UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
(State or other jurisdiction of
incorporation or organization)
902 Carnegie Center Blvd., Suite 520
Princeton, New Jersey
(Address of Principal Executive Offices)
82-4005693
(I.R.S. Employer
Identification No.)
08540
(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
Common Stock, $0.01 par value
Securities registered pursuant to Section 12(g) of the Act: None
Name of Each Exchange on Which Registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ N O ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ N O ☒
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
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
Non-accelerated filer
Emerging growth company
☐
☒
☒
Accelerated filer
Smaller reporting 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 June 29, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of Essential Properties Realty Trust,
Inc.'s shares of common stock, $0.01 par value, held by non-affiliates of the registrant, was $438.3 million based on the last reported sale price of $13.54 per share on the New
York Stock Exchange on June 29, 2018.
The number of shares of registrant’s Common Stock outstanding as of February 22, 2019 was 43,795,460.
Table of Contents
Page
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
i
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42
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48
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79
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119
125
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133
135
137
140
PART I
In
this
Annual
Report
on
Form
10-K,
we
refer
to
Essential
Properties
Realty
Trust,
Inc.,
a
Maryland
corporation,
together
with
its
consolidated
subsidiaries,
including
its
operating
partnership,
Essential
Properties,
L.P.,
as
“we,”
“us,”
“our”
or
“the
Company”
unless
we
specifically
state
otherwise
or
the
context
otherwise
requires.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements pertaining to
our business and growth strategies, investment, financing and leasing activities and trends in our business, including trends in the market for long-
term, net leases of freestanding, single-tenant properties, contain forward-looking statements. When used in this annual report, the words “estimate,”
“anticipate,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “seek,” “approximately,” “plan,” and variations of such words, and similar words or
phrases, that are predictions of future events or trends and that do not relate solely to historical matters, are intended to identify forward-looking
statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions of management.
Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance or
achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements; accordingly,
you should not rely on forward-looking statements as predictions of future events. Forward-looking statements depend on assumptions, data or
methods that may be incorrect or imprecise, and may not be realized. We do not guarantee that the transactions and events described will happen
as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially
from those set forth or contemplated in the forward-looking statements:
•
•
•
•
•
•
•
•
•
•
•
general business and economic conditions;
continued volatility and uncertainty in the credit markets and broader financial markets, including potential fluctuations in the
Consumer Price Index (the “CPI”);
risks inherent in the real estate business, including tenant defaults or bankruptcies, potential liability relating to environmental
matters, illiquidity of real estate investments, and potential damages from natural disasters;
the performance and financial condition of our tenants;
the availability of suitable properties to acquire and our ability to acquire and lease those properties on favorable terms;
our ability to renew leases, lease vacant space or re-lease space as existing leases expire or are terminated;
the degree and nature of our competition;
our failure to generate sufficient cash flows to service our outstanding indebtedness;
our ability to access debt and equity capital on attractive terms;
fluctuating interest rates;
availability of qualified personnel and our ability to retain our key management personnel;
1
•
•
•
•
changes in, or the failure or inability to comply with, applicable law or regulation;
our failure to qualify for taxation as a real estate investment trust (“REIT”);
changes in the U.S. tax law and other U.S. laws, whether or not specific to REITs; and
additional factors discussed in the sections entitled “Business,” “Risk Factors” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in this annual report.
You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this annual report. While
forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly
update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future
events or other changes, except as required by law.
Because we operate in a highly competitive and rapidly changing environment, new risks emerge from time to time, and it is not possible for
management to predict all such risks, nor can management assess the impact of all such risks on our business or the extent to which any risk, or
combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Item 1. Business.
We are 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. We have assembled a diversified
portfolio using an investment strategy that focuses on properties leased to tenants in businesses such as restaurants (including quick service and
casual and family dining), car washes, automotive services, medical services, convenience stores, entertainment, early childhood education and
health and fitness. We believe that properties leased to tenants in these businesses are essential to the generation of the tenants’ sales and profits
and that these businesses exhibit favorable growth potential and are generally more insulated from e-commerce pressure than many others.
We were organized on January 12, 2018 as a Maryland corporation and intend to qualify to be taxed as a REIT beginning with our taxable
year ended December 31, 2018. As of December 31, 2018, 91.1% of our $106.8 million of annualized base rent was attributable to properties
operated by tenants in service-oriented and experience-based businesses. “Annualized base rent” means annualized contractually specified cash
base rent in effect on December 31, 2018 for all of our leases (including those accounted for as direct financing leases) commenced as of that date
and annualized cash interest on our mortgage loans receivable as of that date.
Our objective is to maximize stockholder value by generating attractive risk-adjusted returns through owning, managing and growing a
diversified portfolio of commercially desirable properties. We have grown strategically since commencing investment activities in June 2016. As of
December 31, 2018, we had a portfolio of 677 properties (including one undeveloped land parcel, 12 properties that secure our investment in
mortgage loans receivable and four properties under development) built on the following core attributes:
Diversified Portfolio. Our portfolio was 100% occupied by 161 tenants operating 180 different brands, or concepts, in 15 industries
across 43 states, with none of our tenants contributing more than 5% of our annualized base rent. Our strategy targets a scaled portfolio that, over
time, derives no more than 5% of its annualized base rent from any single tenant or more than 1% from any single property.
2
Remaining Lease Term of 14.2 Years. Our leases had a weighted average remaining lease term of 14.2 years (based on annualized
base rent), with only 3.1% of our annualized base rent attributable to leases expiring prior to January 1, 2023. Our properties are subject to relatively
new, long-term net leases that we believe provide us a stable base of revenue from which to grow our portfolio.
Significant Use of Master Leases. 67.4% of our annualized base rent was attributable to master leases.
Healthy Rent Coverage Ratio and Extensive Tenant Financial Reporting. Our portfolio’s weighted average rent coverage ratio was
2.8x and 97.5% of our leases (based on annualized base rent) obligate the tenant to periodically provide us with specified unit-level financial
reporting. “Rent coverage ratio” means the ratio of (x) tenant-reported or, when unavailable, management’s estimate (based on tenant-reported
financial information) of annual earnings before interest, taxes, depreciation, amortization and cash rent attributable to the leased property (or
properties, in the case of a master lease) to (y) the annualized base rental obligation as of a specified date.
Contractual Base Rent Escalation. 97.1% of our leases (based on annualized base rent) provided for increases in future base rent at a
weighted average rate of 1.5% per year.
Differentiated Investment Approach. Our average investment per property was $2 million (which equals our aggregate investment in our
properties (including transaction costs, lease incentives and amounts funded for construction in progress) divided by the number of properties owned
at December 31, 2018), and we believe investments of similar size allow us to grow our portfolio without concentrating a large amount of capital in
individual properties and limit our exposure to events that may adversely affect a particular property.
2018 Financial and Operating Highlights
•
•
•
•
•
•
During the year ended December 31, 2018, we invested approximately $516 million in 215 property locations (excluding one property
securing $3.5 million of short-term financing).
As of December 31, 2018, our total gross investment in real estate totaled $1.4 billion and we had total debt of $540.1 million.
During 2018, we completed our initial public offering (the “IPO”) of 32,500,000 shares of our common stock and issued 2,772,191
additional shares of common stock pursuant to the partial exercise of an option granted to underwriters of our IPO. We received total
proceeds of $458.7 million, net of underwriters’ discounts and offering expenses, from the issuance of these shares.
At the time of the IPO, we also completed a $125.0 million concurrent private placement (the “Concurrent Private Placement”) of our
common stock and units of Essential Properties, L.P., which is our operating partnership (the “Operating Partnership”) and through
which we hold substantially all of our assets and conduct our operations.
For the period of 2018 subsequent to our IPO, we made distributions totaling $0.434 per share of common stock.
In June 2018, we entered into a four-year, senior unsecured revolving credit facility which allows up to $300.0 million in principal
borrowings (the “Revolving Credit Facility”).
Our Target Market
We are an active investor in single-tenant, net leased real estate. Our target properties are generally freestanding, commercial real estate
facilities where a middle-market tenant conducts activities that are
3
essential to the generation of its sales and profits. We believe that this market is underserved from a capital perspective and offers attractive
investment opportunities.
Within this market, we emphasize investment in properties leased to tenants engaged in a targeted set of service-oriented or experience-
based businesses, such as restaurants (including quick service and casual and family dining), car washes, automotive services, medical services,
convenience stores, entertainment, early childhood education, and health and fitness because we believe these businesses are generally more
insulated from e-commerce pressure than many others. In addition, we believe that many of these businesses are favorably impacted by current
macroeconomic trends that support consumer spending, such as generally declining unemployment and positive consumer sentiment.
We also focus on properties leased to middle-market companies, which we define as regional and national operators with between 10 and
250 locations and $20 million to $500 million in annual revenue, and we opportunistically invest in properties leased to smaller companies, which we
define as regional operators with less than 10 locations and less than $20 million in annual revenue. Although it is not our primary investment focus,
we will opportunistically consider investments leased to large companies. While most of our targeted tenants are not rated by a nationally recognized
statistical rating organization, we primarily seek to invest in properties leased to companies that we determine have attractive credit characteristics
and stable operating histories.
Despite the market’s size, the market for single-tenant, net leased real estate is highly fragmented. In particular, we believe that there is a
limited number of participants addressing the long-term capital needs of unrated middle-market and small companies. We believe that many publicly
traded REITs that invest in net leased properties concentrate their investment activity in properties leased to investment grade -rated tenants, which
tend to be larger organizations, with the result that unrated, middle-market and small companies are relatively underserved and offer us an attractive
investment opportunity.
Furthermore, we believe that there is strong demand for our net-lease solutions among middle-market and small owner-operators of
commercial real estate, in part, due to the bank regulatory environment, which, since the turmoil in the housing and mortgage industries from 2007-
2009, has generally been characterized by increased scrutiny and regulation. We believe that this environment has made commercial banks less
responsive to the long-term capital needs of unrated middle-market and small companies, many of which have historically depended on commercial
banks for their financing; accordingly, we see an attractive opportunity to address the capital needs of these companies by offering them an efficient
alternative to financing their real estate with traditional mortgage or bank debt and their own equity.
Accordingly, while we believe our net-lease financing solutions may be attractive to a wide variety of companies, we believe our most
attractive opportunity is owning properties net leased to bank finance-dependent, middle-market and small companies that are generally unrated and
have less access to efficient sources of long-term capital than larger, rated companies.
Our Competitive Strengths
We believe the following competitive strengths distinguish us from our competitors and allow us to compete effectively in the single-
tenant, net-lease market:
•
Carefully
Constructed
Portfolio
of
Recently
Acquired
Properties
Leased
to
Service-Oriented
or
Experience-Based
Tenants
.
We have strategically constructed a portfolio that is diversified by tenant, industry and geography and generally avoids exposure
to businesses that we believe are subject to pressure from e-commerce. Our properties are subject to relatively new, long-term net
leases that we believe provide us a stable base of revenue from which to grow our portfolio. As of December 31, 2018, we had a
portfolio of 677 properties, with annualized base rent of $106.8 million, which was selected by our management team in
4
accordance with our focused investment strategy. Our portfolio is diversified with 161 tenants operating 180 different concepts across
43 states and 15 industries. None of our tenants contributed more than 5% of our annualized base rent as of December 31, 2018,
and our strategy targets a scaled portfolio that, over time, derives no more than 5% of its annualized base rent from any single tenant
or more than 1% from any single property.
We focus on investing in properties leased to tenants operating in service-oriented or experience-based businesses, such as
restaurants (including quick service and casual and family dining), car washes, automotive services, medical services, convenience
stores, entertainment, early childhood education and health and fitness, which we believe are generally more insulated from e-
commerce pressure than many others. As of December 31, 2018, 91.1% of our annualized base rent was attributable to tenants
operating service-oriented and experience-based businesses.
We believe that our portfolio’s diversity and recent underwriting decreases the impact on us of an adverse event affecting a specific
tenant, industry or region, and our focus on leasing to tenants in industries that we believe are well-positioned to withstand
competition from e-commerce increases the stability of our rental revenue.
Experienced
and
Proven
Net
Lease
Management
Team
.
Our senior management has significant experience in the net lease
industry and a track record of growing net lease businesses to significant scale, and it was directly responsible for sourcing, financing
and acquiring each of the properties in our portfolio.
Our senior management team has been responsible for our refined investment strategy and for developing and implementing our
investment sourcing, underwriting, closing and asset management functions, which we believe can support significant investment
growth without a proportionate increase in our operating expenses. As of December 31, 2018, exclusive of our initial investment
activity on June 16, 2016 when we acquired a portfolio of 262 net leased properties, consisting primarily of restaurants, that were
being sold as part of the liquidation of General Electric Capital Corporation for an aggregate purchase price of $279.8 million
(including transaction costs) (the “ GE Seed Portfolio”), 82.2% of our portfolio’s annualized base rent was attributable to internally
originated sale-leaseback transactions and 92.1% was acquired from parties who had previously engaged in one or more
transactions that involved a member of our senior management team (including operators and tenants and other participants in the
net lease industry, such as brokers, intermediaries and financing sources). The substantial experience, knowledge and relationships
of our senior leadership team provide us with an extensive network of contacts that we believe allows us to originate attractive
investment opportunities and effectively grow our business.
Growth
Oriented
Balance
Sheet
Supporting
Scalable
Infrastructure
. As of December 31, 2018, we had $549.1 million of
gross debt outstanding, with a weighted average maturity of 4.1 years, and net debt of $532.9 million. For the three months ended
December 31, 2018, our net income was $8.2 million, our Annualized Adjusted EBITDA re
was $102.3 million and our ratio of net
debt to Annualized Adjusted EBITDA re
was 5.2x.
Net debt and Annualized Adjusted EBITDA re
are non-GAAP financial measures. For definitions of net debt and Annualized Adjusted
EBITDA re
, reconciliations of these measures to total debt and net income, respectively, the most directly comparable GAAP
financial measures, and a statement of why our management believes the presentation of these non-GAAP financial measures
provide useful information to investors and a discussion of how management uses these measures, see “Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”
5
•
•
In June 2018, we entered into the Revolving Credit Facility, which is a four-year, senior unsecured revolving credit facility that allows
for up to $300.0 million in principal borrowings and is available for general corporate purposes, including funding future acquisitions.
As of December 31, 2018, we had borrowed $34.0 million under the Revolving Credit Facility and had an available borrowing
capacity of $266.0 million. Our borrowings under the Revolving Credit Facility initially bear interest at an annual rate of (i) applicable
LIBOR plus an applicable margin between 1.45% and 2.15%; or (ii) the base rate (which rate is equal to the greatest of the prime
rate, the federal funds effective rate plus 0.5% or LIBOR plus 1.0%) plus an applicable margin of between 0.45% and 1.15%.
Our largest borrowing source is our private conduit program (the “Master Trust Funding Program”), under which we may, subject to
applicable covenants, issue multiple series and classes of notes from time to time to institutional investors in the asset-backed
securities market. As of December 31, 2018, we had Class A Notes and Class B Notes outstanding under our Master Trust Funding
Program with an aggregate outstanding principal balance of $515.1 million and a weighted average annual interest rate of 4.35% .
These notes are secured by a pool of 347 properties and the related leases as of December 31, 2018; however, we have the ability
to prepay these notes without the payment of a make-whole amount after November 2021, giving us flexibility to unencumber the
pledged assets, should we choose to do so as part of a strategy to seek an investment grade credit rating in the future or for other
reasons. Prepayments with respect to notes issued under our Master Trust Funding Program with an aggregate outstanding principal
amount of $272.3 million (as of December 31, 2018) on or after November 25, 2019 do not require a make-whole payment,
and prepayments with respect to notes issued under our Master Trust Funding Program with an aggregate outstanding principal
amount of $242.8 million (as of December 31, 2018) on or after November 25, 2021 do not require a make-whole payment. These
notes are non-recourse to us, subject to customary limited exceptions.
We are the property manager and servicer for the leases that are the collateral for the notes under our Master Trust Funding
Program and, in that capacity, have discretion in managing the collateral pool. We believe that this discretion enhances our
operational flexibility by enabling us to: issue additional notes in future series that reflect the increase in the value of properties or the
entire collateral pool; substitute assets in the collateral pool (subject to meeting certain prescribed conditions and criteria); and sell
underperforming assets and reinvest the proceeds in better performing properties, subject, in the case of substitutions and sales, to
certain limitations unless the substitution or sale is credit- or risk-based. We also have the ability to add properties to the collateral
pool between series issuances, thereby further increasing the pool’s size and diversity. By issuing investment grade-rated debt
through the Master Trust Funding Program, we seek to lower our borrowing costs and, in turn, be in a position to deliver more
competitive financial terms to our tenants and attractive returns to our stockholders.
We also have 330 unencumbered properties that contribute $58.2 million of annualized base rent as of December 31, 2018. We seek
to manage our balance sheet so that we have access to multiple sources of debt capital in the future, such as term borrowings from
insurance companies, banks and other sources, single-asset mortgage financing and CMBS borrowings, that may offer us the
opportunity to lower our cost of funding and further diversify our sources of debt capital.
•
Differentiated
Investment
Strategy
. We seek to acquire and lease freestanding, single-tenant commercial real estate facilities
where a tenant services its customers and conducts activities that are essential to the generation of its sales and profits. We primarily
seek to invest in properties leased to unrated middle-market companies that we determine have attractive credit characteristics and
stable operating histories. We believe middle-market companies are underserved from a capital perspective and that we can offer
them attractive real estate financing solutions and enter into lease agreements that provide us with attractive
6
•
•
•
risk-adjusted returns. Furthermore, many net lease transactions with middle-market companies involve properties that are individually
relatively small, which allows us to avoid concentrating a large amount of capital in individual properties. We maintain close
relationships with our tenants, which we believe allows us to source additional investments and become the capital provider of choice
as our tenants’ businesses grow and their real estate needs increase.
Asset
Base
Allows
for
Significant
Growth
.
Building on our senior leadership team’s experience of more than 20 years in net
lease real estate investing, we have developed leading origination, underwriting, financing, documentation and property management
capabilities. Our platform is scalable, and we will seek to leverage these capabilities to improve our efficiency and processes to seek
attractive risk-adjusted growth. While we expect that our general and administrative expenses will continue to rise in some measure
as our portfolio grows, we expect that such expenses as a percentage of our portfolio will decrease over time due to efficiencies and
economies of scale. We have grown substantially since we commenced investment activities on June 16, 2016 when we acquired
our GE Seed Portfolio for $279.8 million (including transaction costs). During the years ended December 31, 2017 and 2018, we
purchased properties with aggregate purchase prices of $535.4 million and $521.8 million, respectively. With our smaller asset base
relative to other institutional investors that focus on acquiring net leased real estate, we believe that superior growth can be achieved
through manageable acquisition volume.
Disciplined
Underwriting
Leading
to
Strong
Portfolio
Characteristics
. We generally seek to execute transactions with an
aggregate purchase price of $3 million to $50 million. Our size allows us to focus on investing in a segment of the market that we
believe is underserved from a capital perspective and where we can originate or acquire relatively smaller assets on attractive terms
that provide meaningful growth to our portfolio. In addition, we seek to invest in commercially desirable properties that are suitable for
use by different tenants, offer attractive risk-adjusted returns and possess characteristics that reduce our real estate investment risks.
As of December 31, 2018:
•
•
•
•
•
•
Our leases had a weighted average remaining lease term (based on annualized base rent) of 14.2 years, with only 3.1% of our
annualized base rent attributable to leases expiring prior to January 1, 2023;
Master leases contributed 67.4% of our annualized base rent;
Our portfolio’s weighted average rent coverage ratio was 2.8x, with leases contributing 74.0% of our annualized base rent
having rent coverage ratios in excess of 2.0x (excluding leases that do not report unit-level financial information);
Our portfolio was 100% occupied;
Leases contributing 97.1% of our annualized base rent provided for increases in future annual base rent, ranging from 1.0% to
4.0% annually, with a weighted average annual escalation equal to 1.5% of base rent; and
Leases contributing 91.9% of annualized base rent were triple-net.
Extensive
Tenant
Financial
Reporting
Supports
Active
Asset
Management.
We seek to enter into lease agreements that
obligate our tenants to periodically provide us with corporate and/or unit-level financial reporting, which we believe enhances our
ability to actively monitor our investments, negotiate through lease renewals and proactively manage our portfolio to protect
stockholder value. As of December 31, 2018, leases contributing 97.5% of our
7
annualized base rent required tenants to provide us with specified unit-level financial information.
Our Business and Growth Strategies
Our objective is to maximize stockholder value by generating attractive risk-adjusted returns through owning, managing and growing a
diversified portfolio of commercially desirable properties. We intend to pursue our objective through the following business and growth strategies.
•
Structure
and
Manage
Our
Diverse
Portfolio
with
Disciplined
Underwriting
and
Risk
Management
.
We seek to maintain the
stability of our rental revenue and maximize the long-term return on our investments while continuing our growth by using our
disciplined underwriting and risk management expertise. When underwriting assets, we emphasize commercially desirable
properties, with strong operating performance, healthy rent coverage ratios and tenants with attractive credit characteristics.
Leasing.
In general, we seek to enter into leases with (i) relatively long terms (typically with initial terms of 15 years or more and
tenant renewal options); (ii) attractive rent escalation provisions; (iii) healthy rent coverage ratios; and (iv) tenant obligations to
periodically provide us with financial information, which provides us with information about the operating performance of the leased
property and/or tenant and allows us to actively monitor the security of payments under the lease on an ongoing basis. We strongly
prefer to use master lease structures, pursuant to which we lease multiple properties to a single tenant on a unitary (i.e., “all or none”)
basis. In addition, in the context of our sale-leaseback investments, we generally seek to establish contract rents that are at
prevailing market rents, which we believe enhances tenant retention and reduces our releasing risk if a lease is rejected in a
bankruptcy proceeding or expires.
Diversification.
We monitor and manage the diversification of our portfolio in order to reduce the risks associated with adverse
developments affecting a particular tenant, property, industry or region. Our strategy targets a scaled portfolio that, over time, will
(1) derive no more than 5% of its annualized base from any single tenant or more than 1% of its annualized base rent from any single
property, (2) be primarily leased to tenants operating in service-oriented or experience-based businesses and (3) avoid significant
geographic concentration. While we consider these criteria when making investments, we may be opportunistic in managing our
business and make investments that do not meet one or more of these criteria if we believe the opportunity presents an attractive
risk-adjusted return.
Asset
Management.
We are an active asset manager and regularly review each of our properties for changes in the business
performance at the property, credit of the tenant and local real estate market conditions. Among other things, we use Moody’s
Analytics RiskCalc (“RiskCalc”), which is a model for predicting private company defaults based on Moody’s Analytics Credit
Research Database, to proactively detect credit deterioration. Additionally, we monitor market rents relative to in-place rents and the
amount of tenant capital expenditures in order to refine our tenant retention and alternative use assumptions. Our management team
utilizes our internal credit diligence to monitor the credit profile of each of our tenants on an ongoing basis. We believe that this
proactive approach enables us to identify and address issues expeditiously and to determine whether there are properties in our
portfolio that are appropriate for disposition.
In addition, as part of our active portfolio management, we may selectively dispose of assets that we conclude do not offer a return
commensurate with the investment risk, contribute to unwanted geographic, industry or tenant concentrations, or may be sold at a
price we determine is attractive. During the year ended December 31, 2018, we sold 45 properties for net sales proceeds of
$60.2 million, representing a 3.6% gain compared to our gross investment in these assets of $58.1 million.
8
•
•
•
Focus
on
Relationship-Based
Sourcing
to
Grow
Our
Portfolio
by
Originating
Sale-Leaseback
Transactions
.
We plan to
continue our disciplined growth by originating sale-leaseback transactions and opportunistically making acquisitions of properties
subject to net leases that contribute to our portfolio’s tenant, industry and geographic diversification. Since we commenced
investment activities in June 2016, our senior management team has sourced, underwritten, negotiated and structured 175
investment transactions that have closed. As of December 31, 2018, exclusive of our GE Seed Portfolio, 82.2% of our portfolio’s
annualized base rent was attributable to internally originated sale-leaseback transactions and 92.1% was acquired from parties who
had previously engaged in transactions that involved a member of our senior management team (including operators and tenants and
other participants in the net lease industry, such as brokers, intermediaries and financing sources). In addition, we seek to leverage
our relationships with our tenants to facilitate investment opportunities, including selectively agreeing to reimburse certain of our
tenants for development costs at our properties in exchange for contractually specified rent that generally increases proportionally
with our funding. As of December 31, 2018, exclusive of our GE Seed Portfolio, approximately 48.2% of our investments were
sourced from operators and tenants who had previously consummated a transaction involving a member of our management team,
and approximately 43.9% were sourced from participants in the net lease industry, such as brokers, intermediaries or financing
sources, who had previously been involved with a transaction involving a member of our management team. We believe our senior
management team’s reputation, in-depth market knowledge and extensive network of long-standing relationships in the net lease
industry provide us access to an ongoing pipeline of attractive investment opportunities.
As of February 22, 2019, we have entered into purchase and sale agreements for 20 properties with an aggregate purchase price of
$40.1 million.
Focus
on
Middle-Market
Companies
in
Service-Oriented
or
Experience-Based
Businesses
.
We primarily focus on investing
in properties that we lease on a long-term, triple-net basis to unrated middle-market companies that we determine have attractive
credit characteristics and stable operating histories. Properties leased to middle-market companies may offer us the opportunity to
achieve superior risk-adjusted returns, as a result of our intensive credit and real estate analysis, lease structuring and portfolio
construction. We believe our capital solutions are attractive to middle-market companies due to their more limited financing options,
as compared to larger, rated organizations, and, in many cases, smaller transactions with middle-market companies will allow us to
maintain and grow our portfolio’s diversification. Middle-market companies are often willing to enter into leases with structures and
terms that we consider attractive (such as master leases and leases that require ongoing tenant financial reporting) and believe
contribute to the stability of our rental revenue.
In addition, we emphasize investment in properties leased to tenants engaged in service-oriented or experience-based businesses,
such as restaurants (including quick service and casual and family dining), car washes, automotive services, medical services,
convenience stores, entertainment, early childhood education, and health and fitness, as we believe these businesses are generally
more insulated from e-commerce pressure than many others.
Internal
Growth
Through
Long-Term
Triple-Net
Leases
That
Provide
for
Periodic
Rent
Escalations
. We seek to enter into
long-term (typically with initial terms of 15 years or more and tenant renewal options), triple-net leases that provide for periodic
contractual rent escalations. As of December 31, 2018, our leases had a weighted average remaining lease term of 14.2 years
(based on annualized base rent), with only 3.1% of our annualized base rent attributable to leases expiring prior to January 1, 2023,
and 97.1% of our leases (based on annualized base rent) provided for increases in future base rent at a weighted average of 1.5%
per year. Additionally, our underwriting and active asset management, which we believe
9
reduce default losses and increase renewal probabilities, is intended to enhance the stability of our rental revenue.
•
Actively
Manage
Our
Balance
Sheet
to
Maximize
Capital
Efficiency
.
We seek to maintain a prudent balance between debt
and equity financing and to maintain funding sources that lock in long-term investment spreads and limit interest rate sensitivity. As of
December 31, 2018, we had $549.1 million of gross debt outstanding and net debt of $532.9 million. Our net income for the three
months ended December 31, 2018 was $8.2 million, our Annualized Adjusted EBITDA re
was $102.3 million and our ratio of net debt
to Annualized Adjusted EBITDA re
was 5.2x. We target a level of net debt that, over time, is generally less than six times our
Annualized Adjusted EBITDA re
. We have access to multiple sources of debt capital, including the investment grade-rated, asset-
backed bond market, through our Master Trust Funding Program, and bank debt, through the Revolving Credit Facility.
Net debt and Annualized Adjusted EBITDA re
are non-GAAP financial measures. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Non-GAAP Financial Measures.”
Competition
We face competition for acquisitions of real property from investors, including traded and non-traded public REITs, private equity investors
and institutional investment funds, some of which have greater financial resources than we do, a greater ability to borrow funds to acquire properties
and the ability to accept more risk. We also believe that competition for real estate financing comes from middle-market business owners
themselves, many of whom have had a historic preference to own, rather than lease, the real estate they use in their businesses. This competition
may increase the demand for the types of properties in which we typically invest and, therefore, reduce the number of suitable investment
opportunities available to us and increase the prices paid for such acquisition properties. This competition will increase if investments in real estate
become more attractive relative to other forms of investment.
As a landlord, we compete in the multi-billion dollar commercial real estate market with numerous developers and owners of properties,
many of which own properties similar to ours in the same markets in which our properties are located. Some of our competitors have greater
economies of scale, lower costs of capital, access to more resources and greater name recognition than we do. If our competitors offer space at
rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose our tenants or prospective tenants,
and we may be pressured to reduce our rental rates or to offer substantial rent abatements, tenant improvement allowances, early termination rights
or below-market renewal options in order to retain tenants when our leases expire.
Employees
As of December 31, 2018, we had 18 full-time employees. Our staff is mostly comprised of professional employees engaged in origination,
underwriting, closing, financial reporting, portfolio management and capital markets activities essential to our business.
Insurance
Our tenants are generally required to maintain liability and property insurance coverage for the properties they lease from us pursuant
to triple-net leases. These leases generally require our tenants to name us (and any of our lenders that have a mortgage on the property leased by
the tenant) as additional insureds on their liability policies and additional named insured and/or loss payee (or mortgagee, in the case of our lenders)
on their property policies. Depending on the location of the property, losses of a catastrophic nature, such as those caused by earthquakes and
floods, may be covered by insurance policies that are held by our tenant with limitations such as large deductibles or co-payments that a tenant may
not be able to meet. In addition, losses of a catastrophic nature, such as those caused by wind/hail,
10
hurricanes, terrorism or acts of war, may be uninsurable or not economically insurable. If there is damage to our properties that is not covered by
insurance and such properties are subject to recourse indebtedness, we will continue to be liable for the indebtedness, even if these properties are
irreparably damaged. See “Risk Factors—Risks Related to Our Business and Properties—Insurance on our properties may not adequately cover all
losses and uninsured losses could materially and adversely affect us.”
In addition to being a named insured on our tenants’ liability policies, we separately maintain commercial general liability coverage. We also
maintain full property coverage on all untenanted properties and other property coverage as may be required by our lenders, which are not required
to be carried by our tenants under our leases.
Regulation
General.
Our properties are subject to various laws, ordinances and regulations, including those relating to fire and safety requirements,
and affirmative and negative covenants and, in some instances, common area obligations. Our tenants have primary responsibility for compliance
with these requirements pursuant to our leases. We believe that each of our properties has the necessary permits and approvals.
Americans
With
Disabilities
Act
(“ADA”).
Under Title III of the ADA, and rules promulgated thereunder, in order to protect individuals with
disabilities, public accommodations must remove architectural and communication barriers that are structural in nature from existing places of public
accommodation to the extent “readily achievable.” In addition, under the ADA, alterations to a place of public accommodation or a commercial facility
are to be made so that, to the maximum extent feasible, such altered portions are readily accessible to and usable by disabled individuals. The
“readily achievable” standard takes into account, among other factors, the financial resources of the affected site and the owner, lessor or other
applicable person.
Compliance with the ADA, as well as other federal, state and local laws, may require modifications to properties we currently own or may
purchase, or may restrict renovations of those properties. Failure to comply with these laws or regulations could result in the imposition of fines or an
award of damages to private litigants, as well as the incurrence of the costs of making modifications to attain compliance, and future legislation could
impose additional obligations or restrictions on our properties. Although our tenants are generally responsible for all maintenance and repairs of the
property pursuant to our lease, including compliance with the ADA and other similar laws or regulations, we could be held liable as the owner of the
property for a failure of one of our tenants to comply with these laws or regulations.
Environmental Matters
Federal, state and local environmental laws and regulations regulate, and impose liability for, releases of hazardous or toxic substances into
the environment. Under various of these laws and regulations, a current or previous owner, operator or tenant of real estate may be required to
investigate and clean up hazardous or toxic substances, hazardous wastes or petroleum product releases or threats of releases at the property, and
may be held liable to a government entity or to third parties for property damage and for investigation, clean- up and monitoring costs incurred by
those parties in connection with the actual or threatened contamination. These laws may impose clean-up responsibility and liability without regard to
fault, or whether or not the owner, operator or tenant knew of or caused the presence of the contamination. The liability under these laws may be
joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken,
although a party held jointly and severally liable may seek to obtain contributions from other identified, solvent, responsible parties of their fair share
toward these costs. These costs may be substantial, and can exceed the value of the property. In addition, some environmental laws may create a
lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. As the owner or
operator of real estate, we also may be liable under common law to third parties for damages and injuries resulting from environmental
contamination emanating from the real estate. The presence of contamination, or the failure to properly remediate contamination, on a property
11
may adversely affect the ability of the owner, operator or tenant to sell or rent that property or to borrow using the property as collateral, and may
adversely impact our investment in that property.
Some of our properties contain, have contained, or are adjacent to or near other properties that have contained or currently contain storage
tanks for the storage of petroleum products or other hazardous or toxic substances. Similarly, some of our properties were used in the past for
commercial or industrial purposes, or are currently used for commercial purposes, that involve or involved the use of petroleum products or other
hazardous or toxic substances, or are adjacent to or near properties that have been or are used for similar commercial or industrial purposes. These
operations create a potential for the release of petroleum products or other hazardous or toxic substances, and we could potentially be required to
pay to clean up any contamination. In addition, environmental laws regulate a variety of activities that can occur on a property, including the storage
of petroleum products or other hazardous or toxic substances, air emissions, water discharges and exposure to lead-based paint. Such laws may
impose fines or penalties for violations, and may require permits or other governmental approvals to be obtained for the operation of a business
involving such activities. As a result of the foregoing, we could be materially and adversely affected.
Environmental laws also govern the presence, maintenance and removal of asbestos-containing material (“ACM”). Federal regulations
require building owners and those exercising control over a building’s management to identify and warn, through signs and labels, of potential
hazards posed by workplace exposure to installed ACM in their building. The regulations also have employee training, record keeping and due
diligence requirements pertaining to ACM. Significant fines can be assessed for violation of these regulations . As a result of these regulations,
building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits by
workers and others exposed to ACM. The regulations may affect the value of a building containing ACM in which we have invested. Federal, state
and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of ACM when those materials are in
poor condition or in the event of construction, remodeling, renovation or demolition of a building. These laws may impose liability for improper
handling or a release into the environment of ACM and may provide for fines to, and for third parties to seek recovery from, owners or operators of
real properties for personal injury or improper work exposure associated with ACM.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem
remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can
also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen,
viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects
and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our
properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the
affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to
liability from our tenants, employees of our tenants or others if property damage or personal injury occurs.
Before completing any property acquisition, we obtain environmental assessments in order to identify potential environmental concerns at the
property. These assessments are carried out in accordance with the Standard Practice for Environmental Site Assessments (ASTM Practice E 1527-
13) as set by ASTM International, formerly known as the American Society for Testing and Materials, and generally include a physical site inspection
, a review of relevant federal, state and local environmental and health agency database records, one or more interviews with appropriate site-
related personnel, review of the property’s chain of title and review of historical aerial photographs and other information on past uses of the
property. These assessments are limited in scope. If, however, recommended in the initial assessments, we may undertake additional assessments
such as soil and/or groundwater samplings or other limited subsurface investigations and ACM or mold surveys to test for substances of concern. A
prior owner or operator of a property or historic operations at our properties may have created a material environmental condition that is not known
to us or the independent consultants preparing the
12
site assessments. Material environmental conditions may have arisen after the review was completed or may arise in the future, and future laws,
ordinances or regulations may impose material additional environmental liability. If environmental concerns are not satisfactorily resolved in any
initial or additional assessments, we may obtain environmental insurance policies to insure against potential environmental risk or loss depending on
the type of property, the availability and cost of the insurance and various other factors we deem relevant (i.e., an environmental occurrence affects
one of our properties where our lessee may not have the financial capability to honor its indemnification obligations to us). Our ultimate liability for
environmental conditions may exceed the policy limits on any environmental insurance policies we obtain, if any.
Generally, our leases require the lessee to comply with environmental law and provide that the lessee will indemnify us for any loss or
expense we incur as a result of lessee’s violation of environmental law or the presence, use or release of hazardous materials on our property
attributable to the lessee. If our lessees do not comply with environmental law, or we are unable to enforce the indemnification obligations of our
lessees, our results of operations would be adversely affected.
We cannot predict what other environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations
will be administered or interpreted or what environmental conditions may be found to exist on the properties in the future. Compliance with existing
and new laws and regulations may require us or our tenants to spend funds to remedy environmental problems. If we or our tenants were to become
subject to significant environmental liabilities, we could be materially and adversely affected.
About Us and Available Information
We were incorporated under the laws of Maryland on January 12, 2018. Since our IPO in June 2018, shares of our common stock have been
listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “EPRT”. Our offices are located at 902 Carnegie Center Blvd., Suite 520,
Princeton, New Jersey, 08540. We currently lease approximately 13,453 square feet of office space from an unaffiliated third party. Our telephone
number is (609) 436-0619 and our website is www.essentialproperties.com.
We electronically file with the Securities and Exchange Commission (the “SEC”) our annual reports on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K, pursuant to Section 13(a) of the Exchange Act. You may obtain a free copy of our annual reports on Form 10-
K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports, on the day of filing with the SEC on our
website, or by sending an email message to info@essentialproperties.com.
Item 1A. Risk Factors.
There
are
many
factors
that
affect
our
business
and
the
results
of
our
operation,
some
of
which
are
beyond
our
control.
Set
forth
below
are
the
risks
that
we
believe
are
material.
You
should
carefully
consider
the
following
risks
in
evaluating
us
and
our
business.
The
occurrence
of
any
of
the
following
risks
could
materially and
adversely
impact
our
financial
condition,
results
of
operations,
cash
flows,
liquidity,
the
market
price
of
our
common
stock,
and
our
ability
to,
among
other
things,
satisfy
our
debt
service
obligations
and
to
make
distributions
to
our
stockholders,
which
in
turn
could
cause
our
stockholders
to
lose
all
or
a
part
of
their
investment.
Some
statements
in
this
report
including
statements
in
the
following
risk
factors
constitute
forward-looking
statements.
Please
refer
to
the
section
entitled
“Special
Note
Regarding
Forward-Looking
Statements.”
13
Risks Related to Our Business and Properties
We
are
subject
to
risks
related
to
commercial
real
estate
ownership
that
could
reduce
the
value
of
our
properties.
Our core business is the ownership of real estate that is net leased on a long-term basis to middle-market companies operating service-
oriented or experience-based businesses. Accordingly, our performance is subject to risks incident to the ownership of commercial real estate,
including:
•
•
•
•
•
•
•
•
•
•
inability to collect rents from tenants due to financial hardship, including bankruptcy;
changes in local real estate conditions in the markets in which we operate, including the availability and demand for single-tenant
restaurant and retail space;
changes in consumer trends and preferences that affect the demand for products and services offered by our tenants;
inability to re-lease or sell properties upon expiration or termination of existing leases;
environmental risks, including the potential presence of hazardous or toxic substances on our properties;
the subjectivity of real estate valuations and changes in such valuations over time;
the illiquid nature of real estate compared to most other financial assets;
changes in laws and governmental regulations, including those governing real estate usage and zoning;
changes in interest rates and the availability of financing; and
changes in the general economic and business climate.
The occurrence of any of the risks described above may cause the value of our real estate to decline, which could materially and adversely
affect us.
Global
market
and
economic
conditions
may
materially
and
adversely
affect
us
and
the
ability
of
our
tenants
to
make
rental
payments
to
us
pursuant
to
our
leases.
Our results of operations are sensitive to changes in the overall economic conditions that impact our tenants’ financial condition and leasing
practices. Adverse economic conditions such as high unemployment levels, interest rates, tax rates and fuel and energy costs may have an impact
on the results of operations and financial conditions of our tenants. During periods of economic slowdown, rising interest rates and declining demand
for real estate may result in a general decline in rents or an increased incidence of defaults under existing leases. A lack of demand for rental space
could adversely affect our ability to maintain our current tenants and gain new tenants, which may affect our growth and profitability. Accordingly, a
decline in economic conditions could materially and adversely affect us.
Our
business
is
dependent
upon
our
tenants
successfully
operating
their
businesses
and
their
failure
to
do
so
could
materially
and
adversely
affect
us.
Generally, each of our properties is operated and occupied by a single tenant. Therefore, the success of our investments is materially
dependent on the financial stability of our tenants. The success of any one of our tenants is dependent on its individual business and its industry,
which could be adversely affected by poor management, economic conditions in general, changes in consumer trends and preferences that
decrease demand for a tenant’s products or services or other factors over which
14
neither they nor we have control. Our portfolio consists primarily of properties leased to single tenants that operate in multiple locations, which
means we own numerous properties operated by the same tenant. To the extent we own or finance numerous properties operated by and leased to
one company, the general failure of that single tenant or a loss or significant decline in its business could materially and adversely affect us.
At any given time, any tenant may experience a downturn in its business that may weaken its operating results or the overall financial
condition of individual properties or its business as whole. As a result, a tenant may delay lease commencement, fail to make rental payments when
due, decline to extend a lease upon its expiration, become insolvent or declare bankruptcy. We depend on our tenants to operate the properties we
own in a manner which generates revenues sufficient to allow them to meet their obligations to us, including their obligations to pay rent, maintain
certain insurance coverage, pay real estate taxes and maintain the properties in a manner so as not to jeopardize their operating licenses or
regulatory status. The ability of our tenants to fulfill their obligations under our leases may depend, in part, upon the overall profitability of their
operations. Cash flow generated by certain tenant businesses may not be sufficient for a tenant to meet its obligations to us. We could be materially
and adversely affected if a number of our tenants were unable to meet their obligations to us.
Our
assessment
that
certain
businesses
are
more
insulated
from
e-commerce
pressure
than
many
others
may
prove
to
be
incorrect,
and
changes
in
macroeconomic
trends
may
adversely
affect
our
tenants,
either
of
which
could
impair
our
tenants’
ability
to
make
rental
payments
to
us
and
materially
and
adversely
affect
us.
We primarily invest in properties leased to tenants engaged in a targeted set of
service-oriented or experience-based businesses, and we believe these businesses are generally more insulated from e-commerce pressure than
many others. While we believe this to be the case, businesses previously thought to be internet resistant, such as the retail grocery industry, have
proven to be susceptible to competition from e-commerce. Technology and business conditions, particularly in the retail industry, are rapidly
changing, and our tenants may be adversely affected by technological innovation, changing consumer preferences and competition from non-
traditional sources. To the extent our tenants face increased competition from non-traditional competitors, such as internet vendors, some of which
may have different business models and larger profit margins, their businesses could suffer. There can be no assurance that our tenants will be
successful in meeting any new competition, and a deterioration in our tenants’ businesses could impair their ability to meet their lease obligations to
us and materially and adversely affect us.
Additionally, we believe that many of the businesses operated by our tenants are favorably impacted by current macroeconomic trends that
support consumer spending, such as generally declining unemployment and positive consumer sentiment. Economic conditions are cyclical, and
developments that discourage consumer spending, such as increasing unemployment, wage stagnation, decreases in the value of real estate and/or
financial assets, inflation or increasing interest rates, could adversely affect our tenants, impair their ability to meet their lease obligations to us and
materially and adversely affect us.
Single-tenant
leases
involve
significant
risks
of
tenant
default.
Our strategy focuses primarily on investing in single-tenant triple-net leased properties throughout the United States. The financial failure of,
or default in payment by, a single tenant under its lease is likely to cause a significant or complete reduction in our rental revenue from that property
and a reduction in the value of the property. We may also experience difficulty or a significant delay in re-leasing or selling such property. This risk is
magnified in situations where we lease multiple properties to a single tenant under a master lease. A tenant failure or default under a master lease
could reduce or eliminate rental revenue from multiple properties and reduce the value of such properties. Although the master lease structure may
be beneficial to us because it restricts the ability of tenants to remove individual underperforming assets, there is no guarantee that a tenant will not
default in its obligations to us or decline to renew its master lease upon expiration. The default of a tenant that leases multiple properties from us or
its decision not to renew its master lease upon expiration could materially and adversely affect us.
15
Our
portfolio
has
geographic
market
concentrations
that
make
us
especially
susceptible
to
adverse
developments
in
those
geographic
markets.
In addition to general, regional, national and international economic conditions, our operating performance is impacted by the economic
conditions of the specific geographic markets in which we have concentrations of properties. Our business includes substantial holdings in the
following states as of December 31, 2018 (based on annualized base rent): Texas (12.5%), Georgia (10.8%), Michigan (6.2%), Florida (5.9%) and
Alabama (5.6%). In addition, a significant portion of our holdings as of that date (based on annualized rent) were located in the South (54.9%) and
Midwest (26.2%) regions of the United States (as defined by the U.S. Census Bureau). This geographic concentration could adversely affect our
operating performance if conditions become less favorable in any of the states or markets within such states in which we have a concentration of
properties. We cannot guarantee that any of our markets will grow, not experience adverse developments or that underlying real estate
fundamentals will be favorable to owners and operators of service-oriented or experience-based properties. Our operations may also be affected if
competing properties are built in our markets. A downturn in the economy in the states or regions in which we have a concentration of properties, or
markets within such states or regions, could adversely affect our tenants operating businesses in those states, impair their ability to pay rent to us
and materially and adversely affect us.
We
are
subject
to
risks
related
to
tenant
concentration,
and
an
adverse
development
with
respect
to
a
large
tenant
could
materially
and
adversely
affect
us.
As of December 31, 2018, Captain D’s (Captain D’s, LLC), our largest tenant, contributed 5.0% of our annualized base rent. Additionally, we
derived 4.1%, 3.9% and 3.6% of our annualized base rent as of December 31, 2018 from Art Van Furniture (AVF Parent, LLC), Mister Car Wash
(Car Wash Partners, Inc.), and Zips Car Wash (Zips Car Wash, LLC), respectively. As a result, our financial performance depends significantly on
the revenues generated from these tenants and, in turn, the financial condition of these tenants. Our strategy targets a scaled portfolio that, over
time, derives no more than 5% of its annualized base from any single tenant or more than 1% from any single property. In the future, we may
experience additional tenant and property concentrations. If one of these tenants, or another tenant that occupies a significant portion of our
properties or whose lease payments represent a significant portion of our rental revenue, were to experience financial weakness or file for
bankruptcy, it could have a material adverse effect on us.
The
vast
majority
of
our
properties
are
leased
to
unrated
tenants
whom
we
determine
are
creditworthy
via
our
internal
underwriting
and
credit
analysis
procedures.
However,
the
tools
we
use
to
measure
credit
quality,
such
as
property-level
rent
coverage
ratio,
may
not
be
accurate.
The vast majority of our properties are leased to unrated tenants whom we determine, through our internal underwriting and credit analysis,
to be creditworthy. Substantially all of our tenants are required to provide corporate-level financial information to us periodically or, in some
instances, at our request. This financial information generally includes balance sheet, income statement and cash flow statement data, or other
financial and operating data, on an annual basis. Additionally, as of December 31, 2018, leases contributing 97.5% of our annualized base rent
required tenants to provide us with specified unit-level financial information and leases contributing 98.3% of our annualized base rent required
tenants to provide us with corporate-financial information. To assist in our determination of a tenant’s credit quality, we utilize RiskCalc. RiskCalc is a
model for predicting private company defaults, based on Moody’s Analytics Credit Research Database, that provides an estimated default frequency
(“EDF”) and a “shadow rating,” and we evaluate a lease’s property-level rent coverage ratio.
Our methods may not adequately assess the risk of an investment. An EDF score and shadow rating from RiskCalc is not the same as a
published credit rating and lacks the extensive company participation that is typically involved when a rating agency publishes a rating; accordingly,
an EDF score or a shadow rating may not be as indicative of creditworthiness as a rating published by Moody’s Investors Services, Inc. (“Moody’s”),
S&P Global Ratings, a division of S&P Global, Inc. (“S&P”), or another nationally recognized statistical rating organization. An EDF is only an
estimate of default
16
probability based, in part, on assumptions incorporated into the product. Our calculations of EDFs, shadow ratings and rent coverage ratios are
unaudited and are based on financial information provided to us by our tenants and prospective tenants without independent verification on our part,
and we must assume the appropriateness of estimates and judgments that were made by the party preparing the financial information. If our
assessment of credit quality proves to be inaccurate, we may be subject to defaults, and investors may view our cash flows as less stable. The
ability of an unrated tenant to meet its obligations to us may be more speculative than that of a rated tenant.
The
decrease
in
demand
for
restaurant
and
retail
space
may
materially
and
adversely
affect
us.
As of December 31, 2018, leases representing approximately 25.3% and 6.4% of our annual rent were with tenants in the restaurant and
retail industries, respectively. In the future we may acquire additional restaurant and retail properties. Accordingly, decreases in the demand for
restaurant and/or retail spaces may have a greater adverse effect on us than if we had fewer investments in these industries. The market for
restaurant and retail space has been, and could continue to be, adversely affected by weakness in the national, regional and local economies, the
adverse financial condition of some large restaurant and retail companies, the ongoing consolidation in the restaurant and retail industries, the
excess amount of restaurant and retail space in a number of markets and, in the case of the retail industry, increasing consumer purchases through
the internet. To the extent that these conditions continue, they are likely to negatively affect market rents for restaurant and retail space and could
materially and adversely affect us.
We
may
be
unable
to
renew
leases,
lease
vacant
space
or
re-lease
space
as
leases
expire
on
favorable
terms
or
at
all.
Our results of operations depend on our ability to continue to strategically lease space in our properties, including renewing expiring leases,
leasing vacant space and re-leasing space in properties where leases are expiring, optimizing our tenant mix or leasing properties on more
economically favorable terms. As of December 31, 2018, leases representing approximately 0.7% of our annualized base rent will expire during
2019. As of December 31, 2018, exclusive of one vacant land parcel that we own, our occupancy was 100%. Current tenants may decline, or may
not have the financial resources available, to renew current leases, and we cannot guarantee that leases that are renewed will have terms that are
as economically favorable to us as the expiring lease terms. If tenants do not renew the leases as they expire, we will have to find new tenants to
lease our properties and there is no guarantee that we will be able to find new tenants or that our properties will be re-leased at rental rates equal to
or above the current average rental rates or that substantial rent abatements, tenant improvement allowances, early termination rights or below-
market renewal options will not be offered to attract new tenants. We may experience significant costs in connection with re-leasing a significant
number of our properties, which could materially and adversely affect us.
As
we
continue
to
acquire
properties,
we
may
decrease
or
fail
to
increase
the
diversity
of
our
portfolio.
While we will seek to maintain or increase our portfolio’s tenant, geographic and industry diversification with future acquisitions, it is possible
that we may determine to consummate one or more acquisitions that actually decrease our portfolio’s diversity. If our portfolio becomes less diverse,
the trading price our common stock may fall, as our business will be more sensitive to the bankruptcy or insolvency of fewer tenants, to changes in
consumer trends of a particular industry and to a general economic downturn in a particular geographic area.
We
have
investments
in
industries
that
depend
upon
discretionary
spending
by
consumers.
A
reduction
in
the
willingness
or
ability
of
consumers
to
use
their
discretionary
income
in
the
businesses
of
our
tenants
and
potential
tenants
could
reduce
the
demand
for
our
properties.
Most of our portfolio is leased to tenants operating service-oriented or experience-based businesses at our properties. Restaurants (including
quick service and casual and family dining), car washes, medical
17
services, home furnishings, convenience stores, automotive services, entertainment (including movie theaters), early childhood education and health
and fitness represent the largest industries in our portfolio. Captain D’s, Art Van Furniture, Mister Car Wash, Zips Car Wash, AMC Theaters,
Applebee’s, The Malvern School, R-Store, Latitude Sports Clubs and 84 Lumber represent the largest concepts in our portfolio. The success of most
of these businesses depends on the willingness of consumers to use discretionary income to purchase their products or services. A downturn in the
economy could cause consumers to reduce their discretionary spending, which may have a material adverse effect on us.
Our
ability
to
realize
future
rent
increases
on
some
of
our
leases
may
vary
depending
on
changes
in
the
CPI.
Our leases often provide for periodic contractual rent escalations. As of December 31, 2018, leases contributing 97.1% of our annualized
base rent provided for increases in future annual base rent, generally ranging from 1.0% to 4.0% annually, with a weighted average annual
escalation equal to 1.5% of base rent. Although many of our rent escalators increase rent at a fixed amount on fixed dates, approximately 10.3% of
our rent escalators relate to an increase in the CPI over a specified period.
Therefore, during periods of low inflation or deflation, small increases or decreases in the CPI will subject us to the risk of receiving lower
rental revenue than we otherwise would have been entitled to receive if our rent escalators were based on higher fixed percentages or amounts.
Inflation
may
materially
and
adversely
affect
us
and
our
tenants.
While our tenants are generally obligated to pay property-level expenses relating to the properties they lease from us (e.g., maintenance,
insurance and property taxes), we incur other expenses, such as general and administrative expense, interest expense relating to our debt (some of
which bears interest at floating rates) and carrying costs for vacant properties. These expenses would increase in an inflationary environment, and
such increases may exceed any increase in revenue we receive under our leases. Additionally, increased costs may have an adverse impact on our
tenants if increases in their operating expenses exceed increases in their revenue, which may adversely affect the tenants’ ability to pay rent owed to
us.
Some
of
our
tenants
operate
under
franchise
or
license
agreements,
which,
if
terminated
or
not
renewed
prior
to
the
expiration
of
their
leases
with
us,
would
likely
impair
their
ability
to
pay
us
rent.
As of December 31, 2018, tenants contributing 15.5% of our annualized base rent operated under franchise or license agreements.
Generally, franchise agreements have terms that end earlier than the respective expiration dates of the related leases. In addition, a tenant’s rights
as a franchisee or licensee typically may be terminated and the tenant may be precluded from competing with the franchisor or licensor upon
termination. Usually, we have no notice or cure rights with respect to such a termination and have no rights to assignment of any such franchise
agreement. This may have an adverse effect on our ability to mitigate losses arising from a default on any of our leases. A franchisor’s or licensor’s
termination or refusal to renew a franchise or license agreement would likely have a material adverse effect on the ability of the tenant to make
payments under its lease, which could materially and adversely affect us.
The
bankruptcy
or
insolvency
of
a
tenant
could
result
in
the
termination
or
modification
of
such
tenant’s
lease
and
material
losses
to
us.
The occurrence of a tenant bankruptcy or insolvency could diminish the income we receive from that tenant’s lease or leases or force us to
“take back” a property as a result of a default or a rejection of a lease by a tenant in bankruptcy. If a tenant becomes bankrupt, the automatic stay
created by the bankruptcy will prohibit us from collecting pre-bankruptcy debts from that tenant, or from its property, or evicting such tenant based
solely upon such bankruptcy or insolvency, unless we obtain an order
18
permitting us to do so from the bankruptcy court. In addition, a bankrupt or insolvent tenant may be authorized to reject and terminate its lease or
leases with us. Any claims against such bankrupt tenant for unpaid future rent would be subject to statutory limitations that would likely result in our
receipt of rental revenues that are substantially less than the contractually specified rent we are owed under the lease or leases. In addition, any
claim we have for unpaid past rent, if any, may not be paid in full. We may also be unable to re-lease a terminated or rejected space or to re-lease it
on comparable or more favorable terms. As a result, tenant bankruptcies may materially and adversely affect us.
Tenants who are considering filing for bankruptcy protection may request that we agree to amendments of their master leases to remove
certain of the properties they lease from us under such master leases. We cannot guarantee that we will be able to sell or re-lease properties that we
agree to release from tenants’ leases in the future or that lease termination fees, if any, will be sufficient to make up for the rental revenues lost as a
result of lease amendments.
Property
vacancies
could
result
in
significant
capital
expenditures.
The loss of a tenant, either through lease expiration or tenant bankruptcy or insolvency, may require us to spend significant amounts of
capital to renovate the property before it is suitable for a new tenant and cause us to incur significant costs. Many of the leases we enter into or
acquire are for properties that are specially suited to the particular business of our tenants. Because these properties have been designed or
physically modified for a particular tenant, if the current lease is terminated or not renewed, we may be required to renovate the property at
substantial costs, decrease the rent we charge or provide other concessions in order to lease the property to another tenant. In addition, if we are
required to sell the property, we may have difficulty selling it to a party other than the tenant due to the special purpose for which the property may
have been designed or modified. This potential illiquidity may limit our ability to quickly modify our portfolio in response to changes in economic or
other conditions, including tenant demand. These limitations may materially and adversely affect us.
Defaults
by
borrowers
on
mortgages
we
hold
could
lead
to
losses.
From time to time, we have made and may, in the future, assume a limited number of mortgage or other loans to extend financing to tenants
at our properties. A default by a borrower on its loan payments to us that would prevent us from earning interest or receiving a return of the principal
of our loan could materially and adversely affect us. In the event of a default, we may also experience delays in enforcing our rights as lender and
may incur substantial costs in collecting the amounts owed to us and in liquidating any collateral.
Foreclosure and other similar proceedings used to enforce payment of real estate loans are generally subject to principles of equity, which
are designed to relieve the indebted party from the legal effect of that party’s default. Foreclosure and other similar laws may limit our right to obtain
a deficiency judgment against the defaulting party after a foreclosure or sale. The application of any of these principles may lead to a loss or delay in
the payment on loans we hold. Further, in the event we have to foreclose on a property, the amount we receive from the foreclosure sale of the
property may be inadequate to fully pay the amounts owed to us by the borrower and our costs incurred to foreclose, repossess and sell the
property. Any of such events could materially and adversely affect us.
We
may
be
unable
to
identify
and
complete
acquisitions
of
suitable
properties,
which
may
impede
our
growth,
and
our
future
acquisitions
may
not
yield
the
returns
we
seek.
Our ability to expand through acquisitions requires us to identify and complete acquisitions or investment opportunities that are compatible
with our growth strategy and to successfully integrate newly acquired properties into our portfolio. We continually evaluate investment opportunities
and may acquire properties when strategic opportunities exist. Our ability to acquire properties on favorable terms and successfully operate them
may be constrained by the following significant risks:
19
•
•
•
•
•
•
•
•
•
•
•
•
we face competition from other real estate investors with significant capital, including REITs and institutional investment funds, which
may be able to accept more risk than we can prudently manage, including risks associated with paying higher acquisition prices;
we face competition from other potential acquirers which may significantly increase the purchase price for a property we acquire,
which could reduce our growth prospects;
we may be unable to locate properties that will produce a sufficient spread between our cost of capital and the lease rate we can
obtain from a tenant, in which case our ability to profitably grow our company will decrease;
we may fail to have sufficient equity, adequate capital resources or other financing available to complete acquisitions;
we may incur significant costs and divert management attention in connection with evaluating and negotiating potential acquisitions,
including ones that we are subsequently unable to complete;
we may acquire properties that are not accretive to our results upon acquisition, and we may be unsuccessful in managing and
leasing such properties in accordance with our expectations;
our cash flow from an acquired property may be insufficient to meet our required principal and interest payments with respect to debt
used to finance the acquisition of such property;
we may discover unexpected items, such as unknown liabilities, during our due diligence investigation of a potential acquisition or
other customary closing conditions may not be satisfied, causing us to abandon an investment opportunity after incurring expenses
related thereto;
we may fail to obtain financing for an acquisition on favorable terms or at all;
we may spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;
market conditions may result in higher than expected vacancy rates and lower than expected rental rates; or
we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown
liabilities such as liabilities for clean-up of undisclosed environmental contamination not revealed in Phase I environmental reports or
otherwise through due diligence, claims by tenants, vendors or other persons dealing with the former owners of the properties,
liabilities incurred in the ordinary course of business and claims for indemnification by general partners, directors, officers and others
indemnified by the former owners of the properties.
If any of these risks are realized, we may be materially and adversely affected.
We
may
not
acquire
the
properties
that
we
evaluate
in
our
pipeline.
We generally maintain a robust pipeline of investment opportunities. Transactions may fail to close for a variety of reasons, including the
discovery of previously unknown liabilities or other items uncovered during our diligence process. Similarly, we may never execute binding purchase
agreements with respect to properties that are currently subject to non-binding letters of intent, and properties with respect to which we are
negotiating may never lead to the execution of any letter of intent. For many other reasons, we
20
may not ultimately acquire the properties currently in our pipeline. Accordingly, you should not place undue reliance on the concept of a pipeline as
we have referred to in this Annual Report.
Illiquidity
of
real
estate
investments
could
significantly
impede
our
ability
to
respond
to
adverse
changes
in
the
performance
of
our
properties
and
harm
our
financial
condition.
Our investments are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more properties in our portfolio in
response to changing economic, financial or investment conditions is limited. Return of capital and realization of gains, if any, from an investment
generally will occur upon disposition or refinancing of the underlying property. We may be unable to realize our investment objective by sale, other
disposition or refinancing at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy. In particular,
these risks could arise from weakness in or even the lack of an established market for a property, changes in the financial condition or prospects of
prospective purchasers, changes in national or international economic conditions and changes in laws, regulations or fiscal policies of the jurisdiction
in which the property is located.
In addition, the Internal Revenue Code of 1986, as amended (the “Code”), imposes restrictions on a REIT’s ability to dispose of properties
that are not applicable to other types of real estate companies. In particular, the tax laws applicable to REITs effectively require that we hold our
properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forgo or defer sales of properties
that otherwise would be in our best interest. Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly
or on favorable terms, which may materially and adversely affect us.
We
face
significant
competition
for
acquisitions,
which
may
reduce
the
number
of
acquisitions
we
are
able
to
complete
and
increase
the
costs
of
these
acquisitions.
We face competition for acquisitions of real property from investors, including traded and non-traded public REITs, private equity investors
and institutional investment funds, some of which have greater financial resources than we do, a greater ability to borrow funds to acquire properties
and the ability to accept more risk than we can prudently manage. This competition may increase the demand for the types of properties in which we
typically invest and, therefore, reduce the number of suitable investment opportunities available to us and increase the prices paid for such
acquisition properties. This competition will increase if investments in real estate become more attractive relative to other types of investment.
Accordingly, competition for the acquisition of real property could materially and adversely affect us.
Our
growth
depends
on
external
sources
of
capital
that
are
outside
of
our
control
and
may
not
be
available
to
us
on
commercially
reasonable
terms
or
at
all.
In order to qualify as a REIT, we are required under the Code, among other things, to distribute annually at least 90% of our REIT taxable
income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to income tax at
the corporate rate to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid
deduction and including any net capital gain. Because of these distribution requirements, we may not be able to fund future capital needs, including
any necessary acquisition financing, from operating cash flow. Consequently, we rely on third-party sources to fund our capital needs, including for
funding acquisitions and refinancing indebtedness as it matures. We may not be able to obtain the financing on favorable terms or at all. Any
additional debt we incur will increase our leverage and likelihood of default. Our access to third-party sources of debt and equity capital depends, in
part, on:
•
•
•
general market conditions;
the market’s perception of our growth potential;
our current debt levels;
21
•
•
•
our current and expected future earnings;
our cash flow and cash distributions; and
the market price per share of our common stock.
If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, meet the
capital and operating needs of our existing properties, satisfy our debt service obligations or make the cash distributions to our stockholders
necessary to qualify as a REIT. Periods of volatility in the credit and capital markets negatively affect the amounts, sources and cost of capital
available to us. If sufficient sources of external financing are not available to us on cost effective terms, we could be forced to limit our acquisition
activity and/or to take other actions to fund our business activities and repayment of debt, such as selling assets. To the extent that we access
capital at a higher cost (reflected in higher interest rates for debt financing or lower stock price for equity financing), our acquisition yields, earnings
per share and cash flow could be adversely affected.
Failure
to
hedge
effectively
against
interest
rate
changes
may
materially
and
adversely
affect
us.
While we have not hedged our exposure to interest rate volatility, we may choose to do so in the future. Should we seek to hedge our interest
rate exposure, we may choose to use interest rate swaps, caps or derivative instruments. However, these arrangements involve risks and may not
be effective in reducing our exposure to interest rate changes. In addition, the counterparties to any hedging arrangements we enter into in the future
may not honor their obligations. Failure to hedge effectively against changes in interest rates relating to the interest expense of our future floating-
rate borrowings may materially and adversely affect us.
A
significant
portion
of
our
assets
have
been
pledged
to
secure
the
borrowings
of
our
subsidiaries.
A significant portion of our investment portfolio consists of assets owned by our consolidated, bankruptcy remote, special purpose entity
subsidiaries that have been pledged to secure the long-term borrowings of those subsidiaries. As of December 31, 2018, we had properties
comprising $609.2 million of net investments pledged as collateral under our Master Trust Funding Program. We or our other consolidated
subsidiaries are the equity owners of these special purpose entities, meaning we are entitled to the excess cash flows after debt service and all other
required payments are made on the debt of these entities. If our subsidiaries fail to make the required payments on this indebtedness, distributions
of excess cash flow to us may be reduced or eliminated and the indebtedness may become immediately due and payable. If the subsidiaries are
unable to pay the accelerated indebtedness, the pledged assets could be foreclosed upon and distributions of excess cash flow to us may be
suspended or terminated. In this case, our ability to make distributions to our stockholders could be materially and adversely affected.
Loss
of
our
key
personnel
with
long-standing
business
relationships
could
materially
impair
our
ability
to
operate
successfully.
Our continued success and our ability to manage anticipated future growth depend, in large part, upon the efforts of key personnel,
particularly our President and Chief Executive Officer, Peter M. Mavoides, and Gregg A. Seibert, our Executive Vice President and Chief Operating
Officer, who have extensive market knowledge and relationships and exercise substantial influence over our operational, financing, acquisition and
disposition activity. Among the reasons that they are important to our success is that each has a national or regional industry reputation that attracts
business and investment opportunities and assists us in negotiations with lenders, existing and potential tenants and industry personnel.
Many of our other executive personnel also have extensive experience and strong reputations in the real estate industry and have been
instrumental in setting our strategic direction, operating our business,
22
identifying, recruiting and training key personnel and arranging necessary financing. In particular, the extent and nature of the relationships that
these individuals have developed with financial institutions and existing and prospective tenants is critically important to the success of our business.
We cannot guarantee the continued employment of any of our management team, who may choose to leave our company for any number of
reasons, such as other business opportunities, differing views on our strategic direction or other personal reasons. The loss of services of one or
more members of our management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business,
diminish our investment opportunities and weaken our relationships with lenders, business partners, existing and prospective tenants and industry
personnel, which could materially and adversely affect us.
Any
material
failure,
weakness,
interruption
or
breach
in
security
of
our
information
systems
could
prevent
us
from
effectively
operating
our
business.
We rely on information systems across our operations and corporate functions, including finance and accounting, and depend on such
systems to ensure payment of obligations, collection of cash, data warehousing to support analytics, and other various processes and procedures.
Our ability to efficiently manage our business depends significantly on the reliability and capacity of these systems. The failure of these systems to
operate effectively, maintenance problems, upgrading or transitioning to new platforms, or a breach in security of these systems, such as in the
event of cyber-attacks, could adversely affect us. Although we make efforts to maintain the security and integrity of our information systems, and
we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts
and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected
information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve
and generally are not recognized until launched against a target, and in some cases are designed to not be detected and, in fact, may not be
detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures,
and thus it is impossible for us to entirely mitigate this risk. A security breach or other significant disruption involving our information systems could
disrupt the proper functioning of our networks and systems; result in misstated financial reports, violations of loan covenants and/or missed reporting
deadlines; result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT; result in the
unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable
information of ours or others, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and
outcomes; require significant management attention and resources to remedy any damages that result; subject us to claims for breach of contract,
damages, credits, penalties or termination of leases or other agreements; or damage our reputation among our tenants and investors generally.
We
have
a
limited
operating
history
and
our
past
experience
may
not
be
sufficient
to
allow
us
to
successfully
operate
as
a
public
company
going
forward.
We commenced business operations in March 2016. We cannot assure you that our past experience will be sufficient to successfully operate
our company as a publicly traded company, including the requirements to timely meet disclosure requirements of the SEC and comply with the
Sarbanes-Oxley Act. We are required to develop and implement control systems and procedures in order to satisfy our periodic and current reporting
requirements under applicable SEC regulations and comply with the NYSE listing standards, and this transition could place a significant strain on our
management systems, infrastructure and other resources. Failure to operate successfully as a public company could materially and adversely affect
us.
We
are
subject
to
litigation,
which
could
materially
and
adversely
affect
us.
We are party to various lawsuits, claims and other legal proceedings. These matters may involve significant expense and may result in
judgments or settlements, which may be significant. There can be no assurance that insurance will be available to cover losses related to legal
proceedings or that our
23
tenants will meet any indemnification obligations that they have to us. In the future, we may become subject to additional litigation. Some of these
claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against.
Resolution of these types of matters against us may result in our having to pay significant fines, judgments or settlements, which, if uninsured, or if
the fines, judgments, and settlements exceed insured levels, could adversely impact our business, financial position, results of operations or liquidity.
Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could materially and
adversely impact us, expose us to increased risks that would be uninsured, and materially and adversely impact our ability to attract directors and
officers.
In
connection
with
its
audit
of
the
consolidated
financial
statements
of
Essential
Properties
Realty
Trust
LLC,
which
became
our
Operating
Partnership
prior
to
our
IPO,
for
the
period
from
March
30,
2016
(commencement
of
operations)
to
December
31,
2016,
Ernst
&
Young
LLP
identified
a
material
weakness
in
internal
control
over
financial
reporting.
Material
weaknesses
or
a
failure
to
maintain
an
effective
system
of
internal
control
over
financial
reporting
could
prevent
us
from
accurately
reporting
our
financial
results
in
a
timely
manner,
which
could
materially
and
adversely
affect
us.
In connection with its audit of the consolidated financial statements of Essential Properties Realty Trust LLC, which became our Operating
Partnership prior to our IPO, for the period from March 30, 2016 (commencement of operations) to December 31, 2016, Ernst & Young LLP, our
independent registered public accounting firm, identified a material weakness in internal control over financial reporting. A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The identified material weakness
involved a lack of formally designed processes and controls relating to non-routine and estimation processes to prevent or mitigate the risk of
material errors from occurring within the financial statements. During the audit, Ernst & Young LLP identified material audit differences individually
and in the aggregate that required adjusting journal entries to be made to the consolidated financial statements. Ernst & Young LLP indicated that
formally implementing accounting processes, written job descriptions and responsibilities, and designing and implementing controls over non-routine
and estimation processes would reduce the risk that material misstatements may not be prevented or detected on a timely basis. Though we
remediated this material weakness and no material weaknesses were identified in connection with the audits of our financial statements for the years
ended December 31, 2017 and 2018, there can be no guarantee that we will not identify material weaknesses in the future.
As a publicly traded company, we are required to report annual audited financial statements and quarterly unaudited interim financial
statements prepared in accordance with GAAP. We rely on our internal control over financial reporting to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. More broadly,
effective internal control over financial reporting is a necessary component of our program to seek to prevent, and to detect any, fraud and to operate
successfully as a public company. Though we remediated the material weakness described above that was identified in connection with the audit of
our financial statements for the period from March 30, 2016 (commencement of operations) to December 31, 2016 and no material weaknesses
were identified in connection with the audits of our financial statements for the years ended December 31, 2017 and 2018, there can be no
guarantee that we will not identify material weaknesses in the future or that our internal control over financial reporting will be effective in
accomplishing all of its objectives. Furthermore, as we grow, our business, and hence our internal control over financial reporting, will likely become
more complex, and we may require significantly more resources to develop and maintain effective controls. Designing and implementing an effective
system of internal control over financial reporting is a continuous effort that requires significant resources, including the expenditure of a significant
amount of time by senior members of our management team.
While Section 404 of the Sarbanes-Oxley Act will require us to assess the effectiveness of our internal control structure and procedures for
financial reporting on an annual basis, for as long as we are
24
an “emerging growth company” under the JOBS Act (which we may be until the last day of the fiscal year following the fifth anniversary of our IPO,
which occurred in June 2018), the registered public accounting firm that issues an audit report on our financial statements will not be required to
attest to or report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. An
independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not.
In connection with our ongoing monitoring of our internal control over financial reporting or audits of our financial statements, we or our
auditors may identify additional deficiencies in our internal control over financial reporting that may be significant or rise to the level of material
weaknesses. Any failure to maintain effective internal control over financial reporting or to timely effect any necessary improvements to such controls
could harm our operating results or cause us to fail to meet our reporting obligations (which could affect the listing of our common stock on the
NYSE). Additionally, ineffective internal control over financial reporting could also adversely affect our ability to prevent or detect fraud, harm our
reputation and cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price
of our common stock.
If
we
fail
to
implement
and
maintain
effective
disclosure
controls
and
procedures,
we
may
not
be
able
to
meet
applicable
reporting
requirements
or
prevent
or
detect
fraud,
which
could
harm
our
reputation,
cause
investors
to
lose
confidence
in
our
reports,
and
materially
and
adversely
affect
us.
We are subject to the informational requirements of the Exchange Act and are required to file reports and other information with the SEC. As
a publicly traded company, we are required to maintain disclosure controls and procedures that are designed to ensure that information required to
be disclosed in the reports that we file with, or submit to, the SEC is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms. They include controls and procedures designed to ensure that information required to be disclosed in reports
filed with, or submitted to, the SEC is accumulated and communicated to management, including our principal executive and principal financial
officers, to allow timely decisions regarding required disclosure. Effective disclosure controls and procedures are necessary for us to provide reliable
reports, effectively prevent and detect fraud, and to operate successfully as a public company. Designing and implementing effective disclosure
controls and procedures is a continuous effort that requires significant resources and devotion of time. We may discover deficiencies in our
disclosure controls and procedures that may be difficult or time consuming to remediate in a timely manner. Any failure to maintain effective
disclosure controls and procedures or to timely effect any necessary improvements thereto could cause us to fail to meet our reporting obligations
(which could affect the listing of our common stock on the NYSE). Additionally, ineffective disclosure controls and procedures could also adversely
affect our ability to prevent or detect fraud, harm our reputation and cause investors to lose confidence in our reports filed with, or submitted to, the
SEC, which would likely have a negative effect on the trading price of our common stock.
We
will
continue
to
incur
significant
expenses
as
a
result
of
being
a
public
company,
which
will
negatively
impact
our
financial
performance.
We incur, and will continue to incur, significant legal, accounting, insurance and other expenses as a result of being a public company. The
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and the Sarbanes-Oxley Act, as well as related rules
implemented by the SEC and the NYSE, have required changes in corporate governance practices of public companies. Although the JOBS Act
may for a limited period of time lessen the cost of complying with some of these additional regulatory and other requirements, we nonetheless have
experienced a substantial increase in legal, accounting, insurance and certain other expenses, which will negatively impact our financial
performance. In addition, rules that the SEC is implementing or is required to implement pursuant to the Dodd-Frank Act are expected to require
additional changes. We expect that compliance with these and other similar laws, rules and regulations, including compliance with Section 404 of the
Sarbanes-Oxley Act, will substantially increase our expenses, including our legal and accounting costs, and make some activities more time-
consuming and costly. We also expect these laws, rules and regulations to make it
25
more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage, which may make it more difficult for us to attract and retain qualified persons to
serve on our board of directors or as officers.
The
costs
of
compliance
with
or
liabilities
related
to
environmental
laws
may
materially
and
adversely
affect
us.
The properties we own or have owned in the past may subject us to known and unknown environmental liabilities. Under various federal,
state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs
and damages resulting from environmental matters, including the presence or discharge of hazardous or toxic substances, waste or petroleum
products at, on, in, under or migrating from such property, including costs to investigate or clean up such contamination and liability for personal
injury, property damage or harm to natural resources. We may face liability regardless of:
•
•
•
•
our knowledge of the contamination;
the timing of the contamination;
the cause of the contamination; or
the party responsible for the contamination of the property.
There may be environmental liabilities associated with our properties of which we are unaware. We obtain Phase I environmental site
assessments on all properties we finance or acquire. The Phase I environmental site assessments are limited in scope and therefore may not reveal
all environmental conditions affecting a property. Therefore, there could be undiscovered environmental liabilities on the properties we own. Some of
our properties use, or may have used in the past, underground tanks for the storage of petroleum-based products or waste products that could
create a potential for release of hazardous substances or penalties if tanks do not comply with legal standards. If environmental contamination exists
on our properties, we could be subject to strict, joint and/or several liability for the contamination by virtue of our ownership interest. Some of our
properties may contain asbestos-containing materials (“ACM”). Environmental laws govern the presence, maintenance and removal of ACM and
such laws may impose fines, penalties, or other obligations for failure to comply with these requirements or expose us to third-party liability (e.g.,
liability for personal injury associated with exposure to asbestos). Environmental laws also apply to other activities that can occur on a property, such
as storage of petroleum products or other hazardous toxic substances, air emissions, water discharges and exposure to lead-based paint. Such laws
may impose fines and penalties for violations, and may require permits or other governmental approvals to be obtained for the operation of a
business involving such activities.
The known or potential presence of hazardous substances on a property may adversely affect our ability to sell, lease or improve the
property or to borrow using the property as collateral. In addition, environmental laws may create liens on contaminated properties in favor of the
government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties,
environmental laws may impose restrictions on the manner in which they may be used or businesses may be operated, and these restrictions may
require substantial expenditures.
In addition, although our leases generally require our tenants to operate in compliance with all applicable laws and to indemnify us against
any environmental liabilities arising from a tenant’s activities on the property, we could be subject to strict liability by virtue of our ownership interest.
We cannot be sure that our tenants will, or will be able to, satisfy their indemnification obligations, if any, under our leases. Furthermore, the
discovery of environmental liabilities on any of our properties could lead to significant remediation costs or to other liabilities or obligations
attributable to the tenant of that property, or could result in material interference with the ability of our tenants to operate their businesses as
26
currently operated. Noncompliance with environmental laws or discovery of environmental liabilities could each individually or collectively affect such
tenant’s ability to make payments to us, including rental payments and, where applicable, indemnification payments.
Our environmental liabilities may include property and natural resources damage, personal injury, investigation and clean-up costs, among
other potential environmental liabilities. These costs could be substantial. Although we may obtain insurance for environmental liability for certain
properties that are deemed to warrant coverage, our insurance may be insufficient to address any particular environmental situation and we may be
unable to continue to obtain insurance for environmental matters, at a reasonable cost or at all, in the future. If our environmental liability insurance is
inadequate, we may become subject to material losses for environmental liabilities. Our ability to receive the benefits of any environmental liability
insurance policy will depend on the financial stability of our insurance company and the position it takes with respect to our insurance policies. If we
were to become subject to significant environmental liabilities, we could be materially and adversely affected.
Our
properties
may
contain
or
develop
harmful
mold,
which
could
lead
to
liability
for
adverse
health
effects
and
costs
of
remediation.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem
remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor
exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other
reactions. As a result, should our tenants or their employees or customers be exposed to mold at any of our properties we could be required to
undertake a costly remediation program to contain or remove the mold from the affected property. In addition, exposure to mold by our tenants or
others could subject us to liability if property damage or health concerns arise. If we were to become subject to significant mold-related liabilities, we
could be materially and adversely affected.
Natural
disasters,
terrorist
attacks,
other
acts
of
violence
or
war,
or
other
unexpected
events
could
materially
and
adversely
impact
us.
Natural disasters, terrorist attacks, other acts of violence or war or other unexpected events could materially interrupt our business
operations (or those of our tenants), cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and worldwide
financial markets and economy. They also could result in or prolong an economic recession in the United States. Any of these occurrences could
materially and adversely affect us.
Insurance
on
our
properties
may
not
adequately
cover
all
losses
and
uninsured
losses
could
materially
and
adversely
affect
us.
Our tenants are required to maintain liability and property insurance coverage for the properties they lease from us pursuant to triple-net
leases. Pursuant to such leases, our tenants are required to name us (and any of our lenders that have a mortgage on the property leased by the
tenant) as additional insureds on their liability policies and additional named insured and/or loss payee (or mortgagee, in the case of our lenders) on
their property policies. All tenants are required to maintain casualty coverage and most carry limits at 100% of replacement cost. Depending on the
location of the property, losses of a catastrophic nature, such as those caused by earthquakes and floods, may be covered by insurance policies that
are held by our tenant with limitations such as large deductibles or co-payments that a tenant may not be able to meet. In addition, losses of a
catastrophic nature, such as those caused by wind/hail, hurricanes, terrorism or acts of war, may be uninsurable or not economically insurable. If
there is damage to our properties that is not covered by insurance and such properties are subject to recourse indebtedness, we will continue to be
liable for the indebtedness, even if these properties are irreparably damaged.
Inflation, changes in building codes and ordinances, environmental considerations and other factors, including terrorism or acts of war, may
make any insurance proceeds we receive insufficient to repair or replace a property if it is damaged or destroyed. In that situation, the insurance
proceeds received may
27
not be adequate to restore our economic position with respect to the affected real property. Furthermore, if we experience a substantial or
comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications without significant capital
expenditures which may exceed any amounts received pursuant to insurance policies, as reconstruction or improvement of such a property would
likely require significant upgrades to meet zoning and building code requirements. The loss of our capital investment in or anticipated future returns
from our properties due to material uninsured losses could materially and adversely affect us.
Compliance
with
the
ADA
and
fire,
safety
and
other
regulations
may
require
us
to
make
unanticipated
expenditures.
Our properties are subject to the ADA. Under the ADA, all public accommodations must meet federal requirements related to access and use
by disabled persons. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition
of fines by the U.S. government or an award of damages to private litigants, or both. While our tenants are obligated by law to comply with the ADA
and typically obligated under our leases to cover costs associated with compliance, if required changes involve greater expenditures than anticipated
or if the changes must be made on a more accelerated basis than anticipated, the ability of our tenants to cover costs could be adversely affected,
and we could be required to expend our own funds to comply with the provisions of the ADA.
In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use
regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. We may be required to make
substantial capital expenditures to comply with those requirements and may be required to obtain approvals from various authorities with respect to
our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. There can be no assurance
that existing laws and regulatory policies will not adversely affect us or the timing or cost of any future acquisitions or renovations, or that additional
regulations will not be adopted that increase such delays or result in additional costs. Additionally, failure to comply with any of these requirements
could result in the imposition of fines by governmental authorities or awards of damages to private litigants. While we intend to only acquire
properties that we believe are currently in substantial compliance with all regulatory requirements, these requirements may change and new
requirements may be imposed which could require significant unanticipated expenditures by us.
Changes
in
accounting
standards
may
materially
and
adversely
affect
us.
From time to time the Financial Accounting Standards Board (“FASB”) and the SEC, who create and interpret accounting standards, may
change the financial accounting and reporting standards or their interpretation and application of these standards that will govern the preparation of
our financial statements. These changes could materially and adversely affect our reported financial condition and results of operations, and, under
certain circumstances, may cause us to fail to comply with financial covenants contained in agreements relating to our indebtedness. In some cases,
we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Similarly, these
changes could materially and adversely affect our tenants’ reported financial condition or results of operations and affect their preferences regarding
leasing real estate.
In
the
future,
we
may
choose
to
acquire
properties
or
portfolios
of
properties
through
tax
deferred
contribution
transactions,
which
could
result
in
stockholder
dilution
and
limit
our
ability
to
sell
such
assets.
In the future we may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for interests in
our Operating Partnership, which may result in stockholder dilution. This acquisition structure may have the effect of, among other things, reducing
the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require that we agree to protect the contributors’
ability to defer recognition of taxable gain through restrictions on our ability to
28
dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions could
limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions.
Risks Related to Our Indebtedness
As
of
December
31,
2018,
we
had
$549.1
million
principal
balance
of
indebtedness
outstanding,
which
requires
substantial
cash
flow
to
service,
subjects
us
to
covenants
and
refinancing
risk
and
the
risk
of
default.
As of December 31, 2018, we had $549.1 million of indebtedness outstanding. This indebtedness consisted of $515.1 million aggregate
principal amount of Class A Notes and Class B Notes issued under our Master Trust Funding Program, which allows us to issue multiple series of
rated notes from time to time to institutional investors in the asset-backed securities market, and $34.0 million of borrowings under our Revolving
Credit Facility. Payments of principal and interest on indebtedness may leave us with insufficient cash resources to meet our cash needs or make
the distributions to our common stockholders currently contemplated or necessary to qualify as a REIT. Our level of indebtedness and the limitations
imposed on us by our debt agreements could have significant adverse consequences, including the following:
•
•
•
•
•
•
•
•
•
•
•
our cash flow may be insufficient to make our required principal and interest payments;
cash interest expense and financial covenants relating to our indebtedness may limit or eliminate our ability to make distributions to
our common stockholders;
we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our
ability to consummate investment opportunities or meet operational needs;
we may be unable to refinance our indebtedness at maturity, or the refinancing terms may be less favorable than the terms of the
debt being refinanced;
because a portion of our debt bears interest at variable rates, increases in interest rates could increase our interest expense;
we may be unable to hedge floating rate debt, counterparties may fail to honor their obligations under any hedge agreements we
enter into, such agreements may not effectively hedge interest rate fluctuation risk, and, upon the expiration of any hedge
agreements we enter into, we would be exposed to then-existing market rates of interest and future interest rate volatility;
we may be forced to dispose of properties, possibly on unfavorable terms or in violation of certain covenants to which we may be
subject;
we may default on our obligations and the lenders or mortgagees may foreclose on our properties or our interests in the entities that
own the properties that secure their loans and receive an assignment of rents and leases;
foreclosure on collateral securing indebtedness could create taxable income without accompanying cash proceeds, which could
adversely affect our ability to meet the distribution requirement necessary to qualify for taxation as a REIT under the Code;
we may be restricted from accessing some of our excess cash flow after debt service if certain of our tenants fail to meet certain
financial performance metric thresholds;
we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations; and
29
•
our default under any loan with cross default provisions could result in a default on other indebtedness.
The occurrence of any of these events could materially and adversely affect us.
Market
conditions
could
adversely
affect
our
ability
to
refinance
existing
indebtedness
or
obtain
additional
financing
for
growth
on
acceptable
terms
or
at
all.
Credit markets may experience significant price volatility, displacement and liquidity disruptions, including the bankruptcy, insolvency or
restructuring of certain financial institutions. Such circumstances could materially impact liquidity in the financial markets, making financing terms for
borrowers less attractive, and potentially result in the unavailability of various types of debt financing. As a result, we may be unable to obtain debt
financing on favorable terms or at all or fully refinance maturing indebtedness with new indebtedness. Reductions in our available borrowing capacity
or inability to obtain credit when required or when business conditions warrant could materially and adversely affect us.
If prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense
relating to that refinanced indebtedness would increase. Higher interest rates on newly incurred debt may negatively impact us as well. If interest
rates increase, our interest costs and overall costs of capital will increase, which could materially and adversely affect us and our ability to make
distributions to our stockholders.
Total debt payments for 2019 are $8.0 million, all of which represents scheduled principal amortization. We expect to meet these repayment
requirements primarily through financing activity or net cash from operating activities.
Our
debt
financing
agreements,
including
the
Master
Trust
Funding
Program
and
the
Revolving
Credit
Facility,
contain
restrictions
and
covenants
which
may
limit
our
ability
to
enter
into
or
obtain
funding
for
certain
transactions,
operate
our
business
or
make
distributions
to
our
common
stockholders.
The agreements governing our borrowings, including the Master Trust Funding Program and the Revolving Credit Facility, contain financial
and other covenants with which we are required to comply and that limit our ability to operate our business. These covenants, as well as any
additional covenants to which we may be subject in the future because of additional borrowings, could cause us to have to forego investment
opportunities, reduce or eliminate distributions to our common stockholders or obtain financing that is more expensive than financing we could obtain
if we were not subject to the covenants. In addition, the agreements governing our borrowing may have cross default provisions, which provide that a
default under one of our debt financing agreements would lead to a default on all of our debt financing agreements.
The covenants and other restrictions under our debt agreements may affect, among other things, our ability to:
•
•
•
•
•
incur indebtedness;
create liens on assets;
cause our subsidiaries to distribute cash to us to fund distributions to stockholders or to otherwise use in our business;
sell or substitute assets;
modify certain terms of our leases;
30
•
•
manage our cash flows; and
make distributions to equity holders, including our common stockholders.
Additionally, these restrictions may adversely affect our operating and financial flexibility and may limit our ability to respond to changes in
our business or competitive environment.
Under
certain
circumstances,
the
subsidiaries
included
in
our
Master
Trust
Funding
Program
would
be
prohibited
from
distributing
excess
cash
flow
to
us,
and
the
assets
of
such
subsidiaries
could
be
foreclosed
upon.
Through our Master Trust Funding Program, certain of our Operating Partnership’s indirect wholly owned subsidiaries have issued net-lease
mortgage notes payable with an aggregate outstanding principal balance as of December 31, 2018 of $515.1 million. As of December 31, 2018, we
had pledged 347 properties, with a net investment amount of $609.2 million, as collateral under this program. As the equity owner of the subsidiaries
included in our Master Trust Funding Program, we are only entitled to the excess cash flows from such subsidiaries after debt service and all other
required payments are made on the notes. If at any time the monthly debt service coverage ratio (as defined) generated by the collateral pool is less
than or equal to 1.25 to 1, excess cash flow (as defined) from the subsidiaries included in our Master Trust Funding Program will be deposited into a
reserve account to be used for payments to be made on the net-lease mortgage notes, to the extent there is a shortfall. Additionally, if at any time
the three month average debt service coverage ratio generated by the collateral pool is less than or equal to 1.15 to 1, excess cash flow from the
subsidiaries included in our Master Trust Funding Program will be applied to an early amortization of the notes. For the year ended December 31,
2018, the debt service coverage ratio was approximately 1.53 to 1. If we fail to maintain the required debt service coverage ratios, the excess cash
flows we receive from these subsidiaries would be reduced or eliminated. This could materially and adversely affect us, including by reducing our
ability to pay cash distributions on our common stock and possibly prevent us from maintaining our qualification for taxation as a REIT. In addition, if
the subsidiaries included in our Master Trust Funding Program are unable to repay the notes, including in connection with any acceleration of
maturity, the pledged assets could be foreclosed upon and our equity in such assets eliminated.
Risks Related to Our Organizational Structure
Eldridge
Industries,
LLC
(“Eldridge”)
has
substantial
influence
over
our
business,
and
its
interests,
and
the
interests
of
certain
members
of
our
management,
may
differ
from
our
interests
or
those
of
our
other
stockholders.
Eldridge beneficially owns approximately 17.8% of our outstanding common stock. As a result, Eldridge has significant influence in the
election of our directors, who will elect our executive officers, set our management policies and exercise overall supervision and control over us and
our subsidiaries. In addition, pursuant to our charter, our bylaws and the stockholders agreement that we entered into with Eldridge, Eldridge, subject
to certain limitations, has the right to designate nominees for election to our board of directors, designate a member of certain board committees and
approve certain actions, such as the removal of directors designated by Eldridge and amendments to certain provisions of our charter and bylaws. In
addition to the waiver from our ownership limit that we granted to Eldridge, allowing Eldridge to own up to 19.0% of our outstanding common stock,
we agreed in the stockholders agreement to, upon Eldridge’s request, subject to the delivery by Eldridge of any additional information requested by
our board of directors, increase the percentage of our outstanding common stock that may be owned by Eldridge, unless our board concludes that
any such increase could jeopardize our ability to qualify for taxation as a REIT. Additionally, for so long as Eldridge owns at least 10% of the units of
limited partnership interest in our Operating Partnership (“OP Units”), we will be prohibited from undertaking certain actions, including, without
limitation, consummating fundamental transactions, without first gaining the approval of the partners as specified in the partnership
agreement. Certain potential transactions may affect Eldridge differently than other stockholders and it is possible that Eldridge may have different
interests than stockholders with respect to such transactions.
31
The interests of Eldridge may differ from the interests of our other stockholders, and Eldridge’s significant stockholdings and rights described
above may limit other stockholders’ ability to influence corporate matters. In this regard, sales or other dispositions of our properties may have
adverse tax implications for Eldridge. In addition, certain members of our management have equity interests in the holding company through which
Eldridge owns some of its interest in our business, which may cause them to have interests that differ from our other stockholders. The concentration
of ownership and voting power of Eldridge and Eldridge’s rights described above may also delay, defer or even prevent an acquisition by a third
party or other change of control of our company and may make some transactions more difficult or impossible without the support of Eldridge, even if
such events are in the best interests of our other stockholders. The concentration of voting power in Eldridge may have an adverse effect on the
price of our common stock. As a result of Eldridge’s influence, we may take actions that our other stockholders do not view as beneficial, which may
adversely affect our results of operations and financial condition and cause the value of your investment in us to decline.
Eldridge and its affiliates engage in a broad spectrum of activities, including investing in real estate. In the ordinary course of their business
activities, Eldridge and its affiliates may engage in activities where their interests conflict with our interests or those of our stockholders. Our charter
provides that, to the maximum extent permitted by Maryland law, none of Eldridge, its affiliates, each of their representatives, and each of our
directors or officers that is an employee, affiliate or designee for nomination as a director of Eldridge has any duty to refrain from engaging, directly
or indirectly, in the same business activities or similar business activities or lines of business in which we operate or directly or indirectly doing
business with any of our clients, customers or suppliers. Eldridge and its affiliates also may pursue acquisition opportunities that may be
complementary to our business (except that our charter provides that any corporate opportunity presented to a person solely in his or her capacity as
a director or officer of us must be presented to us). As a result, those acquisition opportunities may not be available to us.
Our
charter
and
bylaws
and
Maryland
law
contain
provisions
that
may
delay,
defer
or
prevent
a
change
of
control
transaction,
even
if
such
a
change
in
control
may
be
in
your
interest,
and
as
a
result
may
depress
the
market
price
of
our
common
stock.
Our
charter
contains
certain
restrictions
on
ownership
and
transfer
of
our
stock.
Our charter contains various provisions that are intended to, among other things, assist us in maintaining our qualification for taxation as a
REIT and, subject to certain exceptions, authorizes our directors to take such actions as are necessary or appropriate to cause us to qualify as a
REIT. For example, our charter prohibits the actual, beneficial or constructive ownership by any person of more than 7.5% in value or in number of
shares, whichever is more restrictive, of the outstanding shares of our common stock or more than 7.5% in value of the aggregate of the outstanding
shares of all classes and series of our stock. However, certain entities that are defined as designated investment entities in our charter, which
generally includes pension funds, mutual funds and certain investment management companies, are permitted to own up to 9.8% (in value or in
number of shares) of our outstanding common stock, or 9.8% in value of the aggregate of the outstanding shares of all classes and series of stock,
so long as each beneficial owner of the shares owned by such designated investment entity would satisfy the ownership limits if each such beneficial
owner owned directly its pro rata share of the common stock owned by the designated investment entity.
Our board of directors, in its sole and absolute discretion, may exempt a person, prospectively or retroactively, from these ownership limits if
certain conditions are satisfied. The restrictions on ownership and transfer of our stock may, among other things:
•
•
discourage a tender offer or other transactions or a change in management or of control that might involve a premium price for our
common stock or that our stockholders otherwise believe to be in their best interests; or
result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of one or more charitable beneficiaries
and, as a result, the forfeiture by the acquirer of the benefits of owning the additional shares.
32
We
could
increase
or
decrease
the
number
of
authorized
shares
of
stock,
classify
and
reclassify
unissued
stock
and
issue
stock
without
stockholder
approval.
Our board of directors, without stockholder approval, has the power under our charter to amend our charter to increase or decrease the
aggregate number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue, to authorize us to issue
authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any unissued shares of our common stock or
preferred stock into one or more classes or series of stock and to set the terms of such newly classified or reclassified shares. As a result, we may
issue one or more classes or series of common stock or preferred stock with preferences, conversion or other rights, voting powers or rights,
restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption that are senior to, or otherwise
conflict with, the rights of our common stockholders. Our board of directors could establish a class or series of common stock or preferred stock that
could, depending on the terms of such class or series, delay, defer or prevent a transaction or a change of control that might involve a premium price
for our common stock or otherwise be in the best interest of our stockholders.
Termination
of
the
employment
agreements
with
certain
members
of
our
senior
management
team
could
be
costly
and
could
prevent
a
change
in
control
of
our
company.
The employment agreements with certain members of our senior management team provide that if their employment with us terminates
under certain circumstances (including in connection with a change in control of our company), we may be required to pay them significant amounts
of severance compensation, thereby making it costly to terminate their employment. Furthermore, these provisions could delay or prevent a
transaction or a change in control of our company that might involve a premium paid for shares of our common stock or otherwise be in the best
interests of our stockholders.
Our
board
of
directors
may
change
our
investment
and
financing
policies
without
stockholder
approval,
including
those
with
respect
to
borrowing,
and
we
may
become
more
highly
leveraged,
which
may
increase
our
risk
of
default
under
our
debt
obligations.
Our investment and financing policies are exclusively determined by our board of directors. Accordingly, our stockholders do not control
these policies. Further, our organizational documents do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur.
Although we are not required to maintain a particular leverage ratio and may not be able to do so, we generally intend to target a level of net debt
(which includes recourse and non-recourse borrowings and any outstanding preferred stock issuance less unrestricted cash and cash equivalents)
that, over time, is less than six times our Annualized Adjusted EBITDA re
. However, from time to time, our ratio of net debt to our Annualized
Adjusted EBITDA re
may exceed six times. Our board of directors may alter or eliminate our current policy on borrowing at any time without
stockholder approval. If this policy changed, we could become more highly leveraged, which could result in an increase in our debt service. Higher
leverage also increases the risk of default on our obligations. In addition, a change in our investment policies, including the manner in which we
allocate our resources across our portfolio or the types of assets in which we seek to invest, may increase our exposure to interest rate risk, real
estate market fluctuations and liquidity risk. Changes to our policies with regards to the foregoing could materially and adversely affect us.
Our
rights
and
the
rights
of
our
stockholders
to
take
action
against
our
directors
and
officers
are
limited.
As permitted by Maryland law, our charter limits the liability of our directors and officers to us and our stockholders for money damages to the
maximum extent permitted by Maryland law. Therefore, our directors and officers are subject to monetary liability resulting only from: actual receipt
of an improper benefit or profit in money, property or services; or active and deliberate dishonesty by the director or officer that was established by a
final judgment as being material to the cause of action adjudicated.
33
As a result, we and our stockholders have rights against our directors and officers that are more limited than might otherwise exist.
Accordingly, if actions taken by any of our directors or officers impede the performance of our company, your and our ability to recover damages
from such director or officer will be limited. In addition, our charter and our bylaws require us to indemnify our directors and officers for actions taken
by them in those and certain other capacities to the maximum extent permitted by Maryland law.
We
are
a
holding
company
with
no
direct
operations
and
rely
on
funds
received
from
our
Operating
Partnership
to
make
any
distributions
to
stockholders
and
to
pay
liabilities.
We are a holding company and conduct substantially all of our operations through our Operating Partnership. We do not have any
independent operations, and our only material asset is our interest in our Operating Partnership. As a result, we rely on distributions from our
Operating Partnership to pay any distributions we might declare on shares of our common stock. We also rely on distributions from our Operating
Partnership to meet any of our obligations, including any tax liability on taxable income allocated to us from our Operating Partnership. In addition,
because we are a holding company, claims by our stockholders will be structurally subordinated to all existing and future liabilities and obligations
(whether or not for borrowed money) of our Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or
reorganization, our assets and those of our Operating Partnership and its subsidiaries will be able to satisfy the claims of our stockholders only after
all of our and our Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.
In connection with our future acquisition of properties or otherwise, we may issue units of our Operating Partnership to third parties. Such
issuances would reduce our ownership in our Operating Partnership. If you do not directly own units of our Operating Partnership, you will not have
any voting rights with respect to any such issuances or other partnership level activities of our Operating Partnership.
Conflicts
of
interest
could
arise
in
the
future
between
the
interests
of
our
stockholders
and
the
interests
of
holders
of
units
in
our
Operating
Partnership,
which
may
impede
business
decisions
that
could
benefit
our
stockholders.
Conflicts of interest could arise in the future as a result of the relationships between us and our stockholders, on the one hand, and our
Operating Partnership and its limited partners, on the other. Our directors and officers have duties to our company under applicable Maryland law in
connection with the management of our company. At the same time, one of our wholly owned subsidiaries, Essential Properties General OP
Holdings, LLC, as the general partner of our Operating Partnership, has fiduciary duties and obligations to our Operating Partnership and its limited
partners under Delaware law and the partnership agreement of our Operating Partnership. The fiduciary duties and obligations of Essential
Properties General OP Holdings, LLC, as general partner of our Operating Partnership, to our Operating Partnership and its limited partners may
conflict with the duties of our directors and officers to our company and its stockholders.
Under the terms of the partnership agreement of our Operating Partnership, if there is a conflict between the interests of our stockholders, on
one hand, and any limited partners, on the other, we will endeavor in good faith to resolve the conflict in a manner not adverse to either our
stockholders or any limited partners; provided, however, that at such time as we own a controlling economic interest in our Operating Partnership,
any conflict that cannot be resolved in a manner not adverse to either our stockholders or any limited partners shall be resolved in favor of our
stockholders.
34
Certain
mergers,
consolidations
and
other
transactions
require
the
approval
of
a
majority
in
interest
of
the
outside
limited
partners
in
our
Operating
Partnership
(which
excludes
us
and
our
subsidiaries),
which
could
prevent
certain
transactions
that
may
result
in
our
stockholders
receiving
a
premium
for
their
shares
or
otherwise
be
in
their
best
interest.
The partnership agreement requires the general partner or us, as the parent of the general partner, to obtain the approval of a majority in
interest of the outside limited partners in our Operating Partnership (which excludes us and our subsidiaries) in connection with certain mergers,
consolidations or other combinations of us, or a sale of all or substantially all of our assets. In addition, for so long as Eldridge owns at least 10% of
the OP Units, the Operating Partnership will be prohibited from undertaking certain actions (including, without limitation, consummating fundamental
transactions) without first gaining the approval of in excess of 50% of (i) the units owned by us or our subsidiaries (voted in the same proportion as
the vote of holders of our shares of common stock) plus (ii) the units issued to Eldridge and EPRT Holdings, LLC (“EPRT Holdings”) in connection
with our IPO. This approval right could prevent a transaction that might be in the best interests of our stockholders.
We
are
an
“emerging
growth
company,”
and
we
cannot
be
certain
that
the
reduced
SEC
reporting
requirements
applicable
to
emerging
growth
companies
will
make
our
common
stock
less
attractive
to
investors,
which
could
make
the
market
price
and
trading
volume
of
our
common
stock
more
volatile.
We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur
of (i) the last day of the fiscal year during which our total annual revenue equals or exceeds $1.07 billion (subject to adjustment for inflation), (ii) the
last day of the fiscal year following the fifth anniversary of our IPO, which occurred in June 2018, (iii) the date on which we have, during the previous
three-year period, issued more than $1 billion in non-convertible debt securities or (iv) the date on which we are deemed to be a “large accelerated
filer” under the Exchange Act. We take advantage of exemptions from various reporting requirements that are applicable to most other public
companies, whether or not they are classified as “emerging growth companies,” including, but not limited to, an exemption from the provisions of
Section 404(b) of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation report on the
effectiveness of our internal control over financial reporting. An attestation report by our auditor would require additional procedures by them that
could detect problems with our internal control over financial reporting that are not detected by management. If our system of internal control over
financial reporting is not determined to be appropriately designed or operating effectively, it could require us to restate financial statements, cause us
to fail to meet reporting obligations and cause investors to lose confidence in our reported financial information, all of which could lead to a significant
decline in the market price of our common stock.
We cannot predict if investors will find our common stock less attractive because we rely on certain of these exemptions and benefits under
the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active, liquid and/or orderly trading market for
our common stock and the market price and trading volume of our common stock may be more volatile and decline significantly.
Risks Related to Our Status as a REIT
Failure
to
qualify
as
a
REIT
would
materially
and
adversely
affect
us
and
the
value
of
our
common
stock,
and
even
if
we
qualify
as
a
REIT,
we
may
be
subject
to
certain
additional
taxes.
We believe that we have been organized and have operated in a manner that will allow us to qualify as a REIT for federal income tax
purposes commencing with our taxable year ended December 31, 2018, and we intend to continue operating in such a manner. We have not
requested and do not plan to request a ruling from the Internal Revenue Service, or IRS, that we qualify as a REIT, and the statements in this Annual
Report are not binding on the IRS or any court. Therefore, we cannot assure you that we will qualify as a REIT, or that we will remain qualified as
such in the future. If we lose our REIT status, we will
35
face significant tax consequences that would substantially reduce our cash available for distribution to you for each of the years involved because:
•
•
•
we would not be allowed a deduction for distributions to stockholders in computing our taxable income and would be subject to
federal income tax at the corporate rate;
we also could be subject to increased state and local taxes; and
unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years
following the year during which we were disqualified.
Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our operations and
distributions to stockholders. In addition, if we fail to qualify as a REIT, we will not be required to make distributions to our stockholders. As a result of
all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and could materially and
adversely affect the trading price of our common stock.
Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and
administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to
qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the ownership of our
stock, requirements regarding the composition of our assets and a requirement that at least 95% of our gross income in any year must be derived
from qualifying sources, such as “rents from real property.” Also, we must make distributions to stockholders aggregating annually at least 90% of
our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. In addition, legislation, new
regulations, administrative interpretations or court decisions may materially and adversely affect our investors, our ability to qualify as a REIT for
federal income tax purposes or the desirability of an investment in a REIT relative to other investments.
Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, state and local income, property and
excise taxes on our income or property and, in certain cases, a 100% penalty tax, in the event we sell property as a dealer. In addition, any taxable
REIT subsidiaries will be subject to tax as regular corporations in the jurisdictions in which they operate.
If
our
Operating
Partnership
fails
to
qualify
as
a
partnership
for
federal
income
tax
purposes,
we
would
cease
to
qualify
as
a
REIT
and
suffer
other
adverse
consequences.
We believe that our Operating Partnership will be treated as a partnership for federal income tax purposes. As a partnership, our Operating
Partnership would generally not be subject to federal income tax on its income. Instead, for federal income tax purposes, if our Operating
Partnership is treated as a partnership, each of its partners, including us, would be allocated, and may be required to pay tax with respect to, such
partner’s share of its income. Our Operating Partnership will generally be required to determine and pay an imputed underpayment of tax (plus
interest and penalties) resulting from an adjustment of the Operating Partnership’s items of income, gain, loss, deduction or credit at the partnership
level. We cannot assure you that the IRS will not challenge the status of our Operating Partnership or any other subsidiary partnership in which we
own an interest as a disregarded entity or partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS
were successful in treating our Operating Partnership or any such other subsidiary partnership as an entity taxable as a corporation for federal
income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would
likely cease to qualify as a REIT. Also, the failure of our Operating Partnership or any subsidiary partnerships to qualify as a disregarded entity or
partnership could cause it to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash
available for debt service and for distribution to its partners, including us.
36
To
maintain
our
REIT
status,
we
may
be
forced
to
borrow
funds
during
unfavorable
market
conditions,
and
the
unavailability
of
such
capital
on
favorable
terms
at
the
desired
times,
or
at
all,
may
cause
us
to
curtail
our
investment
activities
and/or
to
dispose
of
assets
at
inopportune
times,
which
could
materially
and
adversely
affect
us
and
the
per
share
trading
price
of
our
common
stock.
To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, determined
without regard to the dividends-paid deduction and excluding any net capital gains, and we will be subject to corporate income tax on our
undistributed taxable income to the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends-
paid deduction and including any net capital gains, each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any,
by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and
100% of our undistributed income from prior years.
In order to maintain our REIT status and avoid the payment of income and excise taxes, we may need to borrow funds to meet the REIT
distribution requirements even if the then prevailing market conditions are not favorable for these borrowings. These borrowing needs could result
from, among other things, differences in timing between the actual receipt of cash and recognition of income for federal income tax purposes, or the
effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. These sources, however, may not
be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of factors, including the market’s
perception of our growth potential, our debt level and creditworthiness, the market price of our common stock, and our then current and potential
future earnings. We cannot assure you that we will have access to such capital on favorable terms at the desired times, or at all, which may cause
us to curtail our investment activities and/or to dispose of assets at inopportune times, and could materially and adversely affect us and the per share
trading price of our common stock.
The
IRS
may
treat
sale-leaseback
transactions
as
loans,
which
could
jeopardize
our
REIT
status
or
require
us
to
make
an
unexpected
distribution.
A significant portion of our investments were obtained through, and the majority of our future investments are expected to be obtained
through, sale-leaseback transactions, where we purchase owner-occupied real estate and lease it back to the seller. The IRS may take the position
that specific sale-leaseback transactions that we treat as leases are not true leases for federal income tax purposes but are, instead, financing
arrangements or loans.
If a sale-leaseback transaction were so re-characterized, we might fail to satisfy the REIT asset tests, the income tests or distribution
requirements and consequently lose our REIT status effective with the year of re-characterization unless we elect to make an additional distribution
to maintain our REIT status. The primary risk relates to our loss of previously incurred depreciation expenses, which could affect the calculation of
our REIT taxable income and could cause us to fail the REIT distribution test that requires a REIT to distribute at least 90% of its REIT taxable
income, determined without regard to the dividends-paid deduction and excluding any net capital gain. In this circumstance, we may elect to
distribute an additional dividend of the increased taxable income so as not to fail the REIT distribution test. This distribution would be paid to all
stockholders at the time of declaration rather than the stockholders existing in the taxable year affected by the re-characterization.
Dividends
payable
by
REITs
do
not
qualify
for
the
reduced
tax
rates
available
for
some
dividends.
The maximum tax rate applicable to income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates is
20%. Dividends payable by REITs, however, generally are not eligible for the 20% rate applicable to “qualified dividends” except to the extent the
REIT dividends are attributable to “qualified dividends” received by the REIT itself. However, for non-corporate U.S. stockholders, dividends payable
by REITs that are not designated as capital gain dividends or otherwise treated as “qualified dividends” generally are eligible for a deduction of 20%
of the amount of
37
such dividends, for taxable years beginning before January 1, 2026. More favorable rates will nevertheless continue to apply for regular corporate
“qualified dividends.” Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the 20%
rate continues to apply to regular corporate qualified dividends, investors who are individuals, trusts and estates may regard investments in REITs to
be relatively less attractive than investments in the stocks of
non-REIT corporations.
The
tax
imposed
on
REITs
engaging
in
“prohibited
transactions”
may
limit
our
ability
to
engage
in
transactions
which
would
be
treated
as
sales
for
federal
income
tax
purposes.
A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other
dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not
intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business, unless a sale or
disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS
would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors.
Complying
with
REIT
requirements
may
limit
our
ability
to
hedge
effectively
and
may
cause
us
to
incur
tax
liabilities.
The REIT provisions of the Code substantially limit our ability to hedge our assets and liabilities. Any income from a hedging transaction that
we enter into to manage the risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets, or
from certain terminations of such hedging positions, does not constitute “gross income” for purposes of the 75% or 95% gross income tests that
apply to REITs, provided that certain identification requirements are met. To the extent that we enter into other types of hedging transactions or fail
to properly identify such transaction as a hedge, the income is likely to be treated as non-qualifying income for purposes of both of the gross income
tests. As a result of these rules, we may be required to limit our use of advantageous hedging techniques or implement those hedges through a
taxable REIT subsidiary (“TRS”). This could increase the cost of our hedging activities because any TRS in which we own an interest may be subject
to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in
any TRS in which we own an interest will generally not provide any tax benefit, except that such losses could theoretically be carried forward against
future taxable income in such TRS.
Complying
with
REIT
requirements
may
affect
our
profitability
and
may
force
us
to
liquidate
or
forgo
otherwise
attractive
investments.
To qualify as a REIT, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the
sources of our income and the amounts we distribute to our stockholders. We may be required to liquidate or forgo otherwise attractive investments
in order to satisfy the asset and income tests or to qualify under certain statutory relief provisions. We also may be required to make distributions to
stockholders at disadvantageous times or when we do not have funds readily available for distribution. As a result, having to comply with the
distribution requirement could cause us to: (1) sell assets in adverse market conditions; (2) borrow on unfavorable terms; or (3) distribute amounts
that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt. Accordingly, satisfying the REIT requirements
could materially and adversely affect us. Moreover, if we are compelled to liquidate our investments to meet any of these asset, income or
distribution tests, or to repay obligations to our lenders, we may be unable to comply with one or more of the requirements applicable to REITs or
may be subject to a 100% tax on any resulting gain if such sales constitute prohibited transactions.
38
There
is
a
risk
of
changes
in
the
tax
law
applicable
to
REITs.
Because the IRS, the United States Treasury Department and Congress frequently review federal income tax legislation, we cannot predict
whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted. Any of such legislative actions may
prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us and/or our investors.
The Tax Cuts and Jobs Act of 2017 (the “TCJA”), has significantly changed the U.S. federal income taxation of U.S. businesses and their
owners, including REITs and their stockholders. Changes made by the TCJA that could affect us and our stockholders include:
•
•
•
•
•
•
•
temporarily reducing individual U.S. federal income tax rates on ordinary income; the highest individual U.S. federal income tax rate
has been reduced from 39.6% to 37% for taxable years beginning after December 31, 2017 and before January 1, 2026;
permanently eliminating the progressive corporate tax rate structure, with a maximum corporate tax rate of 35%, and replacing it with
a flat corporate tax rate of 21%;
permitting a deduction for certain pass-through business income, including dividends received by our stockholders from us that are
not designated by us as capital gain dividends or qualified dividend income, which will generally allow individuals, trusts, and estates
to deduct up to 20% of such amounts for taxable years beginning after December 31, 2017 and before January 1, 2026;
reducing the highest rate of withholding with respect to our distributions to non-U.S. stockholders that are treated as attributable to
gains from the sale or exchange of U.S. real property interests from 35% to 21%;
limiting our deduction for net operating losses to 80% of REIT taxable income (prior to the application of the dividends paid
deduction);
generally limiting the deduction for net business interest expense in excess of 30% of a business’s adjusted taxable income except
for taxpayers that engage in certain real estate businesses and elect out of this rule (provided that such electing taxpayers must use
an alternative depreciation system for certain property); and
eliminating the corporate alternative minimum tax.
You are urged to consult with your tax advisor with respect to the status of legislative, regulatory, judicial or administrative developments and
proposals and their potential effect on an investment in our securities.
Risks Related to the Ownership of Our Common Stock
Changes
in
market
conditions
and
volatility
of
stock
prices
could
adversely
affect
the
market
price
of
our
common
stock.
Our common stock has traded on the NYSE only since June 21, 2018. The market price of our common stock may be volatile. The NYSE, on
which our common stock is listed, and other equity markets have experienced significant price and volume fluctuations. From June 21, 2018 through
February 26, 2019, the closing sale price of our common stock on the NYSE ranged from $13.34 to $16.80 per share. The market price of our
common stock will fluctuate, and such fluctuations could be significant and frequent; accordingly, our common stockholders may experience a
decrease in the value of their shares, including decreases that may be related to technical market factors and may be unrelated to our operating
performance or prospects. Similarly, the trading volume of our common stock may decline, and
39
our common stockholders could experience a decrease in liquidity. In addition to the risks discussed or referred to in this “Risk Factors” section, a
number of factors could negatively affect the price per share of our common stock, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
general market and economic conditions;
actual or anticipated variations in our quarterly operating results or distributions or our payment of distributions in shares of our
common stock;
changes in our funds from operations (“FFO”), adjusted FFO (“AFFO”) or earnings estimates;
difficulties or inability to access capital or extend or refinance existing debt;
changes in market valuations of similar companies;
publication of research reports about us or the real estate industry;
the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities;
general stock and bond market conditions, including changes in interest rates on fixed income securities, that may lead prospective
purchasers of our stock to demand a higher annual yield from future distributions;
a change in ratings issued by any analyst following us or any nationally recognized statistical rating organization;
additions or departures of key management personnel;
adverse market reaction to any additional debt we may incur in the future;
speculation in the press or investment community;
terrorist activity which may adversely affect the markets in which our securities trade, possibly increasing market volatility and
causing further erosion of business and consumer confidence and spending;
failure to meet and to continue to maintain our qualification as a REIT;
strategic decisions by us or our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or
changes in business strategy;
failure to satisfy listing requirements of the NYSE;
governmental regulatory action and changes in tax laws; and
the issuance of additional shares of our common stock, or the perception that such sales might occur.
Many of the factors listed above are beyond our control. These factors may cause the market price of shares of our common stock to decline,
regardless of our financial condition, results of operations, business or our prospects.
40
Furthermore, in recent years, the stock markets have experienced significant price and volume fluctuations. This volatility has had a
significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear
to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon
factors that have little or nothing to do with us in particular, and these fluctuations could materially reduce the price of our common stock and
materially affect the value of an investment in us.
Increases
in
market
interest
rates
may
result
in
a
decrease
in
the
value
of
shares
of
our
common
stock.
One of the factors that may influence the price of shares of our common stock is the distribution yield on shares of our common stock (as a
percentage of the price of shares of our common stock) relative to market interest rates. An increase in market interest rates, which are currently at
low levels relative to historical rates, may lead prospective purchasers of shares of our common stock to expect a higher distribution yield.
Additionally, higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher
market interest rates could cause the per share trading price of our common stock to decrease.
We
may
be
unable
to
continue
to
make
distributions
at
our
current
distribution
level,
and
our
board
may
change
our
distribution
policy
in
the
future.
While we expect to continue to make regular quarterly distributions to the holders of our common stock, if sufficient cash is not available for
distribution from our operations, we may have to fund distributions from working capital, borrow to provide funds for such distributions, or reduce the
amount of such distributions. To the extent we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings
and cash available for distribution from what they otherwise would have been. If cash available for distribution generated by our assets is less than
expected, or if such cash available for distribution decreases in future periods from expected levels, our inability to make distributions could result in
a decrease in the market price of our common stock.
The decision to declare and pay distributions on our common stock, as well as the form, timing and amount of any such future distributions,
is at the sole discretion of our board of directors and depends on upon a number of factors, including our actual and projected results of operations,
FFO, AFFO, liquidity, cash flows and financial condition, the revenue we actually receive from our properties, our operating expenses, our debt
service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, our REIT taxable income, the
annual REIT distribution requirements, applicable law and such other factors as our board of directors deems relevant. We may not be able to make
distributions in the future, and our inability to make distributions, or to make distributions at expected levels, could have a material adverse effect on
the market price of our common stock.
Future
offerings
of
debt,
which
would
be
senior
to
shares
of
our
common
stock
upon
liquidation,
and/or
preferred
equity
securities
that
may
be
senior
to
shares
of
our
common
stock
for
purposes
of
distributions
or
upon
liquidation,
may
materially
and
adversely
affect
the
market
price
of
shares
of
our
common
stock.
In the future, we may attempt to increase our capital resources by making additional offerings of debt or preferred equity securities, including
by causing our Operating Partnership or its subsidiaries to issue additional debt securities. Upon liquidation, holders of our debt securities, other
lenders and creditors, and any holders of preferred stock with a liquidation preference will receive distributions of our available assets prior to our
stockholders. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more
favorable than those of our common stock and may result in dilution to owners of our common stock. Our stockholders are not entitled to preemptive
rights or other protections against dilution. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on
distribution payments that could limit our right to make distributions to our stockholders. Because our decision to issue securities in any future
offering will
41
depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings.
Our stockholders bear the risk of our future offerings reducing per share trading price of our common stock.
Sales
of
substantial
amounts
of
our
common
stock
in
the
public
markets,
or
the
perception
that
they
might
occur,
could
reduce
the
price
of
our
common
stock
and
may
dilute
your
voting
power
and
your
ownership
interest
in
us.
Sales of substantial amounts of our common stock, or the perception that they might occur, could adversely affect the market price of our
common stock. Our charter provides that we may issue up to 500,000,000 shares of common stock, and a majority of our entire board of directors
has the power to amend our charter to increase the aggregate number of shares of stock or the number of shares of stock of any class or series that
we are authorized to issue without stockholder approval. As of December 31, 2018, we had 43,749,092 shares of common stock outstanding and
19,056,552 OP Units outstanding (excluding OP Units held directly or indirectly by us), that are generally redeemable for cash or, at our election,
shares of our common stock on a one-for-one basis.
Eldridge and its affiliates own 7,785,611 shares of our common stock and 19,056,552 OP Units, and we have entered into registration rights
agreements with respect to resales of common stock held by Eldridge and its affiliates and shares of common stock that may be received by
Eldridge or its affiliates upon exchange of OP Units. As a result of these registration rights agreements, common stock held by Eldridge and its
affiliates, including common stock that may be issued in exchange for OP Units, may be eligible for future sale without restriction. Additionally, we
filed a registration statement on Form S-8 under the Securities Act to register the offer and sale of up to 3,550,000 shares of our common stock or
securities convertible into or exchangeable for shares of our common stock that may be issued pursuant to our 2018 Incentive Plan. Such Form S-8
registration statement automatically became effective upon filing. Accordingly, recipients of shares issued pursuant to such registration statement
may generally freely resell those shares in the open market, subject to limitations in the case of any such recipients who are our affiliates.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
As of December 31, 2018, we had a portfolio of 677 properties, including one undeveloped land parcel and 12 properties that secure our
investments in mortgage loans receivable, that was diversified by tenant, industry and geography and had annualized base rent of $106.8 million.
Our 161 tenants operate 180 different concepts in 15 industries across 43 states. None of our tenants represented more than 5.0% of our annualized
base rent at December 31, 2018, and our top ten largest tenants represented 33.1% of our annualized base rent as of that date.
Our Real Estate Investment Portfolio
42
Diversification
by
Tenant
As of December 31, 2018, our top ten tenants included ten different concepts: Captain D’s, Art Van Furniture, Mister Car Wash, Zips Car
Wash, AMC Theatres, Malvern School, R-Store, Latitude Sports Clubs, 84 Lumber and VASA Fitness. Excluding our investment in one undeveloped
land parcel, our 676 properties are operated by 161 tenants. The following table details information about our tenants and the related concepts they
operate as of December 31, 2018 (dollars in thousands):
Tenant (1)
Captain D's, LLC (3)
AVF Parent, LLC
Car Wash Partners, Inc.
Zips Car Wash, LLC
American Multi-Cinema, Inc. (4)
Malvern School Properties, LP
Riiser Fuel Holdings, LLC
Town Sports International Holdings, Inc.
Magerko Real Estate, LLC
VASA Fitness, LLC
Top 10 Subtotal
Other
Total
Concept
Captain D's
Art Van Furniture
Mister Car Wash
Zips Car Wash
AMC Theatres
Malvern School
R-Store
Latitude Sports Clubs
84 Lumber
VASA Fitness
Number of
Properties (2)
Annualized
Base Rent
% of
Annualized
Base Rent
77 $
5
13
15
5
13
26
3
19
5
181
495
676 $
5,337
4,394
4,148
3,833
3,664
3,084
2,929
2,668
2,643
2,627
35,327
71,505
106,832
5.0%
4.1%
3.9%
3.6%
3.4%
2.9%
2.7%
2.5%
2.5%
2.5%
33.1%
66.9%
100.0%
(1)
(2)
(3)
(4)
Represents tenant or guarantor.
Excludes one undeveloped land parcel. Includes 12 properties which secure our investments in mortgage loans receivable.
Includes two properties leased to a subsidiary of Captain D’s, LLC.
Includes four properties leased to a subsidiary of AMC Entertainment Holdings, Inc.
As of December 31, 2018, our five largest tenants, who contributed 20.0% of our annualized base rent, had a rent coverage ratio of 2.6x, and
our ten largest tenants, who contributed 33.1% of our annualized base rent, had a rent coverage ratio of 2.8x.
As of December 31, 2018, 91.9% of our leases (based on annualized base rent) were triple-net, and the tenant is typically responsible for all
improvements and is contractually obligated to pay all operating expenses, such as maintenance, insurance, utility and tax expense, related to the
leased property. Due to the triple-net structure of our leases, we do not expect to incur significant capital expenditures relating to our triple-net leased
properties, and the potential impact of inflation on our operating expenses is reduced.
43
Diversification
by
Concept
Our tenants operate their businesses across 180 concepts. The following table details those concepts as of December 31, 2018 (dollars in
thousands):
Concept
Captain D's
Art Van Furniture
Mister Car Wash
Zips Car Wash
AMC Theatres
Applebee's
Malvern School
R-Store
Latitude Sports Clubs
84 Lumber
Top 10 Subtotal
Other
Total
Type of
Business
Annualized
Base Rent
% of
Annualized
Base Rent
Number of
Properties (1)
Building
(Sq. Ft.)
Service
Retail
Service
Service
Experience
Service
Service
Service
Experience
Other
$
$
5,503
4,394
4,148
3,833
3,664
3,100
3,084
2,929
2,668
2,643
35,966
70,866
106,832
5.2%
4.1%
3.9%
3.6%
3.4%
2.9%
2.9%
2.7%
2.5%
2.5%
33.7%
66.3%
100.0%
79
5
13
15
5
18
13
26
3
19
196
480
676
203,731
284,713
54,621
58,511
240,672
149,781
93,689
106,870
245,475
896,955
2,335,018
3,676,914
6,011,932
(1)
Excludes one undeveloped land parcel. Includes 12 properties which secure our investments in mortgage loans receivable.
44
Diversification
by
Industry
Our tenants’ business concepts are diversified across various industries. The following table summarizes those industries as of December
31, 2018 (dollars in thousands):
Tenant Industry
Quick Service
Car Washes
Early Childhood Education
Medical / Dental
Convenience Stores
Casual Dining
Automotive Service
Other Services
Family Dining
Service Subtotal
Health and Fitness
Movie Theatres
Entertainment
Experience Subtotal
Home Furnishings
Grocery
Retail Subtotal
Building Materials
Total
Type of
Business
Annualized
Base Rent
% of
Annualized
Base Rent
Number of
Properties (1)
Building
(Sq. Ft.)
Rent Per
Sq. Ft. (2)
Service
Service
Service
Service
Service
Service
Service
Service
Service
Experience
Experience
Experience
Retail
Retail
Other
$
$
15,494
12,107
11,152
10,260
9,620
7,661
6,662
4,053
3,875
80,884
8,742
4,295
3,455
16,492
6,601
212
6,813
2,643
106,832
14.5%
11.3%
10.4%
9.6%
9.0%
7.2%
6.2%
3.8%
3.7%
75.7%
8.2%
4.0%
3.2%
15.4%
6.2%
0.2%
6.4%
2.5%
100.0%
197
46
48
82
80
56
51
24
25
609
19
6
12
37
10
1
11
19
676
530,224
218,982
578,017
449,359
314,866
326,846
372,994
188,415
147,197
3,126,900
761,013
293,206
408,640
1,462,859
493,027
32,190
525,217
896,956
6,011,932
$
$
29.61
55.29
18.73
22.83
30.55
23.87
18.13
20.20
26.32
25.84
11.03
14.65
8.46
11.04
13.39
6.58
12.97
2.95
17.67
(1)
(2)
Excludes one undeveloped land parcel. Includes 12 properties which secure our investments in mortgage loans receivable.
Excludes properties with no annualized base rent and properties under construction .
As of December 31, 2018, our tenants operating service-oriented businesses had a weighted average rent coverage ratio of 2.7x, our
tenants operating experience-based businesses had a weighted average rent coverage ratio of 2.2x, our tenants operating retail businesses had a
weighted average rent coverage ratio of 3.4x and our tenants operating other types of businesses had a weighted average rent coverage ratio of
7.3x.
45
Diversification
by
Geography
Our 677 property locations are spread across 43 states. The following table details the geographical locations of our properties as of
December 31, 2018 (dollars in thousands):
State
Texas
Georgia
Michigan
Florida
Alabama
Minnesota
Wisconsin
Tennessee
Arkansas
Ohio
Pennsylvania
New York
South Carolina
Massachusetts
Arizona
New Mexico
North Carolina
Iowa
Maryland
Colorado
Missouri
Louisiana
Kansas
Illinois
Oklahoma
Kentucky
Mississippi
Indiana
Connecticut
Virginia
Oregon
West Virginia
Utah
New Jersey
Nebraska
California
Alaska
Wyoming
North Dakota
New Hampshire
Vermont
Washington
Maine
Total
Annualized
Base Rent
% of
Annualized
Base Rent
Number of
Properties (1)
Building
(Sq. Ft.)
$
$
13,361
11,591
6,639
6,319
5,936
5,189
4,467
4,176
3,764
3,364
3,338
3,085
2,891
2,713
2,639
2,622
2,304
2,268
1,896
1,859
1,787
1,590
1,399
1,298
1,234
1,134
1,011
998
963
859
723
551
540
412
368
351
301
256
245
140
99
80
72
106,832
12.5%
10.8%
6.2%
5.9%
5.6%
4.9%
4.2%
3.9%
3.5%
3.1%
3.1%
2.9%
2.7%
2.5%
2.5%
2.5%
2.2%
2.1%
1.8%
1.7%
1.7%
1.5%
1.3%
1.2%
1.2%
1.1%
0.9%
0.9%
0.9%
0.8%
0.7%
0.5%
0.5%
0.4%
0.3%
0.3%
0.3%
0.3%
0.2%
0.1%
0.1%
0.1%
0.1%
100.0%
77
80
27
43
44
29
33
34
27
21
17
31
15
4
12
17
15
17
8
8
13
7
5
13
9
9
10
12
6
4
3
7
1
3
4
2
2
1
1
3
1
1
1
677
795,755
454,665
408,554
310,296
425,434
431,351
185,725
177,277
125,093
430,118
158,362
76,229
154,364
247,875
89,442
81,896
200,095
97,198
75,473
137,128
72,729
53,628
96,153
63,397
73,232
87,922
64,114
66,629
34,751
38,726
102,636
50,146
42,540
19,091
13,342
28,739
6,630
10,001
6,041
9,914
3,442
2,404
3,395
6,011,932
(1)
Includes 12 properties which secure our investments in mortgage loans receivable.
46
Lease
Expirations
As of December 31, 2018, the weighted average remaining term of our leases was 14.2 years (based on annualized base rent), with only
3.1% of our annualized base rent attributable to leases expiring prior to January 1, 2023. The following table sets forth our lease expirations for
leases in place as of December 31, 2018 (dollars in thousands):
Lease Expiration Year (1)
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
Total/Weighted Average
Annualized
Base Rent
% of
Annualized
Base Rent
Number of
Properties (2)
Weighted
Average Rent
Coverage Ratio (3)
$
$
772
801
900
901
6,973
2,720
621
1,888
9,429
2,886
477
2,705
4,129
11,843
11,078
3,606
—
1,878
23,348
17,928
1,000
949
106,832
0.7%
0.8%
0.8%
0.8%
6.5%
2.5%
0.6%
1.8%
8.8%
2.7%
0.4%
2.5%
3.9%
11.1%
10.4%
3.4%
—
1.8%
21.9%
16.8%
0.9%
0.9%
100.0%
10
9
13
7
80
21
8
10
53
18
4
33
22
77
51
25
—
18
105
94
11
7
676
3.0x
2.8x
3.5x
3.6x
3.2x
2.6x
3.8x
2.6x
2.5x
3.0x
3.2x
4.7x
3.5x
2.9x
2.3x
2.3x
—
2.4x
3.0x
2.3x
3.6x
2.9x
2.8x
(1)
(2)
(3)
Expiration year of contracts in place as of December 31, 2018, excluding any tenant option renewal periods that have not been exercised.
Excludes one undeveloped land parcel. Includes 12 properties which secure our investments in mortgage loans receivable.
Weighted by annualized base rent.
Item 3. Legal Proceedings.
W e are subject to various lawsuits, claims and other legal proceedings . Management does not believe that the resolution of any of these
matters either individually or in the aggregate will have a material adverse effect on our business, financial position, results of operations or liquidity.
Further, from time to time, we are party to certain legal proceedings for which third parties, such as our tenants, are contractually obligated to
indemnify, defend and hold us harmless. In some of these matters, the indemnitors have insurance for the potential damages. In other matters, we
are being defended by tenants who may not have sufficient insurance, assets, income or resources to satisfy their defense and indemnification
obligations to us. The unfavorable resolution of such legal proceedings could, individually or in the aggregate, materially adversely affect the
indemnitors’ ability to satisfy their respective obligations to us, which, in turn, could have a material adverse effect on our business, financial position,
results of operations or liquidity. It is management’s opinion that there are currently no such legal proceedings pending that will, individually or in the
aggregate, have such a material adverse effect. Despite management’s view of the ultimate resolution of these legal proceedings, we may have
47
significant legal expenses and costs associated with the defense of such matters. Further, management cannot predict the outcome of these legal
proceedings and if management’s expectation regarding such matters is not correct, such proceedings could have a material adverse effect on our
business, financial position, results of operations or liquidity.
Item 4. Mine Safety Disclosures.
Not applicable.
48
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed on the NYSE under the symbol “EPRT”. As of February 22, 2019, there were 125 holders of record of the
43,795,460 outstanding shares of our common stock. Because many of our shares of common stock are held by brokers and other institutions on
behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Distributions
We intend to make quarterly distributions to our common stockholders. In particular, in order to qualify and maintain our qualification for
taxation as a REIT, we intend to make annual distributions to our stockholders of at least 90% of our REIT taxable income, determined without
regard to the deduction for dividends paid and excluding any net capital gain. However, any future distributions will be at the sole discretion of our
board of directors, and their form, timing and amount, if any, will depend upon a number of factors, including our actual and projected results of
operations, FFO, AFFO, liquidity, cash flows and financial condition, the revenue we actually receive from our properties, our operating expenses,
our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, our REIT taxable
income, the annual REIT distribution requirements, applicable law and such other factors as our board of directors deems relevant. To the extent
that our cash available for distribution is less than 90% of our REIT taxable income, we may consider various means to cover any such shortfall,
including borrowing under the Revolving Credit Facility or other loans, selling certain of our assets, or using a portion of the net proceeds we receive
from offerings of equity, equity-related or debt securities or declaring taxable share dividends. Agreements relating to our indebtedness, including our
Master Trust Funding Program and the Revolving Credit Facility, limit and, under certain circumstances, could eliminate our ability to make
distributions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of Certain Debt.”
We have determined that, for federal income tax purposes, approximately 58.9% of the distributions paid in 2018 represented taxable income
and 41.1% represented a return of capital.
Issuer Purchases of Equity Securities
During the year ended December 31, 2018, the Company did not repurchase any of its equity securities.
Stock Performance Graph
The following performance chart compares, for the period from June 21, 2018 (the first day our common stock was traded on the NYSE)
through December 31, 2018, the cumulative total stockholder return on our common stock with that of the Standard & Poor’s 500 Composite Stock
Index (“S&P 500”) and the FTSE NAREIT All Equity REITs index (“FNER”) . The chart assumes $100.00 was invested on June 21, 2018 and
assumes the reinvestment of any dividends. The historical stock price performance reflected in the following graph is not necessarily indicative of
future stock price performance.
49
Essential Properties Realty Trust, Inc.
Ticker / Index
EPRT
S&P 500
FNER
6/21/2018
100.00
100.00
100.00
6/30/2018
99.27
98.86
101.35
9/30/2018
104.03
105.97
101.22
12/31/2018
103.16
92.65
94.04
The
performance
graph
and
the
related
chart
and
text
are
being
furnished
solely
to
accompany
this
Annual
Report
on
Form
10-K
pursuant
to
Item
201(e)
of
Regulation
S-K,
and
are
not
being
filed
for
purposes
of
Section
18
of
the
Exchange
Act
and
are
not
to
be
incorporated
by
reference
into
any
filing
of
ours,
whether
made
before
or
after
the
date
hereof,
regardless
of
any
general
incorporation
language
in
such
filing.
Equity Compensation Plan Information
See Part III, Item 11 of this Annual Report on Form 10-K for the information required by this Item .
Recent Sales of Unregistered Securities
On January 17, 2018, in connection with our formation and initial capitalization, we issued 100 shares of our common stock to EPRT
Holdings for an aggregate purchase price of $100. These securities were issued in reliance on the exemption set forth in Section 4(a)(2) of the
Securities Act.
On June 25, 2018, in connection with the completion of our IPO, an affiliate of Eldridge Industries, LLC purchased 7,785,611 shares of our
common stock at a purchase price of $14.00 per share. These securities were issued in reliance on the exemption set forth in Section 4(a)(2) of the
Securities Act.
50
Item 6. Selected Financial Data.
The following tables set forth selected consolidated financial and other information of the Company as of and for the years ended
December 31, 2018 and 2017 and the period from March 30, 2016 (commencement of operations) to December 31, 2016. The tables should be
read in conjunction with our consolidated financial statements and the notes thereto and Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in this Annual Report on Form 10-K.
Operating Data:
(In thousands, except per share data)
Revenues:
Rental revenue
Interest income on loans and direct financing lease
receivables
Other revenue
Total revenues
Expenses:
Interest
General and administrative
Property expenses
Depreciation and amortization
Provision for impairment of real estate
Total expenses
Other operating income:
Gain on dispositions of real estate, net
Income from operations
Other income:
Interest
Income before income tax expense
Income tax expense
Net income
Year ended December 31,
2018
2017
Period from
March 30, 2016
(Commencement of
Operations) to
December 31, 2016
$
94,944 $
53,373 $
15,271
656
623
96,223
30,192
13,762
1,980
31,352
4,503
81,789
5,445
19,879
930
20,809
195
20,614
(5,001)
15,613 $
293
783
54,449
22,574
8,775
1,547
19,516
2,377
54,789
6,748
6,408
49
6,457
161
6,296
—
6,296 $
161
88
15,520
987
4,321
533
5,428
1,298
12,567
871
3,824
3
3,827
77
3,750
—
3,750
Net income attributable to non-controlling interests
Net income attributable to stockholders and members
$
Basic net income per share
Diluted net income per share
Cash dividends declared per share
Period from June 25,
2018 to December 31,
2018
$
$
$
0.26
0.26
0.43
51
Consolidated Balance Sheet Data:
(In thousands)
Total real estate investments, at cost
Total real estate investments, net
Net investments
Cash and cash equivalents
Restricted cash
Total assets
Secured borrowings, net of deferred financing costs
Notes payable to related party
Revolving credit facility
Intangible lease liabilities, net
Total liabilities
Total stockholders'/members' equity
Non-controlling interests
Other Data:
(In thousands)
FFO (1)
AFFO (1)
EBITDA (1)
EBITDA re
(1)
(Dollar amounts in thousands)
Net debt (2)
Number of investment property locations
Occupancy
$
2018
1,377,044 $
1,325,189
1,342,694
4,236
12,003
1,380,900
506,116
—
34,000
11,616
569,859
562,179
248,862
December 31,
2017
2016
932,174 $
907,349
914,247
7,250
12,180
942,220
511,646
230,000
—
12,321
760,818
181,402
—
455,008
448,887
452,546
1,825
10,097
466,288
272,823
—
—
16,385
291,638
174,650
—
Period from
March 30, 2016
(Commencement of
Operations) to
December 31, 2016
9,605
8,579
10,239
10,666
21,438 $
20,337 $
48,498 $
44,127 $
Year ended December 31,
2017
2018
$
$
$
$
2018
51,007 $
48,442 $
81,423 $
80,481 $
December 31,
2017
$
$
532,881
677
100.0%
$
733,511
508
98.8%
2016
278,609
344
96.8%
(1)
FFO, AFFO, EBITDA and EBITDA re
are non-GAAP financial measures. For definitions of FFO, AFFO, EBITDA, EBITDA re
and
reconciliations of these measures to net income, the most directly comparable GAAP financial measure, and a statement of why our
management believes the presentation of these measures provides useful information to investors and any additional purposes for which
management uses these measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-
GAAP Financial Measures.”
(2) Net debt is a non-GAAP financial measure. For a definition of net debt and a reconciliation of this measure to total debt, the most directly
comparable GAAP financial measure, and a statement of why our management believes the presentation of this measure provides useful
information to investors and any additional purposes for which management uses this measure, see “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”
52
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with the “Selected Financial
Data” and “Business” sections, as well as the consolidated financial statements and related notes in Part II, Item 8 of this Annual Report on Form 10-
K. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our
plans and strategies for our business, includes forward‑looking statements that involve risks and uncertainties. You should read “Item 1A. Risk
Factors” and the “Special Note Regarding Forward‑Looking Statements” sections of this Annual Report on Form 10-K for a discussion of important
factors that could cause actual results to differ materially from the results described in or implied by these forward‑looking statements.
Overview
We are 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. We have a diversified portfolio that
focuses on properties leased to tenants in businesses such as restaurants (including quick service and casual and family dining), car washes,
automotive services, medical services, convenience stores, entertainment, early childhood education and health and fitness. We acquire and lease
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.
We were organized on January 12, 2018 as a Maryland corporation and intend to qualify to be taxed as a REIT beginning with our taxable
year ended December 31, 2018. On June 25, 2018, we completed our IPO of 32,500,000 shares of our 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 SEC under
the Securities Act. On July 24, 2018, we issued an additional 2,772,191 shares of common stock at the IPO price of $14.00 per share pursuant to
the partial exercise of an option granted to the underwriters of our 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. Our common stock is listed on the NYSE under the
ticker symbol “EPRT”.
Prior to the completion of the IPO, we engaged in a number of formation transactions designed to facilitate the completion of the IPO (the
“Formation Transactions”). Among other things, on June 20, 2018, 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 we hold
substantially all of our assets and conduct our operations. Prior to the completion of the Formation Transactions, EPRT LLC was a wholly owned
subsidiary of EPRT Holdings (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, our wholly owned subsidiary, became the sole general partner of the Operating Partnership in connection with the
completion of our IPO.
Concurrent with the completion of the IPO, we received an additional $125.0 million investment from an affiliate of Eldridge in the Concurrent
Private Placement of 7,785,611 shares of our common stock and 1,142,960 OP Units. We contributed the net proceeds from the issuance of the
43,057,802 shares of common stock in our 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.
We generally lease each of our properties to a single tenant on a triple-net, long-term basis, and we generate our cash from operations
primarily through the monthly lease payments, or base rent, we receive from the tenants that occupy our properties. As of December 31, 2018, we
had a portfolio of real estate investments at 677 properties (inclusive of one undeveloped land parcel and 12 properties which
53
secure our investments in mortgage loans receivable) that was diversified by tenant, industry and geography, had annualized base rent of $106.8
million and was 100.0% occupied.
Substantially all of our leases provide for periodic contractual rent escalations. As of December 31, 2018, leases contributing 97.1% of our
annualized base rent provided for increases in future annual base rent, generally ranging from 1% to 4% annually, with a weighted average annual
escalation equal to 1.5% of base rent. As of December 31, 2018, leases contributing 91.9% of annualized base rent were triple-net, which means
that our tenant is responsible for all operating expenses, such as maintenance, insurance, utility and tax expense, related to the leased property
(including any increases in those costs that may occur as a result of inflation). Our remaining leases were “double net,” where the tenant is
responsible for certain expenses, such as taxes and insurance, but we retain responsibility for other expenses, generally related to maintenance and
structural component replacement that may be required on such leased properties in the future. Also, we incur property-level expenses associated
with our vacant properties and we occasionally incur nominal property-level expenses that are not paid by our tenants, such as the costs of
periodically making site inspections of our properties. Since our properties are predominantly single-tenant properties, which are generally subject to
long-term leases, it is not necessary for us to perform any significant ongoing leasing activities on our properties. As of December 31, 2018, the
weighted average remaining term of our leases was 14.2 years (based on annualized base rent), excluding renewal options that have not been
exercised, with 3.1% of our annualized base rent attributable to leases expiring prior to January 1, 2023. Renewal options are exercisable at the
option of our tenants upon expiration of their base lease term. Our leases providing for tenant renewal options generally provide for periodic
contractual rent escalations during any renewed term that are similar to those applicable during the initial term of the lease.
As of December 31, 2018, 67.4% of our annualized base rent was attributable to master leases, where we have acquired multiple properties
from a seller and leased them back to the seller under a master lease. Since properties are generally leased under a master lease on an “all or
none” basis, the structure prevents a tenant from “cherry picking” locations, where it unilaterally gives up underperforming properties while
maintaining its leasehold interest in well-performing properties.
Consistent with our intent to elect to qualify as a REIT for federal income tax purposes commencing with our taxable year ended December
31, 2018, we believe that we were organized and operated in a manner that will allow us to qualify as a REIT, and we intend to continue operating in
such a manner.
Liquidity and Capital Resources
We seek to acquire real estate with a combination of debt and equity capital and with cash from operations that will not otherwise be
distributed to our stockholders. Prior to the IPO, equity capital needed for our real estate investments had been provided to us by Eldridge, our
primary institutional capital provider. Subsequent to the IPO, we added public equity capital to our initial private institutional equity capital to facilitate
our growth. Additionally, we used the net proceeds from the IPO and the Concurrent Private Placement to repay promissory notes issued to an
affiliate of Eldridge, which had been our primary source of short-term debt capital prior to the IPO. Historically, upon accumulating a sufficiently large
and diverse pool of real estate, we generally refinanced this debt through the issuance of long-term, fixed-rate debt through our Master Trust
Funding Program, as further described below.
In June 2018, we entered into the Revolving Credit Facility, which is available to fund our short-term debt capital requirements, as further
described below. Over time, we may access additional long-term debt capital with future debt issuances through our Master Trust Funding Program.
Additionally, future sources of debt capital may include term borrowings from insurance companies, banks and other sources, single-asset mortgage
financing and CMBS borrowings, and may offer us the opportunity to lower our cost of funding and further diversify our sources of debt capital. Over
time, we may choose to issue preferred equity as a part of our overall funding strategy. As our outstanding debt matures, we may refinance it as it
comes due or choose to repay it using cash and cash equivalents or borrowings under the Revolving Credit Facility. Management believes that the
cash generated by our operations, together with our cash and cash equivalents at December 31, 2018, the Revolving Credit Facility, and our access
54
to long-term debt capital, will be sufficient to fund our operations for the foreseeable future and allow us to acquire the real estate for which we
currently have made commitments.
By seeking to match the expected cash inflows from our long-term leases with the expected cash outflows for our long-term, fixed-rate debt,
we seek to “lock in,” for as long as is economically feasible, the expected positive difference between our scheduled cash inflows on the leases and
the cash outflows on our debt obligations. In this way, we seek to reduce the risk that increases in interest rates would adversely impact our results
of operations. Although we are not required to maintain a particular leverage ratio and may not be able to do so, we generally intend to target, over
time, a level of net debt (which includes recourse and non-recourse borrowings and any outstanding preferred stock less unrestricted cash and cash
held for the benefit of lenders) that is less than six times our annualized adjusted EBITDA re
.
As we grow our real estate portfolio, we intend to manage our long-term debt maturities to reduce the risk that a significant amount of our
debt will mature in any single year in the future. As of December 31, 2018, our nearest significant debt maturity was $272.3 million of notes issued
under the Master Trust Funding Program, which mature in November 2046 but require monthly principal and interest payments through October
2021, with a balloon principal payment of $259.5 million due in November 2021. Under the Revolving Credit Facility, we had, as of December 31,
2018, outstanding borrowings of $34.0 million and $266.0 million of unused borrowing capacity.
As of December 31, 2018, we had $1.3 billion of net investments in our investment portfolio, consisting of investments in 677 properties
(inclusive of one undeveloped land parcel and 12 properties which secure our investments in mortgage loans receivable), with annualized base rent
of $106.8 million. Substantially all of our cash from operations is generated by our investment portfolio.
Our short-term liquidity requirements consist primarily of funds necessary to pay for our operating expenses, including principal and interest
payments on our outstanding indebtedness, and the general and administrative expenses of servicing our portfolio and operating our business.
Since our occupancy level is high and substantially all of our leases are triple-net, our tenants are generally responsible for the maintenance,
insurance and property taxes associated with the properties they lease from us. When a property becomes vacant through a tenant default or
expiration of the lease term with no tenant renewal, we incur the property costs not paid by the tenant, as well as those property costs accruing
during the time it takes to locate a substitute tenant. As of December 31, 2018, excluding one undeveloped land parcel, all of our property locations
were occupied and subject to a lease. We expect to incur some property costs from time to time in periods during which properties that become
vacant are being marketed for lease. In addition, we may recognize an expense for certain property costs, such as real estate taxes billed in arrears,
if we believe the tenant is likely to vacate the property before making payment on those obligations. The amount of such property costs can vary
quarter to quarter based on the timing of property vacancies and the level of underperforming properties; however, we do not anticipate that such
costs will be significant to our operations. From time to time, we may also sell properties that no longer meet our long-term investment objectives.
Our short-term liquidity requirements also include the funding needs associated with seven of our properties where we have agreed to
provide construction financing or reimburse the tenant for certain development, construction and renovation costs in exchange for contractually
specified interest or rent that generally increases in proportion with our funding. As of December 31, 2018, we had agreed to finance or reimburse
development, construction or renovation costs in an aggregate amount of $34.4 million and, as of the same date, we had funded $14.9 million of this
commitment. We expect to fund the balance of such commitment by December 31, 2019. Additionally, as of February 22, 2019, we were under
contract to acquire 20 properties with an aggregate purchase price of $40.1 million, subject to completion of our due diligence procedures and
customary closing conditions. We expect to meet our short-term liquidity requirements, including our investment in potential future acquisitions,
primarily from cash and cash equivalents, net cash from operating activities and borrowings under the Revolving Credit Facility.
55
Our long-term liquidity requirements consist primarily of funds necessary to acquire additional properties and repay indebtedness. We expect
to meet our long-term liquidity requirements through various sources of capital, including borrowings under the Revolving Credit Facility, net cash
from operating activities, future financings, working capital, proceeds from select sales of our properties and other secured and unsecured
borrowings (including potential issuances under the Master Trust Funding Program). However, at any point in time, there may be a number of factors
that could have a material and adverse effect on our ability to access these capital sources, including unfavorable conditions in the overall equity and
credit markets, our degree of leverage, our unencumbered asset base, borrowing restrictions imposed by our lenders, general market conditions for
REITs, our operating performance, liquidity and market perceptions about us. The success of our business strategy will depend, to a significant
degree, on our ability to access these various capital sources.
An additional liquidity need is funding the distributions that are one of the requirements for qualification for taxation as a REIT. During the
year ended December 31, 2018, our board of directors declared total cash distributions of $0.434 per share of common stock. Holders of OP Units
are entitled to distributions equivalent to those paid by the Company to common stockholders . During the year ended December 31, 2018, we paid
$14.1 million of distributions to common stockholders and OP Unit holders, and a s of December 31, 2018, we recorded $13.2 million of
distributions payable to common stockholders and OP Unit holders. To qualify for taxation as a REIT, we must make distributions to our stockholders
aggregating annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net
capital gain. As a result of this requirement, we cannot rely on retained earnings to fund our business needs to the same extent as other entities that
are not REITs. If we do not have sufficient funds available to us from our operations to fund our business needs, we will need to find alternative ways
to fund those needs. Such alternatives may include, among other things, selling properties (whether or not the sales price is optimal or otherwise
meets our strategic long-term objectives), incurring additional indebtedness or issuing equity securities in public or private transactions. The
availability and attractiveness of the terms of these potential sources of financing cannot be assured.
Description of Certain Debt
Master
Trust
Funding
Program
SCF RC Funding I LLC, SCF RC Funding II LLC and SCF RC Funding III LLC (collectively, the “Master Trust Issuers”), all of which are
indirect wholly owned subsidiaries of the Operating Partnership, have issued net-lease mortgage notes payable (the “Notes”) with an aggregate
outstanding principal balance of $515.1 million as of December 31, 2018. The Notes are secured by all assets owned by the Master Trust Issuers.
We provide property management services with respect to the mortgaged properties and service the related leases pursuant to an amended and
restated property management and servicing agreement, dated as of July 11, 2017, among the Master Trust Issuers, the Operating Partnership (as
property manager and as special servicer), Midland Loan Services, a division of PNC Bank, National Association (as back-up manager) and
Citibank, N.A. (as indenture trustee).
Beginning in 2016, two series of Notes, each comprised of two classes, were issued under the program: (1) Notes originally issued by SCF
RC Funding I LLC and SCF RC Funding II LLC (the “Series 2016-1 Notes”), with an aggregate outstanding principal balance of $272.3 million as of
December 31, 2018 and (2) Notes originally issued by SCF RC Funding I LLC, SCF RC Funding II LLC and SCF RC Funding III LLC (the “Series
2017-1 Notes”), with an aggregate outstanding principal balance of $242.8 million as of December 31, 2018. The Notes are the joint obligations of all
Master Trust Issuers.
Notes issued under our Master Trust Funding Program are secured by a lien on all of the property owned by the Master Trust Issuers and
the related leases. A substantial portion of our real estate investment portfolio serves as collateral for borrowings outstanding under our Master Trust
Funding Program. As of December 31, 2018, we had pledged 347 properties, with a net investment amount of $609.2 million, under the Master Trust
Funding Program. The agreement governing our Master Trust
56
Funding Program permits substitution of real estate collateral from time to time, subject to certain conditions.
Absent a plan to issue additional long-term debt through the Master Trust Funding Program, we are not required to add assets to, or
substitute collateral in, the existing collateral pool. We can voluntarily elect to substitute assets in the collateral pool, subject to meeting prescribed
conditions that are designed to protect the collateral pool by requiring the substitute assets to be of equal or greater measure in attributes such as:
the asset’s fair value, monthly rent payments, remaining lease term and weighted average coverage ratios. In addition, we can sell underperforming
assets and reinvest the proceeds in new properties. Any substitutions and sales are subject to an overall limitation of 35% of the collateral pool
which is typically reset at each new issuance unless the substitution or sale is credit- or risk-based, in which case there are no limitations.
A significant portion of our cash flows are generated by the special purpose entities comprising our Master Trust Funding Program. For the
year ended December 31, 2018, excess cash flow from the Master Trust Funding Program, after payment of debt service and servicing and trustee
expenses, totaled $18.3 million on cash collections of $50.9 million, which represents a debt service coverage ratio (as defined in the program
documents) of 1.53 to 1. If at any time the monthly debt service coverage ratio (as defined in the program documents) generated by the collateral
pool is less than or equal to 1.25 to 1, excess cash flow from the Master Trust Funding Program entities will be deposited into a reserve account to
be used for payments to be made on the Notes, to the extent there is a shortfall; if at any time the three month average debt service coverage ratio
generated by the collateral pool is less than or equal to 1.15 to 1, excess cash flow from the Master Trust Funding Program entities will be applied to
an early amortization of the Notes. If cash generated by our properties held in the Master Trust Funding Program is required to be held in a reserve
account or applied to an early amortization of the Notes, it would reduce the amount of cash available to us and could limit or eliminate our ability to
make distributions to our common stockholders.
The Notes require monthly payments of principal and interest. The payment of principal and interest on any Class B Notes is subordinate to
the payment of principal and interest on any Class A Notes. The Series 2016-1 Notes mature in November 2046 and have a weighted average
annual interest rate of 4.51% as of December 31, 2018. However, the anticipated repayment date for the Series 2016-1 Notes is November 2021,
and if the notes are not repaid in full on or before such anticipated repayment date, additional interest will begin to accrue on the notes. The Series
2017-1 Notes mature in June 2047 and have a weighted average interest rate of 4.17% as of December 31, 2018. However, the anticipated
repayment date for the Series 2017-1 Notes is June 2024, and if the notes are not repaid in full on or before such anticipated repayment date,
additional interest will begin to accrue on the notes.
The Series 2016-1 Notes may be voluntarily prepaid, in whole or in part, at any time on or after the date that is 24 months prior to the
anticipated repayment date in November 2021 without the payment of a make whole amount. Voluntary prepayments may be made before 24
months prior to the anticipated repayment date but will be subject to the payment of a make whole amount.
The Series 2017-1 Notes may be voluntarily prepaid, in whole or in part, at any time on or after the date that is 31 months prior to the
anticipated repayment date in June 2024 without the payment of a make whole amount. Voluntary prepayments may be made before 31 months
prior to the anticipated repayment date but will be subject to the payment of a make whole amount.
An event of default will occur if, among other things, the Master Trust Issuers fail to pay interest or principal on the Notes when due,
materially default in compliance with the material covenants contained in the documents evidencing the Notes or the mortgages on the mortgaged
property collateral or if a bankruptcy or other insolvency event occurs. Under the master trust indenture, we have a number of Master Trust Issuer
covenants, including requirements to pay any taxes and other charges levied or imposed upon the Master Trust Issuers and to comply with specified
insurance requirements. We are also required to ensure that all uses and operations on or of our properties comply in all material respects with
57
all applicable environmental laws. As of December 31, 2018, we were in material compliance with all such covenants.
As of December 31, 2018, scheduled principal repayments on the Notes issued under the Master Trust Funding Program for 2019 are $8.0
million. We expect to meet these repayment requirements primarily through our net cash from operating activities.
Revolving
Credit
Facility
On June 25, 2018, we entered into the Revolving Credit Facility with a group of lenders, which provides senior unsecured revolving credit in
the maximum aggregate initial original principal amount of up to $300.0 million. Barclays Bank PLC, Citigroup Global Markets Inc. and Goldman
Sachs Bank USA were the joint lead arrangers of the facility, with Barclays Bank PLC acting as administrative agent. Under the Revolving Credit
Facility, as of December 31, 2018, we had $34.0 million of outstanding borrowings and $266.0 million of unused borrowing capacity.
The Revolving Credit Facility has a term of four years from the original closing date with an extension option of up to 12-months exercisable
by us, subject to certain conditions, and initially bears interest at an annual rate of (i) applicable LIBOR plus an applicable margin between 1.45%
and 2.15%; or (ii) the base rate (which rate is equal to the greatest of the prime rate, the federal funds effective rate plus 0.5% or LIBOR plus 1.0%)
plus an applicable margin of between 0.45% and 1.15%. The applicable LIBOR is the rate with a term equivalent to the interest period applicable to
the relevant borrowing. The applicable margin is initially a spread set according to a leverage-based pricing grid. At our election, on and after receipt
of an investment grade corporate credit rating from S&P or Moody’s, the applicable margin will be a spread set according to our corporate credit
ratings by S&P and/or Moody’s. The Revolving Credit Facility is freely prepayable at any time and will be mandatorily prepayable if borrowings
exceed the borrowing base or the facility limit. We may re-borrow amounts paid down, subject to customary borrowing conditions. We are required to
pay revolving credit commitment fees throughout the term of the Revolving Credit Facility based upon our usage of the Revolving Credit Facility, at a
rate which depends on our usage of the Revolving Credit Facility during the period before we receive an investment grade corporate credit rating
from S&P or Moody’s, and which rate shall be based on the corporate credit rating from S&P and/or Moody’s after the time, if applicable, we receive
such a rating. However, there can be no assurance that we will receive an investment grade corporate rating from S&P and/or Moody’s. The
Revolving Credit Facility provides an accordion feature to increase, subject to certain conditions, the maximum availability of the facility by up to an
additional $200.0 million.
The Operating Partnership is the borrower under the Revolving Credit Facility, and we and each of the subsidiaries of the Operating
Partnership that owns a direct or indirect interest in an eligible real property asset are guarantors under the Revolving Credit Facility.
We are subject to financial covenants under the Revolving Credit Facility, including maintaining: a limitation on total consolidated leverage of
not more than 60% of the total value of certain of our assets (including unencumbered cash and cash equivalents, the value of real property assets,
mortgage notes receivable and up to $10 million of construction or redevelopment costs) (“Total Consolidated Assets”) with a step up on two non-
consecutive occasions to 65%, at our election, for two consecutive quarters each following a material acquisition; a consolidated fixed charge
coverage ratio of at least 1.50x; a consolidated tangible net worth of at least 75% of our tangible net worth at the date of the facility plus 75% of
future net equity proceeds; a consolidated secured leverage ratio of not more than 50% of our Total Consolidated Assets; a secured recourse debt
ratio of not more than 10% of our Total Consolidated Assets; an unencumbered leverage ratio of not more than 60% of our consolidated
unencumbered real property and mortgage notes receivable with a step up on two non-consecutive occasions to 65%, at our election, for two
consecutive quarters each following a material acquisition; and an unencumbered interest coverage ratio of at least 1.75x.
The Revolving Credit Facility restricts our ability to pay distributions to our stockholders under certain circumstances. In particular, we are
generally limited to paying cash distributions with respect to
58
any period of four fiscal quarters in an amount not to exceed the greater of (i) 95% of adjusted funds from operations (as defined in the credit
agreement), or (ii) the amount required for us to maintain our status as a REIT, and such cash distributions may be further limited during events of
default. The Revolving Credit Facility contains certain covenants that, subject to exceptions, limits or restricts, among other things, our incurrence of
indebtedness and liens, disposition of assets, transactions with affiliates, mergers and fundamental changes, modification of organizational
documents, changes to fiscal periods, making of investments, negative pledge clauses and lines of business and REIT qualification.
Cash Flows
The following discussion of changes in cash flows includes the results of the Company and the Predecessor collectively for the periods
presented.
Comparison
of
the
years
ended
December
31,
2018
and
2017
and
the
period
from
March
30,
2016
(commencement
of
operations)
to
December
31,
2016
As of December 31, 2018, we had $4.2 million of cash and cash equivalents and $12.0 million of restricted cash as compared to $7.3 million
and $12.2 million, respectively, as of December 31, 2017 and $1.8 million and $10.1 million, respectively, as of December 31, 2016.
Cash
Flows
for
the
year
ended
December
31,
2018
During the year ended December 31, 2018, net cash provided by operating activities was $45.9 million. Our cash flows from operating
activities are primarily dependent upon the occupancy level of our portfolio, the rental rates specified in our leases, the collectability of rent and the
level of our operating expenses and other general and administrative costs. Cash inflows related to a net income adjusted for non-cash items of
$48.3 million (net income of $20.6 million adjusted for non-cash items, including depreciation and amortization of tangible and intangible real estate
assets, amortization of deferred financing costs, provision for impairment of real estate, gains on dispositions of investments, net, straight-line rent
receivable, equity-based compensation and allowance for doubtful accounts, of $27.7 million). These cash inflows were partially offset by a decrease
of $1.6 million in accrued liabilities and other payables and an increase of $0.8 million in prepaid expenses and other assets.
Net cash used in investing activities during the year ended December 31, 2018 was $461.9 million. Our net cash used in investing activities
is generally used to fund property acquisitions, the development of our construction in progress, investments in loans receivable and, to a limited
extent, capital expenditures, offset by cash provided from the disposition of real estate and principal collections on our direct financing receivables.
The cash used in investing activities included $488.4 million to acquire investments in real estate, $15.3 million to fund construction in progress,
$14.9 million of investments in loans receivable, $1.7 million for capital expenditures subsequent to acquisition, $0.5 million paid to tenants as lease
incentives and an increase of $1.7 million in deposits on prospective real estate investments. These cash outflows were partially offset by $60.4
million of proceeds from sales of investments, net of disposition costs, and $0.1 million of principal collections on our direct financing lease
receivables.
Net cash provided by financing activities of $412.8 million during the year ended December 31, 2018 related to cash inflows of $464.2 million
from the issuance of common stock in the IPO (inclusive of the shares issued pursuant to the partial exercise by the underwriters of their option to
purchase additional shares), $109.0 million from the Concurrent Private Placement of common stock, $16.0 million from the Concurrent Private
Placement of OP Units, $154.0 million from the issuance of notes payable to related parties, $34.0 million of borrowings under the Revolving Credit
Facility and $50.0 million of capital contributions to the Predecessor. These cash inflows were partially offset by the payment of $5.5 million of IPO
costs, $384.0 million of payments of principal on notes payable to related parties, $7.8 million of repayments of secured borrowing principal, payment
of $3.1 million of deferred financing costs related to the Revolving Credit Facility and the payment of $14.1 million in dividends.
59
Cash
Flows
for
the
year
ended
December
31,
2017
During the year ended December 31, 2017, net cash provided by operating activities was $22.5 million. Cash inflows related to a net income
adjusted for non-cash items of $20.7 million (net income of $6.3 million adjusted for non-cash items, including depreciation and amortization of
tangible and intangible real estate assets, amortization of deferred financing costs, provision for impairment of real estate, gains on dispositions of
investments, net, straight-line rent receivable, equity-based compensation and allowance for doubtful accounts of $14.4 million) and a $4.1 million
increase in accrued liabilities and other payables. These cash inflows were partially offset by a net increase in prepaid expenses and other assets
of $2.3 million.
Net cash used in investing activities during the year ended December 31, 2017 was $464.4 million. The cash used in investing activities
included $509.8 million to acquire investments in real estate, $7.7 million to fund construction in progress, $0.3 million paid to tenants as lease
incentives, $0.3 million paid for deposits on prospective real estate investments and approximately $48,000 for capital expenditures. These cash
outflows were partially offset by $53.6 million of proceeds from sales of investments, net of disposition costs, and $0.1 million of principal collections
on our direct financing lease receivables.
Net cash provided by financing activities of $449.4 million during the year ended December 31, 2017 related to cash inflows of $543.0 million
from the issuance of notes payable to related parties, $248.1 million of proceeds from secured borrowings under our Master Trust Funding Program
and $83.7 million of capital contributions to the Predecessor. These cash inflows were partially offset by $313.0 million of payments of principal on
notes payable to related parties, $101.2 million of equity distributions by the Predecessor, $5.6 million of repayments of secured borrowing principal
and $5.6 million of deferred financing costs.
Cash
Flows
for
the
period
from
March
30,
2016
(commencement
of
operations)
to
December
31,
2016
During the period from March 30, 2016 (commencement of operations) to December 31, 2016, net cash provided by operating activities
was $10.5 million. Cash inflows related to a net income adjusted for non-cash items of $8.6 million (net income of $3.8 million adjusted for non-cash
items, including depreciation and amortization of tangible and intangible real estate assets, provision for impairment of real estate, gains on
dispositions of investments, net, and straight-line rent receivable of $4.8 million) and a $2.4 million increase in accrued liabilities and other payables.
These cash inflows were partially offset by a net increase in prepaid expenses and other assets of $0.5 million.
Net cash used in investing activities during the period from March 30, 2016 (commencement of operations) to December 31, 2016
was $279.1 million. The cash used in investing activities included $288.9 million to acquire investments in real estate, $3.7 million to acquire
investments in direct financing receivables, $2.0 million paid to tenants as lease incentives, $1.0 million to fund construction in progress and $0.1
million paid for deposits on prospective real estate investments. These cash outflows were partially offset by $16.5 million of proceeds from sales of
investments, net of disposition costs, and approximately $37,000 of principal collections on our direct financing lease receivables.
Net cash provided by financing activities of $280.5 million during the period from March 30, 2016 (commencement of operations) to
December 31, 2016 related to cash inflows of $288.6 million of capital contributions to the Predecessor and $7.5 million of proceeds from secured
borrowings under our Master Trust Funding Program. These cash inflows were partially offset by $7.7 million of deferred financing costs, $7.5 million
of equity distributions by the Predecessor and $0.3 million of repayments of secured borrowing principal.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 31, 2018.
60
Contractual Obligations
The following table provides information with respect to our commitments as of December 31, 2018.
(in thousands)
Secured Borrowings—Principal
Secured Borrowings—Fixed Interest (1)
Revolving Credit Facility (2)
Tenant Construction Financing and
Reimbursement Obligations (3)
Operating Lease Obligations (4)
Total
Total
2019
2020 - 2021
2022 - 2023
Thereafter
Payment due by period
$
$
515,120 $
88,232
34,000
19,456
6,254
663,062 $
8,009 $
22,244
—
275,977 $
42,441
—
19,456
1,385
51,094 $
—
2,098
320,516 $
8,804 $
18,930
34,000
—
1,678
63,412 $
222,330
4,617
—
—
1,093
228,040
(1)
(2)
(3)
(4)
Includes interest payments on outstanding indebtedness issued under the Master Trust Funding Program through the anticipated repayment
dates.
As of December 31, 2018, balances on the Revolving Credit Facility bear interest at an annual rate of prime rate plus a leverage-based credit
spread of 0.45%. We also pay a facility fee on the total unused commitment amount of 0.15%. Subsequent to December 31, 2018, balances
on the Revolving Credit Facility bear interest at an annual rate of applicable LIBOR plus an applicable margin between 1.45% and 2.15%.
Includes obligations to reimburse certain of our tenants for construction costs that they incur in connection with construction at our properties
in exchange for contractually specified rent that generally increases proportionally with our funding.
Includes $1.5 million of rental payments due under ground lease arrangements where our tenants are directly responsible for payment.
Additionally, we may enter into commitments to purchase goods and services in connection with the operation of our business. These
commitments generally have terms of one-year or less and reflect expenditure levels comparable to our historical expenditures.
We intend to elect to qualify as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2018;
accordingly, we generally will not be subject to federal income tax, provided we distribute all of our REIT taxable income, determined without regard
to the dividends paid deduction, to our stockholders.
Critical Accounting Policies and Estimates
Our accounting policies are determined in accordance with accounting principles generally accepted in the United States (“GAAP”). The
preparation of our financial statements requires us to make estimates and assumptions that are subjective in nature and, as a result, our actual
results could differ materially from our estimates. Estimates and assumptions include, among other things, subjective judgments regarding the fair
values and useful lives of our properties for depreciation and lease classification purposes, the collectability of receivables and asset impairment
analysis. Set forth below are the more critical accounting policies that require management judgment and estimates in the preparation of our
consolidated financial statements.
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. We evaluate 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):
61
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.
We allocate 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.
We incur various costs in the leasing and development of our 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 our consolidated balance sheets. Tenant
improvements are capitalized to building and improvements within our 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. We do not engage in speculative real estate development. We do, however,
opportunistically agree to reimburse certain of our tenants for development costs at our properties in exchange for contractually specified rent that
generally increases proportionally with our 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. We estimate 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 we consider 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, we include 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 our 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, we utilize a number of sources, including real estate valuations
prepared by independent valuation firms. We also consider 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, we consider information obtained about each
property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible
assets acquired. We use the information obtained as a result of our pre-acquisition due
62
diligence as part of our 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 our 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.
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 statement of
operations and comprehensive income.
Loans
Receivable
We hold our loans receivable for long-term investment. Loans receivable are carried at amortized cost, including related unamortized
discounts or premiums, if any. We recognize 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.
63
We periodically evaluate the collectability of our 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 our 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 we will be unable to collect
all amounts due 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.
Direct
Financing
Lease
Receivables
Certain of our real estate investment transactions are accounted for as direct financing leases. We record 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. Our 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.
If and when an investment in direct financing lease receivables is identified for impairment evaluation, we will apply the guidance in both the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310, Receivables
(“ASC 310”) and ASC 840, Leases
(“ASC 840”). 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 we, as the lessor, will be unable to collect all rental payments associated with our investment in the direct financing lease
receivable. Under ASC 840, we review 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, we determine 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 us as a loss in the period in which the estimate is
changed.
Impairment
of
Long-Lived
Assets
If circumstances indicate that the carrying value of a property may not be recoverable, we review 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.
Allowance
for
Doubtful
Accounts
We continually review receivables related to rent and unbilled rent receivables and determine 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. If the collectability of a receivable is in doubt, the accounts receivable and straight-line rent
receivable balances are reduced by an allowance for doubtful accounts on the consolidated balance sheets or a direct write-off of the receivable is
recorded in the consolidated statements of operations. The provision for doubtful accounts is included in property expenses in our consolidated
statements of operations and comprehensive income. If the accounts receivable balance or
64
straight-line rent receivable balance is subsequently deemed to be uncollectible, such receivable amounts are written-off to the allowance for
doubtful accounts.
Revenue
Recognition
Our rental revenue is primarily related to 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, we record a straight-line rent
receivable and recognize revenue on a straight-line basis through the expiration of the non-cancellable term of the lease. We take into account
whether the collectability of rents is reasonably assured in determining the amount of straight-line rent to record.
We defer 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 our consolidated balance sheets.
Certain properties in our investment portfolio are subject to leases that provide for contingent rent based on a percentage of the tenant’s
gross sales. For these leases, we recognize contingent rental revenue when the threshold upon which the contingent lease payment is based is
actually reached.
Gains
and
Losses
on
Dispositions
of
Real
Estate
Through December 31, 2017, gains and losses on dispositions of real estate investments were recorded in accordance with ASC 360-20,
Property,
Plant
and
Equipment—Real
Estate
Sales,
and include realized proceeds from real estate disposed of in the ordinary course of business,
less their related net book value and less any costs incurred in association with the disposition.
On January 1, 2018, we adopted 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 our primary activity, we determined that our sales of real estate, which are nonfinancial
assets, are sold to noncustomers and fall within the scope of ASC 610-20. We recognize the full gain on the disposition of our real estate
investments as we (i) have no controlling financial interest in the real estate and (ii) have no continuing interest or obligation with respect to the
disposed real estate. We 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 our consolidated financial statements.
Income
Taxes
We intend to elect to be taxed as a REIT under sections 856 through 860 of the Code, commencing with our 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, we will generally not be
subject to U.S. federal income tax to the extent that we meet the organizational and operational requirements and our distributions equal or exceed
REIT taxable income. For the period subsequent to the effective date of our intended REIT election, we intend to meet the organizational and
operational requirements and expect distributions to exceed net taxable income. Accordingly, no provision has been made for U.S. federal income
taxes. Even if we qualify for taxation as a REIT, we may be subject to state and local income and franchise taxes, and to federal income and excise
tax on our undistributed income. Franchise taxes and federal excise taxes on our undistributed income, if any, are included in general and
administrative expenses on the accompanying consolidated statements of
65
operations and comprehensive income. Additionally, taxable income from our non-REIT activities managed through our taxable REIT subsidiary is
subject to federal, state and local taxes.
From the Predecessor’s commencement of operations on March 30, 2016 through January 31, 2017, the Predecessor and its subsidiaries
included in the consolidated financial statements were treated as disregarded entities for U.S. federal and state income tax purposes, and,
accordingly, the Predecessor was not subject to entity-level tax. Therefore, until the Predecessor’s issuance of Class A and Class C units on
January 31, 2017, the Predecessor’s net income flowed through to SCF Funding LLC, its initial sole member, for federal income tax purposes.
Following the issuance of Class A and Class C units, the Predecessor’s net income flowed through to Class A and Class C unitholders for federal
income tax purposes. With regard to state income taxes, the Predecessor was a taxable entity only in certain states that tax all entities, including
partnerships.
We analyze our tax filing positions in all of the U.S. federal, state and local tax jurisdictions where we are required to file income tax returns,
as well as for all open tax years in such jurisdictions. We follow 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 we subsequently determine 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.
Equity-Based
Compensation
In 2018, we granted shares of restricted common stock to our directors, executive officers and other employees that 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. We
account 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.
We recognize 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, we concluded that the Operating Partnership is a VIE of which we are the primary
beneficiary, as we have the power to direct the activities that most significantly impact the economic performance of the Operating Partnership .
Substantially all of our 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 our consolidated balance sheet as of December 31, 2018.
We have concluded that an entity which we have provided a $5.7 million mortgage loan receivable is a VIE because the terms of the loan
agreement limit the entity’s ability to absorb expected losses or the
66
entity’s right to receive expected residual returns. However, we are not the primary beneficiary of the entity, because we do 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 our loan
receivable with this entity was $5.7 million, and our maximum exposure to loss in this entity is limited to the carrying amount of our investment. We
had no liabilities associated with this investment as of December 31, 2018.
Net
Income
per
Share
We compute n et income per share pursuant to the guidance in the FASB ASC Topic 260, Earnings
Per
Share
. The guidance requires the
classification of our 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. The OP Units held by non-controlling interests represent potentially dilutive securities
as the OP Units may be redeemed for cash or, at our election, exchanged for shares of our common stock on a one-for-one basis.
Recently Issued Accounting Pronouncements
In May 2014, with subsequent updates in 2015, 2016 and 2017, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”
(“ASU 2014-09”), which establishes a principles-based approach for accounting for revenue from contracts with customers. The standard does not
apply to revenue recognition for lease contracts or to the interest income recognized from direct financing receivables, which together represent
substantially all of our revenue. Such revenues are related to lease contracts with tenants, which currently fall within the scope of ASC Topic 840
and will fall within the scope of ASC Topic 842 upon the adoption of ASU 2016-02 on January 1, 2019 (see below). Our sales of real estate are
within the scope of ASU 2017-05 (see above). We adopted ASU 2014-09 on January 1, 2018 using the modified retrospective method for transition.
The adoption of this new standard did not result in a cumulative effect adjustment as of January 1, 2018 and did not have any impact on our
consolidated financial statements.
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 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 us. 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 us on January 1, 2019 and, in accordance with the provisions of ASU 2018-11, Leases (Topic 842), Targeted
Improvements, was adopted by us 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. We 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. 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, we are also a lessee under several ground lease arrangements and under our corporate office and office equipment
leases. We have completed our inventory and evaluation of these leases and have calculated a right-of-use asset and a lease liability for the present
value of the minimum lease payments; the amount recognized upon
67
adoption was less than 1% of total assets. For a portion of our ground lease arrangements, the sublessees, or our 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, will be 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 our lease contracts (under which we are the lessor) are “triple-net” leases, which means that our tenants are responsible
for making payments to third parties for operating expenses such as property taxes and insurance costs associated with the properties we lease 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 us to exclude from variable lease payments, and
therefore revenue and expense, costs paid by our tenants directly to third parties (a net presentation). Costs paid by us and reimbursed by our
tenants will be included in variable lease payments (a gross presentation)
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. We early adopted ASU 2018-07 effective July 1, 2018 for accounting for our
liability-classified non-employee awards that had not vested as of that date. No adjustment to our 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. We are currently
evaluating the impact of adopting ASU 2018-13 on our related disclosures.
68
Results of Operations
The following discussion includes the results of the Company’s and the Predecessor’s operations collectively for the periods presented.
Comparison
of
the
years
ended
December
31,
2018
and
2017
(dollar amounts in thousands)
Revenues:
Rental revenue
Interest income on loans and direct financing
lease receivables
Other revenue
Total revenues
Expenses:
Interest
General and administrative
Property expenses
Depreciation and amortization
Provision for impairment of real estate
Total expenses
Other operating income:
Gain on dispositions of real estate, net
Income from operations
Other income:
Interest
Income before income tax expense
Income tax expense
Net income
Net income attributable to non-controlling
interests
Net income attributable to stockholders
and members
Revenues:
Year ended December 31,
2017
2018
Change
%
$
94,944 $
53,373 $
41,571
77.9%
656
623
96,223
293
783
54,449
363
(160)
41,774
30,192
13,762
1,980
31,352
4,503
81,789
5,445
19,879
930
20,809
195
20,614
22,574
8,775
1,547
19,516
2,377
54,789
6,748
6,408
49
6,457
161
6,296
7,618
4,987
433
11,836
2,126
27,000
(1,303)
13,471
881
14,352
34
14,318
123.9%
-20.4%
33.7%
56.8%
28.0%
60.6%
89.4%
-19.3%
1798.0%
21.1%
(5,001)
—
(5,001)
—
$
15,613 $
6,296 $
9,317
Rental
revenue
. Rental revenue increased by $41.6 million to $94.9 million for the year ended December 31, 2018 as compared to $53.4
million for the year ended December 31, 2017. The increase in rental revenue was primarily due to our acquisition of properties during the years
ended December 31, 2018 and 2017, which provided $19.0 million and $22.2 million of additional rental revenue between the comparison periods,
net of a reduction in rental revenue due to sale of properties during the comparison periods, and an increase in the net accretion of above- and
below- market lease intangibles to revenue of $0.3 million between the comparison periods.
Interest
income
on
loans
and
direct
financing
receivables
. Interest income on loans and direct financing receivables increased by $0.4
million for the year ended December 31, 2018 primarily due to our initial investments in loans receivable during 2018.
Other
revenue
. Other revenue decreased by $0.2 million for the year ended December 31, 2018 as compared to year ended December
31, 2017. The decrease in other revenue was primarily due to a $0.7 million decrease in lease termination income during the year ended
December 31, 2018, partially offset
69
by having a full year of expense reimbursement income on two properties that were acquired in September 2017.
Expenses:
Interest
. Interest expense increased by $7.6 million to $30.2 million for the year ended December 31, 2018 as compared to $22.6 million for
the year ended December 31, 2017. The increase in interest expense was primarily due to $5.6 million of additional interest expense from having
notes issued under our Master Trust Funding Program on July 11, 2017 outstanding during the entire year ended December 31, 2018, $0.9 million of
new interest expense relating to the Revolving Credit Facility that was entered into in June 2018 and $1.1 million of additional interest expense on
our notes payable to related parties due to higher average borrowing balances during the year ended December 31, 2018.
General
and
administrative
expenses.
General and administrative expenses increased $5.0 million to $13.8 million for the year ended
December 31, 2018 as compared to $8.8 million for the year ended December 31, 2017. This increase in general and administrative expenses was
primarily due to increases in stock compensation expense of $1.6 million, directors’ fees of $0.2 million, legal and accounting fees of $1.4 million,
personnel costs of $1.2 million and other costs required to support our growing real estate portfolio.
Property
expenses
. Property expenses increased by $0.4 million to $1.9 million for the year ended December 31, 2018 as compared to
$1.5 million for the year ended December 31, 2017. The increase was primarily due to having a full year of reimbursable property expense on two
properties that were acquired in September 2017. Our leases are generally triple-net and provide that the tenant is responsible for the payment of all
property-level expenses, such as maintenance, insurance, utility and tax expense, related to the leased property. Therefore, we are generally not
responsible for operating costs related to the properties, unless a property is not subject to a triple-net lease or is vacant. Barring any significant
changes in occupancy or composition of triple net leases in our portfolio between the comparison periods, we expect property expenses to remain
fairly consistent.
Depreciation
and
amortization
expense
. Depreciation and amortization expense relates primarily to depreciation on the properties and
improvements we own and to amortization of the related lease intangibles. Depreciation and amortization expense increased by $11.9 million to
$31.4 million for the year ended December 31, 2018 as compared to $19.5 million for the year ended December 31, 2017. The increase in
depreciation and amortization expense during the year ended December 31, 2018 was due to the inclusion of depreciation and amortization expense
for properties acquired during the years ended December 31, 2018 and 2017 which added $5.6 million and $8.0 million of additional depreciation
and amortization expense during the year ended December 31, 2018. These increases were partially offset by a reduction of $1.7 million of
depreciation and amortization expense on properties that we disposed during the year ended December 31, 2018.
Provision
for
impairment
of
real
estate
. Impairment charges on real estate investments were $4.5 million and $2.4 million for the years
ended December 31, 2018 and 2017, respectively. During the years ended December 31, 2018 and 2017, we recorded a provision for impairment of
real estate at 20 and nine of our real estate investments. We strategically seek to identify non-performing properties that we may re-lease or dispose
of in an effort to improve our returns and manage risk exposure. An increase in vacancy associated with our disposition or re-leasing strategies may
trigger impairment charges when the expected future cash flows from the properties from sale or re-lease are less than their net book value.
Other
operating
income:
Gain
on
dispositions
of
real
estate,
net.
Gain on dispositions of real estate, net decreased by $1.3 million to $5.4 million for the year ended
December 31, 2018 as compared to $6.7 million for the year ended December 31, 2017. We disposed of 45 real estate properties during the year
ended December 31, 2018 as compared to 47 real estate properties during the year ended December 31, 2017.
70
Other
income
and
expenses:
Interest
. Interest income increased by $0.9 million for the year ended December 31, 2018. The increase in interest income was primarily due
to higher average daily cash balances in our interest-bearing bank accounts during the year ended December 31, 2018 because of the funds raised
through the 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.
Income
tax
expense.
Income tax expense increased by approximately $34,000 for the year ended December 31, 2018. As we are organized
and operate with the intention of qualifying as a REIT, we are generally not subject to U.S. federal taxation. However, the Operating Partnership is
subject to taxation in certain state and local jurisdictions that impose income taxes on a partnership. The increase in income tax expense was
primarily due to the continued growth of our real estate investment portfolio and our expansion into new jurisdictions where we are subject to
taxation.
Net
income
attributable
to
non-controlling
interests.
Net income attributable to non-controlling interests represents the portion of our net
income attributable to the holders of units in our Operating Partnership, which are accounted for as non-controlling interests. No such non-controlling
interests existed during the year ended December 31, 2017.
Comparison
of
the
year
ended
December
31,
2017
and
the
period
from
March
30,
2016
(commencement
of
operations)
to
December
31,
2016
(dollar amounts in thousands)
Revenues:
Rental revenue
Interest income on loans and direct financing
lease receivables
Other revenue
Total revenues
Expenses:
Interest
General and administrative
Property expenses
Depreciation and amortization
Provision for impairment of real estate
Total expenses
Other operating income:
Gain on dispositions of real estate, net
Income from operations
Other income:
Interest
Income before income tax expense
Income tax expense
Net income and comprehensive income
Revenues:
Year ended December 31,
2016
2017
Change
%
$
53,373 $
15,271 $
38,102
249.5%
293
783
54,449
161
88
15,520
132
695
38,929
22,574
8,775
1,547
19,516
2,377
54,789
6,748
6,408
49
6,457
161
6,296 $
987
4,321
533
5,428
1,298
12,567
871
3,824
3
3,827
77
3,750 $
21,587
4,454
1,014
14,088
1,079
42,222
5,877
2,584
46
2,630
84
2,546
82.0%
789.8%
2187.1%
103.1%
190.2%
259.5%
83.1%
674.7%
1533.3%
109.1%
$
Rental
revenue
. Rental revenue increased by $38.1 million to $53.4 million for the year ended December 31, 2017 as compared to
$15.3 million for the period from March 30, 2016 (commencement of operations) to December 31, 2016. The increase in rental revenue was primarily
due to our acquisition of 212 properties during the year ended December 31, 2017, which provided $17.6 million of additional
71
rental revenue between the comparison periods, contractual rent escalations and the inclusion of a full year of operations from properties acquired
during the period from March 30, 2016 (commencement of operations) to December 31, 2016, which contributed $20.5 million of additional rental
revenue between the comparison periods.
As of December 31, 2017, 98.8% of our properties were occupied. We regularly review and analyze the operational and financial condition of
our tenants and the industries in which they operate in order to identify underperforming properties that we may seek to dispose of in an effort to
mitigate risks in our portfolio. As of December 31, 2017, exclusive of two vacant land parcels that we own, six of our properties, representing 1.2% of
our portfolio, were vacant and not generating rent, compared to 11 vacant properties, representing 3.2% of our portfolio, as of December 31, 2016.
Interest
income
on
loans
and
direct
financing
receivables
. Interest income on loans and direct financing receivables increased by $0.1
million to $0.3 million for the year ended December 31, 2017, as compared to $0.2 million for the period from March 30, 2016 (commencement of
operations) to December31, 2016. The increase in interest income on direct financing receivables was due to the inclusion of a full year of
operations from our eight investments in direct financing receivables acquired during the period from March 30, 2016 (commencement of operations)
to December 31, 2016 (net of disposition or termination of two direct financing leases during the year ended December 31, 2017).
Other
revenue
. Other revenue increased by $0.7 million to $0.8 million for the year ended December 31, 2017, as compared to $0.1 million
for the period from March 30, 2016 (commencement of operations) to December 31, 2016. The increase in other revenue was primarily due to the
receipt of $0.7 million of lease termination fees from former tenants during the year ended December 31, 2017.
Expenses:
Interest
. Interest expense increased by $21.6 million to $22.6 million for the year ended December 31, 2017 as compared to $1.0 million for
the period from March 30, 2016 (commencement of operations) to December 31, 2016. The increase in interest expense was primarily due
to $11.8 million of additional interest expense from having $280.8 million of notes issued under our Master Trust Funding Program in December
2016 outstanding for a full year, $8.0 million of additional interest expense on debt issued to finance acquisitions during the year ended December
31, 2017 and $1.8 million of additional non-cash interest expense from the amortization of deferred financing costs. During the year ended
December 31, 2017, we issued an additional $248.1 million of notes under our Master Trust Funding Program and had net borrowings of $230.0
million through short-term notes with related parties.
General
and
administrative.
General and administrative expenses increased $4.5 million to $8.8 million for the year ended December 31,
2017 as compared to $4.3 million for the period from March 30, 2016 (commencement of operations) to December 31, 2016. This increase in
general and administrative expenses was primarily due to the inclusion of a full year of operations and increased costs required to support our larger
real estate investment portfolio during the year ended December 31, 2017.
Property
expenses
. Property expenses increased by $1.0 million to $1.5 million for the year ended December 31, 2017 as compared to
$0.5 million for the period from March 30, 2016 (commencement of operations) to December 31, 2016. The increase in property costs was due to the
inclusion of a full year of operations and related property expenses for our vacant properties during the year ended December 31, 2017, partially
offset by reduced property expenses due to a net four property decrease in our total number of vacant properties during the year ended December
31, 2017.
Depreciation
and
amortization
. Depreciation and amortization expense increased by $14.1 million to $19.5 million for the year ended
December 31, 2017 as compared to $5.4 million for the period from March 30, 2016 (commencement of operations) to December 31, 2016. The
increase during the year ended December 31, 2017 was due to the inclusion of a full year of operations and related depreciation and amortization
expense from properties acquired during the period from March 30, 2016 (commencement of operations) to December 31, 2016, which added $8.6
million of additional
72
depreciation and amortization expense, and $5.5 million of additional depreciation and amortization expense recorded on the 212 properties that we
acquired during the year ended December 31, 2017.
Provision
for
impairment
of
real
estate
. Impairment charges on real estate investments were $2.4 million and $1.3 million for the year ended
December 31, 2017 and the period from March 30, 2016 (commencement of operations) to December 31, 2016, respectively. During the year ended
December 31, 2017, we recorded a provision for impairment of real estate at nine of our real estate investments, compared to seven real estate
investments during the period from March 30, 2016 (commencement of operations) to December 31, 2016.
Other
operating
income:
Gain
on
dispositions
of
real
estate,
net.
Gain on dispositions of real estate, net increased by $5.9 million to $6.8 million for the year ended
December 31, 2017 as compared to $0.9 million for the period from March 30, 2016 (commencement of operations) to December 31, 2016. The
increase in gain on dispositions of real estate was primarily due to our disposition of 47 real estate properties during the year ended December 31,
2017 compared to our disposition of 17 properties during the period from March 30, 2016 (commencement of operations) to December 31, 2016.
Other
income
and
expenses:
Interest
. Interest income increased by approximately $46,000 for the year ended December 31, 2017 as compared to the period from March
30, 2016 (commencement of operations) to December 31, 2016. The increase in interest income was primarily due to higher average daily cash
balances in our interest-bearing bank accounts during the year ended December 31, 2017.
Income
tax
expense.
Income tax expense increased by $0.1 million to $0.2 million for the year ended December 31, 2017 as compared to
$0.1 million for the period from March 30, 2016 (commencement of operations) to December 31, 2016. The Predecessor was subject to taxation in
certain state and local jurisdictions that impose income taxes on a partnership. The increase in income tax expense was primarily due to the
continued growth of our real estate investment portfolio and our expansion into new jurisdictions where we are subject to taxation.
Non-GAAP Financial Measures
Our reported results are presented in accordance with GAAP. We also disclose the following non-GAAP financial measures: funds from
operations (“FFO”), adjusted funds from operations (“AFFO”), earnings before interest, taxes, depreciation and amortization (“EBITDA”), EBITDA
further adjusted to exclude gains (or losses) on sales of depreciable property and real estate impairment losses (“EBITDA re
”), net debt, net
operating income (“NOI”) and cash NOI (“Cash NOI”). We believe these non-GAAP financial measures are accepted industry measures used by
analysts and investors to compare the operating performance of REITs.
We compute FFO in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment
Trusts (“NAREIT”). NAREIT defines FFO as GAAP net income or loss adjusted to exclude extraordinary items (as defined by GAAP), net gain or
loss from sales of depreciable real estate assets, impairment write-downs associated with depreciable real estate assets and real estate-related
depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), including the pro rata
share of such adjustments of unconsolidated subsidiaries. FFO is used by management, investors and analysts to facilitate meaningful comparisons
of operating performance between periods and among our peers primarily because it excludes the effect of real estate depreciation and amortization
and net gains on sales (which are dependent on historical costs and implicitly assume that the value of real estate diminishes predictably over time,
rather than fluctuating based on existing market conditions).
73
To derive AFFO, we modify the NAREIT computation of FFO to include other adjustments to GAAP net income related to certain items that
we believe are not indicative of our core operating performance, including straight-line rental revenue, non-cash interest expense, non-cash
compensation expense, amortization of market lease-related intangibles, amortization of capitalized lease incentives, capitalized interest expense,
transaction costs and other non-cash charges. Such items may cause short-term fluctuations in net income but have no impact on operating cash
flows or long-term operating performance. We believe that AFFO is an additional useful supplemental measure for investors to consider because it
will help them to better assess our operating performance without the distortions created by non-cash and certain other revenues and expenses.
FFO and AFFO do not include all items of revenue and expense included in net income, nor do they represent cash generated from
operating activities, and they are not necessarily indicative of cash available to fund cash requirements; accordingly, they should not be considered
alternatives to net income as a performance measure or cash flows from operations as a liquidity measure and should be considered in addition to,
and not in lieu of, GAAP financial measures. FFO and AFFO may not be comparable to similarly titled measures reported by other companies.
The following table reconciles net income (which is the most comparable GAAP measure) to FFO and AFFO attributable to stockholders and
members and non-controlling interests:
(in thousands)
Net income
Depreciation and amortization of real estate
Provision for impairment of real estate
Gain on dispositions of real estate, net
FFO attributable to stockholders and members and
non-controlling interests
Adjustments:
Straight-line rental revenue, net
Non-cash interest expense
Non-cash compensation expense
Amortization of market lease-related intangibles
Amortization of capitalized lease incentives
Capitalized interest expense
Transaction costs
Other non-cash charges
AFFO attributable to stockholders and members and
non-controlling interests
2018
Year ended December 31,
2017
2016
$
20,614 $
31,335
4,503
(5,445)
51,007
(8,214)
2,798
2,440
336
159
(225)
57
84
6,296 $
19,513
2,377
(6,748)
21,438
(4,254)
1,884
841
531
139
(242)
—
—
$
48,442 $
20,337 $
3,750
5,428
1,298
(871)
9,605
(1,244)
101
—
116
11
(10)
—
—
8,579
We calculate EBITDA as earnings before interest, income taxes and depreciation and amortization. In 2017, NAREIT issued a white paper
recommending that companies that report EBITDA also report EBITDA re
. We compute EBITDA re
in accordance with the definition adopted by
NAREIT. NAREIT defines EBITDA re
as EBITDA (as defined above) excluding gains (or losses) from the sales of depreciable property and real
estate impairment losses. We present EBITDA and EBITDA re
as they are measures commonly used in our industry and we believe that these
measures are useful to investors and analysts because they provide important supplemental information concerning our operating
performance, exclusive of certain non-cash items and other costs. We use EBITDA and EBITDA re
as measures of our operating performance and
not as measures of liquidity.
EBITDA and EBITDA re
are not measures of financial performance under GAAP, and our EBITDA and EBITDA re
may not be comparable
to similarly titled measures reported by other companies. You should not consider EBITDA and EBITDA re
as alternatives to net income or cash
flows from operating activities determined in accordance with GAAP.
74
The following table reconciles net income (which is the most comparable GAAP measure) to EBITDA and EBITDA re
attributable to
stockholders and members and non-controlling interests:
(in thousands)
Net income
Depreciation and amortization
Interest expense
Interest income
Income tax expense
EBITDA attributable to stockholders and members
and non-controlling interests
Provision for impairment of real estate
Gain on dispositions of real estate, net
EBITDA re
attributable to stockholders and members
and non-controlling interests
$
2018
Year ended December 31,
2017
2016
20,614 $
31,352
30,192
(930)
195
81,423
4,503
(5,445)
6,296 $
19,516
22,574
(49)
161
48,498
2,377
(6,748)
3,750
5,428
987
(3)
77
10,239
1,298
(871)
$
80,481 $
44,127
$
10,666
We adjust EBITDA re
for our most recently completed fiscal quarter based on an estimate calculated as if all acquisition and disposition
activity that took place during the quarter had been made on the first day of the quarter (“Adjusted EBITDA re
”). We then annualize Adjusted
EBITDA re
by multiplying it by four (“Annualized Adjusted EBITDA re
”), which we believe provides a meaningful estimate of our current run rate for
all properties owned as of the date of this report. You should not unduly rely on this measure as it is based on assumptions and estimates that may
prove to be inaccurate. Our actual reported EBITDA re
for future periods may be significantly less than our current Annualized Adjusted EBITDA re
for a variety of reasons.
The following table reconciles net income (which is the most comparable GAAP measure) to Annualized Adjusted EBITDA re
attributable to
stockholders and members and non-controlling interests for the three months ended December 31, 2018:
(in thousands)
Net income
Depreciation and amortization
Interest expense
Interest income
Income tax expense
EBITDA attributable to stockholders and members
and non-controlling interests
Provision for impairment of real estate
Gain on dispositions of real estate, net
EBITDA re
attributable to stockholders and members
and non-controlling interests
Adjustment for current quarter acquisition and disposition activity (1)
Adjusted EBITDA re
attributable to stockholders and members
and non-controlling interests
Annualized Adjusted EBITDA re
attributable to stockholders and
members and non-controlling interests
Three months ended
December 31, 2018
8,299
8,510
6,718
(211)
52
23,368
977
(345)
24,000
1,396
25,396
101,584
$
$
$
(1)
Adjustment assumes all acquisitions and dispositions of real estate investments made during the three months ended December 31, 2018
had occurred on October 1, 2018.
75
We calculate our net debt as our gross debt (defined as total debt plus net deferred financing costs on our secured borrowings) less cash
and cash equivalents and restricted cash deposits held for the benefit of lenders. We believe excluding cash and cash equivalents and restricted
cash deposits held for the benefit of lenders from gross debt, all of which could be used to repay debt, provides an estimate of the net contractual
amount of borrowed capital to be repaid, which we believe is a beneficial disclosure to investors and analysts.
The following table reconciles total debt (which is the most comparable GAAP measure) to net debt:
(in thousands)
Secured borrowings, net of deferred financing costs
Notes payable to related party
Revolving credit facility
Total debt
Deferred financing costs on secured borrowings, net
Gross debt
Cash and cash equivalents
Restricted cash deposits held for the benefit of lenders
Net debt
December 31,
2018
2017
$
$
506,116 $
—
34,000
540,116
9,004
549,120
(4,236)
(12,003)
532,881 $
511,646
230,000
—
741,646
11,290
752,936
(7,250)
(12,175)
733,511
We calculate NOI as total revenues less property expenses. NOI excludes all other items of expense and income included in the financial
statements in calculating net income or loss. Cash NOI further excludes non-cash items included in total revenues and property expenses, such as
straight-line rental revenue, amortization of capitalized lease incentives, amortization of market-lease related intangibles and other non-cash
charges. We believe NOI and Cash NOI provide useful and relevant information because they reflect only those income and expense items that are
incurred at the property level and present such items on an unlevered basis.
NOI and Cash NOI are not measures of financial performance under GAAP, and our NOI and Cash NOI may not be comparable to similarly
titled measures reported by other companies. You should not consider our NOI and Cash NOI as alternatives to net income or cash flows from
operating activities determined in accordance with GAAP.
76
The following table reconciles net income (which is the most comparable GAAP measure) to NOI and Cash NOI attributable to stockholders
and members and non-controlling interests:
(in thousands)
Net income
Interest expense
General and administrative expense
Depreciation and amortization
Provision for impairment of real estate
Interest income
Income tax expense (benefit)
Gain on dispositions of real estate, net
NOI attributable to stockholders and members and
non-controlling interests
Straight-line rental revenue, net
Amortization of capitalized lease incentives
Amortization of market lease-related intangibles
Other non-cash charges
Cash NOI attributable to stockholders and members
and non-controlling interests
$
2018
Year ended December 31,
2017
2016
20,614 $
30,192
13,762
31,352
4,503
(930)
195
(5,445)
94,243
(8,214)
159
336
5
6,296 $
22,574
8,775
19,516
2,377
(49)
161
(6,748)
52,902
(4,254)
139
531
—
3,750
987
4,321
5,428
1,298
(3)
77
(871)
14,987
(1,244)
11
116
—
$
86,529 $
49,318 $
13,870
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Over time and for as long as is economically feasible, we generally seek to match the expected cash inflows from our long-term leases with
the expected cash outflows for our long-term, fixed-rate debt. To achieve this objective, we primarily borrow on a fixed-rate basis through longer-term
debt issuances under our Master Trust Funding Program. Additionally, we incur debt that bears interest at floating rates under the Revolving Credit
Facility, which we use in connection with our operations, including for funding acquisitions. As of December 31, 2018, we had $515.1 million of
borrowings under our Master Trust Funding Program, which bears interest at a weighted average fixed rate of 4.35% per annum as of such date,
and $34.0 million of borrowings under the Revolving Credit Facility, which bears interest at an annual rate equal to the prime rate plus a leverage-
based credit spread of 0.45% as of such date. Therefore, an increase or decrease in interest rates would only result in an increase or decrease to
our interest expense related to the Revolving Credit Facility. We monitor our market interest rate risk exposures using a sensitivity analysis. Our
sensitivity analysis estimates the exposure to market risk sensitive instruments assuming a hypothetical adverse change in interest rates. Based on
the results of a sensitivity analysis, which assumes a 100 basis point adverse change in interest rates, the estimated market risk exposure for our
variable‑rate borrowings under the Revolving Credit Facility was $0.3 million as of December 31, 2018 .
We are also exposed to interest rate risk between the time we enter into a sale-leaseback transaction or acquire a leased property and the
time we finance the related real estate with long-term fixed-rate debt. In addition, when our long-term debt matures, we may have to refinance the
debt at a higher interest rate. Market interest rates are sensitive to many factors that are beyond our control. Our interest rate risk management
objective is to limit the impact of future interest rate changes on our earnings and cash flows. Additionally, our long-term debt generally provides for
some amortization of the principal balance over the term of the debt, which serves to reduce the amount of refinancing risk at debt maturity. While
we have not done so to date, we may, in the future, use various financial instruments designed to mitigate the impact of interest rate fluctuations on
our cash flows and earnings, including hedging strategies, depending on our analysis of the interest rate environment and the costs and risks of such
strategies. We do not intend to use derivative instruments for trading or speculative purposes.
77
In addition to amounts that we borrow under the Revolving Credit Facility, we may incur variable rate debt in the future. Additionally,
decreases in interest rates may lead to increased competition for the acquisition of real estate due to a reduction in desirable alternative income-
producing investments. Increased competition for the acquisition of real estate may lead to a decrease in the yields on real estate we have targeted
for acquisition. In such circumstances, if we are not able to offset the decrease in yields by obtaining lower interest costs on our borrowings, our
results of operations will be adversely affected. Significant increases in interest rates may also have an adverse impact on our earnings if we are
unable to acquire real estate with rental rates high enough to offset the increase in interest rates on our borrowings.
If interest rates rise significantly or there is an economic downturn, tenant defaults may increase and result in credit losses, which may
adversely affect our liquidity and operating results.
Fair
Value
of
Fixed-Rate
Indebtedness
The estimated fair value of our fixed-rate indebtedness under the Master Trust Funding Program is calculated based primarily on
unobservable market inputs such as interest rates and discounted cash flow analyses using estimates of the amount and timing of future cash flows,
market rates and credit spreads. The following table discloses fair value information related to our fixed-rate indebtedness as of December 31, 2018
:
(in thousands)
Secured borrowings under Master Trust Funding Program
(1)
Excludes net deferred financing costs of $9.0 million.
78
Carrying
Value (1)
Estimated
Fair Value
$
515,120 $
520,607
Item 8. Financial Statement s and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Boar d of Directors of Essential Properties Realty Trust, Inc.
Opinion on the Financial Statements
We ha v e audited the accompan y ing consolidated balance sheets of Essential Properties Realty Trust, Inc. and Essential Properties Realty Trust,
Inc. Predecessor (the Compan y ) as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive
income, stockholders’/members’ equity and cash flows for the years ended December 31, 2018 and 2017 and for the period from March 30, 2016
(Commencement of Operations) to December 31, 2016, and the re l ated notes and financial statement schedules listed in the Index at Item 15(a)
(collecti v el y referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements pre s ent fairl y , in all
material respe c ts, the f i nanc i al position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for
the years ended December 31, 2018 and 2017 and for the period from March 30, 2016 (Commencement of Operations) to December 31, 2016, in c
onformit y w ith U.S. generall y accepted accounting principles.
Basis for O p inion
These financial statements are the re s ponsib i lity of the Compan y 's management. Our responsibility is to e x press an opin i on on the Compan y
’s financial statements based on ou r audits. We are a publi c accounting firm regis t ered w ith the Public Compan y Accounting Oversight Boar d
(United States) (PCAOB) and are required to be i ndependent w ith respe c t to the Compan y in ac c ordan c e w ith the U.S. federal se c urities la w
s and the applicable rule s and regulations of the Securities and E x change C ommission and the P C AOB.
We c onducted our audits in accor d an c e w ith the standards of the P C AOB. Those standard s require that w e plan and pe r form the audit to
obta i n rea s onable as s urance about w hether t he financial statements are free of material misstatement, w hether due to error or fr a ud. The
Compan y is not requi r ed to ha v e, nor w ere we engaged to pe r fo r m, an audit of its i nter n al control o v er financial r eporting. A s part of our
audits w e are required to obta i n an understanding of inter n al control o v er financia l reporting but not for the pur p ose of e x pressing an opinion
on the effe c ti v eness of the Compan y 's internal control o v er financ i al reporting. Accordingl y , w e e x press no such opinion.
Our audits included perfo r ming procedures to assess the risks of material miss t atement of the financial statements, whether due to error or fraud,
and pe r forming procedure s that respond to those risks. Su c h pro c edures i ncluded e x amining, on a test basis, e v idence regarding the
amounts and disclo s ures in the f i nancial statements. Our audits also included e v aluat i ng the accounting principles used and sign i ficant est i
mates made b y mana g ement, as w ell as e v aluating the o v erall presentation of the financial statements. We belie v e that our audits pro v ide a
rea s onable basis for our opin i on.
/s/ Ern s t & Young LLP
We have served as the Company’s auditor since 2017.
New York, New York
February 27, 2019
79
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)
December 31,
2018
2017
ASSETS
Investments:
Real estate investments, at cost:
Land and improvements
Building and improvements
Lease incentive
Construction in progress
Intangible lease assets
Total real estate investments, at cost
Less: accumulated depreciation and amortization
Total real estate investments, net
Loans and direct financing lease receivables, net
Real estate investments held for sale, net
Net investments
Cash and cash equivalents
Restricted cash
Straight-line rent receivable, net
Prepaid expenses and other assets, net
Total assets (1)
LIABILITIES AND EQUITY
Secured borrowings, net of deferred financing costs
Notes payable to related party
Revolving credit facility
Intangible lease liabilities, net
Intangible lease liabilities held for sale, net
Dividend payable
Accrued liabilities and other payables (including $324 due to a related party
as of December 31, 2017)
Total liabilities (1)
Commitments and contingencies (see Note 10)
Stockholders' equity:
Preferred stock, $0.01 par value; 150,000,000 authorized; none issued
and outstanding as of December 31, 2018
Common stock, $0.01 par value; 500,000,000 authorized; 43,749,092
issued and outstanding as of December 31, 2018
Additional paid-in capital
Distributions in excess of cumulative earnings
Members' equity:
Class A units, $1,000 per unit, 83,700 issued and outstanding as of December 31, 2017
Class B units, 8,550 issued, 1,610 vested and outstanding as of December 31, 2017
Class C units, $1,000 per unit, 91,450 issued and outstanding as of December 31, 2017
Class D Units, 3,000 issued, 600 vested and outstanding as of December 31, 2017
Total stockholders'/members' equity
Non-controlling interests
Total equity
Total liabilities and equity
$
$
$
$
420,848 $
885,656
2,794
1,325
66,421
1,377,044
(51,855 )
1,325,189
17,505
—
1,342,694
4,236
12,003
14,255
7,712
1,380,900 $
506,116 $
—
34,000
11,616
—
13,189
4,938
569,859
—
—
431
569,407
(7,659 )
—
—
—
—
562,179
248,862
811,041
1,380,900 $
278,985
584,385
2,275
4,076
62,453
932,174
(24,825 )
907,349
2,725
4,173
914,247
7,250
12,180
5,498
3,045
942,220
511,646
230,000
—
12,321
129
—
6,722
760,818
—
—
—
—
—
86,668
574
94,064
96
181,402
—
181,402
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 December 31, 2018, with the exception of $9.2 million of dividends payable, 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.
The accompanying notes are an integral part of these consolidated financial statements.
80
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)
Revenues:
Rental revenue
Interest income on loans and direct financing lease
receivables
Other revenue
Total revenues
Expenses:
Interest (including $4,603 and $3,478 to related
parties during the year ended December 31, 2018
and 2017, respectively)
General and administrative
Property expenses
Depreciation and amortization
Provision for impairment of real estate
Total expenses
Other operating income:
Gain on dispositions of real estate, net
Income from operations
Other income:
Interest
Income before income tax expense
Income tax expense
Net income
Net income attributable to non-controlling interests
Net income attributable to stockholders and members
Comprehensive income attributable to stockholders and
members
Basic weighted average shares outstanding
Basic net income per share
Diluted weighted average shares outstanding
Diluted net income per share
Period from
March 30, 2016
(Commencement
of Operations) to
December 31, 2016
15,271
161
88
15,520
987
4,321
533
5,428
1,298
12,567
871
3,824
3
3,827
77
3,750
—
3,750
3,750
Year ended December 31,
2018
2017
$
94,944 $
53,373 $
656
623
96,223
30,192
13,762
1,980
31,352
4,503
81,789
5,445
19,879
930
20,809
195
20,614
(5,001)
15,613
293
783
54,449
22,574
8,775
1,547
19,516
2,377
54,789
6,748
6,408
49
6,457
161
6,296
—
6,296
$
15,613 $
6,296 $
Period from June 25,
2018 to December 31,
2018
$
$
42,634,678
0.26
61,765,957
0.26
The accompanying notes are an integral part of these consolidated financial statements.
81
ESSENTIAL PROPERTIES REALTY TRUST, INC. AND ESSENTIAL PROPERTIES REALTY TRUST, INC. PREDECESSOR
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Stockholders’/Members’ Equity
(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
— $ — $
—
—
—
—
—
—
— —
—
—
—
—
—
—
—
—
—
—
— —
—
—
—
—
—
—
— —
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
35,272,191
7,785,611
—
353
—
493,458
78
108,921
—
—
—
—
—
(35,107 )
691,290
—
1,692
—
—
443
Balance at March 30, 2016
(Commencement of
Operations)
Contributions
Distributions
Net income
Balance at December 31,
2016
Contributions
Distributions
Conversion of equity
resulting from
issuance of units
Unit compensation expense
Net income
Balance at December 31,
2017
Contributions
Unit compensation expense
Net income
Balance at June 24, 2018
Contribution of Predecessor
equity in
exchange for OP Units
Initial public offering
Concurrent private
placement of
common stock
Concurrent private
placement of
OP Units
Costs related to initial public
offering
Share-based compensation
expense
Unit-based compensation
expense
Dividends declared on
common
stock and OP Units
Net income
Balance at December 31,
2018
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
— $
451,693
(280,793 )
3,750
— $ — $
—
—
—
—
—
—
— $ — $
—
—
—
—
—
—
$
—
451,693
(280,793 )
3,750
174,650
17,308
(101,222 )
—
83,700
—
—
—
—
—
—
—
—
—
—
174,650
101,008
(101,222 )
(90,823 )
—
87
—
—
2,968
— 90,823
—
3,241
574
—
—
96
—
86,668
—
50,000
—
—
—
—
2,414
— 139,082
—
373
—
574 94,064
—
—
1,871
947 95,935
96
—
70
—
166
—
670
6,296
181,402
50,000
443
4,285
236,130
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
—
451,693
(280,793 )
3,750
174,650
101,008
(101,222 )
—
670
6,296
181,402
50,000
443
4,285
236,130
— (139,082 )
—
—
(947 ) (95,935 )
—
—
(166 )
—
(236,130 )
493,811
236,130
—
—
493,811
—
—
—
—
—
108,999
—
108,999
—
—
—
—
—
—
16,001
16,001
—
—
—
—
—
(35,107 )
—
—
—
—
—
1,692
—
—
—
—
—
443
—
—
—
(35,107 )
1,692
443
—
—
—
—
—
—
(18,987 )
11,328
—
—
—
—
—
—
—
—
—
—
(18,987 )
11,328
(8,270 )
5,001
(27,257 )
16,329
43,749,092 $ 431 $ 569,407 $
(7,659 )
$
— $
— $ — $
— $ — $
562,179
$ 248,862
$ 811,041
The accompanying notes are an integral part of these consolidated financial statements.
82
ESSENTIAL PROPERTIES REALTY TRUST, INC. AND ESSENTIAL PROPERTIES REALTY TRUST, INC. PREDECESSOR
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Cash Flows
(In
thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and lease intangible amortization
Amortization of lease incentive
Amortization of above/below market leases
Amortization of deferred financing costs
Provision for impairment of real estate
Gain on dispositions of investments, net
Straight-line rent receivable
Equity-based compensation expense
Allowance for doubtful accounts
Changes in other assets and liabilities:
Prepaid expenses and other assets
Accrued liabilities and other payables
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sales of investments, net
Principal collections on direct financing lease receivables
Investments in loans and direct financing receivables
Deposits for prospective real estate investments
Investment in real estate
Investment in construction in progress
Lease incentives paid
Capital expenditures
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of notes payable to related parties
Payments of principal on notes payable to related parties
Proceeds from secured borrowings
Repayments of secured borrowings
Borrowings under revolving credit facility
Deferred financing costs
Capital contributions by members in Predecessor
Distributions paid to members by Predecessor
Proceeds from initial public offering, net
Initial public offering costs
Proceeds from concurrent private placement of OP Units
Proceeds from concurrent private placement of common stock
Dividends paid
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash, beginning of period
Cash and cash equivalents and restricted cash, end of period
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents
Restricted cash
Cash and cash equivalents and restricted cash, end of period
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized
Cash paid for income taxes
Non-cash investing and financing activities:
Reclassification from construction in progress upon project completion
Non-cash equity contributions
Non-cash distributions
Real estate investments acquired through direct equity investment
Non-cash proceeds from secured borrowings
Contribution of Predecessor equity in exchange for OP Units
Underwriters discount on capital raised through initial public offering
Dividends declared on common stock
Year ended December 31,
2018
2017
$
20,614
$
6,296
$
31,352
159
336
2,798
4,503
(5,445 )
(8,812 )
2,440
385
(767 )
(1,646 )
45,917
60,446
74
(14,854 )
(1,712 )
(488,351 )
(15,258 )
(519 )
(1,689 )
(461,863 )
154,000
(384,000 )
—
(7,816 )
34,000
(3,065 )
50,000
—
464,182
(5,478 )
16,001
108,999
(14,068 )
412,755
(3,191 )
19,430
16,239
$
4,236
12,003
16,239
$
$
27,901
55
$
$
18,009
—
—
—
—
236,130
29,629
13,189
19,516
139
531
1,884
2,377
(6,749 )
(4,329 )
841
148
(2,301 )
4,121
22,474
53,626
79
—
(251 )
(509,777 )
(7,737 )
(275 )
(48 )
(464,383 )
543,000
(313,000 )
248,100
(5,597 )
—
(5,564 )
83,700
(101,222 )
—
—
—
—
—
449,417
7,508
11,922
19,430
7,250
12,180
19,430
20,439
6
4,618
17,308
—
(17,308 )
—
—
—
—
$
$
$
$
$
$
$
$
$
$
Period from
March 30, 2016
(Commencement of
Operations) to
December 31, 2016
3,750
5,428
11
116
101
1,298
(871 )
(1,244 )
—
—
(501 )
2,430
10,518
16,476
37
(3,696 )
(75 )
(288,914 )
(957 )
(2,000 )
—
(279,129 )
—
—
7,495
(316 )
—
(7,713 )
288,604
(7,537 )
—
—
—
—
—
280,533
11,922
—
11,922
1,825
10,097
11,922
633
—
—
163,089
(273,256 )
(163,089 )
273,256
—
—
—
The accompanying notes are an integral part of these consolidated financial statements.
83
Notes to Consolidated Financial Statements
December 31, 2018
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. N et 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 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.
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
84
limitations on the liability of the Parent and the Manager. These limitations 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 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.
85
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 year ended December 31, 2017 and the period from March 30, 2016 (commencement of operations)
to December 31, 2016. 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 periods 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 financial statements have been reclassified in the accompanying
consolidated financial statements to conform to the current period’s presentation of interest income and income taxes (benefit).
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 December 31, 2018, the
Company held a 69.7% ownership interest in the Operating Partnership and the consolidated financial statements include the financial statements of
the Operating Partnership. As of December 31, 2017, all subsidiaries of the Predecessor were wholly owned.
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.
86
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
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.
87
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 years ended December 31, 2018 and 2017 and the period from March 30, 2016 (commencement of operations) to
December 31, 2016, the Company recorded $24.8 million, $14.0 million and $3.0 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 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 December 31, 2018, the Company had no allowance for loan losses recorded in its consolidated financial
statements. The Company had no loans receivable, and therefore had no allowance for loan losses, as of December 31, 2017.
88
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.
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”). 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, 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 December 31,
2018 and December 31, 2017, 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
years ended December 31, 2018 and 2017 and the period from March 30, 2016 (commencement of operations) to December 31, 2016, the
Company recorded a provision for impairment of real estate of $4.5 million, $2.4 million and $1.3 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 December 31,
2018 and December 31, 2017, the Company had deposits of $4.2 million and $7.3 million, respectively, of which $4.0 million and $7.0 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.
89
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 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.
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. If the collectability of a receivable is in doubt, the accounts receivable and straight-
line rent receivable balances are reduced by an allowance for doubtful accounts on the consolidated balance sheets or a direct write-off of the
receivable is recorded in the consolidated statements of operations. The provision for doubtful accounts is 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 is subsequently deemed to be uncollectible, such receivable amounts are written-off to the allowance for doubtful accounts. As of
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. As of December 31, 2017, the Company recorded allowances for doubtful
accounts related to base rent receivable and straight-line rent receivable of $0.1 million and $0.1 million, respectively.
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.
90
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.
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-cancellable 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.
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 years ended December 31, 2018 and 2017 and the period from March 30, 2016 (commencement
of operations) to December 31, 2016, the Company recorded contingent rent of $1.1 million, $1.1 million and $0.4 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, the Company incurred legal, accounting and other offering-related costs. Such costs have been deducted from
the gross proceeds of the IPO. As of December 31, 2018 and December 31, 2017, the Company had capitalized $35.1 million and $1.3 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 December 31, 2018 (after the completion of the IPO) and are presented within prepaid expenses and other assets as of December 31, 2017 (prior
to the completion of the IPO).
Gains
and
Losses
on
Dispositions
of
Real
Estate
Through December 31, 2017, gains and losses on dispositions of real estate investments were recorded in accordance with ASC 360-20,
Property,
Plant
and
Equipment—Real
Estate
Sales
, and include realized proceeds from real estate disposed of in the ordinary course of business,
less their related net book value and less any costs incurred in association with the disposition.
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
91
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 (the
“Code”), 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 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.
From the Predecessor’s commencement of operations on March 30, 2016 through January 31, 2017, the Predecessor and its subsidiaries
included in the consolidated financial statements were treated as disregarded entities for U.S. federal and state income tax purposes, and,
accordingly, the Predecessor was not subject to entity-level tax. Therefore, until the Predecessor’s issuance of Class A and Class C units on
January 31, 2017, the Predecessor’s net income flowed through to the Parent for federal income tax purposes. Following the issuance of Class A
and Class C units, the Predecessor’s net income flowed through to Class A and Class C unitholders for federal income tax purposes. Accordingly,
no provision for U.S. federal income taxes has been included in the accompanying consolidated financial statements during the year ended
December 31, 2017 and the period from March 30, 2016 (commencement of operations) to December 31, 2016. With regard to state income taxes,
the Predecessor was a taxable entity only in certain states that tax all entities, including partnerships.
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 December 31, 2018 and December 31, 2017, 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 years ended December 31, 2018 and 2017, the Company did not record any interest or penalties, and there are
no interest or penalties accrued at December 31, 2018 and 2017. The 2018, 2017 and 2016 taxable years remain open to examination by federal
and state taxing jurisdictions to which the Company is subject.
92
Equity-Based
Compensation
In 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 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
December 31, 2018.
The Company has concluded that an entity which it has provided a $5.7 million mortgage loan receivable is a VIE because the terms of the
loan agreement limit the entity’s ability to absorb expected losses or the entity’s right to receive expected residual returns. However, the Company is
not the primary beneficiary of the entity, because the Company does 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 has no liabilities
associated with this investment as of December 31, 2018.
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
93
outstanding during the period. 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)
Numerator for basic and diluted earnings per share:
Net income
Less: net income attributable to non-controlling interests
Less: net income allocated to unvested restricted common stock
Net income available for common stockholders: basic
Net income attributable to non-controlling interests
Net income available for common stockholders: diluted
Denominator for basic and diluted earnings per share:
Weighted average common shares outstanding
Less: weighted average number of shares of unvested restricted common stock
Weighted average shares outstanding used in basic net income per share
Effects of dilutive securities: (1)
OP Units
Unvested restricted common stock
Weighted average shares outstanding used in diluted net income per share
$
$
Period from
June 25, 2018 to
December 31, 2018
16,329
(5,001)
(300)
11,028
5,001
16,029
43,325,968
(691,290)
42,634,678
19,056,552
74,727
61,765,957
(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 May 2014, with subsequent updates in 2015, 2016 and 2017, the FASB issued ASU 2014-09, Revenue from Contracts with Customers
(“ASU 2014-09”), which establishes a principles-based approach for accounting for revenue from contracts with customers. The standard does not
apply to revenue recognition for lease contracts or to the interest income recognized from direct financing receivables, which together represent
substantially all of the Company’s revenue. Such revenues are related to lease contracts with tenants, which currently fall within the scope of ASC
Topic 840, and will fall within the scope of ASC Topic 842 upon the adoption of ASU 2016-02 on January 1, 2019 (see below). The Company’s sales
of real estate are within the scope of ASU 2017-05 (see above). The Company adopted ASU 2014-09 on January 1, 2018 using the modified
retrospective method for transition. The adoption of this new standard did not result in a cumulative effect adjustment as of January 1, 2018 and did
not have any impact on the Company’s consolidated financial statements.
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 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.
94
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. 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 has completed its inventory and evaluation of these leases and has calculated
a right-of-use asset and a lease liability for the present value of the minimum lease payments; the amount recognized upon adoption was less than
1% of total assets. 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, will be 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 will be included in variable lease payments (a gross presentation).
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.
3.
Investments
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).
95
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).
As of December 31, 2017, the Company had investments in 508 property locations, including two developments in progress and two
undeveloped land parcels. Of these 508 property locations, 493 represented owned properties (of which five were subject to leases accounted for as
direct financing leases) and 15 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 $939.1 million as of December 31, 2017 and consisted of gross acquisition cost of real
estate investments (including transaction costs) totaling $932.2 million, direct financing lease receivables, net, with an aggregate carrying amount of
$2.7 million and net real estate investments held for sale, net of $4.2 million. As of December 31, 2017, 348 of these investments comprising $620.0
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
2018
During the year ended December 31, 2018, the Company did not complete any acquisitions that represented more than 5% of its total
investment activity as of December 31, 2018. The following table presents information about the Company’s acquisition activity during the year
ended December 31, 2018:
(Dollar amounts in thousands)
Ownership type
Number of properties acquired
Allocation of purchase price:
Land and improvements
Building and improvements
Construction in progress (2)
Intangible lease assets
Assets acquired
Intangible lease liabilities
Liabilities assumed
Purchase price (including acquisition costs)
Total
Investments
(1)
204
$
$
160,362
316,894
15,258
12,227
504,741
(1,132)
(1,132)
503,609
(1)
(2)
During the year ended December 31, 2018, the Company acquired the fee interest in 203 properties and acquired one property subject to a
ground lease arrangement.
Represents amounts incurred at and subsequent to acquisition and includes $0.2 million of capitalized interest expense.
96
Acquisitions
in
2017
The Company’s acquisition of a portfolio of home furnishings stores in the state of Michigan (the “Art Van Furniture Portfolio”) represented
more than 5% of its total investment activity as of December 31, 2017. The following table presents information about the Company’s acquisition
activity during the year ended December 31, 2017:
(Dollar amounts in thousands)
Acquisition date
Ownership type
Number of properties acquired
Allocation of purchase price:
Land and improvements
Building and improvements
Construction in progress (1)
Intangible lease assets
Direct financing lease receivables
Assets acquired
Intangible lease liabilities
Liabilities assumed
Purchase price (including acquisition costs)
Art Van
Furniture
Portfolio
March 2017
Fee Interest
5
Individually
Insignificant
Investments
Various
Fee Interest
207
Total
212
$
7,640 $
48,037
—
—
—
55,677
—
—
55,677 $
$
140,452 $
318,225
7,737
12,980
—
479,394
(249)
(249)
479,145 $
148,092
366,262
7,737
12,980
—
535,071
(249)
(249)
534,822
(1)
Represents amounts incurred at and subsequent to acquisition and includes $0.2 million of capitalized interest expense.
97
Acquisitions
in
2016
On June 16, 2016, the Company completed its initial investment through the acquisition of 262 properties from GE Capital US Holdings, Inc.
(“GE Capital”) and subsequently acquired an additional 7 properties in September 2016 and 2 properties in December 2016 from GE Capital
(collectively, the “GE Capital Portfolio”).
The Company’s acquisition of the GE Capital Portfolio and its acquisition of a portfolio of convenience stores in the state of New York (the
“Mirabito Portfolio”) represented more than 5% of its total investment activity as of December 31, 2016. The following table presents information
about the Company’s acquisition activity during the period from March 30, 2016 (commencement of operations) to December 31, 2016:
(Dollar amounts in thousands)
Acquisition date
Ownership type
Number of properties acquired
Allocation of purchase price:
Land and improvements
Building and improvements
Construction in progress (2)
Intangible lease assets
Direct financing lease receivables
Assets acquired
Intangible lease liabilities
Liabilities assumed
Purchase price (including acquisition costs)
GE Capital
Portfolio
Various
(1)
271
Mirabito
Portfolio
August 2016
Fee Interest
23
Individually
Insignificant
Investments
Various
Fee Interest
$
$
116,272 $
132,587
—
52,771
2,018
303,648
(18,043)
(18,043)
285,605 $
1,860 $
31,837
—
—
1,678
35,375
—
—
35,375 $
Total
361
152,908
260,014
957
58,122
3,696
475,697
(19,041)
(19,041)
456,656
67
34,776 $
95,590
957
5,351
—
136,674
(998)
(998)
135,676 $
(1)
(2)
The Company acquired the fee interest in 254 of the properties in the GE Capital Portfolio. The remaining 17 properties in the GE Capital
Portfolio were acquired subject to ground lease arrangements.
Includes approximately $10,000 of capitalized interest.
All of the Company’s acquisitions during the years ended December 31, 2018 and 2017 and the period from March 30, 2016
(commencement of operations) to December 31, 2016 were accounted for as asset acquisitions because there was no substantive process acquired
in any of the acquisitions and substantially all of the fair value of the individual acquisitions was concentrated in a single identifiable asset or group of
similar identifiable assets.
98
Gross
Investment
Activity
During the years ended December 31, 2018 and 2017 and the period from March 30, 2016 (commencement of operations) to December 31,
2016, the Company had the following gross investment activity:
(Dollar amounts in thousands)
Acquisitions of and additions to real estate investments
Investments in direct financing lease receivables
Sales of real estate
Provisions for impairment of real estate (2)
Principal collections on direct financing lease receivables
Gross investments, December 31, 2016
Acquisitions of and additions to real estate investments
Sales of investments in real estate and direct financing lease
receivables
Relinquishment of property at end of ground lease term
Provisions for impairment of real estate (3)
Principal collections on direct financing lease receivables
Other
Gross investments, December 31, 2017
Acquisitions of and additions to real estate investments
Sales of investments in real estate
Relinquishment of properties at end of ground lease term
Provisions for impairment of real estate (4)
Investments in loans receivable (5)
Principal collections on direct financing lease receivables
Other
Gross investments, December 31, 2018
Less: Accumulated depreciation and amortization (7)
Net investments, December 31, 2018
Number of
Investment
Locations
342 (1)
8 (1)
(17)
$
344
212
(47)
(1)
508
204
(45)
(2)
12 (6)
677
$
Dollar
Amount of
Investments
474,001
3,696
(17,632)
(1,361)
(37)
458,667
535,394
(51,120)
(542)
(2,466)
(79)
(782)
939,072
506,949
(58,084)
(853)
(4,543)
14,854
(74)
(2,772)
1,394,549
(51,855)
1,342,694
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Six of the Company’s real estate acquisitions during the period from March 30, 2016 (commencement of operations) to December 31, 2016
had lease components accounted for as operating leases and as direct financing lease receivables.
During the period from period from March 30, 2016 (commencement of operations) to December 31, 2016, the Company identified and
recorded provisions for impairment at four vacant and three tenanted properties. The amount in the table above excludes $0.1 million related
to intangible lease liabilities for these assets.
During the year ended December 31, 2017, the Company identified and recorded provisions for impairment at 6 vacant and 3 tenanted
properties. The amount in the table above excludes $0.1 million related to intangible lease liabilities for these assets.
During the year ended December 31, 2018, the Company identified and recorded provisions for impairment at 7 vacant and 14 tenanted
properties. The amount in the table above excludes approximately $40,000 related to intangible lease liabilities for these assets.
Includes $3.5 million of loan receivable made to the purchaser of one real estate property.
Excludes improvements at one property securing a $3.2 million development construction loan as the land at this location is included in
acquisitions of and additions to real estate investments for 2018.
Includes $38.2 million of accumulated depreciation.
99
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. Substantially all of the leases are triple-net, which means that they provide that the lessees are responsible for the payment of all property
operating expenses, including maintenance, insurance, utilities, property taxes and, if applicable, ground rent expense; therefore, the Company is
generally not responsible for repairs or other capital expenditures related to the properties while the triple-net leases are in effect.
Scheduled future minimum base rental payments due to be received under the remaining non-cancelable term of the operating leases in
place as of December 31, 2018 are as follows:
(in thousands)
2019
2020
2021
2022
2023
Thereafter
Total
Future Minimum
Base Rental
Receipts
105,827
106,082
106,743
108,035
105,924
1,150,158
1,682,769
$
Since lease renewal periods are exercisable at the option of the lessee, the preceding table presents future minimum base rental payments
to be received during the initial non-cancelable lease term only. In addition, the future minimum lease payments exclude contingent rent payments,
as applicable, that may be collected from certain tenants based on provisions related to performance thresholds and exclude increases in annual
rent based on future changes in the Consumer Price Index, among other items.
Loans
and
Direct
Financing
Lease
Receivables
During the year ended December 31, 2018, the Company entered into four loan receivable arrangements with an aggregate carrying amount
of $14.9 million as of December 31, 2018. The Company had no loan receivable activity during the year ended December 31, 2017 or the period
from March 30, 2016 (commencement of operations) to December 31, 2016.
The Company’s loans receivable as of December 31, 2018 are summarized below (dollars in thousands):
Loan Type
Mortgage (1)(2)
Mortgage (1)
Mortgage (1)(2)
Development
construction (2)(3)
Net investment
Monthly Payment
Interest only
Interest only
Interest only
Principal + Interest
Number of
Secured
Properties
2
9
1
1
Interest Rate
10.00%
7.55%
5.25%
Maturity Date
2021
2019
2019
$
Principal
Outstanding
2,376
5,748
3,500
8.00%
2058
$
3,230
14,854
(1)
(2)
(3)
Loan requires monthly payments of interest only with a balloon payment due at maturity.
Loan allows for prepayments in whole or in part without penalty.
Loan is secured by a mortgage on the building and improvements at the development property. The Company provides periodic funding to
the borrower under this arrangement as construction progresses. Monthly payments are made based on a 40-year amortization schedule
with any
100
outstanding principal balance due at maturity or earlier upon the occurrence of certain other events. The mortgaged property is subject to a
ground lease arrangement with the Company, as landlord, and borrower, as tenant. If the tenant does not exercise its right to renew the
ground lease at the end of the ground lease’s initial 15-year term, the balance of the mortgage loan receivable will be forgiven, and the
Company will retain title to the mortgaged property.
Scheduled principal payments due to be received under the Company’s loans receivable as of December 31, 2018 are as follows:
(in thousands)
2019
2020
2021
2022
2023
Thereafter
Total
Loans Receivable
9,259
13
2,391
16
17
3,158
14,854
$
$
As of December 31, 2018 and 2017, the Company had $2.7 million of net investments accounted for as direct financing lease receivables.
The components of the investments accounted for as direct financing lease receivables were as follows:
(in thousands)
Minimum lease payments receivable
Estimated unguaranteed residual value of leased assets
Unearned income from leased assets
Net investment
December 31, 2018
December 31, 2017
$
$
4,198 $
270
(1,817)
2,651 $
4,518
270
(2,063)
2,725
Scheduled future minimum non-cancelable base rental payments due to be received under the direct financing lease receivables as of
December 31, 2018 are as follows:
(in thousands)
2019
2020
2021
2022
2023
Thereafter
Total
Future Minimum
Base Rental
Payments
332
338
340
345
347
2,496
4,198
$
$
Real
Estate
Investments
Held
for
Sale
The Company continually evaluates its portfolio of real estate investments and may elect to dispose of investments considering criteria
including, but not limited to, tenant concentration, tenant credit quality, unit-level financial performance, local market conditions and lease rates,
associated indebtedness, asset location and tenant operation type (e.g., industry, sector, or concept/brand). Real estate investments held for sale
are expected to be sold to within twelve months.
101
The following table shows the activity in real estate investments held for sale and intangible lease liabilities held for sale during the years
ended December 31, 2018 and 2017. During the period from March 30, 2016 (commencement of operations) to December 31, 2016, no real estate
investments were transferred to or from held for sale classification, and no real estate investments were classified as held for sale as of
December 31, 2016.
(Dollar amounts in thousands)
Held for sale balance, January 1, 2017
Transfers to held for sale classification
Sales
Transfers to held and used classification
Held for sale balance, December 31, 2017
Transfers to held for sale classification
Sales
Transfers to held and used classification
Held for sale balance, December 31, 2018
Significant
Concentrations
Number of
Properties
Real Estate
Investments
Intangible Lease
Liabilities
Net Carrying
Value
— $
3
—
—
3
12
(15)
—
—
$
— $
4,173
—
—
4,173
14,487
(18,660)
—
—
$
— $
(129)
—
—
(129)
(256)
385
—
—
$
—
4,044
—
—
4,044
14,231
(18,275)
—
—
$
The Company did not have any tenants (including for this purpose, all affiliates of such tenants) whose rental revenue for the years ended
December 31, 2018 or 2017 or the period from March 30, 2016 (commencement of operations) to December 31, 2016 represented 10% or more of
total rental revenue in the Company’s consolidated statements of operations and comprehensive income.
The following table lists the states where the rental revenue from the properties in that state during the periods presented represented 10%
or more of total rental revenue in the Company’s consolidated statements of operations and comprehensive income:
State
Florida
Georgia
Texas
Year ended December 31,
2018
*
11.5%
12.5%
2017
10.2%
*
13.1%
Period from
March 30, 2016
(Commencement
of Operations) to
December 31, 2016
14.0%
13.0%
11.1%
*
State's rental revenue was not greater than 10% of total rental revenue for all portfolio properties during the period specified.
102
Intangible
Assets
and
Liabilities
Intangible assets and liabilities consisted of the following as of the dates presented:
(in thousands)
Intangible assets:
In-place leases
Intangible market lease
assets
Total intangible assets
Intangible market lease
liabilities
December 31, 2018
December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
50,317 $
9,498 $
40,819 $
44,738 $
6,638 $
38,100
16,104
66,421 $
4,144
13,642 $
11,960
52,779 $
17,715
62,453 $
$
2,794
9,432 $
14,921
53,021
$
14,894 $
3,278 $
11,616 $
14,824 $
2,503 $
12,321
The remaining weighted average amortization period for the Company’s intangible assets and liabilities as of December 31, 2018, by
category and in total, were as follows:
In-place leases
Intangible market lease assets
Total intangible assets
Intangible market lease liabilities
Years Remaining
10.7
8.8
10.2
15.8
The following table discloses amounts recognized within the consolidated statements of operations and comprehensive income related to
amortization of in-place leases, amortization and accretion of above- and below-market lease assets and liabilities, net and the amortization and
accretion of above- and below-market ground leases for the periods presented:
(in thousands)
Amortization of in-place leases (1)
Amortization (accretion) of market lease intangibles, net (2)
Amortization (accretion) of above- and below-market
ground lease intangibles, net (3)
(1)
(2)
(3)
Reflected within depreciation and amortization expense.
Reflected within rental revenue.
Reflected within property expenses.
103
Year ended December 31,
2017
2018
Period from
March 30, 2016
(Commencement
of Operations) to
December 31, 2016
$
6,465 $
780
5,461 $
1,071
(443)
(540)
2,420
128
(11)
The following table provides the projected amortization of in-place lease assets to depreciation and amortization expense, net amortization of
above- and below-market lease intangibles to rental revenue, and net amortization of above- and below-market ground lease intangibles into
property expenses for the next five years:
(in thousands)
In-place lease assets
Adjustment to amortization
expense
Above-market lease assets
Below-market lease liabilities
Net adjustment to rental revenue
Below-market ground lease
assets
Above-market ground lease
liabilities
Net adjustment to property
expenses
2019
2020
2021
2022
2023
$
$
$
$
$
4,907 $
4,459 $
4,260 $
4,130 $
4,907 $
4,459
$
4,260
$
4,130
$
(1,445) $
738
(707) $
(1,291) $
660
(631)
$
(1,242) $
660
(582)
$
(1,241) $
657
(584)
$
74 $
— $
— $
— $
(374)
(228)
(183)
(180)
$
(300) $
(228) $
(183) $
(180) $
3,684
3,684
(1,237)
487
(750)
—
(150)
(150)
Subsequent to December 31, 2018, the Company acquired 23 real estate properties with an aggregate investment (including acquisition-
related costs) of $37.8 million and invested $1.6 million in new and ongoing construction in progress and reimbursements to tenants for
development, construction and renovation costs.
Subsequent to December 31, 2018, the Company sold or transferred its investment in 3 real estate properties for an aggregate gross sales
price of $4.4 million and incurred $0.2 million of disposition costs related to these transactions.
4.
Revolving
Credit
Facility
On June 25, 2018, the Company entered into a revolving credit agreement with a group of lenders for a four-year, senior unsecured revolving
credit facility (the “Revolving Credit Facility”) with aggregate total revolving credit commitments of $300.0 million. Barclays Bank PLC, Citigroup
Global Markets Inc. and Goldman Sachs Bank USA were the joint lead arrangers of the Revolving Credit Facility, with Barclays Bank PLC acting as
administrative agent.
The Revolving Credit Facility has a term of four years with an extension option of up to 12-months exercisable by the Company, subject to
certain conditions, and bears interest at an annual rate of (i) applicable LIBOR, as defined therein, plus an applicable margin between 1.45% and
2.15%; or (ii) the prime rate plus an applicable margin of between 0.45% and 1.15% . The applicable LIBOR is the rate with a term equivalent to the
interest period applicable to the relevant borrowing. The applicable margin is initially a spread set according to a leverage-based pricing grid. At the
Company’s election, on and after receipt of an investment grade corporate credit rating from S&P Global Ratings, a division of S&P Global, Inc.
(“S&P”) or Moody’s Investors Services, Inc. (“Moody’s”), the applicable margin will be a spread set according to the Company’s corporate credit
ratings by S&P and/or Moody’s. The Revolving Credit Facility is freely prepayable at any time and is mandatorily prepayable if borrowings exceed
the borrowing base or the facility limit. The Company may re-borrow amounts paid down, subject to customary borrowing conditions. The Company
is required to pay revolving credit fees throughout the term of the Revolving Credit Facility based upon its usage of the Revolving Credit Facility, at a
rate which depends on the Company’s usage of the Revolving Credit Facility during the period before it receives an investment grade corporate
credit rating from S&P or Moody’s, and which rate shall be based on the corporate credit rating from S&P and/or Moody’s after the time, if applicable,
it receives such a rating. The
104
Revolving Credit Facility provides an accordion feature to increase, subject to certain conditions, the maximum availability of the Revolving Credit
Facility by up to an additional $200.0 million.
During the year ended December 31, 2018, the Company drew down $34.0 million on the Revolving Credit Facility and used these proceeds
to make additional investments in real estate. No repayments were made on the Revolving Credit Facility during the year ended December 31, 2018.
As of December 31, 2018, the Company had $34.0 million outstanding under the Revolving Credit Facility and had $266.0 million of unused
borrowing capacity.
Total deferred financing costs, net, of $3.0 million relating to the Revolving Credit Facility are included within prepaid expenses and other
assets, net on the Company’s consolidated balance sheets as of December 31, 2018. The Company recorded $0.5 million to interest expense during
the year ended December 31, 2018 related to the amortization of these fees and direct costs of the Revolving Credit Facility.
During the year ended December 31, 2018, the Company recorded $0.4 million of interest expense, including unused facility fees, related to
borrowings under the Revolving Credit Facility.
The Revolving Credit Facility requires the Company to meet certain financial covenants. The Company was in compliance with all financial
covenants and was not in default of any other provisions under the Revolving Credit Facility as of December 31, 2018.
5.
Secured
Borrowings
In the normal course of business, the Company transfers financial assets in various transactions with Special Purpose Entities (“SPE”)
determined to be VIEs, which primarily consist of securitization trusts established for a limited purpose (the “Master Trust Funding Program”). These
SPEs are formed for the purpose of securitization transactions in which the Company transfers assets to an SPE, which then issues to investors
various forms of debt obligations supported by those assets. In these securitization transactions, the Company typically receives cash from the SPE
as proceeds for the transferred assets and retains the rights and obligations to service the transferred assets in accordance with servicing
guidelines. All debt obligations issued from the VIEs are non-recourse to the Company.
In accordance with the accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in
determining whether the assets can be derecognized from the balance sheets. For transactions that do not meet the requirements for derecognition
and remain on the consolidated balance sheets, the transferred assets may not be pledged or exchanged by the Company.
The Company evaluates its interest in certain entities to determine if these entities meet the definition of a VIE and whether the Company is
the primary beneficiary and, therefore, should consolidate the entity based on the variable interests it held both at inception and when there was a
change in circumstances that required a reconsideration. The Company has determined that the SPEs created in connection with its Master Trust
Funding Program should be consolidated as the Company is the primary beneficiary of each of these entities.
In December 2016, the Company issued its first series of notes under the Master Trust Funding Program, consisting of $263.5 million of
Class A Notes and $17.3 million of Class B Notes (together, the “Series 2016-1 Notes”). These notes were issued to an affiliate of Eldridge through
underwriting agents. Upon issuance of these notes, the combined net proceeds of $273.3 million were deposited directly with the Parent and are
presented as a non-cash distribution in the accompanying financial statements. The Series 2016-1 Notes were issued by two SPEs formed to hold
assets and issue the secured borrowings associated with the securitization.
105
In July 2017, the Company issued its second series of notes under the Master Trust Funding Program, consisting of $232.4 million of
Class A Notes and $15.7 million of Class B Notes (together, the “Series 2017-1 Notes”). Of these notes, $75.1 million of the Class A Notes and all of
the Class B Notes were issued to an affiliate of Eldridge through underwriting agents. The net proceeds received from the issuance of the Series
2017-1 Notes were used by the Company to repay short-term notes payable to related parties (see Note 6 – Notes Payable to Related Parties). The
Series 2017-1 Notes were issued by three SPEs formed to hold assets and issue the secured borrowings associated with the securitization.
As of December 31, 2018 and 2017, the Company had $515.1 million and $522.9 million, respectively, in combined principal outstanding
under the notes issued through its Master Trust Funding Program and had deferred financing costs, net, of $9.0 million and $11.3 million,
respectively.
Tenant rentals received on assets transferred to SPEs under the Master Trust Funding Program are sent to the trustee and used to pay
monthly principal and interest payments.
The Series 2016-1 Notes mature in November 2046, but the terms of the Class A Notes require principal to be paid monthly through
November 2021, with a balloon repayment at that time, and the terms of the Class B Notes require no monthly principal payments but require the full
principal balance to be paid in November 2021. If the Company does not meet these repayment schedules, the base interest rates on the notes
increase by the greater of (i) 5.00% and (ii) the amount by which the sum of the following exceeds the base interest rates on the notes: (a) the yield
to maturity of 10-year U.S. treasury securities in November 2021, plus (b) 5.00%, plus (c) 2.73% for the Series A Notes or 3.70% for the Class B
Notes. Additionally, in this event, the full amount of any tenant rental payments received on the assets transferred to the securitization would be used
to repay principal.
The Series 2016-1 Notes may be voluntarily prepaid, in whole or in part, at any time on or after the date that is 24 months prior to the
anticipated repayment date in November 2021 without the payment of a make whole amount. Voluntary prepayments may be made before 24
months prior to the anticipated repayment date but will be subject to the payment of a make whole amount. Interest on the Series 2016-1 Notes
accrues at a weighted average interest rate of 4.51%.
The Series 2017-1 Notes mature in June 2047, but the terms of the Class A Notes require principal to be paid monthly through June 2024,
with a balloon repayment at that time, and the terms of the Class B Notes require no monthly principal payments but require the full principal balance
to be paid in June 2024. The Series 2017-1 Notes contain similar interest rate escalation provisions as detailed above for the Series 2016-1 Notes if
these repayment schedules are not met.
The Series 2017-1 Notes may be voluntarily prepaid, in whole or in part, at any time on or after the date that is 31 months prior to the
anticipated repayment date in June 2024 without the payment of a make whole amount. Voluntary prepayments may be made before 31 months
prior to the anticipated repayment date but will be subject to the payment of a make whole amount. Interest on the Series 2017-1 Notes accrues at a
weighted average interest rate of 4.16%.
106
During the years ended December 31, 2018 and 2017 and the period from March 30, 2016 (commencement of operations) to December 31,
2016, the Company recorded $22.6 million, $17.4 million and $0.8 million, respectively, of interest expense related to the Master Trust Funding
Program.
The following table summarizes the scheduled principal payments on the Company’s secured borrowings as of December 31, 2018:
(in thousands)
2019
2020
2021
2022
2023
Thereafter
Total
Scheduled
Principal
Payments
8,009
8,419
267,558
4,292
4,512
222,330
515,120
$
$
The Company was not in default of any provisions under the Master Trust Funding Program a s of December 31, 2018 and 2017 .
6.
Notes
Payable
to
Related
Parties
Until the completion of the IPO, the Company had a secured warehouse line of credit with an affiliate of Eldridge through which it issued
shore-term notes (the “Warehouse Notes”) and used the proceeds to acquired investments in real estate. The Warehouse Notes accrued interest at
a rate equal to LIBOR plus a spread of between 2.14% and 2.76% and matured within one year of the date of issuance. During the year ended
December 31, 2017, the Company issued 33 short-term Warehouse Notes for a combined $523.0 million and separately issued one additional short-
term note for $20.0 million payable to a different affiliate of Eldridge. The $20.0 million short-term note accrued interest at a rate of 8.0%. During the
year ended December 31, 2017, the Company repaid 14 of the Warehouse Notes and the $20.0 million short-term note at or prior to maturity.
During the year ended December 31, 2018, the Company issued 20 Warehouse Notes for a combined $154.0 million. On January 31, 2018,
the Company made principal payments on the Warehouse Notes of $50.0 million, repaying three of the Warehouse Notes in full and one of the
Warehouse notes in part, prior to maturity. On June 25, 2018, the Company used a portion of the net proceeds from the IPO and the Concurrent
Private Placement to repay all 36 of the then outstanding Warehouse Notes, with an aggregate outstanding principal amount of $334.0 million, in full,
prior to maturity, and had no amounts outstanding related to the Warehouse Notes as of December 31, 2018.
The following table presents the activity related to the Company’s notes payable to related parties for the years ended December 31, 2018
and 2017:
(in thousands)
Outstanding, January 1, 2017
Borrowings
Repayments
Outstanding, December 31, 2017
Borrowings
Repayments
Outstanding, December 31, 2018
Warehouse
Notes
Other Short-
term Note
$
—
$
523,000
(293,000)
230,000
154,000
(384,000)
$
— $
—
$
20,000
(20,000)
—
—
—
— $
Total
—
543,000
(313,000)
230,000
154,000
(384,000)
—
107
During the years ended December 31, 2018 and 2017, the Company incurred $4.6 million and $3.5 million of interest expense related to
these notes payable to related parties. As of December 31, 2017, $0.3 million of interest expense was accrued and payable to an affiliate of Eldridge
related to the Warehouse Notes.
7.
Equity
Stockholders’
Equity
On June 25, 2018, EPRT Inc. completed the IPO and issued 32,500,000 shares of its common stock at an initial public offering price of
$14.00 per share. Concurrently with the completion of the IPO, EPRT Inc. completed the Concurrent Private Placement and issued 7,785,611
shares of its common stock and 1,142,960 OP Units at a price per share/unit of $14.00 to an affiliate of Eldridge. The issuance and sale of the
shares and OP Units in the Concurrent Private Placement were made pursuant to private placement purchase agreements and there were no
underwriting discounts or commissions associated with the sales. The OP Units issued to an affiliate of Eldridge are presented as a non-controlling
interest in the Company’s consolidated financial statements. See Note 8 – Non-controlling Interests for additional information.
As part of the IPO, the underwriters of the IPO were granted an option, exercisable within 30 days from June 20, 2018, to purchase up to an
additional 4,875,000 shares of EPRT Inc.’s common stock at the IPO price of $14.00 per share, less underwriting discounts and commissions. On
July 20, 2018, the underwriters of the IPO exercised this option in part, and on July 24, 2018, the Company issued an additional 2,772,191 shares of
common stock. The net proceeds to EPRT Inc. from the IPO (including the purchase of additional shares pursuant to the underwriters’ option) and
the Concurrent Private Placement, after deducting underwriting discounts and commissions and other expenses, were $583.7 million.
On June 25, 2018, EPRT Inc. issued 691,290 shares of restricted common stock to certain of its directors, executive officers and other
employees under the Equity Incentive Plan. See Note 9 – Equity Based Compensation for additional information.
Dividends
on
Common
Stock
During the period from June 25, 2018 to December 31, 2018, the Company’s board of directors declared the following quarterly cash
dividends on common stock:
Date Declared
September 5, 2018
December 10, 2018
Record Date
September 28, 2018
December 31, 2018
Date Paid
October 12, 2018
January 14, 2019
Amount Paid Per Common Share
0.224
0.21
$
$
The Company has determined that, for federal income tax purposes, approximately 58.9% of the distributions it paid during the period from
June 25, 2018 to December 31, 2018 represented taxable income and 41.1% represented a return of capital.
Members’
Equity
EPRT LLC was capitalized by the Parent through direct and indirect capital contributions. During the period from March 30, 2016
(commencement of operations) to December 31, 2016, the Parent made direct capital contributions of $288.6 million and made indirect capital
contributions of $163.1 million. In January 2017, the Parent made additional indirect capital contributions of $17.3 million. In these indirect capital
contributions, the Parent made direct cash payments to sellers of real estate investments acquired by EPRT LLC.
On January 31, 2017, in exchange for Class A units of EPRT LLC, Stonebriar Holdings made a direct equity contribution of $80.0 million and
certain members of EPRT Management and certain members of the EPRT LLC’s board of managers made direct equity contributions of $3.7 million.
Concurrently, EPRT LLC issued Class C units to the Parent in exchange for the Parent’s retention of an
108
equity investment in EPRT LLC of $91.5 million. The Class A and Class C units were issued at $1,000 per unit and both classes contained
liquidation preferences equal to the per unit value of $1,000 plus 8% per annum compounded quarterly.
Additionally, on January 31, 2017, EPRT LLC approved and issued unvested Class B units to members of EPRT Management and a
member of EPRT LLC’s board of managers and approved and issued unvested Class D units to members of EPRT LLC’s board of managers and
external unitholders. See Note 9 – Equity Based Compensation for additional information.
Pursuant to the EPRT LLC Operating Agreement, distributions to unitholders were to be made in the following order and priority:
•
•
•
•
First, to the holders of Class A and Class C units until each holder of these units has first received an amount equal to each class’
yield, as defined in the EPRT LLC Operating Agreement, and then until each holder of these units has received an amount equal to
each class’ aggregate unreturned class contributions;
Next, to the holders of Class B and Class D units in an aggregate amount based on a return threshold defined in the EPRT LLC
Operating Agreement for each class of units;
Then, to the holders of Class B and Class D units in an aggregate amount equal to each class’ unit percentage of distributions, as
defined in the EPRT LLC Operating Agreement; and
Lastly, any remaining amounts to the holders of Class A and Class C units.
Pursuant to the EPRT LLC Operating Agreement, EPRT LLC’s net income or loss was allocated to the holders of the Class A, B, C and D
units in a similar manner as the distribution allocation outlined above.
On December 31, 2017, EPRT LLC completed the EPRT LLC Reorganization and the Parent, Stonebriar Holdings, EPRT Management and
the holders of Class B 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. As of such date, EPRT LLC became a wholly owned subsidiary of EPRT Holdings.
Additionally, EPRT Holdings issued a new grant of 500 unvested Class B units to a member of EPRT Management on the same date.
On January 31, 2018, Stonebriar Holdings LLC made a $50.0 million direct equity contribution to EPRT Holdings. EPRT Holdings used these
proceeds to repay $50.0 million of outstanding principal on the Warehouse Notes.
As part of the Formation Transactions, EPRT LLC converted from a Delaware LLC into a Delaware limited partnership, changed its name to
Essential Properties, L.P. and became the Operating Partnership. In connection with EPRT LLC’s conversion into a Delaware limited partnership,
EPRT Holdings interest in EPRT LLC was converted into 17,913,592 OP Units. The OP Units issued to EPRT Holdings are presented as a non-
controlling interest in the Company’s consolidated financial statements. See Note 8 – Non-controlling Interests for additional information.
8.
Non-controlling
Interests
Essential Properties OP G.P., LLC, a wholly owned subsidiary of the Company, is the sole general partner of the Operating Partnership. The
Company contributed the net proceeds from the IPO (including proceeds received 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 and received
43,749,092 OP Units, which includes 691,290 OP Units related to the issuance of a like number of shares of common stock under the Equity
Incentive Plan, a 68.7% interest in the Operating Partnership. EPRT Holdings and Eldridge, through the Formation Transactions and the Concurrent
Private Placement of OP Units, respectively, directly or indirectly hold 17,913,592 and
109
1,142,960 OP Units, representing 28.5% and 1.8% interests in the Operating Partnership, respectively. The OP Units held by EPRT Holdings and
Eldridge are presented as non-controlling interests in the Company’s consolidated financial statements.
A holder of OP Units has the right to distributions and has the right to redeem OP Units for cash or, at the Company’s election, shares of the
Company's common stock on a one-for-one basis, provided, however, that such OP Units must have been outstanding for at least one year. During
the year ended December 31, 2018, the Company declared total cash dividends of $0.434 per share of common stock. Distributions to OP Unit
holders were declared and paid concurrent with the Company’s cash dividends to common stockholders.
9.
Equity
Based
Compensation
2018
Incentive
Plan
Effective immediately prior to the closing of the IPO, the Company adopted the 2018 Incentive Award Plan (the “Equity Incentive Plan”),
which provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units,
other stock awards, performance awards and LTIP units. Officers, employees, non-employee directors, consultants, independent contractors and
agents who provide services to the Company or to any subsidiary of the Company are eligible to receive such awards. A maximum of 3,550,000
shares may be issued under the Equity Incentive Plan, subject to certain conditions. On June 22, 2018, the Company registered 3,550,000 shares of
common stock, reserved for issuance under the Equity Incentive Plan, pursuant to a registration statement on Form S-8 (File No. 333-225837), filed
with the SEC under the Securities Act.
On June 25, 2018, an aggregate of 691,290 shares of unvested restricted common stock were issued to the Company’s directors, executive
officers and other employees under the Equity Incentive Plan. Of these awards,15,484 shares of restricted common stock vest on the first
anniversary of the date of grant and 675,806 shares of restricted stock vest ratably on the first, second and third anniversaries of the date of grant,
subject to the individual recipient’s continued provision of service to the Company through the applicable vesting dates.
The following table presents information about Equity Incentive Plan activity during the year ended December 31, 2018:
Unvested shares outstanding, January 1, 2018
Granted
Vested
Forfeited
Unvested shares outstanding, December 31, 2018
Restricted Common Stock
—
691,290
—
—
691,290
The Company estimated the grant date fair value of the restricted common stock awards granted under the Equity Incentive Plan using the
average market price of the Company’s common stock on the grant date. The Company determined that the grant date fair value of the restricted
common stock awards was $13.68 per share. D uring the year ended December 31, 2018 , t he Company recorded $1.7 million of compensation
expense related to the restricted common stock awards as a component of general and administrative expense in its consolidated statements of
operations and comprehensive income.
As of December 31, 2018, there was $7.8 million of total unrecognized compensation cost related to restricted common stock awards . This
unrecognized compensation expense is expected to be recognized over a weighted average period of 2.5 years from December 31, 2018. Dividends
declared on restricted common stock are charged directly to distributions in excess of cumulative earnings on the Company’s consolidated balance
sheets and amounted to $0.3 million for the year ended December 31, 2018.
110
In January 2019 , the Compensation Committee of the Company’s board of directors approved target grants of 119,085 performance-based
restricted share units (“RSUs”) to the Company’s executive officers under the Equity Incentive Plan. Of these awards, 75% are nonvested share
awards for which vesting percentages and ultimate number of units vesting will be calculated based on the total shareholder return (“TSR”) of the
Company's common stock as compared to the TSR of 11 peer companies. The payout schedule can produce vesting percentages ranging
from 0% to 250%. TSR will be calculated based upon the average closing price for the 20 trading day period ending December 31, 2021, divided by
the average closing price for the 20 trading day period ended January 1, 2019. The target number of units is based on achieving a TSR equal to
the 50th percentile of the peer group. The remaining 25% of the target performance-based RSUs vest based on the Compensation Committee’s
subjective evaluation of the recipient’s achievement of certain strategic objectives.
Additionally, in January 2019, the Company issued an aggregate of 46,368 shares of unvested restricted common stock to the Company’s
executive officers, other employees and an external consultant under the Equity Incentive Plan. These awards vest over periods ranging from one to
four years from the date of grant, subject to the individual recipient’s continued provision of service to the Company through the applicable vesting
dates.
Unit
Based
Compensation
On January 31, 2017, EPRT LLC approved the issuance of Class B and Class D units and issued 8,050 unvested Class B units to members
of EPRT Management and a member of EPRT LLC’s board of managers and issued 3,000 unvested Class D units to members of EPRT LLC’s
board of managers and external unitholders. The Class B and Class D units vest in five equal installments that began on March 30, 2017 and will
continue on each anniversary thereof through March 30, 2021. The holders of vested Class B units can put the Class B units to the issuer beginning
on March 30, 2024.
On December 31, 2017, in the EPRT LLC Reorganization, the holders of Class B 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
units were exchanged on a one-for-one basis for equivalent units in EPRT Holdings with the same vesting conditions, distribution rights, priority and
income allocation rights, among others. Additionally, EPRT Holdings issued a new grant of 500 unvested Class B units to a member of EPRT
Management on the same date. The Class B units granted on December 31, 2017 vest in five equal installments that began on May 1, 2018 and will
continue on each anniversary thereof through May 1, 2022 and have similar put rights as the Class B units granted on January 31, 2017.
Following the completion of the Formation Transactions, the Class B and Class D unitholders continue to hold vested and unvested interests
in EPRT Holdings and, indirectly, the OP Units held by EPRT Holdings.
The following table presents information about the unvested Class B and Class D units during the years ended December 31, 2018 and
2017:
Unvested units outstanding, January 1, 2017
Granted
Vested
Forfeited
Unvested units outstanding, December 31, 2017
Granted
Vested
Forfeited
Unvested units outstanding, December 31, 2018
Class B Units
Class D Units
Total
—
8,550
(1,610)
—
6,940
—
(1,710)
—
5,230
—
3,000
(600)
—
2,400
—
(600)
—
1,800
—
11,550
(2,210)
—
9,340
—
(2,310)
—
7,030
111
The Company estimated the grant date fair value of the unvested Class B and Class D awards granted to employees on January 31, 2017
and the fair value of the Class D awards granted to non-employees as of July 1, 2018 and December 31, 2017 using a Black-Scholes valuation
model. Effective July 1, 2018, the Company adopted ASU 2018-07 (see Note 2 – Summary of Significant Accounting Policies) and will not
subsequently remeasure the value of the unvested Class D awards granted to non-employees after this date. The Company's assumptions for
expected volatility were based on daily historical volatility data related to market trading of publicly traded companies that invest in similar types of
real estate as the Company, plus an adjustment to account for differences in the Company’s leverage compared to the publicly traded companies.
The risk-free interest rate assumptions were determined by using U.S. treasury rates of the same period as the expected vesting term of each
award. The marketability discounts were calculated using a Finnerty Model.
The Company determined that the grant date per unit fair value of the unvested Class B and Class D units granted on January 31, 2017 was
$323.65 and $152.16, respectively. As of December 31, 2017, the Company determined that the per unit fair value of the Class B units granted on
that date and the Class D units granted to non-employees on January 31, 2017 was $1,280.35 and $650.99, respectively. The weighted average fair
value of Class B and Class D units granted during the year ended December 31, 2017 was $379.60 and $152.16 per share, respectively. As of July
1, 2018, the Company determined that the per unit fair value of the Class D units granted to non-employees on January 31, 2017 was $79.09.
The total fair value of Class B and Class D units that vested during the year ended December 31, 2018 was $0.6 million and $0.1 million,
respectively. The total fair value of Class B and Class D units that vested during the year ended December 31, 2017 was $0.5 million and $0.1
million, respectively. During the years ended December 31, 2018 and 2017, the Company recorded $0.7 million and $0.8 million, respectively, of
compensation expense as a component of general and administrative expense related to the Class B and Class D units in the Company’s
consolidated statements of operations and comprehensive income.
As of December 31, 2018, there was $1.9 million and $0.2 million of total unrecognized compensation cost related to the Class B and Class
D units, respectively. The unrecognized compensation expense for Class B and Class D units is expected to be recognized over a weighted average
period of 2.3 years from December 31, 2018.
As of December 31, 2018 and 2017, the Company had a liability of approximately $33,000 and $0.2 million, respectively, for unvested Class
D units granted to non-employees, which is recorded within accrued liabilities and other payables in the Company’s consolidated balance sheets .
The per unit fair value of unvested Class B and Class D units was estimated using the following assumptions as of the respective valuation
dates:
Volatility
Risk free rate
Marketability discount
July 1, 2018
Valuation Date
December 31, 2017
January 31, 2017
20%
2.33%
25%
35%
1.44%
10%
40%
1.30%
30%
10.
Commitments
and
Contingencies
During the years ended December 31, 2018 and 2017 and the period from March 30, 2016 (commencement of operations) to December 31,
2016, the Company leased office space in Princeton, New Jersey. The Company was obligated under a non-cancelable operating lease for this
space through its expiration in December 2018. During the years ended December 31, 2018 and 2017 and the period from March 30, 2016
(commencement of operations) to December 31, 2016, the Company recorded $0.2 million, $0.2 million and $0.1 million, respectively, of rent
expense related to this operating lease within
112
general and administrative expense in the Company’s consolidated statements of operations and comprehensive income.
In February 2018, the Company entered into a new lease agreement for 13,453 square feet of office space in West Windsor Township, New
Jersey. This lease has a seven-year term and contains provisions for two five -year renewal periods at the Company’s option. The lease commenced
on November 8, 2018 and has a rent commencement date of January 1, 2019. Initial annualized base rent due under the terms of the lease are $0.5
million, with annual escalations in base rent of $0.50 per square foot. In 2018, the Company recorded $0.1 million of rent expense related to this
operating lease within general and administrative expense in the Company’s consolidated statements of operations and comprehensive income.
As of December 31, 2018 and 2017, the Company was a lessee under long-term, non-cancelable ground leases accounted for as operating
leases at 13 and 15 real estate properties, respectively, where the Company did not acquire the fee simple interest in the land. At certain of these
ground leased properties, the Company’s lease as lessor of the building directly obligates the building lessee to pay rents due under the ground
lease to the ground lessor; such ground lease rents are presented on a net basis in the Company’s consolidated statements of operations and
comprehensive income. During the years ended December 31, 2018 and 2017 and the period from March 30, 2016 (commencement of operations)
to December 31, 2016, the Company recorded $0.5 million, $0.7 million and $0.3 million, respectively, of ground rent expense within property
expenses in the Company’s consolidated statements of operations and comprehensive income. The Company’s ground leases do not contain
contingent rental arrangements and, as of December 31, 2018, four of the ground leases escalate based on fixed schedules, with the remaining nine
ground leases containing no rental escalation provisions. As of December 31, 2018, the Company’s ground leases have remaining non-cancelable
lease terms of between two months and 5.4 years, and five of the ground leases are renewable at the Company’s option for periods of up to 20
years.
As of December 31, 2018, the future minimum base cash rental payments due from the Company under the office and ground leases where
the Company is responsible for payment and the future minimum base cash rental payments under the ground leases where the Company’s tenants
are responsible for payment over the next five years and thereafter are as follows:
(in thousands)
2019
2020
2021
2022
2023
Thereafter
Total
Office and
Ground Leases
to be Paid by
the Company
Ground Leases
to be Paid
Directly by the
Company’s
Tenants
Total Future
Minimum
Base Rental
Payments
$
$
893 $
759
680
669
656
1,093
4,750 $
492 $
328
331
327
26
—
1,504 $
1,385
1,087
1,011
996
682
1,093
6,254
As of December 31, 2018, the Company has remaining future commitments, under mortgage notes, reimbursement obligations or similar
arrangements, to fund $19.5 million to its tenants for development, construction and renovation costs related to properties leased from us.
One of the Company’s loans receivable contains a provision through which the borrower, at its sole option, can require the Company to
purchase the nine properties securing the loan receivable for a purchase price of $8.2 million. The borrower had the ability to exercise this option at
any point between January 1, 2019 and February 11, 2019. On February 6, 2019, the borrower exercised this option and the Company is obligated
to purchase these properties on or before March 29, 2019.
113
Legal
Proceedings
We are party to various lawsuits, claims and other legal proceedings. In our opinion the outcome of such matters is not currently expected to
have a material adverse effect on our business, financial position, results of operations or liquidity.
Environmental
Matters
In connection with the ownership of real estate, the Company may be liable for costs and damages related to environmental matters. As of
December 31, 2018, the Company had not been notified by any governmental authority of any non-compliance, liability or other claim, and is not
aware of any other environmental condition that it believes will have a material adverse effect on the Company’s business, financial position, results
of operations or liquidity.
Defined
Contribution
Retirement
Plan
The Company has a defined contribution retirement savings plan qualified under Section 401(a) of the Code (the “401(k) Plan”). The 401(k)
Plan is available to all of the Company’s full-time employees. The Company provides a matching contribution in cash equal to 100% of the first 3% of
eligible compensation contributed by participants and 50% of the next 2% of eligible compensation contributed by participants, which vests
immediately. During the years ended December 31, 2018 and 2017 and the period from March 30, 2016 (commencement of operations) to
December 31, 2016, the Company made matching contributions of $0.1 million, $0.1 million and approximately $10,000, respectively.
Employment
Agreements
The Company has employment agreements with its executive officers. These employment agreements have an initial term of four years, with
automatic one-year extensions unless notice of non-renewal is provided by either party. These agreements provide for initial annual base salaries
and an annual performance bonus. If an executive officer’s employment terminates under certain circumstances, the Company would be liable for
any annual performance bonus awarded for the year prior to termination, to the extent unpaid, continued payments equal to 12 months of base
salary, monthly reimbursement for 12 months of COBRA premiums, and under certain situations, a pro rata bonus for the year of termination.
11.
Fair
Value
Measurements
GAAP establishes a hierarchy of valuation techniques based on the observability of inputs used in measuring financial instruments at fair
value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management
assumptions in the absence of market inputs.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset
or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the
level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair
value measurement in its entirety. The Company evaluates its hierarchy disclosures regularly and, depending on various factors, it is possible that
an asset or liability may be classified differently from period to period. However, the Company expects that changes in classifications between levels
will be rare.
In addition to the disclosures for assets and liabilities required to be measured at fair value at the balance sheet date, companies are
required to disclose the estimated fair values of all financial instruments, even if they are not presented at their fair value on the consolidated balance
sheet. The fair values of financial instruments are estimates based upon market conditions and perceived risks at
114
December 31, 2018 and December 31, 2017. These estimates require management’s judgment and may not be indicative of the future fair values of
the assets and liabilities.
Financial assets and liabilities for which the carrying values approximate their fair values include cash and cash equivalents, restricted cash,
accounts receivable included within prepaid expenses and other assets, notes payable to related party, dividends payable and accrued liabilities and
other payables. Generally, these assets and liabilities are short term in duration and their carrying value approximates fair value on the consolidated
balance sheets.
The estimated fair values of the Company’s fixed‑rate loans receivable have been derived based on primarily unobservable market inputs
such as interest rates and discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit
spreads. These measurements are classified as Level 3 within the fair value hierarchy. The Company believes the carrying value of its fixed-rate
loans receivable approximates fair value.
The estimated fair values of the Company’s borrowings under the Revolving Credit Facility have been derived based on primarily
unobservable market inputs such as interest rates and discounted cash flow analyses using estimates of the amount and timing of future cash flows,
market rates and credit spreads. These measurements are classified as Level 3 within the fair value hierarchy. The Company believes the carrying
value of its borrowings under the Revolving Credit Facility approximate fair value.
The estimated fair values of the Company’s secured borrowings have been derived based on primarily unobservable market inputs such as
interest rates and discounted cash flow analyses using estimates of the amount and timing of future cash flows, market rates and credit spreads.
These measurements are classified as Level 3 within the fair value hierarchy. As of December 31, 2018, the Company’s secured borrowings had an
aggregate carrying value of $515.1 million (excluding net deferred financing costs of $9.0 million) and an estimated fair value of $520.6 million. As of
December 31, 2017, the Company’s secured borrowings had an aggregate carrying value of $522.9 million (excluding net deferred financing costs of
$11.3 million) and an estimated fair value of $527.9 million.
The Company measures its real estate investments at fair value on a nonrecurring basis. The fair values of these real estate investments
were determined using the following input levels as of the dates presented:
(in thousands)
December 31, 2018
Non-financial assets:
Long-lived assets
December 31, 2017
Non-financial assets:
Long-lived assets
Net
Carrying
Value
Fair Value
Fair Value Measurements Using Fair
Value Hierarchy
Level 2
Level 1
Level 3
$
3,238
$
3,238
$
—
$
—
$
3,238
$
5,817 $
5,817 $
— $
— $
5,817
Long-lived
assets:
The Company reviews its investments in real estate when events or circumstances change indicating that the carrying
amount of an asset may not be recoverable. In the evaluation of an investment in real estate for impairment, many factors are considered, including
estimated current and expected operating cash flows from the asset during the projected holding period, costs necessary to extend the life or
improve the asset, expected capitalization rates, projected stabilized net operating income, selling costs, and the ability to hold and dispose of the
asset in the ordinary course of business.
115
Quantitative information about Level 3 fair value measurements as of December 31, 2018 is as follows:
(dollar amounts in thousands)
Non-financial assets:
Long-lived assets:
Quick service restaurant—Tampa, FL
Quick service restaurant—Newark, OH
Casual Dining—Lakewood, NY
Convenience store—Kilgore, TX
Automotive Service—Plano, TX
12.
Related-Party
Transactions
Fair Value
Valuation Techniques
Significant Unobservable
Inputs
$
376
40
200
1,272
1,350
Sales comparison
approach
Discounted cash
flow approach
Sales comparison
approach
Sales comparison
approach
Sales comparison
approach
Non-binding
sales contract
$
De minimis
Comparable
sales prices
Non-binding
sales contract
Non-binding
sales contract
376
40
200
1,272
1,350
During the years ended December 31, 2018 and 2017 and the period from March 30, 2016 (commencement of operations) to December 31,
2016, an affiliate of Eldridge provided certain treasury and information technology services . Additionally, during the period from March 30, 2016
(commencement of operations) to December 31, 2016 and during the first three months of 2017, the Manager provided certain administrative
services to the Company. The Manager charged the Company a flat monthly fee for its services based on the estimated cost incurred in the
provision of the services, and the fee was reviewed by the Company’s management and determined to be reasonable. The Company incurred
$0.1 million and $0.3 million of expense for these services during the year ended December 31, 2017 and period from March 30, 2016
(commencement of operations) to December 31, 2016, respectively, which is included in general and administrative expense in the Company’s
consolidated statements of operations and comprehensive income, and incurred a de minimis amount during the year ended December 31, 2018.
The costs for the services provided by the affiliate of Eldridge and the Manager would likely be different if such services were provided by unrelated
parties.
During the years ended December 31, 2018 and 2017, the Company issued and repaid short-term notes to an affiliate of Eldridge. The
Company had no short-term notes outstanding to an affiliate of Eldridge as of December 31, 2018. See Note 6 – Notes Payable to Related Parties
for additional information.
13.
Quarterly
Results
(Unaudited)
Presented below is a summary of unaudited quarterly financial information for the years ended December 31, 2018 and 2017. All
adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of the interim periods presented are included. As
presented under the three months ended June 30, 2018 heading below, net income per share of common stock - basic and diluted represents
amounts for the period from June 25, 2018 to June 30, 2018, following the completion of the IPO. The calculation of basic and diluted per share
amounts for each quarter is based on the weighted average shares outstanding for that period; consequently, the sum of the quarters may not
necessarily be equal to the full year basic and diluted net income per share (amounts in thousands, except per share amounts).
116
(in thousands, except per share data)
March 31
June 30
September 30
December 31
Three months ended
2018:
Total revenues
Net income
Net income per share of common stock — basic and diluted
Dividends declared per common share
2017:
Total revenues
Net income
14.
Subsequent
Events
$
$
20,167 $
1,109
—
—
21,664 $
3,499
0.01
—
25,742
$
7,707
0.12
0.22
10,091 $
583
13,312 $
2,047
13,580
$
522
28,650
8,299
0.13
0.21
17,466
3,144
The Company has evaluated all events and transactions that occurred after December 31, 2018 through the filing of this Annual Report on
Form 10-K and determined that there have been no events that have occurred that would require adjustment to disclosures in the consolidated
financial statements except as disclosed elsewhere in these notes to the consolidated financial statements.
117
Item 9. Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure
Controls
and
Procedures
As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report on Form 10-K, the design and operation
of our disclosure controls and procedures were effective.
Management’s
Report
on
Internal
Control
over
Financial
Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting
or an attestation report of our independent registered public accounting firm due to a transition period established by rules of the SEC for newly
public companies.
Changes
in
Internal
Control
Over
Financial
Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fourth fiscal quarter to which this report relates that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
118
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
Our board of directors consists of seven directors. Of these seven directors, four are “independent” under New York Stock Exchange
(“NYSE”) listing standards.
Set forth below are the names, ages and positions of our directors and executive officers as of the date of this report.
Name
Paul T. Bossidy
Peter M. Mavoides
Gregg A. Seibert
Hillary P. Hai
Daniel P. Donlan
Todd J. Gilbert
Anthony D. Minella
Stephen D. Sautel
Joyce DeLucca
Scott A. Estes
Age
58
52
54
37
37
37
42
50
54
48
Position
Chairman of the Board of Directors
President and Chief Executive Officer, Director
Executive Vice President and Chief Operating Officer
Chief Financial Officer and Senior Vice President
Senior Vice President — Capital Markets
Director
Director
Director
Director
Director
Paul
T.
Bossidy.
Mr. Bossidy has served as the chairman of our board of directors since 2018. Mr. Bossidy is President and Chief Executive
Officer of Patripabre Capital LLC, in Ridgefield, Connecticut, and provides consulting services to companies in the financial services industry. Mr.
Bossidy also serves on the board of directors of Berkshire Hills Bancorp, Inc., a bank holding company that is the parent of Berkshire Bank with
branches throughout New England. Mr. Bossidy previously served as President and Chief Executive Officer of Clayton Holdings LLC (“Clayton”)
from 2008 to 2014, when it was acquired by Radian Group, Inc. Prior to joining Clayton, Mr. Bossidy was a Senior Operations Executive at Cerberus
Capital Management LP, a real estate investment fund, from 2006 to 2008. Prior to that, Mr. Bossidy served in various executive appointments for
General Electric Company from 1993 to 2006, including General Manager of Corporate Business Development, President of the Refrigerator
Product Line within GE Appliances Division, President and Chief Executive Officer of GE Lighting (North America), President and Chief Executive
Officer of GE Vendor Financial Services, President and Chief Executive Officer of GE Commercial Equipment Financing and President and Chief
Executive Officer of GE Capital Solutions Group. From 2001 to 2006, while Chief Executive Officer of GE Commercial Equipment Financing, Mr.
Bossidy was also responsible for GE Franchise Finance, a lender for the franchise finance market, which operated a large triple-net lease real estate
business. He is a Certified Public Accountant and a Certified Six Sigma Black Belt. Mr. Bossidy holds a B.A. from Williams College, a Masters in
Accounting from New York University and an M.B.A. with concentrations in Finance and Marketing from Columbia University Graduate School of
Business.
Peter
M.
Mavoides.
Mr. Mavoides has been our President and Chief Executive Officer since 2018, and he held similar positions at EPRT
LLC, which became our operating partnership through the Formation Transactions, since March 2016. Previously, from September 2011 through
February 2015, Mr. Mavoides was the President and Chief Operating Officer of Spirit Realty Capital, Inc. (“Spirit”), an NYSE-listed REIT that invests
primarily in single-tenant, net leased real estate . While at Spirit, Mr. Mavoides was instrumental in transforming that company from a private
enterprise, with approximately $3.2 billion of total assets and 37 employees at the time of its September 2012 initial public offering, to a public
company with approximately $8.0 billion of total assets and over 70 employees at the time of his departure in February 2015. During his tenure at
Spirit, Mr. Mavoides chaired the company’s investment committee and led the team that created the infrastructure that acquired over 150 separate
investments with an aggregate purchase price of nearly $2.0 billion and an average investment per property of $2.6 million over a period of
approximately three years. Mr. Mavoides previously worked for Sovereign, as its President and Chief Executive Officer, from May 2003 to January
2011. Sovereign is a private equity firm
119
that focuses on investment opportunities relating to long-term, net-leased real estate. While at Sovereign, Mr. Mavoides developed and implemented
a business plan pursuant to which Sovereign grew from a startup to a leading investor focused on single-tenant, net leased properties, and he
implemented an investment strategy pursuant to which over $1.0 billion was invested in net lease transactions. During his tenure at Spirit and
Sovereign, Mr. Mavoides was instrumental in structuring the investment of approximately $4.0 billion in net lease assets. Prior to joining Sovereign,
Mr. Mavoides was employed by Eastdil Realty, a subsidiary of Wells Fargo Bank, and worked in the banking group at Citigroup, where he focused
on the structuring of sale-leaseback transactions. Mr. Mavoides earned a B.S. from the United States Military Academy and an M.B.A. from the
University of Michigan.
Gregg
A.
Seibert.
Mr. Seibert has been our Executive Vice President and Chief Operating Officer since 2018, and he held similar positions
at EPRT LLC, which became our operating partnership through the Formation Transactions, since June 2016. Previously, Mr. Seibert was employed
by Spirit from its inception in September 2003 through May 2016, where, at various times during his tenure, he was involved in acquisitions,
underwriting, capital markets and special projects, and most recently served as Executive Vice President and Chief Investment Officer . While at
Spirit, Mr. Seibert was a member of the company’s investment committee and its executive management team, and he was instrumental in
establishing and implementing that company’s business strategy, including investment sourcing, tenant underwriting, asset management and capital
markets activities. Prior to his employment by Spirit, Mr. Seibert worked for over nine years at Franchise Finance Corporation of America (“FFCA”),
and held positions as Vice President and Senior Vice President of Underwriting and Research and Senior Vice President of Acquisitions until FFCA’s
acquisition in August 2001 by GE Capital Corporation, where he served as a Senior Vice President until September 2003. From 1989 to 1994,
Mr. Seibert was a Vice President in the commercial real estate lending group of Bank of America, and from 1988 to 1989, served as an investment
analyst with the Travelers Insurance Company. Mr. Seibert earned a B.S. in Finance from the University of Missouri and an M.B.A. in Finance from
the University of Missouri Graduate School of Business.
Hillary
P.
Hai.
Ms. Hai has been our Chief Financial Officer and Senior Vice President since 2018, and she held similar positions at EPRT
LLC, which became our operating partnership through the Formation Transactions, since November 2017. Previously, Ms. Hai was EPRT LLC’s
Senior Vice President of Finance from January 2017 to November 2017 and EPRT LLC’s Vice President of Finance from April 2016 to January
2017. Before joining EPRT LLC, Ms. Hai worked at Spirit as Vice President and Director of Investments from January 2013 to April 2016, where she
underwrote and closed approximately $1 billion of transactions. In her previous roles, Ms. Hai worked at Lowe Enterprises Investors, a real estate
investment management firm, as an analyst, and served in the Peace Corps. Ms. Hai received her B.A. in Economics from the University of
California, Los Angeles and her M.B.A. from the University of Michigan Stephen M. Ross School of Business.
Daniel
P.
Donlan.
Mr. Donlan has been our Senior Vice President — Capital Markets since 2018 and he held similar positions at EPRT
LLC, which became our operating partnership through the Formation Transactions, since February 2018. Before joining us, Mr. Donlan worked at
Ladenburg Thalmann & Co., a financial services company, as a Managing Director and senior REIT analyst from January 2013 to January 2018. In
his previous roles, Mr. Donlan worked at Janney Capital Markets as a Vice President and senior REIT analyst from June 2007 to January 2013 and
at BB&T Capital Markets as an associate analyst from August 2005 to May 2007. Mr. Donlan received his B.B.A. in Finance from the University of
Notre Dame.
Todd
J.
Gilbert.
Mr. Gilbert has served as a director since 2018. Mr. Gilbert is a Principal at Eldridge, which he joined in January 2015,
where he focuses on investing across the capital structure and evolutionary cycle of commercial enterprises. From August 2005 to December 2014,
Mr. Gilbert was an investment professional at Guggenheim Partners and served as Managing Director, responsible for principal investing, business
development and strategic transactions, as well as private equity, private debt, and special situations investment opportunities. He also served as a
senior analyst in the Corporate Credit Group at Guggenheim Investments where he focused on credit and distressed investing across several
industries. Prior to his employment by Guggenheim, from May 2004 to July 2005, Mr. Gilbert
120
worked in the Mergers & Acquisitions group at KeyBanc Capital Markets. Mr. Gilbert currently serves on the board of directors of Stonebriar Finance
Holdings LLC, Thirteenth Floor Entertainment Group, LLC and Lionel Holdings LLC. Mr. Gilbert received his B.B.A. in Finance and Accounting in
2004 from the University of Michigan.
Anthony
D.
Minella.
Mr. Minella has served as a director since 2018. Mr. Minella is President and co-founder of Eldridge. From September
2013 to February 2017, Mr. Minella was Chief Investment Officer of Security Benefit Corporation. Prior to that, he was Co-Head of the Corporate
Credit Group at Guggenheim Investments where he co-chaired its Investment Committee. He is actively involved across Eldridge’s investment
activities. Mr. Minella received his A.B. in Economics from Bowdoin College.
Stephen
D.
Sautel.
Mr. Sautel has served as a director since 2018. Mr. Sautel is a private investor, and he serves on the board of several
private companies engaged in diverse businesses, including business services, manufacturing, distribution, institutional investment management
and residential real estate. Since December 2017, Mr. Sautel has served as a director of CBAM Holdings, LLC, a private company that is an affiliate
of Eldridge and is engaged in managing corporate credit. From 2014 to 2018, Mr. Sautel served as a director of Guggenheim Partners Investment
Management Holdings, LLC, a diversified institutional investment management firm. From October 2001 to June 2014, Mr. Sautel was an investment
professional at Guggenheim Capital, LLC, where he held the titles of Senior Managing Director and Chief Operating Officer of the Investments
Business. While at Guggenheim, Mr. Sautel co-founded the firm’s credit investing business and later was responsible for supervising the firm’s
investment management operations. Prior to Guggenheim, Mr. Sautel worked at J.H. Whitney & Co., First Chicago Capital Markets, and Arthur
Andersen & Co. Mr. Sautel earned a B.B.A. from the University of Kentucky in 1991 and an M.B.A. from the University of Michigan in 1996. Mr.
Sautel is a CFA charterholder.
Joyce
DeLucca.
Ms. DeLucca has served as a director since 2018. Ms. DeLucca is a Managing Director at Hayfin Capital Management,
LLC. Hayfin is a private investment firm focusing on direct lending, special opportunities, high yield credit and securitized credit. Ms. DeLucca joined
Hayfin in January 2018, when Hayfin acquired Kingsland Capital Management LLC. Kingsland was an investment manager specializing in
collateralized loan obligations and leveraged credit that was founded by Ms. DeLucca in January 2005, and where she served as Managing Principal
and Chief Investment Officer. Ms. DeLucca’s career spans 32 years in the debt capital markets, including management of high yield, leveraged loan,
distressed and mezzanine assets. Prior to establishing Kingsland, Ms. DeLucca was a Managing Principal at Katonah Capital, an asset manager
focusing on leveraged loans and high yield bonds, from 2000 to 2004. Previously, Ms. DeLucca was a Managing Director at Chase Manhattan Bank,
where she co-founded Octagon Credit Investors, from 1995 until 1999. Ms. DeLucca was also a Portfolio Manager and Investment Advisor at Fisher
Brothers from 1989 to 1995, where she focused on distressed and high yield investing. She began her career as a trader and analyst with Bernstein
Macaulay’s high yield bond and mortgage-backed securities divisions, where she was employed from 1986 to 1989. Ms. DeLucca served on the
Regulatory and Board Nominating Committees of the Loan Sales and Trading Association from 2006 to 2010. She received a B.S. in Finance from
Ithaca College in 1986 and is a CFA charterholder.
Scott
A.
Estes
. Mr. Estes has served as a director since 2018. Mr. Estes served as Executive Vice President—Chief Financial Officer of
Welltower Inc., a NYSE-listed, S&P 500 constituent REIT focused on healthcare infrastructure, from January 2009 to October 2017. Mr. Estes
served as Senior Vice President and Chief Financial Officer of Welltower from March 2006 to January 2009 and as Vice President of Finance of
Welltower from April 2003 to March 2006. From January 2000 to April 2003, Mr. Estes served as a Senior Equity Research Analyst and Vice
President with Deutsche Bank Securities, a financial services firm, with primary coverage of the Healthcare REIT and Healthcare Services industry
sub-sectors. Previously, Mr. Estes served as a Vice President of Bank of America Securities from January 1998 through December 1999 and as an
Associate Analyst and Vice President at Morgan Stanley from March 1994 through December 1997. Mr. Estes is a member of the board of trustees
of JBG Smith Properties, a NYSE-listed REIT that owns, operates, invests in and develops assets concentrated in leading urban infill submarkets
and around Washington, DC, where he serves as the chairman of the
121
Audit Committee and is a member of the Compensation Committee. Mr. Estes received his B.A. in Economics in 1993 from The College of William
and Mary.
Family Relationships
There are no family relationships among any of our directors or executive officers, except for Mr. Gilbert and Mr. Minella, who are cousins.
Board of Directors
Pursuant to our charter and bylaws, the number of our directors may not be fewer than the minimum number required by Maryland law,
which is one, and may not be greater than fifteen, and will generally be determined from time to time by resolution of the board of directors. Our
current board of directors consists of seven persons. Our board of directors has determined that Messrs. Bossidy, Estes, Sautel and Ms. DeLucca
meet the independence standards of the NYSE.
Our board of directors believes its members collectively have the experience, qualifications, attributes and skills to effectively oversee the
management of the Company, including a high degree of personal and professional integrity, an ability to exercise sound business judgment on a
broad range of issues, sufficient experience and background to have an appreciation of the issues facing the Company, a willingness to devote the
necessary time to board of directors duties, a commitment to representing the best interests of the Company and our stockholders and a dedication
to enhancing stockholder value.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s officers and directors, and persons who own more than 10% of the Company’s
common stock, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% stockholders are
required by regulation to furnish the Company with copies of all Section 16(a) forms they file. The Company currently knows of no person, other than
Eldridge, who owns 10% or more of the Company’s common stock.
Based solely on a review of the copies of such forms furnished to the Company, or written representations from its officers and directors, the
Company believes that during the year ended December 31, 2018, the Company’s officers, directors and greater than 10% stockholders satisfied the
reporting requirements promulgated under Section 16(a) of the Exchange Act, with the exception of the following: one late Form 4 filing for each of
Messrs. Bossidy and Sautel and Ms. Hai, each of which covered one transaction.
Committees of the Board of Directors
Our board of directors has three standing committees: the Audit Committee, the Compensation Committee and the Nominating and
Corporate Governance Committee, each of which meets the NYSE independence standards and other governance requirements for such a
committee. Each of these committees consists of three members.
Audit
Committee
. The Audit Committee is comprised of Ms. DeLucca and Messrs. Estes and Sautel. Mr. Estes serves as chair of our Audit
Committee. Our board of directors has determined affirmatively that (i) Mr. Estes qualifies as an “audit committee financial expert” as such term has
been defined by the SEC in Item 407(d)(5) of Regulation S-K and (ii) each member of our Audit Committee is “financially literate” as that term is
defined by NYSE listing standards and meets the definition for “independence” for the purposes of serving on our Audit Committee under NYSE
listing standards and Rule 10A‑3 under the Exchange Act.
Our board of directors has adopted an Audit Committee charter, which defines the Audit Committee’s principal functions, including oversight
related to:
122
•
•
•
•
•
•
•
our accounting and financial reporting processes;
the integrity of our consolidated financial statements and financial reporting process;
our systems of disclosure controls and procedures and internal control over financial reporting;
our compliance with financial, legal and regulatory requirements;
the evaluation of the qualifications, independence and performance of our independent registered public accounting firm;
the performance of our internal audit functions; and
our overall risk exposure and management.
The Audit Committee is also responsible for engaging, evaluating, compensating, and overseeing an independent registered public
accounting firm, reviewing with the independent registered public accounting firm the plans for and results of the audit engagement, approving
services that may be provided by the independent registered public accounting firm, including audit and non-audit services, reviewing the
independence of the independent registered public accounting firm, considering the range of audit and non-audit fees and reviewing the adequacy of
our internal accounting controls. The Audit Committee also prepares the audit committee report required by SEC regulations to be included in our
annual report or proxy statement.
Compensation
Committee
. The Compensation Committee is comprised of Ms. DeLucca and Messrs. Bossidy, Estes and Sautel.
Ms. DeLucca serves as chair of our Compensation Committee. Our board of directors has determined affirmatively that each member of our
Compensation Committee meets the definition for “independence” for the purpose of serving on our Compensation Committee under applicable
rules of the NYSE and each member of our Compensation Committee meets the definition of a “non-employee trustee” for the purpose of serving on
our Compensation Committee under Rule 16b-3 of the Exchange Act.
Our board of directors has adopted a Compensation Committee charter, which defines the Compensation Committee’s principal functions to
include:
•
•
•
•
assisting the board of directors in developing and evaluating potential candidates for executive officer positions and overseeing the
development of executive succession plans;
together with our other independent directors, annually reviewing and approving our corporate goals and objectives with respect to
compensation for executive officers and, at least annually, evaluating each executive officer’s performance in light of such goals and
objectives to set his or her annual compensation, including salary, bonus and equity and non-equity incentive compensation, subject
to approval by the board of directors;
providing oversight of management’s decisions regarding the performance, evaluation and compensation of other officers; and
reviewing our incentive compensation arrangements to confirm that incentive pay does not encourage unnecessary risk taking and to
review and discuss, at least annually, the relationship between risk management policies and practices, business strategy and our
executive officers’ compensation.
123
The Compensation Committee shall have the authority, in its sole discretion, to retain or obtain the advice of a compensation consultant,
legal counsel or other adviser as it deems appropriate. The committee may form and delegate authority to subcommittees consisting of one or more
members when it deems appropriate.
Nominating
and
Corporate
Governance
Committee
. The Nominating and Corporate Governance Committee is comprised of
Messrs. Bossidy, Estes and Sautel. Mr. Sautel serves as chair of our Nominating and Corporate Governance Committee. Our board of directors has
determined affirmatively that each member of our Nominating and Corporate Governance Committee meets the definition of independence under
NYSE listing standards.
Our board of directors has adopted a Nominating and Corporate Governance Committee charter, which defines the Nominating and
Corporate Governance Committee’s principal functions, to include:
•
•
•
•
•
•
•
identifying individuals qualified to become members of our board of directors and ensuring that our board of directors has the
requisite expertise and its membership consists of persons with sufficiently diverse and independent backgrounds;
developing, and recommending to the board of directors for its approval, qualifications for director candidates and periodically
reviewing these qualifications with the board of directors;
reviewing the committee structure of the board of directors and recommending directors to serve as members or chairs of each
committee of the board of directors;
reviewing and recommending committee slates annually and recommending additional committee members to fill vacancies as
needed consistent with the stockholders agreement;
developing and recommending to the board of directors a set of corporate governance guidelines applicable to us and, at least
annually, reviewing such guidelines and recommending changes to the board of directors for approval as necessary;
overseeing the annual self-evaluations of the board of directors and management; and
reviewing and approving or ratifying any transaction between us and a related party that is required to be disclosed under the rules of
the SEC.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves, or in the past has served, as a member of the board of directors or Compensation Committee, or other
committee serving an equivalent function, of any entity that has one or more executive officers who serve as members of our board of directors or
our Compensation Committee. None of the members of our Compensation Committee is, or has ever been, an officer or employee of the Company.
Corporate Governance Guidelines and Code of Conduct
The Board has adopted Corporate Governance Guidelines and a Code of Business Conduct and Ethics that applies to all of our officers,
directors and employees. The current versions of these corporate governance documents are available free of charge on the Company’s investor
relations website at http://investors.essentialproperties.com
and in print to any stockholder who requests copies by contacting the Company at 902
Carnegie Center Boulevard, Suite 520, Princeton, New Jersey 08540, Attention: Corporate Secretary .
124
Code of Business Conduct and Ethics
Our board of directors has adopted a code of business conduct and ethics that applies to our directors, officers and employees. Among other
matters, our code of business conduct and ethics is designed to deter wrongdoing and to promote:
•
•
•
•
•
•
•
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and
professional relationships;
full, fair, accurate, timely and understandable disclosure in our SEC reports and other public communications;
compliance with applicable governmental laws, rules and regulations;
prompt internal reporting of violations of the code to appropriate persons identified in the code;
accountability for adherence to the code of business conduct and ethics;
the protection of the Company’s legitimate business interests, including its assets and corporate opportunities; and
confidentiality of information entrusted to directors, officers and employees by the Company and its customers.
Any waiver of the code of business conduct and ethics for our directors or executive officers must be approved by a majority of our
independent directors, and any such waiver shall be promptly disclosed as required by law and NYSE regulations.
Additionally, our charter provides that, to the maximum extent permitted by Maryland law, each of Eldridge, its affiliates, each of their
representatives, and each of our directors or officers that is an employee, affiliate or designee for nomination as a director of Eldridge or its affiliates
has the right to, and has no duty not to, (x) directly or indirectly engage in the same or similar business activities or lines of business as us, including
those deemed to be competing with us, or (y) directly or indirectly do business with any of our clients, customers or suppliers. In the event that
Eldridge or any of its affiliates or employees, or any of their representatives or designees, acquires knowledge of a potential transaction or matter
that may be a corporate opportunity for us, Eldridge, its affiliates and employees and any of their representatives or designees shall have no duty to
communicate or present such corporate opportunity to us or any of our affiliates and shall not be liable to us or any of our affiliates, subsidiaries,
stockholders or other equity holders for breach of any duty by reason of the fact that Eldridge or any of its affiliates or employees, or any of their
representatives or designees, directly or indirectly, pursues or acquires such opportunity for themselves, directs such opportunity to another person,
or does not present such opportunity to us or any of our affiliates; provided, however, that such corporate opportunity is not presented to such
person in his or her capacity as a director or officer of us.
The full text of the code of business conduct is posted on our website at www.essentialproperties.com. We intend to disclose future
amendments to the code or waivers of its requirements on our website.
Item 11. Executive Compensation.
Overview
This section provides a discussion of the compensation paid or awarded to our President and Chief Executive Officer and our two other most
highly compensated executive officers as of December 31, 2018. We refer to these individuals as our “named executive officers.” For 2018, our
named executive officers and their positions were as follows:
125
• Peter M. Mavoides, President and Chief Executive Officer;
• Gregg A. Seibert, Executive Vice President and Chief Operating Officer; and
• Hillary P. Hai, Senior Vice President and Chief Financial Officer.
We are an “emerging growth company” under the federal securities laws and, as such, we have elected to comply with certain reduced
disclosure requirements, including in the area of executive compensation.
Prior to our IPO in June 2018, our board of directors set the compensation for Messrs. Mavoides and Seibert and the board of directors of
Essential Properties Realty Trust LLC set the compensation for Ms. Hai. Once we became an independent entity, our board of directors set the
compensation for Ms. Hai. In connection with our IPO, the Compensation Committee was formed and, following the offering, executive officer
compensation decisions were determined by the Compensation Committee.
Our executive compensation programs are intended to align executive compensation with our business objectives and to enable us to attract,
retain and reward executive officers who contribute to our long-term success. The compensation paid or awarded to our executive officers is
generally based on the assessment of each individual’s performance compared against the business objectives established for the fiscal year as well
as the competitive landscape and our historical compensation practices. For 2018, the material elements of our executive compensation program
were base salary, annual cash bonus, and restricted share awards.
Base Salary
Compensation of Named Executive Officers
Base salaries are intended to provide a level of compensation sufficient to attract and retain an effective management team, when
considered in combination with the other components of our executive compensation program. The relative levels of base salary for our named
executive officers are designed to reflect each executive officer’s scope of responsibility and accountability with us. On June 25, 2018, we entered
into employment agreements with each of our named executive officers, which provide for initial annual base salaries for Messrs. Mavoides and
Seibert and Ms. Hai of $100,000, $100,000 and $250,000, respectively. Please see the “Salary” column in the 2018 Summary Compensation Table
for the base salary amounts received by each named executive officer in 2018.
Annual Cash Bonuses
We provide our senior leadership team with short-term incentive compensation through an annual cash bonus plan. Annual bonus
compensation holds executives accountable, rewards the executives based on actual business results and helps create a “pay for performance”
culture. Our annual cash bonus plan provides cash incentive award opportunities based on a qualitative assessment by the Compensation
Committee of the Company’s performance and the named executive officer’s individual performance and leadership.
The payment of awards under the 2018 annual cash bonus plan applicable to the named executive officers was subject to the discretion of
the Compensation Committee. The 2018 bonus target for each of Messrs. Mavoides and Seibert and Ms. Hai was 100% of base salary, with a
maximum bonus opportunity equal to 150% of base salary for Ms. Hai. Based on a qualitative assessment of performance, Messrs. Mavoides and
Seibert and Ms. Hai received bonuses with respect to 2018 performance in the amounts of $250,000, $200,000, and $337,500, respectively. Messrs.
Mavoides and Seibert elected to receive half of their 2018 annual bonuses in equity rather than cash. The annual cash bonus paid to each named
executive officer with respect to 2018 performance is set forth in the “Bonus” column in the 2018 Summary Compensation Table.
126
Restricted Share Awards
To further align the interests of our executive officers with the interests of our stockholders and to further focus our executive officers on our
long-term performance, in 2018, we granted restricted shares to each our named executive officers following the consummation of the IPO. These
restricted share awards vest in one-third annual increments on the first, second and third anniversaries of the date of grant, subject to the executive
officer’s continued employment through the applicable vesting date. Accordingly, on June 25, 2018, Messrs. Mavoides and Seibert and Ms. Hai
received restricted share grants with respect to 290,323, 225,806 and 40,323 shares, respectively.
2018 Summary Compensation Table
The following table presents compensation paid or awarded with respect to the fiscal years ended December 31, 2018 and December 31,
2017 to our named executive officers (dollar amounts in thousands):
Name and Principal
Position
Peter M. Mavoides
President and Chief
Executive Officer
(principal executive
officer)
Gregg A. Seibert
Executive Vice
President and Chief
Operating Officer
Hillary P. Hai
Senior Vice President
and Chief Financial
Officer
Year
Salary
Bonus
(1)
Stock
Awards (2)
Option
Awards
Non-Equity
Incentive Plan
Compensation
Nonqualified
Deferred
Compensation
Earnings
All Other
Compensation
(3)
Total
2018 $
2017 $
300
492
$
$
250
750
$ 3,972
$ 1,214
$
$
—
—
$
$
—
—
$
$
—
—
$
$
14
6
$ 4,536
$ 2,462
2018 $
2017 $
250
400
$
$
200
600
$ 3,089
$ 1,052
$
$
—
—
$
$
—
—
$
$
—
—
$
$
—
—
$ 3,539
$ 2,052
2018 $
2017 $
250
203
$
$
338
300
$
$
552
162
$
$
—
—
$
$
—
—
$
$
—
—
$
$
14
8
$ 1,154
673
$
(1)
(2)
(3)
The amounts reported in this column for 2018 represent the bonus received by each of the named executive officers with respect to 2018
performance. Messrs. Mavoides and Seibert elected to receive half of their 2018 bonuses in equity rather than cash.
Amounts reported in this column for 2018 reflect the full grant-date fair value of restricted share awards granted during 2018 computed in
accordance with ASC Topic 718. The grant date fair value was calculated based on the number of shares subject to the award multiplied by
the average market price on the date of grant.
The amounts reported in this column for 2018 and 2017 for each named executive officer represent matching contributions to our 401(k)
plan.
127
Outstanding Equity Awards at 2018 Fiscal Year End
The following table provides information about the outstanding Essential Properties Realty Trust, Inc. equity-based awards held by each of
our named executive officers as of December 31, 2018. As described further below, excluded from this table are Class B Units with respect to EPRT
Holdings, LLC granted pursuant to a profits-interest program of Eldridge in which our named executive officers participated prior to our IPO (dollar
amounts in thousands):
Name
Peter M. Mavoides
Gregg A. Seibert
Hillary P. Hai
Number of Shares or Units of Stock That Have Not
Vested (1)(2)
Market Value of Shares or Units of Stock That Have
Not Vested (3)
290,323
225,806
40,323
$
$
$
4,018
3,125
558
(1)
(2)
(3)
Amounts reported in this column represent restricted shares granted to our named executive officers on June 25, 2018 and which vest in
one-third annual increments on the first, second and third anniversaries of the date of grant, subject to the named executive officer’s
continued employment through such date.
Excluded from this table are Class B Units with respect to EPRT Holdings, LLC. To further align the interests of our executive officers with
those of Eldridge, our named executive officers participated in a profits-interest program under which our executive officers were granted
Class B Units that vest over a five-year period beginning on March 30, 2017. These Class B Units are excluded from this table as they do not
represent an equity interest with respect to the Company. For informational purposes, as of December 31, 2018, the named executive
officers had Class B Units as follows: Mr. Mavoides,3,750 Class B Units; Mr. Seibert, 3,250 Class B Units; and Ms. Hai, 500 Class B Units.
Market value is based on our closing share price on December 31, 2018 of $13.84 per share.
Securities Authorized for Issuance Under Equity Compensation Plans
Prior to the consummation of our IPO, the 2018 Incentive Plan was adopted by our pre-IPO board of directors and approved by EPRT
Holdings, LLC, which was our sole stockholder at the time. The plan authorizes the issuance of up to 3,550,000 shares of our common stock, and, in
connection with the IPO, we issued 691,290 shares of restricted common stock. The following table sets forth certain information regarding such
plan:
(a)
Number of Securities to be Issued
Upon Exercise of Outstanding
Options, Warrants and Rights
(b)
Weighted-Average Exercise Price of
Outstanding Options, Warrants and
Rights
(c)
Number of Securities Remaining
Available for Future Issuances
Under Equity Compensation Plans
Excluding Securities Reflected in
Column (a)
—
—
—
n/a
n/a
n/a
2,858,710
—
2,858,710
Equity compensation plans
approved by stockholders
Equity compensation plans not
approved by stockholders
Total
Employment Agreements
On June 25, 2018, we entered into employment agreements with each of our named executive officers. The employment agreement for each
of Messrs. Mavoides and Seibert and Ms. Hai has an initial four-year term, with automatic one-year renewals unless notice of non-renewal is
provided by either party. Each of the employment agreements include non-competition and non-solicitation provisions that generally end one year
after the executive’s termination of employment.
128
The employment agreements for Messrs. Mavoides and Seibert and Ms. Hai provide for severance benefits upon a qualifying termination of
employment. None of the employment agreements, however, provide for payments or benefits solely upon the occurrence of a change in control.
Under the terms of each executive’s employment agreement, in the event the executive’s employment is terminated by us without “cause” (as
defined in the agreements) or by the executive for “good reason” (as defined in the agreements), and subject to the executive’s execution and non-
revocation of a general release of claims the executive would become entitled to receive: (i) any annual performance bonus awarded for the year
prior to termination, to the extent unpaid; (ii) continued payments equal to 12 months of base salary; (iii) monthly reimbursement for 12 months of
COBRA premiums; and (iv) for terminations of employment occurring after March 31 in a given year, a pro rata bonus for the year of termination
based on actual performance, provided that the Company is on plan with respect to the budget approved by the board of directors for such year and
the Compensation Committee approves the payment of such bonus. In the event of the executive’s termination of employment due to death or
disability, the executive or the executive’s beneficiary, as applicable, would be entitled to receive: (i) any annual performance bonus awarded for the
year prior to termination, to the extent unpaid; (ii) a pro rata bonus for the year of termination; and (iii) monthly reimbursement for 12 months of
COBRA premiums. In the event of the non-renewal of the employment agreement, the executive would be entitled to receive any annual
performance bonus awarded for the year prior to termination, to the extent unpaid.
Restricted Share Agreements
Under the June 2018 restricted share agreements, the restricted shares will vest in full upon the named executive officer’s termination of
employment due to death, disability or a termination by us without cause, each as defined under the restricted share agreement. In addition, under
our 2018 Incentive Plan, in the event of a change in control of us (as defined in the 2018 Incentive Plan), the board of directors retains discretion to
determine the treatment of outstanding equity awards, which may include acceleration of the vesting of awards upon a change in control.
401(k) Plan
We maintain a qualified 401(k) savings plan for the benefit of our employees, including our named executive officers. The 401(k) plan allows
participants to contribute up to 100% of his or her pre-tax cash compensation, up to the annual maximum statutory limit allowed under Internal
Revenue Service guidelines. Our 401(k) plan allows for discretionary matching of employee contributions. We make matching contributions equal to
100% of the first 3% of eligible compensation contributed by participants and 50% of the next 2% of eligible compensation contributed by
participants. Participants are always vested in both their own contributions to the plan and in our matching contributions to the plan.
129
2018 Director Compensation
The following table shows the compensation earned by our non-employee directors for services during 2018. Directors employed by us or
Eldridge are not entitled to receive compensation for their services as a director and, accordingly, neither Messrs. Gilbert and Minella, who are
employed by Eldridge, nor Mr. Mavoides, our President and Chief Executive Officer, received separate compensation for their services as directors
during 2018 (in thousands):
Name
Paul T. Bossidy
Stephen D. Sautel
Joyce DeLucca
Scott A. Estes
Fees Earned or Paid in Cash
78
34
31
36
$
$
$
$
$
$
$
$
Stock Awards (1)
Total
106
106
106
106
$
$
$
$
184
140
137
142
(1)
All stock award amounts in this column reflect the aggregate fair value on the grant date computed in accordance with FASB ASC Topic 718.
The grant date fair value was calculated based on the number of shares subject to the award multiplied by the average market price on the
date of grant. As of December 31, 2018, each of Messrs. Bossidy, Sautel and Estes and Ms. DeLucca had 7,742 unvested restricted shares
outstanding.
Each of our directors, except for directors who are employed by us or Eldridge, is entitled to receive, as compensation for services as a
director, an annual common stock award of $60,000 of restricted common stock. The equity awards granted to our directors are made pursuant to
our 2018 Incentive Plan and one-half vest on the first anniversary of the date of grant and the other half vest ratably on each of the first three
anniversaries of the date of grant, subject to the director’s continued service on our board of directors. Our Chairman is entitled to receive an
additional annual cash retainer of $100,000, and directors attending in excess of seven board of directors meetings per calendar year receive an
additional $1,000 per board meeting attended in excess of seven. Directors who serve on our Audit Committee, other than the chair of the
committee, receive an annual cash retainer of $10,000, and directors who serve on each of our Compensation Committee and Nominating and
Corporate Governance Committee, other than the chairs of such committees, receive an annual cash retainer of $5,000. The director who serves as
chair of the Audit Committee receives an additional annual cash retainer of $20,000, and the directors who serve as chairs of the Compensation
Committee and the Nominating and Corporate Governance Committee each receive an additional annual cash retainer of $10,000. All members of
our board of directors will be reimbursed for their reasonable costs and expenses incurred in attending our board meetings.
Compensation Risk Assessment
The Company and the Compensation Committee of the Company’s board of directors consider many factors in making compensation
decisions for its named executive officers. One factor is the risk associated with our compensation programs. We have concluded that our
compensation programs do not create risks that are reasonably likely to have a material adverse effect on the Company for, among others, the
following reasons: we engage an independent, external compensation consultant to assist with developing our executive compensation program; we
use time-based restricted stock and, beginning in 2019, performance-based restricted stock units that provide our named executive officers with a
significant interest in the long-term performance of our stock, are subject to forfeiture upon certain employment termination events and are capped;
we base short-term cash incentive awards on metrics related to our financial and operational goals; and we generally do not base incentive awards
on a single performance metric.
Compensation Committee Interlocks and Insider Participation
See Part III, Item 10 of this Annual Report on Form 10-K for the information required by this Item.
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Item 12. Security Ownership of Certain Beneficial Own ers and Management and Related Stockholder Matters.
Equity Compensation Plan Information Table
See Part III, Item 11 of this Annual Report on Form 10-K for the information required by this Item.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial ownership of shares of our common stock, including shares of our
common stock into which OP Units are exchangeable, as of February 22, 2019, unless otherwise indicated in the footnotes to the table below, for (1)
each person who is the beneficial owner of 5% or more of our outstanding common stock, (2) each of our directors and named executive officers and
(3) all of our directors and executive officers as a group. Each person named in the table has sole voting and investment power with respect to all of
the shares of our common stock shown as beneficially owned by such person, except as otherwise set forth in the notes to the table.
The SEC has defined “beneficial ownership” of a security to mean the possession, directly or indirectly, of voting power and/or investment
power over such security. A stockholder is also deemed to be, as of any date, the beneficial owner of all securities that such stockholder has the
right to acquire within 60 days after that date through (1) the exercise of any option, warrant or right, (2) the conversion of a security, (3) the power to
revoke a trust, discretionary account or similar arrangement or (4) the automatic termination of a trust, discretionary account or similar arrangement.
In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of our common stock
subject to options or other rights (as set forth above) held by that person that are exercisable as of the date hereof or will become exercisable within
60 days thereafter, are deemed outstanding, while such shares are not deemed outstanding for purposes of computing percentage ownership of any
other person.
Unless otherwise indicated, the address of each named person is c/o Essential Properties Realty Trust, Inc., 902 Carnegie Center
Boulevard, Suite 520, Princeton, New Jersey 08540. No shares beneficially owned by any executive officer or director have been pledged as
security.
131
Name of Beneficial Owner
Greater than 5% Stockholders:
EPRT Holdings, LLC (2)
Eldridge Industries, LLC (3)
The Vanguard Group (4)
Deutsche Bank AG (5)
BlackRock, Inc. (6)
Directors and Named Executive Officers:
Paul T. Bossidy
Peter M. Mavoides
Gregg A. Seibert
Hillary P. Hai
Todd J. Gilbert
Anthony D. Minella
Stephen D. Sautel
Joyce DeLucca
Scott A Estes
Number of Shares
and OP Units
Beneficially Owned
Percentage of All Shares
(1)
17,913,592
8,928,571
3,545,585
3,385,152
2,991,567
29.0%
19.9%
8.1%
7.7%
6.8%
22,742
332,376
248,627
48,851
—
—
207,742
7,742
17,742
*
*
*
*
*
*
*
*
*
All executive officers and directors as a group (10 persons)
916,992
2.1%
*
(1)
(2)
(3)
(4)
(5)
Represents less than 1%
Assumes 43,795,460 shares of our common stock and, in the case of holders of OP Units, the number of OP Units they hold are outstanding
as of February 22, 2019 and that such units have been exchanged for common stock on a one-for-one basis.
Consists of 17,913,592 OP Units beneficially owned by EPRT Holdings, LLC. As of December 31, 2018, certain members of management
and other continuing investors own a 1.6% interest in EPRT Holdings, LLC and Eldridge Industries, LLC indirectly owns a 98.4% interest in
EPRT Holdings, LLC. EPRT Holdings, LLC is indirectly controlled by Eldridge Industries, LLC. Todd L. Boehly, the indirect controlling
member of Eldridge Industries, LLC, may be deemed to have voting and dispositive power with respect to the OP Units beneficially owned by
EPRT Holdings, LLC. Mr. Boehly disclaims beneficial ownership of the OP Units held by EPRT Holdings, LLC, except to the extent of his
pecuniary interest therein. The address of Eldridge Industries, LLC is 600 Steamboat Road, Greenwich, CT 06830.
Consists of 7,785,611 shares of our common stock beneficially owned by Eldridge Industries, LLC and 1,142,960 OP Units beneficially
owned by Eldridge Industries, LLC. Todd L. Boehly, the indirect controlling member of Eldridge Industries, LLC, may be deemed to have
voting and dispositive power with respect to the shares and OP Units beneficially owned directly and indirectly by Eldridge Industries, LLC.
Mr. Boehly disclaims beneficial ownership of the shares and OP Units held by Eldridge Industries, LLC, except to the extent of his pecuniary
interest therein. The address of Eldridge Industries, LLC is 600 Steamboat Road, Greenwich, CT 06830.
Based upon information contained in a Schedule 13G filed on February 11, 2019, for the year ended December 31, 2018, The Vanguard
Group had sole voting power over 41,387 shares, shared voting power over 4,074 shares, sole dispositive power over 3,505,904 shares and
shared dispositive power over 39,681 shares. The address of The Vanguard Group is 100 Vanguard Blvd., Malvern, PA 19355.
Based upon information contained in a Schedule 13G filed by Deutsche Bank AG and certain of its affiliates on February 14, 2019, for the
year ended December 31, 2018, Deutsche Bank AG had sole voting power over 1,496,519 shares, sole dispositive power over all reported
shares and no shared voting or dispositive power with respect to any of the reported shares. The address of Deutsche Bank AG is
Taunusanlage 12, 60325 Frankfurt am Main, Federal Republic of Germany.
132
(6)
Based upon information contained in a Schedule 13G filed on February 8, 2019, for the year ended December 31, 2018, BlackRock, Inc. had
sole voting power over 2,903,067 shares, sole dispositive power over all reported shares and no shared voting or dispositive power with
respect to any of the reported shares. The address of BlackRock, Inc. is 55 East 52nd Street, New York, NY 10055.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Related Party Transaction Approval Policy
Our board of directors has adopted a written policy regarding transactions with related parties, which we refer to as our “related party policy.”
Our related party policy requires that a “related person” (as defined in Item 404(a) of Regulation S-K) must promptly disclose all transactions with
related parties (as described in Item 404(a) of Regulation S-K) to the person designated by the Chief Executive Officer of the Company as the
compliance officer. All related party transactions must be approved or ratified by either the Nominating and Corporate Governance Committee of the
board of directors or the full board of directors. As a general rule, directors interested in a related party transaction will recuse themselves from any
vote on a related party transaction in which they have an interest. The Nominating and Corporate Governance Committee or board of directors will
consider all relevant facts and circumstances when deliberating such transactions, including whether such transactions are in, or not inconsistent
with, the best interests of the Company and its stockholders.
Summary of Related Party Transactions
The following is a summary of related party transactions since January 1, 2018. The related party transactions listed below were all approved
by the Nominating and Corporate Governance Committee and/or the board of directors.
•
•
•
•
Concurrently with the completion of our IPO, Eldridge invested $125 million in 7,785,611 shares of common stock and in 1,142,960
units of limited partnership interest in the operating partnership, which are redeemable for cash, or, at our election, shares of our
common stock on a one-for-one basis, beginning one year after the issuance of such units, through transactions exempt from the
registration requirement of the Securities Act. In connection with our IPO, we repaid short-term notes, with an aggregate principal
balance of approximately $288.0 million, issued to an affiliate of Eldridge. This indebtedness was incurred to acquire properties, and
the notes accrued interest at an annual rate equal to LIBOR plus a spread of between 2.14% and 2.55%.
In connection with our IPO, we entered into a registration rights agreement with Eldridge pursuant to which we agreed to provide
certain “demand” registration rights and customary “piggyback” registration rights. The registration rights agreement also provides
that we will pay certain expenses relating to such registrations and indemnify the registration rights holders against certain liabilities
which may arise under the Securities Act.
We are party to indemnification agreements with our directors and reporting officers. These agreements require us to indemnify these
individuals to the fullest extent permitted under Maryland law and our charter against liabilities that may arise by reason of their
service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors or executive officers, we have
been informed that in the opinion of the SEC, such indemnification is against public policy and is therefore unenforceable. There is
currently no pending material litigation or proceeding involving any of our directors, officers or employees for which indemnification is
sought.
We are party to a stockholders agreement with Eldridge, under which Eldridge has the power, subject to certain terms and conditions,
to designate nominees for election to our board of directors, designate a member of certain board committees and approve certain
actions, each as more fully described below. For so long as the stockholders agreement remains in effect,
133
directors elected pursuant to Eldridge’s nomination right may only be removed with Eldridge’s consent. If there is a vacancy on our
board of directors because of the resignation or removal of a director elected pursuant to Eldridge’s nomination right (other than due
to a decrease in the number of nominees Eldridge is entitled to designate), the stockholders agreement requires us to nominate an
individual designated by Eldridge for election.
Pursuant to the stockholders agreement, Eldridge has the following nomination rights:
•
•
•
For so long as Eldridge and its Affiliates (as such term is defined in the stockholders agreement) own shares representing
at least 15% or more of the voting power of our common stock, Eldridge is entitled to designate a number of nominees for
election as directors equal to the lowest whole number that is at least 40% of the total number of directors;
When Eldridge and its Affiliates (as such term is defined in the stockholders agreement) own shares representing less
than 15% but greater than or equal to 10% of the voting power of our common stock, Eldridge is entitled to designate a
number of nominees for election as directors equal to the lowest whole number that is at least 25% of the total number of
directors; and
When Eldridge and its Affiliates (as such term is defined in the stockholders agreement) own shares representing less
than 10% but greater than or equal to 5% of the voting power of our common stock, Eldridge is entitled to designate a
number of nominees for election as directors equal to the lowest whole number that is at least 10% of the total number of
directors.
When Eldridge and its Affiliates (as such term is defined in the stockholders agreement) own shares representing at least 10% of the
voting power of our common stock and a nominee designated by Eldridge is elected to our board of directors who qualifies as an
independent director under NYSE standards, Eldridge has the power to designate one independent board member to be elected as a
member of each of the audit committee, compensation committee and the nominating and corporate governance committee.
For so long as Eldridge owns shares representing at least 5% of the voting power of our common stock, the stockholders agreement
and our charter and bylaws provide that Eldridge must first approve:
•
•
•
Any increase to the size of our board of directors;
Amendments to our bylaws relating to the designation of director nominees by Eldridge, Eldridge’s right to consent to any
increase in the size of the board of directors or Eldridge’s right to consent to amendments to such provisions; or
Amendments to the provision of our charter relating to Eldridge’s right to consent to the removal of any director nominated
in accordance with Eldridge’s nomination right or Eldridge’s right to consent to amendments to such provision.
Additionally, for so long as Eldridge owns shares representing at least 5% of the voting power of our common stock, the stockholders
agreement and our charter require the prior approval of Eldridge in order to determine that we will no longer qualify, or attempt to
qualify, as a REIT under the Code or amend our charter to remove such requirement.
Concurrently with the completion of the IPO, we granted a waiver from the ownership limit contained in our charter to Eldridge to own
up to 19.0% of the outstanding shares of our common stock in the aggregate. We also agreed to provide transferees of Eldridge,
subject to the satisfaction of certain conditions, any necessary waivers from our ownership limits
134
provided that any such waivers are consistent with our compliance with the ownership requirements for qualification as a REIT under
the Code. Pursuant to the stockholders agreement, we have agreed, upon Eldridge’s request, subject to the delivery by Eldridge of
any additional information requested by our board of directors, to increase the percentage of our outstanding common stock that may
be owned by Eldridge, unless our board of directors concludes that any such increase could jeopardize our ability to qualify for
taxation as a REIT.
In connection with our IPO, we entered into new employment agreements with each of Messrs. Mavoides and Seibert and Ms. Hai.
In connection with our IPO, we adopted an Equity Incentive Plan to provide equity incentive opportunities to our officers, employees,
non-employee directors, consultants, independent contractors and agents. 3,550,000 shares of our common stock were authorized
for issuance under awards granted pursuant to the Equity Incentive Plan, and 691,290 restricted shares of our common stock,
subject to vesting requirements, were issued to our directors, executive officers and certain of our employees in connection with our
IPO, leaving 2,858,710 shares available for issuance under the Equity Incentive Plan as of December 31, 2018.
In connection with our IPO, the underwriters reserved up to 5.0% of the offered shares for sale to some of our directors, officers,
employees and certain related parties as part of a directed share program. The directed share program does not limit the ability of
such directors, officers and their family members, or holders of more than 5% of our capital stock, to purchase more than $120,000 in
value of our common stock.
•
•
•
Item 14. Principal Accounting Fees and Services.
The following table sets forth the aggregate fees billed to us by Ernst & Young LLP (“EY”) for professional services rendered in 2018 and
2017:
(in thousands)
Audit Fees (1)
Audit-Related Fees (2)
Tax Fees (3)
All Other Fees
Total
2018
2017
$
$
1,372
25
236
—
1,633
$
$
943
36
96
—
1,075
(1)
(2)
(3)
Audit fees consist of fees incurred in connection with the audit of our annual financial statements, as well as services related to SEC matters,
including review of registration statements filed and related issuances of comfort letters, consents and other services.
Audit-related fees consist of fees for attestation services rendered by EY related to our Master Trust Funding Program.
Tax fees consist of fees for professional services rendered by EY for tax compliance, tax advice, and tax planning.
Audit Committee Pre-Approval Policies and Procedures
The charter of the Audit Committee provides that the Audit Committee is responsible for the appointment, compensation and oversight of our
independent auditor and must pre-approve all audit, audit-related and non-audit services to be provided by our independent auditor, other than
certain de minimis non-audit services. In connection with our IPO, the Audit Committee adopted a policy pursuant to which it pre-approves all
services to be provided by and fees to be paid to our independent auditor. Following consummation of our IPO, all services provided by EY were
pre-approved by the Audit Committee. All non-audit services were reviewed by the Audit Committee, and the Audit Committee concluded that the
provision of such services by EY was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions. The Audit
Committee may form and delegate
135
authority to grant pre-approvals of audit and permitted non-audit and tax services to subcommittees consisting of one or more members when it
deems appropriate, provided that decisions of such subcommittee to grant pre-approvals and take any other actions shall be presented to the full
Audit Committee at its next scheduled meeting. In its review of these services and related fees and terms, the Audit Committee considers, among
other things, the possible effect of the performance of such services on the independence of our independent registered public accounting firm.
None of the services described above were approved pursuant to the de
minimis
exception provided in Rule 2-01(c)(7)(i)(C) of
Regulation S‑X promulgated by the SEC.
136
Item 15. Exhibits, Financial Statement Schedules.
PART IV
(a)
(1) and (2) The following financial statements and financial statement schedules are filed as part of this Annual Report on Form 10-K.
Financial
Statements.
(see Item 8)
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2018 and 2017 and the
period from March 30, 2016 (commencement of operations) to December 31, 2016
Consolidated Statements of Stockholders’/Members’ Equity for the years ended December 31, 2018 and 2017 and the period from
March 30, 2016 (commencement of operations) to December 31, 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017 and the period from March 30, 2016
(commencement of operations) to December 31, 2016
Notes to Consolidated Financial Statements
Financial
Statement
Schedules.
(see schedules beginning on page F-1)
Schedule III – Real Estate and Accumulated Depreciation
Schedule IV - Mortgage Loans on Real Estate
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is included in the consolidated financial statements and notes
thereto.
(b) Exhibits. The following exhibits are included or incorporated by reference in this Annual Report on Form 10-K (and are numbered in
accordance with Item 601 of Regulation S-K).
Exhibit
Number
3.1 *
3.2 *
3.3
4.1
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
Articles of Amendment and Restatement of Essential Properties Realty Trust, Inc., dated as of June 19, 2018
Description
Certificate of Correction to the Articles of Amendment and Restatement of Essential Properties Realty Trust, Inc., dated as of
February 27, 2019
Amended and Restated Bylaws of Essential Properties Realty Trust, Inc. (Incorporated by reference to Exhibit 3.2 to the Company’s
Current Report on Form 8-K filed on June 26, 2018)
Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-11
filed on May 25, 2018)
Amended and Restated Master Indenture dated as of July 11, 2017, among SCF RC Funding I LLC, SCF RC Funding II LLC and
SCF RC Funding III LLC, each a Delaware limited liability company, collectively as issuers, and Citibank, N.A., as indenture trustee,
relating to Net-Lease Mortgage Notes (Incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-
11 filed on May 25, 2018)
Amended and Restated Series 2016-1 Indenture Supplement dated as of July 11, 2017, among SCF RC Funding I LLC, SCF RC
Funding II LLC and Citibank, N.A., as indenture trustee (Incorporated by reference to Exhibit 4.3 to the Company’s Registration
Statement on Form S-11 filed on May 25, 2018)
Series 2017-1 Indenture Supplement dated as of July 11, 2017, among SCF RC Funding I LLC, SCF RC Funding II LLC, SCF RC
Funding III LLC and Citibank, N.A., as indenture trustee (Incorporated by reference to Exhibit 4.4 to the Company’s Registration
Statement on Form S-11 filed on May 25, 2018)
Agreement of Limited Partnership of Essential Properties, L.P. (Incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on June 26, 2018)
Stockholders Agreement among Essential Properties Realty Trust, Inc. and the persons named therein, dated as of June 25, 2018
(Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
Registration Rights Agreement among Essential Properties Realty Trust, Inc. and the persons named therein, dated as of June 25,
2018 (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
Indemnification Agreement between Essential Properties Realty Trust, Inc. and Paul T. Bossidy, dated as of June 25, 2018
(Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
Indemnification Agreement between Essential Properties Realty Trust, Inc. and Daniel P. Donlan, dated as of June 25, 2018
(Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16 †
10.17 †
10.18 †
10.19 †
21.1 *
23.1 *
31.1 *
Indemnification Agreement between Essential Properties Realty Trust, Inc. and Joyce DeLucca, dated as of June 25, 2018
(Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
Indemnification Agreement between Essential Properties Realty Trust, Inc. and Scott A. Estes, dated as of June 25, 2018
(Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
Indemnification Agreement between Essential Properties Realty Trust, Inc. and Todd J. Gilbert, dated as of June 25, 2018
(Incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
Indemnification Agreement between Essential Properties Realty Trust, Inc. and Hillary P. Hai, dated as of June 25, 2018
(Incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
Indemnification Agreement between Essential Properties Realty Trust, Inc. and Peter M. Mavoides, dated as of June 25, 2018
(Incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
Indemnification Agreement between Essential Properties Realty Trust, Inc. and Anthony D. Minella, dated as of June 25, 2018
(Incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
Indemnification Agreement between Essential Properties Realty Trust, Inc. and Stephen D. Sautel, dated as of June 25, 2018
(Incorporated by reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
Indemnification Agreement between Essential Properties Realty Trust, Inc. and Gregg A. Seibert, dated as of June 25, 2018
(Incorporated by reference to Exhibit 10.13 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
Revolving Credit Agreement, dated as of June 25, 2018, among the Company, the Operating Partnership, the several lenders from
time to time parties thereto, Barclays Bank PLC, Citigroup Global Markets Inc. and Goldman Sachs Bank USA (Incorporated by
reference to Exhibit 10.14 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
Amended and Restated Property Management and Servicing Agreement dated as of July 11, 2017, among SCF RC Funding I LLC,
SCF RC Funding II LLC and SCF RC Funding III LLC, each a Delaware limited liability company, collectively as issuers, SCF Realty
Capital LLC, a Delaware limited liability company, as property manager and special servicer, and Midland Loan Services, a division of
PNC Bank, National Association, as back-up manager and Citibank, N.A., as indenture trustee (Incorporated by reference to Exhibit
10.14 to the Company’s Registration Statement on Form S-11 filed on May 25, 2018)
Employment Agreement between Essential Properties Realty Trust, Inc. and Peter M. Mavoides, effective as of June 25, 2018
(Incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
Employment Agreement between Essential Properties Realty Trust, Inc. and Gregg A. Seibert, effective as of June 25, 2018
(Incorporated by reference to Exhibit 10.16 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
Employment Agreement between Essential Properties Realty Trust, Inc. and Hillary P. Hai, effective as of June 25, 2018
(Incorporated by reference to Exhibit 10.17 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
Essential Properties Realty Trust, Inc. 2018 Incentive Award Plan, effective as of June 19, 2018 (Incorporated by reference to Exhibit
10.18 to the Company’s Current Report on Form 8-K filed on June 26, 2018)
Subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 *
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 *
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
32.2 *
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
*
†
Filed herewith.
Indicates management contract or compensatory plan.
Item 16. Form 10-K Summary
None.
137
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized .
ESSENTIAL PROPERTIES REALTY TRUST, INC.
SIGNAT URES
Date: February 27, 2019
By:
/s/ Peter M. Mavoides
Peter M. Mavoides
President and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint Peter
M. Mavoides and Hillary P. Hai, and each of them singly, his or her true and lawful attorneys with full power to them, and each of them singly, to sign
for each of the undersigned and in his or her name in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K,
and generally to do all such things in our names and in our capacities as officers and directors to enable Essential Properties Realty Trust, Inc. to
comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission
in connection therewith.
138
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Peter M. Mavoides
Peter M. Mavoides
Director, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Hillary P. Hai
Hillary P. Hai
/s/ Paul T. Bossidy
Paul T. Bossidy
/s/ Joyce DeLucca
Joyce DeLucca
/s/ Scott A. Estes
Scott A. Estes
/s/ Todd J. Gilbert
Todd J. Gilbert
/s/ Anthony D. Minella
Anthony D. Minella
/s/ Stephen D. Sautel
Stephen D. Sautel
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
139
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
ESSENTIAL PROPERTIES REALTY TRUST, INC. AND ESSENTIAL PROPERTIES R EALTY TRUST, INC. PREDECESSOR
Schedule III - Real Estate and Accumulated Depreciation
As of December 31, 2018
(Dollar amounts in thousands)
Description(a)
Initial Cost to Company
Land &
Building &
City
State Encumbrances
Improvements
Improvements
Cost Capitalized Subsequent
to Acquisition
Gross Amount at
December 31, 2018(b)(c)
Land &
Improvements
Building &
Improvements
Land &
Building &
Improvements
Improvements Total
Accumulated
Depreciation
(d)(e)
Year
Constructed
Date
Acquired
Tenant Industry
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Other Services
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Family Dining
Restaurants
Family Dining
Restaurants
Family Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Quick Service
Restaurants
Other Services
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Quick Service
Restaurants
Family Dining
Restaurants
Family Dining
Restaurants
Casual Dining
Restaurants
Family Dining
Restaurants
Family Dining
Restaurants
Family Dining
Restaurants
Family Dining
Restaurants
Family Dining
Restaurants
Family Dining
Restaurants
Family Dining
Restaurants
Quick Service
Restaurants
Family Dining
Restaurants
Family Dining
Restaurants
Family Dining
Restaurants
Family Dining
Restaurants
Family Dining
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Alexander City
Zanesville
Belleville
Grand Rapids
Petaluma
Clarkesville
Philadelphia
Nashville
Plano
Tampa
Ruskin
Brownsville
Waco
Palatine
La Grange
Jacksonville
Corpus Christi
Centennial
Redford
Landrum
Virginia Beach
Thomasville
Plano
Newark
Coon Rapids
Mankato
Omaha
Merrillville
Blaine
Green Bay
Appleton
Waterloo
St. Joseph
Gladstone
Liberty
Brainerd
Bismarck
Cedar Rapids
Urbana
Brooklyn Park
Pontiac
Troy
The Woodlands
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
AL
OH
IL
MI
CA
GA
PA
TN
TX
FL
FL
TX
TX
IL
IL
FL
TX
CO
MI
SC
VA
GA
TX
OH
MN
MN
NE
IN
MN
WI
WI
IA
MO
MO
MO
MN
ND
IA
IL
MN
MI
MI
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
TX
{f}
$
184 $
242 $
397
314
177
467
178
485
332
484
575
641
561
633
926
446
1,086
1,160
277
369
346
533
—
626
106
338
—
—
474
382
354
851
957
—
1,593
3,400
567
87
192
233
977
424
51
856
585
322
780
373
590
391
371
783
465
1,184
468
214
90
903
207
19
635
700
797
609
549
441
466
559
479
319
761
748
804
729
725
316
674
801
Grapevine
TX
{f}
1,385
$
—
—
—
—
—
—
—
—
—
(249 ) (g)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(5 ) (g)
(16 ) (g)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
184 $
242
$
426 $
397
314
177
467
178
485
332
484
326
641
561
633
926
446
277
674
369
683
346
523
533
1,000
—
178
626
106
1,111
438
338
822
—
326
—
641
474
1,035
382
1,015
354
1,280
851
1,297
24
24
34
32
50
—
60
19
37
—
—
47
35
45
69
1987 6/16/2016
1988 6/16/2016
1988 6/16/2016
1989 6/16/2016
1992 6/16/2016
6/16/2016
1980 6/16/2016
1992 6/16/2016
1992 6/16/2016
1992 6/16/2016
1993 6/16/2016
1995 6/16/2016
1991 6/16/2016
1990 6/16/2016
1990 6/16/2016
1,086
957
2,043
116
1997 6/16/2016
1,160
—
1,160
—
2015 6/16/2016
1,593
3,400
4,993
238
1993 6/16/2016
468
214
567
87
1,035
301
90
192
282
903
233
1,136
1,385
977
2,362
207
424
631
14
635
700
35
49
856
1,491
585
1,285
465
1,184
1,649
797
609
549
441
466
559
479
322
1,119
780
1,389
373
922
590
1,031
391
857
371
930
783
1,262
52
13
27
36
93
61
6
80
69
90
30
73
49
62
47
45
70
67
57
52
57
18
73
43
—
21
1998 6/16/2016
1992 6/16/2016
1997 6/16/2016
1999 6/16/2016
1999 6/16/2016
1998 6/16/2016
1979 6/16/2016
1991 6/16/2016
1992 6/16/2016
1979 6/16/2016
1977 6/16/2016
1978 6/16/2016
1977 6/16/2016
1977 6/16/2016
1978 6/16/2016
1978 6/16/2016
1979 6/16/2016
2018 6/16/2016
1990 6/16/2016
1993 6/16/2016
1994 6/16/2016
1993 6/16/2016
1997 6/16/2016
2003 6/16/2016
6/16/2016
2001 6/16/2016
—
631
1,081
950
1,081
2,031
547
491
563
87
693
423
—
181
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
140
761
748
804
729
725
316
674
801
547
1,308
491
1,239
563
1,367
87
816
693
1,418
423
739
—
674
181
982
Description(a)
Initial Cost to Company
Land &
Building &
City
State Encumbrances
Improvements
Improvements
Cost Capitalized Subsequent
to Acquisition
Gross Amount at
December 31, 2018(b)(c)
Land &
Improvements
Building &
Improvements
Land &
Building &
Improvements
Improvements Total
Accumulated
Depreciation
(d)(e)
Year
Constructed
Date
Acquired
Tenant Industry
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Automotive
Services
Family Dining
Restaurants
Family Dining
Restaurants
Casual Dining
Restaurants
Quick Service
Restaurants
Casual Dining
Restaurants
Quick Service
Restaurants
Convenience
Stores
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Brattleboro
Westminster
Ellsworth
Clay
Buna
Carthage
Dayton
Diboll
Huntington
Huntsville
Jasper
Kountze
Rusk
Sour Lake
Vernon
Battle Creek
Mount Clemens
Clio
Charlotte
Saint Johns
Burnsville
Albert Lea
Crystal
West Monroe
Greenfield
Desoto
West Berlin
Rowlett
Redford
Bridgeport
College Station
Birmingham
Oneonta
Union City
Marietta
Vicksburg
Riverdale
Snellville
Trussville
Forest Park
Decatur
Monroe
Decatur
VT
MD
ME
NY
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
CT
MI
MI
MI
MI
MI
MN
MN
MN
LA
WI
TX
NJ
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
TX
{f}
MI
MI
TX
AL
AL
GA
GA
MS
GA
GA
AL
GA
GA
GA
GA
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
77
23
37
129
152
111
195
92
120
120
111
120
129
204
155
114
446
350
190
218
734
337
821
343
556
728
250
808
479
309
383
261
220
416
214
203
309
242
243
233
239
302
292
360
(56 ) (g)
(261 ) (g)
77
51
413
138
239
174
177
180
290
209
290
142
114
208
690
394
889
722
403
309
463
178
94
789
156
399
447
—
619
569
780
485
746
618
627
584
484
480
341
714
733
463
(17 ) (g)
(62 ) (g)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
180
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
141
21
6
37
129
152
111
195
99
120
15
21
51
88
413
542
138
290
239
350
174
369
92
177
269
120
120
111
120
129
204
155
114
446
350
190
218
914
337
821
343
556
728
250
808
479
309
383
261
220
416
214
203
309
242
243
233
239
302
292
180
300
290
410
209
320
290
410
142
271
114
318
208
363
690
804
394
840
889 1,239
722
912
403
621
309 1,223
463
800
178
999
94
437
789 1,345
156
884
399
649
447 1,255
—
479
619
928
569
952
780 1,041
485
705
746 1,162
618
832
627
830
584
893
484
726
480
723
341
574
714
953
733 1,035
463
755
97
12
9
47
15
23
17
17
22
24
19
24
17
15
39
54
53
75
56
43
36
52
31
14
70
21
41
82
—
63
45
62
40
61
48
49
48
42
40
28
56
59
35
1979 6/16/2016
1999 6/16/2016
1979 6/16/2016
1991 6/16/2016
1976 6/16/2016
1975 6/16/2016
1969 6/16/2016
1990 6/16/2016
1980 6/16/2016
1985 6/16/2016
1992 6/16/2016
1995 6/16/2016
1989 6/16/2016
1978 6/16/2016
1983 6/16/2016
1969 6/16/2016
1989 6/16/2016
1991 6/16/2016
1991 6/16/2016
1991 6/16/2016
1973 6/16/2016
1975 6/16/2016
1975 6/16/2016
1988 6/16/2016
1983 6/16/2016
1985 6/16/2016
1992 6/16/2016
1998 6/16/2016
6/16/2016
1989 6/16/2016
1984 6/16/2016
2000 6/16/2016
1993 6/16/2016
1976 6/16/2016
1979 6/16/2016
1979 6/16/2016
1978 6/16/2016
1981 6/16/2016
1996 6/16/2016
1988 6/16/2016
1982 6/16/2016
1985 6/16/2016
1983 6/16/2016
Tenant Industry
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Description(a)
Initial Cost to Company
Land &
Building &
City
State Encumbrances
Improvements
Improvements
Cost Capitalized Subsequent
to Acquisition
Gross Amount at
December 31, 2018(b)(c)
Land &
Improvements
Building &
Improvements
Land &
Building &
Improvements
Improvements Total
Accumulated
Depreciation
(d)(e)
Year
Constructed
Date
Acquired
Columbia
SC
Decatur
GA
Conyers
GA
Stockbridge
GA
Lawrenceville
GA
Lithonia
GA
Tucker
GA
Covington
GA
Columbus
GA
Owensboro
KY
Tupelo
MS
New Albany
MS
Parkersburg
WV
Ashland
KY
Huntington
WV
North Little Rock AR
Jackson
MS
Madison
TN
Little Rock
AR
Hurricane
WV
Parkersburg
WV
Chattanooga
TN
Knoxville
TN
Jacksonville
NC
Knoxville
TN
Forestdale
AL
Louisville
KY
Festus
MO
Jacksonville
FL
Jacksonville
FL
Winter Garden
FL
Sanford
FL
Lebanon
TN
Prattville
AL
Calhoun
GA
Springfield
MO
Mableton
GA
Brunswick
GA
Summerville
SC
Thomaston
GA
Smyrna
GA
Smyrna
TN
Tullahoma
TN
Shelbyville
TN
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
241
302
330
396
306
290
339
379
174
263
731
295
185
279
223
190
400
281
169
238
261
407
352
284
394
241
319
195
330
220
326
350
311
551
346
211
152
532
215
193
392
221
226
323
461
721
767
771
550
606
586
722
442
155
329
346
570
858
539
450
348
458
48
485
513
465
347
152
271
613
238
802
542
701
383
375
736
524
673
81
366
137
720
364
311
556
701
456
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
142
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
241
302
330
396
306
290
339
379
174
263
731
295
185
279
223
190
400
281
169
238
261
407
352
284
394
241
319
195
330
220
326
350
311
551
346
211
152
532
215
193
392
221
226
323
461
702
721
1,023
767
1,097
771
1,167
550
856
606
896
586
925
722
1,101
442
616
155
418
329
1,060
346
641
570
755
858
1,137
539
762
450
640
348
748
458
739
48
217
485
723
513
774
465
872
347
699
152
436
271
665
613
854
238
557
802
997
542
872
701
921
383
709
375
725
736
1,047
524
1,075
673
1,019
81
292
366
518
137
669
720
935
364
557
311
703
556
777
701
927
456
779
42
58
62
59
49
48
48
60
36
16
33
30
47
71
45
41
31
37
11
40
45
40
30
17
25
50
25
63
47
60
35
38
70
46
57
10
32
16
61
34
29
46
61
40
1981
6/16/2016
1986
6/16/2016
1982
6/16/2016
1975
6/16/2016
1988
6/16/2016
1979
6/16/2016
1976
6/16/2016
1979
6/16/2016
1987
6/16/2016
1986
6/16/2016
2000
6/16/2016
1993
6/16/2016
1976
6/16/2016
1979
6/16/2016
1979
6/16/2016
1978
6/16/2016
1981
6/16/2016
1988
6/16/2016
1979
6/16/2016
1981
6/16/2016
1982
6/16/2016
1983
6/16/2016
1981
6/16/2016
1986
6/16/2016
1982
6/16/2016
1975
6/16/2016
1988
6/16/2016
1979
6/16/2016
1976
6/16/2016
1979
6/16/2016
1987
6/16/2016
1986
6/16/2016
1974
6/16/2016
1978
6/16/2016
1979
6/16/2016
1990
6/16/2016
1977
6/16/2016
1995
6/16/2016
1978
6/16/2016
1987
6/16/2016
1981
6/16/2016
1982
6/16/2016
1975
6/16/2016
1976
6/16/2016
Description(a)
Initial Cost to Company
Land &
Building &
City
State Encumbrances
Improvements
Improvements
Cost Capitalized Subsequent
to Acquisition
Gross Amount at
December 31, 2018(b)(c)
Land &
Improvements
Building &
Improvements
Land &
Building &
Improvements
Improvements Total
Accumulated
Depreciation
(d)(e)
Year
Constructed
Date
Acquired
Dallas
North Charleston
LaGrange
Cullman
Batesville
Phenix City
Montgomery
Starke
Madisonville
Marietta
Hueytown
Gallipolis
Valdosta
Douglas
Fayetteville
Wetumpka
St. Albans
Huntington
Lakewood
Newburgh
Troy
Tenant Industry
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Casual Dining
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Casual Dining
Restaurants
Automotive
Services
Casual Dining
Restaurants
Medical / Dental Hurst
Quick Service
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Erie
Dickson
South Daytona
Milford
Portland
Superior
Fond du Lac
Panama City
Alexandria
Jacksonville
Fleming Island
Port Saint Lucie
Fort Pierce
Waycross
Kingsland
Jacksonville
North Fort Myers
Port Charlotte
Cape Coral
Dothan
Albany
GA
SC
GA
AL
MS
AL
AL
FL
KY
OH
AL
OH
GA
GA
GA
AL
AL
WV
WV
NY
NY
PA
TN
FL
NH
OR
CO
WI
FL
LA
TX
FL
FL
FL
FL
GA
GA
FL
FL
FL
FL
AL
GA
Panama City Beach FL
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
260
121
207
260
125
273
333
240
302
175
133
247
236
243
300
183
273
154
233
134
913
444
292
416
409
252
370
832
459
562
723
551
665
349
468
426
506
711
722
545
557
506
520
416
491
540
150
738
562
79
668
355
131
434
521
1,197
229
46
837
1,462
872
586
889
1,493
354
355
930
1,510
810
1,653
861
1,700
602
1,256
821
1,215
1,060
1,817
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(33 ) (g)
(37 ) (g)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
29
—
—
—
—
—
—
—
300
—
—
—
—
—
—
—
—
260
121
207
260
125
273
333
240
302
175
133
247
236
243
300
183
273
154
233
101
913
444
292
416
409
252
370
832 1,092
459
580
562
769
723
983
551
676
665
938
349
682
468
708
426
728
506
681
711
844
722
969
545
781
557
800
506
806
520
703
416
689
491
645
540
773
113
214
738 1,651
562 1,006
108
400
668 1,084
355
764
131
383
434
804
521
1,197 1,718
229
46
275
837
1,462
872
586
889 1,726
1,793 3,255
354 1,226
355
941
930
1,510 2,440
810
1,653 2,463
861
1,700 2,561
602
1,256 1,858
821
1,215 2,036
1,060
1,817 2,877
73
38
48
63
46
61
33
43
38
41
59
63
45
46
43
44
37
40
45
14
86
63
11
61
38
16
40
76
9
105
150
32
30
135
137
140
110
118
145
1985 6/16/2016
1990 6/16/2016
1985 6/16/2016
1999 6/16/2016
1992 6/16/2016
1979 6/16/2016
1986 6/16/2016
1980 6/16/2016
1976 6/16/2016
1979 6/16/2016
1979 6/16/2016
1979 6/16/2016
1980 6/16/2016
1979 6/16/2016
1984 6/16/2016
1985 6/16/2016
1986 6/16/2016
1975 6/16/2016
1992 6/16/2016
1999 6/16/2016
1975 6/16/2016
1977 6/16/2016
1977 6/16/2016
1984 6/16/2016
1993 6/16/2016
2015 6/16/2016
2002 6/16/2016
1996 6/16/2016
1977 6/16/2016
1994 6/16/2016
1997 6/16/2016
2006 6/16/2016
2006 6/16/2016
1988 6/16/2016
1994 6/16/2016
1994 6/16/2016
1995 6/16/2016
1995 6/16/2016
1994 6/16/2016
1,021
850
(95 ) (g)
(79 ) (g)
926
771 1,697
77
1995 6/16/2016
741
1,692
750
959
577
1,144
731
1,249
—
—
—
—
F-1
—
—
—
—
741
1,692 2,433
139
1996 6/16/2016
750
959 1,709
577
1,144 1,721
87
97
1999 6/16/2016
1993 6/16/2016
731
1,249 1,980
102
1991 6/16/2016
Warner Robins GA
FL
GA
FL
FL
GA
FL
TX
GA
WI
NH
OH
AL
MO
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
TX
TX
TX
GA
Description(a)
Binghamton
Panama City
Panama City
Thomasville
Leesburg
San Antonio
Saint Louis
Gainesville
City
Afton
Beloit
Salem
Greene
Windsor
Augusta
Valdosta
Mansfield
Anniston
Tenant Industry
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Family Dining
Restaurants
N/A
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Family Dining
Restaurants
Quick Service
Restaurants
Other Services
Quick Service
Restaurants
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Automotive
Services
Spring
Home Furnishings Frisco
Home Furnishings Fort Worth
Early Childhood
Education
Early Childhood
Education
Medical / Dental
Car Washes
Car Washes
Car Washes
Car Washes
Medical / Dental
Automotive
Services
Davenport
Cumming
Marathon
Freeville
Endicott
Franklin
Earlville
Lansing
Liberty
Vestal
Delhi
Chadwicks
New Hartford
GA
Suwanee
TX
Fort Worth
GA
Acworth
GA
Douglasville
GA
Hiram
Marietta
GA
Port Charlotte FL
Lackawanna
NY
State Encumbrances
Improvements
Improvements
Initial Cost to Company
Land &
Building &
Cost Capitalized Subsequent
to Acquisition
Gross Amount at
December 31, 2018(b)(c)
Land &
Improvements
Building &
Improvements
Land &
Building &
Improvements
Improvements Total
Accumulated
Depreciation
(d)(e)
Year
Constructed
Date
Acquired
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
539
1,389
626
957
193
1,930
673
1,044
943
808
105
272
130
580
720
—
26
174
144
1,134
131
91
312
756
232
112
176
317
273
1,008
272
1,101
557
1,974
348
1,303
861
3,034
524
1,457
520
2,127
301
213
219
258
863
784
811
985
324
1,285
275
1,066
423
188
774
576
324
1,194
805
2,224
1,348
1,577
4,779
7,847
876
2,357
922
1,617
1,346
1,974
1,376
1,302
1,820
2,108
—
2,615
2,882
2,947
2,136
2,072
231
232
—
—
—
50
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(26 )
—
—
—
(42 ) (g)
—
(52 ) (g)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,421
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
197
—
—
—
—
—
—
F-2
539
1,389
1,928
106
1991
6/16/2016
626
957
1,583
87
1994
6/16/2016
193
1,930
2,123
723
1,044
1,767
943
808
105
272
130
580
1,523
720
—
1,528
105
—
272
174
304
144
1,134
1,278
131
49
312
756
232
363
60
176
109
488
317
1,073
273
1,008
1,281
272
1,101
1,373
557
1,974
2,531
348
1,303
1,651
861
3,034
3,895
524
1,457
1,981
520
2,127
2,647
301
213
219
258
863
1,164
784
997
811
1,030
985
1,243
133
115
68
93
—
15
20
82
33
12
23
36
93
102
183
121
281
135
197
80
73
75
91
1994
6/16/2016
1999
6/16/2016
2002
6/16/2016
2007
6/16/2016
6/16/2016
6/16/2016
1975
6/16/2016
1999
6/16/2016
1998
9/16/2016
1988
1992
9/16/2016
9/16/2016
1972
9/16/2016
1970
8/22/2016
1980
8/22/2016
1989
8/22/2016
1994
8/22/2016
2010
8/22/2016
1994
8/22/2016
1995
8/22/2016
1995
8/22/2016
1987
8/22/2016
2004
8/22/2016
1997
8/22/2016
324
1,285
1,609
119
1996
8/22/2016
275
1,066
1,341
423
188
774
1,197
576
764
324
1,194
1,518
805
2,224
1,348
1,577
4,779
7,847
2,382
7,003
9,195
876
2,357
3,233
922
1,814
1,346
1,974
1,376
1,302
1,820
2,108
4,421
2,615
2,882
2,947
2,136
2,072
3,030
6,235
3,961
4,856
4,323
3,438
3,892
99
72
53
111
128
306
502
167
149
124
176
194
199
144
155
1992
8/22/2016
1998
8/22/2016
1995
8/22/2016
1993
8/22/2016
2013
2006
2007
8/4/2016
8/19/2016
8/19/2016
2001
9/30/2016
2009
9/30/2016
2017 10/12/2016
2006 10/17/2016
2006 10/17/2016
2004 10/17/2016
2002 10/17/2016
2000 10/20/2016
231
232
463
17
1987 10/28/2016
Description(a)
State Encumbrances
Initial Cost to Company
Land &
Building &
Improvements
Improvements
Cost Capitalized Subsequent
to Acquisition
Gross Amount at
December 31, 2018(b)(c)
Land &
Improvements
Building &
Improvements
Land &
Building &
Improvements
Improvements Total
Accumulated
Depreciation
(d)(e)
Year
Constructed
Date
Acquired
City
IA
IA
IA
IA
IA
IA
IA
NE
NE
NY
NY
NY
NY
Amherst
Waterloo
Burlington
Muscatine
Mason City
Cedar Falls
Plattsmouth
Williamsville
Fort Madison
Niagara Falls
Cedar Rapids
Cheektowaga
Nebraska City
Dunkirk
Tucson
NY
AZ
Tenant Industry
Automotive
Services
Automotive
Services
Automotive
Services
Automotive
Services
Automotive
Services
Car Washes
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Movie Theatres
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
AL
Restaurants
AL
Medical / Dental
AZ
Medical / Dental
FL
Medical / Dental
FL
Medical / Dental
FL
Medical / Dental
GA
Medical / Dental
IL
Medical / Dental
IL
Medical / Dental
IN
Medical / Dental
IN
Medical / Dental
MA
Medical / Dental
MO
Medical / Dental
MS
Medical / Dental
MS
Medical / Dental
NH
Medical / Dental
NY
Medical / Dental
SC
Medical / Dental
SC
Medical / Dental
SC
Medical / Dental
TX
Medical / Dental
TX
Medical / Dental
Medical / Dental
TX
Health and Fitness West Valley City UT
Quick Service
Restaurants
Gardendale
Stevenson
Tucson
Miami
Sarasota
Sarasota
Dalton
Alton
Quincy
Clarksville
Terre Haute
Brewster
Kansas City
Laurel
Picayune
Rochester
Canandaigua
Anderson
Camden
Columbia
Austin
Richmond
San Antonio
Red Oak
Florence
IA
AL
Birmingham
PA
AL
AL
Jasper
Baden
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
367
410
509
606
615
1,025
419
1,302
255
1,048
187
2,190
444
1,171
436
1,179
264
854
304
1,284
344
309
375
363
846
908
771
748
304
1,302
254
1,519
1,010
6,294
468
2,144
808
1,233
589
191
323
485
323
485
323
252
272
657
292
60
333
100
70
181
70
211
211
211
242
495
282
1,936
1,984
466
780
982
557
446
406
568
608
1,033
325
578
568
1,033
517
426
527
487
537
426
375
446
588
4,210
191
245
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
61
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
F-3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
367
410
509
876
606
1,016
615
1,025
1,640
419
1,302
1,721
255
1,048
187
2,190
442
3,238
444
1,171
1,615
436
1,179
1,615
264
854
1,118
304
1,284
1,588
344
309
375
363
846
1,190
908
1,217
771
1,146
748
1,111
304
1,302
1,606
254
1,580
1,010
6,294
1,264
7,874
468
2,144
2,612
808
1,233
2,041
589
191
323
485
323
485
323
252
272
657
292
60
333
100
70
181
70
211
211
211
242
495
282
1,936
1,984
466
780
982
557
446
406
568
608
1,033
325
578
568
1,033
517
426
527
487
537
426
375
446
588
4,210
2,573
657
1,103
1,467
880
931
729
820
880
1,690
617
638
901
1,133
587
607
597
698
748
637
617
941
870
6,146
191
245
436
37
44
75
95
14
142
89
89
65
97
64
69
58
57
99
77
418
127
83
125
34
43
52
35
32
36
43
45
72
27
30
42
57
30
28
29
28
36
28
28
38
35
241
38
1978 10/28/2016
1998 10/28/2016
1985 10/28/2016
1988 10/28/2016
1980 10/28/2016
11/9/2016
2010
1976 11/15/2016
1991 11/15/2016
1993 11/15/2016
1987 11/15/2016
1982 11/15/2016
1989 11/15/2016
2004 11/15/2016
2014 11/15/2016
1999 11/15/2016
2000 11/15/2016
2015 12/19/2016
2005 12/29/2016
1976 12/29/2016
2005 12/29/2016
1990 12/30/2016
1967 12/30/2016
1981 12/30/2016
1973 12/30/2016
2001 12/30/2016
1960 12/30/2016
2001 12/30/2016
2001 12/30/2016
1994 12/30/2016
1998 12/30/2016
1986 12/30/2016
1979 12/30/2016
1970 12/30/2016
1977 12/30/2016
1958 12/30/2016
2009 12/30/2016
1948 12/30/2016
1985 12/30/2016
1986 12/30/2016
1970 12/30/2016
1982 12/30/2016
2002 12/30/2016
1984 12/30/2016
1962 12/28/2016
Initial Cost to Company
Land &
Building &
Improvements
Improvements
Cost Capitalized Subsequent
to Acquisition
Gross Amount at
December 31, 2018(b)(c)
Land &
Building &
Improvements
Improvements Total
Accumulated
Depreciation
(d)(e)
603
1,584
603
1,584
2,187
115
2008 3/10/2017
997
1,478
(348 ) (g)
(689 ) (g)
649
789
1,438
State Encumbrances
WY
GA
GA
SC
MO
IL
KY
NY
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
Description(a)
City
Plano
Frisco
Alpena
Forsyth
Topeka
Prosper
Grapevine
Cedartown
Rock Springs
Conyers
Covington
Myrtle Beach
Bridgeton
Mokena
Lexington
Islip Terrace
Tenant Industry
Medical / Dental
Car Washes
Car Washes
Movie Theatres
Medical / Dental
Medical / Dental
Medical / Dental
Medical / Dental
Early Childhood
Alpharetta
Education
Home Furnishings Westland
Home Furnishings Ann Arbor
Home Furnishings Muskegon
Home Furnishings Battle Creek
Home Furnishings Holland
Quick Service
Restaurants
Quick Service
Restaurants
Convenience
Stores
Convenience
Stores
Automotive
Services
Automotive
Services
Automotive
Services
Automotive
Services
Automotive
Services
Automotive
Services
Automotive
Services
Car Washes
Car Washes
Home Furnishings Opelika
Automotive
Services
Automotive
Services
Automotive
Services
Convenience
Stores
Convenience
Stores
Early Childhood
Education
Early Childhood
Education
Medical / Dental
Medical / Dental
Medical / Dental
Medical / Dental
Car Washes
Car Washes
Quick Service
Restaurants
Quick Service
Restaurants
Car Washes
San Antonio
Payson
Katy
Baytown
Brownsville
Las Cruces
Las Cruces
Austin
Bossier City
Shreveport
Crystal River
Farmington
Huntingtown
Kernersville
Southlake
McKinney
Inverness
Gambrills
Atlanta
Tyler
GA
MI
MI
MI
MI
MI
GA
GA
AR
KS
TX
TX
TX
TX
TX
TX
TX
LA
LA
AL
MD
MD
TX
TX
NC
TX
AZ
TX
TX
TX
NM
NM
FL
FL
NM
New Freedom PA
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
620
1,136
824
1,465
199
237
199
313
1,595
1,858
2,096
1,113
1,212
1,361
258
464
252
Land &
Improvements
—
—
—
—
—
—
—
—
2,550
4,332
3,759
7,081
578
303
474
436
4,177
14,560
13,399
6,436
7,904
5,739
812
808
703
Building &
Improvements
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,279
1,314
1,244
1,396
1,161
2,534
856
2,124
657
997
774
463
836
1,365
1,678
2,637
2,812
3,864
904
872
984
1,857
2,461
6,139
404
1,433
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
605
1,408
928
548
233
286
1,626
510
570
382
362
634
3,312
1,944
1,228
1,790
—
2,290
2,187
493
523
4,945
—
—
—
—
—
7,743
—
—
—
—
—
—
—
—
—
—
982
—
—
—
—
—
F-4
620
1,136
824
1,465
199
237
199
313
1,595
1,858
2,096
1,113
1,212
1,361
258
464
252
2,550
4,332
3,759
7,081
578
303
474
436
3,170
5,468
4,583
8,546
777
540
673
749
4,177
5,772
14,560 16,418
13,399 15,495
7,549
9,116
7,100
6,436
7,904
5,739
812
1,070
808
1,272
703
955
146
269
242
359
32
29
30
26
248
729
655
323
407
291
46
46
51
Year
Constructed
Date
Acquired
2001 1/17/2017
2013 1/24/2017
2011 1/24/2017
2006 1/31/2017
2/9/2017
1982
2/9/2017
2008
2/9/2017
2014
2/9/2017
1986
2016 2/28/2017
3/1/2017
1987
3/1/2017
1992
3/1/2017
1987
3/1/2017
1996
3/1/2017
1992
1987
3/9/2017
1989
3/9/2017
1985 3/10/2017
1,279
1,314
2,593
1,244
1,396
2,640
1,161
2,534
3,695
856
2,124
2,980
88
85
90
145
126
1998
3/8/2017
2003
3/8/2017
2001
3/8/2017
2010
3/8/2017
2013
3/8/2017
657
997
1,654
60
2002
3/8/2017
774
463
836
1,365
1,678
2,637
2,812
3,864
2,452
3,100
3,648
5,229
94
135
152
192
1998
3/8/2017
2010 3/22/2017
2012 3/22/2017
2007 3/31/2017
904
872
1,776
57
1997 3/28/2017
984
1,857
2,841
2,461
6,139
8,600
404
1,433
1,837
605
1,408
2,013
3,312
4,240
1,944
2,492
1,228
1,461
2,076
1,790
7,743 10,351
2,800
2,290
2,757
2,187
928
548
233
286
2,608
510
570
382
362
634
106
297
100
80
76
159
91
54
78
64
113
108
1998 3/28/2017
2009 3/28/2017
1980 3/30/2017
1995 3/30/2017
1997
4/3/2017
2016 4/25/2017
1988 4/28/2017
2012 5/18/2017
2008 5/18/2017
2018
5/5/2017
2008 5/24/2017
2010 5/24/2017
493
875
34
2003 5/30/2017
523
4,945
885
5,579
32
244
2006 5/30/2017
6/6/2017
2005
392
1,204
(13 ) (g)
(155 ) (g)
379
1,049
1,428
Description(a)
Initial Cost to Company
Land &
Building &
City
Farmington
Pueblo
State Encumbrances
NM
CO
{f}
{f}
Improvements
Improvements
2,795
5,103
746
898
Land &
Improvements
—
—
Nashville
GA
181
513
Cost Capitalized Subsequent
to Acquisition
Soperton
GA
Columbia Station OH
OH
Maumee
OH
Troy
OH
Jackson
OH
Lancaster
OH
Portsmouth
WV
Bridgeport
KY
Radcliff
FL
Gainesville
GA
Cartersville
GA
Douglasville
TX
El Paso
TX
Garland
TX
Conroe
TX
Amarillo
CO
Grand Junction
SC
Mt Pleasant
AL
Irondale
AL
Bessemer
WI
Kenosha
CA
Visalia
Tenant Industry
Car Washes
Car Washes
Quick Service
Restaurants
Quick Service
Restaurants
Building Materials
Building Materials
Building Materials
Building Materials
Building Materials
Building Materials
Building Materials
Building Materials
Building Materials
Building Materials
Building Materials
Building Materials
Building Materials
Building Materials
Building Materials
Building Materials
Building Materials
Building Materials
Building Materials
Movie Theatres
Entertainment
Automotive
Services
Automotive
Services
Automotive
Services
Automotive
Services
Automotive
Services
Automotive
Services
Medical / Dental
Quick Service
Restaurants
Car Washes
Early Childhood
Education
Automotive
Services
Automotive
Services
Automotive
Services
Automotive
Services
Automotive
Services
Medical / Dental
Early Childhood
Education
Health and Fitness Arvada
Car Washes
Algona
Buford
Burton
Ocala
Troy
Knoxville
Forest Park
Martinez
Clarksville
Orlando
Montgomery
Orlando
Garden City
Capitol Heights
Magnolia
Round Rock
Winter Garden
Little Rock
TN
GA
GA
TN
FL
FL
AL
IA
GA
FL
MI
MI
MI
MD
TX
TX
FL
CO
AR
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
312
1,078
733
403
288
376
133
386
414
934
1,313
1,026
901
1,250
2,150
927
760
1,097
546
1,514
3,159
1,320
518
498
612
498
518
456
477
150
1,353
443
1,437
1,238
693
211
833
160
273
200
638
1,743
2,421
177
2,283
631
655
403
171
227
3,413
3,755
2,320
695
850
570
633
715
664
2,976
528
3,693
1,175
4,362
366
961
794
1,389
188
1,180
491
1,734
1,402
713
1,169
1,342
685
2,480
6,821
4,603
2,808
3,361
Gross Amount at
December 31, 2018(b)(c)
Land &
Building &
Improvements Total
Accumulated
Depreciation
(d)(e)
2,795
5,103
3,541
6,001
138
251
Improvements
746
898
Year
Constructed
2013
2008
Date
Acquired
6/6/2017
6/6/2017
181
513
694
30
1991
6/6/2017
312
1,078
733
403
288
376
133
386
414
934
1,313
1,026
901
1,250
2,150
927
760
1,097
546
1,514
3,275
1,320
518
498
612
498
518
456
477
443
1,437
1,238
693
211
833
160
273
200
638
1,743
2,421
177
2,283
631
655
403
171
227
3,413
3,755
2,320
755
2,515
1,971
1,096
499
1,209
293
659
614
1,572
3,056
3,447
1,078
3,533
2,781
1,582
1,163
1,268
773
4,927
7,030
3,640
695
1,213
850
1,348
570
1,182
633
1,131
715
1,233
664
2,976
1,120
3,453
150
1,353
528
3,693
678
5,046
1,175
4,362
5,537
366
961
1,327
794
1,389
2,183
188
1,180
1,368
491
1,734
2,225
1,402
713
1,169
1,342
685
2,480
6,821
3,882
7,534
4,603
3,208
3,361
5,772
4,550
4,046
31
81
69
39
12
47
9
15
11
36
98
136
10
128
35
37
23
10
13
191
217
121
42
47
40
37
44
36
118
26
170
166
42
61
48
62
119
243
175
125
123
6/6/2017
1992
6/1/2017
1961
6/1/2017
1963
6/1/2017
1991
6/1/2017
1995
6/1/2017
1995
6/1/2017
1996
6/1/2017
1978
6/1/2017
1984
6/1/2017
2003
6/1/2017
2003
6/1/2017
2004
6/1/2017
1984
6/1/2017
2001
6/1/2017
2002
6/1/2017
2002
6/1/2017
1983
6/1/2017
1983
6/1/2017
1975
6/1/2017
2002
1997
6/8/2017
1984 6/30/2017
2008 7/21/2017
1992 7/21/2017
1992 7/21/2017
1998 7/21/2017
1989 7/21/2017
1989 7/21/2017
8/7/2017
2001
1993 8/10/2017
2010 8/15/2017
2010 8/25/2017
1984 8/29/2017
1974 8/29/2017
1955 8/29/2017
1960 8/29/2017
2017 9/29/2017
2016 9/12/2017
2015 9/29/2017
1982
9/5/2017
1976 9/12/2017
Building &
Improvements
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
400
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
116
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
F-5
Description(a)
Tenant Industry
Car Washes
Car Washes
Car Washes
Car Washes
Car Washes
Car Washes
Car Washes
City
Knoxville
Knoxville
Knoxville
Bryant
Anderson
Cornelia
South
Commerce
Isanti
Bethel
Smyrna
Braham
Memphis
Grantsburg
Daingerfield
Jacksonville
Jacksonville
Seneca
Greenville
Springdale
Rogers
Shreveport
Car Washes
Car Washes
Car Washes
Car Washes
Car Washes
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Kilgore
Health and Fitness Hobbs
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Automotive
Services
Automotive
Services
Automotive
Services
Automotive
Services
Automotive
Services
Health and Fitness Florence
Early Childhood
Education
Entertainment
Convenience
Tyler
Stores
North Lima
Medical / Dental
Southfield
Medical / Dental
West Lafayette
Medical / Dental
Salem
Medical / Dental
Toledo
Medical / Dental
Pittsburgh
Medical / Dental
Youngstown
Medical / Dental
Madison
Medical / Dental
Youngstown
Medical / Dental
Penn Yan
Medical / Dental
Kent
Medical / Dental
Entertainment
Hoover
Health and Fitness Greeley
Quick Service
Restaurants
Lake Mary
Orlando
Longwood
Hudson
Mobile
Gray
GA
SC
SC
AR
AR
LA
TX
TX
TX
TX
NM
MN
MN
MN
WI
GA
TN
AL
FL
FL
KY
FL
FL
TX
OH
MI
IN
OH
OH
PA
OH
OH
OH
NY
OH
AL
CO
GA
State Encumbrances
TN
TN
TN
AR
SC
GA
Initial Cost to Company
Land &
Building &
Improvements
Improvements
2,105
2,222
2,134
2,790
4,031
2,670
509
509
588
489
793
470
Land &
Improvements
—
—
—
—
—
—
Cost Capitalized Subsequent
to Acquisition
Gross Amount at
December 31, 2018(b)(c)
Land &
Building &
Improvements Total
Accumulated
Depreciation
(d)(e)
Improvements
509
509
588
489
793
470
607
255
715
597
763
460
2,105
2,222
2,134
2,790
4,031
2,670
3,072
2,994
2,724
1,908
2,663
2,615
2,614
2,731
2,722
3,279
4,824
3,140
3,679
3,249
3,439
2,505
3,426
3,075
587
1,357
1,944
269
1,135
1,404
368
259
938
916
1,284
1,062
1,503
1,321
2,441
764
1,353
2,117
Year
Constructed
2009
2009
2009
1997
2008
2001
2016
2005
2005
2009
2005
2017
Date
Acquired
9/18/2017
9/18/2017
9/18/2017
9/20/2017
9/26/2017
9/26/2017
9/26/2017
9/26/2017
9/26/2017
9/29/2017
9/29/2017
9/29/2017
2012
9/29/2017
1979
9/29/2017
1996
9/29/2017
1978
2016
9/29/2017
9/28/2017
1996
9/27/2017
74
80
81
96
148
98
115
103
101
76
100
98
72
48
49
49
69
90
1,167
1,859
3,026
104
1989
9/27/2017
289
1,043
1,332
640
1,673
2,313
689
470
1,159
417
1,294
1,711
219
313
887
868
1,829
2,290
706
112
193
122
92
448
112
275
387
366
132
173
1,403
1,484
595
814
689
1,002
1,263
2,186
2,150
3,054
1,424
4,377
3,253
6,667
511
926
1,536
397
468
1,750
1,221
702
488
1,394
651
610
2,939
4,491
1,217
1,038
1,729
519
560
2,198
1,333
977
875
1,760
783
783
4,342
5,975
48
92
23
48
22
29
63
87
63
164
27
31
52
15
17
60
40
29
20
55
25
23
118
148
1986
9/27/2017
2005
9/27/2017
1997
9/25/2017
1985
9/25/2017
1979
9/25/2017
1984
9/25/2017
2000
1994
9/25/2017
9/28/2017
2005
2007
9/29/2017
9/29/2017
1996 10/16/2017
10/5/2017
1976
10/5/2017
1968
10/5/2017
1976
10/5/2017
1985
10/5/2017
1995
10/5/2017
1983
10/5/2017
1971
10/5/2017
1950
10/5/2017
1995
10/5/2017
1986
1970
10/5/2017
2017 10/13/2017
1989 11/16/2017
293
374
667
17
1992 11/10/2017
Building &
Improvements
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(10 ) (g)
—
(41 ) (g)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
F-6
607
255
715
597
763
460
3,072
2,994
2,724
1,908
2,663
2,615
587
1,357
269
1,135
368
269
938
916
1,103
1,503
764
1,353
1,167
1,859
289
1,043
640
1,673
689
470
417
1,294
219
313
887
868
1,829
2,290
706
112
193
122
92
448
112
275
387
366
132
173
1,403
1,484
595
689
1,263
2,186
1,424
4,377
511
926
1,536
397
468
1,750
1,221
702
488
1,394
651
610
2,939
4,491
293
374
{f}
{f}
{f}
{f}
{f}
{f}
Tenant Industry
Quick Service
Restaurants
Quick Service
Restaurants
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Quick Service
Restaurants
Medical / Dental
Medical / Dental
Medical / Dental
Medical / Dental
Medical / Dental
Medical / Dental
Early Childhood
Education
Early Childhood
Education
Casual Dining
Restaurants
Casual Dining
Restaurants
Movie Theatres
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Quick Service
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Description(a)
Initial Cost to Company
Land &
Building &
City
State Encumbrances
Improvements
Improvements
Cost Capitalized Subsequent
to Acquisition
Gross Amount at
December 31, 2018(b)(c)
Land &
Improvements
Building &
Improvements
Land &
Building &
Improvements
Improvements Total
Accumulated
Depreciation
(d)(e)
Year
Constructed
Date
Acquired
Sandersville
GA
Barnesville
GA
Farmington
NM
Farmington
NM
Farmington
NM
Aztec
NM
283
243
332
342
372
322
515
414
302
604
886
685
Farmington
NM
282
1,077
Farmington
NM
Farmington
NM
503
735
815
352
Ignacio
CO
272
1,047
Farmington
NM
332
775
Farmington
NM
453
1,027
Kirtland
NM
Farmington
NM
Hutchinson
Tyler
Lindale
Franklin
Fayetteville
Greenwood
Indianapolis
KS
TX
TX
IN
AR
IN
IN
{f}
{f}
{f}
332
554
194
985
394
395
905
312
52
906
785
777
5,675
1,429
2,319
1,456
593
416
Lansdowne
VA
2,167
2,982
Overland Park
KS
1,189
4,062
Bossier City
LA
976
2,347
Augusta
Dublin
GA
OH
Sylacauga
AL
Daleville
AL
Roanoke
AL
Jasper
AL
Alexander City AL
Headland
AL
Tallassee
AL
Talladega
AL
Enterprise
AL
Childersburg
AL
Valley
AL
Selma
AL
1,663
2,126
1,909
10,097
166
127
224
370
263
273
195
88
166
195
185
175
351
409
526
331
506
370
302
273
380
302
302
409
Linthicum
MD
1,691
1,124
East Point
GA
Pocomoke City MD
D'Iberville
MS
Clarksville
TN
Scranton
PA
1,153
653
927
861
785
831
849
623
736
755
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
F-7
283
243
332
342
372
322
515
798
414
657
302
634
604
946
886
1,258
685
1,007
282
1,077
1,359
503
735
815
1,318
352
1,087
272
1,047
1,319
332
775
1,107
453
1,027
1,480
332
554
194
985
394
395
905
312
52
906
1,238
785
1,339
777
5,675
1,429
2,319
1,456
593
416
971
6,660
1,823
2,714
2,361
905
468
2,167
2,982
5,149
1,189
4,062
5,251
22
19
15
25
41
29
46
37
20
42
35
50
39
42
28
182
54
76
54
21
13
105
136
1989 11/10/2017
1996 11/10/2017
1966
11/8/2017
1972
11/8/2017
2013
11/8/2017
1982
11/8/2017
1980
11/8/2017
1980
11/8/2017
1982
11/8/2017
1983
11/8/2017
1985
11/8/2017
1990
11/8/2017
1980
11/8/2017
1998 11/21/2017
1971 11/16/2017
1999 11/17/2017
2013 11/17/2017
12/1/2017
2007
12/1/2017
1979
12/1/2017
1952
12/1/2017
1954
2006
12/4/2017
2017
12/8/2017
976
2,347
3,323
85
1993 12/15/2017
1,663
2,126
1,909
3,572
10,097 12,223
66
310
1982 12/15/2017
1994 12/15/2017
166
127
224
370
263
273
195
351
517
409
536
526
750
331
701
506
769
370
643
302
497
88
273
361
166
195
185
175
380
546
302
497
302
487
409
584
1,691
1,124
2,815
1,153
831
1,984
653
927
861
785
849
1,502
623
1,550
736
1,597
755
1,540
13
13
19
16
19
19
13
10
14
11
12
15
49
35
41
26
29
38
1976 12/19/2017
1983 12/19/2017
1990 12/19/2017
2005 12/19/2017
2004 12/19/2017
2007 12/19/2017
2008 12/19/2017
1999 12/19/2017
1974 12/19/2017
1989 12/19/2017
2004 12/19/2017
1996 12/19/2017
2004 12/21/2017
2003 12/21/2017
2005 12/21/2017
2004 12/21/2017
2003 12/21/2017
1995 12/21/2017
State Encumbrances
Improvements
Improvements
Initial Cost to Company
Land &
Building &
Cost Capitalized Subsequent
to Acquisition
Gross Amount at
December 31, 2018(b)(c)
Land &
Improvements
Building &
Improvements
Land &
Building &
Improvements
Improvements Total
Accumulated
Depreciation
(d)(e)
Year
Constructed
Date
Acquired
Alexander City AL
Johnson City
Description(a)
Indianapolis
City
Robert
Jasper
Jasper
Columbia
Palm City
Smithfield
Sevierville
Clemmons
Southaven
Morristown
Spring
Fayetteville
Fayetteville
Bentonville
Stillwater
Stillwater
Stillwater
Tenant Industry
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Casual Dining
Restaurants
Quick Service
Restaurants
Automotive
Services
Car Washes
Car Washes
Car Washes
Car Washes
Car Washes
Car Washes
Health and Fitness Auburn
Health and Fitness Columbus
Early Childhood
Education
Restaurants - Quick
Service
Restaurants - Quick
Service
Restaurants - Quick
Service
Health and Fitness Wichita
Convenience Stores Bloomfield
Early Childhood
Education
Early Childhood
Education
Early Childhood
Education
Early Childhood
Education
Restaurants -
Casual Dining
Restaurants -
Casual Dining
Restaurants -
Casual Dining
Restaurants -
Casual Dining
Restaurants -
Casual Dining
Automotive
Services
Automotive
Services
Grocery
Health and Fitness Aiken
Early Childhood
Education
Early Childhood
Education
Early Childhood
Education
Early Childhood
Education
Woodbury
Burlington
Farmington
Davenport
Davenport
Davenport
Bettendorf
Burlington
Kewanee
Roseville
Trumbull
Saginaw
Raleigh
Canton
Dublin
Cary
Cary
Grand Rapids
Grand Rapids
TN
SC
IN
FL
MO
AL
NC
TN
TN
NC
IN
TX
AR
AR
AR
OK
OK
OK
AL
GA
MS
MI
MI
MI
KS
NM
NC
NC
NC
CT
IA
IA
IL
IA
IA
MN
MN
NC
SC
CT
CT
CT
OH
{f}
{f}
{f}
{f}
{f}
{f}
{f}
511
644
785
1,012
672
644
766
833
634
861
757
226
721
567
597
1,307
320
669
825
1,104
2,175
802
604
500
368
727
755
292
349
528
254
386
931
932
1,377
1,675
2,436
924
1,634
750
2,411
2,540
1,060
1,496
528
1086
299
1,205
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
349
2,594
221
1,166
—
784
—
326
—
485
584
383
1,271
898
2,482
864
—
57
479
402
1,050
115
432
459
1,304
153
1,268
489
1,602
978
762
1,063
2,049
1,300
3,787
432
1,408
730
761
278
1,459
740
2,934
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
F-8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,812
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
511
644
785
802
1,313
604
1,248
500
1,285
1,012
368
1,380
672
644
766
833
634
861
757
226
721
567
597
1,307
320
669
825
1,104
2,175
727
1,399
755
1,399
292
1,058
349
1,182
528
1,162
254
1,115
386
1,143
931
1,157
932
1,377
1,675
2,436
924
1,634
750
2,411
2,540
1,653
1,944
2,272
3,743
1,244
2,303
1,575
3,515
4,715
1,060
1,496
2,556
528
1086
1614
299
1,205
1,504
349
2,920
221
1,166
4,812
784
1,515
7,732
1,005
485
584
1,069
383
1,271
1,654
898
2,482
3,380
864
—
864
57
479
536
402
1,050
1,452
115
432
547
459
1,304
1,763
153
1,268
1,421
489
1,602
2,091
978
762
1,063
2,049
1,300
3,787
3,027
2,062
4,850
432
1,408
1,840
730
761
1,491
278
1,459
1,737
740
2,934
3,674
31
23
23
21
29
27
16
21
25
14
20
30
44
47
58
83
29
57
35
86
99
50
39
40
35
59
24
21
37
69
—
12
29
13
37
33
41
55
38
95
40
28
38
70
2007 12/21/2017
2004 12/21/2017
2003 12/21/2017
1996 12/21/2017
2003 12/21/2017
2001 12/21/2017
1998 12/21/2017
2002 12/21/2017
2003 12/21/2017
2003 12/21/2017
2005 12/21/2017
1998 12/22/2017
2017 12/27/2017
2011 12/28/2017
1980 12/28/2017
2017 12/28/2017
2002 12/28/2017
2006 12/28/2017
2007 12/28/2017
2007 12/29/2017
2005 12/29/2017
2002 12/29/2017
2012
1/4/2018
2016
1/4/2018
2013
2018
1980
1/4/2018
1/19/2018
1/24/2018
1992
1/26/2018
1988
1/26/2018
1994
1/26/2018
1/31/2018
1955
2/8/2018
1975
2/8/2018
1993
2/8/2018
1990
2/8/2018
1952
2/8/2018
1971
2/16/2018
2000
1992
1998
2/16/2018
2/16/2018
3/1/2018
2004
3/9/2018
1979
3/9/2018
1985
3/9/2018
2008
3/13/2018
Description(a)
Initial Cost to Company
Land &
Building &
State Encumbrances
NC
OK
Improvements
Improvements
2,798
—
1,826
2,856
Land &
Improvements
—
108
Cost Capitalized Subsequent
to Acquisition
Gross Amount at
December 31, 2018(b)(c)
Land &
Building &
Improvements
1,826
2,964
Improvements Total
2,798
4,329
4,624
7,293
Accumulated
Depreciation
(d)(e)
City
KS
Pittsburgh
San Antonio
Shelby
Tulsa
Cave Creek
Maricopa
TX
MN
AZ
AZ
Tenant Industry
Movie Theatres
Health and Fitness
Restaurants - Family
Dining
Early Childhood
Education
Automotive Services Elk River
Other Services
Other Services
Early Childhood
MI
Education
MO
Medical / Dental
AR
Medical / Dental
AR
Medical / Dental
TX
Medical / Dental
MD
Car Washes
NC
Automotive Services Apex
NC
Automotive Services Holly Springs
Automotive Services Fuquay Varina NC
AL
Movie Theatres
Automotive Services North Canton
OH
Automotive Services
Byron Center
Springfield
Rogers
Russellville
Paris
Bel Air
Decatur
Clinton
Township
Automotive Services Baltimore
Convenience Stores Sartell
Convenience Stores St. Augusta
Convenience Stores Rice
Convenience Stores Pine City
Convenience Stores Cambridge
Early Childhood
Education
Other Services
Other Services
Other Services
Other Services
Other Services
Other Services
Other Services
Other Services
Other Services
Other Services
Other Services
Other Services
Other Services
Other Services
Convenience Stores Mosinee
Convenience Stores Wausau
Convenience Stores Wausau
Convenience Stores Wausau
Acworth
Sarasota
Bluff City
Erwin
Sparta
Kingsport
Cleveland
Cleveland
Castlewood
Covington
Harlem
London
Elizabethton
Elizabethton
Mountain City
MI
MD
MN
MN
MN
MN
MN
GA
FL
TN
TN
NC
TN
TN
TN
VA
GA
GA
KY
TN
TN
TN
WI
WI
WI
WI
Building &
Improvements
—
4,329
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
{f}
{f}
{f}
{f}
{f}
{f}
{f}
{f}
465
792
482
433
1,789
1,057
513
660
599
710
416
321
229
308
487
1,491
481
1,179
206
988
473
782
792
1,008
637
442
146
713
713
1,220
673
615
1,259
849
703
937
254
488
78
260
311
402
502
1,496
898
2,540
1,057
1,591
1,326
1,229
1,297
1,020
3,120
428
1,283
318
4,350
982
688
1,709
607
1,111
1,461
1,173
2,161
1,365
—
1,347
1,484
1,942
3,143
1,083
2,938
1,786
3,309
1,610
2,391
517
849
176
509
372
1,470
361
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
F-9
465
792
1,257
482
433
1,789
1,057
513
660
599
710
416
321
229
308
487
1,491
481
1,179
206
988
473
782
792
1,008
637
442
146
713
713
1,220
673
615
1,259
849
703
937
254
488
78
260
311
402
502
1,496
898
2,540
1,057
1,591
1,326
1,229
1,297
1,020
3,120
428
1,283
318
4,350
982
688
1,709
607
1,111
1,461
1,173
2,161
1,365
—
1,347
1,484
1,942
3,143
1,083
2,938
1,786
3,309
1,610
2,391
517
849
176
509
372
1,470
361
1,978
1,331
4,329
2,114
2,104
1,986
1,828
2,007
1,436
3,441
657
1,591
805
5,841
1,463
1,867
1,915
1,595
1,584
2,243
1,965
3,169
2,002
442
1,493
2,197
2,655
4,363
1,756
3,553
3,045
4,158
2,313
3,328
771
1,337
254
769
683
1,872
863
Year
Constructed
2004
2018
Date
Acquired
3/22/2018
3/22/2018
2016
3/29/2018
2007
1996
2008
2008
2012
2014
2013
2015
2013
2016
2000
2003
2008
2013
1960
1983
1952
2013
1978
2005
1967
2007
2000
1949
1981
1973
1979
1975
1964
1991
1991
1895
1999
2010
1996
1936
1994
1995
1995
1989
3/29/2018
3/29/2018
4/5/2018
4/5/2018
4/9/2018
4/20/2018
4/20/2018
4/20/2018
4/20/2018
4/26/2018
5/1/2018
5/1/2018
5/1/2018
5/10/2018
5/17/2018
5/17/2018
5/17/2018
5/17/2018
5/17/2018
5/17/2018
5/17/2018
5/17/2018
5/18/2018
5/24/2018
6/1/2018
6/1/2018
6/1/2018
6/1/2018
6/1/2018
6/1/2018
6/1/2018
6/1/2018
6/1/2018
6/1/2018
6/1/2018
6/1/2018
6/1/2018
6/15/2018
6/15/2018
6/15/2018
6/15/2018
75
19
22
34
23
62
28
43
30
29
27
24
66
10
26
11
101
19
27
27
25
28
44
37
58
32
—
21
28
41
68
21
47
41
64
31
50
13
17
3
14
13
30
18
Description(a)
State Encumbrances
City
WI
WI
WI
WI
WI
WI
WI
WI
WI
WI
WI
WI
WI
WI
WI
WI
WI
WI
Gillett
Edgar
Merrill
Hatley
Plover
Pound
Phillips
Tigerton
Prentice
Wausau
Rudolph
Minoqua
Mountain
Marathon
Rothschild
Wittenberg
Tomahawk
Stevens Point
Tenant Industry
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Early Childhood
Education
Car Washes
Early Childhood
Education
Early Childhood
Education
Early Childhood
Education
Early Childhood
Education
Early Childhood
Education
Early Childhood
Education
Early Childhood
Education
Early Childhood
Education
Early Childhood
Education
Early Childhood
Education
Early Childhood
Education
Early Childhood
Education
Early Childhood
Blue Bell
PA
Education
Mountain Grove MO
Medical / Dental
AR
Harrison
Medical / Dental
AR
Jonesboro
Medical / Dental
AR
El Dorado
Medical / Dental
AR
Berryville
Medical / Dental
AR
Medical / Dental
Batesville
MA
Health and Fitness Salisbury
MA
Health and Fitness Peabody
MA
Health and Fitness Methuen
Surprise
Fayetteville
King of Prussia PA
West Norriton
Downingtown
Phoenixville
WI
WI
Collegeville
Royersford
Park Falls
Glen Mills
Voorhees
Malvern
Weston
PA
PA
PA
NJ
PA
NJ
PA
PA
PA
PA
PA
Frazer
Exton
WI
WI
Erial
Initial Cost to Company
Land &
Building &
Improvements
Improvements
Cost Capitalized Subsequent
to Acquisition
Gross Amount at
December 31, 2018(b)(c)
Land &
Improvements
Building &
Improvements
Land &
Building &
Improvements
Improvements Total
Accumulated
Depreciation
(d)(e)
Year
Constructed
Date
Acquired
412
1,164
703
191
321
241
445
753
760
722
478
591
954
1,014
1,054
522
1,857
1,305
683
1,008
261
1,244
502
1,275
783
371
949
883
851
412
1,405
1,305
412
371
840
663
392
1,164
622
843
1,546
675
1,736
2,405
701
2,084
730
2,276
3,938
3,246
740
1,546
442
2,007
509
1,892
259
1,892
557
1,998
490
2,171
605
2,219
423
1,940
1,431
4,466
788
113
144
329
93
62
237
1,169
3,497
4,544
3,218
527
835
1,021
228
120
1,139
14,584
6,523
5,179
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
F-10
412
445
857
1,164
753
1,917
703
191
321
241
760
1,463
722
913
478
799
591
832
954
1,014
1,968
1,054
522
1,576
1,857
1,305
3,162
683
1,008
1,691
261
1,244
1,505
502
949
1,451
1,275
883
2,158
783
371
851
1,634
412
783
1,405
1,305
2,710
412
371
840
1,252
663
1,034
392
1,164
1,556
622
843
1,465
1,546
675
1,736
2,405
3,282
3,080
701
2,084
2,785
730
2,276
3,006
3,938
3,246
7,184
740
1,546
2,286
442
2,007
2,449
509
1,892
2,401
259
1,892
2,151
557
1,998
2,555
490
2,171
2,661
605
2,219
2,824
423
1,940
2,363
1,431
4,466
5,897
788
113
144
329
93
62
237
1,169
3,497
4,544
3,218
527
835
1,021
228
120
1,139
4,006
640
979
1,350
321
182
1,376
14,584 15,753
6,523 10,020
9,723
5,179
16
52
26
17
19
17
46
30
70
37
26
29
35
34
17
64
24
22
30
26
29
37
36
38
75
24
31
31
28
31
32
34
29
73
48
9
12
16
4
3
19
189
93
89
1991
6/15/2018
1989
6/15/2018
1985
6/15/2018
1970
6/15/2018
1983
6/15/2018
1990
6/15/2018
1998
6/15/2018
1993
6/15/2018
1996
6/15/2018
1992
6/15/2018
1987
6/15/2018
1984
6/15/2018
2006
6/15/2018
1997
6/15/2018
1984
6/15/2018
1999
6/15/2018
1992
6/15/2018
1998
6/15/2018
1984
6/15/2018
1993
6/15/2018
2008
2018
6/21/2018
6/21/2018
2006
6/28/2018
1998
6/28/2018
1992
6/28/2018
2000
6/28/2018
2000
6/28/2018
2002
6/28/2018
2002
6/28/2018
2003
6/28/2018
2004
6/28/2018
2007
6/28/2018
2008
6/28/2018
2010
6/28/2018
1967
2012
2006
2005
2000
2000
2017
2004
2009
2002
6/28/2018
6/28/2018
6/28/2018
6/28/2018
6/28/2018
6/28/2018
6/28/2018
6/29/2018
6/29/2018
6/29/2018
Initial Cost to Company
Land &
Building &
Improvements
Improvements
Cost Capitalized Subsequent
to Acquisition
Gross Amount at
December 31, 2018(b)(c)
Land &
Building &
Improvements
Improvements Total
Accumulated
Depreciation
(d)(e)
Land &
Improvements
—
—
—
—
—
978
172
1,329
1,775
913
297
1,011
683
703
828
1,261
1,439
1,683
1,531
3,033
2,454
1,024
2,536
2,027
3,031
2,029
2,187
1,283
1,045
387
1,406
438
1,061
876
1,255
1,497
1,161
468
1,283
1,079
1,262
825
152
253
364
172
992
596
495
384
526
State Encumbrances
SC
TX
AZ
AZ
AZ
KY
GA
GA
GA
GA
GA
Fort Oglethorpe GA
GA
TN
TN
TN
TN
TN
TN
OK
OK
OK
Oklahoma City OK
Description(a)
City
Dayton
Del City
Ringgold
Ooltewah
Soddy Daisy
Midwest City
Chattanooga
Chattanooga
Chattanooga
Brownsville
Mesa
Chandler
Green Valley
Brownsville
Athen
Winder
Decatur
Decatur
Duluth
Tenant Industry
Health and Fitness Moncks Corner
Medical / Dental
Other Services
Other Services
Other Services
Restaurants - Quick
Service
Car Washes
Car Washes
Car Washes
Car Washes
Car Washes
Restaurants - Quick
Service
Restaurants - Quick
Service
Restaurants - Quick
Service
Restaurants - Quick
Service
Restaurants - Quick
Service
Restaurants - Quick
Service
Restaurants - Quick
Service
Restaurants - Quick
Service
Automotive
Services
Automotive
Services
Automotive
Services
Automotive
Services
Early Childhood
Education
Restaurants - Quick
Service
Restaurants - Quick
Service
Restaurants - Quick
Service
Convenience Stores Seguin
Convenience Stores Burleson
Convenience Stores Winfield
Automotive
Services
Restaurants - Quick
Service
San Angelo
Health and Fitness Springfield
Health and Fitness Eugene
Early Childhood
Education
Early Childhood
Education
Restaurants - Quick
Service
Marion
Health and Fitness Metairie
Restaurants - Quick
Service
Restaurants -
Family Dining
Restaurants -
Family Dining
Restaurants -
Family Dining
Restaurants - Quick
Service
Restaurants - Quick
Service
Leon Springs
Midwest City
Eden Prairie
Van Buren
Paragould
Blytheville
Colleyville
Fairbanks
Fairbanks
Montrose
Augusta
Pontiac
Macon
Macon
MN
{f}
1,264
1,651
AR
AR
AR
TX
TX
TX
MI
TX
OR
OR
TX
{f}
{f}
{f}
785
744
642
435
823
908
736
784
946
995
1,660
2,474
445
1,077
161
2,024
1,046
806
2,468
2,986
617
2,258
TX
{f}
695
1,022
AR
LA
CO
GA
GA
GA
AK
AK
459
1,323
920
2,143
698
1,036
825
648
923
894
992
972
438
1,524
687
1,633
Building &
Improvements
—
—
—
—
—
—
600
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
F-11
978
172
1,329
1,775
913
297
1,011
683
703
828
1,261
1,439
1,683
1,531
3,033
2,454
1,024
3,136
2,027
3,031
2,029
2,187
2,417
1,855
2,860
4,808
3,367
1,321
4,147
2,710
3,734
2,857
3,448
1,283
1,045
2,328
387
1,406
1,793
438
1,061
1,499
876
1,255
2,131
1,497
1,161
2,658
468
1,283
1,751
1,079
1,262
2,341
825
152
253
364
172
992
1,817
596
748
495
748
384
748
526
698
1,264
1,651
2,915
785
744
642
435
823
908
736
1,521
784
1,528
946
995
1,660
2,474
1,588
1,430
2,483
3,382
445
1,077
1,522
161
2,024
1,046
806
2,468
2,986
967
4,492
4,032
617
2,258
2,875
695
1,022
1,717
459
1,323
920
2,143
1,379
3,466
698
1,036
1,734
825
648
923
894
1,719
992
1,640
972
1,895
438
1,524
1,962
687
1,633
2,320
29
23
25
48
37
15
43
31
40
32
32
15
20
15
18
16
19
17
16
8
9
8
7
25
10
9
11
12
23
34
14
9
33
31
24
9
9
19
10
8
8
10
14
13
Year
Constructed
2002
2008
1990
2002
2015
Date
Acquired
6/29/2018
7/13/2018
7/13/2018
7/13/2018
7/13/2018
1990
2006
2008
1967
2007
2006
7/18/2018
7/26/2018
7/26/2018
7/26/2018
7/26/2018
7/26/2018
2001
8/8/2018
2015
8/8/2018
2009
8/8/2018
2004
8/8/2018
2012
8/8/2018
2016
8/8/2018
2003
8/8/2018
2006
8/8/2018
1980
8/9/2018
1995
8/9/2018
1985
8/9/2018
1980
8/9/2018
1995
8/10/2018
2007
8/22/2018
2008
8/22/2018
2008
1974
1985
1979
8/22/2018
9/4/2018
9/4/2018
9/4/2018
1978
9/7/2018
1978
1999
1980
9/12/2018
9/13/2018
9/13/2018
2008
9/14/2018
1997
9/18/2018
2007
2016
9/21/2018
9/21/2018
2000
9/25/2018
1968
9/25/2018
1983
9/25/2018
1972
9/25/2018
1971
9/27/2018
2006
9/27/2018
State Encumbrances
TX
Initial Cost to Company
Land &
Building &
Improvements
Improvements
Cost Capitalized Subsequent
to Acquisition
Gross Amount at
December 31, 2018(b)(c)
Land &
Improvements
—
Building &
Improvements
—
Land &
Building &
Improvements
336
Improvements
1,959
1,959
Accumulated
Depreciation
(d)(e)
Total
2,295
12
Year
Constructed
2006
Date
Acquired
9/27/2018
Description(a)
City
Tucson
TX
TX
VA
AZ
AZ
WA
Abilene
Phoenix
Ashburn
Centralia
Grapevine
Hot Springs
IN
AR
AL
AR
AR
AZ
IL
TX
St. Augustine FL
Fleming Island FL
Bremen
Springdale
Andalusia
Forrest City
Countryside
Midland
GA
AL
AL
North Richland
Hills
McDonough
Montgomery
Prattville
Tenant Industry
Medical / Dental
Restaurants -
Quick Service
Medical / Dental
Early Childhood
Education
Restaurants -
Quick Service
Restaurants -
Quick Service
Restaurants -
Quick Service
Automotive
Services
Car Washes
Early Childhood
Education
Restaurants -
Quick Service
Health and Fitness Tucson
Restaurants -
Quick Service
Medical / Dental
Early Childhood
Education
Medical / Dental
Medical / Dental
Convenience
Stores
Convenience
Stores
Convenience
Stores
Convenience
Stores
Early Childhood
Education
Restaurants -
Quick Service
Medical / Dental
Medical / Dental
Medical / Dental
Medical / Dental
Early Childhood
Education
Early Childhood
Education
Entertainment
Entertainment
Entertainment
Entertainment
Entertainment
Entertainment
Entertainment
Entertainment
Entertainment
Early Childhood
Education
Early Childhood
Education
GA
Macon
Health and Fitness Winston-Salem NC
IA
Car Washes
IA
Car Washes
IL
Car Washes
Automotive
Services
Other Services
Other Services
Early Childhood
Education
Home Furnishings Kansas City
CT
Manchester
MN
Andover
MN
Rochester
South St. Paul
MN
Mounds View MN
MN
St. Paul Park
MN
Oakdale
MN
Monticello
MN
St. Paul
MN
Ramsey
Pembroke
Fort Worth
Arlington
Burleson
Dallas
NY
TX
TX
TX
TX
Denton
Georgetown
Middleburg
Dubuque
Davenport
Rock Island
TX
TX
FL
TX
MO
Olive Branch
Duncanville
Arlington
TX
GA
GA
MS
Canton
Macon
336
384
143
898
727
608
671
875
1,113
775
904
917
1,964
221
1,405
1,284
3,139
872
2,523
240
4,227
727
298
604
454
237
977
1,037
568
469
899
—
1,302
1,760
2,065
1,528
857
827
429
509
538
504
2,079
577
466
546
61
1,813
898
845
649
1,091
3,606
1,027
1,050
915
898
379
1,008
1,986
529
2,136
1,527
1,218
609
939
1,208
968
928
3,264
1,058
5,699
3,414
1,407
749
538
1,067
508
986
990
757
1,030
1,278
753
803
1,067
1,205
2,121
2,394
2,949
1,582
—
—
{f}
{f}
{f}
{f}
{f}
{f}
{f}
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
384
143
898
727
608
1,111
751
671
1,569
875
1,113
1,988
775
904
1,679
917
1,964
2,881
221
1,405
1,284
3,139
1,505
4,544
872
2,523
3,395
240
4,227
727
298
604
454
237
977
899
—
1,302
1,760
2,065
1,528
857
1,139
4,227
2,029
2,058
2,669
1,982
1,094
827
1,804
1,037
429
1,466
568
469
509
1,077
538
1,007
7
5
6
12
10
16
10
26
18
7
—
7
8
11
8
4
8
4
5
4
1988
2007
9/28/2018
9/28/2018
2001
9/28/2018
2017
9/28/2018
2016
9/28/2018
2010
9/28/2018
1970
2018
9/28/2018
9/28/2018
2006
9/28/2018
1979
10/4/2018
10/10/2018
2013 10/26/2018
1993 10/31/2018
2002
2004
2012
11/2/2018
11/7/2018
11/7/2018
1985
11/7/2018
1987
11/7/2018
1976
11/7/2018
1980
11/8/2018
504
2,079
2,583
11
2006
11/9/2018
577
466
546
61
1,813
898
845
649
1,091
3,606
1,475
1,311
1,195
1,152
5,419
1,027
1,050
2,077
915
898
379
1,008
1,986
529
2,136
1,527
1,218
609
939
1,208
968
928
3,264
1,058
5,699
3,414
1,407
749
1,854
2,106
1,347
1,936
5,250
1,587
7,835
4,941
2,625
1,358
538
1,067
1,605
508
986
990
757
1,030
1,278
753
803
1,067
1,205
2,121
2,394
2,949
1,582
—
—
3,239
4,683
1,575
2,191
3,111
3,151
3,979
2,860
753
803
4,535
4,956
$
885,656 $ 1,306,504
4
2
2
2
8
4
3
4
2
3
9
2
14
10
3
2
2
2
—
—
—
—
—
—
—
—
—
37,904
2017 11/28/2018
1997 11/30/2018
1999 11/30/2018
1942 11/30/2018
1979 11/30/2018
2009
12/5/2018
1977
12/7/2018
2005 12/12/2018
1958 12/12/2018
1978 12/12/2018
1967 12/12/2018
1959 12/12/2018
2009 12/12/2018
2007 12/12/2018
1955 12/12/2018
1988 12/12/2018
2007 12/14/2018
2008 12/14/2018
1972 12/19/2018
1992 12/20/2018
1990 12/20/2018
1996 12/20/2018
1982 12/20/2018
12/21/2018
12/21/2018
1989 12/27/2018
2007 12/28/2018
1,296
273
419,065 $
3,239
4,683
863,359 $
$
—
—
1,783
$
—
—
22,297
$
1,296
273
420,848 $
F-12
(a)
(b)
(c)
As of December 31, 2018, the Company had investments in 665 single-tenant real estate property locations including 652 owned properties
and 13 ground lease interests. All or a portion of 5 of the Company’s owned properties and 1 property subject to ground lease
interests are subject to leases accounted for as direct financing leases and the portions relating to the direct financing leases are excluded
from the table above. Initial costs exclude intangible lease assets totaling $65.5 million and initial costs and costs capitalized subsequent to
acquisition exclude construction in progress of $1.3 million.
The aggregate cost for federal income tax purposes is $1.4 billion.
The following is a reconciliation of carrying value for land and improvements and building and improvements for the periods presented:
Balance, beginning of period
Additions
Acquisitions
Improvements
Deductions
Provisions for impairment of real
estate
Cost of real estate sold
Balance, end of period
$
$
Year ended December 31,
2018
2017
866,762
$
396,193 $
495,265
1,689
(1,997)
(55,215)
1,306,504
$
514,354
4,666
(2,277)
(46,174)
866,762 $
Period from March 30, 2016
(commencement of operations)
to December 31, 2016
—
412,922
—
(1,199)
(15,530)
396,193
(d)
The following is a reconciliation of accumulated depreciation for the periods presented:
Balance, beginning of period
Additions
Depreciation expense
Deductions
Accumulated depreciation associated with real
estate sold
Balance, end of period
$
$
Year ended December 31,
2018
2017
Period from March 30, 2016
(Commencement of
Operations) to
December 31, 2016
15,356
$
24,854
(2,306)
37,904
$
F-13
2,903 $
14,045
(1,592)
15,356 $
—
3,008
(105)
2,903
(e)
Depreciation is calculated using the straight-line method over the estimated useful lives of the properties, which is up to 40 years for buildings
and improvements and 15 years for land improvements.
(f)
Property is collateral for non-recourse debt obligations totaling $515.1 million issued under the Company’s Master Trust Funding Program.
(g)
Amounts shown as reductions to cost capitalized subsequent to acquisition represent provisions recorded for impairment of real estate.
See accompanying report of independent registered public accounting firm.
F-14
ESSENTIAL PROPERTIES REALTY TRUST, INC. AND ESSENTIAL PROPERTIES REALTY TRUST, INC. PREDECESSOR
Schedule IV - Mortgage Loans on Real Estate
As of December 31, 2018
(Dollar amounts in thousands)
Interest rate
Final
Maturity
Date
Periodic Payment
Terms
Final
Payment
Terms
Prior Liens
Face
Amount of
Mortgages
Carrying
Amount of
Mortgages
Principal
Amount of
Loans Subject
to Delinquent
Principal or
Interest
10.00%
7/1/2021
Interest only
7.55%
5/15/2019
Interest only
5.25%
12/31/2019
Interest only
Balloon of
$2.4 million
Balloon of
$5.7 million
Balloon of
$3.5 million
None
$
2,376 $
2,376 $
—
None
5,748
5,748
None
3,500
3,500
Description
First mortgage loans:
Two convenience
store properties
located in Wisconsin
Nine medical / dental
properties located in
Illinois, Indiana,
Nebraska, Missouri,
Arkansas, Oklahoma
One home furnishings
property located in
North Carolina
Development
construction loan:
One early childhood
education property
located in Connecticut
8.00%
1/1/2058
Principal +
Interest (1)
Fully
amortizing
None
3,230
$ 14,854 $
3,230
14,854 $
(1) Required principal payments commence upon completion of construction.
F-15
—
—
—
—
The following shows changes in carrying amounts of mortgage loans receivable during the years ended December 31, 2018 and 2017 and the
period from March 30, 2016 (commencement of operations) to December 31, 2016 (in thousands):
Year ended December 31,
2018
2017
Period from
March 30, 2016
(Commencement
of Operations) to
December 31, 2016
Balance, beginning of period
Additions
New mortgage loans
Deductions
Collections of principal
Balance, end of period
$
$
— $
14,854
—
14,854 $
— $
—
—
— $
—
—
—
—
See accompanying report of independent registered public accounting firm.
F-16
ESSENTIAL PROPERTIES REALTY TRUST, INC.
ARTICLES OF AMENDMENT AND RESTATEMENT
Exhibit 3.1
FIRST :
Essential Properties Realty Trust, Inc., a Maryland corporation (the “Corporation”), desires to
amend and restate its charter as currently in effect and as hereinafter amended.
SECOND :
The following provisions are all the provisions of the charter currently in effect and as
hereinafter amended:
ARTICLE I
INCORPORATOR
at least 18 years of age, formed a corporation under the general laws of the State of Maryland on January 12, 2018.
Sharon Kroupa, whose address is c/o Venable LLP, 750 E. Pratt Street, Suite 900, Baltimore, MD 21202, being
ARTICLE II
NAME
The name of the corporation (the “Corporation”) is:
Essential Properties Realty Trust, Inc.
ARTICLE III
PURPOSE
The purposes for which the Corporation is formed are to engage in any lawful act or activity (including, without
limitation or obligation, engaging in business as a real estate investment trust under the Internal Revenue Code of 1986, as amended,
or any successor statute (the “Code”)) for which corporations may be organized under the general laws of the State of Maryland as
now or hereafter in force. For purposes of the charter of the Corporation (the “Charter”), “REIT” means a real estate investment trust
under Sections 856 through 860 of the Code or any successor provision.
ARTICLE IV
PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT
The address of the principal office of the Corporation in the State of Maryland is c/o The Corporation Trust,
Incorporated, 2405 York Road, Suite 201, Lutherville, MD 21093. The name of the resident agent of the Corporation in the State of
Maryland is The Corporation Trust, Incorporated whose post address is 2405 York Road, Suite 201, Lutherville, MD 21093. The
resident agent is a Maryland corporation.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
Section 5.1 Number of Directors . The business and affairs of the Corporation shall be managed under
the direction of the Board of Directors. The number of directors of the Corporation is one, which number may be increased or
decreased only by the Board of Directors pursuant to the Bylaws of the Corporation, as the same may be amended or restated (the
“Bylaws”), but shall never be less than the minimum number required by the Maryland General Corporation Law (the
“MGCL”). The name of the director who shall serve until the first annual meeting of stockholders and until his successor is duly
elected and qualifies is:
Any vacancy on the Board of Directors may be filled in the manner provided in the Bylaws.
Peter M. Mavoides
The Corporation elects, effective at such time as it becomes eligible under Section 3-802 of the MGCL to make
the election provided for under Section 3-804(c) of the MGCL, that, except as may be provided by the Board of Directors in setting
the terms of any class or series of stock, any and all vacancies on the Board of Directors may be filled only by the affirmative vote of
a majority of the directors remaining in office, even if the remaining directors do not constitute a quorum, and any director elected to
fill a vacancy shall serve for the remainder of the full term of the directorship in which such vacancy occurred and until a successor
is elected and qualifies.
Section 5.2 Extraordinary Actions . Except as specifically provided in Section 5.8 (relating to removal of
directors) and in Article VIII (relating to amendments to the Charter), notwithstanding any provision of law permitting or requiring
any action to be taken or approved by the affirmative vote of stockholders entitled to cast a greater number of votes, any such action
shall be effective and valid if declared advisable by the Board of Directors and taken or approved by the affirmative vote of
stockholders entitled to cast a majority of all the votes entitled to be cast on the matter.
Section 5.3 Authorization by Board of Stock Issuance . The Board of Directors may authorize the
issuance from time to time of shares of stock of the Corporation of any class or series, whether now or hereafter authorized, or
securities or rights convertible into shares of its stock of any class or series, whether now or hereafter authorized, for such
consideration as the
2
Board of Directors may deem advisable (or without consideration in the case of a stock split or stock dividend), subject to such
restrictions or limitations, if any, as may be set forth in the Charter or the Bylaws.
Section 5.4 Preemptive and Appraisal Rights . Except as may be provided by the Board of Directors in
setting the terms of classified or reclassified shares of stock pursuant to Section 6.4 or as may otherwise be provided by a contract
approved by the Board of Directors, no holder of shares of stock of the Corporation shall, as such holder, have any preemptive right
to purchase or subscribe for any additional shares of stock of the Corporation or any other security of the Corporation which it may
issue or sell. Holders of shares of stock shall not be entitled to exercise any rights of an objecting stockholder provided for under
Title 3, Subtitle 2 of the MGCL or any successor statute unless the Board of Directors upon such terms and conditions as may be
specified by the Board of Directors, determines that such rights apply, with respect to all or any shares of all or any classes or series
of stock, to one or more transactions occurring after the date of such determination in connection with which holders of such shares
would otherwise be entitled to exercise such rights.
Section 5.5 Indemnification . To the maximum extent permitted by Maryland law in effect from time to
time, the Corporation shall indemnify and, without requiring a preliminary determination of the ultimate entitlement to
indemnification, shall pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any individual who
is a present or former director or officer of the Corporation and who is made or threatened to be made a party to, or witness in, the
proceeding by reason of his or her service in that capacity and (b) any individual who, while a director or officer of the Corporation
and at the request of the Corporation, serves or has served as a director, officer, partner, member, manager, trustee, employee or
agent of another corporation, real estate investment trust, partnership, limited liability company, joint venture, trust, employee
benefit plan or other enterprise and who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or
her service in that capacity, in either case, from and against any claim or liability to which such person may become subject or which
such person may incur by reason of his or her service in such capacity. The rights to indemnification and advance of expenses
provided by the Charter shall vest immediately upon election of a director or officer. The Corporation may, with the approval of its
Board of Directors, provide such indemnification and advance for expenses to an individual who served a predecessor of the
Corporation in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of
the Corporation. The indemnification and payment or reimbursement of expenses provided in the Charter shall not be deemed
exclusive of or limit in any way other rights to which any person seeking indemnification or payment or reimbursement of expenses
may be or may become entitled under any bylaw, resolution, insurance, agreement or otherwise.
Neither the amendment nor repeal of this Section, nor the adoption or amendment of any other provision of the
Charter or the Bylaws inconsistent with this Section, shall apply to or affect in any respect the applicability of the preceding
paragraph with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.
pursuant to the direction of the Board of Directors, shall be final
Section 5.6 Determinations by Board . The determination as to any of the following matters, made by or
3
and conclusive and shall be binding upon the Corporation and every holder of shares of its stock: the amount of the net income of
the Corporation for any period and the amount of assets at any time legally available for the payment of dividends, acquisition of its
stock or the payment of other distributions on its stock; the amount of paid ‑in surplus, net assets, other surplus, annual or other cash
flow, funds from operations, adjusted funds from operations, net profit, net assets in excess of capital, undivided profits or excess of
profits over losses on sales of assets; the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any
reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall have
been created shall have been set aside, paid or discharged); any interpretation or resolution of any ambiguity with respect to any
provision of the Charter (including any of the terms, preferences, conversion or other rights, voting powers or rights, restrictions,
limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of any shares of any class or
series of stock of the Corporation) or of the Bylaws; the number of authorized or outstanding shares of stock of any class or series of
the Corporation; the value, fair value, or any sale, bid or asked price to be applied in determining the value, or fair value, of any asset
owned or held by the Corporation or of any shares of stock of the Corporation; any matter relating to the acquisition, holding and
disposition of any assets by the Corporation; any interpretation of the terms and conditions of one or more agreements with any
person, corporation, association, company, trust, partnership (limited or general) or other entity, including, without limitation, the
Stockholders Agreement (as may be amended from time to time, the “Stockholders’ Agreement”), by and among the Company,
Eldridge Industries, LLC, a Delaware limited liability company (“Eldridge”), and the other stockholders from time to time a party
thereto, and the Limited Partnership Agreement of Essential Properties, L.P., a Delaware limited partnership; the compensation of
directors, officers, employees or agents of the Corporation; or any other matter relating to the business and affairs of the Corporation
or required or permitted by applicable law, the Charter or Bylaws or otherwise to be determined by the Board of Directors.
Section 5.7 REIT Qualification . If the Corporation elects to qualify for federal income tax treatment as
a REIT, the Board of Directors shall use its reasonable best efforts to take such actions as are necessary or appropriate to preserve the
status of the Corporation as a REIT; however, if the Board of Directors determines (subject, to the extent required by the
Stockholders’ Agreement, to the consent of Eldridge provided in accordance with the Stockholders’ Agreement) that it is no longer
in the best interests of the Corporation to attempt to, or continue to, qualify as a REIT, the Board of Directors may revoke or
otherwise terminate the Corporation’s REIT election pursuant to Section 856(g) of the Code. The Board of Directors, in its sole and
absolute discretion, also may (a) determine that compliance with any restriction or limitation on stock ownership and transfers set
forth in Article VII is no longer required for REIT qualification and (b) make any other determination or take any other action
pursuant to Article VII.
Section 5.8 Removal of Directors . Subject to the rights of holders of shares of one or more classes or
series of Preferred Stock (as defined below) to elect or remove one or more directors, any director, or the entire Board of Directors,
may be removed from office at any time, but only for cause, and then only by the affirmative vote of at least two thirds of the votes
entitled to be cast generally in the election of directors; except that, to the extent required by the Stockholders’ Agreement, no
director who is an Eldridge Nominee (as defined in the Stockholders’ Agreement) may be removed as a director without the consent
of Eldridge provided in accordance with the Stockholders’ Agreement. For the purpose of this paragraph, “cause” shall mean, with
4
respect to any particular director, conviction of a felony or a final judgment of a court of competent jurisdiction holding that such
director caused demonstrable, material harm to the Corporation through bad faith or active and deliberate dishonesty.
Section 5.9 Corporate Opportunities . (a) If any director or officer of the Corporation who is also an
officer, employee, agent, Affiliate or designee of Eldridge or any of Eldridge’s Affiliates (each, an “Eldridge Designee”), acquires
knowledge of a potential business opportunity, the Corporation renounces, on its behalf and on behalf of its subsidiaries, any
potential interest or expectation in, or right to be offered or to participate in, such business opportunity, unless it is a Retained
Opportunity (as defined in Section 5.9(b) below). Accordingly:
(i)Except for Retained Opportunities, t o the maximum extent permitted by Maryland law, Eldridge, its Affiliates,
each of their respective officers, directors, employees, agents, attorneys, accountants, actuaries, consultants or financial advisors or
any other Person (as such term is defined in Article VII) associated with or acting on behalf of Eldridge or its Affiliates (collectively,
the “Representatives”), and any Eldridge Designee, has the right to, and has no duty not to (x) directly or indirectly engage in the
same or similar business activities or lines of business as the Corporation, including those deemed to be competing with the
Corporation, or (y) directly or indirectly do business with any client, customer or supplier of the Corporation.
(ii)In the event that Eldridge, any Representative of Eldridge or any Eldridge Designee acquires knowledge of a
potential business opportunity (other than a Retained Opportunity), Eldridge, such Representative or such Eldridge Designee shall, to
the maximum extent permitted by Maryland law, have no duty to communicate or present such opportunity to the Corporation or
any of its Affiliates, and shall not be liable to the Corporation or any of its Affiliates, direct or indirect subsidiaries, stockholders or
other equity holders for breach of any duty by reason of the fact that Eldridge, such Representative or such Eldridge Designee,
directly or indirectly, pursues or acquires such opportunity for itself, directs such opportunity to another Person, or does not present
such opportunity to the Corporation or any of its Affiliates.
(iii) Except for Retained Opportunities, (A) no Eldridge Designee is required to present, communicate or offer any
business opportunity to the Corporation or any of its subsidiaries and (B) each Eldridge Designee, on his or her own behalf or on
behalf of Eldridge or its Affiliates, shall have the right to hold and exploit any business opportunity, or to direct, recommend, offer,
sell, assign or otherwise transfer such business opportunity to any person or entity other than the Corporation and its subsidiaries.
(iv) The taking by an Eldridge Designee for himself or herself, or the offering or other transfer to another person or
entity, of any potential business opportunity, other than a Retained Opportunity, whether pursuant to the Charter or otherwise, shall
not constitute or be construed or interpreted as (A) an act or omission of the director committed in bad faith or as the result of active
or deliberate dishonesty or (B) receipt by the director of an improper benefit or profit in money, property, services or otherwise.
For purposes of this Section 5.9, the term “Retained Opportunity” shall mean any business
opportunity of which any Eldridge Designee or other Representative of Eldridge (i) becomes aware as a direct result of his, her or its
capacity as a director or officer of
(b)
5
the Corporation and (i)(A) which the Corporation is financially able to undertake, (B) which the Corporation is not prohibited by
contract or applicable law from pursuing or undertaking, (C) which, from its nature, is in the line of the Corporation’s business, (D)
which is of practical advantage to the Corporation and (E) in which the Corporation has an interest or a reasonable expectancy.
(c) For purposes of this Section 5.9, the term “Affiliate” shall, mean with respect to any specified Person,
(i) any Person that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control
with, such specified Person or (ii) in the event that the specified Person is a natural Person, a member of the immediate family of
such Person; provided that the Corporation and its direct and indirect subsidiaries shall not be deemed to be Affiliates of Eldridge.
As used in this definition, the term “control” means the possession, directly or indirectly, of the power to direct or cause the direction
of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.
(d) The Corporation shall have the power, by resolution of the Board of Directors, to renounce any
interest or expectancy of the Corporation in, or in being offered an opportunity to participate in, business opportunities or classes or
categories of business opportunities that are presented to the Corporation or developed by or presented to one or more directors or
officers of the Corporation.
Section 5.10 Subtitle 8 . In accordance with Section 3-802(c) of the MGCL, the Corporation is prohibited
from electing to be subject to the provisions of Sections 3-803, 3-804(a)-(b) or 3-805 of the MGCL, unless such election is approved
by the affirmative vote of a majority of the votes cast on the matter by stockholders entitled to vote generally in the election of
directors.
ARTICLE VI
STOCK
Section 6.1 Authorized Shares . The Corporation has authority to issue 650,000,000 shares of stock,
consisting of 500,000,000 shares of Common Stock, $0.01 par value per share (“Common Stock”), and 150,000,000 shares of
Preferred Stock, $0.01 par value per share (“Preferred Stock”). The aggregate par value of all authorized shares of stock having par
value is $6,500,000. If shares of one class of stock are classified or reclassified into shares of another class of stock pursuant to
Section 6.2, 6.3 or 6.4 of this Article VI, the number of authorized shares of the former class shall be automatically decreased and the
number of shares of the latter class shall be automatically increased, in each case by the number of shares so classified or
reclassified, so that the aggregate number of shares of stock of all classes that the Corporation has authority to issue shall not be more
than the total number of shares of stock set forth in the first sentence of this paragraph. The Board of Directors, with the approval of
a majority of the entire Board and without any action by the stockholders of the Corporation, may amend the Charter from time to
time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that the
Corporation has authority to issue.
specified in the Charter, each share of Common Stock shall entitle the holder
Section 6.2 Common Stock . Subject to the provisions of Article VII and except as may otherwise be
6
thereof to one vote on each matter upon which holders of shares of Common Stock are entitled to vote. The Board of Directors may
reclassify any unissued shares of Common Stock from time to time into one or more classes or series of stock.
Section 6.3 Preferred Stock . The Board of Directors may classify any unissued shares of Preferred
Stock and reclassify any previously classified but unissued shares of Preferred Stock of any class or series from time to time, into
one or more classes or series of stock.
Section 6.4 Classified or Reclassified Shares . Prior to the issuance of classified or reclassified shares of
any class or series of stock, the Board of Directors by resolution shall: (a) designate that class or series to distinguish it from all
other classes and series of stock of the Corporation; (b) specify the number of shares to be included in the class or series; (c) set or
change, subject to the provisions of Article VII and subject to the express terms of any class or series of stock of the Corporation
outstanding at the time, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms and conditions of redemption for each class or series; and (d) cause the Corporation to file
articles supplementary with the State Department of Assessments and Taxation of Maryland (the “SDAT”). Any of the terms of any
class or series of stock set or changed pursuant to clause (c) of this Section 6.4 may be made dependent upon facts or events
ascertainable outside the Charter (including determinations by the Board of Directors or other facts or events within the control of the
Corporation) and may vary among holders thereof, provided that the manner in which such facts, events or variations shall operate
upon the terms of such class or series of stock is clearly and expressly set forth in the articles supplementary or other Charter
document.
Section 6.5 Action by Stockholders . Any action required or permitted to be taken at any meeting of the
holders of Common Stock entitled to vote generally in the election of directors may be taken without a meeting by consent, in
writing or by electronic transmission, in any manner and by any vote permitted by the MGCL and set forth in the Bylaws.
Corporation are subject to the provisions of the Charter and the Bylaws.
Section 6.6 Charter and Bylaws . The rights of all stockholders and the terms of all stock of the
ARTICLE VII
RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES
meanings:
Section 7.1 Definitions . For the purpose of this Article VII, the following terms shall have the following
control with such Person.
“ Affiliate ” shall mean, with respect to any Person, another Person controlled by, controlling or under common
Aggregate Stock Ownership Limit . The term “Aggregate Stock Ownership Limit” shall mean 7.5% in value of
the aggregate of the outstanding shares of Capital Stock, or such other percentage determined by the Board of Directors in
accordance with Section 7.2.8 of the Charter.
7
Beneficial Ownership . The term “Beneficial Ownership” shall mean ownership of Capital Stock by a Person,
whether the interest in the shares of Capital Stock is held directly or indirectly (including by a nominee), and shall include interests
that would be treated as owned through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the
Code. The terms “Beneficial Owner,” “Beneficially Owns” and “Beneficially Owned” shall have the correlative meanings.
Business Day . The term “Business Day” shall mean any day, other than a Saturday or Sunday, that is neither a
legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive
order to close.
without limitation, Common Stock and Preferred Stock.
Capital Stock . The term “Capital Stock” shall mean all classes or series of stock of the Corporation, including,
Charitable Beneficiary . The term “Charitable Beneficiary” shall mean one or more beneficiaries of the Trust as
determined pursuant to Section 7.3.6, provided that each such organization must be described in Section 501(c)(3) of the Code and
contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the
Code.
Common Stock Ownership Limit . The term “Common Stock Ownership Limit” shall mean 7.5% (in value or
in number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of Common Stock of the Corporation,
or such other percentage determined by the Board of Directors in accordance with Section 7.2.8 of the Charter.
Constructive Ownership . The term “Constructive Ownership” shall mean ownership of Capital Stock by a
Person, whether the interest in the shares of Capital Stock is held directly or indirectly (including by a nominee), and shall include
interests that would be treated as owned through the application of Section 318(a) of the Code, as modified by Section 856(d)(5) of
the Code. The terms “Constructive Owner,” “Constructively Owns” and “Constructively Owned” shall have the correlative
meanings.
Designated Investment Entity . The term “Designated Investment Entity” shall mean (i) a pension trust that
qualifies for look-through treatment under Section 856(h) of the Code, (ii) an entity that qualifies as a regulated investment company
under Section 851 of the Code or (iii) a Qualified Investment Manager if, in each case no Beneficial Owner of such entity (or
Beneficial Owner of the shares of Capital Stock held by such entity) would Beneficially Own or Constructively Own shares of
Capital Stock in excess of the Common Stock Ownership Limit or the Aggregate Stock Ownership Limit, as applicable, if such
Beneficial Owner owned directly the shares of Capital Stock that are held by such Designated Investment Entity and that are
Beneficially Owned by such Beneficial Owner.
Designated Investment Entity Limit . The term “Designated Investment Entity Limit” shall mean (i) with respect
to shares of Common Stock, 9.8% (in value or in number of shares, whichever is more restrictive) of the outstanding shares of
Common Stock of the Corporation, or such other percentage determined by the Board of Directors in accordance with Section 7.2.8
of the Charter, and (ii) with respect to shares of Capital Stock, 9.8% (in value or in
8
number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of Capital Stock, or such other percentage
determined by the Board of Directors in accordance with Section 7.2.8 of the Charter .
Excepted Holder Limit is created by the Charter or by the Board of Directors pursuant to Section 7.2.7.
Excepted Holder . The term “Excepted Holder” shall mean a stockholder of the Corporation for whom an
Excepted Holder Limit . The term “Excepted Holder Limit” shall mean ( provided that the affected Excepted
Holder agrees to comply with the requirements established by the Board of Directors pursuant to Section 7.2.7 and subject to any
increase pursuant to Section 7.2.7(a) or decrease pursuant to 7.2.7(d)) the percentage limit established by the Board of Directors
pursuant to Section 7.2.7.
Stock pursuant to the initial underwritten public offering of the Corporation.
Initial Date . The term “Initial Date” shall mean the date of the closing of the issuance of shares of Common
Market Price . The term “Market Price” on any date shall mean, with respect to any class or series of
outstanding shares of Capital Stock, the Closing Price for such Capital Stock on such date. The “Closing Price” on any date shall
mean the last sale price for such Capital Stock, regular way, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices, regular way, for such Capital Stock, in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to trading on the NYSE or, if such Capital Stock is not listed or admitted
to trading on the NYSE, as reported on the principal consolidated transaction reporting system with respect to securities listed on the
principal national securities exchange on which such Capital Stock is listed or admitted to trading or, if such Capital Stock is not
listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid
and low asked prices in the over-the-counter market, as reported by the principal other automated quotation system that may then be
in use or, if such Capital Stock is not quoted by any such organization, the average of the closing bid and asked prices as furnished
by a professional market maker making a market in such Capital Stock selected by the Board of Directors or, in the event that no
trading price is available for such Capital Stock, the fair market value of the Capital Stock, as determined by the Board of Directors.
NYSE . The term “NYSE” shall mean the New York Stock Exchange.
Person . The term “Person” shall mean an individual, corporation, partnership, limited liability company, estate,
trust (including a trust qualified under Sections 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to
be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of
Section 509(a) of the Code, joint stock company or other entity and also includes a group as that term is used for purposes of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and a group to which an Excepted Holder Limit
applies.
9
Prohibited Owner . The term “Prohibited Owner” shall mean, with respect to any purported Transfer, any
Person who, but for the provisions of this Article VII, would Beneficially Own or Constructively Own shares of Capital Stock in
violation of Section 7.2.1, and if appropriate in the context, shall also mean any Person who would have been the record owner of the
shares that the Prohibited Owner would have so owned.
Qualified Investment Manager . The term “Qualified Investment Manager” shall mean an entity (i) who for
compensation engages in the business of advising others as to the value of securities or as to the advisability of investing in,
purchasing, or selling securities; (ii) who purchases securities in the ordinary course of its business and not with the purpose or effect
of changing or influencing control of the Corporation, nor in connection with or as a participant in any transaction having such
purpose or effect, including any transaction subject to Rule 13d-3(b) under the Exchange Act; and (iii) who has or shares voting
power and investment power within the meaning of Rule 13d-3(a) under the Exchange Act. A Qualified Investment Manager shall be
deemed to Beneficially Own all shares of Common Stock Beneficially Owned by each of its Affiliates, after application of the
beneficial ownership rules under Section 13(d)(3) of the Exchange Act; provided however , that such Affiliate meets the
requirements set forth in the preceding clause (ii).
Restriction Termination Date . The term “Restriction Termination Date” shall mean the first day after the Initial
Date on which the Board of Directors determines pursuant to Section 5.7 of the Charter that it is no longer in the best interests of the
Corporation to attempt to, or continue to, qualify as a REIT or that compliance with the applicable restriction or limitation on
Beneficial Ownership, Constructive Ownership and Transfers of shares of Capital Stock set forth herein is no longer required in
order for the Corporation to qualify as a REIT.
Transfer . The term “Transfer” shall mean any issuance, sale, transfer, gift, assignment, devise or other
disposition, as well as any other event that causes any Person to acquire or change its Beneficial Ownership or Constructive
Ownership, or any agreement to take any such action or cause any such event, of Capital Stock or the right to vote (other than solely
pursuant to a revocable proxy) or receive dividends on Capital Stock, including (a) the granting or exercise of any option (or any
disposition of any option), (b) any disposition of any securities or rights convertible into or exchangeable for Capital Stock or any
interest in Capital Stock or any exercise of any such conversion or exchange right and (c) Transfers of interests in other entities that
result in changes in Beneficial Ownership or Constructive Ownership of Capital Stock; in each case, whether voluntary or
involuntary, whether owned of record, Constructively Owned or Beneficially Owned and whether by operation of law or
otherwise. The terms “Transferring” and “Transferred” shall have the correlative meanings.
Trust . The term “Trust” shall mean any trust provided for in Section 7.3.1.
that is appointed by the Corporation to serve as trustee of the Trust.
Trustee . The term “Trustee” shall mean the Person unaffiliated with the Corporation and a Prohibited Owner
Section 7.2 Capital Stock .
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Restriction Termination Date, but subject to Section 7.4:
Section 7.2.1 Ownership Limitations . During the period commencing on the Initial Date and prior to the
(a) Basic Restrictions . Except as provided in Section 7.2.7,
(i)(1) No Person, other than an Excepted Holder or a Designated Investment Entity, shall Beneficially Own or
Constructively Own shares of Capital Stock in excess of the Aggregate Stock Ownership Limit, (2) no Person, other than an
Excepted Holder or a Designated Investment Entity, shall Beneficially Own or Constructively Own shares of Common Stock in
excess of the Common Stock Ownership Limit, (3) no Excepted Holder shall Beneficially Own or Constructively Own shares of
Capital Stock in excess of the Excepted Holder Limit for such Excepted Holder and (4) no Designated Investment Entity shall
Beneficially Own or Constructively Own shares of Capital Stock in excess of the Designated Investment Entity Limit .
(ii)No Person shall Beneficially Own or Constructively Own shares of Capital Stock to the extent that such
Beneficial Ownership or Constructive Ownership of Capital Stock would result in the Corporation being “closely held” within the
meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable
year), or otherwise failing to qualify as a REIT (including, without limitation, Beneficial Ownership or Constructive Ownership that
would result in the Corporation owning (actually or Constructively) an interest in a tenant that is described in Section 856(d)(2)(B) of
the Code if the income derived by the Corporation from such tenant would cause the Corporation to fail to satisfy any of the gross
income requirements of Section 856(c) of the Code).
(iii)Any Transfer of shares of Capital Stock that, if effective, would result in the Capital Stock being beneficially
owned by less than 100 Persons (determined under the principles of Section 856(a)(5) of the Code) shall be void ab initio , and the
intended transferee shall acquire no rights in such shares of Capital Stock.
Person Beneficially Owning or Constructively Owning shares of Capital Stock in violation of Section 7.2.1(a)(i) or (ii),
(b) Transfer in Trust . If any Transfer of shares of Capital Stock occurs which, if effective, would result in any
(i)then that number of shares of the Capital Stock the Beneficial Ownership or Constructive Ownership of which
otherwise would cause such Person to violate Section 7.2.1(a)(i) or (ii) (rounded up to the nearest whole share) shall be automatically
transferred to a Trust for the benefit of a Charitable Beneficiary, as described in Section 7.3, effective as of the close of business on
the Business Day prior to the date of such Transfer, and such Person shall acquire no rights in such shares; or
(ii)if the transfer to the Trust described in clause (i) of this sentence would not be effective for any reason to
prevent the violation of Section 7.2.1(a)(i) or (ii), then the Transfer of that number of shares of Capital Stock that otherwise would
cause any Person to violate Section 7.2.1(a)(i) or (ii) shall be void ab initio , and the intended transferee shall acquire no rights in
such shares of Capital Stock.
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(iii) To the extent that, upon a transfer of shares of Capital Stock pursuant to this Section 7.2.1(b), a
violation of any provision of this Article VII would nonetheless be continuing (for example where the ownership of shares of Capital
Stock by a single Trust would violate the 100 stockholder requirement applicable to REITs), then shares of Capital Stock shall be
transferred to that number of Trusts, each having a distinct Trustee and a Charitable Beneficiary or Charitable Beneficiaries that are
distinct from those of each other Trust, such that there is no violation of any provision of this Article VII.
Section 7.2.2 Remedies for Breach . If the Board of Directors shall at any time determine that a Transfer or other
event has taken place that results in a violation of Section 7.2.1 or that a Person intends to acquire or has attempted to acquire
Beneficial Ownership or Constructive Ownership of any shares of Capital Stock in violation of Section 7.2.1 (whether or not such
violation is intended), the Board of Directors may take such action as it deems advisable to refuse to give effect to or to prevent such
Transfer or other event, including, without limitation, causing the Corporation to redeem shares, refusing to give effect to such
Transfer on the books of the Corporation or instituting proceedings to enjoin such Transfer or other event; provided , however , that
any Transfer or attempted Transfer or other event in violation of Section 7.2.1 shall automatically result in the transfer to the Trust
described above, and, where applicable, such Transfer (or other event) shall be void ab initio as provided above irrespective of any
action (or non-action) by the Board of Directors.
Section 7.2.3 Notice of Restricted Transfer . Any Person who acquires or attempts or intends to acquire Beneficial
Ownership or Constructive Ownership of shares of Capital Stock that will or may violate Section 7.2.1(a) or any Person who would
have owned shares of Capital Stock that resulted in a transfer to the Trust pursuant to the provisions of Section 7.2.1(b) shall
immediately give written notice to the Corporation of such event or, in the case of such a proposed or attempted transaction, give at
least 15 days prior written notice, and shall provide to the Corporation such other information as the Corporation may request in
order to determine the effect, if any, of such Transfer on the Corporation’s status as a REIT.
Termination Date:
Section 7.2.4 Owners Required To Provide Information . From the Initial Date and prior to the Restriction
(a)every owner of five percent or more (or such lower percentage as required by the Code or the Treasury
Regulations promulgated thereunder) of the outstanding shares of Capital Stock, within 30 days after the end of each taxable year,
shall give written notice to the Corporation stating the name and address of such owner, the number of shares of Capital Stock of
each class or series Beneficially Owned and a description of the manner in which such shares are held. Each such owner shall
promptly provide to the Corporation in writing such additional information as the Corporation may request in order to determine the
effect, if any, of such Beneficial Ownership on the Corporation’s status as a REIT and to ensure compliance with the Aggregate
Stock Ownership Limit, the Common Stock Ownership Limit, any Excepted Holder Limit and the Designated Investment Entity
Limit; and
stockholder of record) who is holding Capital Stock for a Beneficial Owner or Constructive Owner shall promptly provide to the
(b)each Person who is a Beneficial Owner or Constructive Owner of Capital Stock and each Person (including the
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Corporation in writing such information as the Corporation may request, in order to determine the Corporation’s status as a REIT
and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance.
Section 7.2.5 Remedies Not Limited . Subject to Section 5.7 of the Charter, nothing contained in this Section 7.2
shall limit the authority of the Board of Directors to take such other action as it deems necessary or advisable to protect the
Corporation in preserving the Corporation’s status as a REIT.
Section 7.2.6 Ambiguity . In the case of an ambiguity in the application of any of the provisions of this Section
7.2, Section 7.3 or any definition contained in Section 7.1, the Board of Directors may determine the application of the provisions of
this Section 7.2 or Section 7.3 or any such definition with respect to any situation based on the facts known to it. In the event
Section 7.2 or Section 7.3 requires an action by the Board of Directors and the Charter fails to provide specific guidance with respect
to such action, the Board of Directors may determine the action to be taken so long as such action is not contrary to the provisions of
Sections 7.1, 7.2 or 7.3. Absent a decision to the contrary by the Board of Directors, if a Person would have (but for the remedies set
forth in Section 7.2.2) acquired Beneficial Ownership or Constructive Ownership of Capital Stock in violation of Section 7.2.1, such
remedies (as applicable) shall apply first to the shares of Capital Stock which, but for such remedies, would have been Beneficially
Owned or Constructively Owned (but not actually owned) by such Person, pro rata among the Persons who actually own such shares
of Capital Stock based upon the relative number of the shares of Capital Stock held by each such Person.
Section 7.2.7 Exceptions .
(a)Subject to Section 7.2.1(a)(ii), upon receipt of such representations and agreements as the Board of Directors
may require, the Board of Directors, may exempt (prospectively or retroactively) a Person from the Aggregate Stock Ownership
Limit, the Common Stock Ownership Limit and/or the Designated Investment Entity Limit, as the case may be, and may establish or
increase an Excepted Holder Limit for such Person.
(b)Prior to granting any exception or creating or increasing an Excepted Holder Limit pursuant to Section 7.2.7(a),
the Board of Directors may require a ruling from the Internal Revenue Service, or an opinion of counsel, in either case in form and
substance satisfactory to the Board of Directors, as it may deem necessary or advisable in order to determine or ensure the
Corporation’s status as a REIT. Notwithstanding the receipt of any ruling or opinion, the Board of Directors may impose such
conditions or restrictions as it deems appropriate in connection with granting such exception.
(c)Subject to Section 7.2.1(a)(ii), an underwriter, placement agent or initial purchaser which participates in a public
offering or a private placement of Capital Stock (or securities convertible into or exchangeable for Capital Stock) may Beneficially
Own or Constructively Own shares of Capital Stock (or securities convertible into or exchangeable for Capital Stock) in excess of
the Aggregate Stock Ownership Limit, the Common Stock Ownership Limit, the Designated Investment Entity Limit, or any of such
limits, but only to the extent necessary to facilitate such public offering or private placement.
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(d)
The Board of Directors may only revoke an exemption previously granted to an Excepted Holder or
reduce an Excepted Holder Limit for an Excepted Holder: (1) with the written consent of such Excepted Holder at any time, or (2)
pursuant to the terms and conditions of the agreements and undertakings entered into with such Excepted Holder in connection with
the establishment of the Excepted Holder Limit for that Excepted Holder. No Excepted Holder Limit shall be reduced to a
percentage that is less than the Common Stock Ownership Limit.
Section 7.2.8 Increase or Decrease in Common Stock Ownership Limit, the Aggregate Stock Ownership Limit or
the Designated Investment Entity Limit . Subject to Section 7.2.1(a)(ii) and this Section 7.2.8, the Board of Directors may from time
to time increase or decrease the Common Stock Ownership Limit, the Aggregate Stock Ownership Limit or the Designated
Investment Entity Limit for one or more Persons and increase or decrease the Common Stock Ownership Limit, the Aggregate Stock
Ownership Limit or the Designated Investment Entity Limit for all other Persons. No decreased Common Stock Ownership Limit,
Aggregate Stock Ownership Limit or Designated Investment Entity Limit will be effective for any Person whose percentage of
ownership of Capital Stock is in excess of such decreased Common Stock Ownership Limit, Aggregate Stock Ownership Limit or
Designated Investment Entity Limit, as applicable, until such time as such Person’s percentage of ownership of Capital Stock equals
or falls below the decreased Common Stock Ownership Limit, Aggregate Stock Ownership Limit or Designated Investment Entity
Limit, as applicable; provided , however , any further acquisition of Capital Stock by any such Person (other than a Person for whom
an exemption has been granted pursuant to Section 7.2.7(a) or an Excepted Holder) in excess of the Capital Stock owned by such
person on the date the decreased Common Stock Ownership Limit, Aggregate Stock Ownership Limit or Designated Investment
Entity Limit, as applicable, became effective will be in violation of the Common Stock Ownership Limit, the Aggregate Stock
Ownership Limit or the Designated Investment Entity Limit, as applicable. No increase to the Common Stock Ownership Limit, the
Aggregate Stock Ownership Limit or the Designated Investment Entity Limit may be approved if the new Common Stock
Ownership Limit, Aggregate Stock Ownership Limit and/or the Designated Investment Entity Limit would allow five or fewer
Persons to Beneficially Own, in the aggregate more than 49.9% in value of the outstanding Capital Stock.
following legend:
Section 7.2.9 Legend . Each certificate for shares of Capital Stock, if certificated, shall bear substantially the
The shares represented by this certificate are subject to restrictions on
Beneficial Ownership and Constructive Ownership and Transfer for the
purpose, among others, of the Corporation’s maintenance of its status as a
Real Estate Investment Trust under the Internal Revenue Code of 1986, as
amended (the “Code”). Subject to certain further restrictions and except as
(i) no Person may
expressly provided in the Corporation’s Charter,
Beneficially Own or Constructively Own shares of the Corporation’s
Common Stock in excess of the Common Stock Ownership Limit unless such
Person is (a) an Excepted Holder (in which case the Excepted Holder Limit
shall be applicable) or (b) a Designated Investment Entity (in which case the
Designated Investment Entity Limit shall be applicable);
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(ii) no Person may Beneficially Own or Constructively Own shares of Capital
Stock of the Corporation in excess of the Aggregate Stock Ownership Limit,
unless such Person is (a) an Excepted Holder (in which case the Excepted
Holder Limit shall be applicable) or (b) a Designated Investment Entity (in
which case the Designated Investment Entity Limit shall be applicable); (iii)
no Person may Beneficially Own or Constructively Own Capital Stock that
would result in the Corporation being “closely held” under Section 856(h) of
the Code or otherwise cause the Corporation to fail to qualify as a REIT; and
(iv) no Person may Transfer shares of Capital Stock if such Transfer would
result in the Capital Stock of the Corporation being owned by fewer than 100
Persons. Any Person who Beneficially Owns or Constructively Owns or
attempts or intends to Beneficially Own or Constructively Own shares of
Capital Stock which cause or will cause a Person to Beneficially Own or
Constructively Own shares of Capital Stock in excess or in violation of the
above limitations must immediately notify the Corporation. If any of the
restrictions on transfer or ownership provided in (i), (ii) or (iii) above are
violated, the shares of Capital Stock in excess or in violation of the above
limitations will be automatically transferred to a Trustee of a Trust for the
benefit of one or more Charitable Beneficiaries. In addition, the Corporation
may redeem shares upon the terms and conditions specified by the Board of
Directors in its sole and absolute discretion if the Board of Directors
determines that ownership or a Transfer or other event may violate the
restrictions described above. Furthermore, if the ownership restrictions
provided in (iv) above would be violated or upon the occurrence of certain
events, attempted Transfers in violation of the restrictions described above
may be void ab initio . All capitalized terms in this legend have the meanings
defined in the Charter of the Corporation, as the same may be amended from
time to time, a copy of which, including the restrictions on transfer and
ownership, will be furnished to each holder of shares of Capital Stock of the
Corporation on request and without charge. Requests for such a copy may be
directed to the Secretary of the Corporation at its Principal Office.
Instead of the foregoing legend, the certificate or any notice in lieu of a certificate may state that the Corporation
will furnish a full statement about certain restrictions on ownership and transfer of the shares to a stockholder on request and without
charge.
Section 7.3 Transfer of Capital Stock in Trust .
Section 7.3.1 Ownership in Trust . Upon any purported Transfer or other event described in Section 7.2.1(b) that
would result in a transfer of shares of Capital Stock to a Trust, such shares of Capital Stock shall be deemed to have been transferred
to the Trustee as trustee of a Trust for the exclusive benefit of one or more Charitable Beneficiaries. Such transfer
15
to the Trustee shall be deemed to be effective as of the close of business on the Business Day prior to the purported Transfer or other
event that results in the transfer to the Trust pursuant to Section 7.2.1(b). The Trustee shall be appointed by the Corporation and
shall be a Person unaffiliated with the Corporation and any Prohibited Owner. Each Charitable Beneficiary shall be designated by
the Corporation as provided in Section 7.3.6.
Section 7.3.2 Status of Shares Held by the Trustee . Shares of Capital Stock held by the Trustee shall be issued and
outstanding shares of Capital Stock of the Corporation. The Prohibited Owner shall have no rights in the shares held by the
Trustee. The Prohibited Owner shall not benefit economically from ownership of any shares held in trust by the Trustee, shall have
no rights to dividends or other distributions and shall not possess any rights to vote or other rights attributable to the shares held in
the Trust.
Section 7.3.3 Dividend and Voting Rights . The Trustee shall have all voting rights and rights to dividends or other
distributions with respect to shares of Capital Stock held in the Trust, which rights shall be exercised for the exclusive benefit of the
Charitable Beneficiary. Any dividend or other distribution paid prior to the discovery by the Corporation that the shares of Capital
Stock have been transferred to the Trustee shall be paid by the recipient of such dividend or other distribution to the Trustee upon
demand and any dividend or other distribution authorized but unpaid shall be paid when due to the Trustee. Any dividend or other
distribution so paid to the Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no voting
rights with respect to shares of Capital Stock held in the Trust and, subject to Maryland law, effective as of the date that the shares of
Capital Stock have been transferred to the Trust, the Trustee shall have the authority (at the Trustee’s sole and absolute discretion) (i)
to rescind as void any vote cast by a Prohibited Owner prior to the discovery by the Corporation that the shares of Capital Stock have
been transferred to the Trust and (ii) to recast such vote; provided , however , that if the Corporation has already taken irreversible
corporate action, then the Trustee shall not have the authority to rescind and recast such vote. Notwithstanding the provisions of this
Article VII, until the Corporation has received notification that shares of Capital Stock have been transferred into a Trust, the
Corporation shall be entitled to rely on its stock transfer and other stockholder records for purposes of preparing lists of stockholders
entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes and determining the
other rights of stockholders.
Section 7.3.4 Sale of Shares by Trustee . Within 20 days of receiving notice from the Corporation that shares of
Capital Stock have been transferred to the Trust, the Trustee of the Trust shall sell the shares held in the Trust to a person, designated
by the Trustee, whose ownership of the shares will not violate the ownership limitations set forth in Section 7.2.1(a). Upon such
sale, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of
the sale to the Prohibited Owner and to the Charitable Beneficiary as provided in this Section 7.3.4. The Prohibited Owner shall
receive the lesser of (1) the price paid by the Prohibited Owner for the shares or, if the Prohibited Owner did not give value for the
shares in connection with the event causing the shares to be held in the Trust ( e.g.
, in the case of a gift, devise or other such
transaction), the Market Price of the shares on the day of the event causing the shares to be held in the Trust and (2) the price per
share received by the Trustee (net of any commissions and other expenses of sale) from the sale or other disposition of the shares
held in the Trust. The Trustee must reduce the amount payable to the
16
Prohibited Owner by the amount of dividends and distributions which have been paid to the Prohibited Owner and are owed by the
Prohibited Owner to the Trustee pursuant to Section 7.3.3 of this Article VII. Any net sales proceeds in excess of the amount
payable to the Prohibited Owner and any other amounts held by the Trustee with respect to such shares shall be immediately paid to
the Charitable Beneficiary. If, prior to the discovery by the Corporation that shares of Capital Stock have been transferred to the
Trustee, such shares are sold by a Prohibited Owner, then (i) such shares shall be deemed to have been sold on behalf of the Trust
and (ii) to the extent that the Prohibited Owner received an amount for such shares that exceeds the amount that such Prohibited
Owner was entitled to receive pursuant to this Section 7.3.4, such excess shall be paid to the Trustee upon demand.
Section 7.3.5 Purchase Right in Stock Transferred to the Trustee . Shares of Capital Stock transferred to the
Trustee shall be deemed to have been offered for sale to the Corporation, or its designee, at a price per share equal to the lesser of (i)
the price per share in the transaction that resulted in such transfer to the Trust (or, in the case of a devise or gift, the Market Price at
the time of such devise or gift) and (ii) the Market Price on the date the Corporation, or its designee, accepts such offer. The
Corporation must reduce the amount payable to the Trustee by the amount of dividends and distributions which have been paid to the
Prohibited Owner and are owed by the Prohibited Owner to the Trustee pursuant to Section 7.3.3 of this Article VII. The
Corporation may pay the amount of such reduction to the Trustee for the benefit of the Charitable Beneficiary. The Corporation
shall have the right to accept such offer until the Trustee has sold the shares held in the Trust pursuant to Section 7.3.4. Upon such a
sale to the Corporation, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the
net proceeds of the sale to the Prohibited Owner and any dividends or other amounts held by the Trustee with respect to the shares to
the Charitable Beneficiary.
Section 7.3.6 Designation of Charitable Beneficiaries . By written notice to the Trustee, the Corporation shall
designate one or more nonprofit organizations to be the Charitable Beneficiary or Charitable Beneficiaries of the interest in the Trust
such that the shares of Capital Stock held in the Trust would not violate the restrictions set forth in Section 7.2.1(a) in the hands of
such Charitable Beneficiary or Charitable Beneficiaries. Neither the failure of the Corporation to make such designation nor the
failure of the Corporation to appoint the Trustee before the automatic transfer provided in Section 7.2.1(b) shall make such transfer
ineffective, provided that the Corporation thereafter makes such designation and appointment.
Section 7.4 NYSE Transactions . Nothing in this Article VII shall preclude the settlement of any transaction
entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation
system. The fact that the settlement of any transaction occurs shall not negate the effect of any other provision of this Article VII and
any transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this Article VII.
relief, to enforce the provisions of this Article VII.
Section 7.5 Enforcement . The Corporation is authorized specifically to seek equitable relief, including injunctive
any right hereunder shall operate as a waiver of any right of
Section 7.6 Non-Waiver . No delay or failure on the part of the Corporation or the Board of Directors in exercising
17
the Corporation or the Board of Directors, as the case may be, except to the extent specifically waived in writing.
ARTICLE VIII
AMENDMENTS
The Corporation reserves the right from time to time to make any amendment to the Charter, now or hereafter
authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in the Charter, of any shares
of outstanding stock. All rights and powers conferred by the Charter on stockholders, directors and officers are granted subject to
this reservation. Except as set forth in this Article VIII and except for those amendments permitted to be made without stockholder
approval under Maryland law or by specific provision in the Charter, any amendment to the Charter shall be valid only if declared
advisable by the Board of Directors and approved by the affirmative vote of stockholders entitled to cast a majority of all the votes
entitled to be cast on the matter. Any amendment to Section 5.9 of the Charter or to this sentence of the Charter shall be valid only if
declared advisable by the Board of Directors and approved by the affirmative vote of stockholders entitled to cast two-thirds of all
the votes entitled to be cast on the matter. Further, to the extent required by the Stockholders’ Agreement, no amendment to Section
5.7, Section 5.8 or this sentence of the Charter shall be effective without the consent of Eldridge provided in accordance with the
Stockholders’ Agreement.
ARTICLE IX
LIMITATION OF LIABILITY
To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of directors
and officers of a corporation, no present or former director or officer of the Corporation shall be liable to the Corporation or its
stockholders for money damages. Neither the amendment nor repeal of this Article IX, nor the adoption or amendment of any other
provision of the Charter or Bylaws inconsistent with this Article IX, shall apply to or affect in any respect the applicability of the
preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.
THIRD : The amendment to and restatement of the charter as hereinabove set forth have been duly advised by the Board
of Directors and approved by the stockholders of the Corporation as required by law.
FOURTH : The current address of the principal office of the Corporation is as set forth in Article IV of the foregoing
amendment and restatement of the charter.
FIFTH : The name and address of the Corporation’s current resident agent are as set forth in Article IV of the foregoing
amendment and restatement of the charter.
SIXTH : The number of directors of the Corporation and the names of those currently in office are as set forth in Article V
of the foregoing amendment and restatement of the charter.
18
SEVENTH :
The total number of shares of stock which the Corporation had authority to issue immediately prior to
this amendment and restatement was 100,000,000, consisting of 100,000,000 shares of Common Stock, $0.01 par value per
share. The aggregate par value of all shares of stock having par value was $1,000,000.00.
EIGHTH : The total number of shares of stock which the Corporation has authority to issue pursuant to the foregoing
amendment and restatement of the charter is 650,000,000, consisting of 500,000,000 shares of Common Stock, $0.01 par value per
share, and 150,000,000 shares of Preferred Stock, $0.01 par value per share. The aggregate par value of all authorized shares of
stock having par value is $6,500,000.
NINTH : The undersigned officer acknowledges these Articles of Amendment and Restatement to be the corporate act of
the Corporation and as to all matters or facts required to be verified under oath, the undersigned officer acknowledges that, to the
best of such officer’s knowledge, information and belief, these matters and facts are true in all material respects and that this
statement is made under the penalties for perjury.
[SIGNATURE PAGE FOLLOWS]
19
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment and Restatement to be signed in its
name and on its behalf by its President and attested to by its Secretary on this 19th day of June, 2018.
ATTEST:
ESSENTIAL PROPERTIES REALTY TRUST, INC.
/s/ Gregg A. Seibert
Gregg A. Seibert
Secretary
By: /s/ Peter M. Mavoides
Peter M. Mavoides
President
(SEAL)
20
Certificate of Correction
ESSENTIAL PROPERTIES REALTY TRUST, INC.
CERTIFICATE OF CORRECTION
Exhibit 3.2
THIS IS TO CERTIFY THAT:
FIRST: The title of the document being corrected is Articles of Amendment and Restatement (the “Articles”).
SECOND: The sole party to the Articles is Essential Properties Realty Trust, Inc., a Maryland corporation (the
“Corporation”).
THIRD: The Articles were filed with the State Department of Assessments and Taxation of Maryland (the “SDAT”) on
June 19, 2018.
FOURTH: ARTICLE VIII of the Articles as previously filed with the SDAT is set forth below:
The Corporation reserves the right from time to time to make any amendment to the Charter, now or hereafter
authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in the
Charter, of any shares of outstanding stock. All rights and powers conferred by the Charter on the stockholders,
directors and officers are granted subject to this reservation. Except as set forth in this Article VIII and except
for those amendments permitted to be made without stockholder approval under Maryland law or by specific
provision in the Charter, any amendment to the Charter shall be valid only if declared advisable by the Board of
Directors and approved by the affirmative vote of stockholders entitled to cast a majority of all the votes
entitled to be cast on the matter. Any amendment to Section 5.9 of the Charter or to this sentence of the Charter
shall be valid only if declared advisable by the Board of Directors and approved by the affirmative vote of
stockholders entitled to cast two-thirds of all the votes entitled to be cast on the matter. Further, to the extent
required by the Stockholders’ Agreement, no amendment to Section 5.7, Section 5.8 or this sentence of the
Charter shall be effective without the consent of Eldridge provided in accordance with the Stockholders’
Agreement.
FIFTH: ARTICLE VIII of the Articles as corrected hereby is set forth below:
The Corporation reserves the right from time to time to make any amendment to the Charter, now or hereafter
authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in the
Charter, of any shares of outstanding stock. All rights and powers conferred by the Charter on the stockholders,
directors and officers are granted subject to this reservation. Except as set forth in this Article VIII and except
for those
amendments permitted to be made without stockholder approval under Maryland law or by specific provision in
the Charter, any amendment to the Charter shall be valid only if declared advisable by the Board of Directors
and approved by the affirmative vote of stockholders entitled to cast a majority of all the votes entitled to be
cast on the matter. Any amendment to Section 5.8 of the Charter or to this sentence of the Charter shall be valid
only if declared advisable by the Board of Directors and approved by the affirmative vote of stockholders
entitled to cast two-thirds of all the votes entitled to be cast on the matter. Further, to the extent required by the
Stockholders’ Agreement, no amendment to Section 5.7, Section 5.8 or this sentence of the Charter shall be
effective without the consent of Eldridge provided in accordance with the Stockholders’ Agreement.
SIXTH: The undersigned acknowledges this Certificate of Correction to be the corporate act of the Corporation and as to
all matters or facts required to be verified under oath, the undersigned acknowledges that to the best of such officer’s knowledge,
information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for
perjury.
2
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Correction to be signed in its name and on its behalf by its
President and attested to by its Chief Financial Officer on February 27 , 2019 .
ATTEST
ESSENTIAL PROPERTIES REALTY TRUST, INC.
/s/ Hillary P. Hai
Name: Hillary P. Hai
Title: Chief Financial Officer Title: President and Chief Executive Officer
By: /s/ Peter M. Mavoides
Name: Peter M. Mavoides
3
List of Subsidiaries
Exhibit 21.1
Name of Subsidiary
Essential Properties, L.P.
Essential Properties OP G.P., LLC
SCF TRS LLC
SCFRC-HW LLC
SCFRC-HW-V LLC
SCFRC-HW-G LLC
SCF RC Funding I LLC
SCF RC Funding II LLC
SCF RC Funding III LLC
SCF RC Funding IV LLC
SCF Realty Capital Trust LLC
SCF Realty IFH LLC
SCF Realty Funding LLC
SCF Realty Servicing Company LLC
SCF Funding LLC
SCFRC-HW-528 South Broadway-Salem LLC
State of Incorporation
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-225837) pertaining to the Essential Properties Realty
Trust, Inc. 2018 Incentive Plan of our report dated February 27, 2019, with respect to the consolidated financial statements and schedules of
Essential Properties Realty Trust, Inc. and Essential Properties Realty Trust, Inc. Predecessor included in this Annual Report (Form 10-K) for the
year ended December 31, 2018.
/s/ Ernst & Young LLP
New York, New York
February 27, 2019
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Peter M. Mavoides, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Essential Properties Realty Trust, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
(b)
(c)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 27, 2019
By:
/s/ Peter M. Mavoides
Peter M. Mavoides
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Hillary P. Hai, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Essential Properties Realty Trust, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
(b)
(c)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 27, 2019
By:
/s/ Hillary P. Hai
Hillary P. Hai
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Essential Properties Realty Trust, Inc. (the “Company”) for the year ended December
31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
Date: February 27, 2019
By:
/s/ Peter M. Mavoides
Peter M. Mavoides
President and Chief Executive Officer
(Principal Executive Officer)
The foregoing certification is being furnished with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018
pursuant to 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and it is not
to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation
language in such filing.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company
and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Essential Properties Realty Trust, Inc. (the “Company”) for the year ended December
31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
Date: February 27, 2019
By:
/s/ Hillary P. Hai
Hillary P. Hai
Chief Financial Officer
(Principal Financial Officer)
The foregoing certification is being furnished with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018
pursuant to 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and it is not
to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation
language in such filing.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company
and furnished to the Securities and Exchange Commission or its staff upon request.