Essential Properties(EPRT) - 2021 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Total revenue for Q3 2021 was $59.6 million, up $16.7 million or almost 40% compared to the same period in 2020, driven by a full quarter of investments totaling $223 million in Q2 2021 and nearly $600 million in net investment activity year-to-date [21][22] - General and administrative (G&A) expenses decreased by 5.4% to just under $5.6 million in Q3 2021 from $5.9 million in Q3 2020, with G&A as a percentage of total revenue improving to 7.5% from 10.6% [21][22] - Net income for the quarter was $27.6 million, with funds from operations (FFO) totaling $43.6 million or $0.36 per fully diluted share, a 38% increase year-over-year [22] - Adjusted funds from operations (AFFO) totaled $40.2 million for the quarter, up $13.9 million over the same period in 2020, translating to $0.33 per share, an increase of over 22% [22][24] Business Line Data and Key Metrics Changes - The company invested $231 million in Q3 2021 across 31 transactions, with a weighted average cash yield of 7%, primarily in grocery, auto service, equipment rental, early childhood education, and casual dining sectors [9][15] - The weighted average lease term of investments was 16.4 years, with a weighted average annual rent escalation of 1.6% and a unit level coverage ratio of 2.8x [15] - The portfolio consisted of 1,397 properties, 99.9% leased to 297 tenants across 17 industries, with a weighted average lease term of 13.9 years [11] Market Data and Key Metrics Changes - The company reported strong portfolio performance with collections at 100% and only one vacant property, indicating full stabilization [9] - The company noted increased competition in the market, particularly for larger deals and credits, leading to cap rate compression [16][39] Company Strategy and Development Direction - The company aims to maintain a disciplined investment strategy focused on building a resilient net lease portfolio that generates attractive risk-adjusted returns [25] - Future investment activity levels are expected to moderate due to the recapture of pandemic-induced demand and potential changes in tax laws affecting seller motivations [10][24] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the operating environment and capital markets, which have allowed the company to capitalize on a robust pipeline of investment opportunities [25] - The company reaffirmed its 2021 AFFO per share guidance of $1.30 to $1.32 and established a 2022 guidance range of $1.46 to $1.50 per share, indicating a 13% year-over-year growth [13][24] Other Important Information - The company sold 11 properties for $10.1 million in net proceeds during the quarter, achieving a 6.5% average cash yield on these dispositions [19] - The company maintains a strong balance sheet with net debt to annualized adjusted EBITDAre at 4.5x and total liquidity of $428 million [23] Q&A Session Summary Question: Acquisition guidance and future acquisition pace - Management indicated that moderating acquisition activity would be closer to historical averages of $160 million to $200 million per quarter [27] Question: Improvement in unit level rent coverage - The improvement to 3.5x was attributed to strong performance in certain industries, with higher coverage in sectors like equipment rental and medical services [28] Question: G&A outlook for 2022 - Management does not expect significant additions to G&A personnel, indicating the current team is well-staffed for high transaction levels [30] Question: Same-store NOI profile changes - Changes were driven by significant repositionings in the portfolio, affecting the same-store sales numbers [32] Question: Impact of labor shortages on service-based tenants - While labor shortages are noted, they have not yet impacted collections, with coverage improving across the board [48] Question: Pricing and competition outlook - Increased competition is noted, particularly for larger deals, but the company remains focused on maintaining a competitive edge through strong relationships [36][39] Question: Tax law changes and M&A activity - Potential tax law changes are expected to drive increased M&A activity, particularly among small business owners looking to sell [54]