Essential Properties Realty Trust, Inc.

Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust's fourth 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 the 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 Mavoides, 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 Salisbury.

Thank you, operator. Good morning, everyone, and thank you for joining us today for Essential Properties' fourth 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 third quarter earnings call, we discussed how our relationship-driven investment strategy has positioned us well to execute our business plan in that dynamic market environment. Maintaining relationships with and providing value to operators continues to drive investment activity in the fourth quarter, with 79% of our investments generated from existing relationships. underscoring the value of recurring business with our tenant base. Our portfolio also continued to perform well with tenant credit trends and same-store rent performance healthy and in line with our expectations. With quarter-end performer leverage of 3.8 times and liquidity of $1.4 billion, our balance sheet positions us well to continue to grow our portfolio by continuing to support our tenant relationships and investing in our core industries at attractive spreads, generating sustainably attractive earnings growth for our shareholders. The continued strong portfolio trends and the current attractive investment environment remain supportive of our 2025 business plan. As a result, we have updated our 2025 AFFO per share guidance range to $1.85 to $1.89, representing a penny increase at the low end. As we noted on our third quarter earnings call, competition has begun to materialize as capital markets have normalized, resulting in modest cap rate compression. We continue to expect our investment cap rates in 2025 to be slightly lower than 2024, reflecting this trend. However, our large and growing investment pipeline is supportive of our articulated investment guidance of 900 million to 1.1 billion. We ended the quarter with investments in 2,104 properties that were leased to 413 tenants operating in 16 industries. Our weighted average lease term stood at 14 years at quarter end, in line with a year ago, which is 5.8% of our annual base rent expiring over the next five years. From a tenant health perspective, our weighted average unit level rent coverage ratio was 3.5 times this quarter, indicating the profitability and cash flow generation by our tenants at the unit level. At a high level, our portfolio credit trends remain benign, with same store rent growth in the fourth quarter of 1.4%, occupancy of 99.7%, which is seven vacant properties. and collections of 100%. Tenant credit events were de minimis during the quarter, and our leasing activity picked up materially in 2024, with 72 leases signed for a recapture rate of 101%, up from 22 leases at a recapture rate of 79% in 2023. The execution of our property management team serves to further mitigate risk by resolving credit events expediently and at favorable rental rates, which ultimately is supported by disciplined asset pricing when we buy properties. Looking into the first quarter, we continue to expect a constructive tenant credit and portfolio performance backdrop for the company. As noted in recent press reports, one of our Car Wash tenants, Zips Car Wash, recently filed for Chapter 11 bankruptcy protections. At year end, this tenant represented approximately 20 basis points of ABR across three locations in our portfolio, which is a large decline from our peak exposure in 2017 of 16 sites at over 5% of ABR. This material reduction in exposure to an underperforming operator highlights our proactive approach to asset management, driven by our proprietary financial reporting a key underpinning of our differentiated business model. Given the ongoing nature of the bankruptcy, it is premature for us to discuss our expectations around our leases on these three properties. I would note that this credit event is consistent with the assumptions supporting our guidance range. On the investment side, during the fourth quarter, we invested $333 million through 37 separate transactions at a weighted average cash yield of 8%. in line with our trailing four-quarter average. Our investment activity in the quarter was broad-based across most of our top industries with no notable departures from our investment strategy. These investments had a weighted average initial lease term of 17.7 years and a weighted average annual rent escalation of 2%, generating an average gap yield of 9.2%. Our investments this quarter had a weighted average unit level rent coverage of 3.4 times, and the average investment per property was 3.3 million. All of the investments this quarter were sale-leaseback transactions, where we are providing capital to an expanding operator. Looking ahead, our investment pipeline remains solid, reflecting M&A and new unit expansion across a variety of targeted industries. As noted earlier, the current investment climate is characterized by attractive cap rates that have modestly compressed. Our pipeline reflects this trend with pricing in mid to high 7% range and strong contractual escalations, which is supportive of our long-term growth trajectory. From a tenant concentration perspective, our largest tenant represents 4.2% of AVR at quarter end and and our top 10 tenants now account for just 17.6% 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 offer an expansive opportunity set. Dispositions picked up in the fourth quarter as we opportunistically monetized the number of investments at accretive pricing. We sold 24 properties of this quarter for $60.4 million in net proceeds. This represented an average of approximately $2.5 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 7.0 weighted average cash yield with approximately 70% of disposition volume in the car watch sector, allowing us to pair this industry exposure to 14.2% of ABR, down from above our soft ceiling of 15% last quarter. Over the near term, we expect our disposition activity to be slower than the fourth quarter at a level relatively 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 fourth quarter.

Thanks, Pete, and good morning, everyone. As Pete detailed, we had a good fourth quarter, highlighted by a strong level of investments at an 8% initial cash cap rate. Among the headlines from the quarter was our AFFO per share of 45 cents, an increase of 7% versus Q4 of 2023. On a nominal basis, our AFFO totaled $81.8 million for the quarter, which is up $14.8 million over the same period in 2023, an increase of 22%. This AFFO performance was in line with our expectations as reflected in our guidance range provided last quarter. Total G&A in Q4 2024 was $8.5 million versus $7.3 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. Importantly, our recurring cash G&A as a percentage of total revenue was 4.8% for the quarter, which compares favorably to the 5.2% in the same period a year ago. Our total G&A and recurring cash G&A were modestly favorable to our expectations for the quarter. Our recurring cash G&A as a percentage of total revenue was 5.4% for the full year, and 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 29.5 cents in the fourth quarter, which represents an FFO payout ratio of 66%. Our retained free cash flow after dividends continues to build, reaching $30.6 million in the fourth quarter, equating to over $120 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, representing upwards of approximately 10% of our annual capital needs. Turning to our balance sheet, with the net investment activity in Q4 2024, our income-producing gross assets reached $6 billion at quarter end. The increasing scale of our income-producing portfolio continues to build, improving our credit profile. On the capital markets front, we've remained active on our ATM program in the quarter, completing the sale of approximately $79 million of stock all on a forward basis at an average price of $32.01 per share. We settled $325 million of forward equity with a portion of the proceeds utilized to repay our revolving credit facility balance. Our balance of unsettled forward equity totaled $381 million at quarter end, which we plan on utilizing to continue funding our investment program while maintaining flexibility by keeping capacity available on our revolver. Similar to last quarter, our share price remained well above the weighted average price of our unsettled forward equity of $29.03 a 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 fourth quarter, our diluted share count of 182.3 million included an adjustment for 3.2 million shares from our unsettled forward equity related to this Treasury stock calculation. This represented a headwind of approximately one cent to AFFO per share in the quarter and two cents for the full year. Our pro forma net debt to annualized adjusted EBITDA RE as adjusted for our unsettled forward equity was 3.8 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. We further bolstered our liquidity a quarter end with the previously announced closing of our amended $2.3 billion senior unsecured credit facility. The facility amendment yielded a number of strategic accomplishments for the company, including an upsized revolver commitment of $1 billion, improvements to the rate structure and our financial covenants, and an extended maturity date to February 2030. We'd like to thank our entire bank group for their full participation and continued support in another successful financing supporting the growth of our business. Lastly, as we noted in the earnings press release, we've updated our 2025 AFFO per share guidance range to $1.85 to $1.89, implying over 7% growth at the midpoint. Importantly, this guidance range requires minimal equity issuance, 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. In summary, We are very pleased with our fourth quarter and full year results and remain optimistic about the prospects for the business. Operator, please open the call for questions.

Thank you. We will now be conducting 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 using speaker equipment, it may be necessary to pick up to pick up your handset before pressing the star keys.

One moment, please, while we poll for questions. Thank you. Our first question is from Handel St.

Just with Mizuho. Please proceed with your question.

Hey, good morning out there. Thanks for the question. My first question pees on tenant credit. I was hoping you could talk a bit more about the The Zips bankruptcy here and the car wash segment more broadly, rents in the car wash segment have run up quite a bit and cap rates compressed the last couple of years. So I'm curious if 15% is still a level of exposure you're comfortable maintaining, or could we see that drift down more over time? And specifically Zips, I'm hoping you could add some color on how you envision that playing out. It seems like the risk to your AVR this year could be far lower than the 20 basis one exposure you have.

Thanks. Yeah. Sure. There's a lot embedded in that handout and a good place to start. I would, you know, it's too early on ZIPS. Obviously, we're in negotiation with them in bankruptcy. Certainly, we feel like we're in a really good position having paired our exposure down to three properties and 20 basis points to ABR. And, you know, you can look at our Historical recoveries are at 70 to 80 cents on the dollar, but it's an ongoing discussion. More broadly, we have strong conviction in the car wash space. We've been investing in that space for quite some time, and really the first bankruptcy we've seen. It's not one that we didn't see coming, obviously, as we've had our exposure. and we have strong coverage across the portfolio. One of the benefits of our platform is having deep industry expertise with almost 200 car washes across 54 operators, and then ongoing financial reporting where we can see the operators that are adding value, growing sales, improving EBITDA margins, and operators that are not, and take corrective action as we manage the portfolio. So Car Wash will continue to be one of our leading industries. It's been a great industry. We get great risk-adjusted returns, and we're pretty comfortable with our position as we think about looking through Zips bankruptcy.

Appreciate that. And if I could add a follow-up to that question about Zips, curious if you're able to share if they paid January and February rent?

We're not able to share that. But we did make comments on the call where we're 100% collected, so I should give you a hint.

Okay, fair enough. And then second question, I guess on the commentary regarding the increased competition you're seeing, I was hoping you could expound on that a bit. Where are you seeing the competition, specific industries? Do you think it's sustainable? And what do you think it means for your ability to transact for portfolios or sale leasebacks and cap rates, which I think you mentioned you expect to see compressed near term?

Max, why don't you tackle that question?

Sure. Thanks, Pete. You know, over the last couple quarters, we've seen some increased competition, both from our peers, and there's been a couple new entrants into the marketplace. But, you know, the only effect to that would just be a slightly modest compression in cap rates. But otherwise... transaction environment remains favorable to us. You know, we focus on servicing relationships and providing growth capital to middle market operators across the country. And there's an ample opportunity set for us to continue to invest and realize those, you know, attractive risk-adjusted returns. So we're happy with where the pipeline sits and, you know, it'll support the strong earnings chart that's implied in our guidance.

Thanks, Max. Thank you. Yeah, I would say, as we've said, you know, kind of the ACAPs and the 9-2 gap yields we saw in last year were kind of, you know, as we've said all throughout the year, kind of felt like the high water mark. And, you know, we expect to be more in the mid to high sevens as we think about this year. Thank you.

Appreciate the call. You got it. Thank you.

Our next question is from Caitlin Burrows with Goldman Sachs. Please proceed with your question.

Hi, good morning, everyone. I guess maybe just kind of expanding on that, wondering if you could give any more discussion on just like how interest rate volatility has impacted your business recently, maybe on the positive side or more negative side. I mean, if you look at the interest rate moves of 4Q alone, it was like pretty significant. So wondering to what extent you felt that and I guess anything that's happened subsequent to the quarter end.

Yeah, listen, Caitlin, you know, we have what is a 60 to 90-day transaction cycle. So, you know, if we're closing the deal today, we probably priced it anywhere from 60 to 120 days ago. And we're making 20-year investments. And so, you know, the week-over-week and even month-over-month volatility, you know, doesn't come into our pricing. And then, you know, you think about how we've positioned the balance sheet. You know, we're raising capital well in advance of deploying it such that that capital is priced in. And so, you know, we try to insulate ourselves from those volatile moves and move much more slowly. And, you know, to Mac's commentary in the fourth quarter when people were looking at a 3-7-10 year they were getting more aggressive bidding and then you know you turn the calendar and you have a 4-7 they're blown out of deals and we deliberately try to be more consistent and more predictable to that with our counterparties which is why we think we get premium returns for how we deploy our capital so overall I think you know we expect downward pressure on cap rates as we've consistently said and We saw more of that in the fourth quarter, and it's abating a little bit here in the first quarter, but we'll see where the market goes.

Got it. And then maybe just on the dispositions in the fourth quarter, wondering if you could talk a little bit more about what made you decide to move forward with that deal in particular, or maybe it was a couple deals, and as we think about it or how you think about it from portfolio management versus source of capital going forward.

Yeah, you know, from a source of capital, you know, it's not necessarily accretive to where we're pricing new capital. You know, certainly at a seven cap, you know, it's more portfolio management, risk management. You know, the fourth quarter was really lightening up on our car wash exposure, bringing that down from our soft ceiling of 15%, which, you know, you see we did, I think, Sixty-five or 70% of our dispositions in the fourth quarter were in the car wash space, so it was mostly portfolio management, industry exposure. As we said on the call, we expect the disposition activity to moderate and be more consistent with our eight-quarter average as we think about this year.

Thanks.

Thank you. Our next question is from Rich Hightower with Barclays. Please proceed with your question.

Hey, good morning, everybody. Maybe just to stick to the capital side of the equation, Mark, I think you mentioned, you know, minimal equity issuance needed overall this year to hit your investment targets. But, you know, maybe just talk about, you know, what might be needed. And I know that, you know, you also you guys also just said the dispositions obviously will decrease, you maybe relative to what we saw in the fourth quarter, but just help us piece together, you know, any, any sort of remaining equity capital needs to hit the full year guidance. And then obviously, you know, we, we started thinking about 2026 at some point and, uh, maybe just, you know, to hear your thoughts on that as well. Thanks.

You got it. Well, I'll probably leave 2026, uh, out until we actually provide guidance on 2026. So let me, I had to try Mark. Uh, no problem at all. Appreciate it, Rich. Um, Yeah, so listen, I think some of the building blocks, as you think about it, and I mentioned one other thing in my remarks about our growing free cash flow. So if you think about that, that's a pretty significant component of our investment ambition. In addition, Pete even mentioned, even if we use our eight-quarter average on dispositions, that probably delivers a decent amount of capital for that. And we've got $380 million of unsettled poverty. We've got a billion dollars So from our standpoint, the underlying assumption is that our equity issuance and guidance is really sort of you could deploy that, you could achieve that with normal kind of ATM activity. So I'll say it a different way. And, you know, what I mentioned in my remarks is, you know, we like to be front footed on capital raising or equitizing our growth ambitions. So as I think about it, it makes us very, puts us in a position of being very opportunistic. So if we actually wanted to do something in terms of a bigger offering execution or otherwise, we could do that and it would just be, it would be all the more positive to our expectations. But what I would say, as you look at our liquidity, we're sitting at 3.8 times leverage. If you run out, say, the liquidity we have to get to 4.6 times, which is somewhere right around, uh, sort of our, probably our historic, you're pretty much approaching a billion dollars, at least three and a half quarters of, uh, uh, of investment.

Okay. Got it. Sorry. I think Mark, you were breaking up there on my end. Um, but I think I caught most of that. And I guess, um, Just to, so that was sources, just to check in on uses for a second. What's the best way we should be modeling, you know, the timing of acquisition volume, you know, kind of throughout the year at this point? Thanks.

Rob? Hey, Rich. I think from a cadence standpoint, historically the fourth quarter has been a little bit larger for us in years past, but a ratable over the course of the year would probably be a reasonable assumption for right now. Obviously, where our pipeline sits today, we don't have visibility beyond 60 to 90 days there, but just speaking to our historical data.

Got it. Thanks, guys. Thanks. Our next question is from Smeeds Rose with Citi.

Please proceed with your question.

Hey, good morning. This is Maddie Fargis on for Smeeds. Do you have any feedback you're getting around consumer behavior from tenants that you're able to share given the current inflationary environment?

Our feedback is going to be delayed. We're receiving unit level financials at our sites on a one quarter lag. And so we're typically seeing inflation and cost pressures come through on a 90 to 180-day lag. And if anything, what we're seeing is those factors abating in the current numbers. But I would say the data and input you hear on the news is much more current.

Great. Thank you. And then your ABR exposure to tenants under one-times coverage ticked up slightly sequentially. Is there anything there to be concerned about?

No. That bucket ebbs and flows and particularly is influenced by, you know, sites that we're developing with our partners and putting capital to work before those sites are actually producing positive ABR. And certainly the uptick is de minimis in our view and nothing to be concerned about. And I would say, you know, if there were credit issues and they would be built into guidance and they are built into guidance and I think bumping the bottom end of the range of guidance this quarter should give you a sense of where we're thinking at this point.

Great. Thank you. That's it for me.

Thank you.

Our next question is from Eric Borden with BMO Capital Markets. Please proceed with your question.

Good morning. Just noticed that Circle K popped into the top 10 tenant list. I just wondering if you could talk about the potential opportunity to acquire more there, and then more broadly speaking, the appetite to add more C-stores to the portfolio.

AJ, why don't you tackle that?

Sure. So Circle K has been in the top 10 in previous quarters. It was really sequencing of just the rental escalation that put it back in. We're very happy with that tenant. Kushard's a great credit. And I think C-stores across the board is an area that we've continued to grow over the years, ratably. We're really happy with the community store space.

Okay. And then we just noticed that occupancy, you know, slightly moderated 20 BIPs quarter over quarter. I was wondering if you could have a comment there. And then if you could talk about your, you know, current watch list outside of ZIPS. You know, what do you guys have built into guidance for bad debt?

All right. Well, that one's jumping around the room. You know, on occupancy, I wouldn't read too much into going from, you know, three vacant properties to seven. That's certainly, you know, natural ebbs and flows in the portfolio. We did, you know, went through our releasing stats on the call, which I think are positive. So, you know, those seven properties will be brought back online and run through our releasing stats and You know, certainly any specific assumptions around those sites would be built into guidance. In terms of bad debt, Rob, why don't you tackle that?

Yeah, so our guidance range includes a wide range of assumptions, including for credit. We haven't quantified the specific range in the past, but maybe just as a frame of reference, we have said that historically our portfolio has experienced about 30 basis points So when we construct our guidance range, we go through a combination of top-down and a bottom-up process where we identify individual tenants as well as bake in a general reserve. And so typically that results in an assumption that's well in excess of that 30 basis points number, if that's helpful.

Oh, I'm sorry.

I think you're breaking up a little bit. I don't know if I heard the last bit of your question. I'm happy to take it offline, though.

Thanks. Great. We appreciate that. Thanks. Sorry for breaking up.

Our next question is from Michael Goldsmith with UBS. Please proceed with your question.

Good morning. Thanks a lot for taking my question. First question, on the car wash industry again, given what you have visibility into, is the pressure on this group broad-based or is it more focused on a narrow range of operators right within the Zips filing. They noted that they've seen roughly 900 new car wash sites open every year for the past five years. So just trying to understand if this is industry-wide or is this just kind of specific operator, it can seem to just kind of specific operators things.

Yeah, we certainly think it's a specific operator trend. Obviously, there is new competition in the car wash space, and we're monitoring that and trying to deploy our capital with guys who do it right and guys who do it well. Across our overall portfolio, sales are flat and EBITDA is roughly flat with margins in excess of 50%. and coverage, you know, in the mid twos. So we certainly feel good with our exposure and, you know, we monitor it on a quarterly basis and take corrective action where we see sites that aren't working, but I don't think there's, you know, something systemic to the entire car wash space that gives us concern.

I appreciate that. And as a follow-up, you know, keep up the good work with the acquisition guidance, but, you know, you did die to a billion at the midpoint this year down from 1.2 last year. Is that, you know, is that a reflection of, you know, lack of visibility into the transaction market or are some other factors that would potentially lead to a more challenging year this year? Because it did sound like you were relatively optimistic at the start of the call. Thanks.

Yeah, I think it's really conservatism and the recognition that, you know, 2024 was a great year for buying assets at super high cap rates. And we were aggressively looking to take advantage of the dislocation in the capital markets that was allowing us to deploy capital at historically wide spreads and historically wide rates and We expect in 2025 a normalization of the capital markets and a resumption of competition will drive cap rates down and thus making us a little less acquisitive. But it's early in the year, right? And the 10-year remains volatile, as we discussed earlier in the call. And, you know, we'll see where things shake out. But, you know, obviously there's not a huge difference between, you know, where we ended up last year and the midpoint of our guidance. So, you know, we'll continue to transact, continue to service our relationships, and see what the year brings.

Thank you very much. Good luck in 2025. Great.

Thank you.

Our next question is from John Alachowski with Wells Fargo. Please proceed with your question.

Hi, this is Cheryl on behalf of John. I was just wondering what were the drivers for the plus one cent raise on the low end of AFFO Guide and how have you seen acquisitions trend year to date? What does the pipeline look like and have you seen any cap rate compression recently?

Yeah, as we said in our prepared remark, the pipeline's full, albeit with modest cap rate compression. So, you know, as I said, we do expect to transact in the mid to high sevens, which is down from an eight. You know, the range of guidance, you know, is driven by a bunch of assumptions, both around investments, around credit experience, and around the cost of capital. Obviously, I think the cost of capital is not going to be a huge driver given where we're positioned currently and the price of that capital. But, you know, it's really cap rates and credit experience and performance of the portfolio.

Thank you. And then just one last one. We see that the credit coverage picked up in the 1.5 to 1.99 times category last What kind of assets drove the pickup in that bucket?

It's going to be broad-based across the portfolio. I don't think there's anything specific to industries or tenants that's going to kind of drive the increase in that bucket.

Gotcha. Thank you. Thank you.

Our next question is from Farrell Granath with Bank of America. Please proceed with your question.

Hi, good morning. Thank you for taking my question. I wanted to ask about your dispositions that you spoke about. There may be a slowing, but there was a key focus on the reduction in car washes. Is there any other industry that would be a focus going into 2025, or would it be just the rebalancing of the portfolio?

Yeah. So, you know, we have the soft ceiling for any given industry of 15%. And so when we crest that, we look to pair that exposure and create the ability to continue to invest within those industries, really, to be able to service our relationships. You know, beyond that, I think most of this position activity is going to be property level and tenant risk-based, where we see risks either at a tenant level or an individual asset level, and really moving those risks out of the portfolio and nothing really systemic to hang your hat on there.

Okay, thank you. And also, sorry to go back to the bad debt and credit assumptions. I just wanted to understand, compared to your initial guide, on the 20 basis points of exposure for ZIPs. Was that initially included into the bad credit assumption or is there an additional assumption that is maybe baked in now into new guide of that additional 20 basis points?

Yeah, so you got to think about what happens in a credit event. You have a tenant file for bankruptcy and then a lease stops paying and then you take your assets and you reposition those assets and you have a recovery on those assets. So, really, when you're building in the credit assumption, you're going to have the downtime of the assets and then the recovery of experience of those assets, assuming a specific downtime, whether it's 30, 60, you know, 180 days, depending upon the asset, the market. Our credit assumption in guidance goes through all our tenants and all our assets and makes specific assumptions around what we think is going to happen based upon our experience and our visibility into the unit level performance of those sites. And then, on top of that, has an unknown assumption on top of that to account for things that we don't know, that we can't see. And so, without speaking specifically to ZIBS, I would say, Our credit loss assumptions for the year have not changed materially in the 90 days since we initially provided guidance.

Okay. Thank you so much.

Our next question is from Daniel Guglima with Capital One Securities. Please proceed with your question.

Hi, everyone. Thank you for taking my questions. I appreciate the US map on page nine of the supplement, and there weren't many major changes in diversification by state quarter to quarter. But I know you all have a large forward pipeline of deals. So thinking about that map one year from now, are there certain states or regions where you'd expect material changes?

We often say geography is an output of where our tenant relationships bring us, such that I would expect our geographical diversification to grow radably, and I would not anticipate a materially different Page 9, you know, 12 months from now.

Okay, great. And then as a follow-up to that, we looked through kind of the U.S. wage data And it looks like some of the southern cities have had some like re-acceleration in wage growth, Atlanta, Miami, Dallas, Houston. And you mentioned it's kind of where your partners take you. Have you been getting more inbounds from partners and tenants trying to kind of expand in those parts of the country?

Yeah, I mean, our relationships are bringing us into those markets. And given that we're heavy in those markets currently, you know, I would say our our inbound demand for capital has been proportionately similar to our geographic diversity.

Great. Thank you. Thank you.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question is from Jay Cornrich with Wedbush Securities. Please proceed with your question.

Hey, thanks. Good morning. Going back to industry allocations, you know, beyond lowering car exposure, car wash exposure below 15%, it looks like you increased exposure to casual dining ED basis points to 7.5%. And, you know, that's an industry that's faced some headwinds lately. So just curious if you can provide any thoughts around your conviction to increasing exposure there. And if there's any other, you know, smaller industry exposures you have that you'd like to see increase going forward.

Yeah, I would say, you know, and generally I have said, expect our pie to grow rapidly. And much like the geographic discussion I just had, our industry diversification is driven by our relationships and where we have, you know, deep relationships and, you know, they're the ones that, bring us the opportunities. Certainly some industries are, you know, there's more opportunities than others given where they are in consolidation, like car washes, early childhood and automotive service, and other industries like the restaurants are more consolidated. In general, you know, we have a strong conviction around casual dining, which is why it's 7.5% of our ABRs. and that conviction is really more driven by the fungibility of the real estate and our recovery experience around that real estate and our credit loss experience around casual dining credit events that gives us that confidence. And so we continue to invest there. I've been investing in restaurants for 20 plus years in the specific casual dining space and it remains a core investment industry for us.

I appreciate that. And then just one more. In terms of where your transaction is coming from, the bulk of them typically comes from existing tenants. And so I guess I'm just curious how sticky or, I guess, loyal do you feel like your existing tenants are to valuing your platform and your relationship and continuing to transact going forward versus as new capital providers come into the market, really just chasing the best cost of capital they can.

Thanks, Jay. This is Max. I'll take that. You know, I think you can probably look to the repeat business and existing relationship percentages that we post quarter over quarter, and it always kind of ebbs around that 80%, give or take. And so that just kind of tells you that the repeat business continues to drive the majority of our pipeline, but then we're always actively out there sourcing new relationships and I think the strongest driver for new relationships would be referrals. At the end of the day, all these operators and tenants talk to each other. They're exchanging ideas. And when you continually transact with our tenants over and over and you build that relationship, then that relationship continues to expand. And that's always going to be the driving force of our pipeline.

And to the pricing question, I would say these tenants, Operators, they value execution certainty, and they're not unsophisticated, and they certainly are going to do a price check on any capital that they source, but they do place a high reliability, a high priority on reliability and predictability, and being the incumbent, having docs negotiated and having underwritten the credit in advance certainly gives us an advantage over a new capital coming into that system.

Okay. I appreciate that. That's it for me.

Thank you. Our next question is from Greg McGinnis with Scotiabank.

Please proceed with your questions. Greg, is your line on mute?

Sure is. Good morning. Sorry about that. Cash releasing spreads were positive for the first time in a while. Was there anything unique about the expirations or anything handled differently from the portfolio management standpoint that helped you cross that threshold? And do you expect a similar outcome or is a similar outcome achievable in 2025?

AJ, you want to tackle that?

Yeah, I don't think there was anything unique to the quarter on the recovery rates. Some of the lease renewals had some larger bumps than usual, which led to some of that positive relet. And if you look at just kind of the breakdown of the number of leases renewed, this particular trailing 12-month period, we had 42 leases renew with larger than usual bumps, which led to to the total leasing stats being positive. So I think this particular quarter was more just episodic of the fact that we had 42 leases renew in the trailing 12 month period. But it's really kind of two different buckets. One's just contractual renewals and the other is repositioning assets, whether it's through a vacancy or without a vacancy. But I think the stats should be pretty consistent as we move forward.

Okay, thanks, and I can understand that the, sorry, go ahead.

Greg, I would just add, you know, listen, as I look at those rates, the recovery rate, I would anticipate those percentages to be relatively consistent, and the ultimate weighted average is really just going to depend on, you know, how we're renewing an asset. Is it an as of right in the lease? Are we renewing an asset without vacancy? Or are we having to take it back and repurpose it with the downtime? So it's really just a factor of, you know, we had a bunch of renewals, not a bunch of vacant asset relets.

Okay. That makes sense. And then follow-up is on the tenant credit. And I recognize that rent coverage remains healthy and will move quarter to quarter. But we did see what appears to be kind of a doubling of the CCC plus tenant credit to around 4%. from last quarter. Was that due to acquisitions or is that tenants dropping down into that bucket? Any color is appreciated. AJ?

Yeah, it was tenants dropping down within the portfolio. And the thing to remember oftentimes in that particular cohort is it's an implied credit rating. It's something we pay attention to. But what we really look for is if it's migrating down to the CCC plus bucket or even B minus bucket, what's the unit level coverage look like? And, you know, more than half of that particular bucket is still greater than two times coverage, which gives us a lot of confidence. And that's really what we're paying attention to is the marriage of those two categories, which is the implied cut for trading as well as the unit level economics.

Yeah, Greg, and you can assume we're not deploying a lot of fresh capital into CCC credits.

Fair enough. Thank you.

Our next question is from Spencer Glimcher with Green Street Advisors. Please proceed with your question.

Thank you. Just one for me on the acquisitions pipeline. So you guys commented that the pipeline remains robust, reflecting continued M&A activity as well as new unit expansion. Are you able to share which industries you're seeing the most activity from in terms of that new unit growth thus far into the year?

Max, what are you seeing there?

You know, Spencer, I think it's pretty ratable to historical trends, and there's really nothing that draws a conclusion. You know, both new unit M&A, a lot of add-on follow-on transactions with existing tenants, but the pipeline looks pretty consistent as it has been in the historical periods.

Okay, and then actually maybe one just on the dispositions for 2025. I know you commented that some of this would obviously be driven by opportunistic asset sales. Have there been any assets in this particular bucket that have already been earmarked for sale that you guys think might be a compelling divestment, either because of cap rate compression in the industry, good real estate, or are these just kind of ad hoc from inbounds or as they come up throughout the year?

Yeah, we're mostly going to sell because we see an asset that we don't like the risk profile. Generally, if our phone rings and someone trying to buy an asset, they're not going to be the most competitive. Running an auction and finding the most competitive capital is generally how we do it. So we tend not to respond to unsolicited inbounds on our properties. And it's more just deliberate risk management activities that we take. And that's what's driving the volume.

Thank you.

Our next question is from John Masoka with B. Riley Securities. Please proceed with your question.

Good morning. On the 2025 investment volume done year-to-date, maybe even on the pipeline that's kind of in PSA or LOI, I mean, are you seeing that cap rate compression in those investments or potential investments, or is it more just a theoretical view on stuff that's more than 90 days out given just kind of all the macro factors?

No, John, we're living it, you know, and particularly if you think, you know, we negotiated those deals back in November and December where there was a much more constructive tenure. And so, our current pipeline, I think, is, you know, in that mid to high sevens cap rate that we discussed.

Okay. That's helpful. And then, were there any zips in the 4Q24 disposition activity? Was there any what, John? Zips car washes. I mean, it's because there's a big bucket of car washes in 4Q, and I just was curious.

No, we unloaded, and that's the key here, is when something becomes apparent, something's going to break, it becomes illiquid, and the price to transact becomes pretty steep. And as a sophisticated institutional investor, we're not going to sell individual assets that are, you know, imminently going to break. We'll fix them first and then sell them. So there was no zips car wash in the fourth quarter.

Okay. And then if the car wash sales in the fourth quarter more generally, I mean, how much of that was driven by, you know, individual risk at those assets or with those tenants and how much was just kind of getting below that 15 number and some breathing room to maybe, you know, be aggressive on the investment side again for the remainder of this year?

It's both, right? We want the breathing room, so we're going to look at our portfolio and choose the assets that we don't want to own for the next 20 years.

Okay, that's fair. That's it for me. Thank you very much.

Thanks, John. Take care.

Thank you. Our next question is from Caitlin Burrows with Goldman Sachs. Please proceed with your question.

Hi again. I don't think it's come up, so I figured I'd ask. Just as you guys think about the leverage and funding going forward, I think you made a point earlier on, given where your leverage is today, you obviously have a lot of capacity. But from here, like near term, how are you guys deciding between using equity versus debt?

Thanks, Caitlin. I guess what I'd say is, as we think about it just generally, the split between debt and equity had historically been about 60%. With our growing free cash flow, that's really turned into more 60% equity, 30% debt, 10% free cash flow. So as we look at it, we would continue to utilize that. We'd also orient ourselves to where our leverage stands. So that obviously is a data point for us as we think about when to deploy, when to access equity, when to utilize debt issuance. I think from the debt standpoint, as I mentioned, we don't have any near-term demands on liquidity for us to do either. In our case, we can be opportunistic on the equity front, but we can also be opportunistic on the debt front, and hopefully the 10-year will accommodate in some fashion. But for us, we're thinking that the opportunities we have for 2025, you know, really starts with our revolver and then term it out with hopefully an unsecured bond deal.

Thanks. That's all.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Pete Mavoides for any closing remarks.

Great. Well, thank you all for participating in today's call. Obviously, we'll be on the road at various conferences and non-deal roadshows in the next couple months, and so we look forward to meeting with you all in person. Have a great day. Thanks.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.