Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Essential Properties Realty Trust Inc (EPRT, Financial) reported a 5% growth in FFO per share for the second quarter.
- The company made $334 million in investments through 35 transactions, with a weighted average cash yield of 8%.
- 82% of investments were generated from existing relationships, highlighting strong tenant relationships.
- The company has a well-capitalized balance sheet with liquidity of over $1.1 billion.
- AFFO per share guidance for 2024 was reiterated at $1.72 to $1.75, indicating strong portfolio performance.
Negative Points
- Same-store rent growth was 1.4%, down slightly from the previous quarter.
- The company faced headwinds from the conservative posture on leverage due to capital markets volatility.
- Unit level rent coverage ratio decreased slightly to 3.7 times.
- The company experienced a slight increase in exposure to tenants with under one times rent coverage.
- Dispositions were below the trailing eight-quarter average, reflecting a wide bid-ask spread in the market.
Q & A Highlights
Q: Why not raise the guidance given strong volumes, a larger pipeline, and improved cost of capital?
A: Peter Mavoides (CEO) explained that while the business is performing well, the conservative capital position due to market volatility is a headwind. Mark Patten (CFO) added that the treasury stock method accounting dilution is a factor, contributing about a penny per share headwind for the full year.
Q: Can you discuss the dynamics in the market and if the high acquisition volume is a run rate we can expect going forward?
A: Peter Mavoides (CEO) noted that the market is favorable for investments due to limited capital alternatives for middle market tenants. While the pipeline remains strong, he guided to the trailing eight-quarter average as a good indicator of future run rates.
Q: How do you plan to manage your equity issuance given the current share price and liquidity?
A: Mark Patten (CFO) stated that they have ample liquidity and will continue to be opportunistic with equity issuance. Rob Salisbury (Head of Capital Markets) added that they have significant leverage capacity and are in a good position to execute their business plan.
Q: How do you expect your business and opportunities to change as interest rates come down?
A: Peter Mavoides (CEO) mentioned that while competition may normalize and put downward pressure on terms and cap rates, the value proposition of sale-leaseback capital remains strong. The company will continue to focus on being a reliable and value-added capital partner.
Q: Can you provide details on the unit-level rent coverage decline and the exposure to tenants with under one times coverage?
A: Peter Mavoides (CEO) explained that the decline is partly due to development sites coming online and some situational challenges with specific operators. He emphasized that the overall portfolio is performing well and they actively manage at-risk assets.
Q: Are you seeing any feedback from tenants regarding consumer weakness?
A: Peter Mavoides (CEO) stated that they have not seen significant feedback indicating consumer weakness. Their portfolio is largely in service and experience-based industries, which are less subject to discretionary spending.
Q: What is your outlook on cap rates and competition in the market?
A: Peter Mavoides (CEO) expects some downward pressure on cap rates as interest rates decline and competition normalizes. However, the current pipeline remains consistent with recent quarters.
Q: How do you manage tenant concentration and industry exposure, particularly with car washes nearing the 15% cap?
A: Peter Mavoides (CEO) stated that they maintain discipline around tenant concentration and continue to invest in car washes while pricing deals accordingly. The opportunity set remains robust, and they are confident in managing industry exposure.
Q: How do you approach repositioning vacant properties like the Red Lobster assets?
A: Peter Mavoides (CEO) explained that they hire local brokers to find the best economic outcome, whether through lease or sale. They prefer to lease but will sell if unable to find a tenant.
Q: What is your strategy for managing G&A expenses as a percentage of revenue?
A: Peter Mavoides (CEO) noted that G&A as a percentage of revenue has been trending downward as the asset base grows. They aim to run the platform efficiently and better than market, with a focus on continued improvement.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
