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Essential Properties Realty Trust Inc
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Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions]. This conference is being recorded, and a replay of the call will be available 2 hours after the completion of the call for the next 2 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, Dan. You may go ahead.
Thank you, operator, and good morning, everyone. We appreciate you joining us today for Essential Properties' Fourth Quarter 2021 Conference Call. Here with me today to discuss our operating 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 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, please go ahead.
Thank you, Dan. And thank you to everyone who is joining us today for your interest in Essential Properties. We closed out 2021 on a strong note with $322 million of investments in the fourth quarter and $974 million invested for the full year, both records for Essential Properties. Our positive momentum has continued into the new year with over $136 million of investments closed year-to-date, which, coupled with our strong fourth quarter finish, has led us to increase our 2022 AFFO per share guidance to a range of $1.47 to $1.51. Using the midpoint and excluding onetime fees and COVID-related adjustments, this translates to a projected year-over-year earnings growth of 14% in 2022, which follows a 16% year-over-year growth in 2021 using the same methodology. As discussed last quarter, while we continue to expect our investment trajectory to moderate in 2022, which our guidance remains predicated on, our current pipeline is robust due to the strengthening of our relationships, the vast and diverse nature of the marketplace for the properties leased to unrated and middle market tenants and the continued desire of our operators to expand their footprint amidst a strong economic backdrop. With that in mind, our differentiated focus on capital deployment strategies has insulated us from the increased competition, which is evidenced by our initial cash yields averaging 7.1% in 2020 and 7% in 2021. Looking at the quarter in more detail. Our $322 million of investments had a weighted average cash yield of 6.9%, weighted average lease term of 16.3 years and weighted average annual rent bumps of 1.6%. More importantly though, 89% of these investments were derived from prior relationships and 96% were direct sale-leasebacks on our lease form. Turning to the portfolio. We ended the quarter with investments in 1,451 properties leased to 311 tenants operating in 16 distinct industries. Our weighted average lease term stood at 14 years with just 5.4% of ABR expiring through 2026. Our weighted average unit level coverage was 3.7x, which improved versus last quarter's coverage of 3.5x. While our traditional credit statistics, which focus on implied credit ratings and unit-level coverage, experienced solid sequential improvement this quarter, these statistics remain negatively skewed for industries like theaters and early childhood education, which faced state level shutdown and capacity restrictions well into spring of 2021 in certain areas of the country. Given that most of our tenants report trailing 12 months financials to us with a 1 quarter lag, we do not expect these statistics to return to pre-COVID levels for another couple of quarters. Looking out to the balance of the year, we continue to believe our strong AFFO growth potential, combined with our well-covered dividend yield and our commitment to prudently managing our balance sheet and portfolio risks, offer investors a compelling total return opportunity. With that, I'd like to turn the call over to Gregg Seibert, our COO, who will take you through the portfolio and investment activity in greater detail. Gregg?
Thanks, Pete. As Pete indicated, during the fourth quarter, we invested $322 million through 55 separate transactions at a weighted average cash yield of 6.9%. These investments were made in 12 different industries with 70% of our activity coming from grocery, auto service, equipment rental and sales, early childhood education and casual dining. The weighted average lease term of our investments this quarter was 16.3 years. The weighted average annual rent escalation was 1.6%. The weighted average unit level coverage was 3.0x, and the average unit investment per property was $3 million. Consistent with our investment strategy, 96% of our quarterly investments were originated through direct sale leasebacks, which are subject to our lease form with ongoing financial reporting requirements and 59% contained master lease provisions. With that in mind, we continue to believe that our ability to process and close numerous small-sized sale-leasebacks of granular properties with existing relationships is a strong competitive advantage that produces attractive risk-adjusted returns each quarter. From an industry perspective, early childhood education remains our largest industry at 14.6% of ABR, closely followed by quick-service restaurants at 12.4%, medical dental at 11.9% and car washes at 11%. We continue to view these 4 business segments as Tier 1 industries for Essential Properties, and therefore, they are likely to remain our highest concentration industries for the foreseeable future. Of note, we continue to selectively invest in proven operators of profitable locations in both the entertainment and casual dining industries, which expect to generate higher revenues and profits this year as the economy fully reopens this spring. From a tenant concentration perspective, no tenant represented more than 3.3% of our ABR at quarter end, and our top 10 accounts for just 19.7% of ABR. As noted in the past, tenant diversity is an important risk mitigation tool and differentiator for Essential Properties. By focusing on large unrated credits and middle market businesses, we invest in a significantly greater opportunity set and strategies concentrated on publicly traded companies and investment-grade rated credits. In addition, this enables us to procure a more attractive basis in the real estate we acquire at rents that are closer to market. In terms of dispositions, we sold 2 properties this quarter for $4 million in net proceeds. When excluding transaction costs and properties sold subject to tenant buyback options, we achieved a 6% weighted average cash yield on those dispositions. As we mentioned in the past, owning liquid properties is an important aspect of our investment discipline as it allows us to proactively manage industry, tenants and unit-level risk within the portfolio. With that, I'd like to turn the call over to Mark Patten, our CFO, who will take you through the financials and balance sheet.
Thanks, Greg, and good morning, everyone. As Pete noted, the fourth quarter was a record quarter for us, which closed out a record year. Net income was $30 million in the quarter and just over $96 million for the full year. Our nominal FFO totaled $48 million for the quarter or $0.39 per fully diluted share and $162 million for the full year or $1.38 per fully diluted share. That's an increase of 56% and 28%, respectively. Our nominal AFFO totaled $45 million for the quarter. That's up $17 million over 2020, which on a fully diluted per share basis was $0.37, an increase of 37% versus Q4 2020. Our nominal AFFO totaled $158 million for the full year, up $51 million over 2020, which on a fully diluted per share basis was $1.34. That's an increase of 21% versus 2020. Some of the notable elements of our reported operating results for the fourth quarter of 2021 and the full year include the following: Other revenue for the fourth quarter included approximately $1 million of prepayment fees we were paid in connection with the early payoff of approximately $92 million of principal in our loan portfolio. You should not expect this revenue to be a recurring item. We did exclude this fee income from our calculation of annualized adjusted EBITDAre, which is presented in our supplemental disclosure. Our property operating expenses in the fourth quarter totaled $1.82 million, our highest quarter this year. This was largely due to increased reimbursable expenses. Our operating expense net of reimbursable expenses, was approximately $800,000 for the quarter, the lowest it's been all year. The majority of the change in our total G&A in Q4 2021 versus Q4 2020 was due to a reversal of our bonus accrual in Q4 2020, which was reflective of the challenging year that was 2020 in contrast with our record year in 2021. For the full year, we were basically flat year-over-year on total G&A, but notably, while noncash stock compensation was up, we generated significant efficiencies in some of our third-party service relationships. Most importantly, our G&A continues to rationalize against our increasing scale, and you should expect our cash basis G&A as a percentage of total revenue which was just 7.2% for Q4 2021 versus 8.2% for Q4 2020 to trend down favorably. Turning to our balance sheet. The elements I'll highlight are the following: With a strong close to 2021 by our underwriting investment in closing teams, our income-producing gross assets grew to $3.4 billion at year-end. From an equity perspective, our ATM program continued to provide an efficient capital source generating $93 million of gross proceeds during the fourth quarter and $276 million of gross proceeds during all of 2021. Importantly, you'll note in our release last night that we amended our credit facility last week, which, among other things, increased the capacity under the revolver to $600 million, increased the accordion to $600 million, reduced the applicable margin across all levels of the leverage grid by 20 basis points and reduced the credit ratings grid should we opt into that grid in the future. We also extended the revolver maturity to 2026. I'll also mention that in the coming weeks, we expect to complete the repricing of our 7-year term loan into a 5-year term loan that will extend the maturity into early 2027. The repricing should benefit our cost of this debt by 30 basis points. As Pete noted, our balance sheet remains strong with our net debt to annualized adjusted EBITDAre equaling 4.7x at year-end. Our total liquidity was $316 million at year-end, which obviously improved by $200 million with the upsizing of our revolver. Our balance sheet and liquidity position remains highly supportive of our investment pipeline. Lastly, I'll reiterate Pete's important note that our current investment pipeline, our portfolio outlook and our strong performance in 2021, particularly during the fourth quarter and now continuing into the first quarter of 2022 provided us with the basis to increase our 2022 AFFO per share guidance to a range of $1.47 to $1.51, which, as Pete noted, implies a 14% year-over-year growth at the midpoint excluding the loan prepayment fee revenue and the Q2 adjustment related to the tenants we brought back on accrual accounting. With that, I'll turn the call back over to Pete.
Thanks, Mark. We're encouraged that the operating environment and our well-positioned balance sheet have allowed us to capitalize on accretive investment opportunities, which are the predominant driver of our 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 into the future. With that, operator, please open the call for questions.
[Operator Instructions]. Our first question is from the line of Nate Crossett with Berenberg.
Just wanted to maybe get your thoughts on kind of the word moderate. I think you've used it a couple of times now. Maybe you can just help us kind of quantify what that means? What's causing it? Is it just more competition? And then I just had a question on pricing. Maybe you can give us a little color on what's kind of underwritten in your guidance for cap rates?
Yes. Sure. Nate, listen, moderate has a clear definition to it. I would say that we've been using the word moderate really in connection to a heightened level. And clearly, you see that heightened level in our fourth quarter print. Generally, we've tried to point people to our trailing 8 quarter average as a good indicator of what to expect from an investment perspective. And we think that, that remains a good data point, roughly just under $200 million. And so it's hard to divorce that moderate from the heightened level that we were transacting at in the back half of last year, and we discussed on the last call, why that level has heightened, and we just expect a more normalized transactional market in 2022. All that said, as you can see by our first quarter, we're off to a great start and we've got great deals and the pipeline is full, and we remain pretty optimistic about what we're seeing out there. As it pertains to cap rates, we transact in a pretty narrow band and we're able to hold that band by focusing on prior relationships and direct sale leasebacks where the counterparties are valuing us as a reliable capital provider, and we avoid competing purely on cap rates. And if you look out over the last year plus, we've transacted in 20 basis point cap rate range. And I would say it's really hard to get any more precise than that. And in our guidance, there's a range of assumptions.
Okay. That's helpful. Maybe just one more on just the loan repayments in the quarter. Is there any trend that we should be taking away from that? And how should we, I guess, be thinking about the rest of the kind of loan portfolio that you have?
Yes. Listen, that was sizable relative to the overall size of our loan portfolio. Our current loan portfolio is under $200 million, so clearly not material. That $200 million represents a number of loans, nothing terribly chunky. Some of those loans have prepayment options built into them. But I think we don't expect that to come back at us all at once. And -- as with the fourth quarter, we have ample notice period to prepare for that and manage through that. So it's not material. And certainly, we have the ability to kind of manage our business to deal with it when those loans come back.
Our next question comes from the line of [indiscernible] with Bank of America.
I was wondering if you could speak more to the tenants and just the properties and provide a little bit more color around that acquired subsequent to the quarter?
Yes, Lizzy, I would say there's -- by design, there's nothing terribly notable about our investment activity, and it tends to be very ratable. We have sourcing activities across all our industries, where we have relationships. And if you think about transacting at a level of 80%-plus prior relationships, you can assume that the deals we're doing are coming from people that we've done deals with and it looks an awful lot like our portfolio and our prior investment activity. So from an asset complexion is going to be very granular, it's going to be within our 16 core industries, it's going to be predominantly sale-leasebacks on our lease form with long-dated leases and escalations. And there's really nothing distinguishable from our incremental investments from our overall portfolio.
Okay. Great. Appreciate that. And then just looking historically at your weighted average cash cap rate on acquisitions, it looks like this is the first time you acquired below a 7% cap rate in the quarter. Can you just talk more to if this was a result of any specific deals bringing this down or how you expect that to trend going forward?
Yes. As we've said on several last quarters, there's a lot of competition in the market. Really, I think, as I said a little earlier, a 20 basis point range over the last year, it's a pretty tight range, particularly relative to the swings in interest rates and the overall cost of capital. And so we feel really good about our ability to hold cap rates and stay within that range. Certainly, 7% is a psychological hurdle, but it's really not material when you think about where we are. And certainly, when you translate that into the GAAP cap rate of 7%, 8%, it's not material to the business. We hold cap rates by focusing on repeat business with existing relationships and trying to get the best risk-adjusted returns we can. And we're confident in our ability to continue to do that going forward.
Our next question comes from the line of Katy McConnell with Citi.
I just wanted to talk about the acquisition pace a little bit more. Given last quarter, you'd expect the acquisitions to moderate back to prepandemic levels, but ended up greatly exceeding that. First, just wondering if you could provide any more detail on what led to the much stronger quarter? And then aside from your moderating comment, anything else you can share to help frame how we should think about a new normal in terms of a quarterly pace of deals from here?
Yes. Listen, and I think the discussion around moderation was more a forward look embedded in guidance. And I think we certainly coupled that with a current outlook that was indicative of a strong pipeline, much like we're doing today. And much like I said, it's -- the markets have been really robust. Transaction activity across the board is at record levels. M&A is at record levels. Our tenants are growing very rapidly, and it creates a great opportunity for us to deploy capital. And we're not basing a forward business plan on everything remaining that rosy. And so I think that was the context in which we were discussing it really looking out several quarters and expecting a more normalized environment. And listen, I think with the current volatility in the markets, the increasing interest rates, I think a couple of quarters from now, that will be the right call. As I said a little earlier, we continue to point to our trailing 8-quarter average as a good indicator, which is right around $200 million. And clearly, as you think about our subsequent activity of over $100 million quarter to date, we feel good about the current pipeline.
Okay. And then just curious what the company's latest thoughts are around providing to Street with some sort of more specific acquisition guidance now that the pipelines become much larger and a much more significant driver of your per share results?
Yes. Listen, our external growth has been the driver of our per share results largely since becoming public. We invest in a very disciplined and focused way focusing on sale-leasebacks with our existing relationship. And as such, we're reliant on our existing relationships to continue to grow and bring us opportunities and our ability to source new relationships. And that's much different than competing in a massive auction market that is underserved, where you can purely shave 10, 20, 30 basis points to increase your volume. So given the way we deploy capital, we've been reluctant to provide investment guidance because we don't control our relationships and their growth trajectory and finding new relationships to transact with is a long process. And so we give pretty good disclosure looking backwards, and I think that's a good indicator of what to expect going forward, and we're reluctant to be more specific than that and be forced to transact purely to hit a number.
Well, I think the difficulty though, Pete, Michael Bilerman speaking. You're now on year 4 of being public, you're north of $4 billion with $1 billion of acquisitions. So you're quickly becoming as a big size, your guidance includes accretion from deals. But if you're not willing to outline the contribution that, that represents, it doesn't really help because then you don't know what's really driving the numbers. So you've embedded some acquisition accretion, but without outlining the amount, the timing, the yields, the impact of loan repayments, the guidance number doesn't really do much because if you're not going to provide the details of how you get to the number, I'd almost rather you not provide FFO guidance and just give us the assumptions that are built into what you're trying to target. Or do the reverse say, there's no acquisitions in our guidance, and we're at $1.30. But this level of including accretion in your numbers, but not telling the Street how you get there is like embedding one-timers into your guidance. And you're now embarking on year 4 of being a public company. Why wouldn't you?
Well, I explain why we wouldn't because we don't want to be forced to transact in a manner inconsistent with our investment thesis purely to meet a number that we've communicated to The Street. We've...
Then don't include the accretion in the number, right? You can't include accretion from transactions that you're not telling The Street what the transaction volume is or the yield. You can't have it both ways. If you can include the accretion, even FFO and then not tell The Street how you're going to get there. It's one and the same.
Listen, we communicate very clearly to The Street about what to expect as it relates without providing specific investment guidance. And I think The Street has a very good understanding of what to expect from us. And we haven't missed but once since being public. And so I think there is a good understanding of what to expect and the way and the clarity in which we operate this business. We don't control our pipeline. We very rarely have more than 90 days of visibility of what's coming at us. And much like 2Q of 2020 when we shut down investments given what was going on. And that was the right thing to do, and we weren't performing to a number that was communicated to The Street or disappointing relative to that number. Certainly managing the growth that we've communicated we were able to do that. And so there's a lot of ways to approach guidance. And I respect your opinion on that. We think we provide excellent clarity and predictability and this is the way we're going to operate.
But just -- I haven't heard -- you're including accretion in your guidance range, right? So how is that additional clarity by including accretion, but not telling The Street how and what amount is driving that accretion, right? Your accretion could just be by buying earlier. So I think if you're going to put accretion in your guidance numbers, you sort of have to tell people how you are intending to get there or don't include it at all and then just run it quarterly and let The Street come up with their own number. But you're in this -- there's missing pieces. And from what we hear from the investment community, it may be good for you, but it's not good for them. So I'll leave the floor.
Yes, Michael, thank you. Look forward to seeing you in Florida.
Our next question comes from the line of Ki Bin Kim with Truist.
Just going back to the transaction market and the pricing environment, given what's happening with rates, a lot of times, the cap rates that you see today are priced several months before. So what's your best sense of like real-time pricing? And if rates rise a little bit higher from your long rate, how does that calculus work into your mindset about what to pay for assets?
Yes. Listen, Ki Bin, there's certainly a correlation between cap rates and interest rates and cap rates and overall cost of capital, that correlation tends to be on a lagging basis. And so our ability to move cap rates up trails the movement in underlying interest rates, when they rise. Conversely, we benefit on the way down when rates are declining. But we try hard to keep the correlation static and -- but it takes a while. And sellers become accustomed to rates, and it's hard to adjust that in a competitive market environment. But over time, I think it will normalize.
But you haven't seen -- not just your deals, but in terms of all the deals that you see and all the participants, have you seen any kind of spot trends and changes in pricing?
Listen, we focus on our deals, and we haven't seen that yet, but would anticipate it. I would expect there's crosswinds to that, Ki Bin, in the broader market there's new entrants, new competition that's driving cap rates down. So overall, I would expect cap rates to stay flat, which would balance out the increase in competition against the rising rates.
Okay. And just last question for me. Looking at your lease spreads, you -- the recovery rate was around 80% for trailing 12 months of leases. I recognize that it's a small pool relative to the size of the company, but any more color around that? And if there's been any kind of obvious common denominator in terms of like what drove that lower recovery rate?
Yes. Listen, it is a small sample set. Generally, given the vintage of our investments, the only assets that are going through, are releasing activity or assets that we take back through distress, through bankruptcy or through lease termination and those assets are distressed for a reason, and that's what you see in there. And so generally, I think 80% is pretty positive. When you think about our 1,400-plus assets and the 48 that we took back that were distressed in our ability to kind of recover rents at a high level.
Our next question comes from the line of Caitlin Burrows with Goldman Sachs.
Maybe just on the credit side, your rent coverage is up again, but I know you've mentioned that rent coverage can vary with tenant industries. So wondering if you could just go through how you're thinking of your tenant's credit quality right now and which metrics we should be focused on to figure that out?
Yes. I assume you're referring to our credit distribution disclosure on Page 11 of our supplement, which really shows the unit level coverage as it intersects with the underlying implied credit rating of our tenants. And that's really how we look at it is really the intersection of where a unit is not covering its rent adequately and where that subperforming unit is not supported by a very strong corporate credit. And then really, we take the third lens of trying to understand what is our real estate basis relative to market and really sizing that risk. Overall, I always like to start with the fact that we only have 1 vacant property, the portfolio is essentially fully leased and everyone is current and paying and doing well. And so those numbers are really on a lagging basis, as I disclosed on the call. We expect those coverages in those buckets to mitigate over time. So portfolio is in great shape, our tenants are doing well and we feel really good about the overall credit risk in the portfolio.
Great. And yes, just a follow-up there. Could you just go through what guidance assumes for credit events or impact in '22 and maybe how that compares to the actual in '21 or historically?
Yes. When we do our guidance, we sit down and we look at the portfolio and try to bake in where we see specific credit risks. We look at our historical recovery rate on assets and make a specific assumption as it relates to individual tenants and what we would qualify as known potential credit issues. And then we also, on top of that, layer in another generic credit loss assumption into the model to make sure we're appropriately reserved.
Could you quantify any pieces of those or not so much?
Not so much. It's -- listen, historically, the asset class has about a 30 to 50 basis point credit loss per annum. If you look back and that's the asset class, and certainly, I think we're more conservative than that.
Got it. Okay. And then maybe last one on the equity issuance side. It looks like leverage is now at 4.7x. Like you mentioned, you've been pretty active with your ATM. How are you guys thinking about ATM issuance this year versus doing a larger follow-on deal?
I mean I think what you'll see us do is what we've done in the past. We've been pretty measured about it. We do like the ATM. It's a very efficient execution for us. But oftentimes, we've used the follow-on as a way to kind of meet our capital needs, and that's probably how we'll approach it in the future.
Our next question comes from the line of John Massocca with Ladenburg Thalmann.
A sort of detailed question on the acquisition activity subsequent to quarter end. What was the kind of the specific or a rough cap rate on the $128 million of investments you closed?
I would say it's -- the rough cap rate is generally consistent with prior quarters.
Okay. So basically, nothing significantly divergent from what you did in 4Q?
No.
And then kind of bigger picture, I noticed a couple of new car wash tenants entering the kind of top tenant list. We've been hearing some stuff around relatively tight pricing for carwash assets, particularly some of the larger kind of operators in the industry. What are you seeing from a pricing perspective on those investments? I mean especially given your overall car wash exposure went down, so you probably have some opportunity maybe to add to that from a portfolio mix perspective. Just any color there would be helpful.
Yes. Listen, the amount of capital chasing car washes in the current market is astounding. And it's -- that's both from a business and a real estate perspective. I think there's an increasing appreciation of the asset class and the durability of the cash flows. And you can assume our decrease in exposure in the carwash space is not for a lack of transaction activities, but for a gap from where we're willing to buy the assets versus where sellers are willing to sell the assets. That said, we have good relationships in the space. We've been a trusted partner and capital provider to the space and we continue to find incremental investment activity in the space that meets our underwriting parameters, but it's becoming an increasing struggle.
Okay. And then in terms of -- I understand we kind of compare guidance versus 4Q results, obviously, you're not going to have the prepayment income probably on a go-forward basis. Outside of the other kind of typical factors of your acquisition volume yield, kind of capital markets activity, is there anything else we should be aware of that may be either onetime in 4Q that won't translate out into the guidance number or that might be additive to guidance next year versus kind of what you did in 2021 -- this year guidance.
Yes. No. I mean, listen, I think those are the big drivers of what we buy and how we capitalize it. And I think the rest is really certainly noise within the guidance range. So there's nothing unusual in there that you should be aware of.
Our next question comes from the line of Omotayo Okusanya with Crédit Suisse.
Yes. Quick question around the early childhood schools. Just kind of curious if you could give us a sense of the outlook of that business, given everything that kind of going on with vaccine mandates, mask mandates, both for teachers and to children and kind of what you're seeing demand-wise and how the general health of that industry?
Yes. Those guys are doing very well, considering all that. And we expect it only to get better as those things mitigate going forward. And if you think about some of our lower-covering assets, some of our still recovering assets, as we said on the call, clearly, the early childhood bucket is in that space. But it's a good -- it's a great industry. There's great demand for it. And our guys are currently doing well, and we only expect them to do better going forward.
Got you. And then also in regards to your leases, and I think you mentioned earlier on that the rent bumps were like 1.6%. Are those fixed bumps or do you kind of benefit at any point from kind of high inflation and leases kind of resetting to very high CPI-type numbers?
Unfortunately, we don't. That's not standard in the market. And to the extent that we were demanding pure CPI escalators, it wouldn't be competitive to the market. So generally, we have fixed bumps which, from our perspective, is a good thing in that over time, our tenant's profitability, sales and profitability grows faster than our rent such that these assets season favorably and into a higher level of coverage as we get further and further from our initial credit underwriting. So it tends to be fixed. CPI is not standard in the industry, and we would not expect to get outsized rent growth in an inflationary environment.
Our next question comes from the line of Sheila McGrath with Evercore.
Pete, there were some interesting changes to the top 10 tenant list. A few new entries, Drivers Edge, Mammoth Holdings, Whitewater Express and you added more with Equipment Share. Just wondered if you could comment on some of the new tenants to the top 10 about their business and if there's opportunity to continue to grow with those tenants?
Sure. Thanks, Sheila. We have -- we tend to have a lot of churn in our top 10, specifically the bottom 5 as we do more business with those tenants and Driver's Edge is a great example of that, as is White Water. We've been transacting Driver's Edge, which is GB Auto. When you're doing 80% follow-on business, you can -- we're growing with our tenants, and that's why you see them grow into the top 10 and then fall out as we grow with others. And so we like to think and we'd like to hope there's growth opportunity with all our tenants. But clearly, that's what you see with top 10 and White Water. White Water has been a rapidly growing car wash chain that has done a great job, and we've been fortunate to be able to do continuing transactions with them. What's interesting with Mammoth Holdings, which is another car wash operator, they actually bought a smaller car wash operator that we had been doing business with. So they merged into our top 10, which creates a more sizable creditworthy tenant for us and that happens from time to time as well. And so our relationships are where we look to get our growth and the bigger relationships, they tend to be the bigger growers and create the opportunities.
[Operator Instructions]. Our next question comes from the line of Greg McGinniss with Scotiabank.
Just a couple of quick ones here. Going back to the question on escalators. I understand CPIs are atypical for the industry. But are you able to secure higher escalators given the inflationary environment? And the idea then circling here is whether near-term inflation can lead to kind of longer-term growth.
Yes. I would kind of layer my commentary around cap rates on top of that when -- particularly coupled with the fact that 80% of what we're doing is follow-on business and repeat business where the leases have already been struck. And so when we're doing a deal, we very much look at the entire economic package as do our tenants and to the extent that we're trying to get outsized escalators, it's going to, one, potentially make us uncompetitive; and two, create pressure on the initial cap rates. So I don't see an opportunity to really push that in the current environment, but rest assured, we're trying to get the best economic deal that we can for our shareholders while we win the business.
All right. And then, Mark, I want to touch on the unsecured debt real quick. Where do you expect the company could raise debt today and do you anticipate a need to access the unsecured debt market this year?
I guess I'd say, first, I certainly think we could access it today. Whether we would or not is obviously not something I'd comment on. But the way we think about the unsecured debt market is now that we executed our first inaugural offering last June, we like that market. We think it's a very efficient market. So I think we'd be inclined to utilize that market to the extent we need to include this year at some point.
And in terms of rate, what do you think of rates?
Look, it has been pretty volatile, as you know. So that's a bit of a mixed bag. But look, I think if I was to try a range, it would probably be mid- to high 3s.
This concludes our question-and-answer session. I'd like to turn the floor back over to Pete for closing comments.
Great. Well, thank you all for your participation today. We were happy to report a great quarter and really a great year and we have a great outlook and a strong start to the year that we're excited about. So thank you for your time today, and we look forward to engaging with you in the future. Take care.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.