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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. This conference is being recorded, and a replay of the call will be available two 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. 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. You may begin.
Thank you, operator, and good morning, everyone. We appreciate you joining us today for Essential Properties' first quarter 2021 conference call. Here with me today to discuss our first quarter are Pete Mavoides, our President and Chief Executive Officer, Gregg Seibert, our Chief Operating Officer, and Mark Patten, our Chief Financial Officer. 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 Mavoides, 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 emerged from the pandemic as 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 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 their 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 85% were direct sale-leasebacks on our lease form. In terms of the capital markets, the capital markets remained attractive for us, and we continued to operate well within our desired leverage range. Specifically, we finished the quarter with net debt to annualized adjusted EBITDAre of 5.1x .
However, when taking into account our follow-on equity offering subsequent to quarter's end, our pro forma leverage declines to 4.1x , which provides ample capacity to continue our external growth strategy. Looking out to the balance of the year, we anticipate our new vintage portfolio to remain highly occupied, our focused and robust pipeline to generate accretive and attractive investment opportunities, and the capital markets to offer multiple sources of well-priced capital. Based on these assumptions, we are reiterating our 2021 Adjusted Funds From Operations per share guidance of $1.22-$1.26. We believe our projected double-digit increase in AFFO per share, combined with our well-covered dividend and our commitment to prudently managing our balance sheet and portfolio risks, offer an investor a compelling total return opportunity. To dig in with more specificity, we ended the quarter with investments in 1,240 properties that were 99.1% leased to 259 tenants operating in 17 industries.
Our weighted average lease term stood at 14.3 years at quarter end, with only 4.2% of our Annualized Base Rent expiring over the next five years. Our weighted average unit-level coverage ratio was three times, which was a slight improvement over last quarter's 2.9x . As we have previously mentioned, our traditional credit statistics, which focuses on implied credit rating and unit-level coverage, remain skewed as these metrics have been negatively impacted by the pandemic-related shutdowns last year. Yet they do not pick up the benefits of forgivable loan programs and rent deferrals. Nonetheless, it is encouraging to see this upward trend. Our pipeline remains strong, and we look forward to continuing to add properties and tenants to our portfolio, predominantly through direct sale-leasebacks with growing middle-market operators in our targeted industries.
While our balance sheet remains fully supportive of our external growth strategy, we will continue to stay way ahead of our capital needs in order to maintain optimal financial flexibility. With that, I'll turn the call over to Gregg Seibert, our COO.
Thanks, Pete. During the first quarter, we invested $198 million into 74 properties through 22 separate transactions at a weighted average cash yield of 7%. These investments were made within nine different industries, with over 95% of our activity coming from four 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 3x , and our investment per property was $2.7 million. Consistent with our investment strategy, 85% of our first quarter investments were originated through direct sale-leasebacks, which are subject to our lease form with ongoing financial reporting requirements, and 79% contain master lease provisions.
From an industry perspective, car washes remain our largest industry at 14.9% of cash ABR, followed by quick service restaurants at 13.6%, early childhood education at 13.4%, and medical/dental at 12.4%. We view these four business segments as Tier 1 industries for Essential Properties. As we have noted in the past, we view our industry focus as a distinct competitive advantage, as it allows us to remain diverse while retaining deep and specific industry relationships and proprietary data sets. Going forward, we continue to see concentration increases occurring in the more pandemic-resistant industries like auto service, equipment rental and sales, pet care services, building materials, and grocery. However, we are pursuing attractive investment opportunities in both the entertainment and casual dining industries, which have begun to experience strong rebounds in revenues and profits as more states relax indoor capacity restrictions and vaccinations increase.
Conversely, we expect further reductions to the movie theaters and home furnishings. Of note, our combined exposure to both industries is now just 3.4% of ABR, which is down 75% versus three years ago. From a tenant concentration perspective, no tenant represented more than 2.6% of our ABR at quarter end, and our top 10 accounts for just 20.2% of ABR, which compares to our 41.8% concentration just three years ago. Increasing our tenant diversity is an important risk mitigation tool and a differentiator for Essential Properties. This is also a direct benefit of our middle market focus, which offers a significantly more expansive opportunity set than an investment strategy concentrated on publicly traded companies and investment grade-rated credits.
On the occupancy front, we did see a 60 basis points pullback this quarter, which mostly relates to our decision in late March to terminate a seven-property master lease with an auto service tenant in the Southeast. Given our basis in the real estate and the strength of our operator relationships, we determined this was the best course of action for the long term. We have either relet or identified replacement tenants for all of these sites, and we expect a recovery that is consistent or better than our historical performance on lease terminations, which speaks to the quality of our underwriting and desirability of our properties. As of today, our occupancy stands at 99.5% with only six vacant properties. In terms of dispositions this quarter, we sold 16 properties, including one vacant property, for $25 million in net proceeds.
When excluding vacant properties and transaction costs, we achieved a 7.1% weighted average cash yield on those dispositions. As we have mentioned in the past, owning liquid properties is an important aspect of our investment discipline, as it allows us to proactively manage industries, tenants, and unit-level risk within the portfolio. That said, future disposition activity should moderate to levels more consistent with our historical average, as much of COVID-related restructuring is behind us. With that, I'd like to turn the call over to Mark Patten, our CFO, who will take you through the balance sheet and financials for the fourth quarter. Mark?
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.
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 relet intra-quarter. 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 decrease to approximately $4.8 million versus $5.6 million in Q1 last year. 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. Net income was $15.3 million in the quarter, which was up 9.5% from first quarter last year. Our FFO totaled $32.9 million for the quarter. That's an increase of $7.4 million or 29% over the same period in 2020. Our FFO per share on a fully diluted basis was $0.30, as I mentioned, a 7.1% increase over the same period in 2020. Our core FFO on a nominal basis was 21.4% higher than Q1 2020, and on a per share fully diluted basis, core FFO for the quarter was $0.30 per share.
Our AFFO was up $5.9 million. That's a 22% increase versus Q1 last year, totaling approximately $32.5 million for the quarter. On a fully diluted per share basis, AFFO for Q1 2021 was $0.30 per share. That's up 3.4% from Q1 2020. With regard to our balance sheet at quarter end, the notable elements are largely the following. With another strong quarter achieved by our team, particularly investing $198 million in 74 properties, our total gross assets stood at $2.8 billion at quarter end. Our unrestricted cash totaled nearly $43 million, with an additional $2 million in restricted cash available for deployment into new investments. This cash balance was slightly elevated in support of our robust investment pipeline.
The increase in our long-term debt as of quarter end on a gross basis was essentially the result of the $120 million we drew on our credit facility to fund our first quarter 2021 investment activity. From an equity perspective, we generated $65 million of gross proceeds from our at-the-market during the quarter, selling approximately 2.8 million shares at an attractive weighted average price of $23.22 per share. As Pete referenced, subsequent to the quarter end, we executed an upsized overnight equity offering, generating total gross proceeds of $193 million at a price of $23.50 per share before the underwriter's discount. Our total liquidity at quarter end stood at $307 million. As we pointed out in our release, on a pro forma basis, the overnight offering moved our leverage to 4.1 times net debt to annualized adjusted EBITDAre. Our liquidity increased to $492 million.
We appreciated the support from both new and existing investors as we now have ample runway to continue to pursue our strong pipeline of potential investments. With the net proceeds of the offering, we paid down the outstanding balance on the credit facility. As we've noted in our past quarters, our current $492 million of total liquidity does not include the $200 million accordion feature that we could access on our credit facility and an additional $70 million of borrowing capacity available through an accordion feature that we have on our term loan due in 2026. We continue to hold the view that our low lever balance sheet and significant liquidity is a strategic advantage for us and provides not just a platform for growth, but a position of stability to weather a challenging macroeconomic environment, such as we've seen during the height of the pandemic and these intervening quarters.
With that, I'll turn it back over to Pete.
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. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate 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 poll for questions. 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. Just wanted a reminder of when investments are under the Purchase and Sale Agreements or Letter of Intent, how long does those generally take for you to complete? And I know that a lot of it's relationship based, and that helps with the timing standpoint, but just curious if there has been any changes since the pandemic on how expedient you can be on that front.
Yeah. Thanks, Sam. Generally, as we said in the past, we have about a 60- 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. Generally, you should assume we have about a 60- 90 day cycle on our pipeline.
Got it. 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. 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.
Yeah, Sheila. I would first start off by saying we generally don't have a lot of generic retail, and certainly the numbers in that at $1.1 million-[audio distortion] would support that. What you're seeing there is largely the impact of some of Art Van restructuring leases.
Okay, great. Then, I think Gregg [crosstalk]. Go ahead.
Just to 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. Gregg, I think, mentioned that in the pipeline there's more entertainment assets, but you're not focusing on cinemas. What kind of tenants would that include, and are cap rates any higher on entertainment assets now since the pandemic?
I think what Gregg Seibert said is we're seeing some in our pipeline, 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, bowling alleys. We also have some trampoline parks and other miscellaneous type uses in that. Really keeping discipline to having our granular and fungible properties, so it wouldn't encompass some special use assets. Generally, 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. I would think that sector would be in the low 7% range, Sheila McGrath.
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. Maybe just to follow up on Sheila's question a bit. The pipeline that's in place now, the pricing that you're kind of anticipating to execute on, you're saying is in the low sevens. Is that correct? Then just maybe your comments on competition and pricing overall the last three months, as we've seen kind of rates back up.
Yeah. I would say, you should certainly 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. We think we have a great set of relationships, and people choose to transact with us, and we certainly have a full pipeline. You should, despite that competition, expect to continue to see us invest in that kind of low seven range.
Okay. That's helpful. Just one on the funding side. I think you have one investment grade with Fitch. I think last quarter you mentioned you may pursue another this year. I'm just curious where that stands.
Yeah. If there were an update on that, we would've provided it. We're in dialogue with the agencies and when we get somewhere, we'll let you know. That's an ongoing discussion that we're having.
Okay. Is it a material difference if you were to price, I don't know, say, 10-year money today if you had two investment grades versus what you have right now?
Dan can give you more granularity on it, but it certainly depends on which market you're pricing into. I think the more validation of your credit that you have, the more expansive the universe of investors that you can approach. I think given where the markets are today and what we're hearing is that there wouldn't be a material difference. I would say, Nate, that with the recent equity raise and paying down our revolver and sitting on cash, we're 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. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. 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.
I guess starting first on the auto service tenant issue in first quarter that drove the occupancy dip. It seems like there was some prior concerns. I think the tenant was already on cash-based accounting. What changed in the first quarter, and is there any reason for us to be concerned about this sub-sector at all, given this tenant issue, or is this more of a one-off in your perspective?
Yeah. Listen, I would say it shouldn't certainly give you any concern. The automotive service sector is doing fine, and it's 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 certainly not going to get defensive about occupancy over 99%. We gave some commentary on the call where we've worked through those assets. I would say broadly, given the COVID backdrop, Haendel, we gave tenants more leeway than we normally would. Really gave them the benefit of the 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.
It took us a little longer to come to the conclusion that this guy was just a bad operator, and we needed to put better operators in place. That's what we decided to do.
Got it. Can you talk a bit more about maybe the timeline for reletting those seven assets, and how was you thinking about the new rents versus old and the recoveries you're underwriting?
Yeah. 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 process and disciplined process to find whether it's a replacement tenant or it's a sale to find the market, right? That process should not be any longer than 90 days, really, an orderly marketing and negotiation, and the closing. You may have deals fall out, which prolong that. It shouldn't go on for six months. To the extent that we have a vacant asset longer than six months, it's because we're just not meeting the market. So that would be my expectation around timing. We provide, in my view, really good disclosure on our relet history.
As we said on the call, we would expect the outcome on this specific situation to be consistent with our past experience.
Okay. Fair enough. Any tenants begin paying rent in first quarter or did you recognize any prior period rents? What are you thinking here about the prospects for some of the tenants on cash-based accounting as well as the potential for reversing and potentially recognizing some of the accruals? Thanks.
There's a lot going in that question, Haendel. We repositioned a lot of tenants throughout the fourth and into the first. A lot of assets that'll come back online. There's a lot of puts and takes in our revenue and our tenant base. I would say all those puts and takes are baked into our guidance. Generally, we're feeling good about our tenants and what they're paying us. Dan, you or Mark add anything to that?
Yeah. I think what I'd add is on the deferral front, we had said all along the deferrals really burned off the year, and payback was anywhere from 12 -18 months. We're probably 35% of our way into the deferral payments, and we're collecting basically substantially all of them. We're in pretty good shape on the deferral front in terms of getting paid what we agree to defer.
Okay. On the non-accrual, how are we?
Yeah. I think you should expect the non-accrual bucket to continue to increase in terms of their collections throughout the year. In terms of the non-recognized deferrals, which we did not recognize in revenues, there's opportunity for that to come into the earning stream, but that wouldn't be later until 2022 or beyond.
Yeah. Whenever they pay us either the cash or we somehow catch up, which would probably be mostly when they've caught up.
Got you. No, I appreciate this, 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.
Morning, Massocca
How's it going? 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, deposits, any kind of force majeure language, et cetera.
No, not really. Listen, we have a very durable lease. Generally, we're doing a lot of repeat business. In fact some of the tenants in that sector that we're dealing with, the lease is already in place, and we're just adding new properties to it. 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- 40 year agreement.
Okay. The other side of kind of the things that are kind of coming 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 euphoria versus some of the headwinds that existed pre-pandemic and maybe some operating pricing pressures? Just how are you kind of thinking about investing in that segment holistically?
Yeah, I think as we typically do through sale-leasebacks, we're looking at three or four years of operating history and performance and understanding how that site has performed both in a stabilized and a 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. Also kind of back testing the real estate value and understanding the rent per square foot we're charging and our basis. 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 for me. Thank you very much.
Great. 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 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 curious as to whether you guys have any thoughts in terms of what the president's proposal on pre-K funding may do, either as a tailwind or as a headwind to that business.
Yeah. 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. As we sit today, those guys are open and operating and paying and operating profitably. With occupancy, I think occupancies were shut in the second quarter, rebounded to maybe 40%-60% in the third quarter, and call it 60%-80%, almost full occupancy here in the fourth and into the first. Those guys are doing well and open and operating. In terms of the government initiative for subsidized early childhood education, most of our operators are for-profit and not really businesses that are driven or majorly supported by subsidies.
More globally, to the extent that there's more demand for childcare and I think it'd only be a benefit for our operators and the ability to fill up the real estate that we own and they operate. We think it'd be a plus, but clearly I don't think we need it or our operators need it. I think it'd be a nice tailwind.
Great. Thank you. That's all I had.
Great. 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 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.