Essential Properties Realty Trust - Q4 2022

Transcript

Operator (participant)

Good morning, ladies and gentlemen, welcome to the Essential Properties Realty Trust Fourth Quarter 2022 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. This conference call is being recorded, 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. 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.

It is now my pleasure to turn the call over to Dan Donlan, Senior Vice President and Head of Capital Markets and Portfolio Management at Essential Properties.

Daniel Donlan (SVP and Head of Capital Markets and Portfolio Management)

Thank you, operator. Good morning, everyone. We appreciate you joining us today for Essential Properties fourth quarter 2022 conference call. Here with me today to discuss our operating results are Peter Mavoides, our President and CEO, and Mark Patten, our CFO. 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 yesterday's earnings press release. With that, Pete, please go ahead.

Peter Mavoides (President and CEO)

Thank you, Dan, and thank you to everyone who's joining us today for your interest in Essential Properties. We finished 2022 on a strong note with a record $328 million of investments in the fourth quarter and $937 million invested for the full year. This translated to year-over-year AFFO per share growth of 14% in 2022, which we are extremely proud of given the unprecedented volatility in the capital markets and the rapid rise in interest rates.

As our fourth quarter results indicate, our portfolio continues to perform at a high level with unit-level coverage of 4x, occupancy of 99.9%, and same-store rent growth of 1.6%, which speaks to the de minimis credit losses that we experienced in 2022 as our weighted average contractual rent escalations are approximately 1.6% per annum. This strong performance is a testament to our granular and fungible properties, the resiliency of our service-oriented and experience-based tenancy, which represents 93% of our ABR, and our proven ability to accretively recycle out of our weaker performing properties.

On the investment front, we remained active in support of our long-standing tenant relationships as they are increasingly turning to us as a reliable capital provider to grow their footprints given the limited funding available in the bank market and private leverage buyers largely being sidelined due to the dislocation in the debt markets. With quarter end pro forma leverage of 4.5x and liquidity of nearly $700 million, our balance sheet continues to be well-capitalized for our investment activity. We are reaffirming our 2023 AFFO per share guidance of $1.58-$1.64, which implies year-over-year growth of 5% at midpoint. Turning to the portfolio. We ended the quarter with investments in 1,653 properties that were 99.9% leased to 350 tenants operating in 16 industries.

Our weighted average lease terms stood at 13.9 years, with only 6.1% of our ABR expiring through 2027. From a tenant health perspective, our weighted average unit-level coverage ratio was 4x this quarter, which was expected given the lagging impact of inflationary pressures flowing through our tenant financials. Our percentage of ABR under 1x coverage continued to moderate from pandemic pressures experienced during the reporting period and now stands at a more normalized level of 3% of ABR. During the fourth quarter, we invested $328 million through 39 separate transactions at a weighted average cash yield of 7.5%, which was up 40 basis points versus the prior quarter.

These investments were made in 13 different industries, with 75% of our activity coming from the car wash, casual dining, auto service, and entertainment industries. The weighted average lease term of our investments this quarter was 18.7 years. The weighted average annual rent escalation was 1.8%. The weighted average unit-level coverage was 3.2x, and the average investment per property was $2.8 million. Consistent with our investment strategy, 99% of our quarterly investments were originated through direct sale-leasebacks, which are subject to our lease form with ongoing financial reporting requirements. 90% contained master lease provisions and 95% were generated from existing relationships. Looking ahead to the first quarter of 2023, we have closed $65.7 million of investments to date at a 7.6 cash yield.

Our investment pipeline remains robust as an increasing number of middle market companies are seeking sale-leaseback capital as a financing alternative as other sources of capital have become unavailable or uneconomic. We see this trend continuing to benefit Essential Properties as 97% of our 2022 investments were sale-leaseback transactions. We remain well positioned to reliably deliver capital to our relationships. From an industry perspective, car washes are our largest industry at 13.2% of ABR, followed by early childhood education at 12.8%, quick service restaurants at 11.6%, and medical dental at 11.1%. Of note, unit-level coverage for our early childhood education portfolio continues to increase above pre-pandemic levels as our operators are seeing strong pricing power and a better labor environment, which has allowed our facilities to further increase their enrollment.

From a tenant concentration perspective, our largest tenant represents 3.4% of ABR at quarter end, and our top 10 tenants now account for only 18% of ABR. Tenant diversity is an important risk mitigation tool and 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 26 properties this quarter for $75.5 million in net proceeds at a 6.9% weighted average cash yield and a weighted average unit-level coverage ratio of 2.1x. 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 industries, tenants, and unit-level risks within the portfolio.

This record level of disposition activity was in response to the capital markets volatility experienced in the back half of 2022 and our desire to lower our reliance on raising new capital. While we do not anticipate our elevated level of quarterly dispositions to persist, we do expect our disposition activity to remain well above our trailing eight-quarter average of $27 million through at least the first half of 2023. With that, I'd like to turn it over to Mark Patten, our CFO, who will take you through the financials and balance sheet for the second quarter.

Mark Patten (CFO)

Thanks, Pete. Good morning, everyone. We had a fantastic fourth quarter with, as Pete noted, a record level of $328 million in new investments, notably at a 7.5% cash cap rate. Our portfolio continues to produce consistent internal rent growth, as evidenced by our same-store rent growth coming in at 1.6%, and our balance sheet and liquidity remain highly supportive of our growth for 2023. Among the headlines last night was our AFFO per share, which on a fully diluted per share basis reached $0.39 in the quarter. That's an increase of 5% versus the fourth quarter of 2021. On a nominal basis, our AFFO totaled $55.8 million for the quarter, up $10.4 million over the same period in 2021.

That's an increase of nearly 23% and up over 4% compared to the third quarter of 2022. For the full year ended 12/31/2022, our AFFO per share totaled $1.53 per share on a fully diluted per share basis, which is a 14% increase over 2021. On a nominal basis, our full year 2022 AFFO increased by 32% over 2021 or $50.8 million, totaling $208.8 million. Total G&A was just $6.5 million in Q4 2022 versus $5.8 million for the same period in 2021, with the majority of the increase relating to an increase in non-cash stock compensation expense.

Our Q4 2022 cash G&A was approximately $4.3 million and was sequentially lower to Q3 2022 by approximately $1.3 million, which was impacted by the absence of the $250,000 we expensed in Q3, representing the cost we incurred to amend our 2027 term loan to reduce the rate grid on that borrowing and our reduction of our 2022 bonus accrual in the fourth quarter. Our cash G&A as a percentage of total revenue was 5.8% for the quarter and 7% for the full year 2022, which compares favorably to the 9% and 10.6% respectively for the quarter and full year of 2021. On an annual basis, we continue to expect our cash G&A as a percentage of total revenue to rationalize in 2023.

Turning to our balance sheet, I'll highlight the following. With our $328 million in 4Q 2022 investments, our income producing gross assets reached $4.1 billion at year-end. From a capital markets perspective in the fourth quarter, we completed the sale of approximately $22.2 million of stock, all on a forward basis on our ATM program. We settled that forward in early January 2023, along with the shares we sold in January 2023, generating total net proceeds of approximately $39.2 million. From a debt perspective, I'll reaffirm that during the quarter, we swapped to fixed all of the remaining $150 million that we drew in October under the $400 million 2028 term loan. Our net debt to annualized adjusted EBITDARE was 4.6x at quarter end.

Adjusting for the proceeds from the forward sale we completed in the quarter, our net debt to annualized adjusted EBITDARE was 4.5x. We are committed to maintaining a conservative balance sheet. Investors should expect us to remain well within our historical leverage range of 4.5x-5.5x. At quarter end, our total liquidity stood at nearly $700 million. Our conservative leverage position, strong balance sheet, and significant liquidity position continues to be supportive of our current investment pipeline and sufficient to fund our growth plans in 2023.

Lastly, I'll mention that our current investment pipeline, the outlook for our core portfolio, and our continued strong performance at the end of 2022 provided us with the basis to maintain our 2023 AFFO per share guidance range of $1.58-$1.64, which, as Pete mentioned, implies a more than 5% year-over-year growth at the midpoint. With that, I'll turn the call back over to Pete.

Peter Mavoides (President and CEO)

Thanks, Mark. Operator, please open the call for questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we pull for questions. Thank you. Our first question is from Haendel St. Juste with Mizuho. Please proceed with your question.

Ravi Vaidya (VP of REITs Equity Research)

Hi, good morning. This is Ravi Vaidya on the line for Haendel. Hope you guys are doing well. Understanding that 1Q, you know, the transaction activity that's occurred in 1Q so far is not necessarily the run rate for the whole year. Can you talk about your perception of the transaction market today and how that feels compared to prior years in the first quarter?

Peter Mavoides (President and CEO)

Yeah, I think, you know, listen, I wouldn't read too much into the quarter to date activity. Normally the cadence in the first quarter is a slow January, given sort of the hangover effect from what you typically is a very active fourth quarter. The, you know, the transaction market is pretty interesting in that, you know, there is, you know, a slightly diminished level of transaction activity given what's going on in the capital markets. That's also offset by a severe, severely diminished set of competitive set. Such that, you know, those balancing factors, you know, make us feel really good about the pipeline we're seeing and the opportunities that we're working on.

Ravi Vaidya (VP of REITs Equity Research)

Great. That's helpful. Just one more here. Given the portfolio mix, you know, number of private equity-backed tenants, can you comment on your watch list right now and how has that changed over the last few quarters? Are you noticing any margin thinning for any of the companies as labor gets more expensive or has demand come in from any retailers from consumers as well?

Peter Mavoides (President and CEO)

Yeah, I would, you know, our watch list isn't, you know, related to private equity ownership in any way. The vast majority of our portfolio is privately held and, you know, that could be private equity owned or, you know, private individuals. Overall, the watch list as we define it, which is the intersection of a single B- credit and coverage less than 1.5x, is at 50 basis points, which is as low as it's been. You know, overall, the portfolio is in great health. You see that in our same-store sales number that we reported as well as our occupancy, which, you know, at 99% and 1.6% are pretty healthy. Portfolio is in great shape.

Coverage moderated a little bit, as I said in the prepared remarks, which we think is a result of, you know, kind of in the inflationary pressures and the lagging effect of our tenants' ability to push that through. At 4x, it's really nothing that gives us concern.

Ravi Vaidya (VP of REITs Equity Research)

Got it. Thank you, guys.

Peter Mavoides (President and CEO)

Thank you.

Operator (participant)

Thank you. Our next question is from RJ Milligan with Raymond James. Please proceed with your question.

RJ Milligan (Managing Director and Senior Equity Research Analyst)

Hey, good morning. A couple of questions. My first is, it looked like Five Star became a top tenant this quarter. I'm just curious because it does seem like a slight deviation from, you know, buying fungible boxes. Curious if you could give any more color on that incremental investment, how much was it and sort of the thought process there?

Peter Mavoides (President and CEO)

Five Star, had been in our portfolio for a while, and they were formerly Tracks. You know, they, and they rebranded, as they did another add-on investment. You know, we think those assets are pretty fungible, and several of them are kind of in the family, entertainment space, you know, with high land value and, you know, long operating history of great, unit-level economic and coverage and, you know, a great operator with great assets and, you know, we're happy to have them in the top 10.

RJ Milligan (Managing Director and Senior Equity Research Analyst)

Okay. A question for Mark. Most of the forwards here have been used up, and I'm just curious in the short term. How do you anticipate funding, growth, just say over the next 2 quarters? Do you anticipate using the line for that, or could we anticipate additional, you know, potential forwards coming?

Mark Patten (CFO)

I appreciate that question. I think what you could anticipate is that, you know, sort of embedded in our guidance is not needing to access incremental debt, but rather use the revolver. In terms of equity, I think, you know, if it was ATM if it was equity activity, mostly it would probably be opportunistic under the ATM, but we really don't need to do anything of a material nature to hit our midpoint. So in the next two quarters, certainly nothing of significance.

RJ Milligan (Managing Director and Senior Equity Research Analyst)

Great. That's it for me. Thanks, guys.

Peter Mavoides (President and CEO)

Thanks, RJ. We appreciate it.

Operator (participant)

Thank you. Our next question is from Joshua Dennerlein with Bank of America. Please proceed with your question.

Joshua Dennerlein (Equity Research Analyst)

Yeah. Hey, guys. I'm just curious if you're under your own underwriting or if you're seeing kind of competitors for assets kind of changing their IRR hurdles at all, just given the changes in the cost of capital today?

Peter Mavoides (President and CEO)

Yeah. Listen, I can't really speak to what other people are doing. You know, obviously, I think, you know, the leverage buyer who's seen debt costs rise materially and, you know, have severely, you know, are challenged in the current market environment with the current availability and cost of underlying financing. You know, as we look at opportunities, you know, you can see our cap rates have moved 40 basis points sequentially in the quarter. You know, we feel good about, you know, the opportunities we're seeing and our ability to kind of move rates.

You know, I'd also point out, you know, in the quarter, our lease tenor was higher at 18.7 years versus 16.5 years in the third quarter, and our escalations were higher. Overall, we're getting a more favorable economic package in the deals that we're doing. The deals in the quarter were, you know, 95% repeat business. Guys that we have dealt with in the past, that would clearly indicate, you know, higher embedded IRRs inherent in those deals, which kind of goes along with the cost of capital.

Joshua Dennerlein (Equity Research Analyst)

Yeah, I appreciate that. That's good color. Within like the industry verticals that you like to acquire, are there kind of better opportunities out there, like as far as like where you're seeing the most deal volume coming through?

Peter Mavoides (President and CEO)

Yeah. You know, we, you know, we tend to invest, and we tend to tell people to that we'll invest ratably, largely because that's where our relationships reside and that's where our sourcing activity is conducted and across those 16 verticals. It may ebb and flow, you know, any given quarter. The fourth quarter was very heavy in car wash activity for us. You know, quite frankly, for the first couple quarters of the years, those that sector was pretty hot from a cap perspective, and many deals were pricing away from us, and we were choosing to transact in other sectors.

You know, for whatever reason, you know, those operators, you know, didn't have as many capital opportunities in the fourth quarter, and we were able to strike some nice balance there. Overall, you know, over a longer period of time, Josh, I would expect the portfolio to grow ratably.

Joshua Dennerlein (Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. Our next question is from Greg McGinniss with Deutsche Bank. Please proceed with your question.

Greg McGinniss (Director)

Hey, good morning. With Scotiabank. I'm trying to reconcile between the comments made last quarter regarding potentially moderating acquisitions and maintaining guidance this quarter despite a record Q4 on transactions, significant liquidity and a healthy sale-leaseback environment. Is guidance being maintained due to the level of anticipated dispositions in the first half of the year? Any color you can provide on the puts and takes would be appreciated. Also around what cap rates do you anticipate on those asset sales?

Peter Mavoides (President and CEO)

Yeah. Listen, I think, you know, in the asset sales, just to tackle that one, I would expect, you know, something in the mid to high sixes. You know, if you're a conservative, you know, underwrite a 7. Clearly we think there's good liquidity for our properties on an individual basis and we'll continue to sell into that market.

As it relates to guidance, you know, it's early in the year and there remains a lot of, you know, turmoil in the capital markets and, you know, I would say we feel incrementally much better today than we did when we first issued guidance based upon some of the factors you mentioned, you know, our execution in the fourth quarter, the dynamics in the sale-leaseback market, and, you know, quite frankly, the first quarter pipeline that we see. You know, it's still early in the year and, you know, we'll certainly continue to evaluate guidance and, you know, as the year progresses. You know, at this point, we're just affirming our guidance.

Greg McGinniss (Director)

Okay. Thank you. On the dispositions, are there any, I mean, what types of assets are you looking to offload? Are those in a, you know, particular industry, particular tenants? Or are you just kind of finding the ones where, you know, you can get this good cap rate to help fund future growth?

Peter Mavoides (President and CEO)

Yeah, it's certainly not that. You know, we're not cherry-picking and trying to, you know, sell the assets that garner the most attractive cap rates. If that were the case, I would expect, you know, our best assets to sell in the 5s. We're really looking at assets with coverage levels or trends at the unit level that would, you know, indicate it's not gonna be the healthiest asset over a long period of time. Oftentimes we're selling assets out of a master lease so that we can improve our hold position. By and large, it's de-risking sales, you know, getting rid of assets that, you know, just we don't think are gonna be as durable for the 20-year period as we would like.

Greg McGinniss (Director)

Okay. Thank you.

Peter Mavoides (President and CEO)

Thank you.

Operator (participant)

As a reminder, it is star one if you would like to ask a question. Our next question is from Nick Joseph with Citi. Please proceed with your question.

Nick Kerr (Director and Equity Research Analyst)

Hey, good morning. It's Nick Kerr on for Nick Joseph. A bit of a follow-up. You all have cited the $228 million investment activity per quarter, previous presentations, and obviously Q4 is above that. Just curious how we should sort of run rate that as a baseline going forward, if it's gonna be north of that 228 or similar.

Peter Mavoides (President and CEO)

Yeah. You know, listen, we as we always do, kind of guide people towards the 8-quarter average as a good indicator of what to expect. You know, we rarely have visibility on our pipeline out past, you know, 90 days such that, you know, we're uncomfortable giving, you know, more precise investment guidance around that. Historically, one of the reasons we provide, you know, historical quarter-over-quarter guidance or quarter-over-quarter activity, the fourth quarter is heavy, and I think this fourth quarter is consistent with that. You know, as we look at the first quarter, we feel pretty good about what we see.

You know, I think as we said in the context of providing guidance, you know, we would expect a more moderated level in the back half of this year. You know, that may change as the year, you know, plays out. As we said today, you know, we feel good about the first half and, you know, we'll see what comes in the second half.

Nick Kerr (Director and Equity Research Analyst)

That's really helpful. Thank you. Then, on guidance. How do you see the economic environment affecting the tenant base, and how much credit loss, if any, is baked into those numbers right now?

Mark Patten (CFO)

Yeah, actually, what I'd tell you just from a modeling standpoint, if you look at the range, you could just assume that there's a healthy level of credit loss at the bottom end of the range. We've incorporated that, effectively as you move up that range, you're really moving up towards our more historical loss experience, which is probably 30 basis points. You know, candidly, as you discovered in 2022, certainly as you saw in our same-store growth, we had limited credit loss. Oftentimes that can be a pretty good tailwind, for us as we move through the year to kind of, get the ability to adjust our guidance.

Nick Kerr (Director and Equity Research Analyst)

Awesome. Thank you. Looking forward to seeing you guys at the conference.

Peter Mavoides (President and CEO)

Yep. Thanks for hosting. We're looking forward to it.

Operator (participant)

Thank you. Our next question is from John Massocca with Ladenburg Thalmann. Please proceed with your question.

John Massocca (VP of Equity Research)

Good morning.

Peter Mavoides (President and CEO)

Morning, John.

Mark Patten (CFO)

Hey, John.

John Massocca (VP of Equity Research)

Maybe, going back to dispositions a little bit. As you think about loan repayments from the loan book, you know, is that something that could moderate over the course of 2023 versus what was done in 2022, given the, you know, cap rate environment that's out there for those tenants or was kind of 4Q, you know, 3Q to 4Q shift just kind of the inherent lumpiness in repayments?

Peter Mavoides (President and CEO)

Yeah, I think that's just the inherent lumpiness in repayments. I would, you know, the loan book's pretty small and it's not a material part of our asset base, and those repayments tend to be episodic. I would suggest, you know, we have some loans that are repaid through the sale of individual assets, and that kind tends to dribble in. I would expect that dribble in sort of repayment to persist throughout the year because that market remains open and attractive with 1031 buyers continuing to transact and sell and which results in those loans being repaid to us. On occasion, those loans are refinanced out, and that becomes a little more chunky.

I would expect that to be a little more challenged in the current market environment where, you know, the big chunks of repayment coming back to us are a little, a little less probable. Again, it's not a big part of our book, and I wouldn't expect it to, you know, have a material impact on our numbers.

John Massocca (VP of Equity Research)

As we think about the impact on NOI, are those typically repaid, right, at the same rate that they were issued at? Or is there some kind of, I guess, economic benefit that accrues to EPRT on the sale in terms of, you know, bonus or additional penalty stuff?

Peter Mavoides (President and CEO)

Yeah, I mean, on occasion we have prepayment penalties, and you see that's flowing through our numbers on a, you know, when it happens. That's not on all of the loans, and it tends not to be material. We've always said that our loan book tends to carry the same rate as our investments. You know, they, you know, that money probably went out the door, you know, like our investment capital, you know, call it in the low sevens. If we're getting it back today, we're able to redeploy that kinda in the mid to high sevens. There could be some economic impact there.

John Massocca (VP of Equity Research)

Apologies if I missed this earlier in the call, but how are you seeing... If you look at the pipeline, not, you know, you gave the cap rate on acquisitions closed to date, but just looking out in the pipeline, maybe what's under LOI as well, are you seeing kind of additional cap rate expansion versus what was seen in 4Q, or are things, you know, stabilizing a little bit given maybe the interest rate environment?

Peter Mavoides (President and CEO)

It feels like they're stabilizing. You know, our first quarter pipeline is not materially different than, you know, the fourth quarter. You know, and so it doesn't, it's, you know, our cap rates aren't going to eight, but, certainly not back to seven. I think that the mid sevens a good indicator.

John Massocca (VP of Equity Research)

One last question on acquisitions. The competitive set, you mentioned it was kind of smaller than it had historically been. I guess maybe just in terms of what you're seeing at the table as you kind of look at deals and negotiate with potential tenants. I mean, are people potentially drifting more into your space that had historically played in, you know, the investment grade or the more kind of publicly traded names on a sale-leaseback basis? Or is that, I guess, not happening?

Peter Mavoides (President and CEO)

Yeah, I mean, and I would first off encourage you to think about the competitive set, not only as sale-leaseback buyers, but alternative sources of capital. That's the much bigger impact, is that, you know, bank financing, leveraged lenders and asset-backed lenders, they're all challenged. Our tenants just have fewer capital alternatives to capitalize their growth, which is making more and more of them turn to sale-leaseback capital as an alternative. It's really a very unique window in time where there's such dislocation in the overall capital markets that allow us to kind of lock in these attractive returns for, you know, 20+ years.

As it relates to sale-leaseback, competitors, you know, clearly, as I said in the prepared remarks, some of the leveraged buyers are less aggressive, and we are seeing some incremental competition from some of the public peers. Really that's at the margin. You know, the bigger factor is that, you know, financing is challenging all over the place, and more and more people are forced to look to sale-leaseback capital as a means of financing their growth.

John Massocca (VP of Equity Research)

Okay. That's very helpful. That's it for me. Thank you very much.

Peter Mavoides (President and CEO)

Thanks, John.

Operator (participant)

Thank you. Our next question is from Omotayo Okusanya with Credit Suisse. Please proceed with your question.

Omotayo Okusanya (Managing Director of REITs Equity Research)

Hi. Yes, good morning, everyone. I just wanted to go back to the commentary you guys made about still, you know, uncertainty in the credit markets. Specifically, I'm trying to understand what's happening with your middle market tenant base as it pertains to access to capital, whether that's causing any kind of financial distress, which could have, you know, impact on, you know, on rents. Whether, again, the financial distress could potentially even create opportunities for you guys to do, sale-leaseback transactions, with some of these tenants on a going-forward basis.

Peter Mavoides (President and CEO)

Yeah. You know, most of our tenants, you know, the vast majority of our tenants have, you know, long capital that's locked in the form of debt equity and, you know, real estate capital. Really the financial stress really comes from, you know, operating stress or operating under performance, which we are not seeing. As we said, our portfolio is in great shape. Our tenant watch list is as low as it's been in a long time. Our coverages are very high. You know, our tenants are doing very well, and we feel good about that. To the extent that there were any issues, as Mark indicated, that would be baked into our guidance and, you know.

Overall, you know, we feel really good about the underlying credits in the portfolio and their operating performance, which in owning their operating real estate is our primary concern. You know, you can see our coverages are very strong. Our occupancy is 99.9%. Our flow through of rent escalations in 2022 was virtually 100%. All good indicators of, you know, solid credit performance. Lack of capital availability, and the capital markets more pertains to their incremental growth and financing their M&A ability, which at the margin is creating incrementally more opportunities for us to deploy capital at attractive rates. Okay.

Operator (participant)

Thank you. As there are no further questions at this time, I would like to turn the floor back over to Mr. Pete Mavoides for closing comments.

Peter Mavoides (President and CEO)

Great. Well, thank you all for your time today. We look forward to seeing everyone at the upcoming conferences. Please feel free to reach out if you have any questions. Have a great day.

Operator (participant)

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.