Release Date: October 24, 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 strong portfolio performance with high occupancy and healthy same-store growth.
- The company maintained a low leverage ratio of 3.5 times and liquidity of $1.2 billion, positioning it well for future growth.
- EPRT established a 2025 AFFO per share guidance range of $1.84 to $1.89, implying a growth rate of over 7% at the midpoint.
- The company achieved a weighted average cash yield of 8.1% on investments during the quarter, reflecting strong investment performance.
- EPRT's tenant base is diverse, with the largest tenant representing only 4.3% of annual base rent, reducing concentration risk.
Negative Points
- Five properties reported damage due to hurricanes, causing substantial disruption and warranting insurance claims.
- The company anticipates modest cap rate compression due to increased competition as capital markets normalize.
- There is a potential headwind to AFFO per share due to the treasury stock method on unsettled forward equity, estimated at $0.02 for the full year 2024.
- The company expects cash G&A expenses to increase slightly in 2025, driven by investments in infrastructure and staffing.
- EPRT's exposure to the car wash industry is above its soft ceiling of 15%, prompting proactive management to reduce concentration.
Q & A Highlights
Q: Why did Essential Properties Realty Trust decide to provide acquisition guidance for 2025, and is the implied AFFO growth sustainable?
A: Peter Mavoides, President and CEO, explained that providing acquisition guidance is a natural evolution as the company matures, with a more predictable pipeline and stable cost of capital. While they have a robust business plan and differentiated investment strategy, he stopped short of projecting growth rates beyond 2025.
Q: What are the assumptions regarding bad debt or tenant credit in the 2025 outlook, and is there any conservatism built into these assumptions?
A: Mavoides noted that the watch list remains under 100 basis points, indicating a good historical spot. The guidance includes conservative assumptions, with historical credit loss statistics at 30 basis points per annum. The company typically provisions for credit events that may not materialize, allowing for potential upside.
Q: Can you explain the decision-making process behind using existing forward shares versus issuing more shares?
A: Mark Patten, CFO, stated that they plan to settle a fair amount of forward shares in the fourth quarter to address the investment pipeline and pay down the revolver. They have significant liquidity to execute their strategy and expect minimal equity issuance in 2025.
Q: What factors drive the decision to dispose of certain properties, and who are the typical buyers?
A: Mavoides explained that dispositions are driven by managing industry concentrations, lightening up on individual tenants, and selling assets that don't align with their strategy. Buyers are typically third parties, including local and regional buyers, sometimes motivated by 1031 exchanges.
Q: How does the current competitive environment affect your acquisition strategy, and what are your expectations for cap rates?
A: Mavoides noted that the competitive environment is influenced by the volatility of the 10-year treasury rate. A high 10-year rate limits competition, while a lower rate could lead to more aggressive competition. They expect cap rate compression as competition returns, but have not yet seen it in their pipeline.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
