Essential Properties Realty Trust, Inc.

Good morning, ladies and gentlemen, and welcome to the Essential Properties Realty Trust second quarter 2022 earnings conference call. At this time, all parties are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to register a question, please press star 1 on your telephone keypad. If you require operator assistance during the event, please press star 0 on your telephone keypad. This conference call is being recorded and 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. 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. It is now my pleasure to turn the call over to Dan Donlan, Senior Vice President and Head of Capital Markets at Essential Properties. Thank you. Please go ahead.

Thank you, Operator, and good morning, everyone. We appreciate you joining us today for Essential Properties' second quarter 2022 conference call. Here with me today to discuss our operating results is our President and CEO, and Mark Patton, 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. Fraternizing risk could cause actual results to differ materially from expectations or disclose from time to time in gritty detail in the company's funds at the SEC and in yesterday's earnings press 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. As our second quarter results indicate, our portfolio continues to perform at a high level with just two vacancies, same-store rent growth of 1.9%, and unit level rent coverage now at the highest level in our history. Additionally, with the recent data indicating a slowdown in demand for consumer discretionary goods, but continued strength in the demand for services, our portfolio remains well positioned in the current economic environment as over 93% of our ABR is derived from service oriented and experience based businesses. On the investment front, we remained active in support of our long-standing tenant relationships, but we did deliberately slow our investment pace to allow seller expectations to better reset to the rapid changes that occurred in the capital markets this quarter. Looking out to the back half of the year, we see our investment pace trending towards our trailing eight-quarter average at modestly higher cap rates. which, along with the recent closing of our $400 million unsecured term loan, supports our decision to increase our 2022 AFFO per share guidance to a range of $1.52 to $1.54 from a previous range of $1.50 to $1.53. Turning to the portfolio. We ended the quarter with investments in 1,561 properties that were 99.9% leased to 322 tenants operating in 16 industries. Our weighted average lease term stood at 13.8 years with only 4.3% of ABR expiring through 2026. our weighted average unit level coverage ratio improved to 4.0 times from 3.8 times last quarter. While our traditional credit statistics, which focuses on implied credit ratings and unit level coverage, experienced strong sequential improvement this quarter, these statistics are negatively skewed by one, our trailing 12-month reporting convention, which lags our own reporting by one to two quarters, and two, the fact that various municipalities were still placing capacity restrictions on certain industries well into 2021. We continue to expect these statistics to improve sequentially, particularly at the low end of the coverage spectrum, as demand for the services and experiences that our tenants provide largely improved throughout 2021 and into the first half of this year. During the second quarter, we invested $176 million through 23 separate transactions at a weighted average cash yield of 7%. These investments were made in 11 different industries, with 70% of our activity coming from the quick service restaurant, car wash, and family entertainment industries. The weighted average lease term of our investments this quarter was 17.2 years. The weighted average annual escalation was 1.5%. The weighted average unit level coverage was 2.7 times, and the average investment per property was $3.9 million. Consistent with our investment strategy, 100% of our quarterly investments were originated through direct sale lease packs, which are subject to our lease form with ongoing financial reporting requirements.