Essential Properties Realty Trust, Inc.

Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust Third Quarter 2025 Earnings Conference Call. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and 1 on your telephone keypad. 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 Peter 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 call over to Rob Salisbury.

Thank you, operator.

Good morning, everyone, and thank you for joining us today for Essential Properties' third quarter 2025 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.

Thanks, Rob, and thank you to everyone joining us today for your interest in essential properties. In the third quarter, we continue to execute on our focused investment strategy, as our team sourced attractive opportunities to deploy capital accretively into middle market sale leasebacks with growing operators. During the quarter, we added new operators in our portfolio while continuing to support our existing relationships, which contributed 70% of our $370 million of investments, highlighting a healthy balance within our investment sourcing. Pricing was very favorable again this quarter, with a weighted average initial cash yield of 8% and a strong average gap yield of 10%, which represents the highest level for us and an approximately 450 basis points spread to our estimated weighted average cost of capital. Our portfolio performance was another highlight this quarter, with same-store rent growth of 1.6% an increase in overall rent coverage to 3.6 times, 120 basis point decline in the percentage of ABR under one times rent coverage, and a decline in the tenant credit watch list, all of which is better than our budgeted expectations. Our capital position remains healthy with pro forma leverage of 3.8 times and $1.4 billion of liquidity. which was supported by our unsecured bond issuance during the quarter. This positions us well to continue to invest, support our relationships, and grow our portfolio, all to generate sustainable earnings growth for our shareholders. With operating and financial trends coming in ahead of budgeted expectations, we are again increasing our 2025 AFFO per share guidance to a range of $1.87 to $1.89, and our investment volume guidance to a range of $1.2 billion to $1.4 billion. Additionally, we are establishing our initial 2026 AFFO per share guidance range of $1.98 to $2.04, which implies a growth rate of 6% to 8%. Our guidance for 2026 reflects continued strong portfolio performance and a pace of investments generally consistent with our trailing eight quarter average. Cap rates are expected to compress modestly over the coming quarters, reflecting a lower and stable interest rate environment. Specifically, we expect to invest between one and 1.4 billion in 2026. Additionally, We expect cash G&A expense to be between $31 million and $35 million, resulting in continued efficiency gains. Turning to the portfolio, we ended the quarter with investments in 2,266 properties that were leased to over 400 tenants. Our weighted average lease terms continued to be approximately 14 years for the 18th consecutive quarter. with just 4.5% of our annual base rent expiring over the next five years. 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.

Thanks, Pete. As Pete mentioned, at a high level, our portfolio credit trends remain very healthy. With same-store rent growth in the third quarter of 1.6%, up from 1.4% last quarter, an occupancy of 99.8%, with only five vacant properties. Overall portfolio rent coverage increased to 3.6 times from 3.4 times last quarter, and the percentage of ABR under one times rent coverage declined by 120 basis points. There were no noteworthy credit events during the third quarter, and overall tenant credit trends have performed better than our budget expectations and our historical credit loss levels of 30 basis points. From a portfolio diversification perspective, our top tenant concentration continues to decline. With our largest tenant equipment share representing just 3.5% of ABR at quarter end, our top 10 tenants overall accounting for just 16.9% of ABR and our top 20 accounting for only 27.6% of ABR. Tenant diversity is an important risk mitigation tool and it is a direct benefit of our focus on middle market operators. On the disposition front, During the third quarter, we sold seven properties for $11.5 million in net proceeds. This represents an average of $1.6 million per property, highlighting the importance of owning fungible, liquid properties, allowing us to proactively manage portfolio risk. The dispositions this quarter were executed at a 6.6% 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'll 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.

Thanks, AJ. On the investment side, during the third quarter, we invested $370 million at a weighted average cash yield of 8%. Our capital deployment was broad-based across most of our top industries, with no notable departures from our investment strategy. During the third quarter, our investments had a weighted average initial lease term of 18.6 years and a weighted average annual rent escalation of 2.3%, generating a strong average gap yield of 10%. During the quarter, we closed 35 transactions comprising 87 properties, of which 97% were sale leasebacks. Investment per property was 3.8 million this quarter, as our deal activity was characterized by granular, freestanding properties which is one of our core elements of our investment strategy. Looking ahead, our investment pipeline remains strong. Pricing in our pipeline has cap rates in the mid to high 7% range, which represents a healthy spread to our cost of capital with elevated contractual escalations supporting our long-term growth trajectory. Combined with our investments of $1 billion year-to-date, we have again increased our full-year investment guidance to a new range of $1.2 to $1.4 billion. With that, I'd like to turn the call over to Mark Patton, our Chief Financial Officer, who will take you through the financials for the third quarter.

Thanks, Max. Overall, we were very pleased with our third quarter results, highlighted by the record level of investments and our AFFO per share, which totaled 48 cents, representing an increase of 12% versus Q3 of 2024. On a nominal basis, our AFFO totaled $96.2 million for the quarter, which is up 24% from the same period in 2024. This AFFO performance was consistent with our expectations as reflected in our guidance range. Total G&A in Q3 2025 was $10.2 million versus $8.6 million for the same period in 2024, which is consistent with our budgeted expectations. The majority of the year-over-year increase is related to increased compensation expense, including stock compensation, as we continue to invest in our team in support of driving our growth ambitions. Our cash G&A was approximately $6.7 million this quarter, which is consistent with our guidance range of $28 million to $31 million for the full year and represents just 4.6% of total revenue, down from 5.1% from the same period a year ago. We declared a cash dividend of 30 cents in the quarter which represents an AFFO payout ratio of 63%. Our retained free cash flow after dividends continues to build, reaching $36.4 million in the third quarter, equating to over $140 million per annum on a run rate basis, or approximately 10% of the top end of our 2026 investment guidance. Turning to our balance sheet with the net investment activity in Q3 2025, Our income-producing gross assets reached nearly $7 billion at quarter end. The increasing scale and diversity of our income-producing portfolio continues to build, improving our credit profile. On the capital markets front, we successfully executed a $400 million 10-year unsecured bond offering in August with a 5.4% coupon. This achieved an important advancement in a strategic objective of our capital markets program. as we continue to build a more liquid bond complex and work to more closely align the weighted average duration on our liabilities with our long-dated assets. Our weighted average debt maturity improved by approximately 18% to 4.5 years, owing in large part to this issuance. With the liquidity from the bond offering, we were able to be more selective on the equity side this quarter, raising approximately $14 million through our ATM program. We did not settle any forward equity during the quarter, leaving us with a balance of unsettled forward equity totaling $521 million at quarter end. We expect to utilize these funds in the near term to support our investment activities and preserve our balance sheet flexibility by repaying our revolving credit facility balance. Similar to last quarter, our share price remained above the weighted average price of our unsettled forwards of $30.71 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 199.9 million shares included an adjustment for 0.2 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, which was consistent with our budgeted expectations. Based on our current share price, we expect a very modest headwind from the impact of the Treasury stock method in the fourth quarter. Our pro forma net debt to annualized adjusted EBITRE as adjusted for unsettled forward equity remained low at 3.8 times as of quarter end. We remain committed to maintaining a well-capitalized and conservative balance sheet with low leverage and significant liquidity to continue to fuel our external growth and allow us to service our tenant relationships in this dynamic environment. Lastly, as we noted in the earnings press release, we have increased our 2025 AFFO per share guidance to a new range of $1.87 to $1.89. Importantly, this guidance range requires no incremental equity issuance to achieve, and we anticipate ending the year at pro forma leverage of approximately four times, leaving us ample runway to fund our growth ambition in 2026. Turning to 2026, As Pete noted, we have established an initial AFFO per share guidance range for 2026 of $1.98 to $2.04, reflecting a growth rate of approximately 6% to 8%. With that, I'll turn the call back over to Pete.

Thanks, Mark. We are happy with our third quarter of results. The portfolio is performing well, the investment market is exceptional, and the capital markets are supportive. Operator, please open the call for questions.

At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, to ask a question, that is star one. We'll take our first question from Handel St. Just with Mizuho. Your line is open.

Yes, good morning. Thank you.

So I guess first, congrats on another strong quarter. I wanted to ask, I was intrigued, Pete, by your comments about expecting lower cap rates going forward. I understand a lot of that is from lower cost of debt here, but I'm also curious if any of that is from the increased competition we're hearing about, and if you expect any of this new competition to impact your ability to source sale leasebacks going forward. Thanks.

Sure. Thanks, Handel, and thanks for the compliment on the quarter. It was a great quarter, and we feel pretty good about it. You know, listen, the 10-year is down materially, and the interest rate environment is more stable than it has been, which all contributes to a lower cap rate environment. We continue to source a strong pipeline of sale-leaseback opportunities as evidenced by the fourth quarter, as evidenced by our increase in investment guidance for the fourth quarter. And we can compete with any competition in the market. And so There's always competition. I think the cap rates are going to be driven down more by the stability in the interest rate environment. And, you know, we have an ample opportunity set.

Okay, appreciate that. One more, I wanted to ask about the new industrial assets you acquired. I know you have a little exposure there already, but they were really high rent coverage. And I'm curious if there's you know, an expectation perhaps to do more of that asset type going forward.

Thanks. Yeah, sure. We've been investing in industrial outdoor storage sites with service-based companies for quite some time now. You know, our investment in the industrial space really focuses on granular fungible assets. And so one of the important considerations when we're doing those deals is making sure that We're having a very fungible piece of real estate. And, you know, we like it. We like the sale lease back where we can structure master leases on our lease. And, you know, that's been a part of our business and will continue to be a part of our business going forward. I wouldn't expect it to be disproportional. I would expect it to grow radically.

Thank you. Appreciate the call. And appreciate the questions.

Our next question comes from Michael Goldsmith with UBS. Your line is open.

Good morning. Thanks a lot for taking my question. Maybe to follow up on Handel's first question on the expectation for cap rates to come down. Yeah. When you marry that with your initial 2026 outlook, you know, are you contemplating compressing spreads in that? I'm just trying to understand the flow through of cap rates going down.

Yeah, I mean, I've been saying this consistently for the past two years that we expect cap rates to come down. Certainly, you know, as we look at the business we did in the third quarter, initial cap rate of 8% with a 10% gap yield. As I've said in past calls, that's, you know, pretty much as good as it gets. As I, you know, said earlier, you know, 10-year going from 4.5 to 4 certainly contributes to downward pressure on cap rates. And if you think about the lag in the business, you know, there's generally going to be a 60- to 90-day lag there. between movements in underlying interest rates and movements in cap rates. So similar to last year, as we look out here very early, 15 months in advance, we anticipate some downward pressure on cap rates. And overall, as we think about the forward yield curve, I think it really results in a static spread, if anything. um uh you know maybe some some compression and spread i certainly feel like um you know there's some room for that with our historically widespread but um you know there's certainly um as there always is a certain amount of conservatism baked into our forward assumptions um you know because it is pretty early thanks for that and as a follow-up you know the percentage of uh

ABR with less than 1% or 1 times rent coverage came down. It looks like you sold some stuff there. So can you provide a little bit of color about what you sold there, what you still have left in the portfolio in that less than 1 times coverage, and if you have plans for further disposals of that type of product. Thanks.

Yeah, selling seven assets at $11 million really isn't going to drive a material movement in that. It's at the margin. As we generally say, we take a very close look at those assets, and if they're permanently impaired, we come up with a strategy, whether disposal, restructuring, or whatever, to fix that. Many of the assets in those buckets are assets that are transitional and, you know, we expect to come out of that bucket over time. And so, you know, we take an asset by asset look and if we see permanently impaired assets, we'll move them out of the portfolio. I think what you see in the quarter is, you know, decrease in that bucket is just general improvement in some of the underlying operating conditions.

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

Our next question comes from John Kilachowski with Wells Fargo. Your line is open.

Hi, good morning. Thank you. Maybe, Pete, just to kind of go back into the guide here and talk about the drivers, I think it would be really helpful to talk about your assumptions this year versus last year. I understand for the past two years you've been assuming some cap rate compression. I don't know if on the low and the high end if you could talk to maybe the sizing of that and how that looked, you know, on this guide versus the last guide, and then maybe also on credit loss. Maybe if there's more conservatism there, and if that's just general conservatism given weakness in some of the private credit markets, or if there's specific tenants that are on your watch list today that weren't last year, that would be really helpful.

Yeah, you know, I would say, I would start by saying we build up our guide really targeting a FFO per share range and looking at, you know, what we need to do to achieve that. You know, as we said on the call, six to eight is implied in our guide. And, you know, the investment volumes are there to support it. As we think about cap rates, you know, ironically, the cap rates assumptions are pretty similar. to what we were looking at, you know, this time last year, which assumes a modest downtick in cap rates. As we saw when interest rates were rising and cap rates were rising, cap rates were sticky on the way up. We anticipate cap rates to be a little sticky on the way down. And just to frame that, I wouldn't, you know, expect something in the I don't know, you know, mid to low sevens maybe at the end of the year. And obviously there's a range of assumptions built into guidance. As it pertains to credit loss assumptions, we take a very deep dive into our portfolio, look at specific assets and specific tenants and try to create scenarios around where we might potentially take losses. and then we build in on top of that an unknown credit loss assumption to make sure we're covered for the unknown events. I think as we look at the credit loss scenarios built into this year's guidance, again, it's very similar to what we were looking at and thinking about this time last year. And, you know, we would be hopeful that as the year progresses, the The credit loss experience turns out to be favorable to our underlying assumption.

I don't know.

Rob, Mark, do you add anything to that?

Yeah. Hey, John, it's Rob. As you think about the low end and the high end of the range, one of the biggest drivers is actually just the timing of when we close investments and close on capital markets activities. Cap rates and credit losses, of course, will move it a little bit, but it's really when you're going to close deals throughout the So that's the main flux in the bottom versus the high end.

Okay, that's very helpful. Thank you for that. And then maybe just on, you know, the credit side, given the issues we've seen with BDCs and private credit this year, can you talk about how you've been able to outperform, you know, on the credit side as it relates to, you know, the migration out of that sub one times coverage bucket and just your overall coverage?

Yeah, and, you know, I would really, you know, I would really look at the outperformance in our same source rent growth, right, which at 1.6 reflects a, you know, a pretty strong pass through of our contractual rent escalations. And I think our outperformance is really due to our focused and disciplined investment strategy by, you know, focusing on service and experience based industries that are a little less volatile than, you know, general retailing. focusing on owning assets at a conservative basis and owning granular, fungible assets to give us the ability to manage risk and ultimately being the most secured creditor as a landlord in these businesses puts us first in line for the cash flows. So I think it's really a tribute to the team and the discipline and the underwriting and attribute to the assets that we own.

Got it. Thanks, Pete. Congrats on a great quarter.

Thank you very much. Appreciate the questions.

Our next question comes from Smeets Rhodes with Citi. Your line is open.

Hi. Thank you. I just wanted to ask a little bit about maybe if you could just repeat what you're seeing kind of in the fourth quarter in terms of activity. It looks like... Historically, the fourth quarter has picked up seasonally. I guess people kind of rushing into year end. Are you seeing that, and can you maybe provide what you've closed on so far and what maybe the LOI pipeline looks like?

Sure, Smeeds. And listen, I think with our revised guidance, we provide a pretty good landing zone of what the fourth quarter might look like. And, you know, it's early in the fourth quarter and the year-end rush has yet to start. We didn't disclose subsequent activities because they just weren't material. But generally, I would expect the fourth quarter to look, you know, pretty similar to our eight-quarter trailing average and that, you know, kind of 300 million range. And, you know, there's, you know, events that could be a lot bigger, could be, you know, a little smaller. But, you know, that's kind of where we're guiding at this point.

Okay, thank you. And then I just wanted to, did you say you would expect to settle the forward equity? And is that reflected in your 2026 guidance in terms of just the share count we should be thinking about?

Yeah, actually, thanks, Mead. So that actually is reflected still in our 2025 guide as well. So that would be reflective there, and it would also be reflective of how we see the capital markets activity playing out for 2026 and the way we've utilized the reward and then utilized forward equity to wipe that off the balance sheet.

Okay. Okay. Thank you. Thanks, Mates.

Our next question comes from Jaina Galen with Bank of America. Your line is open.

Thank you. Good morning. Sorry, one more on cap rate expectations. In the prepared remarks, there was a comment of kind of the mid to high 7% range, and I'm just curious if that's the current pipeline or if that's kind of the range embedded in the 26 guide.

Yeah, I think it's really both, right?

You know, we have visibility on part of our fourth quarter pipeline, and that's in the mid to high 7s, and You know, as we look out, as I said, we don't anticipate, you know, cap rates falling off a cliff. We anticipate them to be sticky, but, you know, it's really going to be driven by the capital markets, but overall we would expect to maintain our spread. So, yeah, you know, as I always say, we really don't have visibility past, you know, kind of 90 days, but that's kind of what our expectations would be.

Thank you. Thank you. And then back to kind of the, I think that Mark had mentioned the historical credit loss has been 30 basis points. If you can just kind of help kind of frame the scenarios you've considered for 2026.

Yeah, Rob, Mark.

Yeah, I mean, you know, Jana, as you might have suspected, range in our guidance, and I'll let Rob dig into it, but... You know, the range of our guidance, you know, incorporates a wide range of assumptions around credit. Certainly we orient the first aspect of it to be our historical experience at that 30 basis points. But Pete said we do a deep dive on the portfolio and just look both just kind of a general assumption and risk mitigation or otherwise kind of orientation around be appropriate. And that tends to be for us as we move through the year, as Pete, I think, alluded to. If our experience is better than we expected so far this year, that would be a scenario like that.

That gives us an opportunity to tighten the range on our gas. Thank you. I'm sorry.

I don't know if the line was cut off.

No, we're here.

We're here.

Yeah, so we don't guide specific credit loss assumptions, and there's a wide range in there, Yana.

And, Yana, as we mentioned earlier in the call, our credit loss experience has come in much better than we had anticipated, which has been part of the driver for our guidance increases.

Thank you. Appreciate it. Thank you.

Our next question comes from Caitlin Burrows with Goldman Sachs. Your line is open.

Hi. Good morning, everyone. Pete, in the press release, you mentioned the expanding platform that EPRT has. You also mentioned G&A efficiencies in the prepared remarks. So I was wondering if you could talk more about the potential of the platform and maybe why the 26 midpoint volume guidance isn't necessarily a continuation of growth from 25.

Yeah, I think, you know, as I said a little earlier, Kaylin, it's, you know, we targeted an AFFO per share growth and, you know, try to present a business plan that is de-risked from an execution perspective. And so while we continue to scale the platform, we continue to source more opportunities and have the ability to close more opportunities. You know, we're fighting the – you know, the desire to just do more and, you know, to get bigger, you know, so we're more trying to execute a business plan that gives us outsized sustainable growth for a long period of time. So, you know, the platform's growing, our relationship base is growing, our ability to close transactions is improving, but we certainly feel, you know, six to eight percent guide to our FFO per share growth is ample and adequate and de-risked from an execution perspective.

Got it. Okay, that makes sense. And then as you guys think about funding, obviously you did use debt during the quarter, a small amount of dispositions. Could you go through, like, to what extent did share price moves in the quarter impact your equity issuance activity and maybe even bigger picture, not just 3Q, but how you think of it over time?

Yeah, I guess what I'd say is I'd sort of flip that around. We were, you know, I'd say in any given year, if you think about our equity and debt issuance capital raising, it might be anywhere from, you know, 50 and 40, because as I mentioned in my remarks, we're over 10% of our capital needs in any given year is now available through free cash flows, an important source for us. But if we were We are looking at where to access the bond market because I think we've. Our ambition is to be in that bond market, build the bond complex and really align our debt ladder, our maturity ladder with our long dated leases. So we were looking at the bond market. And so what I'd say instead is being able to do that bond execution really put us in a position to be selective on the equity front. And we already had over $500 million of unsettled forward equity, so we didn't really need to lean in too hard in the quarter. And with the bond deal, that made it even more so. And then I guess what I'd say in 2026, as you think about it, we remain very low levered. And so I think depending on the pricing of both our debt and our equity, that's where we would orient kind of our decisions around equity access to equity and then otherwise utilizing the bond market on the debt side.

Okay, got it. Thanks.

Thank you.

Our next question will come from Jay Kornreich with Cantor Fitzgerald. Your line is open.

Hey, thanks very much. Just curious, you know, you added a new top 10 tenant this quarter with Primrose Schools. And as the majority of your deal flow comes from repeat business, I guess I'm just curious, how do you think about prioritizing obtaining new tenants that can really set the stage for continued business going forward? And can we expect more additions to that top 10 quadrant as the next 12 months come on?

Yeah, Max, why don't you tackle that for us?

Sure. Thanks, Pete. Primrose is a premium childcare facility. concept with over 500 locations across the country. And we've been partnering with their largest franchisee over the last couple of years. And so a subsequent transaction put them in the top 10. But on the sourcing front, we're constantly adding new tenants and relationships to the portfolio. And frankly, it's been pretty consistent over the years of every quarter, we're adding anywhere between five and 10 new tenants. But then we're obviously focused on repeat business and growing radically with those operators throughout our industries.

And so it's always going to be a two-pronged approach.

Okay. And then just as a follow-up, in addition to sticky cap rates lately, you also ticked up the lease escalations to 2.3%. And so I'm curious, what's driving that lease negotiation leverage? And is that something on the lease escalations that you feel like you can continue to increase even in an environment where lowering interest rates could lower cap rates?

Yeah, listen, I think that's a key economic term of the sale-leasebacks we're negotiating. And ultimately, in any deal, we're negotiating the best terms we can. And whether or not we win a deal is really a factor of competition. And having an ample opportunity set to focus on the deals with the least amount of competition. I would not anticipate that going higher. And as I said in our prepared remarks, you know, a 10% average cap rate over the life of these leases is as high as we've seen and pretty darn compelling. If you look back to, you know, 2020, 2021, where interest rates were low and competition was very, very high level. Our escalators were down around 1.4, 1.5. And so over a longer period of time, I would expect downward pressure on that key economic term.

Okay. Thank you.

Our next question comes from Rich Hightower with Barclays. Your line is open.

Good morning, guys, and thanks for taking the question. I guess just to maybe follow up on the same theme, I mean, obviously one of the big, I guess, headlines in net lease this year has been that added private market competition. And so we probably asked this question last quarter as well, but just tell us about what you're seeing in the marketplace and how the different features of deal negotiation are impacted as more capital flows into the space? And does that affect the way you underwrite, you think about guidance, et cetera? Thanks.

Yeah, I mean, it's always a competitive market. There's always competitive forces, competitive sources of capital, competitive alternatives for our tenants. And ultimately, we compete on our reliability and our ability to execute and deliver capital into capital needs. And, you know, I think when you have a lot of new entrants, you know, there's a lot of foot faults and a lot of misstarts. And, you know, I think the priority on reliability and certainty and relationships and the ability to service and those relationships reliably gets rewarded. And that's been our operating thesis since starting this company and will continue to be the way we go to market. And so I'm confident that we'll be able to offer more compelling and certain capital to our counterparties than new market participants.

I appreciate that, Pete. Maybe just to follow up or put a finer point on it, if you are losing out on a transaction, where are you typically losing and on what terms and that sort of thing?

Yeah, we're going to lose on price. We're going to lose on, you know, I think the initial cap rate is ultimately the highest point of sensitivity. And if, you know, I view it as if we lose a deal, it's because we're choosing not to do it and we're choosing not to chase the price. And we see, you know, a different risk adjusted return dynamic and, you know, opt to deploy our capital somewhere else. So it's not necessarily losing a deal. It's just deciding to invest somewhere else.

All right. Thank you. Thank you.

Our next question comes from Eric Borden with BMO Capital Markets. Your line is open.

Hey, good morning, everyone. Just a quick question on the bad debt watch list. You know, understand that it's coming in above your underwriting. You know, just curious if you could provide an update on the watch list and where it sits today. I believe last quarter you said it was approximately 160 basis points.

AJ, that's on you, buddy.

Yeah, so our watch list, and again, just to refresh, is the intersection of B- and less than 1.5 times coverage. Today, that's at 1.2 times, and there's a variety of tenants on the list that we keep a close eye on, but it is down 40 basis points quarter over quarter.

Thank you very much. That's all I have. Nice. Thank you.

Our next question comes from Dan Guillermo with Capital One Securities. Your line is open.

Hi, everyone. Thank you for taking my questions. There were some changes to the ABR by state, but nothing that jumps off the page. When looking at the existing pipeline, are there states or regions where you see better investment opportunities over the next year or so?

Yeah, as we think about it, geography is always an output, not an input. And we go where our tenant relationships bring us, you know, in the United States. And so, you know, there's certainly good opportunities across all states. And, you know, we just prioritize the best opportunities with the best operators. And so I wouldn't expect any material deviation in our geographies as we think about 2026.

Yeah, I appreciate that. And then as a follow-up to the question on the elevated lease escalation number, are there any additional risks you think through for the higher annual rent bumps on some of the newer tenant leases? Anything kind of incremental?

You know, listen, it's Rent escalations are a key economic term. One of the benefits of lower escalations is a more compelling rent basis for the counterparty. The inverse of that is the higher the rent escalations, the more inherent credit risk as you get in the out years to your assets. Certainly, we feel comfortable at the level we're at, you know, kind of roughly CPI-ish. But to the extent that your lease rates are growing faster than the CPI, you know, the tenant's underlying ability to generate profit may not keep up with rent. And so that's an important consideration as we structure these leases is really making sure there's a healthy rent payment and healthy coverage as we think about the out years in, you know, 10, 10 through 20. So it's a balance, and certainly more is better, but making sure you're getting the right level and having tenants that can service those obligations throughout the life of the lease.

Thank you. That's really helpful. Thank you.

Our next question comes from Jim Kammer with Evercore. Your line is open.

Good morning. Thank you. You've covered a lot. Just to go back on the credit loss assumptions for 26, would you just say as a platform you're adopting more conservative expectations for credit loss for 26, given the economy or the portfolio, or I'm reading too much into this, or it's very similar to what you kind of started the 2025 outlook for when you're in late 24?

Yeah, you know, I would say we're looking at it through the same lens. We have the same guys doing the same work, taking the same assumptions with the same base of experience. And our assumptions are based on the most current data that we have in the shop. Ultimately, the result of that process is very consistent to what we were looking at last year at this time. But the risks in the portfolio tend to be very idiosyncratic. idiosyncratic and not really driven by, you know, macro trends. It's more, you know, just specific operators who are not, you know, operating the way we would expect. So it's a consistent, you know, process. The result just happens to be very consistent to last year, as we said today, but, you know, nothing out of norm.

Okay, great. That's very helpful. Thank you.

As a reminder, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star and 2. We'll take our next question from Omotoyo Okusamaya with Deutsche Bank. Your line is open.

Yes, good morning. The group of tenants where the rent coverage is less than one time, could you just kind of at a high level tell us who that is, whether... You can't mention the specific client or tenant, you know, kind of what sector or what industry it is.

Yeah. Hey, Tao. It's a group of assets. First and foremost, let's focus on the real estate properties that we own. And there's really not a consistent theme. It's very much specific idiosyncratic risk to those assets and the lease obligations that the tenants have at those assets. It's going to be across all our industries. It's going to be across all our geographies and just specific sites that aren't working. It could be very idiosyncratic as a child care center lost an operator or a manager, or it could be a restaurant where there's a road widening and the access is offline, or it can be a car wash that's just opened and really ramping into its membership base. Yeah. Very idiosyncratic stuff, not terribly material. Certainly we're happy that it's come down, but, you know, nothing thematic that I would point out.

Thank you. Thank you, Dale.

Our next question comes from Greg McInnis with Scotiabank. Your line is open.

Hey, good morning. Now, it's never particularly low, but acquisitions through existing relationships hit. 70% this quarter, which maybe one could argue is relatively lower than usual. I'm curious if this is an indicator for the growth of EPRT's name as a source of capital, or how do those non-relationship deals come about? Is it market deals, a seller approaching you? I'm just trying to understand if you start having even more investment opportunities as you grow.

Yeah, I think you see that we're having more investment opportunities. Our underwritten pipeline has grown consistently over the years. I think the opportunity set that we've written offers on this year is approaching $7 billion versus $5 billion last year. And we're doing the hard work and attending conferences, sending out mailers, dialing the phone to find new relationships in our industries. And and find new partners. And I think our execution and our reliability has given us a good reputation as a capital provider, and that continues to drive incremental opportunities. So having that number at 70% is great. It wouldn't concern me if that was 50%, because certainly relationships outgrow us from a concentration perspective, and it's important that we're finding new people to bring deals in the coming years.

Okay, thank you. And then I just wanted to kind of confirm whether or not you started seeing any indications of increased competition today or if this is similar to last year at this time when you expected greater competition to materialize given historically widespread and the success that you've been having.

Yeah, there's other buyers out there. We're seeing them bid on deals. We continue to be successful where we choose and where we see appropriate risk-adjusted returns. So There's platforms out there, there's people investing, and there's competition, but we're continuing to execute well and have a good reputation and are able to pick and choose the deals that we do.

Okay, thank you. Thank you.

Our next question comes from Ryan Caviola with Green Street. Your line is open.

Hello, good morning. Is there any color you could share on the differences in yields between your traditional retail portfolio versus the industrial properties that we mentioned earlier in this call? And is that expectation of cap rate compression, does that apply to these industrial properties as well, or is that mostly in the retail space? Thanks.

Yeah, I would say there's really no differentiation. The biggest driver of – Differences in cap rates is going to be, you know, the counterparty, the credit and the real estate pricing, not necessarily whether it's retail service or industrial. So, you know, there's really not a differentiation. And we would expect, you know, cap rate compression across, you know, our entire opportunity set driven by, you know, the, as I said on the call, you know, lower interest rates and more stable capital markets.

Great, thank you. And then I know you've mentioned a few times that credit losses have been better than expected throughout this year. The only notable story across retail that comes to mind for this quarter is some distress in autos. Has any of that flowed into the portfolio, or how are you viewing that space for the rest of the year and going into 26th?

Yeah, we haven't seen it. Our auto exposure is largely focused on automotive service. And so the noise around automotive retailing and dealerships isn't in our portfolio. The noise around auto parts suppliers isn't in our portfolio. So we still think automotive service is a good industry for us. And we like the real estate in that industry, which is granular, bite-sized, well-located boxes. And so we'll most likely continue to invest ratably across that industry as we think about 2026. Thanks.

Appreciate the call. Thank you.

Our next question comes from John Misoka with B. Riley. Your line is open.

Good morning. Sticking with the industrial assets, and sorry if I missed this earlier in the call, Do those properties house consumer facing businesses or are they part of a tenant's internal supply chain? And if it's the later, how are you calculating rent coverage?

Yeah, they're not.

I mean, they're industrial properties, industrial outdoor storage yards where service based operators are running their business. And, you know, the coverage is based upon the revenue generated at that site and the profitability from that site. I would acknowledge that that revenue and that profitability is less tethered to that piece of real estate than a traditional, you know, retail box like a restaurant. But those sites are still essential to that operator's business. And, you know, switching costs are very high such that, you know, we would expect durable tenancy in those assets.

Are they selling, you know, goods? made there, like, directly to other businesses, or is it kind of an internal thing within a tenant that you're kind of just getting whatever their estimate is of the kind of revenue contribution from that particular manufacturing facility or storage facility or whatever it may be?

It's a wide range of businesses and operations, so I would say there's probably a little of both of that.

Okay. And then... As you do your credit underwriting for potential investments with private equity-backed tenants, does the size of the private equity sponsor matter to you at all? Especially in the current environment where private equity capital raising and liquidity events are a little bit more uncertain versus in years past?

We start underwriting real estate and underwriting the unit-level profitability and the economics of the site And then take a look at the corporate credit. And, you know, I tend to be agnostic to the equity source. It could be private. It could be, you know, large private equity and, you know, credit's credit. And we ultimately hang our hat on owning a good piece of real estate at the appropriate basis with a good lease structure supported with rent supported by the operating business.

Is there any difference versus maybe a smaller regional private equity operator versus a bigger brand name one? Or would there be a trend, do you think, in the current kind of credit environment to move one way or another between the two in terms of how you're thinking about valuing potential transactions with those tenants and their sponsors?

No. You know, there's good big operators and bad big operators, and there's good small operators and bad small operators. And we really focus on, you know, our history and our relationships. And, you know, the bigger the operator, you know, we find the more use of leverage. And so we certainly take that into consideration. But, you know, it's underwriting credit.

Okay. I appreciate the color. That's it for me. Thank you. You got it, John. Thank you.

And it appears we have no further questions at this time. I'll turn the program back to the speakers for any additional or closing remarks.

Super. Well, thank you all for your questions today, and thank you for your time. And we look forward to seeing everyone in the conferences in the upcoming months. Have a great day.

This concludes today's program. Thank you for your participation, and you may disconnect at any time.