Ladies and gentlemen, hello, and thank you all for joining this Essential Properties Realty Trust fourth quarter 2019 earnings call. All lines are in a listen-only mode, but instructions on how to ask a question will be shared after today's presentation. To get us started with opening remarks and introductions, I am pleased to yield the floor to Senior Vice President of Capital Markets, Mr. Dan Donlan. Welcome, Dan.
Thank you, operator. Good morning, everyone. We appreciate you joining us today for Essential Properties' fourth quarter 2019 conference call. Here with me today to discuss our fourth quarter results are Peter Mavoides, our President and CEO, Gregg Seibert, our COO, and Hillary Hai, our CFO. During this call, we'll 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. 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 filing with the SEC and today's earnings release.
Before I turn the call over to Pete, we'd like to apologize to investors and analysts inconvenienced by the rescheduling of our earnings date and conference call. Unfortunately, with 2019 being our first year as a large accelerated filer, the process of getting through SOX compliance and completing our audit required additional time relative to our initial expectations. With that, Pete Mavoides, please go ahead.
Thank you to everyone who's joined us today for your interest in Essential Properties. We are very pleased to report another strong quarter of results. Consistent with past quarters, the fourth quarter saw solid portfolio performance with same-store rent growth of 1.7% and no vacancy. Investment activity during the quarter was robust, with $205 million invested into 94 properties in 41 separate transactions at a 7.3 cash cap rate. We also had an active quarter on the capital markets front. We closed a $430 million unsecured seven-year term loan, which has a $70 million accordion feature. We also raised $103 million of gross equity proceeds via our at-the-market program. The end result is that we are reporting fourth quarter adjusted funds from operations per share of $0.30, representing an 11% year-over-year growth rate.
Looking back at the year, we experienced a transformative improvement in our cost of capital, which allowed us to take a more aggressive stance in regards to our investment activity and balance sheet. We invested $687 million into 375 properties in 136 separate transactions at a 7.4 initial cap rate. We raised $424 million of gross equity to maintain a well-capitalized balance sheet and raised $630 million of senior unsecured term loan debt to further unencumber our asset base, extend out our maturity schedule, and lower our weighted average interest rate. In addition, we sold $519 million of secondary shares from our founding capital partner, which allowed us to increase our free flow and daily trading volume while further broadening our investor base. Lastly, we increased our quarterly dividend by 9.5% during the year while maintaining a conservative payout ratio in the 70% range.
We are proud of these accomplishments. I would like to thank all of our employees, shareholders, and other stakeholders for their support in closing out a very successful 2019. Turning back to the fourth quarter and starting with our investment activity. We invested $205 million at a weighted average initial cap rate of 7.3%. Approximately 81% of our fourth quarter investments were directly originated sale-leasebacks or some mortgage loans subject to sale-leaseback transactions. 41% contained master lease provisions. 99% are required to provide us with corporate and unit-level financial reporting on a regular basis. On the disposition front, in an effort to proactively mitigate risks and exposures, we sold eight properties in the quarter at a 6.9% cash cap rate, which generated $15.2 million in net proceeds.
Looking at the year-end portfolio, we had investments in 1,000 properties that were 100% leased to 205 tenants operating in 16 different industries. Our weighted average lease term stood at a sector-leading 14.6 years, and just 2.7% of our annualized base rent is expiring prior to 2024. Our same-store portfolio, which represented 62% of our ABR at quarter end, experienced cash rent growth of 1.7%. As we have mentioned in the past, when coupling our contractual rent growth with lease rollovers and potential credit loss, we expect same-store cash rents to approximate 1.5% per annum over time. We are pleased to have exceeded this threshold every quarter since coming public, which we believe is a testament to our well-diversified, newly underwritten portfolio.
From a tenant health perspective, our portfolio has a weighted average rent coverage ratio of 2.9x , with 72.6% of our ABR having rent coverage ratio of 2x or better. Looking out over the next 10 years, less than 1.5% of the leases that expire have unit-level rent coverage below 1.5x , which we believe indicates a high likelihood of lease renewal at expiration. Additionally, only 1% of our tenants have both an implied credit rating lower than single B per Moody's RiskCalc and unit-level coverage below 1.5x , which represents a very manageable number of tenants and properties with elevated risk characteristics. With that in mind, a key element of our investment strategy is to take calculated tenant risk to achieve what we believe are superior risk-adjusted returns.
We seek to mitigate these risks through our structuring process, which focuses on direct sale-leasebacks on our lease form with master lease provisions and contractual tenant reporting requirements. We further reduce risk by owning granular and fungible real estate properties that are highly liquid in the sales market and readily fungible from a leasing perspective. We believe we are well compensated for these risks. Namely, we have invested at a 7.6 weighted average cash cap rate since inception. The collateral benefits of our attractive initial yields are a lower basis in our real estate, and the ability to execute de-risking sales of individual properties at cap rates that are nearly 100 basis points lower than our initial investment.
This runs contrary to paying significantly lower cap rates for properties leased to investment-grade tenants, which often results in an inflated basis, inferior lease structures, and limited unit-level visibility, thereby providing little margin for error in our view. With all that said, subsequent to year-end, Art Van Furniture, our third-largest tenant at 2.5% of ABR, publicly commented that they are actively exploring a variety of options with creditors, investors, and landlords to ensure the company's future. We have remained in constant dialogue with Art Van and their advisors, but it is still too early for us to opine on the eventual outcome. As a reminder, we own four properties leased to Art Van, representing roughly 241,000 sq ft. We acquired our Art Van exposure in a five-unit sale-leaseback transaction in March of 2017.
After selling one property in the second quarter of 2019, our yield on cost is 7.9%. Per our disclosure, Art Van is currently paying approximately $16 per sq ft in rent at our properties, and the range of potential outcomes can be readily calculated when looking at market rent comparable. Keeping that in mind, we are managing an increasingly diverse and granular portfolio of net lease properties. No tenant represents more than 3.4% of ABR, and our average ABR per property is approximately $152,000, which is among the lowest in the net lease sector. As such, our portfolio is built to withstand the impact of episodic tenant issues like Art Van, and we are reiterating our 2020 AFFO per share guidance of $1.27- $1.30.
As we look out to the balance of the year, we remain focused on growing our portfolio through the origination of sale-leaseback transactions with middle-market tenants in our targeted industries. We anticipate our level of investment activity to be consistent with our historical averages with cap rates in a low to mid 7% range. With that, I'd like to turn the call over to Hillary Hai, our CFO, who will take you through the financials for the fourth quarter. Hillary?
Thank you, Pete, and good morning, everyone. Starting with the balance sheet, we ended the quarter with $2.1 billion of total undepreciated assets and $735 million of total debt. We have no significant debt maturities before 2024, and our net debt to annualized adjusted EBITDARE was 5x at quarter end. However, when adjusting for the impact of our January follow-on offering, which raised $192 million in net proceeds, our pro forma quarter and net debt to annualized adjusted EBITDARE was 3.6x . This gives us ample capacity to continue to execute on our external growth strategy while managing within our targeted leverage range. Moving on to our capital markets activities.
During the quarter, we utilized our ATM to sell over 4 million shares of common stock at an average price of $25.23, raising gross proceeds of over $103 million. On the debt front, we drew down $250 million on our $430 million seven-year unsecured term loans facility, which has an additional $180 million of available borrowing capacity and a $70 million accordion feature. Turning to the income statement. Our fourth quarter NAREIT-defined funds from operations or FFO was $25.3 million or $0.31 per diluted share. Core funds from operations or core FFO was $26.2 million or $0.32 per diluted share, and adjusted funds from operations or AFFO was $24.4 million or $0.30 per diluted share.
Of note in the quarter, we wrote off $887,000 of deferred financing costs, which resulted from the voluntary prepayment of $70.4 million of Series 2016-1 secured ABS notes. Turning to the expense front. Our G&A as a percentage of total revenues was 13.5%, which was on par with our trailing four-quarter average. Going forward, we continue to expect our G&A to grow on an absolute basis, to decline as a percentage of total revenues. As Pete mentioned, we are reiterating our 2020 AFFO per share guidance range of $1.27-$1.30, which at the midpoint implies approximately 13% growth year over year. As we have stated in the past, our historical investment activity, which we provide on a trailing eight-quarter basis, and our quarterly supplemental is a good gauge for our future investment potential.
With that, I'll turn the call over to Chief Operating Officer, Gregg Seibert.
Thanks, Hillary. During the quarter, we invested $205 million into 41 transactions in 94 properties at a weighted average cash cap rate of 7.3%. These investments were made within nine of our 16 targeted industries, with the car wash, medical, dental, and quick-service restaurant industries representing over 70% of our investment activity in the quarter. The average lease term of these properties was 16.3 years. The weighted average rent escalation was 1.3%. The weighted average unit level coverage was 3.1x . Our average investment per property was $2 million. Consistent with our investment strategy, approximately 81% of our fourth quarter investments were originated through direct sale-leasebacks and mortgage loans subject to a sale-leaseback transaction, which are subject to our lease form with ongoing financial reporting requirements. In addition, 78% of our fourth quarter investment activity was relationship based.
From an industry perspective, QSRs remained our largest industry at 14.2% of annualized base rent, followed by car washes at 12.5%, early childhood education and C stores at roughly 11% each, and medical/dental at 10.6%. Conversely, our home furnishings concentration is now just 3.5% of ABR, which is down 70 basis points quarter-over-quarter and down 260 basis points year-over-year. We expect this trend to persist as we see better risk-adjusted returns in other industries. From a tenant concentration perspective, no tenant represented more than 3.4% of our ABR at quarter end. Our top 10 tenants represented 23.4% of our ABR, which was down 210 basis points quarter-over-quarter. We expect our top 10 concentration to decline further in the coming quarters as we continue to grow our concentrations with existing tenants outside of our top 10.
Looking at the portfolio more broadly, approximately 94.4% of our ABR is derived from tenants that operate service-oriented and experience-based businesses, which is a 680 basis points increase since our IPO. We believe tenants in these industries, and more importantly, real estate occupied by these tenants, are more recession resistant and better insulated from e-commerce pressures. Moving on to asset management, our portfolio remains healthy with a weighted average rent coverage of 2.9x and 72.6% of our ABR having a rent coverage ratio of 2x or better. In addition, with 98% of our tenants required to report unit level financials to us, we have near real time transparency into the health of our tenancy, which is an important component to managing risk in our portfolio. In terms of dispositions this quarter, we sold eight properties from five different industries for $15.2 million net of transaction cost.
Despite having 1.7 unit level coverage, we achieved a 6.9% weighted average cash cap rate on the seven leased properties that we sold, which equated to an 8.5% realized gain versus our allocated purchase price. With that, I will turn it back to Pete for his concluding remarks.
Thanks, Gregg. Our portfolio remains in excellent shape today with healthy coverages coupled with strong transparency, high property level liquidity, and de minimis near term lease expirations. Our pipeline is healthy with over $90 million of closed investments through February. With our January equity offering, our balance sheet is extremely well-positioned to fund our growth objectives as we look forward to continuing to execute our business plan. Again, I would like to apologize for any inconveniences caused by our earnings call being unexpectedly pushed back. We look forward to meeting with many of you in the next several days at the Citigroup REIT conference. With that, operator, please open the call for questions.
Pete, thank you. Thank you to each of our presenters for your remarks today. To our audience joining today over the phones, if you would like to ask a question at this time, simply press star and one on your telephone keypad. Pressing star and one will place your line into a queue. A friendly reminder that if you are joining us today on a speakerphone, please return to your handset prior to pressing star and one to be sure that your signal does reach our equipment. Once again, ladies and gentlemen, that is star and one if you would like to ask a question. We'll hear first from the line of Greg McGinniss at Scotiabank. Please go ahead. Your line is open.
Hey, good morning, everyone.
Hey, Greg.
Actually, let's start with Pete. We appreciate the update on Art Van. I was just hoping you could clarify what the impact from that tenant is that's embedded in guidance?
Listen, we have a range of guidance, and we have a range of scenarios around the Art Van resolution in guidance. Regardless of those scenarios, the guidance holds. It's really too early to speculate on specific impacts, but our guidance holds independent of the resolution of Art Van.
Okay. At the very least, we can assume that there is some impact at least embedded into that lower end of guidance.
Sure. Yeah.
Okay. Greg, in Q4, there was a few shifts in top tenant lists. We had Town Sports rejoin, R-Store and Ladybird Academy falling off. Could you just give us some details as to what drove those changes?
Yes. We had one property for the Ladybird transaction, which was kind of a temporary loan that they paid off. We did a portfolio, and there was one short-term property they intended to exit from, and they executed on that, so they just dipped down slightly.
R-Store was acquired by GPM during the quarter.
Right. Okay. Thank you.
Next, we'll take a question from the line of Ki Bin Kim at SunTrust. Please go ahead. Your line is open as well.
Thanks. I know you guys addressed this in the morning comments about the changing of the date and the earnings release. I just want to make sure that kind of all the details are out there. Was there anything that came out from the delayed earnings release and the 10-K?
No. We filed a clean 10-K this morning, and it was purely just getting through that process as a first-year SOX compliance.
Okay. Obviously, I don't want you to negotiate against yourself on a conference call, but what do you think are some of the likely scenarios to come out of Art Van ?
Yeah. Listen, I'm purely addressing hypothetical scenarios here, but it could be a liquidation. It could be someone buying a portion of that company and assuming our lease with the lease amendment. It could be a Chapter 11 restructuring. It's really all three of those scenarios are currently in play as we continue to have dialogue with that company.
Could you talk about the real estate quality for the couple boxes that you have?
Yeah. We own four furniture stores in Michigan. They're Art Van Furniture stores, and we have a couple very good ones and a couple of average ones. They're all subject to a master lease. As I said in the prepared remarks, 214,000 sq ft with about $16 a square foot in rent.
If I could squeeze a last question in here. I guess more importantly, though, is there any lessons learned from the Art Van scenario?
Every time you go through one of these, you learn some lessons, I think. We saw the declining performance in Art Van coming. We tried to sell the properties. They had been listed for a long period of time. One of the key lessons, and we often talk about our granularity and our liquidity, and given the size of these assets, they were a little less liquid than our average asset. That's a lesson we continue to reinforce in our investment process.
Okay. Thank you.
You got it, Ki Bin. Thanks.
Our next question will come from Douglas Harter at Credit Suisse.
Hi, this is actually Sam Cho on for Douglas today. I'm seeing that the experience sector kind of consists of 14% of your portfolio, and I'm just kind of thinking through more of the macro picture. If there is some sort of impact with the pandemic, I'm just curious as to how you guys see the tenant credit trending, if you have any commentary on that?
Yeah, I would say, clearly, if you think about our entertainment sector comprising bowling alleys and movie theaters and places where people congregate. If the pandemic spreads and people elect not to use those facilities, it's going to impact the profitability of our tenants. The magnitude of that really depends upon the depth and the breadth of that change in customer behavior. We believe it'll be temporary, certainly as a landlord with healthy coverage and master leases and healthy tenants, we would expect our tenants to be able to kind of withstand that temporary dislocation. It's certainly something we're going to watch very closely in the coming quarters as we get unit-level profit and loss statements that come in and monitor our tenant health, which is an important part of our credit discipline.
Now, do you have the average tenant credit for these sectors versus other segments in your portfolio?
We do. That's not something we necessarily disclose. I would say that generically, the coverage and the credit profile of our entertainment tenants is very similar to our overall portfolio.
Okay. That's helpful. Thank you.
Thank you. Sam Cho. Excuse me. Our next question will come from Nate Crossett at Berenberg.
Hey, good morning, guys. Appreciate the call on Art Van. Are there any other tenants on the watch list that we should be aware of?
No, nothing material. Clearly, American Blue Ribbon has been a name that people have been talking about. We have a a bout seven properties with them, but we don't expect to experience any kind of rent loss through that process. Overall, the portfolio's in great health, really attributed to being recently underwritten with fresh diligence, and we feel good about where we're sitting.
Okay. What about just home furnishing in general? I know this is kind of an Art Van-specific issue, but it looks like there's maybe three other locations, not Art Van's, that you have that are home furnishings. Maybe what are those, and how do you feel about them?
Yeah. Listen, I think our home furnishing exposure has been coming down quarter-over-quarter really since 2017, as we haven't been investing in that sector. We don't love the sector and really think there's a surplus of big-box retail spaces in our country that provides competition for our real estate. We have very modest furnishing exposure, and modest and decreasing. Clearly, the three sites we have, we're comfortable with. Some good sites, and one's in Dallas, Plano Metro, which is a real strong sub-market. Another's in Fort Worth, which we feel real good about. The third one is more of an upscale site outside of Kansas City. The exposure we have, we feel good about. It's very modest, but overall, it's an industry that we have not been adding to.
Okay, thanks.
Our next question will come from the line of Brian Hawthorne at RBC Capital Markets.
Hi. Your exposure to tenants with credit ratings of CCC+ and B increased this quarter. What drove that change?
That was largely driven by Art Van and their year-end financials coming in weaker and getting a credit downgrade per the model.
That's it?
There's about another 100 basis points in there, and they're all just kind of small operators.
Okay. Can you provide an update on the performance of the Perkins assets you have?
We really just kind of restructured that in the fourth quarter, and I haven't really got through their year-end numbers yet. We would imagine the sales at the sites we had were stable going into the restructuring, and one of the reasons why our lease was extended and affirmed, and I wouldn't anticipate any issues there. A recapitalized tenant with a firmed lease is not something that gives us a lot of concern, but certainly something we're watching.
Okay. Thank you for taking my questions.
You got it, Brian. Thank you.
Once again, to our audience, if you'd like to ask a question today or need clarification on anything covered in the update, simply press star and one on your telephone keypad. Next, we'll hear from the line of John Massocca at Ladenburg Thalmann. Go ahead, your line is open.
Good morning.
Good morning, John.
What types of car washes were in the acquisition activity in 4Q, just because the two tenants you have in the top 10 didn't seem to increase at all?
Gregg, why don't you give some color there for him?
Sure. We're adding on the car wash side. We have a lot of regional operators that perhaps have the dominant market share in their market in a lot of parts of the country. We have a few groups in that kind of 10-35-store, dominant local player kind of operator that we've been able to do a lot of direct sale-leasebacks with. That's kind of the profile.
Yeah. Just to add some color, John. You look at these big national guys when they get to a couple of 100 units, so they get pretty efficient in the sale-leaseback market and start charging cap rates in the low sixes. We prefer to go with the regional kind of 10-5 0 unit guy, and get that extra 100 basis points and just add a little more value there. That's kind of part of our investment methodology.
[audio distortion] The total exposure.
Say again? You broke up on us.
Oh, sorry. Just broadly speaking, how kind of big are these operators in terms of the total number of units they're operating?
As Gregg said, it could be a 10-5 0 unit operator.
Okay. [audio distortion] Sorry, I have a little trouble with the headset. Sorry, guys, I'm having a little trouble with my headset. Can you hear me?
Yes, we can.
Okay. Last question. Does the current macro backdrop and the volatility in the capital markets change how you guys view leverage and maybe the pace of capital deployment?
Sure. Listen, we see what's going on with the pro forma year-end leverage, sub-four. We feel pretty comfortable. As we deploy this capital and we look out and we continue to invest, we'll certainly be cognizant of the volatility and our own individual cost of capital. Certainly, we feel like our balance sheet's positioned to weather a storm, and we just need to be cognizant about how long that storm may last.
Okay. That's it for me. Thank you guys very much.
Thanks, John.
Once more, ladies and gentlemen, that is star and one if you'd like to ask a question. We'll take a follow-up from Ki Bin Kim at SunTrust.
Thanks. Excluding this past week, you guys were trading at a pretty healthy valuation level, at one point, sub 5% implied cap rate. Obviously, that gives you the ability to raise some efficient debt and equity. It also gives you a little more leeway in terms of maybe not having to buy a mid-seven cap rate. Maybe it gives you the ability to increase the quality of acquisitions. Has that translated at all into the type of assets you're targeting for investments?
Yeah. Listen, we buy what we believe to be the best risk-adjusted assets that we can source through our relationships and sale-leaseback transactions and get the most attractive cap rates. We reject the notion that investment quality is solely equated to cap rates. Clearly, our cap rates have come down. A year ago, we were transacting in the mid to high 6%, excuse me, mid to high 7%, and now we're transacting in the low to mid 7%. Our investment discipline and the way we view risk is really an output of our collective 50 years of investing in this space, not the output of our cost of capital. What we buy is really the best stuff we can find at the most attractive yields.
Okay. A question for Gregg. I know it's early, but is there any discernible trends you're seeing from the investment landscape for assets that are up for sale, maybe in particular that relates to experiential or restaurants? Any kind of hesitancy or change in cap rates at all?
Not yet. We have, as you probably know, a number of assets on the market. We have buyers under some purchase contracts to purchase those. We haven't seen anyone fall out or try to re-trade because of what's going on in the stock market.
Okay. Thank you.
At this time, we have no further signals from our listening audience. I'll turn it back to our leadership team for any additional or closing remarks.
Great. Thanks, Jim. Thank you all for participating today. Thank you for the questions. Again, we apologize for any inconvenience, and we look forward to talking to you all in the future. Thanks again. Bye now.
Ladies and gentlemen, this does conclude today's update, and we do thank you all for joining.