Q4 2019 Earnings Call
Ladies and gentleman Hello, and thank you all for joining this essential properties Realty Trust fourth quarter 2019 earnings call.
All lines are in listen only mode, but instructions on how to ask your question will be shared after today's presentation to get US started with opening remarks on introductions I'm pleased to turn the yield the floor to senior Vice President of capital markets Mr., Dan Donlan welcome Dan. Thank you operator, and good morning, everyone. We appreciate you joining us today first central properties fourth quarter 2019 conference call.
Earlier today, just got her fourth quarter results are people bodies President CEO.
Gregg Seibert, our CLL and Hillary high our CFO.
During this call will make certain statements that maybe considered forward looking statements under federal Securities law.
I mean is actual future results may differ significantly from them I was discussing these forward looking statements.
We may not really through the revisions to this for that to stay with reflect changes. After the statements were made factors and risks that could cause actual results to differ materially from expectations are described from time to time in greater detail in the company's bond with the FCC in todays earnings release.
Before I turn the call I repeat.
We'd like to apologize to investors and analyst inconvenienced by the rescheduling of earnings State in conference call.
Unfortunately, what 2019 being our first year as a large accelerated filer the process of getting through Sox compliance in completing our audit.
We acquired additional time relative to our initial expectations.
With that Pete. Please go ahead.
Thank you, everyone, who joined US today for your interest in the central properties.
I'm very pleased to report another strong quarter result.
Consistent with past quarters, the fourth quarter saw solid portfolio performance with same store rent growth of 1.7% and no vacancy.
Investment activity during the quarter was robust with 205 million invested into 94 properties and 41 separate transactions.
7.3 cash cap rate.
We also had an active quarter on the capital markets right.
We closed a $430 million unsecured seven year term loan.
Which has a 70 million dollar accordion feature.
We also raised 103 million for gross equity proceeds via our ATM program.
The end result is that we're reporting fourth quarter after AFFO per share of 30 cents.
Representing an 11% year over year growth rate.
Looking back at the year, we experienced a transformative improvement in our cost of capital, which allowed us to take a more aggressive stance in regards to our investment activity and balance sheet, we invested 687 million into 375 properties and 136 separate transactions.
At a 7.4 initial cap rate.
We raised 424 million of gross equity to maintain a well capitalized balance sheet and raised 630 million of senior unsecured term loan debt to further unencumber asset base.
Extend out our maturity schedule and lower our weighted average interest rate.
In addition, we sold $519 million secondary shares from our founding capital partner, which allowed us to increase our free flow and daily trading volume, while further broadening our investor base.
Lastly, we quit Cree started quarterly dividend by 9.5% during the year to year, well maintained conservative payout ratio in the 70% right.
We are proud of these accomplishments and I would like to thank all of our employees shareholders and other stakeholders for their support closing out a very successful 2019.
Turning back to the fourth quarter and starting with our investment activity.
We invested 205 million at a weighted average initial cap rate of 7.3% approximately 81% of our fourth quarter investments were directly originated sale leasebacks, what's mortgage loans subject sale leaseback transactions.
41% contain master lease provisions and 99% are required to provide us with corporate and unit level financial reporting on a regular basis.
On the disposition front.
In an effort to proactively mitigate risks and exposures, we sold eight properties in the quarter at a 6.9% cash cap rate, which generated 15.2 million in net proceeds.
[laughter] looking at the year end portfolio, we had investments in 1000 properties that were 100% leased to 205 tenants operating in 16 different industries.
Our weighted average lease term stood at a sector, leading 14.6 years and just 2.7% ABR Abbey art is expiring prior to 2024, our same store portfolio works represented 62% Arbor Hbr at quarter end experienced cash rent growth of one point.
7%.
As we have mentioned in the past when coupling our contractual rent growth with lease rollovers and potential credit loss. We expect same store cash rent to approximate 1.5 per cent per annum overtime.
We're pleased to have exceeded this threshold every quarter since going public, which we believe is a testament to our well diversified newly underwritten portfolio.
Hello perspective, our portfolio has a weighted average rent coverage ratio of 2.9 times was 72.6% of our AB are having right coverage ratio of two times or better.
Looking out over the next 10 years less than 1.5% of the leases that expire have unit level rent coverage below 1.5 times.
Which we believe indicates a high likelihood of lease renewal at expiration.
Additionally, only 1% of our tenants have both an implied credit rating lower than single B from Moodys Riskcalc and unit level coverage below 1.5 times, which represent a very manageable number of tenants and properties with elevated risk characteristics.
With that in mind, a key element of our investment strategy is to take calculated tenant risk to achieve what we believe our superior risk adjusted returns.
We seek to mitigate these risks through restructuring process, which focuses on direct sale leasebacks.
In our lease for with Master lease provisions contractual tenant reporting requirements.
We further reduced risk by owning granular and fungible real estate properties that are highly liquid in the sales market and readily fungible from a leasing perspective.
We believe we are well compensated for these risks.
Namely we have invested at a 7.6 weighted average cash cap rate since inception.
The collateral benefits of our attractive initial yields are lower basis, and our real estate.
And the ability to execute de risking sales of individual properties at cap rates that are nearly 100 basis points lower than our initial investment.
This runs contrary to paying significantly lower cap rates for properties leased to investment grade tenants, which often results in inflated basis.
Inferior lease structures and limit it unit level visibility, thereby providing little margin for error in our view.
With all that said.
Subsequent to year end arts and furniture.
Third largest tenant at 2.5% for baby are.
We commented that they are actively exploring a variety of options with creditors investors and landlords to ensure the company's feature.
We have remained in constant dialogue with Heartland advisors.
Still too early off for us.
Two upside on the eventual outcome.
As a reminder, we own four properties leased dark than representing roughly 241000 square feet.
We acquired a hard Dan exposure in five unit sale leaseback transaction in March of 2017.
And after selling one property in the second quarter 2019, our yield on cost is 7.9%.
For our disclosure art, Dan is currently paying approximately $16 per square foot in rent at our properties.
And the range of potential outcomes can be readily tell people what calculated when looking at market rent comparable.
Keeping that in mind, we are managing an increasingly diverse and granular portfolio of net lease properties.
No tenant represents more than 3.4% of baby, our and our average hbr per property is approximately $152000, which is among the lowest and then at least sector as such our portfolio is built to withstand the impact of episodic tenant issues like ours that and we are reiterating.
Our 2020 AFFO per share guidance of one dollar and 27 cents to $1.30 cents as we look out to the balance of the year, we remain focused on growing our portfolio through the origination sale leaseback transactions with middle market tenants in our targeted industries.
And we anticipate our level investment activity to be consistent with our historical average averages with cap rates in a low to mid 7% range.
And with that I'd like to turn the call over to Hillary high our CFO, who will take you through the financials for the fourth quarter Hillary.
Thank you Kate and good morning, everyone, starting with the balance sheet. We ended the quarter was 2.1 billion of total undepreciated assets and 735 million up total debt.
We have no significant debt maturities before 2024, and our net debt annualized adjusted EBITDA. Our he was five times at quarter end.
However, when adjusting for the impact of our January follow on offering which raised $192 million and net proceeds our pro forma quarter end that your annualized adjusted EBITDA. Our he was 3.6 times.
This gives us ample capacity to continue to execute on our external growth strategy, while managing within our targeted leverage range.
Moving onto a capital markets activity.
During the quarter, we utilize our ATM to sell over 4 million shares of common stock at an average price of $25.23.
Raising gross proceeds of over $103 million.
On a different we drew down 250 million on our 430 million southern year unsecured term loan facility.
Which has an additional $180 million of available borrowing capacity under 70 million. According feature turning to the income statement, our fourth quarter and they read defined funds from operations, our AFFO was 25.3 million.
Or 31 cents per diluted share core funds from operations or core AFFO was 26.2 million or 32 cents per diluted share.
On an adjusted funds from operations or a thought though was 24.4 million or 30 cents per diluted share.
No in the quarter, we wrote off $887000 of deferred financing costs, which resulted from the voluntary prepayment of 70.4 million of series 2016 Dash ones secured ABS notes.
Turning to the expense front, our DNA as a percentage of total revenues was 13.5%.
Which was on par with our trailing four quarter average going forward. We continue to expect our journey to grow on an absolute basis.
To decline that's a percentage of total revenues as Pete mentioned, we are reiterating our 2020 AFFO per share guidance range of dollar 27 to $1.30 cents.
Which at the midpoint implies approximately 13% growth year over year as we have stayed in the past our historical investment activity, which we provide on a trailing eight quarter basis.
And our quarterly supplemental it's a good goalpost or a feature investment potential.
With that I'll turn the call over to COO Gregg Seibert.
Thanks, sorry during the quarter, we invested 205 million into 41 transactions and 94 properties at a weighted average cash cap rate of 7.3%.
These investments were made within nine of our 16 targeted industries with the Carwash medical dental and QSR industry is representing over 70% of our investment activity in the quarter.
The average lease term of these properties was 16.3 years, the weighted average rent escalation was 1.3% and the weighted average unit level coverage was 3.1 times and our average investment per property was 2 million.
Consistent with our investment strategy, approximately 81% of our fourth quarter investments were originated through direct sale leasebacks and mortgage loans subject to a sale leaseback transaction, which are subject to our lease farm with ongoing financial reporting requirements.
In addition to 78% of our fourth quarter investment activity was relationship based.
From an industry perspective, QSR has remained our largest industry at 14.2% of baby are followed by car washes at 12.5% early childhood education and C stores at roughly 11% each and medical dental at 10.6%.
Conversely, our home furnishings concentration is now just 3.5% of baby are which is down 70 basis points quarter over quarter and down 260 basis points year over year.
We expect this trend to persist as we see better risk adjusted returns in other industries.
From a tenant concentration perspective, no tenant represented more than 3.4% of our Avi are at quarter end, our top 10 tenets represented 23.4% ever Avi, our which was down 210 basis points quarter over quarter.
We expect our top 10 concentration to decline further in the coming quarters as we continue to grow our concentrations with existing tenants outside of our top 10 looking at the portfolio more broadly approximately 94.4% of our Hbr is derived from tenants that operate service oriented and experience base businesses.
Which is a 680 basis point increase since our IPO, we believe tenants in these industries and more importantly, real estate occupied by these tenants are more recession resistant and better insulated from E commerce pressures.
Moving on to asset management, our portfolio remains healthy with a weighted average rent coverage of 2.9 times and 72.6% of our AB are having a rent coverage ratio of two times or better.
In addition, with 98% of our tenants required to report unit level financials to us we have near real time transparency into the health of our tenancy, which is an important component to managing risk in our portfolio in terms of dispositions. This quarter, we sold eight properties for five different industries for 15 point.
2 million net of transaction cost despite having 1.7 unit level coverage, we achieved a 6.9% weighted average cash cap rate on the seven leased properties that we sold which equated to a 8.5% realized gain versus our allocated purchase price with that.
I will turn it back to Pete for his concluding remarks.
Thanks, Greg our portfolio remains in excellent shape today with healthy coverages, coupled with strong transparency.
Hi property level liquidity.
And de Minimis near term lease expirations.
Our pipeline is healthy with over $90 million of close investments through February.
With our January equity offering.
Our balance sheet is extremely well positioned to fund our growth objectives as we look forward to continuing to execute our business plan.
Again, I would like to apologize for any inconveniences caused by our earnings call being unexpectedly pushed back.
We look forward to meeting with many of you and the next several days at the Citigroup re conference.
With that operator, please open the call for questions.
Great. Thank you and thank you for each of our presenters for your remarks today and to our audience joining today over the phones. If you would like to ask your question at this time simply press the star and one on your telephone keypad perfect storm on will place your line into Q and a friendly reminder, that if you are joining us today on the speakerphone. Please return to your handset prior to pressing star and wanted to be sure that your signal.
Does reach our equipment once again, ladies and gentlemen that is star in one of you would like to ask your question. We'll hear first from the line of Greg Mcguinness. That's Scotia Bank. Please go ahead. Your line is open.
Hey, good morning, everyone.
Great Thats you fuel.
Actually let's start with Pete So we appreciate the update on aren't ban.
So can you clarify what the impact from that tenant is that's embedded in guidance.
Listen we have arranger guidance and we have a range of scenarios.
Around that aren't van resolution in guidance and.
Regardless of those scenarios you know the guidance holds and so.
It's really too early to speculate on specific impacts but.
Our guidance holds independent of the resolution as Mark that.
Okay. So it's very least we can't assume that there is some impact at least embedded into that lower and that's guidance.
Sure Yeah, Okay, and then Craig So in Q4, there was a few shifting top tenant list yet Tom sports rejoin North shore Lady Bird selling off could you just give us some details as to what drove this changes.
Yes, we are we had a one property for.
The Lady Bird transaction, which was.
Kind of a temporary loans that they paid off.
So it was that we did a portfolio narrows the one short term.
Property, we they intended to exit freiman, they executed on that so they just dip down slightly.
And then our stores was acquired by GTN during the quarter.
Right. Okay. Thank you.
Next we'll take your question from the line of Ki bin Kim at Suntrust. Please go ahead. Your line is open as well.
Thanks, I know you guys I addressed us in the morning comments about changing invade the earnings release, but it's a fight that's why make sure that there is.
All the details are out there whether anything.
I came out from the.
The delayed.
<unk> earnings release, and the 10-K.
No no. If you we filed a scene 10-K this morning.
It was purely just.
Getting through that process.
As a first year Sox compliance.
Okay, and I know, obviously I don't want you to negotiate against yourself on a conference call, but what do you think are somewhat likely scenarios to come out of our fan.
Yeah, and listen I purely.
Addressing a hypothetical scenarios here, but it could be a liquidation.
It could be someone buying a portion of that company and assuming our lease.
With that lease amendment.
Or could be.
Chapter 11 restructuring and it's really.
All three scenarios or are currently in play as we continue.
With that company.
Could you talk about the the real estate quality for though the couple boxes that you have.
Yes, we.
We owned for furniture stores in Michigan.
There are advanced furniture stores, and we have a couple of very good launch and a couple of of average loans, they're all subject to a master lease.
Two on as I said in his prepared remarks 214000.
Square feet with about $16 per square foot in rent.
Yeah.
And if I can squeeze out last question here.
I guess more importantly, though is there any lessons learned from the our fans scenario.
You know every time you go through one of these you learn some lessons I think.
We saw the.
Declining performance in our van.
Coming.
We tried to sell the properties. They had been listed for a long period of time.
And one of the Q lessons, we often talk about our granularity in our liquidity and given the size of these assets they were a little less liquid than our average assets and so that's.
A lesson, we continue to reinforce and our investment process.
Okay. Thank you.
You got Stephen Thanks.
Our next question will come from Douglas Harter at Credit Suisse.
Hi, This is actually a Sam choe on for Doug today, So I'm seeing that they experience sectors car consist of 14% of your portfolio and I'm, just kind of thinking through more of the macro picture.
If there is some sort of impact with the pen damn Eric I'm, just curious as to how you guys see.
The tenant credit trending if you have any commentary on that.
Yeah, I would say.
Clearly and if you think about our entertainment says a sector comprising both.
Bowling alleys and movie theaters in.
Places where people congregate.
You noticed the pandemic spreads and people elect not to use those facilities.
It's going to impact the profitability of our tenants.
And the magnitude of that really.
You know.
Depends upon the depth and breadth of that.
Change and customer behavior, we believe it would be temporary and and certainly as a landlord with healthy coverage and master leases and healthy tenants. We would expect our tends to be able to kind of withstand that temporary dislocation, but it's certainly something we're going to watch very closely in the coming quarter.
As you know we get.
Profit and loss statements that come in and and monitor our tenant health, which is an important part of our credit.
Discipline.
Now do you have to make the average tenant credit for these sectors versus other segments in your portfolio.
We do not something we necessarily disclose.
I would say that generically.
You know the coverage and the credit profile of our entertainment tenants is very similar to our overall portfolio.
Okay. That's helpful. Thank you.
Thank you Douglas aren't or excuse me.
Next question will come from May cross it at Berenberg.
Hey, good morning, guys.
Appreciate the color on aren't van are there any other tenants on the watch list that we should be aware of.
No I, yeah, nothing material clearly American Blue ribbon has been a name that people have been talking about.
We have oh.
Seven properties with them, but we don't expect this experience any you know kind of rent lost through that process, but overall the portfolios and great. Great Health really you know attributed to being a recently underwritten with fresh diligence and you know we feel good about where.
We're sitting.
Okay, and what about just like furnish home furnishing in general I.
I noticed you kind of an arm Dan specific issue, but.
It looks like there's maybe three other locations not our bands or you have that her home furnishings.
Maybe one or though isn't how do you feel about them.
Yeah listen I think.
Our our home furnishing exposure has been coming down.
Quarter over quarter since you know really since 2017, as we haven't been investing in that sector.
You know, we we don't love the sector and really think there's a a surplus of big box retail spaces in our country that provides competition.
Our real estate and so.
We have very modest furnishing <unk> exposure and modest and decreasing.
And.
You know clearly the three sites, we have we're comfortable with.
Some good sites, a and ones in Dallas, or Plano Metro, which is a real strong submarket and others in Fort worth, which we feel really good about and the third one is as more of an upscale site outside of Kansas City. So.
The exposure we have we feel good about it's very modest.
But overall its industry that we have not been adding too.
Okay. Thanks.
Our next question will come from the line of Brian Hawthorne at RBC capital markets.
Hi, I'm your exposure to tenants with credit ratings of C. C C plus and be increase this quarter what drove that change.
That was largely driven by our advance and their year end financials.
You know coming in.
Weaker and getting this critic downgrade per the model.
That's it.
There's another theres about another 100 basis points in there and they're also just kind of small.
Operator.
Okay.
And then can you provide an update on the performance of the Perkins assets you have.
[noise] you know, we really just kind of restructured that and I'm in the fourth quarter and I have and I'm really got through there they're kind of year end numbers yet.
But we would imagine yeah. The sales as the sites, we had were stable going into the restructuring and one of the reasons why our lease was extended and affirmed and I wouldn't anticipate any.
Issues there.
But you know the recapitalized tenant with it affirmed lease is not something that gives us a lot of concern, but certainly something we're watching.
Okay. Thank you for taking my question.
Thank you.
Once again onto our audience, if you'd like to ask your question today or any clarification on anything covered in the update simply press star and one on your telephone keypad next we'll hear from the line of John Massocca add Ladenburg Thalmann go ahead. Your line is open.
Good morning.
Hi, Jeff So what types of car washes, we're kind of any acquisition activity in Fourq you just because you know the two tenants you have in the top 10 didnt seem to increase it all.
[noise], Greg once you get some color therefore.
Sure.
Well I mean right on the Carwash side.
We have a lot of.
Regional operators that perhaps have the dominant market share and then their market in a in a lot of parts of the country. So we have a few groups.
And that kind of.
10 to 35 store.
Dominant local player kind of operators that weve been able to do a lot of direct sale leaseback Swift.
So that's kind of the profile.
Yes, just to add some color you look it.
You know these these big national guys when they get.
A couple of hundred units are they get pretty efficient in sale leaseback market.
Start charging cap rates in the low Sixs and you know we just do we we prefer to go with the regional kind of 10 to 50 unit Guy.
And get that extra 800 basis points, and just add a little more value there.
And so that's kind of part of our investment.
Okay.
The total exposure.
Hey, good.
You broke up a notch Oh, sorry, I just broadly speaking how kind of big are these operators in terms of the total number of units they're operating.
You know as Greg said, it can be a 10 to 15 it operator.
Okay.
[music].
Oh.
And then.
<unk>.
Sorry to handle the trouble headset.
Sorry, I didn't have any let's start with my head that you hear me.
Yes, we can.
And then last question does the current map macro backdrop in the volatility in the capital markets change, how you guys view leverage and maybe the pace of capital deployment.
Sure I mean listen we see what's going on you know with a pro forma year end leverage it you know some four we feel pretty.
Pretty comfortable and you know as we deploy this capital and we look out and we continue to invest.
Well certainly be cognizant of the volatility in our own individual cost of capital and you know certainly we feel like our balance sheets position to weather. The storm and you know, we just need to be cognizant about how long that star may last.
[laughter].
That's it for me. Thank you guys very much.
Thanks, John.
Once more ladies and gentlemen that is star and wonder if you'd like to ask your question, we'll take a follow up from Ki bin Kim at Suntrust.
Thanks, So excluding this past week you guys were trading at a pretty healthy valuation level at one point fell 5% implied cap rate.
Obviously that gives you the ability to raise some efficient <unk> that an equity.
But it also gives you a little more leeway in terms of maybe not having to buy and mid seven cap rate maybe it gives you the ability to.
Increase the quality of acquisitions or has that translate it all into the type of assets you're targeting for investments.
Yeah, we shouldn't we we.
Well, we believe to be the best risk adjusted assets.
We can we can source through our relationships in sale leasebacks transactions and and and get the than most attractive cap rates and.
We we reject the notion that investment quality is solely equated to cap rate.
You know clearly our cap rates have come down from you know a year ago. We are transacting in the mid to high six now were excuse me mid to high Sevens and now were transacting.
In the low to mid Sevens, but you know our investment discipline and the way we view risk is really and output of our collective 50 years of missing in the space.
Not the output of our cost of capital and so you know what we buy is you know really the best stuff, we can find with.
The most attractive yields.
Okay, and a question for Greg I.
I know, it's early but is there any discernible trends you're seeing from the investment landscape for assets that are of a for sale or maybe in particular that relates to experiential or restaurants, any kind of 'em hasn't Tennessee or change in cap rates at all.
I mean, not not yet I mean, we don't we have as you probably know up to a number of assets on the market.
We have people lender.
Buyers under.
Purchase contracts to purchase homes, and I mean, we havent seen anyone like fall out or try to recur retrade because of what's going on the stock market.
Okay. Thank you.
And at this time, we have no further signals from our listening audience I'll turn it back to our leadership team for any additional or closing remarks.
Great. Thanks, Jim.
Thank you all for participating today. Thank you for the questions again, we apologize for the any inconvenience and we look forward to talking to you all in the future. Thanks again bye now.
Ladies and gentlemen, this does conclude todays update and we do thank you all for joining you may now disconnect your lines and we hope that you enjoy the rest of your week.
[noise].
[noise] [noise].
[music].
[noise] [noise] [noise].
[noise].
[noise] [noise].
[music].
[noise] [noise].
[noise] [noise].
[music].