Essential Properties Realty Trust, Inc.

Good morning ladies and gentlemen and welcome to Essential Properties Realty Trust's third quarter 2023 earnings conference call. If anyone should require operator assistance during the conference, please press star zero 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 Realty Trust's website at www.essentialproperties.com, an archive of which will be available for 90 days. On the call this morning are Pete Mavoides, EPRT's President and Chief Executive Officer, Mark Patton, EPRT's Executive Vice President and Chief Financial Officer, and Rob Salisbury, EPRT's Senior Vice President and Head of Capital Markets. and it is now my pleasure to turn the call over to Rob Salisbury. Thank you, sir. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us today for the third quarter 2023 earnings conference call for Essential Properties Realty Trust. During this 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, I'll turn the call over to Pete.

Thanks, Rob. And thank you to everyone who is joining us today for your interest in essential properties. As our third quarter earnings release indicates, we are pleased to report another quarter of strong results, driven by the strength and stability of our portfolio that continues to perform well and was impacted favorably by our solid investment activity. Despite some areas of the broader consumer sector noting a slowdown in recent months, our growth-oriented middle market tenants continue to perform well, as reflected by our unit-level rent coverage that remained strong at 4.0 times, our same-store rent growth, which remained favorable at 1.2%, and just three vacant properties. The overall health of our portfolio is a testament to our disciplined underwriting process, which focuses on growing operators in durable service- and experience-based industries and owning granular and fungible properties that generate strong cash flow for these operators. Our tenants provide a strong value proposition to their customers with generally low average tickets that do not rely on consumer financing and therefore do not experience demand headwinds from a rising rate environment. In the third quarter, we acquired 65 properties in 30 separate transactions that were 100% sale-leaseback transactions with 86% of those opportunities generated from existing relationships. Our third quarter investments reflect an improving pricing environment for our business with an initial cash cap rate of 7.6%, an average annual rent escalation in those leases of 2%, and a weighted average lease term of 17.6 years, which results in an average gap yield over the primary lease term of 8.7%. With limited active competitors in the middle market sale-leaseback arena today and higher base rates driving up the cost of private credit alternatives for these operators, we expect the favorable cap rate environment to persist in the near term. Our balance sheet remains in great shape, as Mark will discuss shortly, as we remain committed to maintaining a conservative leverage profile and strong liquidity position. We are establishing our 2024 AFFO per share guidance at $1.71 to $1.75, which implies a 5% growth rate midpoint to midpoint. Our guidance for 2024 reflects continued healthy portfolio performance and an improving pricing on new investments, tempered by an expectation of a higher cost of capital and a generally volatile capital markets backdrop continuing in the near term. Importantly, I am pleased to note that supported by our conservative leverage profile and our low dividend payout ratio, The company's nearly $100 million of forecasted retained free cash flow can be accretively deployed into our investment pipeline without any additional reliance on the capital markets. Combining the reinvestment of our retained cash flow, our strong capital deployment year-to-date, and our healthy rent escalators, net of tenant credit assumptions, we estimate our AFFO per share can grow nearly 4% in 2024 without requiring any additional external capital. Notably, favorable developments in the capital markets could provide the opportunity to achieve a higher growth rate than what is implied at our midpoint of guidance. Turning to the portfolio, we ended the quarter with 1,793 properties in our portfolio that were 99.8% leased to 363 tenants operating in 16 industries. Our weighted average lease term stood at 13.9 years, with only 5% of our ABR expiring through 2027. From a tenant health perspective, our unit level rent coverage ratio at quarter end was 4.0 times, and the percentage of our ABR that had a less than one times rent coverage level remained consistent from the second quarter of 2023, totaling just 3.1% at quarter's end. As I noted, our same-store rent growth remained favorable at 1.2%, although that represents a 30 basis points decrease from last quarter. Our rent growth in the third quarter was impacted by a 30 basis point headwind from the bankruptcy of a gym operator in Oregon, Like many other businesses in Oregon, this particular operator experienced significant operating challenges due to the longer imposition of pandemic operating restrictions in Oregon, which was somewhat unique in the context of our broader portfolio of health and fitness properties. Specifically, we did not collect rents on two properties operated by this tenant, which totaled only $8 million of net book value. we expect to find a replacement tenant and recruit a meaningful amount of the economics. We view this as a tenant-specific event, given that our portfolio of health and fitness properties continues to perform well, as evidenced by industry unit level rent coverage of 2.1 times. Regarding our third quarter investments, we invested $213 million in 30 separate transactions and properties representing 12 of our 16 targeted industries. In the quarter, 100% of our investments were originated through direct sale leaseback transactions completed on our lease form with ongoing financial reporting requirements. In addition, 60% of our investments were in a master lease structure. The weighted average unit level rent coverage of the tenants at these properties was 3.3 times and our average investment per property was 2.8 million. Looking ahead to the fourth quarter, we remain active and our pipeline should support investment levels relatively consistent with our recent activity, with the potential for further improvement in initial cash cap rates as our capital is becoming increasingly attractive against the capital-constrained backdrop for middle market businesses today. Specifically, We expect initial investment cap rates in the high 7% range with strong underlying lease terms. Looking at our portfolio industry breakdown at quarter end, car washes remained our largest industry at 15.3% of ABR, which is down 30 basis points from last quarter. Our next largest industries were early childhood education, medical, dental, and quick service restaurants. Our largest tenant, equipment share, represented 3.3% of ABR at quarter end, and our top 10 tenants continue to demonstrate the diversity in our portfolio, accounting for just 17.8% of our ABR. As we've consistently stated, portfolio diversity is an important risk mitigation tool for us and a product of our differentiated investment strategy. a direct benefit of our focus on non-credit-rated tenants and middle market operators, which offers an expansive opportunity set and, in our view, generates superior risk-adjusted returns. In terms of dispositions, we sold 10 properties this quarter for $28.5 million in net proceeds at a weighted average cash yield of 6.5%. The weighted average unit level rent coverage for the properties we sold was 3.6 times. Owning fungible and liquid properties and capitalizing on that liquidity is an important aspect of our investment discipline, and it allows us to proactively manage our industry, tenant, and unit level risks within our portfolio. Heading into the fourth quarter, we expect to selectively take advantage of favorable market pricing to creatively recycle capital away from identifiable risks, reduce our industry concentrations, and importantly, support our tenant relationships. With that, I'd like to turn the call over to Mark, who will take you through the operating results and balance sheet for the third quarter and discuss our capital markets activities.