Essential Properties(EPRT) - 2019 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported fourth quarter AFFO per share of $0.30, representing an 11% year-over-year growth rate [7] - The total un-depreciated assets at the end of the quarter were $2.1 billion, with total debt of $735 million [22] - The net debt to annualized adjusted EBITDAre was five times at quarter-end, improving to 3.6 times when adjusted for a follow-on offering [22][23] - The company increased its quarterly dividend by 9.5% during the year while maintaining a conservative payout ratio in the 70% range [10] Business Line Data and Key Metrics Changes - The fourth quarter saw same-store rent growth of 1.7% with no vacancy [6] - Approximately 81% of fourth quarter investments were directly originated sale leasebacks or mortgage loans subject to sale-leaseback transactions [11] - The weighted average lease term for the portfolio was 14.6 years, with only 2.7% of ABR expiring before 2024 [13] - The average investment per property was $2 million, with a weighted average cash cap rate of 7.3% for the quarter [28] Market Data and Key Metrics Changes - The company invested $205 million into 94 properties across nine of its 16 targeted industries during the fourth quarter [28] - The QSR industry remains the largest sector at 14.2% of ABR, followed by carwashes at 12.5% [31] - The concentration in home furnishings has decreased to 3.5% of ABR, down 70 basis points quarter-over-quarter [31] Company Strategy and Development Direction - The company aims to grow its portfolio through the origination of sale-leaseback transactions with middle-market tenants in targeted industries [21] - A key element of the investment strategy is to take calculated tenant risk to achieve superior risk-adjusted returns [16] - The company is focused on maintaining a well-capitalized balance sheet and managing within its targeted leverage range [23] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the portfolio's resilience, noting that less than 1.5% of leases expiring have unit-level rent coverage below 1.5 times [15] - The company reiterated its 2020 AFFO per share guidance of $1.27 to $1.30, indicating a growth rate of approximately 13% year-over-year [26][20] - Management acknowledged potential impacts from the pandemic on tenant profitability, particularly in the entertainment sector, but expects these to be temporary [47] Other Important Information - The company sold eight properties in the quarter at a 6.9% cash cap rate, generating $15.2 million in net proceeds [12] - The portfolio has a weighted average rent coverage ratio of 2.9 times, with 72.6% of ABR having a rent coverage ratio of two times or better [34] - The company is managing an increasingly diverse portfolio, with no tenant representing more than 3.4% of ABR [20] Q&A Session Summary Question: Impact of Art Van on guidance - Management stated that the guidance holds regardless of the resolution of Art Van, with a range of scenarios considered [38][39] Question: Changes in top tenant list - Management explained that changes were due to a temporary loan repayment and an acquisition affecting tenant rankings [40] Question: Real estate quality for Art Van properties - Management provided details on the quality of Art Van properties, noting a mix of good and average locations [44] Question: Other tenants on watch list - Management indicated no material concerns beyond Art Van, with American Blue Ribbon mentioned but not expected to cause rent loss [51] Question: Credit ratings of tenants - Management acknowledged an increase in exposure to lower-rated tenants, primarily driven by Art Van's downgrade [55] Question: Performance of Perkins assets - Management expressed confidence in the stability of Perkins assets following a restructuring [56] Question: Carwash acquisition activity - Management highlighted a focus on regional operators for carwash investments, emphasizing their market dominance [57] Question: Current macro backdrop and leverage - Management indicated comfort with their leverage position and awareness of market volatility as they deploy capital [60]