Q4 2024 Essential Properties Realty Trust Inc Earnings Call
Speaker Change: Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust's fourth quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A 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.
Speaker Change: As a reminder, this conference is being recorded and a replay of the call will be available three hours after the completion of the call for the next two weeks.
Speaker Change: The dial-in details for the replay can be found in yesterday's press release. Additionally, there will be an audio webcast available on Essential Properties' website at www.essentialproperties.com, an archive of which will be available for 90 days.
Pete Mavoides: On the call this morning are Pete Mavoides, President and Chief Executive Officer, Mark Patten, Chief Financial Officer, Rob Salisbury, Head of Capital Markets, Max Jenkins, Head of Investments, and A.J. Peel, Head of Asset Management.
Speaker Change: It is now my pleasure to turn the call over to Rob Salisbury.
Speaker Change: Thank you, operator. Good morning, everyone. And thank you for joining us today for essential properties fourth quarter 2024 earnings conference call
Speaker Change: During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities law.
Speaker Change: 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.
Thank you, Rob.
Speaker Change: And thank you to everyone joining us today for your interest in essential properties.
Speaker Change: On our third quarter earnings call, we discussed how our relationship-driven investment strategy has positioned us well to execute our business plan in a dynamic market environment.
Speaker Change: Maintaining relationships with and providing value to operators continues to drive investment activity in the fourth quarter.
Speaker Change: with 79% of our investments generated from existing relationships, underscoring the value of recurring business with our tenant base.
Speaker Change: Our portfolio also continued to perform well, with tenant credit trends and same-store rent performance healthy and in line with our expectations.
Speaker Change: With quarter-end performer leverage of 3.8 times and liquidity of $1.4 billion, our balance sheet positions us well to continue to grow our portfolio by continuing to support our tenant relationships and investing in our core industries at attractive spreads.
generating sustainably attractive earnings growth for our shareholders.
Speaker Change: The continued strong portfolio trends and the current attractive investment environment remain supportive of our 2025 business plan.
Speaker Change: As a result, we have updated our 2025 AFFO per share guidance range to $1.85 to $1.89, representing a penny increase at the low end.
Speaker Change: As we noted on our third quarter earnings call, competition has begun to materialize as capital markets have normalized, resulting in modest cap rate compression.
Speaker Change: We continue to expect our investment cap rates in 2025 to be slightly lower than 2024, reflecting this trend.
Speaker Change: However, our large and growing investment pipeline is supportive of our articulated investment guidance of $900 million to $1.1 billion.
Speaker Change: We ended the quarter with investments in 2,104 properties that were leased to 413 tenants operating in 16 industries.
Speaker Change: Our weighted average lease term stood at 14 years at quarter end, in line with a year ago, which is 5.8% of our annual base rent expiring over the next five years.
Speaker Change: From a tenant health perspective, our weighted average unit level rent coverage ratio was 3.5 times this quarter, indicating the profitability and cash flow generation by our tenants at the unit level.
Speaker Change: Tenant credit events were de minimis during the quarter, and our leasing activity picked up materially in 2024, with 72 leases signed for a recapture rate of 101%.
Speaker Change: The execution of our property management team serves to further mitigate risk by resolving credit events expediently and at favorable rental rates, which ultimately is supported by disciplined asset pricing when we buy properties.
Speaker Change: Looking into the first quarter, we continue to expect a constructive tenant credit and portfolio performance backdrop for the company.
Speaker Change: As noted in recent press reports, one of our car wash tenants, Zips Car Wash, recently filed for Chapter 11 bankruptcy protections.
Speaker Change: At year-end, this tenant represented approximately 20 basis points of ABR across three locations in our portfolio.
Speaker Change: which is a large decline from our peak exposure in 2017 of 16 sites at over 5% of ABR.
Speaker Change: This material reduction in exposure to an underperforming operator highlights our proactive approach to asset management, driven by our proprietary financial reporting, a key underpinning of our differentiated business model.
Speaker Change: Given the ongoing nature of the bankruptcy, it is premature for us to discuss our expectations around our leases on these three properties. I would note that this credit event is consistent with the assumptions supporting our guidance range.
Speaker Change: On the investment side, during the fourth quarter we invested $333 million through 37 separate transactions at a weighted average cash yield of 8% in line with our trailing four quarter average.
Speaker Change: Our investment activity in the quarter was broad-based across most of our top industries with no notable departures from our investment strategy.
Speaker Change: These investments had a weighted average initial lease term of 17.7 years and a weighted average annual rent escalation of 2%, generating an average gap yield of 9.2%.
for our investments.
Speaker Change: this quarter, had a weighted average unit level rent coverage of 3.4 times and the average investment per property was $3.3 million.
Speaker Change: All of the investments this quarter were sale-leaseback transactions, where we are providing capital to an expanding operator.
Speaker Change: Looking ahead, our investment pipeline remains solid, reflecting M&A and new unit expansion across a variety of targeted industries.
Speaker Change: As noted earlier, the current investment climate is characterized by attractive cap rates that have modestly compressed. Our pipeline reflects this trend with pricing in mid to high 7% range and strong contractual escalations.
which is supportive of our long-term growth trajectory.
and Robert Salisbury. Thank you. I'm Robert Salisbury.
Speaker Change: From a tenant concentration perspective, our largest tenant represents 4.2% of ABR at quarter end, and our top 10 tenants now account for just 17.6% of ABR.
Speaker Change: Tenant diversity is an important risk mitigation tool and a differentiator for us and it is a direct benefit of our focus on middle market operators which offer an expansive opportunity set.
Speaker Change: Dispositions picked up in the fourth quarter as we opportunistically monetized the number of investments at accretive pricing.
Speaker Change: We sold 24 properties this quarter for $60.4 million in net proceeds.
Speaker Change: This represented an average of approximately $2.5 million per property, highlighting the importance of owning fungible liquid properties, which allows us to proactively manage portfolio risks.
Speaker Change: The dispositions this quarter were executed at a 7.0 weighted average cash yield.
Speaker Change: Over the near term, we expect our disposition activity to be slower than the fourth quarter at a level relatively in line with our trailing eight-quarter average, driven by opportunistic asset sales and ongoing portfolio management activity.
Speaker Change: With that, I'd like to turn the call over to Mark Patten, our CFO, who will take you through the financials and balance sheet for the fourth quarter.
Mark Patten: Thanks Pete and good morning everyone. As Pete detailed, we had a good fourth quarter highlighted by a strong level of investments at an 8% initial cash cap rate.
Mark Patten: Among the headlines from the quarter was our AFFO per share of 45 cents.
Mark Patten: an increase of 7% versus Q4 of 2023. On a nominal basis, our AFFO totaled $81.8 million for the quarter, which is up $14.8 million over the same period in 2023, an increase of 22%.
Mark Patten: This AFFO performance was in line with our expectations as reflected in our guidance range provided last quarter.
Mark Patten: Total GNA in Q4 2024 was 8.5 million dollars versus 7.3 million dollars for the same period in 2023, with the majority of the increase relating to increased compensation expense as we continue to invest in our team.
Mark Patten: Importantly, our recurring cash G&A as a percentage of total revenue was 4.8% for the quarter, which compares favorably to the 5.2% in the same period a year ago. Our total G&A and recurring cash G&A were modestly favorable to our expectations for the quarter.
are recurring cash G&A as a percentage of total revenue.
Mark Patten: was 5.4% for the full year and we continue to expect that on an annual basis, our cash DNA as a percentage of total revenue will decline as our platform generates operating leverage over a scaling asset base.
Mark Patten: enabling us to manage a larger portfolio and invest at higher levels.
Mark Patten: We declared a cash dividend of $0.295 in the fourth quarter, which represents an AFFO payout ratio of 66%.
Mark Patten: Our retained free cash flow after dividends continues to build, reaching $30.6 million in the fourth quarter, equating to over $120 million per annum on a run rate basis.
Mark Patten: We continue to view our retained free cash flow as an attractive source of capital to support our investment program, representing upwards of approximately 10% of our annual capital needs.
Mark Patten: Turning to our balance sheet with the net investment activity in Q4 2024, our income producing gross assets reached six billion dollars at quarter end. The increasing scale of our income producing portfolio continues to build, improving our credit profile.
Mark Patten: On the capital markets front, we've remained active on our ATM program in the quarter, completing the sale of approximately $79 million of stock, all on a forward basis, at an average price of $32.01 per share.
Mark Patten: We settled $325 million of forward equity with a portion of the proceeds utilized to repay our revolving credit facility balance.
Mark Patten: Our balance of unsettled forward equity totaled $381 million at quarter end, which we plan on utilizing to continue funding our investment program while maintaining flexibility by keeping capacity available on our revolver.
Mark Patten: Similar to last quarter, our share price remained well above the weighted average price of our unsettled forward equity of $29.03 a quarter end.
Mark Patten: As a result, under the Treasury stock method, the potential dilution from these forward shares is included in our diluted share count.
Mark Patten: For the fourth quarter, our diluted share count of 182.3 million.
Mark Patten: included an adjustment for 3.2 million shares from our unsettled forward equity related to this Treasury stock calculation. This represented a headwind of approximately one cent to AFFO per share in the quarter and two cents for the full year.
Mark Patten: Our pro forma net debt to annualized adjusted EBITDA RE as adjusted for our unsettled forward equity was 3.8 times a quarter end.
Mark Patten: We remain committed to maintaining a well-capitalized balance sheet with low leverage and significant liquidity to continue to fuel our external growth.
Mark Patten: We further bolstered our liquidity at quarter end with the previously announced closing of our amended $2.3 billion senior unsecured credit facility.
Mark Patten: The facility amendment yielded a number of strategic accomplishments for the company, including an upsized revolver commitment of $1 billion, improvements to the rate structure and our financial covenants, and an extended maturity date to February 2030.
Mark Patten: We'd like to thank our entire bank group for their full participation and continued support in another successful financing supporting the growth of our business.
Mark Patten: Lastly, as we noted in the earnings press release, we've updated our 2025 AFFO per share guidance range to $1.85 to $1.89.
Mark Patten: implying over 7% growth at the midpoint. Importantly, this guidance range requires minimal equity issuance, which we believe is a testament to our front-footed approach to capital raising.
With that, I'll turn the call back over to Pete.
Thanks, Mark.
In summary,
Speaker Change: We are very pleased with our fourth quarter and full year results and remain optimistic about the prospects for the business.
Operator, please open the call for questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please, while we poll for questions.
Speaker Change: Thank you. Our first question is from Handel St. Just with Mizuho. Please proceed with your question.
Hey, good morning out there. Thanks for the question.
Speaker Change: My first question is on tenant credit. I was hoping you could talk a bit more about this.
Speaker Change: the ZIPS bankruptcy here and the car wash segment more broadly.
Speaker Change: Rents in the car wash segment have run up quite a bit and cap rates have compressed the last couple of years. So I'm curious if...
Speaker Change: 15% is still a level of exposure you're comfortable maintaining? Or could we see that drift down more over time? And specifically ZIPS, I'm hoping you can add some color on how you envision that playing out. It seems like the risk to your AVR this year could be far lower than a 20 basis 1 exposure you have. Thanks.
yeah
Speaker Change: Sure, there's a lot embedded in that handout and a good place to start.
Speaker Change: You know, it's too early on ZIPS. Obviously, we're in negotiation with them in bankruptcy. Certainly, we feel like we're in a...
Speaker Change: in a really good position, having paired our exposure down to three properties and 20 bases point to ABR and, you know, you can look at our...
Speaker Change: historical recoveries at 70 to 80 cents on the dollar but you know it's an ongoing discussion.
Speaker Change: More broadly, you know, we have strong conviction in the car wash space. You know, we've been investing in that space for quite some time.
really the first bankruptcy we've seen.
Speaker Change: It's not one that we didn't see coming, obviously, as we prepared our exposure.
and we have strong coverage across the portfolio.
One of the benefits of our platform
almost 200 car washes across 54 operators.
Speaker Change: and then ongoing financial reporting, where we can see the operators that are adding value, growing sales, improving EBITDA margins, and operators that are not, and take corrective action as we manage the portfolio. So Car Wash will continue to be one of our leading industries. It's been a great industry. We get great risk-adjusted returns.
Speaker Change: You know, we're pretty comfortable with our position as we think about working through the ZIPS bankruptcy.
Speaker Change: Appreciate that. And if I could add a follow-up to that question about ZIPS. Curious if you're able to share if they paid January and February rent?
We're not.
able to share that.
Speaker Change: but we did make comments on the call where we're 100% collection collected so I should give you a hint.
Speaker Change: Okay, fair enough. And then second question, I guess on the commentary regarding the increased competition you're seeing, I was hoping you could expound on that a bit. Where are you seeing the competition in specific industries? Do you think it's sustainable? And what do you think it means for your ability to transact for portfolios or say leasebacks?
Speaker Change: and Capra, which I think you mentioned, you expect to see compressed near term.
Max, why don't you tackle that question?
Sure, thanks Pete
Max: You know, over the last couple quarters, we've seen some increased competition, both from our peers and there's been a couple new entrants into the marketplace.
Speaker Change: But the only effect to that would just be a slightly modest compression in cap rates.
Speaker Change: The transaction environment remains favorable to us. We focus on servicing relationships and providing growth capital to middle market operators across the country and there is an ample opportunity set for us to continue to invest.
Speaker Change: realize those, you know, attractive risk-adjusted returns. So we're happy with where the pipeline sits and, you know, it'll support the strong earnings growth that's implied in our guidance.
Speaker Change: The A-caps and the 9-2 gap yields we saw in last year were kind of, you know, as we said all throughout the year, kind of felt like the high water mark and, you know, we expect to be more in the mid to high sevens as we think about this year.
Thank you. Appreciate the call.
You got it. Thank you.
Thank you.
Speaker Change: Our next question is from Caitlin Burroughs with Goldman Sachs. Please proceed with your question.
Caitlin Burroughs: Hi, good morning everyone. I guess maybe just kind of expanding on that. Wondering if you could give any more discussion on just like how interest rate volatility has impacted your business recently, maybe on the positive side or more negative side. I mean if you look at the interest rate moves of 4Q alone, it was like pretty significant. So wondering to what extent you felt that and I guess anything that's happened subsequent to the quarter end.
and and we're making 20-year investments and and so
Caitlin Burroughs: You know, the week over week and even month over month volatility, you know, doesn't come into our pricing.
Caitlin Burroughs: And then, you know, you think about how we've positioned the balance sheet, you know, we're raising capital.
Caitlin Burroughs: well in advance of deploying it such that that capital is priced in.
Caitlin Burroughs: 3, 7, 10 year, they were getting more aggressive bidding and then...
Caitlin Burroughs: You know, you turn the calendar and you have a 4-7, they're blown out of deals and we deliberately try to be more consistent and more predictable to that with our counterparties, which is why we think we get
Caitlin Burroughs: premium returns for how we deploy our capital. So overall I think
Caitlin Burroughs: You know, we expect downward pressure on cap rates as we've consistently said. We saw more of that in in the fourth quarter, and it's abating a little bit here in the first quarter. But you know, we'll see where where the market goes.
Speaker Change: and then maybe just on the dispositions in the fourth quarter wondering if you could talk a little bit more about what made you decide to move forward with that deal in particular or maybe it was a couple deals and as we as we think about it how you think about it from like portfolio management versus like source of capital going forward
Speaker Change: Yeah, you know, from a source of capital, you know, it's not necessarily accretive to where we're pricing new capital, you know, certainly at a seven cap.
You know, it's more portfolio management, risk management.
Speaker Change: The fourth quarter was really lightening up on our car wash exposure, bringing that diaphragm or soft ceiling of 15%, which you see we did. I think 65 or 70% of our dispositions in the fourth quarter were in the car wash space. So it was mostly...
Speaker Change: you know, portfolio management, industry exposure. As we said on the call, we expect the disposition activity to moderate and be more consistent with our eight quarter average as we think about this year.
Speaker Change: Thank you. Our next question is from Rich Hightower with Barclays. Please proceed with your question.
Hey, good morning, everybody.
Speaker Change: Maybe just to stick to the capital side of the equation, Mark, I think you mentioned minimal equity issuance needed overall this year to hit your investment targets, but maybe just talk about what might be needed.
Speaker Change: You guys also just said the dispositions obviously will decrease, maybe relative to what we saw in the fourth quarter, but just help us piece together, you know, any sort of remaining equity capital needs to hit the full year guidance. And then obviously, you know, we started thinking about 2026 at some point.
Speaker Change: maybe just to hear your thoughts on that as well. Thanks.
Speaker Change: You got it. Well, I'll probably leave 2026 out until we actually provide guidance on 2026.
Speaker Change: I had to try, Mark. No problem at all, appreciate it, Rich. Yeah, so listen, I think some of the building blocks, as you think about it, and I mentioned one other thing in my remarks about our growing free cash flow, so if you think about that.
Speaker Change: That's a pretty significant component of our investment ambition for the future.
Pete Mavoides: In addition, Pete even mentioned even if we use our eight-quarter average on dispositions that probably delivers, you know, a decent amount of capital for that and we've got 380 million of unsettled poverty, we've got a billion dollars
Pete Mavoides: standpoint, the underlying assumption is that our equity issuance and guidance is really
Pete Mavoides: deploy that you could achieve that with normal kind of ATM activity. So, I'll say it a different way and, you know, what I mentioned in my remarks is, you know, we like to be front-footed at some point in capital raising or equitizing our growth ambitions.
Pete Mavoides: So as I think about it, it makes us very puts us in a position of being very opportunistic So if we actually wanted to do something in terms of a bigger
Pete Mavoides: execution or otherwise, we could do that and it would just be, it would be all the
Pete Mavoides: positive to our Expectations, but what I would say as you look at our liquidity We're sitting at 3.8 times leverage if you run out say
Pete Mavoides: The liquidity we have to get to 4.6 times, which is somewhere right around sort of our, probably our historical
You're pretty much approaching a billion dollars.
least three and a half quarters of
Thank you.
of Investment Care.
Speaker Change: Okay, got it. Sorry, I think, Mark, you were breaking up there on my end, but I think I caught most of that. And I guess, just to, so that was sources, just to check in on uses for a second. What's the best way we should be modeling, you know, the timing of acquisition volume, you know, kind of throughout the year at this point? Thanks.
Rob? Thanks. Thanks.
Rich: Hey, Rich. I think from a cadence standpoint, historically the fourth quarter has been a little bit larger for us in years past, but a ratable over the course of the year would probably be a reasonable assumption for right now. Obviously, where our pipeline sits today, we don't have visibility beyond 60 to 90 days there, but just speaking to our historical
Got it. Thanks, guys.
Thanks.
Speaker Change: Our next question is from Smeads Rose with Citi. Please proceed with your question.
Speaker Change: Hey, good morning. This is Maddy Fargis on First Needs. Do you have any feedback you're getting around consumer behavior from tenants that you're able to share given the current inflationary environment?
Speaker Change: Our feedback is going to be delayed, right? We're receiving unit level financials at our sites on a, you know, on a one-quarter lag.
Speaker Change: 90 to 180 day lag and, you know, if anything, you know, what we're seeing is those
Speaker Change: Those factors abating in the current numbers, but you know, it's I would I would say, you know, the the data and input you hear on the news is much more current.
Speaker Change: Great, thank you. And then your ABR exposure to tenants under one-times coverage ticked up slightly sequentially. Is there anything there to be concerned about?
Speaker Change: No, that bucket ebbs and flows and particularly is influenced by sites that we're developing with our partners and putting capital to work before those sites are actually producing positive ABR.
Speaker Change: and certainly the uptick is de minimis in our view and nothing to be concerned about. And I would say, you know, if there were credit issues and they would be built into guidance and they are built into guidance and I think bumping the bottom end of the range of guidance this quarter should give you a sense of where we're at.
where we're thinking at this point.
Great, thank you. That's it for me.
Thank you.
Speaker Change: Our next question is from Eric Borden with BMO Capital Markets. Please proceed with your question.
Eric Borden: Good morning. Just noticed that Circle K popped into the top 10 tenant list, you know, I just want to talk wondering if you could talk about the, you know, potential opportunity to acquire more there and then more broadly speaking the appetite to add more C stores to the portfolio.
Eric Borden: AJ, why don't you tackle that? Sure, so Circle K has been in the top ten in previous quarters. It was really a sequencing of just the rental escalation that put it back in. We're very happy with that tenant. Couchard is a great credit and I think C-Stores across the board is an area that we've continued to grow over the years ratably and we're really happy with the community store space.
Thank you.
Speaker Change: Okay. And then we just noticed that occupancy, you know, slightly moderated 20 BIPs quarter over quarter. I was wondering if you could have a comment there. And then if you could talk about your, you know, current watch list outside of ZIPS, you know, what do you guys have built into guidance for bad debt?
Speaker Change: Alright, well that one's jumping around the room. You know, on occupancy, I wouldn't read too much into going from, you know, three vacant properties to seven. That's certainly, you know, natural ebbs and flows in the portfolio.
Speaker Change: We did, you know, went through our releasing stats on the...
Speaker Change: on the call, which I think are positive, so, you know, those seven properties will be brought back online and run through our releasing stats and, you know, certainly any specific assumptions around those sites would be built into guidance.
Speaker Change: in terms of bad debt. Rob, why don't you tackle that?
Rob Salisbury: Yeah, so our guidance range includes a wide range of assumptions including for credit. We haven't quantified this specifically.
but maybe just as a frame of reference,
Rob Salisbury: So when we construct our guidance range, we go through a combination of top-down and a bottom-up process, where we identify individual tenants as well as bake in a general reserve. And so typically that results in an assumption that's well in excess of that 30 basis points number.
if that's helpful.
Speaker Change: Oh, I'm sorry, I think you're breaking up a little bit. I don't know if I heard the last bit of your question. Happy to take it offline, though. Thanks.
Great, we appreciate that. Thanks. Sorry for breaking up.
Speaker Change: Our next question is from Michael Goldsmith with UBS. Please proceed with your question.
Good morning. Thanks a lot for taking my question.
Speaker Change: First question, on the car wash industry again, you know given what you have visibility into, is the pressure on this group broad-based or is it more
Speaker Change: focused on a narrow range of operators right within the ZIPS filing. They noted that they've seen roughly 900 new car wash sites open every year for the past five years. So just try to understand if this is industry-wide or is this just kind of specific operator? It can seem to just kind of specific operators, thanks.
Speaker Change: Yeah, we certainly think it's a specific operator trend. Obviously there is new competition in the car wash space and we're monitoring that and trying to
Speaker Change: deploy our capital with guys who do it right and guys who do it well. Across our overall portfolio, sales are flat and EBITDA is roughly flat with margins in excess of 50%.
Speaker Change: and coverage in the mid-twos, so we certainly feel good with our exposure and we monitor it on a quarterly basis and take corrective action where we see sites.
Speaker Change: that aren't working, but I don't think there's something systemic to the entire car wash space that gives us concern.
at the start of the call. Thanks.
Speaker Change: Yeah, I think it's really conservatism and the recognition that, you know, 2024 was a great year for buying assets at super high cap rates.
Speaker Change: And we were aggressively looking to take advantage of the dislocation in the capital markets
Speaker Change: deploy capital at historically wide spreads and historically wide rates and
Speaker Change: We expect in 2025 a normalization of the capital markets and a resumption of competition will drive cap rates down and thus making us a little less acquisitive.
Speaker Change: but it's early in the year, right, and the 10-year remains volatile as we discussed earlier in the call and, you know, we'll see where things shake out.
Speaker Change: But, you know, obviously there's not a huge difference between, you know, where we ended up in last year and the mid part of our guidance. So, you know, we'll continue to transact, continue to service our relationships and see what the year brings.
Thank you very much. Good luck in 2025.
Great, thank you.
Speaker Change: Our next question is from John Alachowski with Wells Fargo. Please proceed with your question.
Speaker Change: Hi, this is Cheryl on behalf of John. I was just wondering what were the drivers for the plus one cent raise on the low end of AFFO Guide and how have you seen acquisitions trend year-to-date? What does the pipeline look like and have you seen any cap rate compression recently? Cheryl Kane-Piasecki
Speaker Change: Yeah, as we said in our prepared remark, the pipeline's full, albeit with modest cap rate compression. So, you know, as I said, we do expect to transact in the mid to high sevens, which is down from an eight.
Speaker Change: You know, the range of guidance, you know, is driven by a bunch of assumptions, both around investments.
around credit experience and around the cost of capital.
Speaker Change: Obviously, I think the cost of capital is not going to be a huge driver given where we're positioned currently and the price of that capital, but it's really cap rates and credit experience and performance of the portfolio.
Speaker Change: Thank you. And then just one last one. We see that the credit coverage picked up in the 1.5 to 1.99 times category. What kind of assets drove the pickup in that bucket?
Speaker Change: It's going to be broad-based across the portfolio. I don't think there's anything specific to industries or tenants that's going to, you know, kind of drive the increase in that bucket.
Thank you.
Thank you.
Speaker Change: Our next question is from Farrell Granath with Bank of America. Please proceed with your question.
Farrell Granath: Hi, good morning. Thank you for taking my question. I wanted to ask about your dispositions that you spoke about that there may be a slowing, but there was a key focus on the reduction in car washes. Is there any other industry that would be a focus going into 2025, or would it be just the rebalancing of the portfolio?
Farrell Granath: Yeah, so, you know, we have the soft ceiling for any given industry of 15% and so when we crest That we look to pair that exposure and and create the ability to continue to invest within in those industries really
Farrell Granath: property level and tenant risk based where we see risks either at a tenant level or an individual asset level and really moving those risks out of the portfolio and nothing really systemic to hang your head on there.
Speaker Change: Okay, thank you. And also, I'm sorry to go back to the bad debt and credit assumptions. I just wanted to understand, compared to your initial guide on the 20 basis points of exposure for ZIPS,
Speaker Change: Was that initially included into the bad credit assumption or is there an additional Assumption that is maybe baked in now into new guide of that additional 20 basis points
Yes, so you got to think about
Speaker Change: what happens in a credit event. You have a tenant file for bankruptcy and then a lease.
Speaker Change: stops paying and then you take your assets and you reposition those assets.
Speaker Change: and you have a recovery on those assets. So really, when you're building in the credit assumption, you're going to have the downtime of the assets and then the recovery of experience of those assets, assuming a specific downtime, whether it's 30, 60, 180 days, depending upon the asset, the market.
Speaker Change: Our credit assumption in guidance goes through all our tenants and all our assets and makes specific assumptions around what we think is going to happen.
Speaker Change: you know unknown assumption to on top of that to account for things that we don't know that we can't see and so without speaking specifically to ZEVs I would say our credit loss assumptions for the year have not changed materially in the 90 days since we initially provided guidance.
Thank you.
Okay, thank you so much.
Speaker Change: Our next question is from Daniel Guglielmo with Capital One Securities. Please proceed with your question.
Daniel Guglielmo: Hi everyone. Thank you for taking my questions. I appreciate the U.S. map on page 9 of the supplement and there weren't many major changes in diversification by state quarter to quarter, but I know you all have a large forward pipeline of deals, so thinking about that map one year from now, are there certain states or regions where you'd expect material changes?
Daniel Guglielmo: We often say geography is an output of where our tenant relationships bring us such that I would expect our geographical diversification to grow radibly and I would not anticipate a materially different page nine, you know, 12 months from now.
Daniel Guglielmo: Okay, great. And then as a follow-up to that, we looked through kind of the U.S. wage data and it looks like some of the southern cities have had some like re-acceleration in wage growth, Atlanta, Miami, Dallas, Houston, and you mentioned it's kind of where your partners take you. Have you been getting more inbounds from partners and tenants trying to kind of expand in those parts of the country?
Daniel Guglielmo: Yeah, I mean our relationships are bringing us into those markets and given that we're heavy in those markets currently, you know, I would say our inbound, you know, demand for capital has been proportionately, you know, similar to our geographic
diversity.
Speaker Change: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: Our next question is from Jay Cornridge with Wedbush Securities. Please proceed with your question.
Thanks, good morning.
Speaker Change: Going back to industry allocations, you know, beyond lowering car exposure, car wash exposure below 15%, it looks like you increased exposure to casual dining ED basis points to seven and a half percent.
Speaker Change: And, you know, that's an industry that's faced some headwinds lately. So just curious if you can provide any thoughts around your conviction to increasing exposure there and if there's any other, you know, smaller industry exposures you have that you'd like to see increased going forward.
Speaker Change: Yeah, I would say, you know, and generally I have said, expect our pie to grow ratherbly and much like the geographic discussion I just had, our industry
Speaker Change: diversification is driven by our relationships and where we have, you know, deep relationships and, you know, they're the ones that...
Speaker Change: bring us the opportunities. Certainly some industries are, you know, there's more opportunities than others given where they are in consolidation, like car washes, early childhood, and automotive service, and other industries like the restaurants are more consolidated.
Speaker Change: In general, we have a strong conviction around casual dining, which is why it's 7.5% of our ABR.
Speaker Change: and that conviction is really more driven by the fungibility of the real estate and our recovery experience around that real estate.
Speaker Change: and our credit loss experience around, you know, casual dining, credit events that gives us that confidence.
Speaker Change: and so we continue to invest there. I've been investing in restaurants for 20 plus years in the specific casual dining space and it remains a core investment industry for us.
Speaker Change: I appreciate that. And then just one more. In terms of
Speaker Change: you know, where your transaction is coming from. They typically come, the bulk of them typically comes from existing tenants.
Speaker Change: And so I guess I'm just curious how how sticky or I guess loyal do you feel like your existing tenants are to valuing your platform and your relationship and continuing to transact going forward versus as new you know capital providers come into the market really just chasing you know the best cost of capital they can.
mode.
Speaker Change: Thanks, Jay. This is Max. I'll take that. You know, I think you can probably look to the repeat business and existing relationship percentages that we...
Speaker Change: post quarter over quarter and it always kind of ebbs around that.
Speaker Change: at 80%, give or take. And so that just kind of tells you that the repeat business continues to drive the majority of our pipeline. But then we're always actively out there sourcing new relationships. And I think the strongest.
Speaker Change: you know, driver for new relationships would be referrals. At the end of the day, all these operators and tenants talk to each other, they're exchanging ideas, and when you continually transact with our tenants over and over, you build that relationship, then that relationship continues to expand, and that's, you know, always going to be the driving force of our pipeline.
Speaker Change: And to the pricing question, I would say, you know, these operators, they value execution certainty and they...
Speaker Change: They're not unsophisticated, and they certainly are going to do a price check on any capital that they source, but they do place a high priority on reliability and predictability.
Speaker Change: Being the incumbent, having docs negotiated, having underwritten the credit in advance certainly gives us an advantage over a new capital coming into that system.
I appreciate that. That's it for me.
Thank you.
Greg, is your line on mute?
Sure is.
Speaker Change: Good morning. Sorry about that. Cash releasing spreads were positive for the first time in a while. Was there anything unique about the expirations or anything handled differently from the portfolio management standpoint that helped you cross that threshold? And do you expect a similar outcome or is a similar outcome achievable in 2025?
and Robert Salisbury. Thank you. Thank you.
AJ, you want to tackle that?
Speaker Change: Yeah, I don't think there was anything unique to the quarter on the recovery rates. Some of the lease renewals had
Speaker Change: some larger bumps than usual, which led to some of that positive Relent, and if you look at just kind of the breakdown of the number of leases renewed this particular
trailing
Speaker Change: 12-month period we had 42 leases renew with larger than usual bumps which led to the total leasing staff being positive. So I think this particular quarter was more just episodic of the fact that we had 42 leases renew.
Speaker Change: in the trailing 12-month period, but you know, it's really kind of two different buckets. One's just contractual renewals and the other is repositioning assets, whether it's through a vacancy or without a vacancy. But I think the stats should be pretty consistent as we move forward.
Okay, thanks. And, you know, I can understand that the.
I'm sorry, go ahead.
Speaker Change: Greg, I would just add, you know, listen, as I look at those rates, the recovery rate, I would anticipate those percentages to be relatively consistent and the ultimate weighted average is really just going to depend on, you know, how we're renewing an asset. Is it an as of right in the lease?
Speaker Change: are we renewing an asset without vacancy, or are we having to take it back and repurpose it with the downtime? So it's really just a factor of, you know, we had a bunch of renewals, not a bunch of vacant asset relets. Okay. That makes sense.
and then
Speaker Change: follow-up is on the tenant credit and I recognize that rent coverage remains healthy and will move quarter to quarter but we did see what appears to be kind of a doubling of the triple C plus tenant credit to around four percent
Speaker Change: from last quarter. Was that due to acquisitions or is that tenants dropping down into that bucket? Any colors appreciated.
Speaker Change: Yeah, it was tenants dropping down from the portfolio and the thing to remember often times in that particular cohort is...
It's an implied credit rating.
It's something we pay attention to.
Speaker Change: But what we really look for is if it's migrating down to the triple C plus bucket or even B minus bucket, what's the unit level coverage look like? And more than half of that particular bucket is still greater than two times coverage, which gives us a lot of confidence. And that's really what we're paying attention to is the marriage of those two categories, which is the implied cover trading as well as the unit level economics.
Fair enough. Thank you.
Thank you.
Speaker Change: Our next question is from Spencer Glimcher with Green Street Advisors. Please proceed with your question.
Spencer Glimcher: Thank you. Just one for me on the acquisitions pipeline. So you guys commented that the pipeline remains robust reflecting continued M&A activity as well as new unit expansion. Are you able to share which industries you're seeing the most activity from in terms of that new unit growth thus far into the year?
Spencer Glimcher: Max, what do you see in there? You know, Spencer, I think it's pretty routable to historical trends and there's really nothing that draws a conclusion and you know both new unit M&A, a lot of add-on follow-on transactions with existing tenants, but the pipeline looks pretty consistent as it has been in the historical periods.
Speaker Change: Have there been any assets in this particular bucket that have already been earmarked for sale that you guys think might be a compelling divestment either because of, you know, cap rate compression in the industry, good real estate, or are these just kind of ad hoc from inbounds or as they come up throughout the year?
Yeah, it's...
Speaker Change: We're mostly going to sell because we see an asset that you know, we don't like the risk profile
Speaker Change: you know generally if our phone rings and someone you know trying to to buy an asset that that they're not going to be the most competitive you know running an auction and you know finding the most competitive capital is generally how we do it so we tend not to respond to you know unsolicited inbounds on our properties.
Speaker Change: and it's more just deliberate risk management activities that we take, you know, and that's what's driving the volume.
Thank you.
Speaker Change: Our next question is from John Misoka with B Riley Securities. Please proceed with your question.
Speaker Change: Good morning. On the 2025 investment volume done year-to-date, maybe even on the pipeline that's kind of in PSA or LOI, I mean, are you seeing that cap rate compression
Speaker Change: And those investments are potential investments, or is it more just a theoretical view on stuff that's more than 90 days out, given just kind of all the macro factors?
Speaker Change: No, John, we're living it, you know, and particularly if you think, you know, we negotiated those deals back in November and December where there was a much more constructive 10-year, and so our current pipeline I think is, you know, in that mid to high sevens cap rate that we discussed.
Speaker Change: Okay, that's helpful. And then, were there any zips in the 4Q24 disposition activity?
Was there any what, John?
Speaker Change: Zip's car washes. I mean, it's because there's a big bucket of car washes in 4Q, and I just was curious.
Speaker Change: No, we unloaded, and that's the key here, is when something, when it becomes, you know, apparent, something's going to break.
Speaker Change: It becomes illiquid and the price to transact becomes pretty steep.
Speaker Change: And as a sophisticated institutional investor, we're not going to sell individual assets that are imminently going to break. We'll fix them first and then sell them. So there was no zips car wash in the fourth quarter.
Speaker Change: And then just the car wash sales in the fourth quarter more generally, I mean, how much of that was driven by, you know, individual risk at those assets or with those tenants and how much was just kind of getting...
Speaker Change: below that 15 number and some breathing room to maybe, you know, be aggressive on the investment side again for the remainder of this year.
Speaker Change: It's both, right? We want the breathing room so we're going to look at our portfolio and choose the assets that we don't want to own for the next 20 years.
Speaker Change: Okay, that's fair. That's it for me. Thank you very much. Thanks, John. Take care.
Speaker Change: Thank you. Our next question is from Caitlin Burroughs with Goldman Sachs. Please proceed with your question.
Caitlin Burroughs: Hi again, I don't think it's come up so I figured I'd ask just as you guys think about the leverage and funding going forward I think you made a point earlier on given where your leverage is today You obviously have a lot of capacity but from here like near term. How are you guys deciding between using equity versus debt?
Speaker Change: Thanks Caitlin. I guess what I'd say is as we think about it just generally the split between debt and equity had historically been about 60 percent.
Speaker Change: With our growing free cash flow, that's really turned into more 60% equity, 30% debt.
Speaker Change: 10% free cash flow. So I, as we look at it, we would continue to utilize that. We also orient ourselves to where our leverage stands. So that obviously is a data point for us as we think about when to deploy, when to access equity, when to utilize debt issuance. I think from the debt standpoint, as I mentioned, we don't have any.
Speaker Change: near-term demands on liquidity for us to do either. In our case, we can be opportunistic on the equity front, but we can also be opportunistic on the debt front, and hopefully the 10-year will accommodate in some fashion. But for us, we're thinking that, you know, that
Speaker Change: means we have for 2025, you know, really starts with our revolver and then term it out with hopefully a unsecured bond deal.
Thanks, that's all.
Thank you.
Speaker Change: Thank you. There are no further questions at this time. I would like to hand the floor back over to Pete Mavoides for any closing remarks.
Pete Mavoides: Great, well thank you all for participating in today's call. Obviously we'll be on the road at various conferences and in non-deal roadshows in the next couple months and so we look forward to meeting with you all in person. Have a great day. Thanks.
and Robert Salisbury.
Speaker Change: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.