Q3 2020 Essential Properties Realty Trust Inc Earnings Call
Adding home furnishings health and fitness and movie theaters continuing to decline.
In aggregate. These five industries now represent 17.3% of our Hbr, which compares to 31.7% in the second quarter of 2018, which was our first quarter as a publicly traded REIT.
From a tenant concentration perspective, no tenant represented more than 3% of our hbr at quarter end with our top 10, representing 22.6% of Hbr.
In terms of dispositions this quarter, we sold 14 properties, including three vacant properties for $19.6 million in net proceeds.
When excluding vacant properties and transaction cost, we achieved a 7% weighted average cash cap rate on our dispositions in the quarter.
As we have mentioned in the past owning properties that are highly liquid is an important aspect of our investment discipline as it allows us to proactively manage industries tenants and unit level risk within the portfolio.
With that I will turn it back to Pete for his concluding remarks.
Thanks, Greg.
We are excited that the operating environment and capital markets have allowed us to pivot away from managing through the pandemic with our tenants and properties and move forward with capitalizing on our robust pipeline of accretive investment opportunities in order to drive earnings growth.
We look forward to the balance of the year and continuing to put pandemic related issues behind us as we continue to accretively build our portfolio of granular net lease properties.
With that operator, please open the call for questions.
Thank you and we will now.
Now be conducting a question and answer session. If you would.
Like to ask a question. Please press star one on your telephone keypad, a confirmation tunnel indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from the line of Haendel St shoes with the Mizuho. Please proceed with your question.
Yeah. Thank you good morning, good morning.
So warning double what do you can you hear.
Hey, there. So a question on I guess the portfolio about a quarter of your revenue is tied to travel centers movie and entertainment. So curious on profit where you'd like to get that over time in your prepared remarks, you I think you mentioned, reducing movies and Jim but not childhood kinda. So maybe you could discuss them.
Of these as well the potential portfolio shifts post close good post vaccine.
A bit more thank you.
Sure and thanks for that and I think you know Greg gave you some stats in the prepared remarks, and you know we have the very deliberately been focusing our.
Our investments in industries that we that we saw as durable and and and had real estate characteristics that we liked and you saw that trend really since pre pandemic <unk>.
And you know taking those five industries down from 37 to 17.
Was material and and you know quite frankly, we haven't invested in the movie theater since coming public or gyms have been go out growing at a much slower rate as has our casual and family dining we've been lightning up both through growth as well as disposition.
You know, notably our kinda generic.
Retail exposure has been coming down dramatically as well, which is largely concentrated in furniture.
And so you know we've had a very deliberate shift in our industry mix you know the one outlier you to that that you pointed to his child care, we like child care. He you know we think that industry has as a good place in our portfolio and has good operating fundamentals.
Additionally, it was impacted I'm pretty significantly by the pandemic, but our operators in that space and it has had been recovering nicely and performing and performing well and so you should expect to see us continue to invest in childcare, we have not been investing in a material.
Okay and any of those other industries and you should expect ICSI that continue.
Thank you. Thank you that's helpful and maybe can you discuss a bit more the investments in the quarter a cap rate that here in the low seven you've heard some peers I discussed higher cap rate or and have you been seeing thumb investment yields north of 8%. So maybe you can discuss some of the pricing trends you're seeing in the asset that into.
Christine is this low seven seven.
A rate that we actually expect to continue near term and in the <unk> hundred 50, Millionish you acquired in the quarter a good run rate to think about near term. Thanks.
Sure and so you know in terms of volume and cap rate. You know generally are our discussion around that has been pointing to our trailing quarterly average, which you know is pretty consistent with what this quarter I'm. So you know I think that's a good indicator of what.
Where you know we're set up to transact.
Terms of cap rates, we generally have been you know telling people to expect us to transact in kind of the low to mid Sevens range and clearly this quarter at seven one is towards the low end of that range and I think what you see there is you know we are deliberately focusing in industries.
That you know had relatively de minimis impact from the pandemic, notably auto service, QSR ours and and car washes.
And really staying away from some of the higher cat industries that were adversely impacted I'm such as you know movie theaters in gyms, and furniture, and so I think driving that cap rate down a little bit is the industry mix and and you know the select the this the selection of the tenants that we did.
During the quarter.
But from a going forward perspective, you should continue to see us transact in the low to mid Sevens range.
At a pace that is relatively consistent with our past practice.
Got it got it thank you.
Okay.
Thank you. Our next question comes from the line of Nathan profit with Darren Baird. Please proceed with your question.
Hey, good morning, guys.
Just wanted to get your thoughts on if we went back into a potential a lot down how that may affect your pipeline.
And also whether it was there any kind of elevated deal activity from people trying to get things done before the election.
Sure I I would say you know there was elevated deal activity really from what we saw as you know kind of a backlog of six months' worth of deals a lot of our relationships and operators put you know M&A and development and other expense.
Action on hold while they focus on grappling with the pandemic and as we come out of the back side. You know I think Dave you know restarted those growth plans and that has created a backlog of opportunity.
We have not seen a lot of election related sales and you know there may be some here in the late you know it late in the fourth quarter, but we have not seen that to date.
In terms of you know in terms of shutdowns in and.
The potential impact to the pipeline I would say you know you know, we're making 20 year investments in industries that we think to be durable.
And and lasting and and so you know I think temporary shutdowns.
Really aren't going to weigh heavily on that you know in my in our view you know shutdowns.
Shutdowns would be very localized and temporary and you know shouldn't have a massive impact on our pipeline may have some impact on the portfolio.
But you know, we'll monitor that and you know obviously continue to work with our tenants as we navigate through this pandemic.
Okay. Thank you and then I was just going to ask one on the theater and I only asked I mean the.
But for year property, specifically are there any potential other you keep it I guess in a worst case scenario now.
Yeah, I think you know we have six theaters by them with AMC on average there are 50000 square foot boxes with contractual rent of about $14 $15 a square foot.
You know it.
They're just generic real estate and and you know to the extent that there I think the first course of action to the extent that one of our operators were to go out would be a real at two another theater, operator, and you know they are theaters and we believe firmly that theaters will.
Survive and have a role in and continue to exist, but to extent that we had to go to them and reposition them into you know.
Other uses at the end of the day there are 50000 square foot boxes, you know with a very reasonable rent per square foot.
Okay. Thank you.
Thank you. Our next question comes from the line of Sheila Mcgrath with Evercore. Please proceed with your question.
I guess good morning, Pete I was wondering if you could comment if there's any evidence that your target tenant base may be more prone to seek out.
Raising capital via sale leaseback, given the pressure from KOL event that might bode well for more acquisition opportunities as you look ahead into 2021.
Oh, we haven't seen that Sheila generally are you know or middle market tenant base. You know one of the reasons are in our in our tenant base is that they see the benefits of sale leaseback transactions and and view the weighted average cost of capital of our capital.
As favorable to their own weighted average cost of capital and and you know the at the margin the pandemic hasn't shifted that mindset and but you know I think yeah. There there will be some of that as you know alternative sources of capital become more expensive.
You know kind of.
Against that is you know rates are really low and borrowings really cheap.
To the people that can get it I would say that the people that the universe of people that can access traditional bank financing is probably a bit more limited as a result of the pandemic. So you know I I guess, that's that's a long way of saying we haven't seen it we would expect to see some of it at the margin.
But regardless, we have plenty of opportunities and a robust pipeline.
Okay, Great one more I'm just I missed what you said on town sports. They rejected to me, but did you say you already have a tenant.
I did not but [laughter] hours.
Yeah listen we <unk>, we saw that bankruptcy coming you know I'm for a long time, and we've engaged with the market defined tenants and we have robust demand in those properties and and those gyms and we would expect to.
Have them re let and in short order, which is kind of what we said on the call that there's good demand and we have a number of discussions going on and.
Those sites will be hopefully be productive here shortly.
Okay, Great and one last quick one on Ruby Tuesdays, how many units do you have there and do you have any visibility on their path forward do you expect to get those.
[noise] buildings back vacant.
What is your expectation.
Yeah, I wouldn't you know listen that's an ongoing negotiation with the tenant what I would say we have seven sites leased to them in a master lease and I would say you know just generically. We're you know we're confident in the basis in our assets and that you know that they have you know good reuse potential.
And you know to the extent that you know we don't come to a favorable outcome was Ruby Tuesdays through this process you know much like town sports, we're confident that there will be a a another user that would pay.
Pay us similar or less.
Levels of rents in those sites.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from the line of Katy Mcconnell with Citigroup. Please proceed with your question.
Great. Thanks, Whining no baseball.
Well I thought that you bought anything to date.
The demand that you're seeing really making things today and based on any progress you've made so far what do you have that.
Yeah listen I would I would argue that we haven't seen a vacancy fall out you know Ed you know at quarter end, we are over 99% leased and and we were you know had seven vacant properties you know three of which came to us on the last day of the quarter.
And and so I I think and we tried to set us in our prepared remarks. It there's good demand for our properties and we have a very robust ability to keep these properties leased and occupied.
As evidenced by our very high occupancy so.
No. It's important part of our underwriting is to have.
You know fungible assets that have a ready reuses and and.
Have the ability to re tenant sites when they do become vacant and you know I think our team has done an excellent job of maintaining a very high occupancy in our in our properties.
Okay. Thanks, and then can you provide some more color on your strategic plan.
Dan I'm kind of excited here, where you expected why the coverage.
Good it's categories, how much I'd be I'm collecting three keys.
Fair point Bert.
That's all right.
Tomorrow.
Sure. So you know the slower recovery industries, you know the casual dining the health and fitness.
You know entertainment and I would say the gyms, they're open operating and returning to profitability. Our entertainment sector has has which is largely trampoline parks and bowling alleys, we've seen them rebound very nicely and return to profitability.
Realty and you know our restaurants are doing well in both the casual dining.
Where the slowest recovery at at 2.5% of our E. B are really is in the movie theaters and and I think you know everyone can draw their own conclusion I'm on that you know our view is you know the recovery there is not this.
Necessarily pandemic related it's more related to you know release the release of content and it seems like that is on the horizon would should bring those sites back open and operating and so you know we have very.
Little left to be deferred we had some commentary on the call that gets you know about about $3 million and only one $1 million of that one point something is going to be recognized into revenue. The vast majority of the balance of that is largely attributable to our theaters.
Which is you know AMC.
Okay. Thank you.
Thank you as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Greg I get asked with Scotiabank. Please proceed with your question.
Hey, good morning.
Greg just to make sure I heard correctly collections and how consistent 91% for the last few months, but sounds like deferrals are starting to be repaid. So does that mean, we could see collections number tick up closer to 94% in November given those repayments.
Well the repayments aren't going to you know really it that's not a b R. The repayments really is his prior periods rent that was recognized not collected so that's really just a cash flow number.
You know the the paid ticking up from 90 to 94 is really going to be the burn off of the reckons the recognize deferrals.
And you know, which is 3% and that'll happen I.
I think it will most of those deferrals probably go through the end of the year.
So you know our return to that 94.
You know, it's going to be slower because those deferrals are in place that said were recognized in revenue. We think theyre money. Good in those tenants are going to pay us as contracted so.
In our view there is not a big differential between you know the 91 and the 94 reckon in those 33.
3% recognize deferrals.
Right. Okay. So it's basically just reflecting a different deferral agreement that were maybe in place for Q2, but not Q3 and vice versa.
That's why we're seeing I know, there's either yeah. There's the same deferral agreements that were in place. They just span through the end of the year.
Okay.
And then Pete on the acquisitions front I have to imagine that you kind of weren't up to full speed or this quarter given pandemic uncertainty.
But obviously balancing that against your comments on the backlog <unk> backlog of opportunities in the return to kind of pre pandemic level acquisitions. Just curious how we should be thinking about kind of that level of acquisitions into Fourq, you and you know obviously not guidance on 2021, but how you're feeling about it.
Yeah listen that you know.
I think you're right. We got started in the quarter late largely as a result of you know kind of working through August wanting to see sustained collections in us and you know stabilization in the cost of capital, but you know I think you know if you look at the one for going on in the quarter is kind of right on our eight.
Trailing eight quarter run rate you know it's pretty.
Pretty indicative of our ability to scale the pipeline we feel good about the pipeline. If you look in our Q that we filed last night.
Subsequent to quarter end, we've closed about 75 million.
And so and we feel good kind of you know looking at the back half of the year.
So back order excuse me almost there.
All right. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Alexander Park, and I guess with Bank of America. Please proceed with your question.
Hi, guys. Thanks for taking the question I'm, sorry, if I missed this but how much quarterly revenue is on a cash basis and its passports included in that.
Yes, a town sports is is is on a non accrual basis. This is Dan Donlan. So you should you should look at the disclosure on page 15.
You should assume that everybody and their non recognize unresolved lost a beta bucket. So it all on the 6% give or take is on non accrual status.
So they're all in cash accounting.
Okay.
Great. Thank you and then could you just give your.
Outlook for bankruptcies or kind of the next 12 months and How's your tenant watch list changed over the course of the Panda right.
Yeah, I would say you know at the onset of the pandemic or tenant watch list was you know is comprised of all of our tenants in and you know really focused on on the industries and and and the sectors that we felt to be most impacted.
You know and I think we gave good disclosure around that on page 16.
You know as we sit here today, you know I would say our main focus is on the 6% that's on cash accrual guys that are either.
Not paying us rent that they owe us or this a deferral that we were not sure we're going to get down the road.
And so you know I think that it really is where our focus is and that you know as you would imagine is really in the sectors that have been most impacted and are the slowest to recover but you know I think we see a path for most of those operators and you know we'll continue to monitor from them.
Work with them as as you know hopefully we've put that put this pandemic behind us.
Great. Thank you.
Thank you.
Thank you. Our next question comes from the line of John Methodical with Ladenburg Thalmann. Please proceed with your question.
Good morning.
Hey, good morning, John.
Oh, I'm, sorry, if I missed this earlier, but what drove the big decline in industrial same store rents.
Yeah.
Yeah, Hey, John This is Dan that was a typo. That's my fault you should just switch around the retail and the industrial it was updated on the web site <unk>.
That's really the retail is actually down that amount.
Related to loves furniture.
Okay that makes sense and then as we think about dispositions there kind of appears to be a strong bid out there for restaurant properties you could that's revenue acceleration and capital recycling on your end and assuming you are seeing that kind of same strong bid are you seeing it extend to kind of family dining and casual dining assets as well as you know QSR.
Our.
Yeah listen the QSR or are clearly there's a stronger bid for QSR is you know arc. Our our disposition activity has been focused on you know kind of de risking the portfolio and as a result has been largely focused in the casual and family dining.
Sectors.
You know we feel you know.
Pretty good about our QSR.
Exposure and our tenants there and so you know.
We don't feel the need to you know to sell to recycle capital I think you know we have a great capital position and good access to capital and so really our sales of assets just to be you know kind of just moving risk out of the portfolio and that'll be in the casual and family dining sectors.
Okay, but those would be I mean potentially.
It's kind of a thesis in how you want your portfolio, maybe that that over time could be something that.
Comes out of the portfolio by a dispositions or partially out of the portfolio via dispositions.
Yeah, Yeah, I think that's been a thesis since day, one and I think you've seen a you know kind of regular disposition activity and we disclose kind of where the industry is our we're selling.
Get Greg gave you the commentary you know, bringing down those five industries from 37 to 17.
And a lot of that is through a strategic asset disposition.
John as we've discussed a very important part of our portfolio construction is having asset level liquidity and owning assets that are granular bite size and where there exists a good bid on an individual asset basis, and so we think for the most part the vast majority of our assets have strong bids.
And and that allows us to sell and manage industry exposures, where you think a broker.
I guess, just generally I mean, what is kind of the spread in a bid out there I know, it's little bit generic so.
It's kind of tough to know if an asset asset, but its spread out there between kind of casual and family dining Hearst is kinda QSR.
But you know listen I think you know QSR new deals you know they can be five and a half to six and a half casual dining could be no seven to eight to no bid right and so I I know, that's pretty you know a wide range, but.
You know, there's there's not a lot of demand for casual diners and I think a lot of the bankruptcies are focused in and the casual dining I'm on the flip side you know the QSR guys are doing great.
Well, yes that's.
That's it for me.
Yeah. I mean, you saw carol's was in our top 10, I'm last quarter I'm, you know, we really like them as a QSR operator, they dropped out this quarter and replaced by his Ax piece franchisee again, a great QSR. Operator, you know that you can see them, replacing names like Perkins and Ruby Tuesdays and so thats.
That's been.
Underway for a long time now.
Thanks for the color very helpful. That's it for me.
Great. Thanks, Jeff jump.
Thank you there are no further questions at this time I'd like to turn the floor back over to management for closing comments.
Great well. Thank you all for your time today hopefully this has been helpful and we look forward to engaging with you all and then coming a Navy conference. Thank you.
Good day.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.