Q4 2023 Essential Properties Realty Trust Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Central properties Realty Trust's fourth quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the call.
Operator: Good morning, ladies and gentlemen, and welcome to the Essential Properties Realty Trust's fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode.
Operator: A brief question and 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 call is being recorded, and a replay of the call will be available two hours after the completion of the call for the next two weeks. The dial-in details for the replay can be found in yesterday's press release.
So please press star zero on your telephone keypad.
This conference call is being recorded and a replay of the call will be available two hours. After the completion of the call through the next two weeks.
The dial in details for the replay can be found in yesterday's press release. Additionally, there'll be an audio webcast available on the central properties website at Www Dot central properties Dot Com, an archive of which will be available for 90 days.
Operator: Additionally, there will be an audio webcast available on the Essential Properties website at www.essentialproperties.com, an archive of which will be available for 90 days. On the call this morning are Pete Mavoides, EPRT's President and Chief Executive Officer, Mark Patton, EPRT's Chief Financial Officer, and Rob Salisbury, EPRT's Senior Vice President and Head of Capital Markets. It is now my pleasure to turn the call over to Rob Salisbury. Thank you, operator. Good morning, everyone.
On the call. This morning are Pete avoid these E. P. R T as president and Chief Executive Officer, Mark Paddle E. P. R Keyes, Chief Financial Officer, and Rob Salisbury, EPR T as senior Vice President and head of capital markets and it's now my pleasure to turn the call over to Rob Salisbury.
Thank you operator, good morning, everyone and thank you for joining us today for our central properties fourth quarter 2023 earnings Conference call.
Rob Salisbury: And thank you for joining us today for Essential Properties' fourth quarter 2023 earnings conference call. During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities law. The company's 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 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, I'll turn the call over to Pete.
During this conference call, we will make certain statements that may be considered forward looking statements under federal Securities law.
Company's 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 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 I'll turn the call over to Pete.
Pete Mavoides: Thank you, Rob, and thank you to everyone joining us today for their interest in essential property. We finished 2023 with a strong $315 million of investments in the fourth quarter and just over a billion invested for the full year. This translated to AFFO per share growth of 8% in 2023. We are proud of, given the industry backdrop of heightened volatility in the capital market and wider bid-ask spreads in the transaction market, serving as a testament to the resilience of our differentiated investment strategy and durable portfolio. As the fourth quarter results indicate, our portfolio continues to perform at a high level with unit level rent coverage of 3.8 times, occupancy of 99.8, and same-store rent growth of 1.5%. The overall health of our portfolio is a result of our disciplined underwriting process, which focuses on growing operators in durable service and experience-based industries and owning granular and fungible properties that generate strong cash flow for these operators. By underwriting and focusing on all three risk factors associated with net leased real estate investing, corporate credit, unit level performance, lease risk, and real estate basis.
Thank you Rob.
And thank you to everyone joining us today for your interest in essential properties.
We finished 2023 with a strong $315 million of investments in the fourth quarter and just over 1 billion invested for the full year.
This translated to a S F O per share growth of 8% in 2023.
Which we are proud of given the industry backdrop of heightened volatility in the capital markets.
And wider bid ask spreads in the transaction markets, serving as a testament to the resilience of our differentiated investment strategy and durable portfolio.
As of fourth quarter results indicate our portfolio continues to perform at a high level.
With unit level rent coverage of three eight times.
Currency of 99, eight and same store rent growth of one 5%.
The overall health of our portfolio is a result of our disciplined underwriting process, which focuses on growing operators and durable service and experience based industries.
And granular and fungible properties that generate strong cash flow for these operators.
By underwriting and focusing on all three risk factors associated with net leased real estate investing corporate credit.
Unit level performance and lease risk and real estate basis.
We were able to construct and own and exceptionally durable portfolio of properties.
Regarding our strong and consistent year of investments we remained active in support of our long standing tenant relationships as they increasingly turn to us as a valued and reliably consistent capital provider to grow their businesses given the limited funding availability in the bank market.
Pete Mavoides: We are able to construct and own an exceptionally durable portfolio of property. Regarding our strong and consistent year of investments, we remained active in support of our longstanding tenant relationships as they increasingly turned to us as a valued and reliably consistent capital provider to grow their businesses given the limited funding availability in the bank market and the continued dislocation in the credit market, and the diminished level of competition from other net lease investors. With quarter end, they performed a leverage of 4.0 times and liquidity of nearly 800 million. Our balance sheet continues to be well capitalized for continued investment activity, as we look to aggressively capitalize on these trends that are creating the opportunity to generate historically high risk-adjusted returns. We are affirming our 2024 AFFO per share guidance of $1.71 to $1.75, which implies year-over-year growth of 5% at the midpoint. Turning to the portfolio, We ended the quarter with investments in 1,873 properties that were 99.8% leased to 374 tenants operating in 16 industries. Our weighted average lease term stood at 14 years at year end, which is consistent year over year.
And the continued dislocation in the credit markets.
The diminished level of competition from other net lease investors.
With quarter end pro forma leverage of 4.0 times and liquidity of nearly $800 million.
Our balance sheet continues to be well capitalized for continued investment activity as.
As we look to aggressively capitalize on these trends that are creating the opportunity to generate historically wide risk adjusted returns.
We are affirming our 2020 for F F O per share guidance of $1 71 to.
To one dollar and 75 cents.
Which implies year over year growth of 5% at the midpoint.
Turning to the portfolio.
We ended the quarter with investments in 1873 properties that were 99, 8% leased to 374 tenants operating in 16 industries.
Our weighted average lease term stood at 14 years at year end, which is consistent year over year.
With only four 7% of our ABR expiring through 2028.
From a tenant health perspective.
Our weighted average unit level rent coverage ratio was three eight times this quarter.
Slightly from last quarter, driven in large part by investment activity.
Our same store rent growth in the fourth quarter was one 5%.
The improvement from one 2% in the third quarter, driven primarily by positive leasing results in asset management activities, including at a gym, operator that we discussed in our last earnings call.
Yeah.
During the fourth quarter, we invested $315 million through 43 separate transactions at a weighted average cash yield of seven 9%.
Representing a continued increase and pricing power for sale leasebacks as we noted on the last earnings call.
Pete Mavoides: With only 4.7% of our ABR expiring through 2028, from a tenant health perspective. Our weighted average unit level rent coverage ratio was 3.8 times this quarter, down slightly from last quarter, driven in large part by investment activity. Our same-store rent growth in the fourth quarter was 1.5 percent, an improvement from 1.2 percent in the third quarter, driven primarily by positive leasing results and asset management activities, including at a gym operator that we discussed in our last earnings call. During the fourth quarter, we invested $315 million through 43 separate transactions at a weighted average cash yield of 7.9%, representing a continued increase in pricing power for sale leaseback. As we noted on the last earnings call, our investment activity in the quarter was broad-based across most of our industries with no notable departures from our well-defined investment strategy. The weighted average lease term of our investments this quarter was 17.6 years, and the weighted average annual risk escalation was 1.9 percent, generating an average gap yield of 9.1%. Additionally, our investments this quarter had a weighted average unit level rent coverage of 3.3 times.
Our investment activity in the quarter was broad based across most of our industries with no notable departures from our well defined investment strategies.
The weighted average lease term of our investments this quarter was 17.6 years and the weighted average annual risk escalation was one 9%.
Generating an average GAAP yield of nine 1%.
Our investments this quarter had a weighted average unit level rent coverage of three three times.
And the average investment per property was 3.0 million.
Consistent with a key tenant of our investment strategy, 97% of our quarterly investments were originated through direct sale leaseback transactions.
Which are subject to our lease form with ongoing financial reporting requirements seven.
72% contained master lease provisions and 96% were generated from existing relationships.
Looking ahead to the first quarter of 2024, we have closed $40 9 million of investments to date.
The cash yield of slightly above eight.
And our pipeline remains robust as an increasing number of middle market companies are seeking sale leaseback capital as a financing alternative as other sources of capital have become unavailable or on economic.
While we have capitalized on the dislocation in private credit markets generating heightened pricing power with favorable lease terms, we are cognizant of the potential for easing in the monetary policy over the course of 2024.
Which could alleviate financial conditions, bringing with it a lower cap rate environment.
Should our pricing power diminish later this year.
We would hope to benefit from a commensurate reduction in our cost of debt capital such that our net investment spread is maintained.
As a value added capital provider.
We're able to dynamically price our sale leaseback transactions, which overtime has afforded us the ability to generate investment returns in excess of market pricing.
That being said our current pipeline today suggests that our investment cap rates should be stable in the near term.
Yeah.
From a tenant concentration perspective.
Our largest tenant represents three 8% of ABR at quarter end and our top 10 tenants now account for only 18, 1% of ABR.
Pete Mavoides: And the average investment per property was $3.0 million. Consistent with a key tenet of our investment strategy, 97% of our quarterly investments were originated through direct sale e-spec transactions, which are subject to our lease form with ongoing financial reporting requirements. 72% contained master lease provisions, and 96% were generated from existing relationships.
And that diversity is an important risk mitigation tool and a differentiator for us.
And it is a direct benefit of our focus on unrated tenants and middle market operators, which offers an expansive opportunity set in terms of dispositions. We sold nine properties. This quarter for $30 6 million in net proceeds at a 6.6% weighted average cash yield with a weighted.
Average unit level coverage ratio of three five times.
As we have mentioned in the past owning fungible and liquid properties is an important aspect of our investment discipline as it allows us to proactively manage industry tenant unit level risks within the portfolio.
Pete Mavoides: Looking ahead to the first quarter of 2024, we have closed $40.9 million of investments to date at a cash yield of slightly above $8. And our pipeline remains robust as an increasing number of middle market companies are seeking sale spec capital as a financing alternative, as other sources of capital have become unavailable or uneconomic. While we have capitalized on the dislocation in private credit markets, generating heightened pricing power with favorable lease terms, we are cognizant of the potential for easing in monetary policy over the course of 2024, which could alleviate financial conditions, bringing with it a lower cap rate environment. Should our pricing power diminish later this year, we would hope to benefit from a commensurate reduction in our cost of debt capital such that our net investment spread is maintained
Going forward, we expect our disposition activity over the near term to remain relatively in line with our trailing eight quarter average driven by opportunistic asset sales and ongoing portfolio management activity.
With that I'd like to turn the call over to Mark Patten our CFO.
Mark.
Thanks, Pete and good morning, everyone. As Pete noted, we had a great fourth quarter, which was punctuated by a strong level of $315 million of investments.
I had a seven 9% cash cap rate.
Among the headlines from the quarter was our F O per share, which reached 42 cents, that's an increase of 8% versus Q4 of 2022.
On a nominal basis or if a faux totaled $67 million for the quarter, that's up $11.1 billion over the same period in 2022, an increase of nearly 20%.
This F O performance was in line with our expectations when we updated our guidance last quarter.
For the full year ended December 31, 2023 R. F O per share totaled $1 65 per share.
Which is an increase of 8% over 2022.
Pete Mavoides: As a value-added capital provider, we're able to dynamically price our sale-leaseback transactions, which over time has afforded us the ability to generate investment returns in excess of market prices. That being said, our current pipeline today suggests that our investment cap rates should be stable in the near term. From a tenant concentration perspective, our largest tenant represents 3.8% of ABR at quarter end, and our top 10 tenants now account for only 18.1% of ABR. Tenant diversity is an important risk mitigation tool and a differentiator for us, and it is a direct benefit of our focus on unrated tenants and middle market operators, which offers an expansive opportunity set in terms of disposition. We sold nine properties this quarter for $30.6 million in net proceeds at a 6.6% weighted average cash yield and a weighted average unit level coverage ratio of 3.5 times.
On a nominal basis, our full year 2023 portfolio increased by 21% over 2022 totaling $253 $4 million.
Total G&A was $7 3 million in Q4 of 2023 versus $6 5 million for the same period in 2022 with the majority of the increase relating to an increase in compensation expense.
Our recurring cash G&A as a percentage of total revenue was five 2% for the quarter and five 9% for the full year of 2023, which compares favorably to the five 8% and 7% respectively for the quarter and full year of 2022.
We continue to expect that on an annual basis, our cash G&A as a percentage of total revenue will decline in 2024.
Our platform generates operating leverage over a scaling asset base.
Turning to our balance sheet I'll highlight the following.
With our $315 million of investments in Q4 of 2023 are income producing gross assets reached $4 9 billion at year end.
From a capital markets perspective in the fourth quarter, we completed the sale of approximately $47 $9 million of stock all on a forward basis on our ATM program.
Additionally, during the quarter, we settled $196 million of the forward equity we raised in September at.
At year end, our balance of unsettled forward equity totaled $136 million.
Our pro forma net debt to annualized adjusted EBITDA three adjusted for unsettled forward equity was 4.0 times at yearend.
We are committed to maintaining a conservative balance sheet with best in class leverage and liquidity.
At year end, our total liquidity stood at nearly $800 million, our conservative leverage robust balance sheet and significant liquidity positions the company well to fund our growth plans for 2024 based on the pipeline we see today.
Mark Patton: As we have mentioned in the past, owning fungible and liquid properties is an important aspect of our investment discipline, as it allows us to proactively manage industry, tenant, and unit-level risks within the portfolio. Going forward, we expect our disposition activity over the near term to remain relatively in line with our trailing eight-quarter average, driven by opportunistic asset sales and ongoing portfolio management activity. With that, I'd like to turn the call over to Mark Patton, our CFO. Mark.
Finally, the strong performance to end the year in 2023 are conservatively capitalized balance sheet and.
And the investment pipeline, we're seeing all support our previously issued 2024 <unk> per share guidance range of $1 71 to $1 75, which implies a 5% growth rate at the midpoint.
It's also important to note that with the ATM equity issuance achieved this quarter, we do not require additional external equity capital to achieve our 2024 guidance.
Mark Patton: Thanks, Pete. And good morning, everyone. As Pete noted, we had a great fourth quarter, which was punctuated by a strong level of $315 million of investments at a 7.9% cash cap rate. Among the headlines from the quarter were our AFFO per share, which reached 42 cents. That's an increase of 8% versus Q4 of 2022. On a nominal basis, our AFFO totaled $67 million for the quarter.
With that I'll turn the call back over to Pete. Thanks.
Thanks Mark.
In summary, we are quite pleased with our fourth quarter and full year results and remain excited about the prospects for the business operator, Please open the call for questions.
Okay.
You will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
She tone will indicate your line is in the question queue.
Star two if he would like to remove your question from the queue.
Do you think speaker equipment, it may be necessary to pick up your handset before pressing the starkey.
You saw we poll for questions.
Okay.
And it comes from Connor Seversky with Wells Fargo.
Sure.
Good morning out there and thank you for the time.
Mark Patton: That's up $11.1 million over the same period in 2022, an increase of nearly 20%. This AFFO performance was in line with our expectations when we updated our guidance last quarter. For the full year ended December 31st, 2023, our AFFO per share totaled $1.65 per share, which is an increase of 8% over 2022. On a nominal basis, our full year 2023 AFFO increased by 21% over 2022, totaling $253.4 million.
A quick question on the liquidity profile, our understanding that a chunk of that $800 million in liquidity is really predicated on the revolver and I'm curious with a robust pipeline. You meant you mentioned how comfortable would you be how comfortable would you be letting leverage run.
Towards the end of this year.
And then what is the desired funding mix for each incremental acquisition between free cash flow.
Capacity on the forward and the revolver.
Mark why don't you tackle that one you got it alright.
Alright, a couple of things in terms of just kind of funding mix generally speaking.
We had been largely probably 60 40 in terms of equity and debt, but now with almost a $100 million of free cash flow, that's probably more like 60.
Equity 30 debt and 10 is kind of your free cash flow. So that's kind of how we think about looking at liquidity in terms of running leverage up I guess would say is we've all we've said pretty consistently that.
Mark Patton: Total G&A was $7.3 million in Q4 of 2023 versus $6.5 million for the same period in 2022, with the majority of the increase relating to an increase in compensation expense. Our recurring cash G&A as a percentage of total revenue was 5.2% for the quarter and 5.9% for the full year of 2023, which compares favorably to 5.8% and 7%, respectively, for the quarter and full year of 2022. We continue to expect that on an annual basis, our cash G&A as a percentage of total revenue will decline in 2024 as our platform generates operating leverage over a scalating asset base. Turning to our balance sheet, I'll highlight the following. With our $350 million of investments in Q4 of 2023, our income-producing gross assets will reach $4.9 billion at year-end. From a capital markets perspective, in the fourth quarter, we completed the sale of approximately $47.9 million of stock, all on a forward basis on our ATM program. Additionally, during the quarter, we settled $190.6 million of the forward equity we raised in September. At year end, our balance of unsettled forward equity totaled $130.6 million.
If we were to choose a range that we thought was reasonable.
In terms of leverage it would be four and a half to five and a half time.
So if you think about that and we're sitting at four times now we've got a fair amount of runway to go before we ever even kind of step into that range.
Yeah.
Next question operator.
And your next question is from.
Oh hold on operator kind of where you get.
Yeah, No I'm good I think the line cut out for a second but I'll leave it there for now thank you.
[laughter], Yeah, just cut out at the very end there.
Okay.
Alright next question please operator.
Okay. Our next question comes from Josh <unk> with Bank of America. Please proceed with your question.
Hi, Good morning. This is on behalf of Josh.
My first question I wanted to ask if you can go into a little bit more detail on the unit level rent coverage and the slight downtick or how that was attributed to.
<unk>.
Yeah.
Listen we'd provide you know pretty granular detailed supplemental on the unit level rent coverage clearly the headline number is.
Decreasing from you.
Down 20 basis points. Some of that is attributable to you know the acquisitions in the fourth quarter as well as the acquisitions in the third quarter, both of which were at three three times.
Theres always some ebbs and flows with different operators in different reporting periods and the like but you know overall you know the portfolio is in a great spot and we're not seeing any concerns that you.
You know give us pause.
Okay, and I guess on the flip side of that the increase in your same store rent growth is this being driven off of either different lease terms higher escalators or what what's.
That's a driver that's leading to that.
Yeah, I mean, that's just going to be the the rent escalations built into our contracts generally they range from anywhere between one and a quarter on up to two on average. It's one seven I believe theres different compounding periods and I'm you know clearly at one five that represents a pretty.
Mark Patton: Our pro forma net debt to annualized adjusted EBITDA RE adjusted for unsettled forward equity was 4.0 times at year end. We are committed to maintaining a conservative balance sheet with best-in-class leverage and liquidity. At year-end, our total liquidity stood at nearly $800 million.
<unk> solid flow through of those Escalations for US and you know, that's that's going to kind of ebb and flow as as we've disclosed.
Okay, great. Thank you so much.
Thank you.
Our next question comes from Smedes Rose with Citi.
Please proceed with your question.
Hi, Thank you.
Just wanted to ask you a little bit you talked about some of the more traditional sources of capital either not available or just becoming too expensive.
Pete Mavoides: Our conservative leverage, robust balance sheet, and significant liquidity position the company well to fund our growth plans for 2024 based on the pipeline we see today. Finally, the strong performance to end the year in 2023, our conservatively capitalized balance sheet, and the investment pipeline we're seeing all support our previously issued 2024 AFFO per share guidance range of $1.71 to $1.75, which implies a 5% growth rate at the midpoint. It's also important to note that with the ATM equity issues achieved this quarter, we do not require additional external equity capital to achieve our 2024 guidance. With that, I'll turn the call back over to Pete.
Are you seeing.
Other kind of competitors come to the market or do you have sort of a relative advantage at this point as you look for new acquisition opportunities.
In this environment.
Yes. Thanks me is and I think you know.
That's a great question and I. Appreciate you asking it you know we have a relative advantage to alternative sources of capital currently I'm like you know the bank market and the high yield market and in leverage loans and private credit a lot of those traditional sources of capital has been had been priced in.
Side of sale leaseback capital in the current environment, we're able to compete pretty competitively with those sources.
And then secondarily you know the the.
Traditional sale leaseback Hum market participants are somewhat limited, particularly from the private buyers who are more relying on on debt financing and accessing the ABS market a lot of those guys are a little more conservative in the current environment. So you know.
From an alternative capital perspective, and from a competitive perspective, we're finding.
Pete Mavoides: Thanks, Mark. In summary, we are quite pleased with our fourth quarter and full year results and remain excited about the prospects for the business. Operator, please open the call for questions. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A tone will indicate that your line is in the question queue if you would like to remove your question from the queue. Using speaker equipment, it may be necessary to pick up your handset before pressing the start button.
Nice opportunity to put capital to work.
Yeah.
Okay and then just you mentioned, you're you have a lot of room to draw on the revolver.
We're gonna. This issue you know kind of 10 year unsecured debt today can you just give us a sense of where you think it would price.
Yeah, I think the best Mark would be our current bonds, which are out there trading and they're kind of in the mid sixes I would think that hopefully a new issuance and out the yield curve good price inside of that so call it low to mid six.
Alright. Thank you appreciate it thank you.
Okay.
Our next question comes from Eric <unk> with BMO capital markets. Please proceed with your question.
Hey, good morning out there.
Just understand that the majority of the acquisitions completed in the fourth quarter was heavily driven by existing relationships, but looking ahead and given the limited access to the bank markets for some of your.
Operator: This is where we poll for questions. This question comes from Connor Soberski with Wells Fargo. Please type your question. Good morning out there, and thank you for the time.
Potential tenants are you seeing an uptick in new potential partners in the pipeline.
Yeah.
That's a great question I generally.
Mark Patton: A quick question on the liquidity profile, understanding that a chunk of that $800 million in liquidity is really predicated on the revolver. You know, I'm curious, with the robust pipeline you mentioned, how comfortable would you be letting leverage run towards the end of this year? And then what is the desired funding mix for each incremental acquisition between free cash flow capacity on the forward and the revolver? Mark, why don't you tackle that one?
You know tell people, we like to see our 80, 20, or 70, 525% mix, where we're 75% existing relationships, 25% new relationships because it's important for us to continually source new relationships because you know eventually some relationships outgrow us clearly in the fourth quarter.
We're at 96, it's more skewed towards existing relationships.
You know in the in the current environment, you know, we try to maintain our most profitable relationships and service.
So the relationships that generate the best risk adjusted returns and take care of that.
Good good clients and reliable clients and that's kind of what we're doing.
Mark Patton: You got it. All right, a couple of things. In terms of just kind of funding mix, generally speaking, we had been largely 60-40 in terms of equity and debt, but now with almost $100 million of free cash flow, that's probably more like 60. Equity, 30 debt, and 10 is kind of your free cash flow.
I think in a more normalized environment, we would add back down to that 70, 525, or 80 20, but clearly.
Partnering with long term relationships is bringing value to us and we're bringing value to them and.
It's a dynamic market.
We're happy to have those relationships.
Okay. That's helpful. And then maybe on the disposition front, just given the potential for lower yields in the back half of the year.
Mark Patton: So that's kind of how we think about looking at liquidity. In terms of running leverage up, I guess what I would say is we've said pretty consistently that if we were to choose a range that we thought was reasonable in terms of leverage, it would be four and a half to five and a half times. So if you think about that, and we're sitting at four times now, we've got a fair amount of runway to go before we ever even kind of step into that range.
Is there potential for that that quantum.
Total dispositions to rise above your four quarter trailing average just given the benefits there.
Yeah, I think the expectation.
You should be it is going to be more towards our eight quarter average you know clearly the current.
Market for dispositions is a bit challenged.
We have a very granular and fungible portfolio, but.
The lack of financing out there is making it a little more difficult to sell assets than in a normalized environment.
And.
We will focus on kind of managing individual tenant and industry exposures and getting out of any risky assets that we see but I would expect it to be closer to the eight quarter average.
Operator: Next question, operator. Our next question is from... Hold on, hold on, operator. Connor, are we good? Yeah, no, I'm good.
And really we don't see the need to we don't see the need to lean into dispositions to generate accretive capital given where we are from a balance sheet perspective.
That sounds great I'll leave it there thanks guys.
Great. Thank you very much.
Operator: I think the line cut out for a second, but I'll leave it there for now. Thank you. Your line did just cut out at the very end there, www.
Next question comes from Nate Crossett with BNP Paribas asset management. Please proceed with your question.
Uh huh.
Right right.
Okay.
Uh huh.
Okay.
That's right.
Okay.
Okay.
Hum.
Okay.
I gotcha.
Nate I got to tell you theyre using he came through broken up I didn't catch that question I don't know if you're on a handset or not.
Operator: TheBusinessProfessor.com: Sorry, I'm just kidding. All right, next question, please, operator. Okay, our next question comes from Josh Dennerlein with Bank of America. Please proceed with your question. Hi, good morning. This is Farrell Granup on behalf of Josh Dennerlein.
You might come back and when we just.
Hi, Brendan.
Yes, Please and comes from Greg Mcginniss from Scotiabank. Please proceed with your question.
Hi, Good morning, this is Andre Chang on with Greg.
Just on tenants is there more conservatism on bad debt expense and losses baked into 2020 guidance versus let's say.
Pete Mavoides: My first question is, if you can go into a little bit more detail on the unit level of rent coverage and the slight downtick or how that was attributed to receipts. Yeah, I mean, listen. We provide, you know, pretty granular detail supplemental to the unit-level rent coverage. Clearly, the headline number, you know, decreased from down 20 basis points. Some of that is attributable to, you know, the acquisitions in the fourth quarter, as well as the acquisitions in the third quarter, both of which were at 3.3 times.
25 to 40 basis points, you've experienced historically.
Given uncertainty about the consumer and then how much of that is tied to experiential operators feeling demand pressures on consumers.
Either returning to work or steel still feeling the effects of inflation.
Okay.
Yeah listen we have conservative rent loss assumption and credit loss assumptions built into our guidance as we.
I always do we take a very close look at our portfolio and.
Look at individual exposures to include the credits unit level coverage and in our rent basis to try to anticipate where we might take any rent loss in.
A wide range of assumptions.
Pete Mavoides: And there's always some ebbs and flows with different operators and different reporting periods and the like. But, you know, overall, the portfolio is in a great spot, and we're not seeing any concerns that, you know, give us pause.
Baked into guidance around that as we said in the past generally when you see us rising raising guidance throughout the year it tends to be.
Partially driven by the fact that those credit losses arent really coming to play so the 40% to 50 basis points.
We don't give specific guidance on the numbers in there.
But that's certainly where the range of guidance has a range around that I think is fair to say.
Pete Mavoides: And I guess on the flip side of that, the increase in your same store rent growth, is this being driven by either different lease terms, higher escalators, or what? Yeah, I mean, that's just going to be the rent escalations built into our contracts. Generally, they range from anywhere between one and a quarter on up to two. On average, it's one seven, I believe, there are different compounding periods.
No we really don't have a specific concerns about the consumer and specifically as it relates to the service and experience based industries that we're in.
Our experiential tenants are doing great and continue to we continue to see.
Good sales trends, there and coverage improvements.
And.
Our credit loss assumptions are going to be much more specific to individual situations and investments but.
That is baked into guidance.
Pete Mavoides: And, you know, clearly at one five, that represents a pretty solid flow through those escalations for us. And, you know, that's, that's going to kind of ebb and flow as we've disclosed. Okay, great. Thank you so much.
What about the guidance that we've reiterated today.
Okay. Thank you.
Yeah, you mentioned.
No.
Mentioned those.
Consumers not being concerned about them, but within the portfolio of early childhood and casual dining operators.
Would you characterize their ability to pass through higher costs to consumers.
Pete Mavoides: Thank you. Our next question comes from Smithys Rose. Please proceed with your question. Hi, thank you.
Now that it seems inflation is easing a bit and you and Kevin you've talked about those types of businesses not being able to raise rates in the past several quarters.
Yeah listen I think.
Pete Mavoides: I just wanted to ask you a little bit. You talked about some of the more traditional sources of capital either not available or just becoming too expensive. But are you seeing, you know, other kinds of competitors come to the market? Or do you have, you know, sort of a relative advantage at this point as you look for new acquisition opportunities in this environment? Yeah, thanks, Mies. And I think, you know, that's a great question. I appreciate you asking it.
Early childhood is going to be much different than casual dining.
Our early childhood education providers.
Yeah.
A good job of passing through increases.
Tends to be lumpy around semesters in new students, but we've seen increasing trends there.
I think the casual dining sector as the price is a little more a competitive be less discretionary and certainly those guys are going to have less ability to drive through.
Inflationary pressures and we are seeing some some margin compression there.
Pete Mavoides: You know, we have a relative advantage to alternative sources of capital currently, like, you know, the bank market and the high yield market and leverage loans and private credit. A lot of those traditional sources of capital have already been priced inside of Salesback Capital. In the current environment, we're able to compete pretty competitively with those sources. And then, secondarily, you know, the traditional sale leaseback market participants are somewhat limited, particularly by private buyers who are more reliant on debt financing and accessing the ABS market. A lot of those guys are a little more conservative in the current environment.
But ultimately on both <unk> and <unk>.
All of those industries, those end up being equity owner risk it not landlord risks and.
We don't see any.
Outsized losses flowing through the portfolio in.
In general and then in specific in either one of those industries.
Okay, great. Thank you.
Thank you.
Our next question comes from Handelsbanken.
Hello, Greg.
Please proceed.
Hey, good morning.
I Hope you can hear me.
We got I.
First question is on you know I guess theres, a new tenant in your top.
Your top tenant list here title wave auto sponsor, maybe can you spend a moment talking about them the opportunity to do more with them in your overall exposure to.
So kind of a car wash car care vertical with I think about 15% here.
And why.
That's it thanks.
Yes.
Tidal wave is a tenant that.
We've been doing business with for a number of years and number of.
Mark Patton: So, you know, both from an alternative capital perspective and from a competitor perspective, we're finding a nice opportunity to put capital to work. Okay, and then just, you know, you mentioned you have a lot of room to draw on the revolver, but if you were going to just issue, you know, kind of, 10 year unsecured debt today, can you just give us a sense of where you think it would price? Yeah, I think the best mark would be our current bonds, which are out there trading, and they're kind of in the mid-sixes. I would think that, you know, hopefully, a new issuance out of the yield curve would have a good price inside of that. So call it a low to mid-six.
A number of deals over the years.
And they've kind of.
It actually moved into our top 10, it's about a 200 plus.
Unit chain.
Currently led by its founder in the company was founded back in 2000, 1999, So a well run company. It's been in business for a long time, and we're happy to have them in our top 10.
Generally we.
As we've said in the past very comfortable with car washes, given the trends in the industry and the stability of the cash flows and the high margins and solid rent coverage and Thats why you see it as one of our top industries.
The exposure kind of came back a little bit in the last quarter, but we.
We continue to see good opportunities to invest in that space and.
And we like it so we will continue to do so.
Okay.
And then maybe I think you made a comment on.
The pipeline, saying that cap rates in there suggest that.
It should be stable near term. So can you spend a moment or two on talking about the pipeline what's in there any new categories and broadly your expectations for cap rates given the choppiness in.
Mark Patton: All right, thank you. I appreciate it. Thank you. Our next question comes from Eric Borden with BMO Capital Markets. Please proceed with your question. Hey, good morning out there.
And the capital markets.
Yes.
As we said on the prepared remarks, the pipeline is full and you know when you're running the business, that's nearly 100% sale leaseback and nearly 100% follow on business.
Pete Mavoides: Just understand that the majority of the acquisitions completed in the fourth quarter were heavily driven by existing relationships, but looking ahead and given the limited access to the bank markets for some of your potential tenants, you know, are you seeing an uptick in new potential partners in the pipeline? You know, that's a great question. I generally, you know, tell people we like to see an 80-20 or 75-25% mix where we're 75% existing relationships, 25% new relationships, because it's important for us to continually source new relationships because, you know, eventually, some relationships outgrow us. You know, clearly, in the fourth quarter at 96, it's more skewed towards existing relationships. You know, in the current environment, we try to maintain our most profitable relationships and service, you know, the relationships that generate the best risk-adjusted returns and, you know, take care of, you know, the good clients and the reliable clients, and that's kind of what we're doing.
You know your new your forward pipeline is going to look a whole lot like your portfolio and and that's what it looks like so really nothing new.
We're investing across all our industries and <unk>.
Largely with existing relationships.
In terms of <unk>.
Cap rates as the commentary around the competitive landscape would suggest there.
Remaining stable and our you know clearly.
Around an eight mm.
As I said on the prepared remarks, we would expect once the market normalizes and competition.
Comes back in a more normalized fashion, we would expect some downward pressure on cap rates clearly if there is.
If interest rates trend down we would expect some downward pressure on cap rates, but.
We're just not seeing that is as we sit here in the first quarter.
I appreciate that and maybe on the terms that you're getting.
Given the lack of alternatives that a lot of these tenants have you been.
<unk> been able to get longer walls, better bumps I'm curious if you're able to.
If you're getting any pushback from for many of those folks and could we see those terms get even better near term. Thanks.
Yeah.
Listen.
Every transaction, we negotiate as a negotiated transaction.
We've negotiated deals with these people in the past so.
There is a lease in place and the.
The terms of the prior transaction tend to bias the new transaction.
Our investment team has done a great job improving the overall terms.
I look back in the first quarter of 2022, our average rent escalation was one four in the.
Pete Mavoides: You know, I think in a more normalized environment, we would head back down to that 75-25 or 80-20, but, you know, clearly partnering with long-term relationships is bringing value to us, and we're bringing value to them, and, you know, it's a dynamic market that, you know, we're happy to have those relationships. Okay. That's helpful. And then maybe on the disposition front, you know, given the potential for lower yields in the back half of the year, is there potential for that quantum of total dispositions to rise above your four-quarter trailing average, just, you know, given the benefits there? Yeah, I think the expectation should be it's going to be more towards our eight-quarter average.
Last quarter. It was one 9% in the quarter before that it was too low.
I would and really for the whole year to <unk> 109 to $1 nine.
I would not set the expectation that that's going higher.
But we continue to negotiate the best terms that we can from from these relationships and.
We'll see what the market bears.
I did make I would point out on that.
On the.
Prepared remarks, our weighted average lease term at 14 years as the same as it was a year ago.
Which would speak to the benefit of the long duration leases that we add and we added this past year, which is which is a good spot to be.
Appreciate the color.
Thanks, Andrew.
Our next.
Our next question comes from John <unk> with B Riley Securities. Please proceed.
Good morning.
Good morning, guys, Hey, Jon.
Can you speak with the pipeline.
Do you have kind of like a rough number of brackets around the gross size of that today I know you kind of mentioned its full but just maybe number wise what should we be thinking.
Typically we point people to our eight quarter average as a good indicator of what to expect and you know I don't know.
That exact number is but.
Somewhere between $2 50 and three.
Okay. That's helpful and then.
Pete Mavoides: You know, clearly, the current market for dispositions is a bit challenged. We have a very granular and fungible portfolio, but, you know, the lack of financing out there is making it a little more difficult to sell assets than in a normalized environment. And, you know, we'll focus on kind of managing individual tenant and industry exposures and getting out of, you know, any risky assets that we see, but I would expect it to be closer to the eight-quarter average. And really, we don't see the need to lean into dispositions to generate creative capital given where we are from a balance sheet perspective. That sounds great!
In terms of volumes have you seen any maybe reluctance on the part of sale leaseback partners to kind of come to the come to market or closed deals just given some of the interest rate volatility and you essentially are your partners on the on the selling of the property side.
Maybe holding out for better cap rates or lower cost of alternative financing.
Yeah Theres some of that there's clearly overall transaction volume in the single tenant lease single tenant net lease market is down 40% and I think a lot of that or people not.
Choosing not to transact in the current market environment.
But the flip side of that as these these operators are running running their businesses and they have the opportunity to grow their footprints by buying smaller competitors or opening new units.
Pete Mavoides: I'll leave it there. Great, thank you very much. The next question comes from Nate Crossett with BNP Paribas Asset Management. Please proceed with your question. Mr. McGrath, Haendel Juste, Ki Kim, Nicholas Joseph, Nick Joseph, Essential Properties Realty Trust, Inc., www.cdc.gov.au, We can just back it up if you can't do it, and... 808-AXA. Nate, I got to tell you, you came through broken up.
<unk> is a <unk>.
<unk> part of that overall.
Investment decision for them.
They're aggressively growing and choosing to use us as a capital partner to do that.
So.
While there is muted volume across the board.
We still see an ample opportunity set to transact.
Okay, and then maybe in terms of the competitive environment.
For sale leaseback, particularly I mean, how does that look today setting aside kind of the bank financing market or any kind of other types of financing you compete with them.
How many competitors are there out there today are roughly how does that compare to.
Operator: I didn't catch that question. I don't know if you're on a handset or not. You might come back in. Why don't we... Operator. Operator. Yeah, please.
This time last year, maybe even a couple of years ago.
Yeah listen I don't think it's materially different from where we were a year ago, because it feels like the overall.
<unk>.
Capital market environment is about the same if not.
<unk> improved slightly.
Operator: This question comes from Greg McGinnis from Scotiabank. Please proceed with your question. Hi, good morning. This is Elmer Chang on with Greg.
But two years ago there was.
Half dozen too.
10, new private capital backed buyers, who are coming to the market trying to build funds and platforms.
Pete Mavoides: Just on tenants, is there more conservatism on bad debt expense or credit losses baked into 2024 guidance versus the, say, 25 to 40 basis points you've experienced historically, given uncertainty with the consumer? And then how much of that is tied to experiential operators feeling demand pressures from consumers either returning to work or still feeling the effects of inflation? Listen, we have conservative rent loss assumptions and credit loss assumptions built into our guidance, as we always do. We take a very close look at our portfolio and look at individual exposures to include the credits, the unit level coverage, and our rent basis to try to anticipate where we might take any rent loss.
And by and large a lot of those guys are.
Kind of not currently investing at the levels that they would have hoped and so that private buyers is greatly diminished.
We also on occasion compete 10 31 buyers people coming in with large exchanges, who are looking to to place tax deferred capital and theres not a lot of people who are generating gains from the sale of real estate assets and that source of capital.
Yeah.
Dried up and not.
Competing.
There's plenty of public market participants you guys follow him and know kind of where they are and what their.
Appetites are and so we certainly see.
Competition.
Here and there but overall.
You know, it's a diminished level of competition that we're benefiting from.
Okay. That's helpful. That's it for me.
Thank you very much.
Thanks, John appreciate it.
Sorry, if you would like to ask a question. Please press star one on your telephone keypad.
And comes from Kevin Kim with <unk> Securities.
Your question.
Hey, Good morning, you have Kyle on for Kevin.
Pete Mavoides: And, you know, there's a wide range of assumptions baked into guidance around that. As we've said in the past, generally, when you see us raising guidance throughout the year, it tends to be partially driven by the fact that those credit losses aren't really coming into play. So the 40 to 50 basis points, you know, we don't give specific guidance on the numbers in there. But, you know, it's certainly where the range of guidance has a range around that, I think it's fair to say. You know, we really don't have specific concerns about the consumer and, specifically, as it relates to the service and experience-based industries that we're in. Our experiential tenants are doing great and continue to, we continue to see, you know, good sales trends there and coverage improvements. And, you know, our credit loss assumptions are going to be much more specific to individual situations and investments.
I think on the second quarter call.
You guys mentioned approximately 90 basis points, maybe are on watch list with more than half of that in theaters.
Can you just provide an update on how that's trended recently.
Yes, so our current watch list.
Which I'll remind you we defined as the intersection of credit risk.
Single, B minus or below and coverage risk as one five or below is currently 70 basis points.
So so 20 basis points inside of where it was in the second quarter.
And it is still.
<unk>, 50% theaters.
Gotcha. Thank you.
Thank you.
Operator, we got any more questions.
Okay.
Next question is coming from Jim Cameron <unk> with Evercore ISI.
Good morning, Thank you.
Thanks for your question.
Oh I'm sorry, good morning, Thank you Pete.
Pete you and your team have worked with these middle market credits for a long time, obviously and it seems like the business is pretty well set up with your unit and parents are ntt's financial reporting requirements.
What are some of the flash points that you monitor or set off of sort of warning signs in your mind.
Some things that the problem might be a foot with given credit I mean is it.
And coverage declines from the original three five to two five or they've been you had to round them up and collect the rent three months in a row tardy I'm just trying to cure I'm curious what are those most of those markets historically to help you monitor and proactively kind of engage with those tenants.
Pete Mavoides: But, you know, that's baked into guidance, and, you know, we feel good about the guidance that we've reiterated today. Okay, thank you.
Yeah listen I think.
Wouldn't even call it an early warning sign but.
Late payers or guy.
<unk>, who arent paying timely.
Certainly.
Top of the list.
Who are laid on the rent I would say generally that tends to be less than a handful of of actors and historically its the same guys that your arm wrestling with but.
Pete Mavoides: You mentioned those experiential consumers and not being concerned about them, but within the portfolio of early childhood and casual dining operators, how would you characterize their ability to pass through higher costs to consumers? Now that it seems inflation has been easing a bit and given you've talked about these types of businesses not being able to raise rates in the past several quarters. Yeah, listen. I think, you know, early childhood is going to be much different than casual dining.
Currently that's not.
Not a material amount, but more importantly, its monitor monitoring the trends at the unit level because that's ultimately our collateral on our first form of payments is solid cash flow at the unit level.
One of the reasons, we provide such disclosure around.
Where our rents are covered and how they are covered.
But.
From our analysis, it's more just tracking trends and anything that thats falling off or below sector average as you know when you have the amount of data that we have for each of these given industries.
Average.
Pete Mavoides: You know, our early childhood education providers have done a good job of passing through increases. It tends to be lumpy around semesters and new students, but we've seen increasing trends there. I think the casual dining sector is pricey and is a little more A, competitive, B, less discretionary. And certainly those guys are going to have less ability to drive through inflationary pressures.
Sales per site margin per site rent growth per se.
Sales growth all of that trying to see outliers as to performance at the unit and understand that and to the extent that something arises that's concerning.
And you are taking a deeper dive into the corporate credit to understand.
If our asset sales as a source of rent payment.
How solid is the corporate credit that's backing that lease and understanding the risk there.
And then ultimately making a cell decision on assets that you don't think have the durability that you want and expect in the portfolio.
Pete Mavoides: And we are seeing some margin compression there. But ultimately, on both in all those industries, those end up being, you know, equity owner risk and not landlord risk. And, you know, we don't see any outsized losses flowing through the portfolio in general, and then specifically in either one of those industries.
Oh that seems logical and just one follow up to that do you have like substitution rights in your master leases and whatnot. I mean, you said you might see for ailing assets, maybe look to sell them, but do you have other protections, where you could either add other collateral or maybe work with the retailer to.
Put a performing asset.
Forming asset out.
Yes, many of our leases do have substitution rights.
Where the tenant would be incentive to take take an exit.
Pete Mavoides: Okay, great, thank you. Thank you. Our next question comes from Haendel St. To who? Radius.
Performing asset.
And substituted in I would say.
Pete Mavoides: Hey, good morning. I hope you can hear me. First question is on, you know, I guess there's a new tenant on your top tenant list here, Title Wave Auto Spa, so maybe you could spend a moment talking about them, the opportunity to do more with them, and your overall exposure to, you know, kind of the car wash and car care vertical, which I think is about 15 percent here. And last.
More importantly, it's really just having good relationships and working with these tenants because.
Our interests are aligned and not.
Keeping a precise that doesn't work online and operating so we may re tenanted the site and.
The tenant makes us whole for the contract rent that was that was in leases.
Delta between that and the.
Underlying sub tenant rent.
So there is a lot of ways to work through it I would say one of the benefits of being as granular as we are at the asset level, it's pretty easy and painless to work through individual site level issues.
Great I appreciate the update thank you.
Pete Mavoides: That's it. Yes, so Tidal Wave is a tenant that we've been doing business with for a number of years, a number of, you know, a number of deals over the years. And they've kind of, you know, actually moved into our top 10. It's about a 200-unit chain.
Great. Thank you.
No further questions at this time I would now like to turn the floor back over to Pete for closing comments.
Great well, we're sorry, we didn't get your question and if you want to follow up with Mark of Rob Afterwards.
Gladly answer any questions that you might have had but generally.
Pete Mavoides: It's currently led by its founder, and the company was founded back in 1999. So, you know, a well-run company; it's been in business for a long time. And we're happy to have them in our top 10.
Congrats to the team for an excellent quarter and an excellent year.
Feel pretty proud about the results we passed.
Posted last year.
And we're excited about this year, we're off to a great start.
So thank you all for your participation today, we look forward to engaging with you all at the upcoming conferences and have a great weekend. Thanks guys.
Pete Mavoides: Generally, you know, we're, as we've said in the past, very comfortable with car washes, given the trends in the industry and the stability of the cash flows and the high margins and, you know, the solid rent coverage. And that's why you see it as one of our top industries. The exposure kind of came back a little bit in the last quarter, but we continue to see good opportunities to invest in that space, and we like it.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
[music].
Okay.
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Yeah.
Yes.
Okay.
Pete Mavoides: So we'll continue to do so. And then maybe, I think you made a comment on your pipeline saying that the cap rates in there suggest that cap rates should be stable near term. So can you spend a moment or two talking about the pipeline, what's in there, any new categories, and broadly your expectation for cap rates given the choppiness in the capital market? Yeah, you know, as we said in the prepared remarks, the pipeline's full. And, you know, when you're running a business that's, you know, nearly 100% sale lease back, and nearly 100%, you know, follow on business, your new pipe, your forward pipeline is going to look a whole lot like your portfolio. And, and that's, you know, what it looks like. So really, nothing new.
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Pete Mavoides: We're investing across all our industries and, you know, largely with existing relationships, you know, in terms of... Cap rates, as the commentary around the competitive landscape would suggest, they're remaining stable and, you know, clearly, you know, I think around an 8. As I said in my prepared remarks, we would expect, you know, once the market normalizes and competition comes back in a more normalized fashion, we would expect some downward pressure on cap Clearly, if there's, you know, if interest rates trend down, we would expect some downward pressure on cap rates. But, you know, we're just not seeing that as we sit here in the first quarter.
Yeah.
Okay.
Uh huh.
[music].
Okay.
[music].
Pete Mavoides: I appreciate that. And maybe on the terms that you're getting, given the lack of alternatives that a lot of these tenants have, you've been able to get longer walls, better bumps. I'm curious if you're able to, if you're getting any pushback from any of those folks, and could we see those terms get even better in the near term?
Pete Mavoides: Yeah, I listen, with every transaction we negotiate is a negotiated transaction. You know, we've negotiated deals with these people in the past, so, you know, there's a lease in place, and the terms of the prior transaction tend to bias the new transaction. And our investment team has done a great job of proving the overall terms. You know, I look back at the first quarter of 2022, our average escalation was 1.4, and, you know, last quarter it was 1.9, and the quarter before that it was 2.0. I would, and really for the whole year, 2.0, 1.9, 2.0, 1.9. I would not set the expectation that that's going to go higher.
Okay.
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Yeah.
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Pete Mavoides: But, you know, we continue to negotiate the best terms that we can from these relationships, and, you know, we'll see what the market bears. I did make, I would point out in the prepared remarks, you know, our weighted average lease term, at 14 years, is the same as it was a year ago, which, you know, would speak to the benefit of the long-duration leases that we added this past year, which is a good spot to be. I appreciate the color.
Okay.
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[music].
Pete Mavoides: Thanks, Haendel. Our next call will be. Our next question comes from John Masoco with B. Reilly Securities. Please proceed. Good morning. Good morning, John. Good morning, John. So when you think about the pipeline, do you have kind of like a rough number or brackets around the gross size of that today? I know you kind of mentioned it's full, but maybe number-wise, what would you be thinking? Yeah, you know, typically, we point people to our eight-quarter average as a good indicator of what to expect. And, you know, I don't know what that exact number is, but, you know, somewhere between 250 and three.
Okay.
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Pete Mavoides: Sure, that's helpful. And then, you know, in terms of volumes, have you seen any maybe reluctance on the part of sale-leaseback partners to kind of come to the market or close deals just given some of the interest rate volatility? I mean, essentially, are your partners on the selling of the property side maybe holding out for better cap rates or lower costs of alternative financing? Yeah, there's some of that.
Yeah.
Yeah.
Pete Mavoides: There's, you know, clearly, overall transaction volume in the single tenant lease, single tenant net lease market is down 40%. And I think a lot of that is people not, you know, choosing not to transact in the current market environment. But the flip side of that is, you know, these operators are running their businesses, and they have the opportunity to grow their footprints by, you know, buying smaller competitors or opening new units. And, you know, rent is, you know, a small part of that overall investment decision for them. And, you know, they're aggressively growing and, you know, choosing to use us as a capital partner to do that. So, you know, while there is muted volume across the board, we still see an ample opportunity set to transact.
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Pete Mavoides: Okay. And then maybe in terms of the competitive environment for sale e-SPAC, particularly, I mean, how does that look today, setting aside the bank financing market or any kind of other types of financing you compete with? How many competitors are there out there today, roughly, and how does that, you know, compare to this time last year, maybe even a couple of years ago? Yeah, listen. I don't think it's materially different from where we were a year ago because, you know, it feels like the overall capital market environment is about the same, if not slightly improved. But two years ago, there were, you know, half-dozen to, you know, 10 kinds of new private capital-backed buyers who were coming to the market trying to, you know, build funds and platforms.
Okay.
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Pete Mavoides: And by and large, a lot of those guys are, you know, kind of not currently investing at the levels that they would have hoped, and so that private buyer is greatly diminished. We also, on occasion, compete with 1031 buyers, people coming in with large exchanges who are looking to place tax-deferred capital, and, you know, there's not a lot of people who are generating gains from the sale of real estate assets, and that source of capital is largely dried up and not competing.
Yeah.
[music].
Pete Mavoides: There are plenty of public market participants. You guys follow them and know kind of where they are and what their appetites are, and so we certainly see competition here and there, but overall, you know, it's a diminished level of competition that we're benefiting from. Okay, that's helpful. And that's it for me.
Okay.
Pete Mavoides: Thank you very much. Thanks, John. I appreciate it. Or if you would like to ask a question, please press star one on your telephone. And this comes from Ki-Bin Kim, Mutro Security.
[music].
Yeah.
[music].
Operator: Your question. Hey, good morning. You have Kyle on for Keenan.
Yes.
Okay.
Unnamed Speaker: I think on the second quarter call. You guys mentioned approximately 90 basis points, maybe are on the watch list with more than half of that in beaters. Please provide an update on how that's trending recently. Yes, our current watch list, which I'll remind you we defined as the intersection of credit risk as a single B minus or below and coverage risk as one five or below. It's currently 70 basis points. So, 20 basis points inside of where it was in the second quarter, and it's still, you know, 50% theater.
Yeah.
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[music].
Unnamed Speaker: Gotcha. Thank you. Thank you. Operator, do we have any more questions?
Yeah.
Operator: Thank you. Thank you. Thank you. Our next question comes from Jim Cameron with Evercar ISI.
Yeah.
Yeah.
[music].
Pete Mavoides: Good morning, thank you. Good morning, thank you. Pete, you and your team have worked with these middle market credits for a long time, obviously, and it seems like the business is pretty well set up with the unit and parent or entity financial reporting requirements. But what are some of the flash points that you monitor or set off some sort of warning signs in your mind that a problem might be afoot with a given credit? And coverage declines from an original 3-5 to 2-5, or you had to round them up and collect the rent three months in a row late. I'm just curious, what are some of those historical markers that have helped you monitor and proactively kind of engage with those targets? Yeah, you know, listen, I think, you know, I wouldn't even call it an early warning sign.
Okay.
Good.
Yes.
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Pete Mavoides: But you know, late payers or, you know, guys who aren't paying on time, you know, are certainly, you know, top of the list. You know, guys who are late on the rent. I would say, generally, that tends to be less than a handful of actors. And historically, it's the same guys that you're arm wrestling with, but, You know, currently, that's not a material amount, but more importantly, it's monitoring the trends at the unit level because that's ultimately our collateral, and our first form of payment is solid cash flow at the unit level. One of the reasons we provide such disclosure around where our rents are covered and how they're covered. But, you know, from our analysis, it's more just tracking trends and anything that's falling off or below sector averages.
Yeah.
[music].
Thank you.
Yes.
Sure.
Yes.
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Pete Mavoides: You know, when you have the amount of data that we have for each of these given industries, you know, average sales per site, margin per site, rent growth per site, sales growth, all of that, trying to see outliers as to performance at the unit and understand that. And, you know, to the extent that something arises that's concerning, then you take a deeper dive into the corporate credit to understand, you know, if our asset fails as a source of rent payment, you know, how solid is the corporate credit that's backing that lease and understanding the risk there. And then, ultimately, you make a sell decision on assets that you don't think have the durability that you want and expect in the portfolio.
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Pete Mavoides: That seems logical, and just one follow-up to that: do you have substitution rights in your master leases and whatnot? I mean, you said you might, obviously, for ailing assets, maybe look to sell them, but do you have other protections where you could either add other collateral or maybe work with the retailer to put a performing asset in and take a low-performing asset out?
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Pete Mavoides: Yes, many of our leases do have substitution rights, you know, where the tenant would be incented to take and exit a sub-performing asset and substitute it in. I would say, you know, more importantly, it's really just having good relationships and working with these tenants because, you know, our interests are aligned and not, you know, keeping a site that doesn't work online and operating, you know, so we may re-tenant a site, and the tenant pays a toll for the contract rent that was in the lease, the delta between that and the, you know, underlying sub- I would say one of the benefits of being as granular as we are at the asset level is that it's pretty easy and painless to work through individual site-level issues. Great I appreciate the update. Thank you. Great, thank you. No further questions at this time. I would now like to turn the floor back over to Pete Mavoidius for closing comments. Great Well, Nate, we're sorry we didn't get your question in.
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Pete Mavoides: If you want to follow up with Mark or Rob afterwards, we'd gladly answer any questions that you might have had. But generally, congratulations to the team for an excellent quarter, an excellent year. We feel pretty proud about the results we posted last year, and we're excited about this year. We're off to a great start.
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Pete Mavoides: So thank you all for your participation today. We look forward to engaging with you all at the upcoming conferences, and have a great weekend. Thanks, guys. This concludes today's teleconference. You may disconnect your lines at this time.
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