Q1 2021 Essential Properties Realty Trust Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to our Central properties properties Realty Trust first quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A brief question answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your.
Telephone keypad. This conference is being recorded and a replay of the call will be available two hours. After completion of the call for the next two weeks the dial in details for the replay can be found in today's press release. Additionally, there will be an audio webcast available on essential properties website at www dot a central properties dotcom.
An archive of which will be available for 90 days. It is now my pleasure to turn the call over to Dan Donlan Senior Vice President and head of capital markets at essential properties. Thank you you may begin.
Thank you operator, and good morning, everyone. We appreciate you joining us today for our central properties first quarter 2021 conference call here with me today to discuss our first quarter our people on what he's our president and CEO Gregg Seibert, our COO and Mark Patten our CFO.
During this conference call, we will make certain statements that may be considered forward looking statements on our federal Securities law.
Actual future results may differ significantly from the matters discussed on these forward looking statements and we may not release revisions to those forward looking statements to reflect changes. After the statements were made factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in yesterday's earnings press release with that Pete. Please go ahead.
Thank you Dan and thank you to everyone who is joining us today for your interest in essential properties.
The first quarter was solid for us on all fronts.
In terms of the portfolio, our portfolio demonstrated great stability and durability as our tenants largely put the impacts of COVID-19 behind them and emerge from the pandemic are stronger operators.
While the pandemic pandemic continues to affect businesses. These burdens are now more manageable with the vast majority of our tenants no longer needing support from us in the form of deferred rents.
Additionally, the fourth quarter and into the first quarter, we largely completed the repositioning of properties, formerly leased to tenants that needed to restructure as a result from the pandemic.
Yes.
In terms of investments our industry relationships, which were strengthened during the pandemic are driving investment activity as tenants continue to turn to us as a capital partner of choice for the real estate capital needs.
As a result, the record level of activity that we experienced in the fourth quarter continued into the first quarter with another strong performance on the investment front.
During the quarter, we invested $198 million into 74 properties at a 7.0% initial casually yield with over 16 years of lease term.
More importantly, 81% of these deals were repeat slash relationship transactions.
And 85% were direct sale leasebacks on our lease.
In terms of the capital markets the capital markets remain attractive for us and we continue to operate well within our desired leverage range.
Specifically.
Finished the quarter with net debt to annualized adjusted EBITDAR Ari of five one times.
However, when taking into account our follow on equity offering subsequent to quarter quarter's end, our pro forma leverage declined to four one times, which provides ample capacity to continue our external growth strategy.
Looking out to the balance of the year, we anticipate our new vintage portfolio to remain highly occupied.
Our focused and robust pipeline to generate accretive in attracting attractive investment opportunities and the capital markets to offer multiple sources of well priced capital.
Based on these assumptions, we are reiterating our 2021 F F O per share guidance of $1.22 to $1.26.
We believe our projected double digit increase in E. F F O per share combined with our well covered dividend and our commitment to prudently managing our balance sheet and portfolio of risks offer investor a compelling total return opportunity.
To dig in with more specificity, we ended the quarter with investments in 1240 properties that were 99, 1% leased to 259 tenants operating in 17 industries.
Our weighted average lease term stood at $14 three years at quarter end with only four 2% of our ABR expiring over the next five years.
Our weighted average unit level coverage ratio was three times, which was a slight improvement over last quarter's two nine times.
As we have previously mentioned our traditional credit statistics, which focuses on implied credit rating and unit level coverage remained skewed as these metrics have been negatively impacted by the pandemic related shutdowns last year, yet they do not pick up the benefits up from euro loan programs and rent.
Nonetheless, it is encouraging to see this upward trend.
Our pipeline remains strong and we look forward to continuing to add properties and tenants to our portfolio predominantly through direct sale leasebacks with growing middle market operators in our targeted industries.
While our balance sheet remains fully supportive of our external growth strategy. We will continue to stay way ahead of our capital needs in order to maintain optimal financial flexibility.
With that I'll turn the call over to Greg Our C O.
Thanks, Pete during the first quarter, we invested $198 million and the 74 properties through 'twenty two separate transactions at a weighted average cash yield of 7%.
These investments were made within nine different industries with over 95% of our activity coming from four industries quick service restaurants Auto service medical dental and early childhood education.
The weighted average lease term of our quarterly investments was 16.1 years, the weighted average annual rent escalation was one 8%.
The weighted average unit level coverage was three times.
On our investment per property was $2 7 million.
Consistent with our investment strategy, 85% of our first quarter investments were originated through direct sale leasebacks, which are subject to our lease form with ongoing financial reporting requirements and 79% contain master lease provisions.
From an industry perspective car washes remain our largest industry at 14, 9% of cash ABR, followed by quick service restaurants at 13, 6% early childhood education at 13, 4% and medical dental at 12, 4%.
We view these four business segments as tier one industries for a central properties.
As we have noted in the past we view our industry focus is a distinct competitive advantage as it allows us to remain diverse are retaining deep in specific industry relationships and proprietary datasets.
Going forward, we continue to see concentration increases occurring in the more pandemic resistant industries like auto service.
Women right on sales Petcare services building materials and grocery however.
However, we are pursuing attractive investment opportunities in both the entertainment in casual dining industries, which have began to experience strong rebounds in revenues and profits as more states relax indoor capacity restrictions and vaccinations increase.
Conversely, we expect further reductions to the movie theaters and home furnishings I've note. Our combined exposure to both industries is now just 3.4% of a b R, which is down 75% versus three years ago.
From a tenant concentration perspective, no tenant represented more than two 6% of our ABR at quarter end and our top 10 accounts for just 22% of ABR, which compares to our 41.
8% concentration just three years ago.
Increasing our tenant diversity is an important risk mitigation tool and a differentiator for our central properties.
This is also a direct benefit of our middle market focus which offers a significantly more expansive opportunity set than investment strategy concentrated on publicly traded companies and investment grade rated credits on the occupancy front, we did see a 60 basis point pullback this quarter, which mostly relates.
Our decision in late March to terminate a seven property master lease with an auto service tenant in the South East.
Given our basis in the real estate and the strength of our operator relationships. We determined this was the best course of action for the long term.
We have either relapsed or identified replacement tenants for all of these sites and we expect to recovery that is consistent or better than our historical performance on lease terminations.
Which speaks to the quality of our underwriting and desirability of our properties.
As of today, our occupancy stands at 99, 5% with only six vacant properties.
In terms of dispositions this quarter, we sold 16 properties, including one vacant property for 25 million in net proceeds.
Excluding vacant properties and transaction cost, we achieved a seven 1% weighted average cash yield on those dispositions.
As we have mentioned in the past.
On a liquid properties is an important aspect of our investment discipline.
It allows us to proactively manage industries tenants and unit level risk within the portfolio.
That said future disposition activity should moderate to levels more consistent with our historical average as much sort of COVID-19 related restructuring is behind us.
With that I'd 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, Greg.
Pete and Greg noted in their remarks and was evident in our release last night, we had a great first quarter highlighted by strong revenue growth and our F. O N E F F O results, which on a per share basis, we're 30 cents.
Some of the notable elements on our reported operating results for the first quarter of 2021 include the following.
Total revenue reached $48 6 million for Q1, an increase of $7 $1 million or 17%.
Over last year, which reflects the full quarter impact of our record level of investments of $244 million in Q4, 2020, and more broadly our total twenty-twenty investment activity of $603 million at a weighted average cash yield of 7.1 percentage.
For the first time since the onset of the pandemic. Our results did not have notable adjustments directly related to COVID-19.
I said, we did incur approximately $300000 of property level expenses associated with property taxes and maintenance for a vacant property that was sold in April 2020, as well as a few properties that were re let intra quarter. So those should be nonrecurring going forward.
We recognized approximately $5 $7 million in impairment charges during the quarter $3 8 million of this charge related to a single furniture property.
We also recognized $3 $8 million on gains on asset dispositions that Greg mentioned during the quarter.
Total GAAP G&A was $6 4 million in Q1, 2021 versus $7 $5 million on the same period last year, that's a 15% improvement which reflected reduced costs for professional services, such as audit and legal as well as certain outsource services. We expect that these particular cost elements in our G&A.
I will continue to trend favorably during 2021.
We saw a recurring cash basis G&A for Q1, 2021 decrease to approximately $4 $8 million versus $5 6 million in Q1 last year, and notably as a percentage of total revenue our Q1 2021 cash G&A was just over 10%.
Bill level level compared to Q1, 'twenty, 'twenty, which was nearly 13% of revenue.
Net income was $15 3 million in the quarter, which was up nine 5% from first quarter last year.
Our F O totaled $32 $9 million for the quarter, that's an increase of $7 4 million or 29% over the same period in 2020.
Or F O per share on a fully diluted basis was <unk> 30 cents as I've mentioned.
Seven 1% increase over the same period in 2020.
Our core F F O on a nominal basis was 21, 4% higher than Q1, 'twenty 'twenty and on a per share fully diluted basis core for flow for the quarter was 30 cents per share.
<unk> was up $5 $9 million, that's a 22% increase versus Q1 last year totaling approximately $32 5 million for the quarter.
On a fully diluted per share basis, if a flow for Q1 'twenty 'twenty. One was 30 cents per share that's up three 4% from Q1 2020.
With regard to our balance sheet at quarter end. The notable elements are largely the following.
With another strong quarter achieved by our team, particularly investing on a $998 million and 74 properties. Our total gross assets stood at $2.8 billion at quarter end.
Our unrestricted cash totaled nearly $43 million with an additional $2 million in restricted cash available for deployment into new investments with.
This cash balance was slightly elevated in support of our robust investment pipeline.
The increase in our long term debt as of quarter end on a gross basis was essentially the result of the $120 million. We drew on our credit facility to fund our first quarter 2021 investment activity.
From an equity perspective.
We generated $65 million of gross proceeds from our ATM during the quarter selling approximately two 8 million shares at an attractive weighted average price of $23 22 per share.
As Pete referenced subsequent to the quarter end, we executed on an upsized overnight equity offering generating total gross proceeds of $193 million at a price of $23.50 per share before the underwriters' discount.
Our total liquidity at quarter end stood at $307 million.
As we pointed out in our release on a pro forma basis, the overnight offering moved our leverage to $4 one times net debt to annualized adjusted EBITDA Ari.
And our liquidity increased to $492 million.
We appreciate the support from both new and existing investors as we now have ample runway to continue to pursue our strong pipeline of potential investments.
With the net proceeds of the offering we paid down the outstanding balance on the credit facility.
As we've noted in our past quarters, our current $492 million of total liquidity does not include the $200 million accordion feature that we could access on our credit facility and an additional $70 million of borrowing capacity available through an accordion feature that we have on our term loans due in 2026.
We continue to hold the view that our low levered balance sheet and significant liquidity is a strategic advantage for us and provides not just a platform for growth, but a position of stability to weather a challenging macroeconomic environment such as we've seen during the height of the pandemic and these intervening quarters.
With that I'll turn it back over to Pete.
Great, Thanks, Greg and Mark with that operator, please open the call for questions.
Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will be and.
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Yeah.
Okay.
Our first question comes from the line of Sam Choe with Credit Suisse. Please proceed with your question.
Hi, guys good morning.
I was just kind of looking at your investment activity.
Just just saying that March was especially strong so.
I wanted a reminder, off when investments are under like the PSA, It's our LOI, how how long does it does generally take for you to compare and I.
I know that.
A lot of its relationship based on that.
It helps with the timing standpoint, but just curious if there has been any changes since our debt.
The pandemic on how expedient you can be on that front.
Yeah, Thanks, Sam generally and as we said in the past we have about a 60 to 90 day transaction cycle. I'm, you know 30 days to negotiate a contract and then 30 days to perform diligence and that May vary we've closed deals isn't as quick as three weeks.
And you know we've had deals that lag lag for for many months.
Given that were.
Predominantly sale lease backs a lot of our deals are driven by an underlying M&A transaction that often becomes the gating item for close to closing.
Where another operator is buying.
Our competitor in and doing diligence and that business deal.
<unk> drives the timing, but generally you should assume we have about a 60 to 90 day cycle on our pipeline.
Got it.
<unk>.
Are you able to disclose how much investments are under PSA LOI subsequent to the quarter.
But generally we don't in the context of our overnight offering that we did in April we disclosed our forward pipeline in the context of that offering which was about $250 million.
And so I guess my my broad commentary would be we have a full pipeline and we're working hard to close the quality opportunities that we see in and drive drive investments.
Got it alright, thank you so much guidance.
Thank you Sir.
Yes.
Thank you. Our next question comes from the line of Sheila Mcgrath with Evercore ISI. Please proceed with your question.
I guess good morning Pete.
Pete on in the supplemental on.
The leasing page the retail line item looks to have some lease restructuring with a lower recovery rate I was just wondering if you could give us a little bit of detail on that.
Yeah.
Yeah Sheila.
I would first start off by saying, we generally don't have a lot of generic retail in and certainly the numbers.
And that had a million one to 569 would support that.
What youre seeing there is largely the impact of some of our art van restructuring leases.
Okay.
Okay great.
And then I think Greg any and.
I just just to tie that together if you go back to Mark commentary on the impairment that we had during the quarter.
Was it related to a furniture properties.
Okay. Thanks, and then Greg I think mentioned that in the pipeline Theres more entertainment.
Assets, but youre not focusing on cinema, so what would that what kind of tenants would that include and our cap rates any higher on entertainment assets.
Now since the pandemic.
Yeah. So I think what Greg said is we're seeing some in our pipeline and were open to investing in both the entertainment.
Assets as well as casual dining is those sectors have.
Rebound rebounded and you know certainly selectively debt that can includes family Entertainment Center bowling alleys. We also have some trampoline parks and other miscellaneous.
Type uses in that.
You know keeping.
Really keeping discipline to having our granular and fungible properties. So it wouldn't encompass some special use assets.
And generally those those that industry is going to be at the wide range of or our cap rate range.
But for the high quality operators and fungible assets, we're looking at it's not going to be Super why too.
Our our average.
And so you know I would.
Think debt that the that sector would be in the low seven range Sheila.
Okay. Thank you.
Thank you.
Yes.
Thank you. Our next question comes from the line of Nate Crossett with Bahrenburg. Please proceed with your question.
Hey, good morning.
So maybe just to follow up on Sheila's question that day. So the pipeline that's in place now the pricing.
And you're kind of anticipating to execute on you're saying is in the low sevens.
Is that correct and then just maybe your comments on competition and pricing overall.
Remind them as we've seen kind of rates back up.
Yeah, I would say.
You should certainly in and expect to see US continue transact in that low seven range and the current pipeline is supportive of that you know we've seen them kind of in the first half of the year here increased competition.
As you know competitors have every started their investment activities and new competitors have come to the space and and that competition has not.
Really abated as a result of you know rates cause sort of spiking up.
But you know we think we have a great set of relationships in and people choose to transact with US and you know we we certainly have a full pipeline.
And you should you know despite that count competition to continue to see us invest in that kind of low seven range.
Okay. That's helpful. And then just one on the funding side I think you have one investment grade, which debt and I think last quarter. You mentioned you may pursue another this year and so I'm, just curious where that stands.
Yeah.
If there were an update on that we would have provided it.
We're.
And the dialogue with the agencies and you know when we get somewhere we'll let you know, but that's an ongoing.
Discussion that we're having.
Okay, I mean, it didn't make a real difference if you were to price and on that.
Let's say 10 year money today, if you had two investment grade versus where you're at right now.
It it and then give you more granularity on it but you know it certainly depends on which market you are pricing into and I think you know the more.
Validation of your credits that you have the day more expansive the universe of investors that you can approach, but I you know I think given where the markets are today and and.
You know that what we're hearing is that there wouldn't be a material difference.
And I would say Nate that.
With the recent equity raise and paying down our revolver and sitting on.
On cash.
We're not I'm not in a position, where we need any debt capital, but you know certainly preparing ourselves for the time when we do.
Okay. Thank you.
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 Handel St. Jude with Mizuho. Please proceed with your question.
Hey, Thank you for taking my question good morning out there.
Good morning.
So I.
I guess, starting first on the the auto service tenants you're in first quarter that drove the occupancy dip at.
It seems like there was some part concerns I think the tenant was already on cash based accounting so what's changed in the first quarter and is there any reason trust to be concerned about this sub sector at all given this kind of issue on this more of a one off in your perspective.
Yeah listen I would say.
No it Shouldnt certainly give.
To give you any concern the automotive service sector is doing fine and it's one of the.
The least impacted industries that we invest in from a COVID-19 related perspective.
You know.
The occupancy dip is really not terribly material at all if you think.
We're not certainly not going to get defensive about occupancy over 99%.
And we gave some commentary on the call where we've worked through those.
Those assets.
I would say.
Rodley.
Given the COVID-19 backdrop, and we gave tenants.
Tenants more leeway than we normally would.
<unk> really gave them the benefit of the doubt and and you know as the pandemic played out and impacted their business.
And you know really trying to discern whether the operator was impacted truly from the pandemic or was just a bad operator, and so it took us a little on longer to come to conclusion on this guy was just a bad operator, and we needed to put better operators in place and.
And that's why we decided to do.
Got it got it and can you talk a bit more about maybe the timeline for re letting those seven assets and how we should think about the new rents versus the old and the recoveries your underwriting.
Yeah.
Separate from from this specific tenant you know generally the mandate to our asset management team is find the market for the assets and then finding the market means running an organized processed and disciplined process defined whether it's a replacement tenant or it's a sale to <unk>.
The market right and that process should not be any longer than 90 days really you know in an orderly.
You know an orderly marketing and negotiation in the closing.
You may have deals.
Fall out which.
Prolong that but I'm sure.
It shouldn't go on for six months and you know to the extent that we have a vacant asset longer than six months is because we're just not meeting the market.
And so that would be my expectation around timing and.
We provide you know in my view, a really good disclosure on a rewrite history and and as we said on the call. We would expect the outcome on this specific situation to be consistent with our past experience.
Okay fair enough.
Any clinics begin paying rents in first quarter or did you recognize any prior period rents are and what are you thinking here about the prospects for some of the tenants.
Tenants on caspase accounting as well as the potential for reversing in the casting recognizing that somebody calls thanks.
You know, there's a lot going on in that question.
We we repositioned a lot of tenants you know.
Throughout the fourth and into the first a lot of assets that that'll come back online.
And so you know there's a lot of puts and takes in our revenue and our tenant base and you know I would say all of those puts and takes are baked into our guidance.
Generally we're feeling feeling good about our tenants and what they're paying us, but Dan you on market anything to that yeah. I mean, I think what I'd add is on the deferral front, we had said all along on the deferrals really.
Burned off the year payout payback was anywhere from 12 to 18 months. So we're probably.
35% of our way into the deferral payments and we're collecting basically substantially all of them. So we're in pretty good shape on the deferral front in terms of getting paid what we agreed to defer okay on the non QM non accrual Oh yeah.
Yeah, Andrew I think you should expect the non accrual bucket to continue to increase in terms of their collections throughout the year and then in terms of the non recognized deferrals, which we did not recognize in revenues there's opportunity for that to come into the earnings stream, but that wouldn't be later until 2022 or beyond yeah whenever they pay us either the.
Cash or we somehow ketchup, which would probably.
Mostly women have caught up.
Got you got to know I appreciate that and then I'll probably follow up you've got offline to get a bit more color. Thank you.
Great. Thank you henna.
Thank you. Our next question comes from the line of John Masada with Ladenburg Thalmann. Please proceed with your question.
Good morning.
Volume of silica.
That's good.
And you start looking at investments in the entertainment sector. In particular has there been any change to how you are structuring leases with potential new tenants kind of post pandemic, just thinking insurance requirements deposit any kind of force majeure language et cetera.
No I mean, not really listen we have a very durable lease and <unk>.
Generally we're doing a lot of repeat business. So in fact.
Some of the tenants in that sector that we're dealing with the leases already in place and we're just adding new properties to it and you know we have not more broadly seen change in terms of our leases as a result of the pandemic I think.
Both investors and operators recognize that this is a.
Sort of hopefully once in a lifetime sort of event and shouldn't change the nature of an underlying.
20% to 40 year agreement.
Okay, and then on the other side of kind of the.
Things are kind of coming back on the investment radar how are you thinking about underwriting on the casual dining space is it tough to get a feel for this segment given may be balancing some of the reopening for you versus some of the headwinds that existed pre pandemic and maybe some operating pricing pressures just how are you guys thinking about investing in that.
Holistically.
Yeah, I think you know as we typically do through sale leasebacks. We were looking at you know three or four years of operating history and performance in <unk>.
Understanding how that site has performed.
Both in our in our stabilized and in a challenged environment how that site has recovered.
You know, we're certainly digging into P&L and understanding.
Kind of the sources of revenue both on premises off premises and and and the like and and then also kind of back testing the real estate value on understanding the rent per square foot, we're paying we're charging an hour basis.
And so I guess you know the.
On a broad basis, our discipline in terms of underwriting assets really hasnt changed we certainly have more data to look at but you know.
Making sure we're getting in at the right basis and buying units that are healthy and stabilized.
Is what we're looking to do.
Okay. That's it for me thank you very much.
Thanks, John I appreciate it.
Thank you. Our next question comes from the line of Chris Lucas with capital One Securities. Please proceed with your question.
Hey, Good morning, guys just a just a quick one on the early childhood education.
Line of business.
Just kind of curious as to how that business performed over the last several quarters and then.
I'm curious as to whether you guys have any thoughts in terms of what the President's proposal on free cash funding may do either.
Tailwind or the headwind to that business.
Okay.
Yeah, so yeah.
The early childhood.
Education space was severely impacted by the COVID-19 pandemic is as we disclosed in our collections in that sector, you know kind of lagged in terms of recovery as we've also disclosed.
But as we sit today you know those guys are open and operating and paying an operating profitably.
You know with with occupancy I think you know occupancies were shut in the second quarter rebounded to you know maybe 40% to 60% in the third quarter and you know call it 60% to 80% almost full occupancy here in the fourth and into the first so those guys are doing well in an open and operating.
In terms of the the government initiatives for subsidized you know early childhood education.
Most of our operators are for profit and and.
Not really.
Businesses that are driven majorly supported by subsidies.
But more globally to the extent that there's more demand for child care and and you know.
It would only be a benefit for operators in and the ability to fill up the real estate debt a day on that we own and they operate so.
We think it would be a plus but you know clearly I don't think you know.
We need it or our operators needed I think it'll be a nice tailwind.
Great. Thank you that's all I had.
Great. Thank.
Thank you Chris.
Thank you that does conclude today's question and answer session I'd like to turn the floor back over to management for closing comments.
Great well. Thank you all very much we look forward to engaging with you guys over next several weeks as we have a couple of non deal roadshows coming up and.
We're excited to continue to execute here in the second quarter. Thank you.
This concludes today's teleconference. You may disconnect. Your lines now. Thank you for your participation and have a wonderful day.
Yeah.