Essential Properties Realty Trust, Inc.

Good morning, ladies and gentlemen, and welcome to the Essential Properties Realty Trust's first quarter 2025 earnings conference call. This conference call 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, Max Jenkins, Chief Operating Officer, A.J. Peel, Chief Investment Officer, and Rob Salisbury, Head of Corporate Finance and Strategy. It is now my pleasure to turn the conference over to Rob Salisbury.

Thank you, Operator. Good morning, everyone, and thank you for joining us today for Essential Properties' first quarter 2025 earnings conference call. During this conference call, we'll make certain statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to these 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 for joining us today for your interest in essential properties. In the first quarter, despite a choppy capital markets backdrop, the operating environment has remained favorable for our business as our team continues to source attractive investment opportunities, focusing on middle market saley specs with growing operators within our targeted industries. During the quarter, we invested $308 million as we continued to support our existing relationships, which contributed 86% of our investments, underscoring the value of recurring business within our tenant base. Our portfolio also continued to perform well, with tenant credit trends and same-store rent performance healthy and in line or slightly ahead of our expectations. We further solidified our capital position during the quarter, issuing over $300 million of equity and upsizing our credit facility, leaving us with pro forma leverage of 3.4 times and liquidity of $1.5 billion, which positions us well to continue to grow our portfolio and continue to generate sustainable earnings growth for our shareholders. The continued healthy portfolio trends and the attractive investment environment remain supportive of our 2025 business plan. As a result, we have reaffirmed our 2025 AFFO per share guidance range of $1.85 to $1.89. On our fourth quarter earnings call, we discussed our expectation that competition could build as capital markets normalized, resulting in modest cap rate compression. We continue to expect our investment cap rates in 2025 to be slightly lower than 2024. However, the recent heightened volatility in the capital markets has resulted in less competition than we had anticipated at the beginning of the year. Overall, our investment pipeline is supportive of the upper half of our articulated investment guidance of $900 million to $1.1 billion. Importantly, we do not need to raise any incremental capital to achieve our guidance range this year. Turning to the portfolio, we ended the quarter. with investments in 2,138 properties that were leased to 423 tenants operating in 16 industries. Our weighted average lease term stood at 14 years at quarter end, in line with a year ago, with just 5.4% of annual base rent expiring over the next five years. From a tenant health perspective, our weighted average unit level coverage ratio was 3.5 times this quarter. indicative of the profitability and cash flow generation by our tenants at the unit level. With that, I'd like to turn the call over to Max Jenkins, our Chief Operating Officer, who will provide an update on our investment activities and the current market dynamics.

Max? Thanks, Pete. On the investment side, during the first quarter, we invested $308 million through 21 separate transactions at a weighted average cash yield of 7.8%. Our investment activity in the quarter was broad-based across most of our top industries, with no notable departures from our well-defined investment strategy. This quarter, our investments had a weighted average initial lease term of 17.5 years and a weighted average annual rent escalation of 2.2%, generating a strong average gap yield of 9.4%. Our investments this quarter had a weighted average unit-level rent coverage of three times and the average investment per property was 5.5 million. 90% of the investments this quarter were sale-leaseback transactions. Looking ahead, our investment pipeline remains strong across all of our targeted industries. Pricing in our pipeline is relatively consistent with our first quarter transactions, with cap rates in the high 7% range and strong contractual escalations, which is supportive of our long-term growth trajectory. including $135 million of investments closed subsequent to quarter end, we have invested $443 million year-to-date, providing a line of sight to our guidance range that is encouraging at this early point in the year. With that, I'll turn the call over to A.J. Peel, our Chief Investment Officer, who will provide an update on our portfolio and asset management activities. A.J.? Thanks, Max. Thanks.

At a high level, our portfolio credit trends remain healthy, with same-store rent growth in the first quarter of 1.5%, up slightly from last quarter. Tenant credit events remain muted, with occupancy of 99.7% and collections of effectively 100%. While there were no noteworthy credit events during the first quarter, we continue to work through the Zips Car Wash bankruptcy, which impacts three of our properties and approximately 20 basis points of our ABR. Given the ongoing nature of the bankruptcy, it is premature to discuss any expectations around our lease on these three properties. However, as an update, I would note that this tenant remains current on their rental obligations. From a tenant concentration perspective, our largest tenant represents 3.9% of our ABR at quarter end, and our top 10 tenants now account for just 17.3% of our ABR. Tenant diversity is an important risk mitigation tool and differentiator for us. It is a direct benefit of our focus on middle market operators, which offers an expansive opportunity set. Our car wash industry exposure further rationalized to 13.9% of ABR, comfortably below our soft ceiling of 15%. On the disposition front, after a busier fourth quarter, our asset sale activity normalized in the first quarter. We sold 11 properties this quarter for $24.3 million in net proceeds. This represents an average of approximately $2.2 million per property, highlighting the importance of owning fungible, liquid properties, which allows us to proactively manage portfolio risk. The dispositions this quarter were executed at a 6.9% weighted average cash yield. Over the near term, we expect our disposition activity to be consistent 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 Battin, our Chief Financial Officer, who will take you through the financials and balance sheet for the first quarter.

Thanks, AJ. Overall, we had a good first quarter highlighted by the strong level of investments that Max outlined at a 7.8% cash cap rate. AFFO per share of 45 cents represented an increase of 7% versus Q1 of 2024. On a nominal basis, our AFFO totaled $85.7 million for the quarter, which is up $14.6 million over the same period in 2024, an increase of 21%. This AFFO performance was consistent with our expectations as reflected in our guidance range updated last quarter. Total G&A in Q1 2025 was $11.5 million versus $9.4 million for the same period in 2024, which is consistent with our expectations. The majority of the year-over-year increase is related to increased compensation expense as we continue to invest in our team. Our recurring cash G&A was $7.6 million this quarter, which is consistent with our guidance range of $28 million to $31 million for the year and represents 5.9% of total revenue, which compares favorably to the 6.2% in the same period a year ago. We declared a cash dividend of 29.5 cents in the first quarter, which represents an AFFO payout ratio of 66%. Our retained free cash flow after dividends, which we view as an attractive source of capital to support our growth goals, continues to build, reaching $30.1 million in the first quarter, equating to over $120 million per annum on a run rate basis. Based on our investment guidance for 2025, that would represent more than 10% of our capital needs to fund our external growth. Turning to our balance sheet, with the net investment activity in Q1 2025, our income producing gross assets reached $6.3 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 issued $292 million in an equity offering in March, which complemented our ATM activity of approximately $21 million, giving us a total of $313 million of equity raised in the quarter. We settled $279 million of forward equity in the quarter, with a portion of the proceeds utilized to repay our revolving credit facility balance. Our balance of unsettled forward equity totaled $410 million at quarter end, which we expect to utilize to fund our near-term investment activities while preserving our flexibility by keeping our $1 billion revolver fully available. Similar to last quarter, our share price remained above the weighted average price of our unsettled forward equity of $30.51 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 first quarter, our diluted share count of 191 million shares included an adjustment for 1.1 million shares from our unsettled forward equity related to this Treasury stock calculation. This represented a modest headwind to our AFFO per share for the quarter. Based on our current share price, we continue to expect a modest headwind again in the second quarter. Our pro forma net debt to annualized adjusted EBITDA RE as adjusted for unsettled forward equity was 3.4 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 and allow us to service and protect our tenant relationships despite the choppy capital market environment. Our liquidity was bolstered this quarter with the previously announced closing of our amended $2.3 billion senior unsecured credit facility, which provides $1 billion of capacity on the revolver, along with the aforementioned equity activity. Lastly, as we noted in the earnings press release, we have reaffirmed our 2025 AFFO per share guidance range of $1.85 to $1.89, representing over 7% growth at the midpoint. Importantly, this guidance range requires no incremental equity issuance, which we believe is a testament to our front-footed approach to both investments and capitalization. With that, I'll turn the call back over to Pete.

Thanks, Mark. In summary... We are happy with our first quarter results and remain excited about the prospects for the business. Operator, please open the call for questions.

At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may withdraw yourself from the queue at any time by pressing star 2. Again, that is star and 1. And we'll take our first question from Spencer Glimcher with Green Street. Your line is open.

Thank you and good morning. Can you comment on how you're thinking about the ongoing tariff situation in regards to tenant health? Are you guys expecting any impacts to tenants in the portfolio?

You know, Spencer, we are not. I mean, obviously we're watching it closely as it unfolds, but given the fact that we're 93% service and experience based and not really a lot of goods, you know, the tariff impacts will be, you know, very tangential to our operators. But obviously we pay close attention to the credits and the portfolio, but I think we'll be in a pretty good spot.

Okay, thank you. And then I know you mentioned there's been less competition than expected thus far in 25. Is it fair to say that that's a widespread theme across like all of your target industries or are there any pockets of the portfolio where you're seeing outsized competition?

Yeah, I wouldn't really characterize it across industries. We're certainly finding more competition in bigger transactions. The larger the deal, the more eyes that are on it, and larger credits. The bigger the credit, the more eyes are on it, and the more competitive those opportunities become. The small granular transactions in the $5 to $10 million range and the midsize operators that we deal with day in, day out, it hasn't been as competitive.

Great. Thank you so much.

Thank you, Spencer.

We'll move next to Eric Borden with BMO Capital Markets. Your line is open.

Hey, good morning, everyone. Just given the strong acquisition volumes in the first quarter and a solid start to the second quarter, you know, and your liquidity is full and, you know, the balance sheet continues to improve, what's really the governing factor from raising the acquisition guidance today?

Yeah, I'd ask Rob to handle that one.

Hey, Eric. So you're right to point out that we're off to a great start to the year on volume. Cap rates have been coming in pretty favorably as well. And because we've talked about our portfolio, tenant credit continues to evolve very favorably as well. We hiked guidance last quarter. And while we're off to a great start and the balance sheet's fully loaded, it's still pretty early in the year. And we have visibility on the pipeline for call it 60 to 90 days. And typically there's a little bit of a lull in the summertime and then people come back to school in September and there's more transaction volume into year end. So while we have some great visibility into 2Q, it's still pretty early in the year and we'll just see how it evolves from here. Helpful.

And then we appreciate that. And then Dave and Buster's saw that it moved into the top 10, you know, just curious on the investment thesis there, you know, was it, you know, a strong sponsor relationship or, you know, just, just curious on any color incremental detail you can provide on the Dave and Buster's acquisition.

Hey, Jay, why don't you tackle that one for us? So, you know, Dave and Buster's is a management team or a company that we've known probably for the better part of 15 years. So we were presented with the opportunity to do a sale lease back. You know, we structured on our lease form, which provides ongoing unit-level reporting. We structured the rent so that we're generating greater than two times coverage going into it. And we invested in some markets that we really like with the real estate that's positioned near other national retailers. So for us, it seemed like a really good risk-adjusted opportunity to make an investment. And then, Max, I don't know if you have anything to add on kind of how the deal came to us.

Sure. And, Eric, I note that, you know, we participated in various sale leaseback transactions over the years with the main event, Dave & Buster's team, and And historically, they always price away from us. And in Q1, we were presented a unique opportunity and less competition because of the volatility in the capital markets. And so we were able to generate some pretty attractive pricing and terms. And it was kind of a unique opportunity for us to transact there.

Great. I would add that, you know, given our diversity through the top 10 at, you know, 1.7%, you know, it has – higher prominence than probably warranted. And many of our competitors, that would be down around a 15 to 20 tenant. So good investment, known for a while, well-structured, good pricing, and we feel good about it.

Well, thank you very much. I will leave it there. Thank you.

We'll take our next question from Michael Goldsmith with UBS. Your line is open.

Good morning. Thanks a lot for taking my question. Maybe just to follow up on the Dave and Buster's. It seems like you have a good relationship there, though it does seem that the operating metrics for the company have been a bit softer with negative comparable sales and some declining traffic. So just trying to get a sense of, you know, it sounds like you've got good rent coverage and you're comfortable with the markets, but just trying to get a sense of, you know, your comfort level overall with the business. in this environment.

Sure. And listen, we've been investing in the family entertainment space for a long time and have strong conviction there. We're making 20-year investments. And so, you know, a six-month operating environment really has limited impact on that, you know, long duration investment. And, you know, ultimately we We own the real estate that generates the cash flows, and we're senior to the debt holders, and we're senior to the equity. And while there may be some noise around the equity story, there isn't noise around the landlord collecting rent story. In fact, in our diligence, we found Dave & Buster's has only closed two sites in its history, and we feel eminently comfortable with the real estate that we own.

Very helpful context. And then beyond Zips, is there anything else on the watch list or any sort of notable movement on and off? I also know you have very good visibility into your tenants, so any sort of evolving dynamics that you're noticing or keeping an eye on?

Yeah, you know, AJ, what's the current watch list?

So 1.6% down 50 basis points quarter over quarter.

Yeah, so the watch list is in a good spot. The watch list tends to be comprised of a bunch of idiosyncratic operator level events, nothing really thematic across industries or property types and so it's in a good spot. It's down quarter over quarter. You should expect any sort of credit events are well baked into our guidance and overall we feel good about where the portfolio sits today.

Thank you very much. Good luck in the second quarter. Great. Thank you.

We'll take our next question from Heindel St. Hustay with Mizuho. Your line is open.

St. Hustay. I love it. Good morning, guys. Good to hear from you. I had a couple quick ones. First, just to follow up one more on the Dave and Busters. You mentioned the coverage was More than 2x. I was hoping we could get a bit more from you guys in light of some of the questions we've heard from investors about the discretionary nature and history of this tenant. So maybe any color on if you can get a bit more specific with the coverage and then maybe color on the rent bumps and the term of these leases. Thanks.

Yeah.

Yeah, it's you know, we generally don't disclose tenant specific you know, coverage and the lease term would generally be consistent 15 to 20 years with 2% plus bumps. And the master lease is north of two times, absent of getting specific.

Okay. Fair enough. I appreciate that, Pete. And then one more, maybe if you guys could Perhaps give us a bit more color on the transaction environment broadly out there. Last quarter, you're seeing more competition for private equity. This quarter, less. I'm curious if you think they're waiting on the sideline for more stability and will be perhaps more active in the second half. I know a lot of them have raised capital, so they need to deploy. Are deals taking longer? Any retrading? Any thoughts on cap rates in the second half? Would appreciate just some more context and color on the transaction environment. Thank you.

Sure. Max, why don't you tackle that, please?

Sure, Pete. And, you know, when we, early in the year, you know, spreads were pretty tight and we, you know, noted increased competition and, you know, there was less volatility. But then, you know, the volatility continued to persist. And so some of that competition, as Pete noted, has diminished. However, with larger portfolios, broadly marketed deals, we still see it there in some pretty more efficient pricing. However, our bread and butter has always been those kind of smaller follow-on repeat business sale-expect transactions with our tenant partners, and so we're still generating adequately attractive risk-adjusted returns, and the pipeline remains strong for us, and we're focused on servicing our relationships and providing that surety of close with our tenant partners. As the markets normalize, we do expect competition to continue to compressed cap rates, but we're frankly not seeing that right now, but we do expect it to probably happen once the market's normalized.

Yeah, and I would add, I think there's a growing appreciation for the asset class and the durability of the asset class, and the longer there's an operating track record of solid, stable performance, I think over time it's going to continue to attract capital and make the market more efficient.

No, that's great, guys. If I could ask a quick follow-up on just if this would lead you to perhaps be more active in the first half of the year or maybe the first two to three quarters than you historically would have been just in this scenario where you seem to have just more of an opportunity in front of you and, as you outlined, lots of capital at your disposal.

Yeah, I think you see that. You certainly see it in the numbers. You see it in our – this is our largest first quarter print. you know, and going along with that is our highest gap yield at 9.4, right? So let's not ignore the fact that, you know, despite losing 10, 20 basis points on the initial cap rate, you know, we gained, you know, significant economics throughout the life of these leases. And so the narrative that this is a great buying environment for us that, you know, I was talking about pretty much all through last year continues and we are working very hard to capitalize on it.

Great. Thank you. Appreciate it. Thank you.

We'll move next to Caitlin Burrows with Goldman Sachs.

Your line is open. Hi, good morning. Maybe just following up on that investment volume opportunity, it does seem like your business could be somewhat reliant on your operators expanding. So just wondering if, what impact you've seen or expect could be seen on any of your tenants and their interest or ability to expand and how that could or wouldn't impact your volumes.

Yeah, there's been a consistent source of opportunities for us. Our tenants continue to engage with us on expansion and M&A and development opportunities in these industries that we've targeted. And while that activity may diminish at the margin, I think the lack of competition will diminish as well such that we continue to be well positioned as the first and last call and a valuable partner to these guys. And so it's a steady flow business and we provide great disclosure around our investment activity on a quarterly basis. You know, there has not been a ton of variability, nor do we expect it.

Yeah, no, definitely seems like a steady business, which is surprising, but great. Maybe on the leverage side, you guys are at 3.4 times, like you mentioned, which versus other REITs is quite low. So I was wondering if you could go through if there are any circumstances that you think could come up, not that they're necessarily likely, but in what scenario would that leverage go up? Yeah, wondering what you can talk about on the leverage side. Mark, why don't you tackle that, please?

Yeah, I mean, look, I guess, you know, historically, we've been at about, call it four, five, four, six times. We have been thoughtfully over-equitized probably over the last year and a half, given just the dynamics between the cost of our equity and the cost of debt. I think, as we think about it, I'll kind of come at it maybe slightly differently for you. If you think about that four or six times, you know, I've probably got, we've probably got four, four and a half quarters worth of liquidity before we'd reach that 4.6 times. So if you think about that, that kind of gets you through, gets you into 2026. I'll say it another way, you know, if you think about our unsettled forward equity at 410 million, you think about our recurring free cash flow through the next three quarters at about 90. even at the pace of dispositions they referenced, that's a good $560 million worth of liquidity before you're using leverage. So we anticipate remaining pretty conservative on the leverage front.

Got it. Thanks.

We'll take our next question from John Kilichowski with Wells Fargo. Your line is open.

Thank you. Good morning. Maybe just on the credit side, would you mind talking us through the increase in the sub-one times coverage bucket? I think there was 70 bps quarter-over-quarter.

Yeah, I think it's all going to be kind of idiosyncratic stuff, but, AJ, any call-outs there that you would point to?

No, I wouldn't call anything out, and it's certainly a data point that we pay attention to, but that in and of itself does not indicate a default scenario necessarily, and what we really think about is how that bucket kind of couples with the overall corporate credit. And so what I would suggest is if you think about our watch list being down 50 basis points quarter per quarter, and if you think about the shadow rating that we provide in the histogram, the single B bucket and lower is down 420 basis points sequentially. So, you know, our unit level coverage ebbs and flows over time, but it just moving to 3.7 doesn't necessarily indicate that there's a theme or some type of risk that we need to get ahead of. And what it will encourage us to do is to think about those assets. And if they're permanently impaired, we're going to go to the disposition market. And I think that's how you'll see us react over time. Okay.

Got it. And then I guess, have your credit loss or non-reimbursable assumptions changed at all, given any of the volatility we've seen?

They, you know, listen, we make a spot estimate and bake it into guidance and then adjust throughout the year. you know and it changes things situations get better than we anticipated and other situations crop up that you know are worse you know but overall I think the performance the portfolio is pretty consistent with what's built into guidance certainly a a 1.5 same store sale growth would indicate you know strong kind of performance of the portfolio with lack of credit events

John, I'm sure you noticed, by the way, that the under 1.5 times, so that 1.5 to 1 and the under 1 actually dropped 90 basis. So at 12.3, that's lining up to be a pretty good data point for us relative to the portfolio. Understood.

Appreciate the color. Thank you. Great. Thank you.

We'll take our next question from Jay Kornreich with Wedbush Securities. Your line is open.

Hi, thanks. Good morning. If I could just do one more follow-up on the transaction market. I guess besides competition being down, as you think about new potential tenants you've been targeting to transact with for the first time, are they being any more cautious or slower to conduct sale-leaseback transactions? Do they wait more clarity on the economy? Or are those types of conversations still progressing at a normal pace?

Yeah, you know, I forget the number, but it was in the mid 80s percent of repeat business in the first quarter. So, you know, as we said in the past, our existing relationships drive a good, good proportion of our investment opportunity. And we focus on those first and foremost, you know, on an ideal run rate. You know, we're sourcing maybe 75 percent from our existing relationships and 25 percent new. So I think the fact that, you know, we're skewed off of that, you know, ideal would suggest, you know, there's our existing relationship coming to us, you know, and we're servicing those and they're placing a high premium on our reliability. And, you know, there still remains active dialogue and new relationships, but I think the lack of new relationships really is more our focus than their cautiousness.

And Jay, I'd also add with the ongoing discussions with our tenants that, yes, some may be a little bit more cautious on growth. It ebbs and flows on the specific business and industry. Whereas they might slow down growth, they'll look to monetize the real estate on balance sheet to strengthen their liquidity position. So, you know, using real estate to monetize those discussions have not slowed down, and we're working with our tenant partners to help them, you know, achieve success and maximize EBITDA growth for their specific company.

Okay, I appreciate that. And then just for one follow-up, I guess as you look at your current portfolio segment exposures, I guess in the current environment, are there any areas where I guess you really like that maybe you want to drive exposure higher? Or on the flip side, maybe you want to increase dispositions and get some lower exposure given the volatility?

Yeah, you know, as I said kind of earlier, you know, we're taking a 20-year investment view, and this industry list has been curated due to the real estate fundamentals that we like in these industries and the service and experience base. So, and then secondarily, we conduct sourcing activities across all these sectors. And so, you know, my general response to that question is you should expect the pie to grow ratably. But for, you know, obviously we've lightened up in casual dining. We continue to not invest in movie theaters and home furnishings. At 30 basis points in home furnishings, You know, maybe we can just get rid of that little slice there at this point. But generally, it should grow radibly, and that's very purposeful on our part.

Okay. Thank you very much. I'll stop there.

Thanks.

And we'll move next to Smady's Rose with Citi. Your line is open.

Hi, thanks. I just wanted to ask a little bit about the car wash exposure. As expected, it came down from fourth quarter with some of the sales that you've highlighted. Could you just speak to a little bit about how trends were for your car wash tenants in the quarter?

Sure. Just looking at the operators, AUVs were flat and coverage was flat for all our operators across the board. Generally, You know, there's not a material movement that I can see across any of them here. It's flat.

Okay. And then you've talked about, you know, your 20-year outlook, et cetera, and I guess prices are adjusting within the various segments that you invest in. But with the U.S. economy, you know, people very much split as to whether or not we could head into, you know, a fairly severe recession here. I mean, do you find that pricing for, say, like your Dave and Buster's investment, which would certainly be susceptible to any kind of U.S. recession? I mean, is the cap rate adjusting enough? You clearly think it is. Maybe you could just talk a little bit about decisions to move into that kind of space more than maybe within your portfolio, something slightly more defensive, like I would think like medical and dental or even convenience stores. Just trying to think about how you're looking at the acquisition landscape, given what we are all seeing in the broader economy.

Yeah, I think, you know, ultimately these deals are being priced in the competitive market, and we're finding the pricing that clears in each individual market, and then, you know, looking at those risk-adjusted returns compared to our experience and our credit loss within those sectors over 20 years of investing. As Max said in his commentary, you know, We've seen a lot of Dave & Buster's deals, and over the years, they've priced away from us. And so I think the recent noise in that sector tempered a lot of investors' appetite for entertainment space, such that it priced at a risk-adjusted return that made sense for us, and ultimately we transacted. That said, we didn't make any casual dining investments in the quarter. And we actually lightened up. But, you know, we look at each individual transaction relative to the market clearing pricing and our experience and our opportunity set and, you know, make pricing decisions. And I would say, you know, the industries have an impact, but bigger impacts are more idiosyncratic to those investment opportunities. The quality of the credit, the location of the real estate, the pricing of the real estate And remember, we're a 93% service and experience base, so most of these businesses are not really getting hit by the tariff and the recent volatility.

Right. Yeah, no, I think we understand it's not a tariff issue, but it is an issue related to the broader U.S. economy and discretionary income. But I appreciate the extra discussion.

Yeah, great, Smith. Thank you.

We'll take our next question from Jana Galon with Bank of America. Your line is open.

Thank you. Good morning. Question for Mark, and thank you for quantifying the impact of the Treasury stock method in the first quarter and expectations for it to be similar in 2Q. Can you let us know how much of a headwind you have in your ASFO guidance for the year because of the accounting treatment on the forward shares?

Yeah, I think the guidance of the way we put it together, the headwinds was no more than, I think, a penny or two in terms of the Treasury stock. And by the way, Jana, just to put a finer point on my remarks, that headwind was sort of taking the current stock price and sort of assuming that it stays the same. That was how I kind of referenced it.

Thank you. Jana, it's Rob. Thank you. I'm just going to add to that. If you look at page 25 of our supplemental package, we've recently added some disclosure on the impact from the shares from that dilution. So you can see for the first quarter, it was 1.1 million shares. So hopefully that's helpful from a modeling standpoint.

Great. Thanks.

We'll take our next question from Jim Kamert with Evercore. Your line is open.

Good morning. Thank you. Going back to Dave and Buster's, how long have they operated in these five locations that you picked up?

Come on, that's a tough one. It varies. You know, they all have operating history and cash flowing, and as we said, the mass release coverage is north of two times. But on the individual locations, the opening date would vary across the portfolio.

So we're talking several years in each instance? Yes.

Yeah, I would imagine somewhere between 3 and 10, but we can do the math and get back to you.

No, these aren't brand-new locations. No, I got it. And then you've got, obviously, play here with Avian Busters and Circle K. Can you remind me what percentage of your portfolio ABR is from public companies? And I'm just wondering, is there enough agita in the markets that, you know, away from your traditional private middle market tenants, are there more opportunities for EPRT with public tenants?

You know, generally, you know, I'm completely agnostic to the source of equity, whether it's public markets or private. Credit's credit. And generally, you know, the public credits create a little more noise than the private credits. But, you know, that noise doesn't correlate to risk. And so, you know, it's not really a major consideration. But, you know, just off the top of my head, we have Dave and Buster's. We got Red Robin. We got Circle K. We got Mr. Car Wash. Kindercare, they're public now. Anyone else? AMC, Cinemark, obviously not major exposures. But, you know, it's not really something that factors into our, you know, our calculus around credit.

Understood. Thank you.

We'll move next to Greg McGinnis with Scotiabank. Your line is open.

Hey, good morning. Pete, I just wanted to follow up on that reduction in casual dining exposure. We saw it fell by 17 properties and 3 million of ABR during the quarter, but you only sold 11 properties. That's around 1.5 million of ABR during the quarter. We saw QSR exposure went up by 17 properties. So, We're wondering if there were actually dispositions there or if it was just a reclassification or mix.

It was a mix. When you start defining restaurants and the fast casual kind of in the middle there, it was a reclass in the quarter of some of those properties. We also sold some and we didn't buy some.

Okay. And then... If the lending environment were to worsen from here, does that maybe create an opportunity to do more deals as a financing option that otherwise wouldn't have been utilized? Or do you expect kind of middle market M&A deals to slow and negatively influence the level of available transactions?

Yeah, listen, I think we're coming off a very long period of difficult financing alternatives for middle market credits. You know, it got better for a period of time, you know, late in the third into the fourth. And, you know, here in the first, it's gotten worse. And so I don't, you know, and then, you know, you have the impact of less transactions coupled with less competition. And so, you know, it's hard to say. I think challenging financial markets do create more opportunities from a tenant demand perspective. But That's also mitigated by less overall transaction activity. So, you know, I guess I would say the year's off to a great start. We got well on our way against our investment guidance for the year, and we remain aggressive on deploying capital.

Okay. Thank you.

And once more, for your questions, that is star and one. Again, that is star and one. We'll move next to Daniel Guglielmo with Capital One Securities. Your line is open.

Hi, everyone. Thank you for taking my question. Just one from me. In the industry diversification table, the entertainment bucket increased to 9.5% of cash ABR. Dave and Buster's has been mentioned multiple times, but it feels like that's a pretty broad sub-industry grouping here. Can you just give us a sense of what other kinds of businesses are in there, and would there be potential for breaking that up into more detailed lines over time?

Yeah, I mean, there's not a ton of variability. The vast majority of that entertainment bucket is going to be entertainment outlets like Dave & Buster's, like Chicken & Pickle, like bowling, family entertainment centers. And so, you know, we try to think about that, you know, really a food-driven entertainment experience with real estate that's, you know, relatively fungible and well-located. And so there's a lot in it, but, you know, I don't think calling it out would materially enhance our disclosure.

Great. Thank you. And I guess just one follow-up to that. Would that, like, soft 15% cap, would that be, like, for that line, would that be in effect then?

Yeah. I think we would think about it that way. Great. Thank you. Thank you.

We'll move next to Omoteo Oksu.

Ocusanya with Deutsche Bank. Your line is open.

Yes. Good morning, everyone. I wanted to talk a little bit about the acquisition environment. Clearly, you mentioned you're seeing less competition We also know that the lending environment is getting tougher for a typical middle market company. Just curious if you're looking at opportunities to do more kind of like structured finance deals with your tenants rather than three simple deals. And if you're moving in that direction, how you think about that, if at all.

Yeah, I mean, ultimately our goal as a company is to own real estate with a durable cash flow that grows over time. We have done some structured finance lending products over the years. Our loan book has not grown materially. and it's never really been a material part of our business, given our focus on acquiring fee-simple assets with long-dated leases supporting the cash flows. And so, you know, we look at it, we consider it, we provide it on a, you know, kind of special situations for tenant relationships that we want to support. And when we do provide it, we want to get, you know, compensated for it relative to our core business or buying real estate and owning it. And so, um, I wouldn't expect a material shift in our mix of, uh, fee, uh, fee ownership and loans. Um, you know, we'll do it, you know, to support a relationship, but ultimately look to get paid for it, but, um, don't expect us to change what we're doing.

Okay. That's great. And if I may ask just one other quick one, uh, just again, it, I appreciate the comments about tariffs and you guys being more services-oriented, and that's helpful. But again, curious, if you really are setting up for whether it's a recession or slowdown in the economy, however you want to define that, and a higher for longer-wave environment due to stubbornly high inflation, I guess how do we think about the middle market sector against that backdrop? in general, and will there be potential areas of risk, or you just kind of look at that as, again, they can pass on the cost, so there should be no impact. I'm just kind of curious how you're also kind of thinking about that scenario and how it could impact the tenant base.

Yeah, I mean, we start with the industries we selected, which are service and experience base, largely necessity. And then we focus on our position as a landlord, which, as I pointed out earlier in the call, is senior to the debt and senior to the equity. Most of our operators, many of our operators, are really sale-leaseback capital and equity in their capital stack. And so there will be operating pressures, but we do not expect them to materialize into situations where our tenants are looking for rent relief. given our three and a half times coverage of rent across the portfolio, it would take real prolonged dislocation to create a scenario where our guys are not paying their rent.

I appreciate that.

Thank you. Awesome. Thank you.

And it does appear that there are no further questions at this time. I would now like to turn the call back to Pete Mavoides for any additional or closing remarks.

Great. Well, first, thanks to the team. Great job this quarter and great momentum here into the second. We're going to be on the road quite a bit in the coming weeks and months with the Bank of Montreal Conference and the Wells Fargo Conference and the NARIT. So, We certainly look forward to the opportunity to engage with investors and continue to talk about the business. Thank you all for your time today.

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful rest of your day.