Essential Properties Realty Trust, Inc.

Good morning, ladies and gentlemen, and welcome to the essential properties, royalty trust, third quarter, 2024 earnings conference call. At this time, our participants are in a listen only mode. A question after the 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 W. W. essential properties.com. And archive of which we available for 90 days on the call this morning are peak my body president and chief executive officer. Mark pattern, chief financial officer Robert Robb, head of capital markets, Max Jenkins, head of investments and a J. P. O. head of asset management. It is now my pleasure to turn the call over to Rob. 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, least 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 the steady pace of investments with cap rates expected to compress modestly over the coming quarters as competition reemerges to 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 2053 properties that were .9% leased to 407 tenants operating in 16 industries. Our weighted average lease terms to that 14.1 years at quarter end, which is up year over year. With only .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 the strong profitability of our tenants at the unit level. Same store rent growth in the third quarter was .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 strong 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 warning and warranting an insurance claim. As a reminder, as a condition to providing our capital in a lease back 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 .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 lease term of 17.2 years and a weighted average annual rent to less relation of .1% generating an average gap yield of 9.1%. Our investments this quarter at 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 lease backs. 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 .3% of ABR at quarter end and our top 10 tenants now account for just .7% of ABR. Tenant diversity is an important risk mitigation tool and a differentiator for us and 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 .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 .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 .1% for the quarter, which compares favorably to the .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 reach $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 one cent to AFFO per share this quarter and we estimate the headwind to AFFO per share for the full year in 2024 will reach two cents. 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 as adjusted for unsettled forward equity was 3.5 times a 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 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 2 if you'd like to remove your question from the queue. For participants who speak with equipment, it may be necessary to pick up your handset before pressing the star key. Again, that's star 1 at this time. One moment, I'll recall our first question. Our first question comes from Han Bill. 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. 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 afro growth in that guide is a sustainable multi year growth rate? Thanks.

Great. Thanks. I'll handle, you know, listen, I think providing acquisition guidance really just, you know, as a natural evolution and the maturation of the company, you know, we've. Growing our tenant base, expansively from 100 tenants to 400 tenants. Our acquisition team has now been in their seats and seasoned over, you know, 5 years, and they're 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, 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, creatively and are well positioned to continue to do that. But I would short, I would stop short of, you know, 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 on around the watch list and categories you're monitoring today.

Thanks. Sure, well, the watch list is easy, you know, 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 a 100 basis points and continues to be in a good spot. You know, historically, you know, generally, as I hope you've seen, there tends to be conservatism in all of our guidance and all 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 that we've, you know, budgeted for or provision for, you know, we provided some good credit loss statistics in our net, Nare deck up 30 basis points per Adam, you know, is our historical experience. You can assume 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 to add us, or if they come at us. But, you know, we feel like we're in a good spot and certainly have the appropriate level of conservatism built into our guidance.

Great, great. Thank you. I'll yield the floor. Thanks. Thanks.

The next question comes from Kate 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.

I think so when to use the existing forward shares, I think we may have mentioned in the in the remarks that our expect. And the fourth quarter will begin to settle a fair amount of that. 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, you know, that gives. We've got a fair amount of dry powder that dry powder is probably a good three and a half quarters of liquidity to execute and still. Below end of our leverage range. So, all it for sick. And I think Good news embedded in that as well as that we Assumptions around equity needs in twenty, twenty five and they're pretty, you know, pretty low amount of equity needed. In fact, very little. And that's something we think we

could address, you know, on a phone.

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 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, lightening up on individual tenants. In the quarter, we sold an equipment share. And again, we really like that tenant. But, you know, to the extent that we're able to sell some assets off in the low sixes, mid sixes, we can redeploy that capital increasingly to continue to support that tenant relationship. And then lastly, just selling assets that don't work for whatever reason. And, you know, we see risk of, 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, sometimes 1031 motivated buyers. And we've demonstrated that, you know, 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 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 Gordon, the CMO of Capital. Please proceed.

Good morning, guys. Thanks for taking my question. Maybe just on the remainder of the 2024 acquisitions, you mentioned, you know, some possible M&A opportunities, maybe some singles and doubles. You know, you've 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. You know, maybe you could talk about how much you have under LOI or PSA.

Yeah, we, you know, listen, it's, 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 quarter average is probably a good indicator and kind of 250 ish. But it's really too, too soon to put a pin in that when we go out to A-REIT, 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, you know, if we square that with your trailing 12 or 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 conservatives and given that one month after closing the three quarter books?

Yeah, I think, you know, the consistent over the last, you know, kind of three or four quarters, we've, 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. Work at 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 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-risk 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, you know, with 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 and, you know, to the extent that, you know, that gets deals get priced away from us. We want to be in a position where we can be patient and prudent and conservative. And so we put a lot of thought into building this 20, 25 business case to support guidance and we believe it's imminently achievable and conservative.

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

Thank

you.

The next question, Councilman Smith is Rose with Citi. Please proceed.

Hi, thank you. 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 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 lease back and that 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, you know, it's the 10 years been volatile, you know, I guess, you know, three weeks ago was in the mid threes. Now it's in the low fours. And that's, that's, you know, 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 threes, you know, I think the leveraged private buyer is going to be more aggressive and, you know, be creating 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 the 10 year and what that does for private competitors.

Okay, and then I just wanted to ask you on your ADR coverage levels, the coverage of under one time 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 its 3% sort of where you think it would sort of stabilize in terms of ADR under one time.

Yeah, I would stop short of 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 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 a early childhood education operator that, you know, was was of size. You know, I 1% of that was executing a turnaround play on some 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 was just took them some time to to get those sites to the spot where they're out of that sub one bucket and glad to see that, but it's going to be idiosyncratic. It never really gives us too much pause because 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.

The next question comes from John 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 two one and then great rent coverage. What allowed you to kind of get those terms here, especially the rent coverage step up versus your trailing eight quarters?

Yeah, I wouldn't read too much into the rent coverage step up. That number is really an output of kind of the mix of industries that we do in any given quarter. And so some of our industries have higher coverage just by the nature of the industries like medical dental, equipment rental and things like that. And some have lower like gyms and and and things like that in the entertainment bucket. So I wouldn't read too much into that number. That's really just an industry mix. I'd 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 backspace 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 shake up there quarter over quarter. Maybe if you could just talk about strategically the new entrance and the exits and how you think about shaping your book moving forward.

Yeah, I, we always want to maintain diversity. And I think the bigger picture from my perspective is having .7% in our top 10 represents good diversity. And more importantly, having kind of one to 2% exposures through a bunch of tenants is good diversity, but also creates a good opportunity set to continue to grow. 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 Epson flows in that, you know, undefeated tribe, the crunch, fish, a front fitness operators, 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, and, and so it's been nice to see them up there. And, you know, certainly a name like, and they're 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 1 on your telephone keypad. Our next question comes from Ben Kim with Truiex Securities. Please proceed.

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

Yeah, you know, generally, in my experience in the market is structured bonds that are rated are going to trade anywhere from 25 to 50 basis points wide of similar similarly rated corporate unsecured. So if you assume, you know, the triple B index at, you know, one five ABS is through a similar level should be 25 to 50 basis points. Why that? And then, you know, you gotta 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, you know, an elevated 10 year and, you know, widespread or less competitive. As that market becomes more robust and tightens, they become more competitive and it's really it as it flows. I would say there's been a trend of more and more capital, you know, 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 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, you know, at the 10 million, eight to 10 million dollar chunks that we transact.

Thanks and on the cash, GNA guidance for 25, the flight increase is that driven by just more hiring on staffing or kind of inflationary pressures just curious, you know, what's driving that?

Yeah, thanks. I think if you look at our the guide on cash, GNA, 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 into a as a percentage of our total revenue, obviously continue to season favorably. We think about investing in really non executive hires sort of an embedded normal inflation for a lot of the other GNA elements, even though we don't have a lot of GNA 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 Jeff Stenner Lane with Bank of America, please proceed.

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, can 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 the trajectory of how this kind of fades out.

So, yeah, Mark noted in the prepared remarks, the

treasury stock method on forwards 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. 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 You know, 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's a little hard to hear you breaking up. We all follow up offline. So appreciate that. And then, Pete, you, you mentioned lightning 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 opportunities that there's nothing inherently you know, challenging in that industry that we see and we have plenty of opportunities to continue to invest, but it's just it's more portfolio construction than anything else.

Okay, I appreciate that. Thanks Pete. Thanks, Josh.

The next question comes from Michael Goldsmith. Would you be asked, please proceed.

Good morning. Thanks a lot for taking my questions. First questions, just 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 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 theater, the cause just being thinking of prudent conservative approach just given the lack of visibility and 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 historically, we haven't provided investment volume. So it's safe to assume when we do start providing them, it's going to have a appropriate level of conservatism baked in.

And then one thing we noted was that there was a decrease in the percentage of sale, these fact transactions this quarter. Is there anything changing specifically within the market there? Is that the reflection of like, the greater competition? Just try to get understanding of the market overall.

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

Hey, good morning. Because given that 10 year treasuries are back to levels not seen since July, what are you seeing in the capital markets 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 seems like the 10 years high, it backed up, you know, you know, three weeks goes and in the mid threes. And so there's certainly volatility and, you know, I would expect, you know, it to level out. And so, you know, we're being conservative and, you know, we're, we're assuming that the 10 years ago, you know, we had a lot of volatility. And so we're just going to move around and may move against us. I 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 would stick around this level, or potentially move higher, do you think that leads to a more favorable competitive environment for you?

I do. Yeah. Yeah. Okay.

Just last one for me implied Q4, if guidance fairly wide, three cents, is that just potential treasury share dilution and equity issues timing or are there other factors being taken in consideration there?

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

Thank

you. The next question comes from John. The soccer would be writing please proceed.

Good morning. 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. It weren't even maybe the space before that that have now entered just given. I know volatility, there's no volatility in the 10 year, but maybe we're expectations of where rates are going to go.

Yeah, yeah, it's just, it's an overall feeling and sense when you're doing 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, you know, it's, it's, it's not any one data point, but just the overall sense of the market. And I think you can 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 they back up. And so there's 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, is it more kind of refinancing existing liabilities or is it is it kind of growth still?

It's the vast majority is going to be growth either supporting them in individual activity, or them developing sites and providing development capital. Very little, 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 kind of performance and coverage looking in the restaurant portion of the portfolio, both kind of on the 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. So, you know, you think of a red lobster Fridays, you know, these large systems that are able to get unsecured corporate debt, which really becomes the catalyst that trips a lot of these 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 that with the equity capital and real estate financing. That said, you know, we are seeing some pressures in the restaurant space, you know, but I would say that you're seeing top line sales pressures. You know, so the top line sales are off, but, you know, there, there are seeing some expansion and margins as the, you know, plat 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, you know, 10 or 20 basis points on coverage.

Okay,

I appreciate

the color that's for me. Thank you.

Thanks, John.

The next question comes from Jim Cameron with ever core. Please proceed.

Thank you. Good morning. Perhaps just building on the last topic as possible. It looks like your overall at the portfolio level coverage unit level coverage is drifted down modestly. Let's call from the 394 times to 36 here at 930. And were there other, you know, does that imply basically that the unit unit level cash flows are growing a little slower than your average .7% escalator across the portfolio or is it? Isn't that's too generic and it's more specific to certain industries. I'm just curious, you know, which sectors are doing a little better, 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, you know, equipment share. They can they can go from a 12 to a 10 or something along those lines generally in car washes. You know, 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. So, mostly you're going to see it flat to flat to be either down 10 or up 10. But some of those different industries like building materials and equipment supplier going to have more volatility.

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

Yeah, I think the 7-Eleven, I think that's more just capital allocation for that company than anything's going on systemically in the C-store space. Yesway is a convenience store operator that populated our top 10 that's growing and seeking capital to facilitate their growth. Popsmart is a C-store operator that has been in our top 10. They're growing. And so I don't, 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 what brings the incremental investment opportunities over time. We expect that to kind of be an 80-20 sort of mix. And so it's good to see 20% new relationships coming into portfolio because there's certainly a cohort of tenants that are going to move on and transact somewhere else.

Okay, 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. 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, bringing new people online to build the organization to both underwrite and process, close and manage a larger portfolio. So, 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 at star one on your telephone keypad. There are no further questions at this time. I would like to turn the floor back over to Pete Mallari 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 May next month. And thank you very much.

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