Q4 2020 Essential Properties Realty Trust Inc Earnings Call
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Greetings and welcome to the essential properties Realty Trust, Inc. Fourth quarter 2020 earnings conference call at the.
This time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
And then once you require operator assistance during the conference. Please press Star Zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Dan Donlan of senior Vice President of the capital markets. Thank you you may begin. Thank you operator and good morning, everyone. We appreciate you joining.
As of today for our Central properties fourth quarter 2020 conference call with me today, just south of our fourth quarter and for your results for people avoid he's our president and CEO Gregg Seibert, our CFO and Mark Patten, our CFO. During this conference call. We will make certain statements that may be considered forward looking statements under federal securities laws the car.
Actual future results may differ significantly from the matters discussed in these forward looking statements.
Not release revisions to those forward looking statements to reflect changes after the statements were made.
And the risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's bonds of the SEC and the yesterday's earnings release with that Pete. Please go ahead.
Thank you Dan.
And thank you to everyone who is joining us today for your interest in the essential properties.
We are excited to report our fourth quarter and full year results and more importantly turned the calendar two of new year.
While the COVID-19 pandemic is still very much with us our tenants have adapted their businesses to profitably operate in the current environment.
And most importantly pay rent reliably and timely.
I wanted to take a moment to acknowledge all of our employees out of essential properties and their incredible efforts over this unprecedented the year.
Our team members rose to the challenges presented by the pandemic by effectively managing tenant relationships negotiating.
Negotiating structuring and documenting the appropriate tenant of accommodations.
Working through necessary lease restructurings and asset repositioning.
And then seamlessly and aggressively shifting back to growth when the conditions warranted in the back half of 2020.
These actions have stabilized the portfolio with high occupancy and sustained rent collections.
And we are firmly on track to deliver attractive earnings growth in 'twenty 'twenty, one and beyond.
Turning to the fourth quarter.
We saw a continued improvement in our rent collections.
And an increase to our occupancy as we re let properties and restructured leases for a handful of larger tenants.
In addition to these positive operating trends for our cost of capital has continued to improve in the capital markets remain conducive towards investing in external growth opportunities and maintaining a conservative balance sheet to support that growth.
As such with pent up demand from our existing relationships and renewed M&A activity from the various growth oriented tenants.
We invested 244 million at of seven one initial cash yield in the fourth quarter.
Which was a record level of activity for us.
Consistent with our investment strategy.
88% of of our investments were direct sale leasebacks.
And 90% for transactions that involved an existing relationship.
Which speaks to the quality of our market relationships and the predictability of our investment platform from <unk>.
Both of the sourcing and underwriting perspective.
All of these combined factors gave us of the visibility in late January to provide 2021, <unk> guidance of $1 22 to $1.26 per share.
Turning to the fourth quarter collections, we collected approximately 91 per cent of our contractual cash ABR.
With another 3% attributable to recognize rent deferrals.
In January we collected 95 per cent of our contractual cash ABR with another 2% attributable to recognize the rent deferrals.
The majority of these rent deferrals were granted due to the reintroduction of state and local mandated shutdowns that disproportionately impacted certain tenants due to the geographic concentration of their operations.
Over half of the recognized deferrals in January which provided to one tenant and the entertainment industry, whose entire business has been mandated to close since mid December.
With that in mind now the our rent collections are mostly on par with our net lease peers. Many of them drive the majority of the rents from investment grade tenants.
We remain convinced that our disciplined investment strategy continues to provide for some of the best risk adjusted returns in the net lease sector.
Turning to the portfolio.
We ended the quarter with investments in 1181 properties that were $99 seven per cent waste.
237 tenants operating in 17 industries.
This is up from 16 industry the last quarter as we broke out our 3.3% concentration in the equipment rental and sales industry.
On the different note I would like to highlight our progress towards reducing exposures to the more challenged industries of casual and family dining.
Health and fitness home furnishings and movie theaters.
Combined these five industries now represent less than 17% of our ABR.
Which is nearly a 50 per cent decline since the second quarter of 2018, our first reported quarter as a public company.
This deliberate reduction in exposure was driven not only by our ability to dispose of assets in the timely manner.
But also the smaller size of our asset base, which has allowed us to efficiently manage our diversity in order to adapt our portfolio to changing market and industry dynamics.
That said, we continue to view, both casual and family dining and health and fitness is core industries for essential, but we will remain highly selective one exploring new opportunities.
Due to the fungible nature of our real estate and our active releasing efforts we had just three vacant properties at quarter end.
As we have stated before the value of our company does not reside in our leases the resides in our properties and our ability to keep them consistently least.
Therefore, we see high and stable occupancy as a key indicator of that value.
Our weighted average lease term stood at 14 five years at quarter end.
With the 0.1% of our a b are expiring in 2021.
And for 8% expiring over the next five years.
Our weighted average unit level coverage ratio was two nine times.
Which was a slight improvement over last quarter's 2.8 times coverage.
This was a pleasant surprise for us as we had expected our coverage to migrate lower.
However, due to the positive impact of fourth quarter investments, which had an average coverage ratio of three six times.
And various 10 minutes over two times coverage seeing their profitability accelerate year over year, our coverage managed to tick up.
As we have mentioned previously our.
Our traditional credit statistics, which focus on implied credit ratings and unit level coverage of.
Somewhat skewed as these metrics have been negatively impacted by the pandemic related shutdowns yet they do not pick up the benefits of forgivable loan programs and rent deferrals.
Turning to the balance sheet, we finished the quarter with the leverage of 4.8 times net debt to annualized adjusted EBITDAR RV.
Which has us well positioned to finance our growth plans.
While we are confident in our ability to grow alongside of our operators and capture attractive investment opportunities, where you recognized of the pandemic could have a lingering impact on certain tenants and industries.
As such we remain diligent in the underwriting and highly focused on tenants and locations that have shown resiliency and an ability to adapt throughout the pandemic.
With that I'd like to turn it over to Gregg Seibert, Our C O L who will take you through the portfolio and investment activity in greater detail.
Thanks, Pete during the fourth quarter, we invested $244 million into 108 properties through 33 separate transactions at a weighted average cash cap rate of seven 1%.
These investments were made within the 11 different industries with over 80 per cent of our activity coming from five industries quick service restaurants, the equipment rental and sales out of service medical dental and car washes.
The weighted average lease term of our quarterly investment.
16.3 years, the weighted average annual rent escalation was one four per cent the way.
Weighted average unit level coverage was three six times and our average investment per property was $2 2 million.
Consistent with our investment strategy 88 per cent of our fourth quarter of investments were originated through direct sale leasebacks, which are subject to our lease form with ongoing financial reporting requirements and 89% contain master lease provisions.
From an industry perspective car washes or in our largest industry at $15 five per cent of cash ABR, followed by quick service restaurants at 13, 9% early childhood education at $12 three per cent and medical dental the 10, 6%.
We view these four business segments as tier one industries for essential properties and going forward, we see our industry concentration increases coming in the auto service equipment rental and sales pet care services building materials and grocery.
Conversely, we expect further reductions to the casual and family dining health and fitness home furnishings and movie Theater industries.
Due to our deliberate efforts to de emphasize casual and family dining and health and fitness. Our combined concentration has declined 35% over the last two and a half years to 13% of ABR of today.
In addition, our 2018 decision to redline the home furnishing and movie Theater Industries has resulted in a combined concentration declining 70% over the last two and a half years 236 per cent of ABR today.
From a tenant concentration perspective, no tenant represented more than 2.8 per cent of our ABR at quarter end and our top 10 now accounts for just 21 per cent of ABR, which compares to 39% two and a half years ago.
Increasing our tenant diversity is an important risk mitigation tool and a differentiator for our central properties as our top 10 tenant concentration is one of the lowest in the net lease sector.
This is also a direct benefit of our middle market focus which offers a significantly more expansive opportunity set that an investment strategy concentrated on the publicly traded companies and investment grade rated credits.
In terms of dispositions this quarter, we sold 23 properties, including two vacant properties for 39 million of net proceeds with the.
Excluding the vacant properties and transaction cost, we achieved a seven 4% average cash cap rate on our dispositions in the quarter, which was slightly elevated this quarter as one of the tenants exercise of their buyback option.
As we have mentioned in the past owning properties that are highly liquid. It is an important aspect of our investment discipline as it allows us to proactively manage industries tenants and unit level of risk within the portfolio.
With that I would like to turn the call over to Mark Patten, Our CFO, who will take you through the balance sheet and financials for the fourth quarter Mark.
Thanks, Craig.
As we reported in our earnings release last night, we were pleased with our fourth quarter results.
Particularly the initial impact of our strong investment activity that kicked off in the latter part of the third quarter.
Our operating results for the fourth quarter of 2020 compared to the same period in 2019 included.
Total revenue of $41 1 million for the fourth quarter, an increase of approximately $1.9 million or nearly 5%.
Which was impacted by having the right off nearly a million five in revenues, including nearly a million dollars of straight line revenue as previously recognized the mostly stem from the chapter 11 bankruptcy filings of two tenants during the quarter.
We also recognized an additional COVID-19 related adjustment of the quarter.
We picked up nearly a million dollars from property level expenses, specifically property taxes associated with the previously mentioned tenants that filed for bankruptcy.
As well as other vacancies that were resolved in the quarter.
I'll mention here, we did move the aforementioned two tenants, which total nine properties and represent less than one per cent of our ABR at year end into non accrual status during the fourth quarter as a result of their bankruptcy filings.
Total GAAP G&A was $4 $7 million in the quarter versus $5 3 million in 2019.
We saw recurring cash basis G&A for Q4, 2020 decreased to approximately $3 $3 million.
Which as a percentage of total revenue was just over 8% for.
<unk> level compared to Q3 'twenty 'twenty.
Which was nearly 11% of revenue in Q4 of 2019, which was $13 five per cent.
Our Q4, 2020, G&A benefited from lower professional fees and lower incentive compensation.
For the year, our recurring cash G&A was approximately $17 $8 million or just over 11% of our total revenue.
Net income was $5 $7 million in the quarter and $42 5 million for the full year.
Our F O totaled $26 $2 million for the quarter and 100 and for $4 million for the full year of 2020, an increase of three four per cent and 26, 3% respectively over the same periods in 2019.
F O per share on a fully dilutive basis was 25 cents in the fourth quarter and the dollar weighted for the year, which represents a decrease over the same periods in 2019.
Our core <unk> was relatively flat to Q4, 2019 totaling $26 $2 million.
This equated to 25 cents per share on a fully diluted basis.
And core of for full for the full year 'twenty 'twenty totaled $106 7 million up from $96 million in 2019 on a per share fully diluted basis core of for flow for the year was the dollar 10, which is the decrease from 2019.
For food was up $4.4 million, an 18% increase totaling approximately $28 $8 million for the quarter.
For the full year, a half of it was up $27 million totaling $107 million.
On a fully diluted per share basis say for flow for the.
Fourth quarter and full year was 27 cents in the dollar 11, respectively. That's off to an <unk> <unk> per share respectively compared to the same periods in 2019.
Consistent with the third quarter, our per share metrics for F. O of core of F. O F O b.
Were obviously impacted adversely by the adjustments, we made the revenues and receivables in connection with the pandemic.
In addition, the full weight of our follow on offering in late September 'twenty 'twenty.
In an adverse impact on these per share metrics as the impacts of deploying this capital into a record level of Q4, 'twenty 'twenty of investments was not yet fully reflected in our results.
As it relates to the two tenants.
That I referenced earlier, these tenants and another tenant or of current and paying rent today.
And in the in the aggregate the ABR associated with the with these tenants is higher in Q1, 'twenty 'twenty, one and what was owed to us in Q4 2020.
So the good news is that the approximately $1.5 million negative impact to our Q4 'twenty 'twenty cash NOI from these two tenants and formerly vacant properties as nonrecurring and therefore limited to the adjustments we made in Q4 2020.
Separately, we collected substantially all of the $2.6 million and deferred rent we were one in the fourth quarter from those tenants that we accounted for on an accrual basis.
Turning to our balance sheet I'll highlight just a few points.
With the addition of more than $244 million of investments in the quarter that Greg mentioned, our total unappreciated gross assets was $2 $6 billion at year end.
Our unrestricted cash totaled nearly $27 million with an additional $6 million in restricted cash available for deployment in the new investments.
Our long term debt on a gross basis ticked up by $18 million, which was really related to the draw on the credit facility that we made in late December in connection with our investment activity.
From an equity perspective, we generated approximately $35 million of gross proceeds from our ATM program.
Selling approximately one 7 million shares at a weighted average price of $20 from 50 cents a share.
As Pete noted our leverage of just for 0.8 times as of year end continues to be well within our leverage targets.
And provides an ample runway for us to continue to pursue our strong pipeline of potential investments.
External growth also remains supportive bar of significant liquidity position totaling approximately $415 million as of year end, which of course excludes the $200 million accordion feature on the credit facility and.
In the $70 million of it alone one of the term loans.
We continue to hold the view that our low levered balance sheet and significant liquidity as the strategic advantage for us and provides us not just the platform for growth, but the position of stability to weather of challenging macroeconomic environment.
Such as we've seen during the height of the pandemic in these intervening months.
With that I'll turn the call back over to Pete.
Thanks Mark.
We are excited at 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 a robust pipeline of accretive investment opportunities in order to drive earnings growth.
More importantly, we believe our disciplined and differentiated investment strategy has created an incredibly resilient net lease portfolio that should continue to generate attractive risk adjusted returns as we grow in the future.
With that operator, let's please open the call for questions.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask the question you May Press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the Q4 participants using speaker equipment. It made the necessary to pick up your handset.
Oh for pressing the star key our first question comes from the line of Nate Crossett with Baird. Please proceed with your question.
Hey, good morning day.
Obviously acquisition volumes have been ramping so I was just curious to know what kind of of the run rate.
And for your guidance here.
And then also just based on the current size of your team there kind of an upward bound limit that we should be thinking about.
Sure, Thanks, Nate and good morning.
You know.
The fourth quarter was a really big quarter for us and and you know were happy with the results there, but you know as has been our tradition. We don't provide acquisition guidance. You know we provide very specific detail on our trailing eight quarters of average and you know really guide people to that.
As an indicator of of you know, where we're likely to transact.
And you can see that's been a wide range and it really depends upon the the opportunities that come up in any given quarter.
But you know the averaging out around you know 125 150, you know with highs and lows you can see in our disclosure.
Our team you know when we came public in end and has been staffed and and remained staff to transact at that level and and so you know as you look out in 'twenty 'twenty, one and certainly our guidance has the range of assumptions built into it but you know a good baseline as you know looking at the trailing.
The trailing average.
Okay. That's fair what of what about just your comments on pricing it seems like.
For the year. It was pretty stable you know just the bus that then is that kind of your expectation for this year as well.
Yeah, you know the the cap rates you know of all over the last eight quarters really range from seven one to seven five I would say that.
No theres really two factors going into that one being the industry mix and two being the overall competitive environment.
And really you know our industry mix as we said on the call has been gravitating towards the more secure industries, we invest in and away from some of the more risky industries and the that's impacted our cap rate down and then I would add you know it's.
It's all for competitive out there right now a lot of people have a lot of capital put to work in the space I think coming through this pandemic, there's a greater appreciation of the durability durability of.
Of the assets in the space, specifically the middle market tenants.
And and so we're seeing a lot of competition.
And and you know we fight to get every basis point, we can on our transactions and you know generally my guidance. There has been low to mid Sevens I would say low Sevens, you know, Greg and I are in investing in the space for for 20 years and really.
It's rare that we had been investing below seven and it's becoming more and more common and and and so you know there is a lot of competitive pressures on that.
It's hard for me to see a sea of scenario, where an entire quarter is sub seven but I you know I wouldn't put it out of out of the realm of possibility.
But you know certainly we're trying to get the best risk adjusted returns and Unfortunately, our cost of capital is supportive of an end to make those of those accretive even if we do dip down but low sevens would still be the guidance.
Okay, just quickly on the cost of capital that you guys think that you're getting closer to the potential investment grade rating.
I'm, playing just given that you are growing pretty quickly.
Well share it with you know I would remind you we have some grade rating from Fitch. We certainly have maintained an investment grade quality balance sheet since coming public you know, we haven't really pursued of second investment grade rating.
You know really because we hadn't needed need it to support all of our debt activity I think you know the.
Maybe on the calendar here for 2021.
And and so you know certainly something we're thinking about and looking at but I do think if we needed it we could get.
Okay. Thank you.
Thank you and I appreciate the questions.
Our next question comes from the line of Handel St. Juste with Mizuho. Please proceed with your question.
Hey, good morning, hope everyone's well.
So we first question I was hoping you guys could talk about the the two bankruptcies in the fourth quarter loved the Ruby Tuesday, it sounds like from your comment that you'd make them from real progress. There. So maybe can you share. Some color have you released all of its one of the boxes of what are the recovery look like what do you think they'll look like and maybe off the clarify what's embedded in your guidance.
For the especially.
Resolution specs.
Yeah, I would start by saying those are those.
The guidance has the resolution of those situations in our guidance you know I would say.
The recoveries are or are not static and certainly complicated, particularly as you think about of Ruby Tuesday's, where we sold assets.
The material gains over the investments and repositioned assets and taken assets back.
Vacant to be repositioned in and.
You know the recovery is really just just the face rate of rent them and really you know.
Re leasing the asset to a local tenant that would trade at an eight cap of releasing asset to the chick Fil a on the ground lease that would trade at a for class cap. So you know the the static recovery number is not something we're going to disclose on either of those investments what I would say is generally we provide them.
Some very detailed numbers.
The numbers on our recoveries in our in our supplemental generally in the 90% range and certainly both of those my expectation on both of the scenarios would be ultimately when when everything shakes out we would be relatively consistent with that.
Okay.
Maybe differently it sounds like you've heard the along with the room then the loved and I'm just curious on.
The demand for the loved suffered for the boxes, what type of market as debt and maybe some color on.
What the rent levels broadly the market offer for that type of space.
Yeah, you know it really I would start and say that we only had for loves of for form of art van sites and yeah. So so we don't have a broad sample set.
You know recoveries can be you know it as low as six Bucks a square foot or as high as 18 Bucks a square foot really depending on the specific sites you know as we sit today, we have one remaining loves furniture and and.
If we have worked our two repositioned two of them to another of furniture, operator, and you know the the let the one of the the third one we repositioned.
In the furniture use but you know.
Generally the recoveries and the assets or are decent and.
And fungible.
I appreciate that and one on of the questions. That's on page 15 of the stopping of hope you could set some light on some of the figures and the drivers of the sequential changes in January versus the fourth quarter collections. Overall, you know the grew up to 97 per cent in January of this 96% fourth quarter, but the cash collections were up from 91% last quarter to 90.
5% of while the deferral of decline from five per cent book yield of 2% January So how can you talk a bit about some of those sequential changes are maybe a bit color on the leases you mentioned restructuring and also what's left in that 2% of deferral bucket and when do you expect to convert that the cash rents.
That's a lot of questions there handle.
Generally you know that our money.
We had.
[laughter] you know I would say the the biggest change in collections of the cash rent was.
Certainly the explorations of deferrals as we said on the call. We had some new deferrals that that crept in late in the fourth quarter of.
But generally when we approached the deferrals in in the second quarter of last year.
You know, we really werent looking out beyond the end of the year I'm really recognizing you know the the situation would change would be materially different.
The biggest change in collection of cash rents I would say is just the exploration of of deferrals.
You know we also had you know a bunch of repositioning assets at one you know one offline and came back up online.
Throughout the fourth into the first which is going to contribute to that I'm sitting here at a and.
95 per cent collections and 2%.
You know recognized deferrals of you know, we really ended up talking about the 3% and a good chunk of that remains our our five theatres least of M C.
And they continue to struggle that industry continues to struggle and I'm sure you know.
You've gotten some much more insightful commentary on on the movie industry from.
The other net lease peers, who have much larger exposures, but you know that that remains a good chunk of the of the 3% debt that we're not collecting.
And the type of follow up on you said you mentioned that there was a deferral of that crept in late in the quarter I'm curious it sounds like the it might've been COVID-19 restriction related so maybe some color on the tenants in the street and what makes you think that that the money good the phones.
Yeah.
You know it was COVID-19 related and in the re institution of shutdowns.
Largely the the sectors that remain challenged our or the entertainment and fitness centers as you would imagine.
You know what what gives me comfort and in recognizing those deferrals is that those those tenants.
I remain current and those tenants remained credit worthy and you know of.
Supported by good capital structures.
Okay.
At the time.
Great. Thanks.
Our next question comes from the line of Katy Mcconnell with Citi. Please proceed with your question.
Great. Thanks, Good morning could you maybe just touch on the timing of the acquisition, whether it's salary that's sort of thing before year end might be the reason for the letter volume the other day.
Yeah, I mean listen the you know generally in this business Kt there the the acquisitions for better for worse tend to be you know quarter end loaded.
And the this fourth quarter was no different.
Fight like Heck every quarter to front end them in and for whatever reason they tend to slip.
And and that that trend is.
It is particularly acute in the fourth quarter, where you have.
Some more activity, that's more tax driven and in that year end crush tends to result in end of January law that we all in the industry fight.
I would argue you know sitting here of 50, you know I wouldn't say that that's the slow start to the year. We feel good about that we feel good about our pipeline and you know you know where our are excited for a big March.
Alright, Thanks, and then Keith Weiss from more background on what drove the tax adjustment right into the fall on you in for.
Fourth quarter and it's about the M. S for any of the bankruptcy kind of the project.
Yeah.
Yeah, I mean that you know what when we.
Kick out of tenant and terminate the lease we become liable for.
For for those of those taxes in and paying those taxes to the extent that a bankrupt tenant isn't paying it and that's what happened and so that's the U S.
Landlord, knowing you know over.
1100 properties, we certainly bear the risk of of taxes, and and we pass those the risk through to our tenants, but you know to the extent of the tenant.
You know becomes on credit worthy we become liable now in you know oftentimes will receive of bankruptcy claim that'll make us whole for those taxes.
You know it becomes more of a timing issue but.
Certainly of a risk.
For all net lease investing in but in general.
I think it was outsized in the fourth quarter and shouldn't be repeated.
In the first quarter here.
Okay, great. Thank you.
Thank you Kate.
Our next question comes from the line of Sheila of Macquarie.
Evercore. Please proceed with your question.
I guess good morning.
Peter I was wondering with the benefit of hindsight, if either tenants or essential properties as a landlord are requiring any new lease language surrounding a shutdown like providing more clarity on what of short term.
The ferro might look like.
You know that really show that hasn't crept into our lease negotiations.
You know are the good quite frankly, I wouldn't be surprised if tenants start.
Looking to.
You know share of that risk of of state mandated shutdowns. You know currently you know the 10.
<unk> per those risks and are required to pay a rent regardless of of the mandated shutdowns of which is why we were forced to structure of deferral agreements as opposed to the tenants.
Being able to say of force majeure or not pay rents as of right and ultimately the the leases are.
A allocation of risks so that hasn't crept in.
And I, you know quite frankly, given the nature of the pandemic and hopefully you know it's a once in a lifetime of event for US. The you know I I don't expect it to be topical.
Okay, Great and one last question you did have more of dispositions in fourth quarter than typical I'm just wondering what the drivers there are and do you expect larger disposition volume in 2021, as you produce casual dining and exposure to gyms.
No I I think I think those industries are our right sized where they are we had one large tenant buyback that happened in the fourth quarter and quite frankly that tenant wasn't performing as we would've expected. So we were happy to transact and moved those those assets back.
And be able to redeploy that capital into better performing operators.
I would say our historical average is a good guide on the.
<unk> much like you.
You know on the acquisition so.
It certainly heightened in the fourth quarter, but you know the debt.
The $15 million ish, a quarter of it feels about right for 2021.
Okay. Thank you.
Thank you for you.
Our next question comes from the line of.
Teething Kim with tourists. Please proceed with your question.
Thanks, and good morning.
So there were a couple of moving pieces to the revenue run rate this quarter and you guys did a good job outlining some of them, but just given how some of these kind of trouble of tenants had been released like town sports or will be to thief or a lot of furniture I'm just curious how much a b or is.
On the come and not in the fourth quarter run rate.
Hum.
I know what you mean by on the come keeping but Dan you want you tackle that.
Yeah, I mean, so keeping I think the the the main aspect would be town sports you know they paid us the new town sports paid us rent in December So I think that that's a big piece of it and then you just have the non accrual tenants that are paying us and paying us on a cash basis.
As those folks potentially pass more going throughout 2021, that's potential upside to the run rate as well.
Yeah, I would say it certainly you know the fourth quarter of certainly depressed from the run rate perspective, and you know we have good momentum in the first quarter, which is reflected in our guidance.
Doug It's one piece of that is the one point of 5 million right of a b R and expenses that are debt what the drag in the fourth quarter about reverse.
My question was with something like passport you have one month of rent.
I'm not sure if there the other aspects too.
The other tenants that you know you're going to collect the partial rent, but the starting in the first quarter is at 1.5 million plus.
Well you know what are the dollars are that should we be modeling going forward.
Well part of it is the one five as of catch up on.
That's over several quarters.
I'm not going to be one quarter shot for the one.
Part of that is the straight line catch up.
Okay got it.
And how.
How much rent are you currently collecting from AMC and if there's been any dialogue that you've had with the with your tenants.
Yeah.
Yeah, I'd stop short of of disclosing exactly what we're collecting from a M C.
You'll recall that we put them on a percentage went rent deferral through the end of the year that really was you know kind of dependent on the level of revenue they they.
<unk> that our sites.
And.
You know certainly we've been in active dialogue with them and as have all of our landlords and it remains a fluid situation.
Got it.
And just last question for me.
What kind of G&A run rate should we expect in 2021.
Hum.
Well I think.
I think where we settled out in Q4 the.
Yes.
I think that was a pretty good pretty good run rate other than I think it's going to tick up a little bit simple.
Simply because you know one of the things we.
From a compensation level in terms of incentives just the obviously this year being tougher the most.
But on some of the professional fees were awful, but that's kind of of recurring.
Better news.
Right.
I think probably you know where we finished off.
And just driving real quick.
Yeah.
I think probably if you look at just total G&A forgetting cash G&A, unless that's kind of where you're going but I think of well.
G&A is probably the.
They'll probably tick up a little bit from the 24 for the web for the full year. So probably you know a little bit more than that of call. It a millionaire.
Okay. Thank you.
Our next question comes from the line of Greg Mcginniss with Scotiabank. Please proceed with the question.
Hey, good morning, everyone.
So P E. T has had a fairly concentrated approach to target industries, what's you're looking for acquisitions, but we noticed that you added the other services.
The industry exposure disclosure this quarter, just curious what that category encompasses and whether or not you're starting to look into other industries for transactions.
Yeah. Thanks, Greg I would say we vote, we've always had another services bucket and generally when an industry reaches a sufficient concentration to warrant being separate it out we will do that much like we did with equipment rental and sales.
You know the the.
The underpinnings to.
Our investment thesis is owning service and experience based real estate.
Yeah, and and the coupled with granular fungible pieces of property range, which is manifest in our $2 1 million dollar investment per asset and then the services are pretty self explanatory. So we're certainly open.
The other industries to the extent that their service based industries and they have real estate fundamentals that are or meet our fungibility and granularity.
Criteria and and so.
You know we're open we're constantly looking at to expand our investment universe.
And that remains a challenge for for the investment team here.
You know as we sit today.
You know what sits in that two 3% of other services.
Don't know that I don't know off the top of my head Dan what do we got.
The asking me a blank stare because he doesn't know either one or 2.3 per cent of the services what's in that bucket as we sit today you know, it's mostly a funeral homes.
Okay.
We have some other assets, which maybe have a we have one particular of there's a small retail and the service component.
And some.
Some of those are just the.
You know not real easy to identify them and the one of our existing buckets. So.
Great. Thanks, Greg.
Okay, that's fair.
And just another one you've mentioned lowering exposure some categories, where you're not as bullish on future prospects I'm. Just curious if there's any specific tenants right now in the portfolio that may be rent paying but you have.
Some near term concerns are kind of trying to get at whether or not that 97 per cent retina recognition. In January is a fair run rate until you know AMC has dealt with it maybe a little bit from some of the other mines.
The minority of tenants, where you're also not recognizing right.
Yeah, I mean listen we have the 237 tenants and you know certainly some of them are on our watch list and and you know we're working to right size of those investments as youll see in our disposition activity.
You know.
Certainly the the 3% that debt.
You know and in the non recognized the.
Two thirds of that is AMC and you know the.
The other is you know a bunch of the little guys that you know I would say is not materially material. You know, we're hopeful that 1% comes back online, but it's certainly not a driver of our story.
Oh.
Alright, thanks for the time.
Thank you.
Our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.
Hi, good morning.
If you could just talk about on guidance what additional credit event. If any are of skin in the guidance range, but I think that's the impact of bad debt levels, and how that compares to 'twenty and 'twenty or 'twenty of 19 actual result.
Sure and welcome back Caitlin and thank you for free.
The initiating on us.
You know listen the this whole COVID-19 pandemic and our view really accelerated.
You know the the restructuring of weak tenants within the portfolio and so I think the the high level of restructure.
The restructurings we experienced.
In 2020.
Largely you know from our perspective is in the rearview mirror and as we look out to.
'twenty 'twenty, one we expect the much more normalized level of of core.
Credit events as.
As we've disclosed in the past.
The good proxy is roughly 50 basis points of ABR and you know we certainly.
Bake in a a a joe.
Generic credit loss assumption as well as specific.
Yeah, the situations that we know of.
And are you now.
I think you know guidance incorporates all of those scenarios.
Okay, and then maybe similarly in terms of the increasing from.
From the I recognize the rent levels I think in the fourth quarter of it was about 94% does guidance assume the and increased at the year goes on.
We're not.
Yeah, I mean, you know we expect the deferrals to burn off we expect guys, who who arent paying to either start paying or.
You know, we have the ability to kick them out and put people in who who will pay and.
We make a very you know the.
The tenant by tenant asset by asset assumption as we look at the portfolio and we built up our guidance.
I think.
Yeah.
We don't envision a scenario, where we have assets that we're not collecting rent that we don't collect rent them you.
You know in the future.
Okay, and then maybe on the unit level rent coverage. It looks like that was the same in 40 20, and 14 19 at two nine times, but the distribution of tenants has shifted to the now with a coverage of about two times. The declined in the portion of west coverage under one time that I was wondering if you could just go through.
And of the details on how that distribution and Pie chart. The ECL has shifted a deal for.
For all of the names.
Changed.
Yeah, I think you know certainly you know my commentary on the call were was we really had been steering people away from that disclosure as we didn't feel it was particularly relevant given the nature of the pandemic and the fact that.
The majority of our tenants were offline for the entire quarter and partially online for.
You know for for the balance of the year and that's one of the reasons why we've.
The transition to provide monthly collections data is because that is much more real time in an indicative of the risk in the portfolio. So I don't I don't spend a lot of time looking at that distribution just because it doesn't take into account.
You know the nature of the pandemic, nor does it take into account.
For the deferrals that were granted.
And so you know generally we expect that annoyed that the number to be pretty noisy kind of through the second quarter until we start getting.
The full effects of this pandemic behind our tenants.
Okay got it. So I think you may be kind of answered it but then would you say that it's fair to think debt.
Those that have shifted in their debt that the temporary shift in that over the kind of medium to longer term you would expect the metrics to look more similar kept pre pandemic.
Yes, certainly.
And I would say yes.
Whereas if we can go to if we were to go through the exercise of.
Of.
Affecting all of the those sites for the deferrals that were granted.
I would imagine it looks pretty similar to pre pandemic lam of levels, if not better.
Mhm, Okay. Thank you.
We are done operator anymore questions guys.
Yeah.
For the operator.
Okay.
Operator are you there.
Yeah.
Okay.
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Ladies and gentlemen, I apologize for the delay we are going to go ahead and resume our conference. Our next question is going to come from the line of Sam Choe with Credit Suisse. Please proceed with your question.
All of its quite a long delay. Thank you for taking my questions I think most of the bad I'm happy to answer it.
I think that maybe discount tires and Terry your top 10 tenant am I correct to assume that they supposed to an example of a you're kind of expanding on a preexisting relationship.
Yeah, Yeah, Sam and <unk>.
We apologize for the for the the GAAP there we lost our operator somehow.
We're happy to plough through the rest of the questions here.
We had we did some investments with them earlier in the year and we're able to do some add on investments with them. They are of great tenant a great company, we have really good.
In the North Sea North East that we were happy to add to our portfolio.
Got it so I think in your prepared remarks, you said that most of the growth around 80, 90% has been pre existing relationships. So could building on preexisting relationship increased top 10, 10 of exposure or given that growth will be throughout your entire portfolio of that should be relatively flat.
Yes.
Yeah.
We have relationships with the vast majority of our tenants and we look to continue to grow with them you know when tenants start populating our top 10.
We kind of get capacities with with our exposures and and.
And kind of stop investing at some point.
And certainly as the managing our top 10 of concentration managing our individual concentrations are.
An important portfolio.
Construction considerations that we way.
And so I would expect the vast majority of our investments to be outside of our top 10.
Got it one more from me.
So your strategy of reducing exposure to the more challenged segments makes sense, obviously, but I'm seeing that you guys added from health and fitness.
The quarter.
<unk> wise I mean, what did you like about the assets because I think you mentioned that you still consider casually bonding and health and fitness core operations.
Yeah, you know I would think the what youre seeing in adding that was the re re tenant Inc. And repositioning of our town sports that was in the in the bank in bankruptcy in the third quarter and emerged during.
During the fourth and start paying rent during the fourth.
We like gems that are well well.
Well positioned from a membership perspective, and the revenue perspective, and the competition perspective, they have high coverage.
They are newer facilities that are well positioned against older facilities within those local markets and have a rent basis that gives us comfort that if it doesn't work out as of Jim we'd be able to put in other user in there.
And a similar rent level.
And so we're open to investing in Jim's and we continue to evaluate opportunities in the health and fitness space and you know I think you know it.
It's not going to be a material part of our investments but.
Certainly you know we'll continue to look there.
Got it thank you and hopefully the operating scale.
Yes of course.
Of course.
Thank you, Brian we'll move onto our next question, which is coming from the line of RJ Milligan with Raymond James You May proceed with your question.
Hey, good morning, guys. The most of my questions have been the asked and answered I'm just curious with the recent spike in the 10 year has that had any impact on the on your business and then at what point or what level of of the tenure need to get to before it does start to have an impact from your business.
Yeah, certainly I.
I would say the recent spike has not had any material impact on all of our business. You know, we're making 15 to 20 year investments.
You know at spreads to our cost of capital that is historically wide.
And you know really hasn't crept in and certainly.
The overlay that with a a 90 of 60 to 90 day transaction cycle.
The 30, 30 day movement isn't kind of really impact those transactions.
You know, we think are moving in the right would ultimately help us as it would disadvantage more leverage dependent private buyers.
And also create.
Create them make the alternative capital sort of sources for our tenants are more expensive.
I would stop short of saying what that move with low.
Would have to be.
And I certainly think of as you'd think about the forward yield curve. You know are at that level of dramatic move is and what the markets anticipating.
Okay. That's helpful. And then just in terms of typically going after non rated or below investment grade tenants as we move through the pandemic.
Any change in thoughts does that given the performance of those those assets in your portfolio does that make that strategy more attractive less attractive any interest in increasing investment grade exposure or.
Perhaps going even further down the credit curve.
In terms of new investments.
Yeah listen I think our middle market strategy is really.
Governed by our desire to be of sale leaseback of.
Provider of choice to our tenants and and you know because in the context of the sale leaseback.
We're competing on the quality of our execution and the reliability of us as a counterparty and were able to structure of long term investments on our lease form with our terms.
And you know sitting.
Sitting here in January.
With 97% money good rent.
And comparing that to.
My investment grade peers, we feel pretty good about the quality of the portfolio that we've assembled an end of the nature of our tenancy.
Particularly when you couple that with the fact that this portfolios had been roughly constructed at a seven five cash cap rate with almost 100 basis points pick up the GAAP cap rate.
As I said in the prepared remarks, we think we're getting some of the best risk adjusted returns in the net lease space in and.
I think if anything we feel our investment thesis has been validated through this pandemic and.
We will continue to be disciplined in and invest in relationships and sale leasebacks with people that we know and trust in the assets that have good marketability.
Okay and my final question is as you're thinking about new sale leasebacks and structuring those leases for any changes or contemplated changes in the the the.
For the shape of form of the escalators going forward.
I listen I would say the negotiated the the lease Escalations are always a a intensely negotiated provision with the the counterparties wanting to pay as little as possible and and you know us wanting to get as high as possible the market range.
Tends to be flat to 2%.
You know on occasion, you'll see higher than 2% I would say you.
You see flat with investment grade tenants.
You know on average we were one four in the quarter you know historically, we've been closer to 1617, and that's really just day a illustrates.
The illustrative of the sample of deals we did not a change in the market and so that that negotiation remains dynamic and we'll continue to push to get as.
As good as Escalations, we can.
And hence we will continue to try to lower their cost of funds as much as they can I would say.
We like being kind of below 2%.
Because when you have higher Escalations, you have a scenario where.
Instead of seasoning favorably.
Your rents may be growing faster than the tenant's profitability and and you know as you get further from Europe.
Underwriting it's better for the the 10 tended to grow faster than your rent. So your rents get more better coverage and more stable.
Thanks very much.
You got it thank you.
Thank you. Our next question is coming from the line of John Masako with Ladenburg Thalmann. Please proceed with your question.
Morning.
Good morning, most of my questions. Most of my questions have also been answered, but just a quick one.
You mentioned cap rate compression that youre seeing out in the marketplace. Today, I mean, I guess as you think about middle market non investment grade tenants what are some of the alternative financing sources out there that have been driving some of this cap rate compression.
Competing reads is there more access the bank capital now than there was.
Maybe even prior to the pandemic.
It's one of the factors there because you know of any.
One of the benefits of kind of middle market.
Net lease is supposed to be kind of the stickiness of those cap rates.
Yeah listen I would argue are that stickiness certainly remains in and you know over the past year, we've really transacted in the 20 basis point.
Window the.
Despite all the noise in the volatile movements in and in the interest rate. So I you know John I don't think that stickiness is is.
Gone.
Most of the competition is coming from other net lease.
Capital investors, whether it's a public Reits.
Who are dipping down into the middle markets to fill their investment appetites or private guys who.
Discovered the.
The the technology of the ABS financing and are now able to compete on the levered basis with the more aggressive cost of capital.
I would certainly say.
Bank financing is no more no no more easy to get today than it was 689 12 months ago.
And I guess as someone who's really utilized the ABS you know in the past how sustainable do you think some of that private market high leverage ABS back investment in the states is it just kind of of passing phase do you think in your opinion or could that be a real kind of cap rate.
Compressor, if you will going forward.
That's a very efficient market, it's a very efficient way to access debt capital.
And.
It's been around for a long long time.
You know.
Yeah, Gregg on the call here.
One of the first ABS bonds.
A long time ago.
And I think its uses is more prevalent today than I would anticipate you know.
It is being here as the competitive factor going forward.
Okay. That's it for me. Thank you all very much. Thank you.
Sure.
Thank you and as a reminder, ladies and gentlemen, if you would like to ask the question at this time. Please press star one on your telephone keypad. Please hold while we poll for questions.
I'm not seeing any additional questions coming in at this time, so I'd like to pass the floor back over to management for any additional closing comments.
Great. Thank you operator in the and again, we apologize for the first of all of the.
Dropped the host and leaving leaving you guys are waiting for a bit there, but thanks for your time today.
Clearly we're excited about.
The fourth quarter, but more importantly, we're excited about 2021, where the portfolio is come and our ability to continue to invest and grow.
So we look forward to meeting.
With a lot of you.
Investors at the Citigroup conference upcoming and munis.
Stay well and thank you. Thanks again bye now.
Ladies and gentlemen, we thank you for your participation on today's conference you may disconnect your lines at this time.
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Yeah.
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