Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust First Quarter 2021 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.

This conference is being recorded and a replay of the call will be available 2 hours after completion of the call for the next two weeks. The dial-in details for the replay can be found in today's press release.

Additionally, 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..

Thank you, operator and good morning everyone. We appreciate you joining us today for Essential Properties first quarter 2021 conference call. Here with today to discuss our first quarter are Peter Mavoides, our President and CEO, Gregg Seibert, our COO and Mark Patten, our CFO.

During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities laws.

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 release. With that, Pete, please go ahead..

Thank you, Dan. And thank you to everyone who is joining us today for your interest in Essential Properties. The first quarter was solid for us on all fronts.

In terms of the portfolio, our portfolio demonstrated great stability and durability as our tenants largely put the impacts of COVID 19 behind them and emerge from the pandemic a stronger operators.

While the pandemic continues to affect businesses, these burdens are now more manageable with the vast majority of our tenants, no longer needing support from us in the form of deferred rents.

Additionally, the fourth quarter and into the first quarter, we largely completed the repositioning of properties formerly leased to tenants that needed to restructure as a result of the pandemic.

In terms of the investments, our industry relationships, which were strengthened during the pandemic are driving investment activity as tenants continue to turn to us as a capital partner of choice for the real estate capital needs.

As a result, the record level of activity that we experienced in the fourth quarter continued into the first quarter with another strong performance on the investment front. During the quarter we invested $198 million into 74 properties at a 7.0% initial cash yield with over 16 years of lease term.

More importantly, 81% of these deals were repeat/relationship transactions and 80% were direct sale leasebacks on our lease form..

Thanks, Pete. During the first quarter, we invested $198 million in the 74 properties through 2002 separate transactions at a weighted average cash yield of 7%.

These investments were made within 9 different industries with over 95% of our activity coming from 4 industries, quick service restaurants, auto service, medical, dental and early childhood education. The weighted average lease term of our quarterly investments was 16.1 years.

The weighted average annual rent escalation was 1.8%, the weighted average unit level coverage was 3 times and our investment per property was $2.7 million..

Thanks, Gregg. As both Pete and Gregg noted in their remarks and was evident in our release last night, we had a great first quarter, highlighted by strong revenue growth and our FFO and AFFO results which on a per share basis were $0.30.

Some of the notable elements in our reported operating results for the first quarter of 2021 include the following.

Total revenue reached $48.6 million for Q1, an increase of $7.1 million or 17% over last year, which reflects the full quarter impact of our record level of investments of $244 million in Q4 2020 and more broadly our total 2020 investment activity of $603 million at a weighted average cash yield of 7.1% for the first time since the onset of the pandemic, our results did not have notable adjustments directly related to COVID.

That said, we did incur approximately $300,000 of property level expenses associated with property taxes and maintenance for a vacant property that was sold in April 2020, as well as a few properties that were re-let intra-quarter so those should be non-recurring going forward.

We recognized approximately $5.7 million in impairment charges during the quarter, $3.8 million of this charge related to a single furniture property. We also recognized $3.8 million in gains on asset dispositions that Gregg mentioned during the quarter. Total GAAP G&A was $6.4 million in Q1 2021 versus $7.5 million in the same period last year.

That's a 15% improvement, which reflected reduced costs for professional services, such as audit and legal, as well as certain outsourced services. We expect that these particular cost elements in our G&A will continue to trend favorably during 2021.

We saw our recurring cash basis G&A for Q1 2021 decreased to approximately $4.8 million versus $5.6 million in Q1 last year, and notably as a percentage of total revenue, our Q1 2021 cash G&A was just over 10%, a favorable level compared to Q1 2020 which was nearly 13% of revenue..

Great. Thanks, Gregg and Mark. With that, operator, please open the call for questions..

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Sam Choe with Credit Suisse. Please proceed with your question..

Hi, guys. Good morning. I was just kind of looking at your investment activity and just seeing that March was especially strong. So just wanted to reminder of when investments are under like the PSAs or LOI.

How long does those generally take for you to complete? And I know that a lot of its relationship-based and that helps with the timing standpoint, but just curious if there has been any changes since the pandemic on how experienced you can be on that front?.

Yes. Thanks, Sam. Generally, as we said in the past, we have about a 60 to 90 day transaction cycle, 30 days to negotiate a contract and then 30 days to perform diligence and that may vary.

We've closed deals as quick as three weeks, and we've had deals that lag for many months, given that we’re predominantly sale leasebacks, a lot of our deals are driven by an underlying M&A transaction that often becomes the gating item for closing.

Where another operator is buying a competitor and doing diligence and that business deal drives the timing. But generally you should assume we have about a 60 to 90 day cycle on our pipeline..

Got it.

And are you able to disclose how much investments are under the PSA, LOI subsequent to the quarter?.

Generally, we don't. In the context of our overnight offering that we did in April, we disclosed our forward pipeline in the context of that offering, which was about $250 million. And so I guess my broad commentary would be, we have a full pipeline and we're working hard to close the quality opportunities that we see and drive investments..

Got it. All right, thank you so much, guys..

Thank you, Sam..

Thank you. Our next question comes from the line of Sheila McGrath with Evercore ISI. Please proceed with your question..

Yes, good morning. Pete, in the supplemental, on the leasing page, the retail line item, looks to have some lease restructurings with a lower recovery rate.

I was just wondering if you could give us a little bit of detail on that?.

Yes, Sheila. I would first start off by saying, we generally don't have a lot of generic retail and certainly the numbers that had a million one to 569 would support that. What you're seeing there is largely the impact of some of our Art Van restructuring leases..

Okay, great. And then I think Gregg and….

Just tie that together. If you go back to Mark commentary on the impairment that we had during the quarter, it was related to a furniture property..

Okay, thanks. And then Gregg, I think mentioned that in the pipeline there's more entertainment asset, but you're not focusing on cinemas.

So what would that - what kind of tenants would that include and our cap rates any higher on entertainment assets now since the pandemic?.

Yes. So I think what Gregg said is, we're seeing some in our pipeline and we're open to investing in both entertainment assets, as well as casual dining, as those sectors have rebounded and certainly selectively that includes family entertainment center, and bowling alleys.

We also have some trampoline parks and other miscellaneous type uses in that, keeping - really keeping discipline to having our granular and fungible properties, so it wouldn't encompass some special use assets. And generally those - that industry is going to be at the wider end of our cap rate range.

But for the high quality operators and fungible assets, we're looking at, it's not going to be super-wide to our average. And so I would think that that sector would be in the low 7 range, sure..

Okay, thank you..

Thank you..

Thank you. Our next question comes from the line of Nate Crossett with Berenberg. Please proceed with your question..

Hey, good morning. So maybe just to follow up on Sheila's question a bit. So the pipeline that's in place now, the pricing you're kind of anticipating you're saying is in the low sevens is that correct? And then just maybe your comments on competition and pricing overall though at 3 months as we've seen kind of rates back up..

Yes, I would say, you should certainly and expect to see us continue to transact in that low seven range and the current pipeline is supportive of that.

We've seen kind of in the first half of the year here increased competition, as competitors have restarted their investment activities and new competitors have come to the space and that competition has not really abated as a result of rates sort of spiking up.

But we think we have a great set of relationships and people choose to transact with us and we certainly have a full pipeline and despite that competition, we expect to continue to see us invest in that kind of low seven range..

Okay, that's helpful. And then just one on the funding side, I think you have one investment-grade with Fitch, and I think last quarter you mentioned you may pursue another this year.

And so I'm just curious where that stands?.

Yes. If there were an update on that, we would have provided it. We're in dialogs with the agencies and when we get somewhere, we'll let you know. But that's an ongoing discussion that we’re having..

Okay.

I mean, is there a material difference if you were to price and then I'll say 10-year money today if you had to investment-grade versus what you have right now?.

It then give you more granularity on it, but it certainly depends on which market you're pricing into. And I think the more validation of your credit that you have the more expensive the universe of investors that you can approach. But I think given where the markets are today and what we're hearing is that there wouldn't be a material difference..

And I would say, Nate, with the recent equity raise and paying down our revolver and sitting on us - on cash, we’re not - not in a position where we need any debt capital, but certainly preparing ourselves for the time when we do..

Okay, thank you..

Thank you..

Thank you. Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your question..

Hey, thank you for taking my question. Good morning out there..

Good morning..

So I guess starting first on the auto service tenant issue in first quarter that drove the occupancy dip. It seemed like there were some prior concerns. I think the tenant was already on cash basis accounting. So what changed in the first quarter and is there any reason for us to be concerned about the sub-sector at all.

Given this tenant issue, or is this more of a one-off in your perspective?.

Yes, it was - I would say, it shouldn't certainly give you any concern, the automotive service sector is doing fine and is one of the least impacted industries that we invest in from a COVID-related perspective.

The occupancy dip is really not terribly material at all, if you think we're not, certainly not going to get defensive about, I can see over 99% and we gave some commentary on the call, where we've worked through those assets.

I would say broadly, given the COVID backdrop and we gave tenants more leeway than we normally would, really gave them the benefit of doubt and as the pandemic played out and impacted their business and really trying to discern whether the operator was impacted truly from the pandemic or was just a bad operator.

And so it took us a little longer to come to the conclusion of this guy was just a bad operator and we need to put better operators in place and that's why we decided to do..

Got it, got it.

And can you talk a bit more about maybe the timeline for re-letting those seven assets and how we should think about the new rents versus old and the recoveries you're underwriting?.

Yes. Separate from the specific tenant, generally the mandate to our asset management team is find the market for the asset. And then finding the market means, running an organized processed and disciplined process to find whether it's a replacement tenant or it's a sale to find the market, right.

And that process should not be any longer than 90 days, really an orderly marketing and negotiation and the closing, you may have deals fallout which prolong that, but it shouldn't go on for six months. And to the extent that we have a vacant asset longer than six months is because we're just not meeting the market.

And so that would be my expectation around timing and we provide in my view, really good disclosure on our re-let history. And as we said on the call, we would expect the outcome on the specific situation to be consistent with our past experience..

Okay, fair enough. Any tenants began paying rents in first quarter or did you recognize any prior period rent? And what are you thinking here about the prospects for some of the tenants on cash basis accounting, as well as the potential for reversing and because you recognizing some of the accruals. Thanks..

There is a lot going in that question, Haendel. We repositioned a lot of a tenants throughout the fourth and into the first. A lot of assets that will come back online.

And so there's a lot of puts and takes in our revenue and our tenant base, and I would say, all of those puts and takes are baked into our guidance and generally we're feeling good about our tenants and what they're paying us. But Dan you or Mark, add anything to that..

I mean, I think what I'd add is on the deferral front, we had said all along on the deferrals really burned off the year, payout - payback was anywhere from 12 to 18 months. So we're probably 35% our way into the deferral payments and we're collecting basically substantially all of them.

So we're in pretty good shape on the deferral front in terms of getting paid. What we agreed to defer..

Okay.

And on non-accrual?.

Yes, I mean, Haendel I think you should expect the non-accrual bucket to continue to increase in terms of their collections throughout the year. And then in terms of the non-recognized deferrals which we did not recognize in revenues, there is opportunity for that to come into the earnings stream, but that wouldn't be later until 2022 or beyond..

Yes. Whenever they pay us either the cash or we somehow catch up, which would probably - mostly when caught up..

Got you, got you. I appreciate that, and I'll probably follow up with you guys offline to get a bit more color. Thank you..

Great. Thank you, Haendel..

Thank you. Our next question comes from the line of John Massocca with Ladenburg Thalmann. Please proceed with your question..

Good morning..

Good morning, Massocca..

As you start looking at investments in the entertainment sector, in particular, has there been any change to how you are structuring leases with potential new tenants, kind of post-pandemic, just thinking insurance requirements, deposit any kind of force majeure language et cetera..

No, I mean, not really. Listen, we have a very durable lease and generally we're doing a lot of repeat business. So, in fact some of the tenants in that sector that we're dealing with the leases already in place and we're just adding new properties to it. And we have not more broadly seen change in terms of our leases, as a result of the pandemic.

I think both investors and operators recognize that this is a sort of hopefully once in a lifetime sort of event and shouldn't change the nature of an underlying 20 to 40 year agreement..

Okay. And then the other side of kind of the things are tight pulling back on the investment radar.

How are you thinking about underwriting in the casual dining space, is it tough to get a feel for the segment, given maybe balancing some of the reopening versus some of the headwinds that existed pre-pandemic and maybe some operating pricing pressures.

Just how you kind of thinking about investing in that segment holistically?.

Yes, I think as we typically do through sale-leasebacks, we’re looking at 3 or 4 years of operating history and performance and understanding how that site has performed, both in a stabilized and challenged environment, how that site has recovered.

We're certainly digging into P&Ls and understanding kind of the sources of revenue, both on-premises, off premises and the like. And then also kind of back testing the real estate value and understanding the rent per square foot we're paying, we're charging in our basis.

And so I guess, on a broad basis, our discipline in terms of underwriting assets really hasn't changed. We certainly have more data to look at, but making sure we're getting in at the right basis and buying units that are healthy and stabilized is what we're looking to do..

Okay, that's it from me. Thank you very much..

Thanks, John. Appreciate it..

Thank you. Our next question comes from the line of Chris Lucas with Capital One Securities. Please proceed with your question..

Hey, good morning, guys. Just Pete, just a quick one on the, early childhood education line of business. Just kind of curious as to how that business performed over the last several quarters.

And then, I'm curious as to whether you guys have any thoughts in terms of what the president's proposal on pre-K funding may do either in a tailwind or as a headwind to that business?.

Yes.

So the early childhood education space was severely impacted by the COVID pandemic, as we disclosed, and our collections in that sector kind of lagged in terms of recovery, as we've also disclosed, but as we sit today, those guys are open and operating and paying and operating profitably with occupancy, I think occupancy were shut in the second quarter, rebounded maybe 40% to 60% in the third quarter and call it 60% to 805 almost full occupancy here in the fourth and into the first.

So those guys are doing well and open and operating.

In terms of the government initiatives for subsidized, early childhood education, most of our operators are for profit and not really businesses that are driven or majorly supported by subsidies, but more globally, to the extent that there is more demand for childcare and I think it only be a benefit for operators and the ability to fill up the real estate that they own - that we own and they operate.

So we think it'll be a plus. But clearly, I don't think we needed or our operators needed, I think it be a nice tailwind..

Great, thank you. That's all I had..

Thank you, Chris..

Thank you. That does conclude today's question-and-answer session. I’d like to turn the floor back over to management for closing comments..

Great. Well, thank you all very much. We look forward to engaging with you guys over the next several weeks. As we have a couple of non-deal roadshows coming up and we're excited to continue to execute here in the second quarter. Thank you, all..

This concludes today's teleconference. You may disconnect your lines now. Thank you for your participation and have a wonderful day..