Q1 2024 Earnings Summary
- Strong Portfolio Performance and Tenant Health: EPRT's portfolio continues to demonstrate excellent durability with 99.9% occupancy and only one vacant property at quarter end. The weighted average unit-level rent coverage ratio increased to 3.9x from the previous quarter, indicating strong tenant performance and reliable cash flows.
- Robust Investment Activity and Pipeline: In the first quarter of 2024, EPRT invested $249 million at a weighted average cash yield of 8.1%, an increase of 20 basis points from the last quarter. The company has a strong and growing pipeline, expecting to approach $6 billion in income-producing assets by later this year. EPRT's capital position and the increasing demand for sale-leaseback capital position it well for continued growth.
- Strong Balance Sheet and Increased AFFO Guidance: EPRT maintains a well-capitalized balance sheet with pro forma leverage of 3.6x and liquidity of over $850 million. The company refined its 2024 AFFO per share guidance to a range of $1.72 to $1.75, implying over 5% growth at the midpoint, reflecting confidence in its financial performance and growth prospects.
- Increasing exposure to casual dining, which currently accounts for 7.5% of annual base rent, may pose risks due to flat performance in this sector; expanding this exposure could impact portfolio stability if economic conditions worsen.
- The reported 20% realized loss on property dispositions suggests potential challenges in asset valuations or market conditions, indicating that assets are being sold at a loss, which could negatively affect financial results.
- Heavy reliance on private equity-backed tenants, who make up the vast majority of the tenant base, may increase risk in a higher interest rate environment, as these tenants could face financing difficulties, potentially leading to higher default rates.
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Funding Strategy Amid Higher Rates
Q: How will you fund growth with higher rates?
A: We will utilize our existing equity and leverage capacity to fund growth, potentially executing term loans around 5.4%–5.5% interest rates. We're well-capitalized and can invest $1 billion without exceeding 5× leverage. -
Cap Rate Expectations
Q: What are your near-term expectations for cap rates?
A: We expect cap rates to remain flat in the near term. While cap rates increased by 20 basis points last quarter, we don't anticipate pushing them higher. If capital markets normalize, cap rates may gravitate down as competition returns. -
Competition in Sale-Leaseback Market
Q: How competitive is the sale-leaseback market today?
A: Competition has been muted recently due to challenging financing costs, though there is still some competition from other investors and alternative capital sources. Overall, it's at a lower level than we've seen in past years. -
Tenant Risk and Red Robin Exposure
Q: What's causing movement in tenant risk metrics, and your comfort with Red Robin?
A: Movements in tenant risk are due to idiosyncratic events with specific tenants. Overall, our portfolio coverage improved from 3.8× to 3.9×. Regarding Red Robin, we're confident in their real estate and believe they'll turn the brand around; we've had positive credit experience in casual dining, often increasing ABR after credit events. -
Consumer Spending Trends
Q: Any trends in consumer spending across verticals?
A: Generally positive trends; casual dining is flat, but rent coverages are increasing due to higher CPI and lease escalations. Car washes are performing well, and overall portfolio health is fine. -
Disposition Activity and Losses
Q: Are realized losses on dispositions due to non-core assets?
A: Dispositions focus on assets we don't plan to own long-term or to manage industry and tenant concentrations. The 20% realized loss isn't significant given the small $12 million subset and isn't indicative of broader trends. -
Exposure to Casual Dining and C-Stores
Q: How much more exposure to casual dining and C-stores are you comfortable with?
A: We're comfortable increasing exposure; we have a soft ceiling of 15% per industry and see room to grow in both sectors due to positive credit experience. -
Acquisitions from Existing Relationships
Q: Why is acquisitions mix skewed towards existing relationships?
A: In volatile markets, capital reliability is valued, so we're focusing on existing relationships. Over time, we aim to balance this and continue finding new relationships. -
Private Equity-Sponsored Tenants
Q: What's the mix of private equity-backed tenants in your pipeline?
A: The vast majority—over 90%—of our tenants are private equity-backed, similar to historical levels. This mix hasn't changed significantly over time. -
Investment Volume Outlook
Q: Is strong Q1 volume indicative for the rest of the year?
A: Q1 isn't a good run rate; we expect volumes to align with our 8-quarter average. The opportunity set is growing due to increased demand for sale-leaseback capital and diminished competition.
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