Q2 2023 Essential Properties Realty Trust Inc Earnings Call
Darwin details for the replay can be found in yesterday's press release.
Additionally, there will be an audio webcast available on essential properties Realty trusts website at www dot essential properties dotcom and archive of which will be available for 90 days.
On the call this morning or Pete <unk>.
E P R Ts, President and Chief Executive Officer, and Mark pattern E. P. R. Ts Executive Vice President and Chief Financial Officer is now my pleasure to turn the call over to Mark pattern.
Thank you operator, good morning, everyone and thank you for joining us today for the second quarter of 2023 earnings Conference call a essential properties Realty Trust.
During this call we will make certain statements that may be considered forward looking statements under federal Securities law.
Companies actual future results may differ significantly from the matters discussed in 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 it 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 I'll turn the call over to Pete.
Thanks, Mark and thank you to everyone who is joining us today for your interest in a P. R T.
As our second quarter earnings release indicates we are pleased to report another quarter of strong results.
Driven by the strength and stability of our portfolio that continues to perform exceptionally well and.
An impacted favorably by our strong investment activity.
Our tenants continues to perform at a high level as reflected by our unit level of coverage that increase to $4 one times.
Our same store rank growth.
Which remained favorable at 1.5%.
And just two vacant properties.
The overall health of our portfolio is a testament to our disciplined underwriting process.
The quality of our operators and the resiliency of our service oriented and experience based businesses.
And the second quarter, we acquired 78 properties and 29 separate transactions.
99% sale leaseback transactions with 66% of those opportunities generated from an existing relationships.
The initial cap right on our second quarter investments with 7.4%.
And the average annual escalation in those leases was 1.9% a 19 three years of weighted average lease term.
Which results in an average yield over the primary lease term of 8.7%.
Our balance sheet remained conservatively position and our liquidity remains strong with quarter and leverage a four three times and pro forma leverage a four two times when taking into account are unsettled forward equity.
And liquidity of approximately $634 million.
As we've said we are committed to maintaining a conservative balance sheet.
Based on our second quarter results, the visibility of our third quarter investment pipeline and.
And are anticipated capital markets activity.
We have increased our guidance for 2023 <unk> per share to a range of one dollar and 62 cents to one dollar and 65 cents.
Turning to the portfolio.
We ended the quarter with 1742 properties in our portfolio that were 99.9% leased to 360 tenants operating a 16 industries.
Are weighted average lease term stood at 14 years with only 5.2% of our AVR expiring through 2000 2007.
From a tenant help perspective.
Level of coverage ratio at quarter end was for one times and the percentage of our AVR that had less than one times ranked coverage level remained relatively consistent from the first quarter of 2023 totaling just $3, 1% at quarter end.
Regarding our second quarter investments, we invested $277 million and 29 separate transactions and properties, representing 12 of our 16 targeted industries with approximately 77% of those investments and properties operated and the Carwash.
Equipment rental.
Casual dining restaurants.
Grocery entertainment and medical industries.
The weighted average lease term of our investments this quarter was 19.3 years.
And as I mentioned earlier, the weighted average annual <unk> escalation remains strong at 1.9%.
The weighted average unit level ranked coverage of tenants at these properties was three nine times and our average investment per property was $3.4 million.
In the quarter, 99% of our investments were originated through direct sale leaseback transactions completed on our lease form with ongoing financial reporting requirements.
In addition, 57% of our investments were in a masterly structure <unk>.
Looking ahead to the third quarter, we remain active in our pipeline, which support investment levels relatively consistent with our recent activity.
From an industry perspective at quarter end car washes was our largest industry at 15.6% of AVR.
Followed by early childhood education at 12%.
Quick service restaurants at 10.8%.
And medical dental office at 10.6%.
From a diversity perspective, our largest tenants equipment sure represented 3.6% of ABR at quarter end.
And our top 10 tenants continues to demonstrate the diversity in our portfolio accounting for 17.5% of AVR.
As we have consistently stated tenant diversity is an important risk mitigation tool for us and a product of our differentiated investment strategy.
Direct benefit of our focus on non credit rated tenants in middle market operators, which offers an expansive opportunities sets.
And in our view generate superior risk adjusted returns.
In terms of dispositions withhold 16 properties this quarter for $41.7 million in net proceeds at a weighted average cash yields of $6 2%.
The weighted average unit level rent coverage ratio for the properties. We sold was two two times.
Owning fungible and liquid properties and capitalizing on that liquidity is an important aspect of our investment disciplined and it allows us to proactively proactively manage our industries tenants in unit level risks within our portfolio.
For the remainder of 2023, we expect our level of quarterly investments to align with our eight quarter average as we selectively take advantage of favourable market pricing to accretively recycle capital away from identifiable risks reduced our industry concentrations and importantly support our tenant relationships.
With that I'd like to turn the call over to Mark who will take you through our operating results and the balance sheet for the second quarter and discuss our capital markets activity Mark.
Thanks Pete.
Echoing pizza remarks, the second quarter of 2023 was certainly a strong quarter for us evidenced by our reported results last night and represented by our increase in the top and bottom end of our guidance range for you for four per share for the full year of 2023.
The performance of our portfolio in our investment results for the quarter continue to reflect the high quality of our tendency consistent internal rent growth and benefits of our differentiated investment platform.
Now is I'll cover in a moment are consistently conservative balance sheet and strong liquidity position continue to support our aspirations for external growth in 2023.
Among the headlines last night was already fulfilled for sure for the second quarter, which on a fully diluted per share basis was 41.
That's an increase of 8% versus Q2 of 2022 on.
On a nominal basis, Orey fulford totaled $61.9 million.
For the second quarter of 2023, that's up $11.3 million over the same period in 2022, an increase of 22%.
And up over 6% compared to the perceived first quarter of 2023.
We also reported core <unk> per share on a fully diluted per share basis of 44 cents for the second quarter, an increase of 7% versus Q2 of 2022.
Total G&A was approximately $7.6 million in Q2 2023, while recurring cash G&A, excluding approximately $360000 of costs associated with the departure of one of our junior executives totaled $5.3 million in Q2 2023.
We adjusted our core by approximately $172000, which reflects the impact of this non-recurring expense none of the impacts of stock compensation forfeitures.
Importantly, a recurring cash basis G&A as a percentage of total revenue decreased to $6, 1% and Q2 2023.
We continue to have the expectation that are recurring cash G&A as a percentage of total revenue will continue to rationalize quarterly and on a full year basis.
Turning to our balance sheet I'll highlight the following.
With our $236 million of net investments and two Q2 thousand 23 are income producing gross assets reached nearly $4 $5 billion a quarter and.
From a capital markets perspective, we had a solid quarter from an equity perspective.
In mid May we settled the second half of our forward equity that we issued through an overnight offering in February of this year at generated approximately $104 $5 million in net proceeds.
We also generated approximately $66 million of gross proceeds in the latter part of the second quarter from our ATM program that was all on a forward basis, we settled approximately $45 million of those ATM sales prior to the close of the quarter.
Turning to leverage I'd like to first and announced that we have received commitments from our bank group for an unsecured $450 million term loan with a tenor including extension options are five and a half years.
The new term loan will have a six month delay draw feature in a closing $200 million will be utilized to retire or $200 million term loan that's due to mature in April of 2024.
Although the 2000 2004 term loan will be paid off we will retain the favorable swaps. We have on that term loan through April of next year.
As part of executing the new term loan we're estimating that the impact of potential swaps on each of the drawers and the April 2024 swap extension will be at a fixed rate ranging between 4.5% to 5%.
We intend to close the new term loan in the third quarter of this year, Although let me note that closing of the new term loan is subject to customer you're closing conditions.
We're very appreciative of the continued support of our Bank group I'm very pleased to have the opportunity to address in near term that maturity and further bolster our balance sheet with attractively priced dead capital, which not only provides us with dry powder do address our near term investment opportunities.
But also favorably impacts the interest costs, we estimated for the remainder of 2023.
Regarding our debt maturities utilizing all the extension options and the new term loan with a result in a maturity date in 2029, which would result in us having no debt maturities until 2026.
Specifically regarding the second quarter of 2023 results.
Our net debt to annualized adjusted EBITDA was four three times a quarter in.
When factoring in the proceeds that will generate by physically settling the remaining $20 million of the equity we issued on a forward basis in the second quarter that we have not yet settled our leverage at quarter end would equal $4 two times are.
Total liquidity at the end of Q2 2023 totaled approximately $634 million.
Ah conservative leverage strong balance sheet and significantly liquidity position continues to be supportive of our current investment pipeline and sufficient to fund our external growth plans for the remainder of 2023.
Lastly, as our release indicated and feed mentioned, we raised <unk> per share guidance range for the full year of 2023.
To $1.62 to $1.65 cents per share.
Which reflects not only are two Q investment performance, our visibility into our investment pipeline.
And our performance expectations for the core portfolio.
But importantly, the strength of our middle market tendency, which experienced no material credit losses in the first half of the year.
The midpoint of our increased guidance range implies a year over year growth rate of nearly 7%.
With that I'll turn the call back over to Pete.
Mark and.
In our view the current landscape for investment remains very positive has operator seeking to grow their businesses faced the challenges.
Of a constrained capital markets environment, which leads them to seek long term capital by executing sale leaseback transactions on the real estate.
Additionally, the challenging market environment.
Particularly the availability and pricing of that capital.
Has curtailed the number of market participants that can fill demand of these operators.
We are excited about the opportunities we see to invest in the second half of the year.
Operator, please open the call for questions.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad and a confirmation tunnel indicate your lines and the question queue.
You May press Star too if you would like to remove your question from the queue.
Participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
One moment, please while we call for questions.
Our first one comes from from the line of Spencer I'll away with Green Street Advisors. Please proceed.
Thank you I was just wondering if you guys could provide some commentary on any <unk>. He might've upsurge if possible different screens in the second quarter.
Yeah, I would say in general cap rates were pretty static across the second quarter. Obviously are the cap right on our investments was down 20 basis points, which is really a mix of.
A result of the industry mix.
We did a number of restaurants and.
Grocery deals that tend to trade it.
Tiger ended the cap right range that we invest.
That brought that down the generally the market's pretty stable and I would expect cap rates to kind of be in that mid seven range in the back half of the year.
Okay, and any kind of just unlimited to write your kind of expecting for that the back half of the year, but can you just provide any color on my ear that served at.
<unk> mm, okay kind of static content cause I can corner or any tylenol.
Yeah. It's.
Static is slightly up.
Three Q pipeline is currently at a little higher than what we posted in the second Q second quarter, but obviously that can change depending upon what actually closes in future deals that come in but overall it's free.
Pretty healthy investing market and it's pretty stable we haven't seen.
Pricing pressures crew.
<unk> and driving cap rates down.
So it's just it's been pretty consistent.
Throughout the year.
Okay. Thank you very much.
Thanks Spencer.
Our next question comes from the line of Josh Dinner line with Bank of America. Please proceed.
Yeah, Hey, guys. Thanks for the time give me a big picture question for you.
Kind of curious what your conversations like have been with tenants and kind of how they are feeling about their expansion opportunities just any pinpoints. They are seeing just kind of curious what would what you're hearing.
Yeah listen I would say overall transaction volumes are down.
As the capital markets and the availability of of capital is.
Somewhat constrained that said the guys who are transacting are finding good opportunities and.
Leaning on relationships and their partners to continue to grow.
Really driving the underlying desire to grow as stable operations and I think you see that rippling through the portfolio's performance and.
Lack of credit issues so.
Overall, the operators are feeling good about their prospects, there's always sort of.
Transitional companies and growth.
Aggregators that are driving investment volumes and.
It feels pretty healthy.
You said that any particular segment that's more active in expansion mode.
Yeah I mean.
The quarter, we invested in I think 12 or 16 industry. So we're really seeing.
Investments across the spectrum.
In the quarter about the third of our opportunities wearing the carwash space and you'll see that our carwash industry.
Concentration is grown.
And I would say that there's a lot of consolidation and a lot of opportunities.
Coming from that and the Carwash space.
We certainly have seen that over the last.
Three four quarters.
The child care space remains pretty.
I'm pretty robust for us with opportunities.
Certainly the restaurants basis alone more mature from that perspective.
But overall I would expect our portfolio to grow rapidly.
Thank you.
You guys, yes. Thank you.
Our next question comes from the line of Greg Mcinnes with Scotiabank. Please proceed.
Hi, Thanks for the question. This is <unk> with Gray you touched on this in your remarks earlier, a little bit, but how is binary competition for.
The smaller office Saturday, you requiring add three to 5 million.
Regarding private cash and leveraged buyers and cost of that recycling slowly, but still still elevated and regional banking terminal society, how how has that changed.
In in your data acquisitions and has that kept normal horse capital recycling opportunities so attractive in Q3, so far.
Giving disposition volume was up.
A little bit over 10% of the queue too.
Got Ya as long [laughter].
You got that [laughter] big into it.
First I would say.
<unk> design.
We do not compete with the three to 5 million dollar.
Retail investor.
By doing sale leasebacks. The sale leaseback transaction is is a more sophisticated transaction with an operator that requires execution certainty that the retail investor generally can't can't provide certainly the retail investor that is.
Dependent on on financing are leveraged bid and I would say that leveraged bit has become even more suspect in the current market.
So.
Not a segment of the market that we compete against on our investment.
That said as I said on the call we do compete with larger leveraged buyers who are.
Struggling to get dead capital and.
On more organizational.
Or portfolio basis, that's allowed us to be a little more competitive and aggressive in our investments.
And turn it.
In terms of the flip side of that coin, which is when we sell our assets.
Into those markets and this the leverage at our buyers get certainly that is challenged.
And the market is.
Investment volumes are down materially.
But that's a huge market and we're able to sell into it because we're not is price sensitive as many sellers.
Given.
The base or basis in our ability to move.
Some of the riskier assets out of our portfolio.
So that markets dried up a bit, but it's still robust and allowing us to.
Recycle capital and keep the portfolio fresh.
Got it thank you and I guess, there's a follow up.
You mentioned.
Sponsoring more potential volume to me that that our meeting investment criteria right do the attractive environment for sale leaseback capital.
Of course, if that's not long list was up above the average.
And I think he touched on all of it in your prepared remarks about G&A rationalizing a little bit I think it was down quarter over quarter.
Do you expect.
<unk> headwinds on on Jan a balance of 2023, given the the level of investment of investment pulling that you're seeing as far.
Yeah, we.
The short answer is no.
We continue to staff at.
At in the organization, but generally the vast majority of our <unk>.
Staff and executives are in their seats and trained in executing and.
Investments when we're making an G&A are really more for like as we look at next year.
And so I wouldn't expect anything out of the norm on G&A Mark would you add anything on that I think that's right I think.
That trend is.
Like you said alright head count as.
Pretty pretty stable, so I wouldn't expect anything different.
Okay. Thank you thanks for the call.
Q.
Our next question.
<unk> comes from the line of <unk> from City. Please proceed.
Thanks, It's actually at next year's six year with Eric we saw the uptick in new relationships in terms of acquisition opportunity versus the recent quarters. He just walk through the typical cadence of the opportunity and have a conversation typically go in terms of growing these relationships from here.
Yeah at least in.
As we said and some of the prior quarter's we were really focusing our capital on servicing existing relationships that were bringing us opportunities.
And we generally like to lean into our relationships because when we have a relationship that gives us.
And an inherent competitive advantage because we've under it and the the credit we have negotiated documents and we're able to perform reliably.
Those opportunities that said, we've always wanted to maintain a balance in <unk>.
Striker relationships with new operators and and they become.
The growth engine down the road and so in the quarter, we were able to strike some new relationships there are some.
Guys, who were in the market doing deals some of them are in the market for the first time because of the capital markets.
Constraints and other fine alternative financing is have drove them to to Sal leasebacks and and some of the relationships were quite frankly transacting with with other people and those those counterparties are no longer active and so their source to find a new counterparty.
But yeah, we make it clear at the outset.
In a relationship for a long term and we want to help our operators grow their businesses and.
The underwriting process as an investment that we make into those relationships such that we can continue to transact with these guys kind of going forward.
Thanks, I appreciate that and then just maybe on the other side in terms of sales, obviously, some some disposition and a quarter how does that impact kind of relationship with the growth with those tenants, where you have existed or where you have continued assets with with one that maybe that's all the handful of their.
Properties.
Yeah, I think that.
That.
Is a process that there is some sensitivity to but as long as you're open and transparent and making the equipment shares a great example, as we are able to sell those sites and really free up capital capacity to continue to invest with them and continue to help them grow their business and so.
They recognize that it's mutually beneficial and.
It's generally a collaborative process to kind of manage those relationships and manage those exposures.
Thank you very much.
You got it thanks next Nick.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
And our next question comes from the line of keeping Kim with Truth Securities. Please proceed.
Good morning, Uhm, Mark you know it seems like the bank that market is a little bit more available for a certain trip on that reef can you just discuss refinancing plans and what kind of pricing or seeing and if starting for swaps isn't the card in the near future. Thank you.
Yep. Thanks, Keven I mean look your note what two days ago I think it was probably.
Pretty good analysis.
For US we are fortunate our bank group is very supportive.
I think the way you.
Sort of pose that dynamic in your piece was probably appropriate.
But for us.
The pricing.
Really was.
Pretty consistent with what we'd seen before from the term loan side of things and then in terms of the forward swaps are frankly, just even swaps as we do the drawers.
You can do either but certainly the forward swap I think is the <unk>.
Used in my remarks, which is kind of that 4.5% to 5% range you know it all depends so I think if you if you look at the.
If you look at the renewal swap or the extension suave in April of 24, that's probably.
Four six kind of number if you look at when we do the draw if we do more than just paying off the 20th 2004 term loan when we close.
That tranche.
<unk> probably prices.
Higher but within the range I was mentioning.
That's where I think the mix of the draws relative to doing a forward swab to match. It that's why that foreign after five is probably a pretty good range.
Great and.
In terms of your coverage you know there was a slight migration for some tennis moving could I below one times covered or below one and a half times covered and on the flip side. Some actually improved I'm not sure. If you know how much acquisition has changed the dynamic but if you can just comment on high level what types of <unk>.
<unk> have maybe migrated south a little bit.
Yeah, certainly I.
I would start with.
Only two two vacant properties, a strong same-store cell number and.
And growth.
Growth in the portfolio and <unk>.
Negligent credit no credit loss.
But the migration there I think what you're seeing is.
Some of the industries that are more sensitive to wage pressures and have lack the ability to increased price on a real time basis like the early childhood education guys.
They can push price, but you're not gonna do it kind of.
Five six times, a year and so we've seen some decrease of their the restaurants.
I've also seen some slight margin pressures with with wages and cost of goods, but overall nothing that's that's given us a concern and we would expect those guys to migrate back to more healthy level.
Okay. Thank you.
You've got a few and thanks.
Our next question comes from the line of hand-held Saint just with Mizuho. Please proceed.
Hi, Good morning, <unk> would be on the line for <unk>.
The question.
See that.
The dancing and liquidity in the bank and we're starting to feel like we're starting to see more of an improvement they're going for do you feel that tenants will be incrementally less reliant on the sale leaseback of the former capital going forward or would you say that <unk> rates are still so high you would still see that being an incremental cost of capital.
Okay.
Yeah, I would think it's more of the ladder.
If you think about a middle market borrower and borrowing unsecured in the.
910, 11% range sale leaseback capital is still accretive to that.
And I think there's a long way to go and kind of normalising of that market to before it becomes.
Reverts to a more normalised level that is.
Inside of what Sally's back pricing they say so I I don't think that that's changed materially and I think it's going to be a while before we see that.
Okay, just one more what's your what's what's today as a percentage of a P. R.
Our watch list as a <unk> as 90 basis points of view and it just to refresh we define that as the intersection of unit level cover coverage risk of one five or below and credit risk of single B or.
<unk> and so that is currently 90 basis points, which is.
The level.
Okay cause I believe your theater exposure.
<unk> so those gears.
Are there are all included.
Included in the matrix.
There'll be some theaters in those in that in that.
And those numbers certainly I think a couple of our theaters are still kind of below that one five level.
Yeah, Okay, so of that 90 basis.
More than half as in our theaters.
Got it thank you again.
You guys. Thanks.
Great.
Any more questions operator.
Nope. There. This concludes question and answer session Pete back to Ya.
Awesome loans and that concludes the call. Thank you all for your time today and we appreciate it.
This concludes today's conference.
Thank you for your participation you may now disconnect your lines.