Essential Properties Realty Trust, Inc.

Good morning, ladies and gentlemen, and welcome to the Essential Properties Realty Trust third quarter 2024 earnings conference call. At this time, all participants are in a 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, and a replay of the call will be available three hours after completion of the call for the next two weeks. The dial-in details for the replay can be found in yesterday's press release. Additionally, there will be an audio webcast available on Essential Properties' website at www.essentialproperties.com, an archive of which will be available for 90 days. On the call this morning are Pete Mavadi, President and Chief Executive Officer, Mark Patton, Chief Financial Officer, Rob Salisbury, Head of Capital Markets, Max Jenkins, Head of Investments, and A.J. Peel, Head of Asset Management. It is now my pleasure to turn the call over to Rob Collison. Please proceed, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us today for Essential Properties' third quarter 2024 earnings conference call. During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to those forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in yesterday's earnings press release. With that, I'll turn the call over to Pete.

Thank you, Rob, and thank you to everyone joining us today for your interest in essential properties. On our last earnings call, we discussed how our portfolio continued to exhibit strong operating trends against a dynamic market backdrop. This resilient portfolio performance continued during the third quarter with high occupancy, healthy same-store growth, and improving credit trends. As a long-term capital provider focused on owning real estate at a conservative basis, leased under our lease form to growing operators in service and experience-based industries, we expect our portfolio to perform at a high level. Maintaining relationships with and providing value to operators continues to drive investment activity as well. In the third quarter, 79% of our investments were generated from existing relationships, underscoring the value of recurring business with our tenant base. With quarter-end pro forma leverage of 3.5 times and liquidity of $1.2 billion, our balance sheet positions us well to continue to grow our portfolio by investing in our core industries at attractive spreads, generating sustainably attractive earnings growth for our shareholders. We are establishing our 2025 AFFO per share guidance range of $1.84 to $1.89, which implies a growth rate of over 7% at the midpoint. Our guidance for 2025 reflects continued portfolio performance and a steady pace of investments with cap rates expected to compress modestly over the coming quarters as competition reemerges through the continued normalization of capital market conditions. Specifically, we expect to invest between $900 million and $1.1 billion in 2025 at approximately 25 basis points below the pricing achieved in 2024. Additionally, we expect cash G&A expense to be between $28 million and $31 million, resulting in continued efficiency gains as a percentage of revenue, as the company is able to invest in its infrastructure while still scaling the platform to generate stronger margins for shareholders. We ended the quarter with investments in 2,053 properties that were 99.9% leased to 407 tenants operating in 16 industries. Our weighted average lease term stood at 14.1 years at quarter end, which is up year over year, with only 3.9% of annual base rent expiring through 2028. From a tenant health perspective, our weighted average unit level rent coverage ratio was 3.6 times this quarter, indicative of of the strong profitability of our tenants at the unit level. Same store rent growth in the third quarter was 1.4%. Over the past month, two hurricanes hit the southeastern United States. Our thoughts and prayers go out to the people, business owners, and operators impacted by these storms as they rebuild in the aftermath. Looking at our portfolio, we own 103 properties located in areas identified as severely impacted by FEMA, of which five properties reported damage causing substantial disruption and warranting an insurance claim. As a reminder, as a condition to providing our capital in a leaseback transaction, our tenants are required to enter into our lease agreement, which requires them to maintain property rent, and business interruption insurance. This provides an important layer of safety for our portfolio in the event of property damage events such as hurricanes. On the investment side, during the quarter, we invested $308 million through 37 separate transactions at a weighted average cash yield of 8.1%, up slightly from last quarter and up 50 basis points from a year ago. Our investment activity in the quarter was broad-based across most of our top industries, with no notable departures from our investment strategy. This quarter, our investments had a weighted average initial lease term of 17.2 years and a weighted average annual rental escalation of 2.1%, generating an average gap yield of 9.1%. Our investments this quarter had a weighted average unit level rent coverage of 4.7 times, and the average investment per property was 4.1 million. The vast majority of the investments in this quarter were originated through direct sale leasebacks. Looking ahead to the fourth quarter, our investment pipeline remains solid, reflecting M&A and new unit expansion activity across a variety of our targeted industries. As we have discussed in the past, we expect the normalization of the capital markets to result in increased competition, causing modest cap rate compression in the near term. We have not yet seen this in our current pipeline, which implies cap rates remaining similar to the past four quarters. From a tenant concentration perspective, our largest tenant represents 4.3% of ABR at quarter end, And our top 10 tenants now account for just 17.7% of ABR. Tenant diversity is an important risk mitigation tool and a differentiator for us, and it is a direct benefit of our focus on middle market operators, which offers an expansive opportunity set. Dispositions were in line with our trailing eight-quarter average in Q3. We sold nine properties this quarter for $17 million in net proceeds. This represents an average of approximately $1.9 million per property, highlighting the importance of owning fungible liquid properties, which allows us to proactively manage portfolio risks. The dispositions this quarter were executed at a 6.8% weighted average cash yield, Over the near term, we expect our disposition activity to remain in line with our trailing eight-quarter average, driven by opportunistic asset sales and ongoing portfolio management activity. With that, I'd like to turn the call over to Mark Patton, our CFO, who will take you through the financials and balance sheet for the quarter.

Thanks, Pete, and good morning, everyone. As Pete detailed, we had a good third quarter, highlighted by a strong level of investments and an 8.1% cash cap rate. Among the headlines from the quarter was our AFFO per share of 43 cents. That's an increase of 2% versus Q3 2023. On a nominal basis, our AFFO totaled $77.9 million for the quarter, which is up $11.6 million over the same period in 2023, an increase of 17%. This AFFO performance was in line with our expectations as reflected in our guidance range provided last quarter. A stronger than anticipated investment volume was partially offset by incremental dilution from the Treasury stock method on our unsettled forward equity. Total G&A in Q3 2024 was $8.6 million versus $7.6 million for the same period in 2023, with the majority of the increase relating to increased compensation expense as we continue to invest in our team. Our recurring cash G&A as a percentage of total revenue was 5.1% for the quarter, which compares favorably to the 5.5% in the same period a year ago. Our total G&A and recurring cash G&A were also in line with our expectations for the quarter and year to date. We continue to expect that on an annual basis, our cash G&A as a percentage of total revenue will decline as our platform generates operating leverage over a scaling asset base, enabling us to manage a larger portfolio and invest at higher levels. We declared a cash dividend of 29 cents in the third quarter, which represents an AFFO payout ratio of 67%. Our retained free cash flow after dividends continues to build, reaching $26.8 million in the third quarter, equating to over $100 million per annum on a run rate basis. We continue to view our retained free cash flow as an attractive source of capital to support our investment program. Turning to our balance sheet, With the net investment activity in Q3 2024, our income-producing gross assets reached $5.8 billion at quarter end. The increasing scale of our income-producing portfolio continues to build, and we expect to approach and perhaps eclipse $6 billion by year end. The significant diversity and increasing scale of our asset base continues to improve our credit profile. Turning to capital markets, we remained active on our ATM program in the quarter, completing the sale of approximately $312 million of stock, all on a forward basis at an average price of $31.04 per share. With no settlements during the quarter, our balance of unsettled forward equity totaled $626 million at quarter end. We expect to begin drawing upon this unsettled forward equity in the fourth quarter as a source of funds for our investment activity and paying down any outstanding balance on our revolver. Similar to last quarter, our current share price remains well above the weighted average price of our unsettled forwards of $27.29 at quarter end. As a result, under the Treasury stock method, the potential dilution from these forward shares is included in our diluted share count. For the third quarter, our diluted share count of $179.6 million included an adjustment for 2.7 million shares from our unsettled forward equity related to this Treasury stock calculation. This represents a headwind of approximately $0.01 to AFFO per share this quarter, and we estimate the headwind to AFFO per share for the full year in 2024 will reach $0.02. As we begin to settle this equity in the near term, we expect the headwind to shrink to a de minimis amount in 2025. During the quarter, we closed on the previously announced $450 million term loan, which was fully drawn and swapped at an all-in rate of approximately 4.9%. Our pro forma net debt to annualized adjusted EBITDA RE, as adjusted for unsettled forward equity, was 3.5 times at quarter end. We remain committed to maintaining a well-capitalized balance sheet with low leverage and significant liquidity to continue to fuel our external growth. As we noted last quarter, Our leverage has trended below average levels over the past year as heightened debt costs and capital markets volatility warranted a more conservative posture. With the first Fed cut materializing in September and capital markets normalizing, our funding costs have improved. Thus, we expect to carefully and prudently increase our leverage from here to levels more consistent with our average over the past several years. Lastly, as we noted in the earnings press release, we have reiterated our 2024 AFFO per share guidance range of $1.72 to $1.75 and established, as Pete mentioned, our 2025 AFFO per share guidance range of $1.84 to $1.89, representing over 7% growth at the midpoint. Importantly, both of these guidance ranges require minimal equity issuance in 2025 and which we believe is a testament to our front-footed approach to capital raising. With that, I'll turn the call back over to Pete. Thanks, Mark.

We are pleased with our third quarter results and remain optimistic about the prospects for the business. Operator, please open the call for questions.

Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd 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. Again, that's star one at this time. One moment while we post our first question. Our first question comes from . Please proceed.

Hey, good morning, guys. Thanks for taking my questions. and also for the early read into 2025. My first question is on the guide, which includes acquisitions and acquisition guidance for the first time ever, I think. So I guess I'm curious, why now in providing that acquisition guidance and what gives you the confidence to put out a forward year acquisition guidance at this point? And then do you think the upper single digit 7%, 8% implied AFO growth in that guide is a sustainable multi-year growth rate. Thanks.

Great. Thanks, Handel. You know, listen, I think providing acquisition guidance really just, you know, is a natural evolution in the maturation of the company. You know, we've grown our tenant base expansively from 100 tenants to 400 tenants. Our acquisition team has now been in their seats and seasoned over you know, five years, and there's just more predictability in our forward pipeline than we've seen in the past. We also have a much more stable cost of capital that allows us to look at deploying capital more consistently and reliably. And so I think it's just, it's a natural evolution. I think as you've been following us for many years, you've seen we've been pretty predictable. We've been pretty transparent. And I thought supporting the guide with some acquisition guidance was appropriate. As we think about the out years, you know, it's early, right? You know, we're just guiding for 2025. And, you know, I would say we have a very robust business plan. We have a very, you know, differentiated investment strategy that allows us to deploy capital accretively and are well positioned to continue to do that. I would stop short of trying to give growth rates beyond next year.

Well, I had to try. Appreciate the color. One more maybe. I was hoping you could talk about your bad debt or tenant credit assumptions embedded in the outlook for next year. I'm curious if there's any potential opportunity for upside or conservatism baked in, and maybe you can add some color around the watch, listen categories you're monitoring today. Thanks.

Sure. Well, the watch list is easy. As we define that, the intersection of tenant credit risk of single B and below and the unit level coverage of 1.5 continues to be under 100 basis points and continues to be in a good spot historically. Generally, as I hope you've seen, there tends to be conservatism in all of our guidance and all of the assumptions that support guidance and In past years, as we've indicated, you know, as we tighten guidance or increase guidance throughout the range, one of the main drivers is the lack of the materialization of credit events, you know, that we've, you know, budgeted for or provisioned for. You know, we provided some good credit loss statistics in our NAERI deck of 30 basis points per annum, you know, is our historical experience. You can assume, you know, guidance has some conservative assumptions, you know, starting from there. And so we'll see how the year plays and how we work through these scenarios that may come at us or if they come at us. But, you know, we feel like we're in a good spot and, you know, certainly have the appropriate level of conservatism built into our guidance.

Great, great.

Thank you.

I'll yield the floor. Thanks. Thanks, Angelo.

The next question comes from Caitlin Barnes with Goldman Sachs. Please proceed.

Hi. Good morning, everyone. Maybe on the funding side, you guys were active with your ATM in the quarter despite already having unsettled forward shares that you went through. So could you just go through the thought process of when to use the existing forward shares versus continue to issue more?

So when to use the existing forward shares, I think we may have mentioned in the remarks that our expectation into the fourth quarter, we'll begin to settle a fair amount of that equity going into the end of the year. That's both to address our investment pipeline as well as to pay down anything we have outstanding on the revolver. I think from there, I probably referenced it as well in the remarks that we've got a fair amount of dry powder. That dry powder is probably a good three and a half quarters worth of liquidity to execute and still stay. low end of our leverage range, so call it 4.6. And I think good news embedded in that as well is that we have assumptions around equity needs in 2025, and they're a pretty low amount of equity needed. In fact, very low.

That's something we think we could address on a forward

Guy, you're kind of breaking up for me. I don't know about for everybody else. Can you still hear me?

Yeah, I can hear you.

Okay. And then maybe just moving over to the disposition side, maybe also like the watch list. As you guys are looking to sell properties, I guess what's driving you to dispose of the properties you choose to pursue? Kind of who are the buyers? How deep is that pipeline of buyers? And is it generally other third parties?

Yeah, it's always other third parties. You know, on occasion it may be a tenant coming back to us, but mostly it's third parties. Really, there's three reasons we're going to sell an asset. One is to manage industry concentrations. As you can see, our car wash exposure has been high, and so we've been proactively trying to lighten up on that industry exposure, really to create some more capacity, continue to invest in that industry. um, lightening up on individual tenants, uh, in the quarter we sold an equipment share. And again, uh, we really liked that tenant, but, you know, to the extent that we're able to sell some assets off in the, you know, low sixes, mid sixes, uh, we can redeploy that capital accretively to continue to support that tenant relationship. And then lastly, just selling assets that don't work for, for whatever reason. Um, and, and, you know, we see risk of, uh, you know, tenant continuing to be able to pay the rent or, you know, a lack of probability that they wouldn't renew as we see through the unit level coverage. And so selling those assets is important to our business plan. You know, granularity and fungibility in our real estate is an important fundamental of our portfolio. So we have good liquidity in our assets, and there's a deep pool for us to dispose into to local and regional portfolios. sometimes 1031-motivated buyers, and we've demonstrated that since coming public, and we'll continue to do that.

Got it. Thanks. Maybe just as an update, I could hear that response much better, so I don't know if you guys are together or sitting in different places or what, but that was very clear. Thank you.

Great. I tend to be more clear than Mark anyway.

The next question comes from Eric Borden with BMO Capital. Please proceed.

Hey, good morning, guys. Thanks for taking my question. Maybe just on the remainder of the 2024 acquisitions, you mentioned some possible M&A opportunities, maybe some singles and doubles. You closed a little over $50 million today, which is above where you were the same time last year, and so investments seem to be tracking well. Maybe you could talk about how much you have under LOI or PSA?

Yeah. You know, there's a lot of time left in the quarter, and the fourth quarter tends to, you know, have some volatility. You know, it could be, you know, a lot of deal volume or a few or a little. And so, you know, I think, you know, our general guide to the eight quarter average is probably a good indicator and kind of 250 ish. but it's really too soon to put a pin in that. When we go out to NA REIT, we'll update our investor deck and give a good snapshot then, but it shouldn't be materially different from that. And to be clear, on the M&A, it's really supporting our tenant relationships in M&A, not us seeking to endeavor in any M&A transactions.

All right. Thank you. And then looking to the 2025 acquisition guidance that you provided, If we square that with your trailing eight-quarter average, it seems to be implying that acquisitions are a little lighter than expected. So is there something that you're seeing in the market that is preventing you to acquire more, or is it potential conservatism given that we're one month after closing the three-quarter books?

Yeah, I think, you know, consistent over the last, you know, kind of three or four quarters, we've indicated it's been a unique buying environment with the dislocation in the capital markets and a lack of competition where we really have been pressing our advantage to put capital to work at rates and levels that really are historic highs in my 20-year-plus career of investing. And so we've been aggressive this year. And so... I think that's part of it. Another part of it is, as we've always said, we want to communicate a business strategy that's de-risked from an execution perspective. And so, you know, supporting guidance with flat investments, I think, is conservative and appropriate. You know, we're not going to come to the market with guidance that's predicated on us, you know, growing our activity 25, 50%. We just don't think that's proven. So there's a number of factors going on there. I would also say, as we've said, with the normalization of the capital markets, we expect competition to return to the market, which could lead to the mispricing of risk by aggressive competitors. And to the extent that deals get priced away from us, we want to be in a position where we can be patient and prudent and conservative. We put a lot of thought into building this 2025 business case to support guidance, and we believe it's eminently achievable and conservative. All right.

Thank you for the time. I'll leave it there. Thank you.

The next question, Councilor Smith, is roles with city. Please proceed.

Hi. Thank you. I appreciate the guidance around the acquisitions outlook, and you mentioned that you expect cap rate compression, I guess, over the course of the year, but you're not seeing it yet. And I was just wondering, could you just talk a little bit about sort of cap rate sensitivity on the short end versus maybe what we're seeing with an upward movement in the 10-year at this point, and maybe how you think that will play out for cap rates maybe over sort of the first half of 25?

Yeah, sure. You know, we compete against alternative forms of capital on the short end of the curve, bank debt and the like for our tenant relationships. More of our competitors on the investment side and the sale leaseback and net lease side are really competing against, we're competing against them based on the long end. of the curve, kind of 10-year and long-term financing as they match funds, these long-dated assets. The 10-year has been volatile. I guess three weeks ago it was in the mid-3s. Now it's in the low 4s, and that's pretty volatile. I think a high 10-year supports us and limits competition, but to the extent that you see 10-year in the mid-3s, You know, I think the leveraged private buyer is going to be more aggressive and, you know, create competition and downward pressure on cap rates. So, you know, it's going to be a while before the banks come back and the low end is really in play as an alternative form of competitive capital. I think we're more sensitive to, you know, the 10-year and what that does for our private competitors.

Okay. And then I just wanted to ask you on your, um, ABR, um, coverage levels, the, um, coverage at under one times declined sequentially to 3% from, I think over 4% last quarter. Can you just talk about what's going on there, if anything, and it's in a 3% sort of where you think it would sort of stabilize in terms of ABR at under one times?

Yeah, I would stop short of, um, saying that that's our expectation to stabilize there. There's always going to be idiosyncratic ebbs and flows in that bucket. It's going to be, you know, less than a dozen of tenants. And, you know, when you have master leases, it could be multiple properties. Specifically in the quarter, we had an early childhood education operator that, you know, was of size, you know, i.e. 1% ABR that was executing a turnaround play on some sites. And, you know, we were glad to see him finally get traction and get those sites open and operating and profitable. It was a strong credit. We supported multiple times over the year, so it wasn't really a credit concern for us. It just took him some time to get those sites to the spot where they're out of that sub one bucket and glad to see that. But yeah, It's going to be idiosyncratic. It never really gives us too much pause because, you know, generally it's backed by strong credits and solid real estate. And we're likely to see some noise in that bucket.

Great. Thank you, guys. Thank you, Smedes.

The next question comes from John Kielaczowski with Wells Fargo. Please proceed.

Thank you. So I'll start on the investment activity side, just looking at the terms here. So cap rates ticked up a bit, you know, really strong on the lease escalations at 2.1 and then great rent coverage. What allowed you to kind of get those terms here, especially the rent coverage step up versus, you know, your trailing eight quarters?

yeah i i wouldn't read too much into the rent coverage step up that number is is really an output of um kind of the mix of industries um that we do in any given quarter and and um and so some of our industries have have higher coverage just by the nature of the industries like medical dental um you know equipment rental and things like that and some have lower like gyms and and um and and things in that sort of an entertainment bucket. So I wouldn't read too much into that number. That's really just an industry mix. I would say big picture, you know, as has been the commentary, you know, there's just not a lot of capital providers out there in the middle markets, at least back space currently. And we're able to drive attractive terms with our counterparties. And that's what you see going on.

Got it. And then maybe just jump into your top 10 tenants. There seems to be a fair bit of shakeup there quarter over quarter. Maybe if you could just talk about strategically the new entrants and the exits and how you think about shaping your book moving forward.

Yeah, we always want to maintain diversity. And I think the bigger picture from my perspective is having 17 0.7% in our top 10 represents good diversity and more importantly, having, you know, kind of one, you know, one to 2% exposures through a bunch of tenants, you know, is good diversity, but also creates a good opportunity set to continue to invest. You know, the names that came into our top 10 are operators that we've been investing with in a series of transactions over you know, multiple years or years. And as we continue to invest, they grow. And as they grow, other guys where we've not invested just fall out. So, you know, every quarter we're going to have ebbs and flows in that. You know, Undefeated Tribe, the Crunt Fitness operator is a great operator. We've been doing deals with him for a long time and has done a great job. And we continue to see opportunities to grow with him and do that. And so it's been nice to see them up there and, you know, certainly a name that we like and are comfortable with. But, you know, just given our diversity, it's natural to see, you know, movements in that top 10.

Thank you. Thank you.

Once again, to ask a question, please press star one on your telephone keypad. Our next question comes from Ben Kim with Trui Securities. Please proceed.

Thank you. Good morning. I was wondering if you can just provide some data points on the ABS market and CMBS market pricing. And typically in a normal year, how much of these capital sources are competitors to your business in terms of like a market share?

Yeah, you know, Generally, in my experience in the ABS market is, you know, structured bonds that are rated are going to trade anywhere from 25 to 50 basis points wide of similarly rated corporate unsecured. So if you assume, you know, the BBB index at, you know, 1.5 ABSs through a similar level should be 25 to 50 basis points wide of that. And then you got to talk about attachment points and valuation and the like, which is beyond my expertise, certainly. A lot of people are more active in that market and have better insight than we do at this point. So that said, we see those guys as competitors. With an elevated tenure and wide spreads, they're less competitive. As that market becomes more robust and tightens, they become more competitive and it's really it ebbs and flows. I would say there's been a trend of more and more capital supporting net lease investing as the asset class has matured and demonstrated great cash flow stability. So there is more and more capital organizing to come into the space. So it's not a static, you know, competitive set. It's very dynamic. But it really just depends. They tend to be more competitive on the bigger transactions, which is why we're staffed and organized to transact, you know, at the $8 million to $10 million chunks that we transact.

Thanks. And on the cash G&A guidance for 25, the flight increased, Is that driven by just more hiring on staffing or kind of inflationary pressures? Just curious, you know, what's driving that?

Yeah, thanks, Kevin. I think if you look at the guide on cash G&A, it's really a reflection of us investing in our platform, continuing to invest in our platform. You know, it's clearly going to season as a percentage of our total revenue, obviously, continue to season favorably. So we think about investing in really non-executive hires, sort of an embedded normal inflation for a lot of the other G&A elements, even though we don't have a lot of G&A levers outside of our infrastructure. So I think, you know, if you think about the range, it's going to be issues around timing of the hire or hires and some of those normal kind of puts and takes.

Okay, thank you, guys.

Thanks, Cuban. The next question comes from Josh Dinalene with Bank of America. Please proceed.

Yeah, hey, guys. I just want to follow up on Mark's comments that there's, I guess, some dilution from the treasury stock method. I guess it's like one cent now, but reaching two cents. I guess, could you just kind of give us more color on how that's showing up in the guide for this year? Then it sounds like, if I heard correctly, 2025 assumes no kind of dilution from that. Just trying to think through kind of like the trajectory of how this kind of fades out.

So, yeah, as Mark noted in the prepared remarks, the Treasury stock method onwards was about a penny. Based on our current share price, it's likely to be around that same level in the fourth quarter. So that's what's assumed for... As we look out into 2025, of course, the calculation is based in part on where our share price will be, which is inherently hard to project. But as we continue to settle these forwards into year-end, we would expect our year-end forward unsettled balance to be a lot smaller. And so as you start the year in 2025, we would expect that headwind to based on our expectations, I think a one to two cent range is probably reasonable. And I think maybe from a modeling standpoint, two cents might be a good starting point as you think about building your 2025 estimate. But again, we'll continue to update you as the share price fluctuates and we'll go from there.

Okay. Sorry, Rob. It was a little hard to hear you. I was breaking up. I'll follow up offline. Okay. Appreciate that. And then Pete, you mentioned lightening up on car washes. Is that just a pure diversification play or something kind of specific to maybe your existing car wash portfolio or maybe just the industry in general?

Yeah, it's just portfolio management, portfolio construction. We generally have a soft ceiling of 15% for any individual industry concentration and car washes ticked above that given The opportunity set, there's nothing inherently challenging in that industry that we see, and we have plenty of opportunities to continue to invest, but it's more portfolio construction than anything else.

Okay. Appreciate that.

Thanks, Pete. Thanks, Josh.

The next question comes from Michael Goldsmith with UBS. Please proceed.

Good morning. Thanks a lot for taking my questions. First question is just on the acquisition guidance. You know, you've done $300 million a quarter over the last four. You're kind of pointing to $250-ish for the fourth quarter, and the guidance applies. you know 250-ish a quarter going forward now typically the fourth quarter is when you've acquired the most and and you're expecting kind of a lower run rate coming going forward so like is this kind of like the turning point where acquisition volumes will start to slow due to competition or is this just you know again kind of like the scene of the call is just being thinking like a prudent conservative approach, just given the lack of visibility, a lot of moving pieces in the market today?

Yeah, I think it's certainly the latter. As we've always said, we generally don't have visibility in our pipeline beyond 90 days, you know, as that's the normal transaction cycle. And we do think, you know, we are at an inflection point in the capital markets that's going to change the competitive landscape. And, you know, given that dynamic, we wanted to be conservative relative to our investment volumes. And, you know, historically, we haven't provided investment volumes. So it's safe to assume when we do start providing them, it's going to have an appropriate level of conservatism baked in.

Got it. And then one thing we noticed that there was a decrease in the percentage of sale leaseback transactions this quarter. Is there anything changing specifically within the market there? Is that the reflection of, like, the greater competition? Just trying to get an understanding of the market overall.

No, nothing. I mean, you know, it's – it's not material. Um, at 89%, we're 90%. We're still kind of, you know, vast majority of sale leasebacks. We just happen to have the opportunity to do some existing lease transactions that made sense during the quarter. Um, you know, I think if anything, you know, that's probably a more normalized level and that we've been heavy into sale leasebacks given, um, the dislocation in the capital markets in the past quarters. And so there's, there's nothing really, um, you know, to read into that number is changing materially.

Thank you very much. Good luck in the fourth quarter. Thank you much.

Thanks. The next question comes from Greg McGinnis with Social Bank. Please proceed.

Hey, good morning. I guess given that 10-year treasuries are back to levels not seen since July, what are you seeing in the capital markets? uh, or amongst your competitive set that's leading you to believe you're going to have greater competition next year?

Yeah, listen, it's, you know, it, it, uh, seems like the 10 years high, it backed up, you know, you know, three weeks goes and, and, and the, uh, mid threes. And, and so there's certainly volatility and, you know, I would expect, you know, it to level out. And so, um, You know, we're being conservative and, you know, we're assuming that the tenure is going to move around and may move against us, i.e. lower, such that competition reorganizes. I think the other part of it is, you know, spreads. Spreads have come in to historically tight levels across all fixed income instruments, which is, you know, an equally important component of that.

So if the 10-year were to stick around this level or potentially move higher, do you think that leads to a more favorable competitive environment for you?

I do, yeah.

Okay. Just last one for me. Implied Q4 AFO guidance fairly wide, $0.03. Is that just potential treasury share dilution and equity issues timing, or are there other factors being taken into consideration there?

I think that that's going to be the biggest driver, you know, with $600 million of unsettled forwards, you know, and, you know, not really sure about the timing when that's going out. You can assume there's some decent volatility in that.

Okay.

Thank you.

The next question comes from . Please proceed.

Good morning.

From the competitive environment, Are you seeing anything kind of tangible at this point? I mean, you mentioned it's not impacting the pipeline, but are there competitors either bidding for deals or talking to tenants that maybe weren't in the space for the last couple of years or that weren't even maybe the space before that that have now entered just given, I know there's been volatility in the 10-year, but maybe expectations of where rates are going to go?

Yeah, it's an overall feeling and sense. When you're negotiating 37 transactions in a quarter, there's a lot of different competitive dynamics in each of those transactions. And we're dealing with 37 different counterparties who are out there sourcing capital through a variety of different sources. And it's not any one data point, but just the overall sense of the market and I think you can see that and feel it when spreads come in and the treasuries are in the mid-threes. People are feeling a lot more bullish and bidding more aggressively. And when spreads gap out and treasury rates gap out, they back up. And so there's certainly natural ebbs and flows and competition in the capital markets, and we live it on a day-to-day basis.

Okay. And then maybe on the tenant partner side, I mean, what's kind of broadly speaking the general driver of them seeking your financing today? I mean, is it more kind of refinancing, you know, existing liabilities, or is it kind of growth still?

The vast majority is going to be growth, either supporting them in individual M&A activity or them developing sites and providing development capital. Very little of it is refinancing past liabilities. There's some, but not a ton.

And then given some of the broad pressures we're seeing in the restaurant industry, especially among smaller operators, how is tenant performance and coverage looking in the restaurant portion of the portfolio, both kind of on the QSR side and the casual dining side?

I would start by saying most of the pressure in the restaurant industry is we're seeing in large operators. You know, you think of Red Lobster, TGI Fridays, you know, these large systems that are able to get unsecured corporate debt, which really becomes the catalyst that, you know, trips a lot of these companies. You know, the smaller regional operators that we see are less likely to have that debt lever and really are capitalized mostly with equity capital and real estate financing. That said, we are seeing some pressures in the restaurant space, but I would say that you're seeing top-line sales pressures, so the top-line sales are off, but there are seeing some expansion in margins as the past inflationary pressures of labor and cost of goods fall off such that I would expect overall our restaurant exposure to be roughly flat to maybe down 10 or 20 basis points on coverage.

I appreciate the comment. That's for me. Thank you. Thanks, John.

The next question comes from Jim Cameron with Evercore ISI. Please proceed.

Thank you. Good morning. Perhaps just building on the last topic, if possible, it looks like your overall at the portfolio level coverage, unit level coverage has drifted down modestly. Let's call from the 3.9 four times to 3.6 here at 9.30. And were there other, you know, does that imply basically that the unit level cash flows are growing a little slower than your average 1.7% escalator across the portfolio, or is it too generic and it's more specific to certain industries? I'm just curious, you know, which sectors are doing a little better and which might be feeling a little more pressure?

Yeah, I think it's going to be specific to specific industries, particularly like, you know, building supply, which, you know, can go from a 20 to a 10 and really have an impact, or equipment rental sales, equipment rentals and sales, like equipment share, they can go from a 12 to a 10 or something along those lines. Generally, car washes, they're flat to down 10 basis points. Early childhood is up 10 basis point coverage. Medical dentals, flat. QSRs are down 10 basis points. I'm just ticking down our industry list here. Mostly, you're going to see it flat to either down 10 or up 10. But some of those different industries like building materials and equipment supply are going to have more volatility.

That's interesting. Thank you. And then just real quickly, I'll let you go. Obviously, 7-Eleven has been reported to be out there marketing a large portfolio. Do you feel you've added consistently to your convenience store segment? Do you think there's more just a 7-Eleven issue regarding maybe their health of those particular stores and not much of a read-through of the C-Store industry overall? Just curious what color thoughts you might have there. Thank you.

Yeah, I think the 7-Eleven, I think that's more just capital allocation for that company than anything going on systemically in the C-Store space. Yesway is a convenience store operator that populated our top 10 that's growing and and seeking capital to facilitate their growth. PopSmart is a C-store operator that has been in our top 10, and they're growing. And so there's nothing going on in the space that gives me concern, and we continue to deploy capital there. I think the 7-Eleven opportunity is more specific to that tenant. Great. Thank you. Thank you.

The next question comes from Spencer Alloway with Green Street. Please proceed.

Thank you. You know that the lion's share of your deals completed in the quarter was from recurring business. Can you just talk about some of the newer relationships in the quarter? What industries were these in? And based on our current portfolios, do you suspect that they're also going to become a source of recurring business?

Yeah, that's our business model is sourcing new relationships and continuing to grow with those relationships. And as I've said in the past, relationships over time tend to outgrow us and find alternative sources of capital as they grow larger and have more diverse funding options. We generally source in all our industries. We conduct sourcing activity. We attend industry conference events and seek to build relationships and deploy capital in those industries. And so those sourcing efforts are really, you know, what brings the incremental investment opportunities. Over time, you know, we expect that to kind of be an 80-20 ratio. Sort of mix and so it's good to see you know 20% new relationships coming into a portfolio because you know there's certainly a you know a cohort of tenants that are Got to move on and transact it somewhere else Great that makes sense and then just as your asset base continues to grow and you're underwriting more and more deals each quarter as you mentioned it's quite an arduous endeavor and

How comfortable are you with your current headcount, or does the acquisition and underwriting team need to keep growing, and when do you think that new headcount would be added?

Yeah, that's a constant process, Spencer. We're always hiring, training new people online to build the organization to both underwrite and process, close, and manage a larger portfolio. You know, it's very much a dynamic organization and infrastructure that we're constantly investing in, and I think you see that in our GNA guide.

Thank you.

Awesome. Thank you very much.

Thank you. At this time, to ask a question, that's star 1 on your telephone keypad. There are no further questions at this time. I would like to turn the floor back over to Pete Malloy for closing comments. Please proceed.

Great. Thank you all very much for your time today. We look forward to meeting with you all out in Vegas for next month. Thank you very much.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your line.