(323	)
Net cash used in investing activities		(371,739	)		(322,089	)
Cash flows from financing activities:
Proceeds from issuance of notes payable to related parties		154,000			412,000
Payments of principal on notes payable to related parties		(384,000	)		(313,000	)
Proceeds from secured borrowings		—			248,100
Repayments of secured borrowings		(5,875	)		(3,751	)
Deferred financing costs		(3,305	)		(5,565	)
Capital contributions by members in Predecessor		50,000			83,700
Distributions paid to members by Predecessor		—			(101,222	)
Proceeds from initial public offering, net		464,182			—
Initial public offering costs		(2,395	)		—
Proceeds from concurrent private placement of OP Units		16,001			—
Proceeds from concurrent private placement of common stock		108,999			—
Net cash provided by financing activities		397,607			320,262
Net increase (decrease) in cash and cash equivalents and restricted cash		54,650			14,468
Cash and cash equivalents and restricted cash, beginning of period		19,430			11,922
Cash and cash equivalents and restricted cash, end of period	$	74,080		$	26,390
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents