Essential Properties Realty Trust, Inc. (NYSE:EPRT) Q4 2023 Earnings Call Transcript
Essential Properties Realty Trust, Inc. (NYSE:EPRT) Q4 2023 Earnings Call Transcript February 15, 2024
Essential Properties Realty Trust, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the Essential Properties Realty Trust 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. [Operator Instructions] 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. 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. On the call this morning are Pete Mavoides, EPRT's President and Chief Executive Officer; Mark Patten, EPRT's Chief Financial Officer; and Rob Salisbury, EPRT's Senior Vice President and Head of Capital Markets. It's now my pleasure to turn the call over to Rob Salisbury.
Rob Salisbury: Thank you, operator. Good morning, everyone, 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 the 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 your interest in Essential Properties. We finished 2023 with a strong $315 million of investments in the fourth quarter and just over a $1 billion invested for the full-year. This translated to AFFO 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 variable portfolio. As the fourth quarter results indicate, our portfolio continues to perform at a high level with unit level rent coverage of 3.8x, 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 real estate investing, corporate credit, unit level performance and lease risk and real estate basis, we are able to construct and own an exceptionally durable portfolio of properties. Regarding our strong and consistent year of investments, we remained active in support of our longstanding 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 and the continued dislocation in the credit markets and the diminished level of competition from other net lease investors.
With quarter end pro forma leverage of 4.0x 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 wide 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 terms stood at 14 years at year end, which is consistent year-over-year with only 4.7% of our ABR expiring through 2028. From a tenant health perspective, our weighted average unit level rent coverage ratio was 3.8x 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%, an improvement from 1.2% in the third quarter, driven primarily by positive leasing results and asset management activities, including 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 leasebacks. 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 strategies. The weighted average lease term of our investments this quarter was 17.6 years, and the weighted average annual risk escalation was 1.9%, generating an average GAAP yield of 9.1%.
Our investments this quarter had a weighted average unit level rent coverage of 3.3x, 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, 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 at an 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 the 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 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 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 are able to dynamically price our sale leaseback transactions, which over time 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.
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 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 3.5x. 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.
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?
Mark Patten: 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 was our AFFO per share, which reached $0.42. That's an increase of 8% versus Q4 of 2022. On a nominal basis, our AFFO totaled $67 million for the quarter. 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 31, 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.
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 the 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 scaling asset base. Turning to our balance sheet, I'll highlight the following: With our $315 million of investments in Q4 of 2023, our 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 $190.6 million of the forward equity we raised in September. At year end, our balance of unsettled forward equity totaled $130.6 million. Our pro forma net debt to annualized adjusted EBITDAre adjusted for unsettled forward equity was 4.0x 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. 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.
Finally, the strong performance to end the year in 2023 are conservatively capitalized balance sheet and the investment pipeline we are seeing, all support our previously issued 2024 AFFO per share guidance range of a $1.71 to a $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.
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.
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