Greetings and welcome to the Essential Properties Realty Trust, Inc.'s fourth quarter 2020 earnings conference call. At this time, all participants are in listen only mode. A 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Donlan, Senior Vice President of Capital Markets. Thank you. You may begin.
Thank you operator. Good morning, everyone. We appreciate you joining us today for Essential Properties' fourth quarter 2020 conference call. Here with me today to discuss our fourth quarter and full year results are Pete 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 these 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. We are excited to report our fourth quarter and full year results, and more importantly, turn the calendar to a new year. While the COVID-19 pandemic is still very much with us, our tenants have adapted their businesses to profitably operate in the current environment, and most importantly, pay rent reliably and timely. I want to take a moment to acknowledge all of our employees at Essential Properties and their incredible efforts over this unprecedented year. Our team members rose to the challenges presented by the pandemic by effectively managing tenant relationships, negotiating, structuring, and documenting the appropriate tenant accommodations, working through necessary lease restructurings and asset repositionings, and then seamlessly and aggressively shifting back to growth when the conditions warranted in the back half of 2020.
These actions have stabilized the portfolio with high occupancy and sustained rent collections. We are firmly on track to deliver attractive earnings growth in 2021 and beyond. Turning to the fourth quarter. We saw a continued improvement in our rent collections and an increase to our occupancy as we relet properties and restructured leases for a handful of larger tenants. In addition to these positive operating trends, our cost of capital has continued to improve and the capital markets remain conducive towards investing in external growth opportunities and maintaining a conservative balance sheet to support that growth. With pent-up demand from our existing relationships and renewed M&A activity from various growth-oriented tenants, we invested $244 million at a 7.1 initial cash yield in the fourth quarter, which was a record level of activity for us.
Consistent with our investment strategy, 88% of our investments were direct sale leasebacks, and 90% were transactions that involved an existing relationship, which speaks to the quality of our market relationships and the predictability of our investment platform from both a sourcing and underwriting perspective. All of these combined factors gave us the visibility in late January to provide 2021 AFFO guidance of $1.22-$1.26 per share. Turning to the fourth quarter collections. We collected approximately 91% of our contractual cash ABR, with another 3% attributable to recognized rent deferrals. In January, we collected 95% of our contractual cash ABR, with another 2% attributable to recognized rent deferrals. The majority of these rent deferrals were granted due to the reintroduction of state and/or local mandated shutdowns that disproportionately impacted certain tenants due to the geographic concentration of their operations.
Over half of the recognized deferrals in January was provided to one tenant in the entertainment industry whose entire business has been mandated to close since mid-December. With that in mind, now that our rent collections are mostly on par with our net lease peers, many of whom derive the majority of their rents from investment-grade tenants, we remain convinced that our disciplined investment strategy continues to provide for some of the best risk-adjusted returns in the net lease sector. Turning to portfolio. We ended the quarter with investments in 1,181 properties that were 99.7% leased to 237 tenants operating in 17 industries. This is up from 16 industries last quarter, as we broke out our 3.3% concentration in the equipment rental and sales industry.
On a different note, I would like to highlight our progress towards reducing exposures to the more challenged industries of casual and family dining, health and fitness, home furnishings, and movie theaters. Combined, these five industries now represent less than 17% of our ABR, which is nearly a 50% decline since the second quarter of 2018, our first reported quarter as a public company. This deliberate reduction in exposure was driven not only by our ability to dispose of assets in a timely manner, but also the smaller size of our asset base, which has allowed us to efficiently manage our diversity in order to adapt our portfolio to changing market and industry dynamics. That said, we continue to view both casual and family dining and health and fitness as core industries for Essential, but we will remain highly selective when exploring new opportunities.
Due to the fungible nature of our real estate and our active re-leasing efforts, we had just three vacant properties at quarter end. As we have stated before, the value of our company does not reside in our leases. It resides in our properties and our ability to keep them consistently leased. Therefore, we see high and stable occupancy as a key indicator of that value. Our weighted average lease terms stood at 14.5 years at quarter end, with 0.1% of our ABR expiring in 2021 and 4.8% expiring over the next five years. Our weighted average unit level coverage ratio was 2.9x , which was a slight improvement over last quarter's 2.8x coverage. This was a pleasant surprise for us as we had expected our coverage to migrate lower.
However, due to the positive impact of fourth quarter investments, which had an average coverage ratio of 3.6x, and various tenants over 2x coverage seeing their profitability accelerate year-over-year, our coverage managed to tick up. As we have mentioned previously, our traditional credit statistics, which focus on implied credit ratings and unit-level coverage, are somewhat skewed as these metrics have been negatively impacted by the pandemic-related shutdowns, yet they do not pick up the benefits of forgivable loan programs and rent deferrals. Turning to the balance sheet. We finished the quarter with a leverage of 4.8x net debt to annualized adjusted EBITDAre, which has us well-positioned to finance our growth plans.
While we are confident in our ability to grow alongside our operators and capture attractive investment opportunities, we recognize the pandemic could have a lingering impact on certain tenants and industries. As such, we remain diligent in our underwriting and highly focused on tenants and locations that have shown resiliency and an ability to adapt throughout the pandemic. With that, I'd like to turn it over to Gregg Seibert, our COO, who will take you through the portfolio and investment activity in greater detail.
Thanks, Pete. During the fourth quarter, we invested $244 million into 108 properties through 33 separate transactions at a weighted average cash cap rate of 7.1%. These investments were made within five different industries, with over 80% of our activity coming from five industries: quick service restaurants, equipment rental and sales, auto service, medical/dental, and car washes. The weighted average lease term of our quarterly investment was 16.3 years. The weighted average annual rent escalation was 1.4%. The weighted average unit level coverage was 3.6x , and our average investment per property was $2.2 million. Consistent with our investment strategy, 88% of our fourth quarter investments were originated through direct sale leasebacks, which are subject to our lease form with ongoing financial reporting requirements, and 89% contained master lease provisions.
From an industry perspective, car washes are now our largest industry at 15.5% of cash ABR, followed by quick service restaurants at 13.9%, early childhood education at 12.3%, and medical/dental at 10.6%. We view these four business segments as tier 1 industries for Essential Properties. Going forward, we see our industry concentration increases coming in the auto service, equipment rental and sales, pet care services, building materials, and grocery. Conversely, we expect further reductions to the casual and family dining, health and fitness, home furnishings, and movie theater industries. Due to our deliberate efforts to de-emphasize casual and family dining and health and fitness, our combined concentration has declined 35% over the last two and a half years to 13% of ABR today.
In addition, our 2018 decision to redline the home furnishing and movie theater industries has resulted in our combined concentration declining 70% over the last two and a half years to 3.6% of ABR today. From a tenant concentration perspective, no tenant represented more than 2.8% of our ABR at quarter end, and our top 10 now accounts for just 21% of ABR, which compares to 39% two and a half years ago. Increasing our tenant diversity is an important risk mitigation tool and a differentiator for Essential Properties as our top 10 tenant concentration is one of the lowest in the net lease sector. 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.
In terms of dispositions this quarter, we sold 23 properties, including two vacant properties for $39 million in net proceeds. When excluding vacant properties and transaction costs, we achieved a 7.4% average cash cap rate on our dispositions in the quarter, which was slightly elevated this quarter as one of the tenants exercised their buyback option. As we have mentioned in the past, owning properties that are highly liquid is an important aspect of our investment discipline, as it allows us to proactively manage industries, tenants, and unit-level risk within the portfolio. With that, I would 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 we reported in our earnings release last night, we were pleased with our fourth quarter results, particularly the initial impact of our strong investment activity that kicked off in the latter part of the third quarter. Our operating results for the fourth quarter of 2020 compared to the same period in 2019 included total revenue of $41.1 million for the fourth quarter, an increase of approximately $1.9 million or nearly 5%, which was impacted by having to write off nearly $1 .5 million in revenues, including nearly $1 million of straight-line revenues previously recognized. That mostly stemmed from the Chapter 11 bankruptcy filings of two tenants during the quarter.
We also recognized an additional COVID-19 related adjustment in the quarter, as we picked up nearly $1 million in property-level expenses, specifically property taxes associated with the previously mentioned tenants that had filed for bankruptcy, as well as other vacancies that were resolved in the quarter. I'll mention here, we did move the aforementioned two tenants, which total nine properties and represent less than 1% of our ABR at year-end into non-accrual status during the fourth quarter as a result of their bankruptcy filings. Total GAAP G&A was $4.7 million in the quarter versus $5.3 million in 2019. We saw our recurring cash basis G&A for Q4 2020 decrease to approximately $3.3 million, which as a percentage of total revenue was just over 8%, a favorable level compared to Q3 2020, which was nearly 11% of revenue, and Q4 of 2019, which was 13.5%.
Our Q4 2020 G&A benefited from lower professional fees and lower incentive compensation. For the year, our recurring cash G&A was approximately $17.8 million, or just over 11% of our total revenue. Net income was $5.7 million in the quarter and $42.5 million for the full year. Our FFO totaled $26.2 million for the quarter and $104.4 million for the full year of 2020, an increase of 3.4% and 26.3% respectively over the same periods in 2019. Our FFO per share on a fully diluted basis was $0.25 in the fourth quarter and $1.08 for the year, which represents a decrease over the same periods in 2019. Our core FFO was relatively flat to Q4 2019, totaling $26.2 million, which equated to $0.25 per share on a fully diluted basis. core FFO for the full year 2020 totaled $106.7 million, up from $99.6 million in 2019.
On a per share fully diluted basis, core FFO for the year was $1.10, which was a decrease from 2019. Our AFFO was up $4.4 million, an 18% increase, totaling approximately $28.8 million for the quarter. For the full year, AFFO was up $20.7 million, totaling $107 million. On a fully diluted per share basis, AFFO for the fourth quarter and full year was $0.27 and $1.11 respectively. That's off $0.02 and $0.03 per share respectively compared to the same periods in 2019. Consistent with our third quarter, our per share metrics for FFO, core FFO, and AFFO were obviously impacted adversely by the adjustments we made to revenues and receivables in connection with the pandemic.
The full weight of our follow-on offering in late September 2020 had an adverse impact on these per share metrics as the impact of deploying this capital into our record level of Q4 2020 investments was not yet fully reflected in our results. As it relates to the two tenants that I referenced earlier, these tenants and another tenant are current and paying rent today, and in the aggregate, the ABR associated with these tenants is higher in Q1 2021 than what was owed to us in Q4 2020. The good news is that the approximate $1.5 million negative impact to our Q4 2020 cash NOI from these two tenants in formerly vacant properties is non-recurring and therefore limited to the adjustments we made in Q4 2020.
Separately, we collected substantially all of the $2.6 million in deferred rent we were owed in the fourth quarter from those tenants that we accounted for on an accrual basis. Turning to our balance sheet, I'll highlight just a few points. With the addition of more than $244 million of investments in the quarter that Gregg mentioned, our total undepreciated gross assets was $2.6 billion at year-end. Our unrestricted cash totaled nearly $27 million, with an additional $6 million in restricted cash available for deployment into new investments. Our long-term debt on a gross basis ticked up by $18 million, which was really related to the draw on the credit facility that we made in late December in connection with our investment activity.
From an equity perspective, we generated approximately $35 million of gross proceeds from our ATM program, selling approximately 1.7 million shares at a weighted average price of $20.50 a share. As Pete noted, our leverage at just 4.8x as of year-end continues to be well within our leverage targets and provides an ample runway for us to continue to pursue our strong pipeline of potential investments. Our external growth also remains supported by our significant liquidity position, totaling approximately $415 million as of year-end, which of course excludes the $200 million accordion feature on the credit facility and $70 million available on one of the term loans.
We continue to hold the view that our low-levered balance sheet and significant liquidity is a strategic advantage for us and provides us 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 in these intervening months. With that, I'll turn the call back over to Pete.
Thanks, Mark. We're excited that the operating environment and capital markets have allowed us to pivot away from managing through the pandemic with our tenants and properties and move forward with capitalizing on our robust pipeline of accretive investment opportunities in order to drive earnings growth. More importantly, we believe our disciplined and differentiated investment strategy has created an incredibly resilient net lease portfolio that should continue to generate attractive risk-adjusted returns as we grow in the future. With that, Operator, let's please open the call for questions.
Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question, you may 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 key. Our first question comes from the line of Nate Crossett with Berenberg. Please proceed with your question.
Hey, good morning, guys. Obviously, acquisition volumes have been ramping, I was just curious to know what kind of the run rate is baked into your guidance here. Just based on the current size of your team, is there kind of an upward bound limit that we should be thinking about?
Sure. Thanks, Nate. Good morning. The fourth quarter was a really big quarter for us, and we're happy with the results there. As been our tradition, we don't provide acquisition guidance. We provide very specific detail on our trailing eight quarters average and really guide people to that as an indicator of where we're likely to transact. You can see that's been a wide range, and it really depends upon the opportunities that come in in any given quarter. Averaging out around 125, 150, with highs and lows, you can see in our disclosure. Our team, when we came public, and has been staffed and remains staffed to transact at that level. As you look out in 2021, certainly our guidance has a range of assumptions built into it. A good baseline is looking at the trailing average.
Okay. That's fair. What about just your comments on pricing? It seems like for the year it was pretty stable, just above seven. Is that kind of your expectation for this year as well?
Yeah. The cap rates over the last eight quarters really range from 7.1%-7.5%. I would say that there's really two factors going into that. One being the industry mix, and two being the overall competitive environment. Really, our industry mix, as we've said on the call, has been gravitating towards the more secure industries we invest in and away from some of the more risky industries. That's impacted our cap rate down. I would add, it's awful competitive out there right now. A lot of people have a lot of capital to put to work in the space. I think coming through this pandemic, there's a greater appreciation of the durability of the assets in this space, specifically the middle market tenants. We're seeing a lot of competition. We fight to get every basis point we can on our transactions.
Generally, my guidance there has been low to mid 7s. I would say low 7s. Gregg and I have been investing in this space for 20 years, and really, it's rare that we had been investing below 7, and it's becoming more and more common. So there is a lot of competitive pressures on that. It's hard for me to see a scenario where an entire quarter is sub 7, but I wouldn't put it out of the realm of possibility. Certainly, we're trying to get the best risk-adjusted returns. Fortunately, our cost of capital is supportive, and to make those accretive, even if we do dip down. Low 7s would still be the guidance.
Okay. Just quickly on the cost of capital side, do you guys think that you're getting closer to a potential investment-grade rating at some point, just given that you're growing pretty quickly?
Well, sure. I would remind you, we have investment-grade rating from Fitch. We certainly have maintained an investment-grade quality balance sheet since coming public. We hadn't really pursued a second investment-grade rating, really because we hadn't needed it to support our debt activity. I think that may be on the calendar here for 2021. Certainly something we're thinking about and looking at. I do think if we needed it, we could get it.
Okay. Thank you.
Thank you, Nate. Appreciate the questions.
Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your question.
Hey, good morning. Hope everyone's well.
We are.
The first question I was hoping you guys could talk about the two bankruptcies in the fourth quarter, Loves and Ruby Tuesday. Sounds like from your comments that you've made some real progress there, so maybe, can you share some color? Have you re-leased all of those former boxes? What do the recoveries look like, or what do you think they'll look like? Maybe also clarify what's embedded in your guidance for those resolution specs?
Yeah, I would start by saying the guidance has the resolution of those situations in our guidance. I would say the recoveries are not static and certainly complicated, particularly as you think about a Ruby Tuesday, where we've sold assets at material gains over the investments and repositioned assets and taken assets back vacant, to be repositioned. And the recovery is really just a face rate of rent. And really, you could release an asset to a local tenant that would trade at an eight cap or release an asset to Chick-fil-A on a ground lease that would trade at a four cap. The static recovery number is not something we're going to disclose on either of those investments. What I would say is, generally, we provide some very detailed numbers on our recoveries in our supplemental.
Generally in a 90% range, and certainly my expectation on both of those scenarios would be ultimately when everything shakes out, we would be relatively consistent with that.
Okay. Maybe differently, it sounds like you're further along with the Ruby than the Loves, and I'm just curious on the demand for the Loves Furniture boxes and what type of market is there, and maybe some color on what the rent levels broadly in the market are for that type of space.
Yeah. I would start and say that we only had four Loves of four of former Art Van sites. We don't have a broad sample set. Recoveries can be as low as $6 a square foot or as high as $18 a square foot, really depending on the specific sites. As we sit today, we have one remaining Loves Furniture, and we have worked to reposition two of them to another furniture operator. The third one we repositioned is not in the furniture use, but generally the recoveries and the assets are decent and fungible.
Appreciate that. One on the collection stats on page 15 and stuff. I was hoping you could shed some light on some of the figures and the drivers of sequential changes in January versus the fourth quarter. Collections overall, they were up to 97% in January versus 96% in the fourth quarter, but your cash collections were up from 91% last quarter to 95%, while the deferrals declined from 5% in 4Q to 2% in January. Can you talk a bit about some of those sequential changes? Maybe a bit of color on the leases you mentioned restructuring, and also what's left in that 2% deferral bucket, and when do you expect to convert that to cash rents?
That's a lot of questions there, Haendel.
Get our money.
I would say the biggest change in collections of cash rent was certainly the expirations of deferrals. As we said on the call, we had some new deferrals that crept in late in the fourth quarter. Generally when we approached the deferrals in the second quarter of last year, we really weren't looking out beyond the end of the year, really recognizing that the situation would change and be materially different. The biggest change in collection of cash rents, I would say, is just the expiration of deferrals. We also had a bunch of repositionings, assets that went offline and came back up online throughout the fourth into the first, which is going to contribute to that. Sitting here at 95% collections and 2% recognized deferrals, we really end up talking about the 3%, and a good chunk of that remains our five theaters leased to AMC.
They continue to struggle. That industry continues to struggle, and I'm sure you've gotten some much more insightful commentary on the movie industry from other net lease peers who have much larger exposures. That remains a good chunk of the 3% that we're not collecting.
If I could follow up on, you mentioned that there was some deferrals that crept in late in the quarter. I'm curious, it sounds like those might have been COVID restriction related, maybe some color on the tenant industry and what makes you think that that's money good deferrals. Thanks.
It was COVID related and the reinstitution of shutdowns. Largely, the sectors that remain challenged are the entertainment and fitness centers, as you would imagine. What gives me comfort in recognizing those deferrals is that those tenants have remained current, and those tenants remain creditworthy and are supported by good capital structures.
Okay. Appreciate the time .
Great. Thanks.
Our next question comes from the line of Katy McConnell with Citi. Please proceed with your question.
Great, thanks. Good morning. Can you maybe just touch on the timing of 4Q acquisitions and whether an acceleration of closings before year-end might be the reason for the lighter volume year to date?
Yeah. Listen, generally in this business, Katy, the acquisitions, for better or for worse, tend to be quarter-end loaded. This fourth quarter was no different. We fight like heck every quarter to front-end them, and for whatever reason, they tend to slip. That trend is particularly acute in the fourth quarter, where you have some more activity that's more tax-driven. That year-end crush tends to result in a January lull that we all in the industry fight. I would argue, sitting here at 50, I wouldn't say that that's a slow start to the year. We feel good about that. We feel good about our pipeline and are excited for a big March.
All right. Thanks. Can you provide some more background on what drove the tax adjustment burden to fall on you in the fourth quarter? Could that be a risk for any other bankruptcy tenants that you have exposure to?
Yeah. When we kick out a tenant and terminate a lease, we become liable for those taxes and paying those taxes to the extent that a bankrupt tenant isn't paying it. That's what happened. As a landlord and owning over 1,100 properties, we certainly bear the risk of taxes, and we pass those risks through to our tenants. To the extent that a tenant becomes un-creditworthy, we become liable. Now, oftentimes, we'll receive a bankruptcy claim that'll make us whole for those taxes, and it becomes more of a timing issue. That's certainly a risk for all net lease investing. In general, I think it was outsized in the fourth quarter and shouldn't be repeated in the first quarter here.
Okay, great. Thank you.
Thank you, Katy.
Our next question comes from the line of Sheila McGrath with Evercore. Please proceed with your question.
Yes, good morning. Pete, I was wondering, with the benefit of hindsight, if either tenants or Essential Properties as a landlord are requiring any new lease language surrounding a shutdown, like providing more clarity on what a short-term deferral might look like.
Sheila, that hasn't crept into our lease negotiations. Quite frankly, I wouldn't be surprised if tenants start looking to share that risk of state-mandated shutdowns. Currently, the tenants bear those risks and are required to pay rent regardless of mandated shutdowns, which is why we were forced to structure deferral agreements as opposed to tenants being able to say force majeure and not pay rents as a right. Ultimately, the leases are allocation of risks. That hasn't crept in, and quite frankly, given the nature of the pandemic, and hopefully it's a once-in-a-lifetime event for us, I don't expect it to be topical.
Okay, great. One last question. You did have more dispositions in the fourth quarter than typical. Just wondered what the drivers there are, and do you expect larger disposition volume in 2021 as you reduce casual dining and exposure to gyms?
No, I think those industries are right-sized where they are. We had one large tenant buyback that happened in the fourth quarter, and quite frankly, that tenant wasn't performing as we would have expected. We were happy to transact and move those assets back and be able to redeploy that capital into better-performing operators. I would say our historical average is a good guide on the dispositions, much like on the acquisition. It certainly heightened in the fourth quarter, but that $15 million-ish a quarter feels about right for 2021.
Okay. Thank you.
Thank you, Sheila.
Our next question comes from the line of Ki Bin Kim with Truist. Please proceed with your question.
Thanks. Good morning. There were a couple moving pieces to the revenue run rate this quarter, and you guys did a good job outlining some of them. Just given how some of these kind of troubled tenants have been released, like Town Sports or Ruby Tuesday or Loves Furniture, I'm just curious how much ABR is on the come and not in the fourth quarter run rate.
I don't know what you mean by on the come, Ki Bin, but Dan, why don't you tackle that?
Ki Bin, I think the main aspect would be Town Sports. The new Town Sports paid its rent in December. I think that's a big piece of it. You just have the non-accrual tenants that are paying us and paying us on a cash basis. As those folks potentially pay us more going throughout 2021, that's potential upside to the run rate as well.
Yeah, I would say certainly, the fourth quarter is certainly depressed from a run rate perspective.
Yeah.
We have good momentum in the first quarter, which is reflected in our guidance.
I guess one piece of that is the $1.5 million, right, of ABR and expenses that was a drag in the fourth quarter. That'll reverse. My question was, with some, like Town Sports, you have one month of rent. I'm not sure if there's other aspects to other tenants that you've only collected partial rent. Starting in the first quarter, is it $1.5+ million , what other dollars that should we be modeling going forward?
Well, part of it is the $1.5 million is a catch-up on and that is over several quarters, so not going to be one quarter shot for the one part of that's a straight line catch-up.
Okay. Got it. How much rent are you currently collecting from AMC, and if there's been any dialogue that you've had with your tenant?
Yeah. I'd stop short of disclosing exactly what we're collecting from AMC. You'll recall that we put them on a percentage rent deferral through the end of the year. That really was kind of dependent on the level of revenue they achieved at our sites. Certainly, we've been in active dialogue with them and as have all their landlords, and it remains a fluid situation.
Got it. Just last question from me. What kind of G&A run rate should we expect in 2021?
I think where we settled out in Q4, I think that was a pretty good run rate other than I think it's going to tick up a little bit, simply because one of the things from a compensation level in terms of incentives, just obviously this year being tougher than most. On some of the professional fees, we're hopeful that that's kind of a recurring better news. I think probably where we finished off. Let me just grab it real quick. I think probably if you look at just total G&A, forgetting cash G&A, unless that's kind of where you're going, I think total G&A, it'll probably tick up a little bit from that 24.4 that we had for the full year. Probably, a little bit more than that, call it $1 million.
Okay. Thank you.
Our next question comes from the line of Greg McGinniss with Scotiabank.
Hey, good morning, everyone. Pete, EPRT has had a fairly concentrated approach to target industries, in which you're looking for acquisitions. We noticed that you added other services to the industry exposure disclosure this quarter. Just curious what that category encompasses and whether or not you're starting to look into other industries for transactions.
Thanks, Greg. I would say, we've always had another services bucket. Generally, when an industry reaches a sufficient concentration to warrant being separated out, we will do that, much like we did with equipment rental and sales. The underpinnings to our investment thesis is owning service and experience-based real estate, coupled with granular fungible pieces of property, right? Which is manifest in our $2.1 million investment per asset. The services are pretty self-explanatory. We're certainly open to other industries to the extent that if they're service-based industries and they have real estate fundamentals that meet our fungibility and granularity criteria. We're open. We're constantly looking to expand our investment universe. That remains a challenge for the investment team here.
As we sit today, what sits in that 2.3% of other services I don't know that I know off the top of my head. Dan, what do we got? Dan's giving me a blank stare because he doesn't know either.
What was that?
Our 2.3% other services. What's in that bucket as we sit today?
It's mostly funeral homes.
Okay.
We have some other assets which maybe have We have one particular that has a small retail and a service component, and some of those are just not real easy to identify them into one of our existing buckets.
Great. Thanks, Gregg.
Okay. That's fair. Just another one. You've mentioned lowering exposure, some categories where you're not as bullish on future prospects. I'm just curious if there's any specific tenants right now in the portfolio that may be rent paying, but you have some near-term concerns. Kind of trying to get at whether or not that 97% rent recognition in January is a fair run rate until AMC is dealt with and maybe a little bit of some of the other, a minority of tenants, where you're also now recognizing rent.
Yeah. Listen, we have 237 tenants and certainly some of them are on our watch list, and we're working to right size those investments as you see in our disposition activity. Certainly, the 3% that's in the non-recognized, two-thirds of that is AMC and the other is a bunch of little guys that I would say is not terribly material. We're hopeful that 1% comes back online, but it's certainly not a driver of our story.
All right. Thanks for the time.
Thank you.
Our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.
Hi, good morning. I was wondering if you could just talk about on guidance, what additional credit events, if any, are assumed in the guidance range, whether that's bankruptcy impacts, debt levels, and how that compares to 2020 or 2019 actual results.
Sure. Welcome back, Caitlin, and thank you for re-initiating on us. Listen, this whole COVID pandemic, in our view, really accelerated the restructuring of weak tenants within the portfolio. I think the high level of restructurings we experienced in 2020, largely from our perspective, is in the rearview mirror. As we look out to 2021, we expect a much more normalized level of credit events. As we've disclosed in the past, a good proxy is roughly 50 basis points of ABR. We certainly bake in a generic credit loss assumption as well as specific situations that we know of. I think guidance incorporates all those scenarios.
Okay. Maybe similarly, in terms of increasing from the recognized rent levels, I think in the fourth quarter, it was about 94%. Does guidance assume an increase as the year goes on or not?
Yeah. We expect the deferrals to burn off. We expect guys who aren't paying to either start paying or we have the ability to kick them out and put people in who will pay. We make a very tenant-by-tenant, asset-by-asset assumption as we look at the portfolio, and we build up our guidance. I think we don't envision a scenario where we have assets that we're not collecting rent, that we don't collect rent in the future.
Okay. Maybe on the unit-level rent coverage, it looks like that was the same in 4Q 2020 and 4Q 2019 at 2.9x . The distribution of tenants has shifted to the amount with coverage above two times has declined and the portion with coverage under one times is up. I was wondering if you could just go through some of the details on how that distribution and pie chart that you show has shifted, but the overall remains unchanged.
I think certainly, my commentary on the call was we really have been steering people away from that disclosure as we didn't feel it was particularly relevant given the nature of the pandemic and the fact that the majority of our tenants were offline for an entire quarter and partially online for the balance of the year. That's one of the reasons why we've transitioned to provide monthly collections data is because that is much more real-time and indicative of the risk in the portfolio. I don't spend a lot of time looking at that distribution just because it doesn't take into account the pandemic, nor does it take into account the deferrals that were granted. Generally, we expect that number to be pretty noisy kind of through the second quarter until we start getting the full effects of this pandemic behind our tenants.
Okay, got it. I think you maybe kind of answered it, would you say that it's fair to think that those that have shifted in there, that that's a temporary shift, and that over the kind of medium to longer term, you would expect those metrics to look more similar to pre-pandemic?
Yes, certainly.
Okay, great. Thank you.
I would say, if we were to go through the exercise of affecting all of those sites for the deferrals that were granted, I would imagine it looks pretty similar to pre-pandemic levels, if not better.
Okay. Thank you.
We done, operator? We got any more questions, guys? Where'd the operator go? Operator, are you there?
Ladies and gentlemen, I apologize for the delay. We're going to go ahead and resume our conference. Our next question is going to come from the line of Sam Cho with Credit Suisse. Please proceed with your question.
That was quite a long delay. Thank you for taking my questions. I think most of them have been answered. I'm seeing that Mavis Discount Tire entered your top 10 tenants. Am I correct to assume that this was an example of you guys expanding on a pre-existing relationship?
Yeah. Sam, we apologize for the gap there. We lost our operator somehow. We're happy to plow through the rest of your questions here. Yeah, we did some investments with them earlier in the year, and we're able to do some add-on investments with them. They're a great tenant, a great company. We have really good sites in the Northeast that we were happy to add to our portfolio.
Got it. I think in your prepared remarks, you said that most of the growth, around 80%-90%, has been pre-existing relationships. Could building on pre-existing relationships increase top 10 tenant exposure? Given that growth will be throughout your entire portfolio, that should be relatively slightish?
Yeah. We have relationships with the vast majority of our tenants, and we look to continue to grow with them. When tenants start populating our top 10, we kind of get capacitized with our exposures and kind of stop investing at some point. Certainly, managing our top 10 concentration, managing our individual concentrations are important portfolio construction considerations that we weigh. I would expect the vast majority of our investments to be outside of our top 10.
Got it. One more from me. Your strategy of reducing exposure to the more challenged segments makes sense, obviously. I'm seeing that you guys added some health and fitness assets during the quarter. What did you like about those assets? Because I think you mentioned that you still consider cash flow in health and fitness core operations.
Yeah. I would think what you're seeing in adding that was the re-tenanting and repositioning of our Town Sports that was in bankruptcy in the third quarter and emerged during the fourth and started paying rent during the fourth. We like gyms that are well-positioned from a membership perspective and a revenue perspective and a competition perspective. They have high coverage. They are newer facilities that are well-positioned against older facilities within those local markets and have a rent basis that gives us comfort that if it doesn't work out as a gym, we'd be able to put another user in there at a similar rent level. We're open to investing in gyms, and we continue to evaluate opportunities in the health and fitness space. I think it's not going to be a material part of our investments, but certainly, we'll continue to look there.
Got it. Thank you. Hopefully the operator is still on.
Yeah, of course.
Yeah.
Of course.
Thank you, everyone. We'll move on to our next question, which is coming from the line of RJ Milligan with Raymond James. You may proceed with your questions.
Hey, good morning, guys. Most of my questions have been asked and answered. I'm just curious, with the recent spike in the 10-year, has that had any impact on your business? At what point or what level does the 10-year need to get to before it does start to have an impact on your business?
Certainly, I would say the recent spike has not had any material impact on our business. We're making 15- to 20-year investments at spreads to our cost of capital that is historically wide and really hasn't crept in. Certainly, you overlay that with a 60- to 90-day transaction cycle, a 30-day movement isn't going to really impact those transactions. We think a move in the rate would ultimately help us as it would disadvantage more leverage-dependent private buyers, and also make alternative capital sources for our tenants more expensive. I would stop short of saying what that move would have to be. I certainly think as you think about the forward yield curve, that level of dramatic move isn't what the market's anticipating.
Okay. That's helpful. Just in terms of typically going after non-rated or below investment-grade tenants as we've moved through the pandemic, any change in thoughts? Given the performance of those assets in your portfolio, does that make that strategy more attractive, less attractive? Any interest in increasing investment-grade exposure or perhaps going even further down the credit curve in terms of new investments?
Yeah. Listen, I think our middle market strategy is really governed by our desire to be a sale leaseback provider of choice to our tenants. Because in the context of the sale leaseback, we're competing on the quality of our execution and the reliability of us as a counterparty, and we're able to structure long-term investments on our lease form with our terms. Sitting here in January with 97% money good rent, and comparing that to my investment-grade peers, we feel pretty good about the quality of the portfolio that we've assembled and the nature of our tenancy. Particularly when you couple that with the fact that this portfolio's been roughly constructed at a 7.5 cash cap rate with almost 100 basis points pick up to GAAP cap rate.
As I said in the prepared remarks, we think we're getting some of the best risk-adjusted returns in the net lease space. I think if anything, we feel our investment thesis has been validated through this pandemic, and we'll continue to be disciplined and invest in relationships and sale leasebacks with people that we know and trust and assets that have good marketability.
Okay. My final question is: As you're thinking about new sale leasebacks and structuring those leases, any changes or contemplated changes in the shape or form of the escalators going forward?
Listen, I would say the lease escalations are always a intensely negotiated provision with the counterparties wanting to pay as little as possible and us wanting to get as high as possible. The market range tends to be flat to 2%. On occasion, you'll see higher than 2%. I would say you see flat with investment-grade tenants. On average, we were 1.4% in the quarter. Historically, we've been closer to 1.6%, 1.7%, and that's really just illustrative of the sample of deals we did, not a change in the market. That negotiation remains dynamic, and we'll continue to push to get as good as escalations we can. Tenants will continue to try to lower their cost of funds as much as they can.
I would say, we like being kind of below 2%, because when you have higher escalations, you have a scenario where instead of seasoning favorably, your rents may be growing faster than the tenant's profitability. As you get further from your underwriting, it's better for the tenant to grow faster than your rent so your rents get better coverage and more stable.
Thanks very much.
You got it. Thank you.
Thank you. Our next question is coming from the line of John Massocca with Ladenburg Thalmann. Please proceed with your question.
Morning.
Morning, John.
Most of my questions have also been answered. Just a quick one. You mentioned cap rate compression that you were seeing out in the marketplace today. I guess as you think about middle market, non-investment grade tenants, what are some of the alternative financing sources out there that have been driving some of this cap rate compression? Is it competing REITs? Is there more access to bank capital now than there was? Maybe even prior to the pandemic? Just what are the factors there? I think one of the benefits of kind of middle market net lease is supposed to be kind of the stickiness of those cap rates.
Yeah. Listen, I would argue that stickiness certainly remains, over the past year, we've really transacted in a 20-basis-point window despite all the noise and the volatile movements in interest rates. John, I don't think that stickiness is gone. Most of the competition is coming from other net lease capital investors, whether it's public REITs who are dipping down into the middle markets to fill their investment appetites, or private guys who've discovered the technology of the ABS financing and are now able to compete on a levered basis with a more aggressive cost to capital. I would certainly say bank financing is no more easy to get today than it was six, eight, nine, 12 months ago.
I guess as someone who's really utilized the ABS in the past, how sustainable do you think some of that private market, high leverage, ABS-backed investment in the space is? Is this kind of a passing phase, you think, in your opinion, or could that be a real kind of cap rate compressor, if you will, going forward?
Listen, that's a very efficient market. It's a very efficient way to access debt capital. It's been around for a long time. Gregg, on the call here, did one of the first ABS bonds a long time ago. I think its use is more prevalent today, and I would anticipate it being here as a competitive factor going forward.
Okay. That's it for me. Thank you all very much.
Thank you.
Thank you.
Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question at this time, please press star one on your telephone keypad. Please hold while we poll for questions. Well, I'm not seeing any additional questions coming in at this time, so I'd like to pass the floor back over to management for any additional closing comments.
Great. Thank you, operator. Again, we apologize for the dropped host and leaving you guys waiting for a bit there. Thanks for your time today. Clearly we're excited about the fourth quarter, but more importantly, we're excited about 2021, where the portfolio has come, and our ability to continue to invest and grow. We look forward to meeting with a lot of you investors at the Citigroup conference upcoming, and stay well, and thank you. Thanks again. Bye now.
Ladies and gentlemen, we thank you for your participation on today's conference. You may disconnect your lines at this time.