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Edited Transcript of EPRT.N earnings conference call or presentation 8-Aug-19 2:00pm GMT

Q2 2019 Essential Properties Realty Trust Inc Earnings Call

Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Essential Properties Realty Trust Inc earnings conference call or presentation Thursday, August 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Paul Donlan

Essential Properties Realty Trust, Inc. - Senior VP & Head of Capital Markets

* Gregg A. Seibert

Essential Properties Realty Trust, Inc. - Executive VP, COO & Secretary

* Hillary P. Hai

Essential Properties Realty Trust, Inc. - Senior VP & CFO

* Peter M. Mavoides

Essential Properties Realty Trust, Inc. - President, CEO & Director

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Conference Call Participants

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* Brian Michael Hawthorne

RBC Capital Markets, LLC, Research Division - Associate

* Christine Mary McElroy Tulloch

Citigroup Inc, Research Division - Director

* HyungJun Choe

Crédit Suisse AG, Research Division - Research Analyst

* John James Massocca

Ladenburg Thalmann & Co. Inc., Research Division - Associate

* Julien Blouin

Goldman Sachs Group Inc., Research Division - Research Analyst

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Nathan Daniel Crossett

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Sheila Kathleen McGrath

Evercore ISI Institutional Equities, Research Division - Senior MD

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to your Essential Properties Realty Trust Second Quarter 2019 Earnings Conference Call. (Operator Instructions) This conference call is being recorded, and a replay of the call will be available 2 hours after the completion of the call for the next 2 weeks.

The dial-in details for the replay can be found in today's press release. Additionally, there will be an audio webcast available on Essential Properties' website at www.essentialproperties.com, an archive of which will be available for 90 days.

It is now my pleasure to turn the call over to Dan Donlan, Senior Vice President and Head of Capital Markets at Essential Properties.

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Daniel Paul Donlan, Essential Properties Realty Trust, Inc. - Senior VP & Head of Capital Markets [2]

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Thank you, operator, and good morning, everyone. We appreciate you joining us today for Essential Properties' Second Quarter 2019 Conference Call. Here with me today to discuss our second quarter results are Pete Mavoides, our President and CEO; Gregg Seibert, our COO; and Hillary Hai, our CFO.

During this call, we will make certain statements that may be considered forward-looking statements under our federal securities law. The company's actual future results may differ significantly from these 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.

Before I turn the call over to Pete, I would note that our 10-Q and second quarter supplemental are available on the Investor Relations section of our website. Pete, please go ahead.

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [3]

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Thank you, Dan, and thank you to everyone who has joined us today for your interest in Essential Properties. We are pleased to report our second quarter results, which include passing the 1-year anniversary of our initial public offering. In the past 4 quarters, since coming public, we have invested $546 million into 243 properties and sold 47 properties for $76 million, which equates to nearly 40% growth in assets over the last 12 months. In addition, our 100% leased portfolio has performed exceptionally well, with same-store contractual cash rents increasing between 1.8% and 1.9%, since coming public. Similarly, our rent coverage ratio, which represents 98% of our cash ABR, has averaged between 2.8x and 2.9x, since coming public, which speaks to the profitability of our properties and their value to the operations of our tenants. Coupling the strong internal growth with consistent external growth has resulted in improved diversity, rationalization of our G&A and, most importantly, dividends and earnings growth.

Turning to the second quarter and starting with the portfolio. As of June 30, we owned 789 properties that were 100% leased to 184 tenants operating in 16 distinct industries. Our weighted average lease term was 14.5 years, with only 3.6% of our ABR expiring through 2023. Our same-store portfolio, which represents 55% of our total portfolio at quarter end, experienced contractual cash rent growth of 1.9% quarter-over-quarter and contractual NOI growth of 1.7% quarter-over-quarter.

As we have mentioned in the past, we expect our same-store portfolio to grow at approximately 1.5% per annum. So we were pleased to exceed that threshold again this quarter through proactive asset management.

From a tenant health perspective, our portfolio has weighted average rent coverage ratio of 2.9x, which is up modestly from 2.8x last quarter. And 73.3% of our cash ABR has rent -- has a rent coverage ratio of 2x or better. With that in mind, less than 1% of our leases that expire over the next 8 years, have unit level rent coverage below 1.5x, which we believe indicates a high likelihood of lease renewal at expiration.

Similarly, 2.1% of our tenants have both an implied credit rating lower than B per Moody's Risk Analytics and a unit-level coverage ratio below 1.5x, which represents a very manageable number of tenants and properties with elevated risk characteristics.

Turning to our second quarter investment activity. We invested $190 million at a weighted average initial cap rate of 7.3%. This level of investment activity was above our trailing 4-quarter average of $136 million and represents our second most active quarter since inception. Approximately 65% of our second quarter investments came via sale-leaseback transactions, 67% were subject to master-lease provisions and 100% are required to provide us with corporate and unit-level financial reporting on a regular basis.

On the disposition front, in an effort to proactively mitigate risks and exposures, we sold 11 assets in the quarter, including 1 vacant property for $26.8 million in net proceeds. Subsequent to quarter end, we completed a secondary offering of common shares for $519 million for Eldridge Industries, our initial capital partner. As a result, Eldridge, no longer owns any shares or OP units in EPRT. The Eldridge team was integral in growing this company from a business plan to a well-capitalized public company that it is today. We would like to thank the Eldridge team for their trust, support and guidance over these past 3 years.

As we look out to the balance of the year, we remain focused on growing our portfolio through the origination of sale-leaseback transactions with middle-market tenants in service-oriented and experience-based industries. And we anticipate our level of investment activity to be consistent with our historical averages, with cap rates in the mid-7% range. Overall, this was a great quarter for the company and has paved the way for us to continue to scale our portfolio accretively and generate attractive risk-adjusted returns for shareholders.

With that, I'd like to turn it over to Hillary Hai, our CFO, who will take you through the financials for the second quarter. Hillary?

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Hillary P. Hai, Essential Properties Realty Trust, Inc. - Senior VP & CFO [4]

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Thank you, Pete, and good morning, everyone. Starting with the balance sheet. We ended the quarter with $1.6 billion in total assets and $579 million of total debt, including $312 million of outstanding master funding notes, $200 million of unsecured term loan and $67 million outstanding on our $400 million unsecured revolving credit facility. We have no major debt maturities coming due until 2024, and our net debt to annualized adjusted EBITDAre was 4.7x at quarter end, which gives us capacity to execute on our external growth plan while managing within our targeted leverage range.

Turning to the income statement. Our second quarter net income was $10.6 million or $0.14 per diluted share. NAREIT-defined funds from operations, or FFO, was $17.7 million or $0.23 per diluted share. Core funds from operations, or Core FFO, was $22 million or $0.29 per diluted share. And adjusted funds from operation, or AFFO, was $21.1 million or $0.27 per diluted share.

Of note, in the quarter, we recognized a loss of $4.4 million related to the partial repurchase of our 2016-1 ABS notes, which included $1.4 million in premium paid, a $2.9 million write-off of deferred financing costs and $100,000 of legal costs. Given the onetime nature of these items, we added new disclosure to this quarter to our income statement, called Core FFO which adds back these items to NAREIT-defined FFO.

While we continue to increase our operating efficiencies, G&A for the second quarter was 14.5% of total revenues. We expect this metric to moderate as our portfolio grows in scale. Subsequent to quarter end, we paid a dividend of $0.22 per share for the second quarter, which equated to an 81.5% payout of our second quarter AFFO per share. We also filed a shelf registration statement, which gives us the ability to raise various forms of equity and debt capital on an overnight basis.

Turning to guidance. We are reiterating our 2019 AFFO per share guidance range of $1.11 to $1.15.

With that, I'll turn the call over to Gregg.

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Gregg A. Seibert, Essential Properties Realty Trust, Inc. - Executive VP, COO & Secretary [5]

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Thanks, Hillary. During the quarter, we invested $190 million in 32 transactions and 91 properties at a weighted average cash cap rate of 7.3%. These investments were made within 10 of our 16 targeted industries, with convenience stores and early childhood education representing half of our investment activity in the quarter. The weighted average lease term of the properties was 15.3 years. The weighted average annual rent escalation was 1.5%. The weighted average unit-level coverage was 3.2x, and our average investment per property was $2 million. Consistent with our investment strategy, approximately 65% of our second quarter investments were originated through direct sale-leaseback transactions, which are subject to our lease form with ongoing financial reporting requirements and master lease provisions in most cases.

In addition, 87% of our second quarter investment activity was relationship based, which we define as transactions completed with operators, sponsors, advisers or brokers that senior management has done business with in the past. From an industry perspective, quick service restaurants or QSRs, remain our largest industry at 12.8% of cash ABR, followed by early childhood education at 11.7%., convenience stores at 10.8%, car washes at 10.7%, and medical dental at 9.4%.

Conversely, due to property sales and portfolio growth in other industries, our home furnishings concentration declined 120 basis points quarter-over-quarter and is down 250 basis points year-over-year, which is a trend that should persist as we continue to seek better risk-adjusted returns in other industries. In addition, we continue to proactively manage our casual dining concentration through selective dispositions of underperforming locations in order to free up capacity to invest in higher-performing brands and properties.

From a tenant perspective, no tenant represented more than 4% of our cash ABR. Our top 10 tenancy represented 28% of our cash ABR at quarter end, which was down 270 basis points quarter-over-quarter. We expect our top 10 concentration to further decline over the coming quarters as we continue to grow our exposures with existing tenants outside of our top 10 and capitalize on newly developed tenant relationships.

Of note, we added 34 Circle K branded convenience stores to the portfolio in the second quarter, which resulted in a subsidiary of Alimentation Couche-Tard entering our top 10 tenancy.

Looking at the portfolio more broadly, approximately 93% of our cash ABR is derived from tenants that operate service-oriented and experience-based businesses, which has been a deliberate focus for Essential since we have started investing over 3 years ago. We believe tenants in these industries, and more importantly, real estate occupied by these tenants are more recession-resistant and heavily insulated against e-commerce pressures.

Moving on to asset management. Our portfolio remains healthy with a weighted average coverage ratio of 2.9x and approximately 73.3% of our cash ABR having a rent coverage ratio of 2x or better. In addition, with approximately 98% of our tenants required to report unit-level financials to us, we have near real-time transparency into the health of our tenancy, which is an important component to managing risk in our portfolio. With an average investment per property of $2.1 million, our portfolio remains highly liquid from a sales perspective and readily fungible from a leasing standpoint.

Turning to dispositions. We sold 11 properties from 7 different industries this quarter for $26.8 million in net proceeds. The 10 of these properties were leased and sold for a blended cash cap rate of 7%, which was slightly elevated given the higher prevalence of portfolio repositioning this quarter.

With that, I will turn it back to Pete for the closing remarks.

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [6]

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Thanks, Gregg. Our portfolio remains in excellent shape with no vacancies, healthy coverage coupled with strong transparency, good property level liquidity and limited near-term lease expirations. Our investment pipeline is full, our balance sheet is well positioned to fund continued growth and we look forward to continuing to execute on our business plan.

With that, operator, please open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Christine McElroy with Citigroup.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [2]

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Just wonder if you could provide some additional color on your acquisition strategy with the pace of -- in Q2 accelerating, recognizing that you had more dry powder did you deal following the equity raise this spring and also your cost of capital position is more favorable. What drove the accelerated pace? And how should we be thinking about the rest of the year?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [3]

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Great, Christine, and thank you. We certainly came into the quarter with a fully-charged balance sheet and an attractive cost of capital, as we went about investing. That said, we've been more focused on transacting around our historical average. We had a large transaction that you see in our top 10, a $52 million deal that we bought during the quarter, and that really drove kind of the outsized performance in the quarter and that we would expect to be transacting more consistent with our historical average.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [4]

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Okay. Got it. And then can you comment on your Perkins exposure and provide an update on where that stands today? How are you feeling about that credit?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [5]

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Sure. And I think Perkins is a great example of the benefits of coupling great unit level of visibility with asset fungibility. And so we acquired 21 Perkins properties when we bought the GE portfolio 3 years ago. We've been monitoring that credit and managing our exposure to the point today, we sit, where we have 12 properties representing about 1.8% of our cash ABR. We sold or repositioned 9 properties and really reduced that exposure to a point where we feel comfortable with the assets that we hold. We think this Chapter 11 restructuring will be a good thing for our tenant, and will come out with our lease intact and a stronger tenant going forward.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [6]

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Pete, it's Michael Bilerman. Now that Eldridge is completely out of the stock, what is going to be the process and timing for their 2 Board seats that they have the nomination rights and also used to sit on the Board? You obviously have a very small Board, given the size of the company and when you went public, and were a controlled company. So can you talk a little bit about improvements that you want to make in corporate governance and the timing that, that's going to occur?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [7]

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Yes. I think it's logical to assume the 2 Board members -- the 2 Eldridge Board members who will transition off in a reasonable time frame. And I think that would be over the next quarter or so, and that we would replace those seats in an orderly manner to bring more diversity and a broader perspective to the Board. And so I think that's something that was discussed at the -- our last Board meeting and really would happen over the back half of the year here.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [8]

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You already engaged advisers to -- so the search is already underway and that will occur in the next 3 to 6 months?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [9]

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We have not engaged the search. But the discussions are ongoing. And once we have something to announce, we will announce it.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [10]

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But you're committed to do it?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [11]

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I think, the Eldridge Board members want to come off the Board, given they have no economic interest in the company any longer. And I think that's the logical transition.

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Operator [12]

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Our next question comes from Sheila McGrath with Evercore.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [13]

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Pete, the coverage for the portfolio did increase to 2.9x. Just wondering if that was driven by the mix of new acquisition? Or is some tenant segment performing well boosting the portfolio coverage higher?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [14]

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Yes. There's a lot going on in that number, Sheila, and obviously, if we bought $190 million representing just about 10% or 11% of our total assets of $1.6 billion. I think it's going to be a combination of factors. Our coverage on investments for the quarter were 3.2x. And so it's slightly accretive to that 2.8x. But I guess if you just did the pure math, you can figure out how much that is from new investments and how much is from movements within the portfolio.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [15]

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Okay. And then, the sales, it was a fairly active quarter for you and a historical perspective. Can you just give us your thoughts on -- or what were the characteristics of the sale of assets? And why you chose those assets to dispose of?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [16]

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Yes, really, it tends to be derisking sales, and that could be derisking a specific asset where we don't see coverage or tenant credit that we like or it can be, in the case of this last quarter, derisking a specific industry sector where we sold down some of our furnishing and casual dining exposure. And so I think the quarter represented a good mix of both specific asset motivations as well industry and tenant motivations.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [17]

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Okay. Great. One last question. You did reduce secured borrowings related to that Master Trust Funding. Should we expect that will be continued -- you'll continue to pay that down over time?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [18]

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Yes. So we had our 2016 notes. We have the opportunity to purchase those notes using unsecured term loan that we put in place in connection with our recasted revolver. We have another chunk of those 16 that become prepayable in November. And I think, in general, you should expect us to transition our balance sheet to a more unsecured borrowing strategy.

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Operator [19]

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And next, we'll go to Sam Choe with Crédit Suisse.

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HyungJun Choe, Crédit Suisse AG, Research Division - Research Analyst [20]

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So you guys cited the debt-to-EBITDA of 4.7%, which is kind of close to your preference of low to mid 5%. Just wondering how you intend to manage that along with the expected investment pacing in the second half of the year?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [21]

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Yes. I think we'll manage that by raising equity. Obviously, we filed a universal shelf subsequent to quarter end. And I think it's logical that you could expect us to get an ATM program in place in the near future and be in the market to raise equity to help fund our investments and manage our leverage within our leverage targets as we look at the back half of the year here.

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HyungJun Choe, Crédit Suisse AG, Research Division - Research Analyst [22]

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Okay. That's what I thought. And then, the property operating expenses were a little lighter this quarter. Could you give some color on that?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [23]

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Yes. Hillary, why don't you give some color on that.

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Hillary P. Hai, Essential Properties Realty Trust, Inc. - Senior VP & CFO [24]

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So last quarter was higher because we had some onetime reimbursable property tax charges, that was due to a tax reassessment. So going forward, this quarter should be a better run-rate for the last half of the year.

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Operator [25]

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And next, we'll go to Brian Hawthorne with RBC Capital.

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Brian Michael Hawthorne, RBC Capital Markets, LLC, Research Division - Associate [26]

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Can you talk about which industries you're seeing the best or the most expansion plans? And then kind of give us your -- any color you can on the close rates of investments by industry?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [27]

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Sure. Listen, we're pretty focused in 16 industries, and we're originating across all those industries. We're conducting sourcing activity across all those industries. And generically, I would expect our exposure is to grow ratably in any given quarter, you'll see ebbs and flows across those industries, but this past quarter was 30% C-stores and 20% child care. Next quarter could be 30% QSRs and 20% car washes. But overall, I think you'll see us grow kind of ratably with the exception we are consciously kind of managing down our home furnishing exposure and trying to stay more neutral on our casual dining and family dining exposure.

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Operator [28]

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Our next question comes from Nate Crossett with Berenberg.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [29]

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Kind of similar to the Perkins question. Can you touch on your exposure to Pizza Hut, as I think they've announced a bunch of store closures?

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Daniel Paul Donlan, Essential Properties Realty Trust, Inc. - Senior VP & Head of Capital Markets [30]

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Yes. It's Dan Donlan. We have 40 basis points roughly of exposure to Pizza Hut as we stand.

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [31]

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Yes. 40 basis points of ABR spread across a good number of properties that are fungible and liquid, and so we don't see any heightened risk there for our portfolio.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [32]

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Okay. And then on just Art Van. I know you talked about reducing home furnishings, and I think Dave, they're trying to change the CEO. And I see you kind of sold one of the Art Vans in the quarter. Just wanted to get a sense of how you feel about the other 4 locations?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [33]

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Yes. Listen, we made that investment not that long ago, and we felt it was a good concept, a good brand. And we had good assets subject to a strong master lease. And that really hasn't changed. I think a management change there will be well received. I think the founding family has come -- taken more active role in the Board, which I see is a positive, and we think that's a good company that should continue to grow. And so we're comfortable with our exposure there. Should we see an opportunity to reduce it accretively and opportunistically, we would, but we feel good about our exposure to Art Van.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [34]

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Okay, that's helpful. And then just 1 more. Can you remind us the size of the sales team? Do you guys feel that, that's enough? Or are there going to be more adds in the coming months?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [35]

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No. Listen, I've often said, we built this company and staffed this company when we were private, to be able to transact predictably in its public form. And hopefully, over the past 12 months, you guys have come to appreciate that. And our team's in place, the infrastructure is in place to execute. And so the key seats are filled, and we're transacting at a high level. Generically, about 1/3 of our 22 employees are focused on originations and closing, another third on asset management, another third on financial -- finance and accounting, and that's not going to change materially.

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Operator [36]

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And our next question comes from John Massocca with Ladenburg Thalmann.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [37]

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So if you look at kind of Page 11 of the supp, you sub out 6% of the kind of portfolio move into the kind of B minus category for the tenant credit breakout you give there in that bar chart? Maybe just any kind of color around that? What drove that move? Was any of that Perkins? Just anything you provide would be helpful.

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [38]

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Yes. I mean I don't have the specific breakdown on the tenancy there. You will see ebbs and flows in any given quarter. We certainly take comfort in the fact that a good chunk of that movement is -- has healthy coverage and really doesn't give us any concern.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [39]

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Okay. And then on the home furnishing side, can you guys provide any color maybe on what tenants are in that subsegment besides Art Van?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [40]

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We have a couple of Ashley Furnitures besides that. And really, it's -- if you think about Art Van and the overall exposure, I think the entire balance is Ashley. Is that right, Gregg?

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Gregg A. Seibert, Essential Properties Realty Trust, Inc. - Executive VP, COO & Secretary [41]

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That's right.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [42]

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Okay. And then 1 more detailed question on the Perkins exposure. Are any of those branded Marie Callender's or are they all Perkins branded locations?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [43]

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Yes. And so all 12 of our Perkins sites are Perkins, and they're all corporate stores and they all are currently operating.

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Operator [44]

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And next we'll go to Caitlin Burrows with Goldman Sachs.

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Julien Blouin, Goldman Sachs Group Inc., Research Division - Research Analyst [45]

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This is Julien on for Caitlin. Earlier this week, another net lease REIT mentioned that non-investment-grade properties were trading at cash cap rates in the range of high 5s to low 8s. I know you mentioned you're expecting mid 7s for the rest of the year, which would be at the high end of that range. I guess what do you believe is driving your ability to achieve cap rates at the high end and how sustainable is that?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [46]

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Yes, I would say, quite simply, I think we're good at what we do. If you look at the stats in our investor deck, a high percentage of the deals are deals we're doing with people we've dealt with in the past, into the 90%. So we have a good reputation and people trust us as a counterparty. We're also structuring sale leasebacks. A high percentage of our deals are direct sale leasebacks where we're delivering capital into a capital need for a tenant. And so we're not competing in the brokered market for existing lease -- net lease deals, which -- that -- whoever that was is probably referring to. We're moving upstream to work with relationships and counterparties that we know and trust us to structure deals in the context of sale-leasebacks, and we've been doing this for 20 years. And you look in our disclosure, we've consistently been in that mid-7% range. So we believe it to be very sustainable.

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Julien Blouin, Goldman Sachs Group Inc., Research Division - Research Analyst [47]

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Got it. And I guess related to that, I know the release mentioned about 70% of the transactions year-to-date are sale leasebacks. I guess when we look at that other 30%, is that mostly made up of the brokerage market? Or what kind of other selling entities are we talking about?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [48]

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Yes. And we think about sale leaseback where we're structuring a new lease at inception, and that could be in the broker market or it can be a direct deal. Outside of the sale leaseback, kind of, the inverse of the sale leaseback is an existing lease deal where we're buying a property subject to an existing lease. We generally focus on doing that only when we can create value either through restructuring that lease with the tenant or having unique insight into the tenant performance or relationship there, but generally trying to find inefficiencies where we're getting paid an attractive risk-adjusted return. A great example of that is the Questar transaction that we transacted with $52 million in the second quarter here. That was an existing lease deal, but it happened to be a deal that my partner had originated 20 years ago. And so we had great insight into the structure, the nature of the lease. We had worked with and for the seller in the past. And so we look for opportunities where we can deliver shareholder value in those existing lease buckets.

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Operator [49]

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Our next question comes from Kevin Kim with SunTrust.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [50]

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Just a quick accounting question. The G&A was a little bit higher this quarter. I know you've addressed some of that. But just curious about longer term. What is the right annualized G&A run rate?

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [51]

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Hillary, what do you got there?

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Hillary P. Hai, Essential Properties Realty Trust, Inc. - Senior VP & CFO [52]

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So this quarter is a little bit higher. We had a few onetime expenses that came through. But looking forward to next 2 quarters, we should be around the 13% range of total revenues.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [53]

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Okay. How about in hard dollars just because the total revenues can change based on acquisitions?

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Hillary P. Hai, Essential Properties Realty Trust, Inc. - Senior VP & CFO [54]

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Yes. So we're looking at roughly per quarter, I would model as $4.6 million to $5 million each quarter. Depending -- also depending on the volume that we're doing, we do have certain variable costs.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [55]

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So the transaction expenses are in the G&A line item. Is that correct?

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Hillary P. Hai, Essential Properties Realty Trust, Inc. - Senior VP & CFO [56]

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Not transaction, but we do have servicing costs that are very dependent on how many properties we have.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [57]

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Okay. And just 1 last question. On your AFFO calculation that you add back transaction costs, which is fully fine, but there seems to be no add-back this quarter. Just curious why that is.

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Hillary P. Hai, Essential Properties Realty Trust, Inc. - Senior VP & CFO [58]

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We -- the transaction cost is actually for our investments that's already in our investment total, so it's not in our AFFO calculation. So that's why you don't see any.

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Operator [59]

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Another question from John Massocca with Ladenburg Thalmann.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [60]

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Actually, I was going to ask about the Questar transaction. But I think you covered it pretty well, so I'm just pulling out of the queue.

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [61]

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Great. Thanks, John.

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Operator [62]

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(Operator Instructions) And there appear to be no questions at this time. So I'll turn it back over to management for any closing remarks.

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Peter M. Mavoides, Essential Properties Realty Trust, Inc. - President, CEO & Director [63]

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Great. I think we're proud of the quarter we just reported. As you'll see in our 10-Q filed yesterday, we've had good progress into the quarter -- into the third quarter here as we continue to execute. And so we look forward to engaging with you all conference season in September, and I hope you enjoy the rest of the summer. Thank you.

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Operator [64]

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And that does conclude today's teleconference. We appreciate your connection. You may disconnect your lines at this time, and have a great day.