August 15, 2018 · Cloud Computing, Hosting News, Web Hosting · Comments Off on Take Charge. Another Boring Net Lease REIT

In a recent Seeking Alpha article, I explained that “as a REIT analyst, it’s critical to understand the benefits of fragmentation and consolidation. I have found that over the years, many investors seem to get confused by the concept and, more importantly, the benefits to building a competitive scale advantage”.

While many REITs struggle to move the needle by growing externally, the Net Lease REITs are unique because they can seek new properties in practically any market. As I went on to explain:

“More specifically, within the $4 trillion REIT universe, we have witnessed a growing evolution of companies that have built powerful scale advantages by utilizing low cost of capital, acquisitions, development, and dispositions.”

When I was a new lease developer (over 15 years ago), there were just a handful of Net Lease REITs, and today the list is growing in size, with each company hoping to carve out a differentiated slice of the market share.

Some REITs, like Realty Income (NYSE:O), utilize their size and cost of capital advantages, while others, like EPR Properties (NYSE:EPR), seek to carve an “experiential” niche focusing on theaters, waterparks, golf entertainment, and charter schools.

I like to compare Net Lease REITs to banks, remembering that there are super regional banks, regional banks, and community banks. All provide a valuable service based on scale, cost of capital, customer service, and location.

Similarly, the bank industry blossomed in the early ’80s as intrastate banking restrictions were lifted, allowing new players to enter new markets. Many banks shifted funds to commercial real estate lending (during the ’80s). When total real estate loans of banks more than tripled, commercial real estate loans nearly quadrupled.

In my backyard (South Carolina), I witnessed the “merger mania” whereby many southeastern banks were acquired by each other (hoping to keep the New York and West Coast banks out), and eventually, they were acquired by the gorillas: Wells Fargo (NYSE:WFC) and NationsBank.

And as I reflect on history, it seems that the Net Lease REITs are becoming the modern-day banks for corporately-owned real estate. The sale/leaseback business model gives corporations the enhanced ability to monetize real estate assets, allowing capital to be utilized more efficiently, thus generating more attractive returns.

Thanks to the time-tested REIT laws, the Net Lease REITs have become an important property sector in which highly predictable rent checks are turned into highly sustainable dividends.

Today, I plan to provide readers with a new name to the Net Lease REIT sector and one in which we are initiating coverage (in our Intelligent REIT Lab). Excerpts from this article first appeared in the August edition of the Forbes Real Estate Investor.

(Photo Source)

Introducing Essential Properties

Essential Properties Realty Trust (NYSE:EPRT) began trading on June 21st and will join Realty Income, STORE Capital (NYSE:STOR), EPR Properties and others within our Net Lease coverage universe. I have known the company’s president and CEO, Pete Mavoides, for a few years (when he was at Spirit Realty Capital (NYSE:SRC)), and I decided to provide subscribers with an exclusive interview.

Bio: Pete previously served as President and COO at Spirit Realty Capital from 2011 until 2015. During his time at Spirit, he helped transition the company from a privately held $3.2 billion company to a publicly traded $9.1 billion enterprise. Prior to joining SRC, Pete was the president and CEO of Sovereign Investment Company, a private equity firm that focused on investment opportunities relating to long-term, single-tenant, sale-leaseback opportunities. Before Sovereign, Pete worked as an investment banker for five years, helping corporations monetize their real estate assets. He graduated from the United States Military Academy (West Point), served as an officer in the army and received an M.B.A. from the University of Michigan.

Brad Thomas (BT): How is EPRT different from the other peers?

Pete Mavoides (PM): First and foremost, our CEO and COO have over 43 years of collective experience investing and managing net lease assets over multiple credit cycles. As a result, the majority of our annualized base rent (ABR) was acquired from parties who had previously engaged in one or more transactions that involved a member of our senior management team.

In addition, we have deliberately concentrated on smaller-scale, fungible properties that are leased to service-oriented and experience-based tenants, which represent approximately 88% of our ABR as of March 31, 2018.

Furthermore, given our focus on sale-leaseback transactions with middle-market companies, approximately 65% of our ABR as of March 31, 2018, comes from properties subject to master leases, while over 97% of our ABR as of the same date is required to provide us with unit-level financial reporting.

PM: We believe the following points further highlight our differences relative to our peers:

Management is comprised of experienced net lease investment professionals -Essential’s CEO, Pete Mavoides, and COO, Gregg Seibert, have over 43 years of collective experience investing in net lease real estate, which includes purchasing and managing several billions of assets through multiple credit cycles during their careers.

Highly e-commerce resistant portfolio – With 87.6% of our annualized base rent (ABR) being derived from service-oriented and experience-based tenants as of March 31, 2018, we believe we have one of the most e-commerce resistant portfolios in the net lease REIT sector. Customers must come to our tenants’ locations in order to receive a service and/or have an experience, which we believe insulates us from e-commerce pressures.

Focused approach to investing in industry verticals – Essential has chosen a focused approach towards investing in net lease properties as our top seven industries: quick-service restaurants, car washes, casual dining, medical/dental, convenience stores, early childhood education, and automotive service; [these] collectively represent approximately 72% of our ABR as of March 31, 2018.

Smaller-scale, granular properties – As of March 31, 2018, our average investment per property was $1.9M, which is indicative of: 1.) the less specialized nature of our real estate, 2.) our general lack of exposure to Big Box retail assets, and 3.) the highly fungible nature of our properties, which we believe are easier to sell and re-lease in comparison to larger retail boxes.

Strong weighted average four-wall EBITDAR coverage of 2.9x and high portfolio transparency, with over 97% of our tenants (by ABR) reporting unit-level financials to us – As of March, 31, 2018, we received unit-level financials from 97.4% of our tenants as a percentage of ABR, and our weighted average four-wall EBITDAR coverage for those same tenants was 2.9x.

Long-weighted average lease term of 13.8 years – We have no exposure to pharmacy, apparel, general merchandise, electronics, sporting goods, and other soft goods retailers.

BT: Given your background at Spirit Realty, do you believe EPRT will be most comparable with SRC?

PM: Spirit is a large-cap diversified net lease REIT with a portfolio that has been assembled by multiple management teams over the past 15 years. Spirit also generates a portion of its revenues from asset management fees and preferred dividends. Conversely, Essential has a purpose-built portfolio of smaller-scale net lease properties that have been assembled by the same management team over the last 24 months.

BT: What are EPRT target credit metrics, and do you expect to achieve investment grade ratings in the near term? Also, can you tell us about your cost of capital?

PM: Our stated objective is to manage our net debt / EBITDA under 6.0x, which we believe is a balance sheet statistic that is consistent with investment grade issuers in the REIT industry. As such, we would expect to become an investment grade issuer over time.

We recognize that maintaining an attractive cost of capital is critical for any REIT that is external growth-focused. Our recent IPO and private placement give us ample investable capital to execute our growth plan over the near term.

BT: On the sourcing side, how does EPRT expect to grow – one-off deals, portfolios, or a combination thereof?

PM: Similar to our past deal flow, we would anticipate using our long-standing industry relationships to generate the bulk of our external growth from sale-leaseback transactions with middle-market tenants.

BT: What are EPRT’s favored categories? Do you expect to own casual dining properties?

PM: As of March 31, 2018, our largest industry exposure was quick-service restaurants at 18% of ABR, followed by car washes, casual dining, medical/dental, convenience stores, early childhood education, and automotive service. Collectively, these seven industries represent approximately 72% of our ABR as of March 31, 2018, with casual dining being our third-largest industry exposure at approximately 11% of ABR.

BT: Does EPRT plan to become a developer or provide developer funding? If so, how will you mitigate these risks?

PM: We have no intention of becoming a developer. However, we will agree to fund new development for existing tenants that we know and trust. We believe we mitigate risk by investing with relationship tenants that have a proven track record of operating performance.

BT: How about sale/leasebacks? Will EPRT be competitive in that arena?

PM: Most of our acquisitions since inception have come from internally originated sale-leaseback transactions with middle-market tenants. The vast majority of these deals were acquired from or through parties that had previously engaged in one or more transactions that involved a member of our senior management team. As such, we would anticipate the bulk of our future external growth to come from sale-leaseback transactions with middle-market tenants and relationship-based deals.

BT: AMC is listed as a top tenant. How do you mitigate the risks within the theatre business?

PM: As of March 31, 2018, we owned five theaters that represented 4.6% of our ABR. We mitigate risk by focusing on newly renovated and highly profitable movie theaters that are leased to the top theater operators in the U.S.

BT: Finally, what is your targeted AFFO payout ratio? Why?

PM: Our new Board of Directors will decide our future dividend policy and the resulting AFFO payout ratio. We would anticipate our policy on both matters to be generally consistent with our peer group.

Earnings Update

In Q2-18, EPRT’s total revenue increased 63% to $21.7 million, as compared to $13.3 million for the same quarter in 2017. Total revenue for the six months ended June 30, 2018, increased 79% to $41.9 million, as compared to $23.4 million for the same period in 2017.

The company’s net income increased 71% to $3.5 million, as compared to $2.0 million for the same quarter in 2017. Net income for the six months ended June 30, 2018, increased 75% to $4.6 million, as compared to $2.6 million for the same period in 2017.

Its FFO increased 81% to $9.6 million, as compared to $5.3 million for the same quarter in 2017. FFO for the six months ended June 30, 2018, increased 87% to $17.8 million, as compared to $9.5 million for the same period in 2017.

EPRT’s AFFO increased 68% to $8.5 million, as compared to $5.0 million for the same quarter in 2017. AFFO for the six months ended June 30, 2018, increased 79% to $15.9 million, as compared to $8.9 million for the same period in 2017.

The REIT’s Net Debt-to-Annualized Adjusted EBITDAre was 4.4x times, while Pro Forma Net Debt-to-Annualized Adjusted EBITDAre was 3.9x (i.e., adjusted for the receipt of net proceeds resulting from the underwriters’ partial exercise of an option to purchase additional shares).

It has a $300 million unsecured credit facility with no amounts outstanding as of August 7, 2018. The credit facility includes an accordion feature to increase, subject to certain conditions, the maximum availability of the facility by up to $200 million. In addition, we had approximately $151 million of cash and cash equivalents and restricted cash as of August 7, 2018.

Peer Comps

EPRT hasn’t declared a dividend yet; however, the company provided the below commentary on the Q2-18 conference call as it pertains to a potential dividend. The CEO said:

“Our objective is to maximize shareholder value by generating attractive risk-adjusted returns through owning, managing and growing a diverse portfolio of assets leased to tenants operating in service-oriented and experience-based industries. These returns will come from a combination of growing our cash available for distribution and paying a current dividend. To that end, as we disclosed in our S-11 filing, we anticipate paying an $0.84 per share initial annual dividend. I would anticipate our board to review that dividend policy and make a declaration for the third quarter and the five-day stub period very shortly.”

Note: $.84/$13.90 share price = 6.0% (estimated)

EPRT’sconsensus AFFO/share in 2019 for the eight analysts that cover the company is $1.09. Using analyst estimates, we arrive at EPRT’s projected AFFO payout ratio:

Again, based on analyst estimates, we arrive at our P/AFFO multiple for EPRT of 12.8x.


EPRT has all of the ingredients to become the next Realty Income. Keeping in mind that the way that O was able to become a premium brand is because of the company’s size and cost of capital advantages. As noted, it is becoming increasingly evident that M&A is likely in the Net Lease sector, and it is only a matter of time before consolidation transforms the top players into the next Wells Fargo and Bank of America in the Net Lease sector.

Source: Yahoo Finance

Source: F.A.S.T. Graphs and EPRT Investor Presentation.

Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors, if they are overlooked.

Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking. If you have not followed him, please take five seconds and click his name above (top of the page).

Peers: O, National Retail Properties (NYSE:NNN), W.P. Carey (NYSE:WPC), Agree Realty Corp. (NYSE:ADC), Four Corners Property Trust (NYSE:FCPT), Getty Realty Corp. (NYSE:GTY), STOR, EPR, VEREIT, Inc. (NYSE:VER), SRC, Global Net Lease, Inc. (NYSE:GNL), and Lexington Realty Trust (NYSE:LXP).


I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

August 15, 2018 · Cloud Computing, Hosting News, Web Hosting · Comments Off on SEC scrutiny of Tesla grows as Goldman hints at adviser role

WASHINGTON (Reuters) – The U.S. Securities and Exchange Commission has sent subpoenas to Tesla Inc (TSLA.O) regarding Chief Executive Elon Musk’s plan to take the company private and his statement that funding was “secured,” Fox Business Network reported on Wednesday, citing sources.

The electric carmaker’s shares fell as much as 4 percent but cut their losses after Goldman Sachs Group Inc (GS.N) said it was dropping equity coverage of Tesla because it is acting as a financial adviser on a matter related to the automaker.

Investors viewed the Goldman statement as confirming a tweet from Elon Musk on Monday about working with Goldman, even as the reported subpoenas indicated the SEC has opened a formal investigation into a matter.

The latest news extended the roller-coaster ride for Tesla investors in recent days, adding to uncertainty about the future course of the company and whether a deal can be done amid growing regulatory complications.

Tesla and the SEC declined to comment.

Musk stunned investors and sent Tesla’s shares soaring 11 percent when he tweeted early last week that he was considering taking Tesla private at $420 per share and that he had secured funding for the potential deal.

FILE PHOTO: A Tesla sales and service center is shown in Costa Mesa, California, U.S., June 28, 2018. REUTERS/Mike Blake/File Photo

The shares fell 2.6 percent to $338.69 on Wednesday, below $341.99, their closing price the day before Musk tweeted his plan to take Tesla private.

The Tesla CEO provided no details of his funding until Monday, when he said in a blog on Tesla’s website that he was in discussions with Saudi Arabia’s sovereign wealth fund and other potential backers but that financing was not yet nailed down.

Musk also tweeted late Monday night he was working with Goldman Sachs and private equity firm Silver Lake as financial advisers. However, as of Tuesday, Goldman was still negotiating its terms of engagement with Musk, according to a person familiar with the matter.

The 47-year old billionaire’s tweet about secured funding may have violated U.S. securities law if he misled investors. On Monday, lawyers told Reuters Musk’s statement indicated he had good reason to believe he had funding but seemed to have overstated its status by saying it was secured.

The SEC has opened an inquiry into Musk’s tweets, according to one person with direct knowledge of the matter. Reuters was not immediately able to ascertain if this had escalated into a full-blown investigation on Wednesday.

This source said Tesla’s independent board members had hired law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP to help handle the SEC inquiry and other fiduciary duties with respect to a potential deal.

The Wall Street Journal said the SEC was seeking information from each Tesla director.

Reporting by Sonam Rai, Michelle Price and Supantha Mukherjee; Editing by Anil D’Silva, Nick Zieminski and Cynthia Osterman