Essential Properties Realty Trust Inc Stock

Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust Third Quarter 2026 Earnings Conference Call. [Operator Instructions] This conference call is being recorded, and a replay of the call will be available 3 hours after the completion of the call for the next 2 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 [Audio Gap], an archive of which will be available for 90 days. [Audio Gap] are Pete Mavoides, Chief Executive Officer; Rob Salisbury, CFO and Chief Strategy Officer; Max Jenkins, President and Chief Operating Officer; Craig Vachris, Chief Investment Officer; and Sheryl Kaul, Director of Financial Planning and Data Analytics. It is now my pleasure to turn the call over to Sheryl Kaul.

Thank you, operator. Good morning, everyone, and thank you for joining us today for Essential Properties' Third Quarter 2026 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. In our earnings release last night, for the quarter, we reported GAAP net income of $60.7 million and AFFO of $111.9 million. With that, I'll turn the call over to Pete.

Thank you, Sheryl, and thank you to everyone joining us today for your interest in Essential Properties. In the third quarter, we continued to execute on our goal of driving compelling earnings growth for shareholders through owning a diverse portfolio with an increasing revenue stream and accretively deploying capital to grow and diversify that portfolio. On the external growth front, we invested $342 million into 100 properties at an average initial cash yield of 7.7% and a GAAP yield of 9.4%. 91% of our investments in this quarter were sale-leaseback transactions, which continues to be a compelling source of growth capital for middle market operators across our targeted industries.

In an elevated cost of capital environment, our ability to deliver reliable permanent capital to operators gives us compelling pricing and structuring leverage, and that is showing up in our pipeline. Our investments team continues to find attractive opportunities across our targeted industries. That said, we are being deliberately selective, prioritizing transactions where pricing reflects a meaningful spread to our cost of capital, supporting long-term earnings growth for our shareholders. As Max will discuss later, we are achieving pricing power real time with new investments being struck at higher cap rates than the third quarter investments, which were largely contracted over the summer.

Importantly, our methodical approach to deployment protects our capital runway and preserves our corporate liquidity in a period of capital markets choppiness. Our capital position remains strong with pro forma leverage of 3.8x and liquidity of $1.3 billion, providing ample financial capacity to execute our business plan, as Rob will discuss later. Turning to the portfolio. We ended the quarter with investments in 2,580 properties that were leased to tenants operating over 700 concepts.

Our weighted average lease term is over 14 years. Our weighted average lease escalations are 1.9% and just 2% of our annual base rent is expiring through 2028. Our portfolio continued to deliver solid and consistent performance this quarter with same-store rent growth of 1.4%, healthy rent coverage of 3.5x and occupancy of 99.6% and a reduction in our tenant credit watch list. With investment activity and portfolio performance tracking ahead of our budgeted expectations, we are increasing our 2026 AFFO per share guidance to a new range of $2.02 to $2.05 and our investment volume guidance to a range of $1.3 billion to $1.5 billion.

Our revised AFFO per share guidance implies a growth rate of almost 8% at the midpoint. We are establishing our initial 2027 guidance with an AFFO per share range of $2.10 to $2.18, investment volume of $1 billion to $1.5 billion and cash G&A expense of $32 million to $37 million.

Our operating plan calls for a slow pace of deployment over the next 2 quarters to 3 quarters as our investment teams remain disciplined on pricing, allowing us to retain balance sheet capacity. Historically, asset pricing adjustments tend to lag the rapid movement of pricing in the capital markets.

Based on our current weighted average cost of capital, dispositions have become an accretive source of capital and are likely to trend higher in the near term to alleviate capital markets funding requirements.

Lastly, I'd like to congratulate Max and Rob on the recent promotions, which recognize the meaningful contributions they have made to the company and position them with greater responsibilities going forward. I'd also like to welcome Craig Vachris to the company as our new Chief Investment Officer. These management changes reflect the continued evolution of management team as we pass our 10-year anniversary. With that, I'll turn the call over to Craig, who will provide an update on our portfolio and asset management activities.

Craig? Thanks, Pete. Overall, our portfolio fundamentals remained healthy during the quarter and continued to perform in line with our expectations. Same-store rent growth was 1.4%, consistent with recent quarters. Occupancy remained strong at 99.6% with only 11 vacant properties. Portfolio rent coverage remained at a very healthy level of 3.5x. The percentage of ABR with rent below 1x was consistent quarter-over-quarter, and our watch list improved, reflecting continued stability in tenant credit.

On the disposition front, we sold 11 properties for $17.9 million at a weighted average cap rate of 6.1%. The dispositions were primarily driven by opportunistic sales led by restaurant and car wash properties. Notably, these dispositions were transacted at cap rates that were accretive to our weighted average cost of capital, highlighting the value of owning granular, fungible properties with a deep buyer pool. Additionally, healthy buyer demand enables us to have the flexibility to scale our disposition activity should we choose to lean further into capital recycling.

Our portfolio continues to benefit from broad diversification as our top 10 tenants represent just 15.2% of ABR at quarter end, while our top 20 tenants account for only 25.1%, reflecting our continued focus on partnering with a broad base of middle market operators and limiting concentration risk. We also reduced our car wash exposure by 60 basis points during the quarter to 12% of ABR, and our portfolio construction remains healthy.

Lastly, you may have noticed that we relabeled certain industry categories in our supplemental to better reflect the businesses in our portfolio. This was simply a name change. For example, medical/dental is now health and wellness and health and fitness is now fitness. With that, I'll turn the call over to Max Jenkins, our President and Chief Operating Officer, who will provide an update on our investment activities and the current market dynamics.

Thanks, Craig. On the investment side, during the third quarter, we invested $342 million at a weighted average initial cash yield of 7.7%. Our investments in the quarter had a weighted average initial lease term of 17.9 years and a weighted average annual rent escalation of 2.3%, generating a strong average GAAP yield of 9.4%. Our capital deployment during the third quarter was broad-based across most of our top industries as we completed 31 transactions totaling 100 properties. With alternative financing sources becoming more difficult to access for many companies, operators continue to monetize their own real estate through sale-leasebacks, which encompassed 91% of our investment volume in the quarter.

Our average investment size was $3 million per property during the quarter, reflecting our focus on granular, highly fungible assets that provide attractive risk-adjusted returns. As Pete mentioned, pricing is front and center for us. As our cost of capital has moved higher, we have been proactive in managing our pipeline and pushing for higher returns reflective of the current environment without taking on any incremental risk. Diminished competition from private players and a more restrictive middle market lending landscape are factors contributing to our pricing power. Consequently, our forward pipeline has cap rates around 8% with GAAP yields in the high 9s.

With over $1 billion of investments closed year-to-date, we have again increased our full year investment guidance to a new range of $1.3 billion to $1.5 billion. With that, I'd like to turn the call over to Rob Salisbury, our CFO and Chief Strategy Officer, who will take us through the financials for the third quarter.

Thanks, Max. Overall, we delivered another strong quarter of operating and financial performance. Our AFFO per share was $0.51, representing an increase of 6% versus the year ago period, while nominal AFFO increased 16% year-over-year to $112 million. This AFFO performance was ahead of our expectations, driven by strong investment volume and a modest benefit from the lack of treasury stock method dilution on our unsettled forward equity balance.

Total G&A in the quarter was $14.1 million. Our cash G&A was $7.3 million, which is trending favorably towards the lower half of our guidance range of $30 million to $34 million for the year and represents just 4.3% of total revenue, down from 4.6% in the same period a year ago. We declared a cash dividend of $0.32 in the third quarter, which represents an AFFO payout ratio of 63%. This low payout ratio enabled us to retain free cash flow totaling $42 million in the quarter, representing a substantial source of internally generated capital.

Turning to the balance sheet. At quarter end, our income-producing gross assets totaled $8.1 billion. The growth and diversification of our portfolio continues to further strengthen our credit profile. During the quarter, we partially exercised the accordion feature on our revolving credit facility, increasing capacity by $300 million to $1.3 billion. We would like to thank our entire bank group for their overwhelming support in this successful transaction. We utilized this extra liquidity to support the prepayment of our sole 2027 maturity, a $430 million term loan, leaving us with no debt maturities until 2028. As a reminder, we retained our favorable interest rate swaps, which had previously hedged that maturity. Our revolving credit facility will utilize this hedge until it expires next month.

Looking ahead, we are evaluating a range of debt capital options to term out our revolver balance and extend our robust liquidity profile. With $483 million of unsettled forward equity at an average price of $30.50 per share and $809 million of revolver capacity, we have more than enough liquidity to continue funding our growth plan, allowing us to be opportunistic when it comes to sourcing external capital. Additionally, from a leverage standpoint, our pro forma net debt to annualized adjusted EBITDAre remains low at 3.8x at quarter end, underscoring our commitment to maintaining a low leverage profile. As Pete mentioned, we increased our 2026 AFFO per share guidance to a range of $2.02 to $2.05, reflecting a growth rate of approximately 8% at the midpoint.

We also established an initial AFFO per share guidance range for 2027 of $2.10 to $2.18, reflecting our expectation of another year of best-in-class earnings growth. The guidance range includes investment volume of $1 billion to $1.5 billion, which is expected to be back-end loaded as we seek to preserve balance sheet capacity in the near term. Importantly, our annual free cash flow after dividends is approaching $200 million, and our guidance assumes approximately $200 million of dispositions next year.

Combined with our expanded revolver capacity and unsettled forward equity balance, these sources provide sufficient funding to support our investment guidance for 2027 without the need to source external capital. With that, I'll turn the call back over to Pete.

Thanks, Rob. In summary, we are pleased with our third quarter results. Volatile capital markets present both challenges and opportunities for disciplined investors. We have positioned this company to manage both the challenges and capitalize on the opportunities with a strong balance sheet, long-standing relationships built on reliable execution and a great team. We are excited about the business plan that supports our 2027 guidance. Operator, please open the call for questions.

[Operator Instructions] And we'll take our first question from Michael Goldsmith with UBS.

First, on the 2027 guidance, I think you started to touch on it, but can you provide us the building blocks for how you're going to achieve that? And then also, what are you assuming on the debt refinancing and how you're going to approach that? I know you put it on the revolver, but just can you talk about your different options there and how you plan to proceed?

Rob, why don't you handle that?

Michael, so we outlined some of the high-level drivers in our press release, most notably the investment volume range. As it relates to financing, yes, so we currently have $430 million on the revolver that was attributed to the prepayment of that term loan that was set to mature in February. So we had 8-K that about a month ago, but we went ahead and expanded our revolver capacity that helps support taking that down a little bit early. And just as a reminder, we've kept that swap in place. You can see some expanded disclosure in our supplemental to show you where that's currently swapped. That swap will mature at the end of November, at which time it will become a floating rate obligation just like the rest of our revolving credit facility. And so as we look at some potential options to term that out, clearly, we don't want to leave that floating -- to seek to have as low variable rate debt exposure as we can. So as we sit here today, we're evaluating all of the debt alternatives. I think we mentioned in the earnings call script.

And when we look at the menu, right now, unsecured bonds on a 10-year basis will probably price in the high 6s. A convert would probably price south of a 5 on a coupon basis, I should say. And then bank debt would probably be somewhere in between the 5.6% to 5.7% range. We're looking at all of those. And as a general comment, we're always looking to extend the duration on our liability stack. We recently did a 10-year bond offering back in June. So strategically, we're continuing to focus on that, understanding, of course, that we do have a hole in our ladder at both a 5- and 7-year maturity.

So we would consider shortening up just a little bit to support the refinancing of that obligation. And I should say that we've included a range of scenarios for that baked into our guidance range. So the range does not assume that we leave it floating for the entirety of 2027. We assume that we do term that out. I think that just given where the swap is today, we'll probably have more to talk about in a month or 2 as we continue to assess those options. But clearly, the interest rates are evolving dynamically, and we'll see where that shakes out.

Mike, the other building blocks for 2027, obviously, we have the investment guidance out there, $1 billion to $1.5 billion, which is a conservative range relative to our historical performance. And then all of that guidance is kind of predicated on continued solid portfolio performance and our compelling growth within the portfolio. So...

And just as a follow-up, speaking about the solid portfolio performance, can you just talk a little bit about tenant health and the watch list? I think your sub 1x rent coverage bucket was flat with last quarter. So just trying to get a sense of -- is there any change in the watch list? How you think about your tenant base and how they've been able to navigate the macro?

Zach, why don't you handle that? You're new to the seat.

Yes. No, it's been very consistent. We don't really seeing any trends or movement one way or another. Obviously, it's -- yes, it's -- I guess, it's going to be pretty consistent. I think we're happy with the way our tenants performing and coverage remains strong.

And Michael, on that, specifically the watch list, it's actually down 50 basis points quarter-over-quarter and sits at 1.1%. And as Zach noted, the portfolio continues to operate within the guidance range and no trends, nothing material to report, and we're happy with how our tenants are performing.

We'll take our next question from Haendel St. Juste with Mizuho.

I want to follow up on. I wanted to follow up on the 2027 line of questioning from Michael before. Can you talk a bit more about your capital deployment strategy and balance sheet management a bit more? It sounds like, Pete, you mentioned investments may be back-end loaded. Should we expect to see leverage tick up a little bit here over the course of '27? And maybe some color on the key swing factors for the upper and lower end of the range for next year. Is it basically volume spreads and debt refis or anything else we should consider?

Listen, I think we're going through a period of time here, as we said in the call, where there's been a rapid movement in our weighted average cost of capital, and we're going through a process of repricing assets and repricing our pipeline. And so as we go through that period of time, we expect volumes to decrease as sellers' expectations are adjusted. Overall, we would expect there to be a lower level of transaction opportunities. But I think on a bigger picture, we would expect a more than commensurate lower level of competition that continues to afford us ample opportunities to invest. But it's a very dynamic time, and we're going to react to the market as it evolves. And as we're focusing on achieving attractive spreads and pricing transactions appropriately for the risk in the current market.

And we're uncertain what that looks like as we think about certainly 2Q and 3Q and out into 4Q. So there's a wide range of scenarios supporting our guidance. And I guess it really just depends on, one, our cost of capital; and two, the pricing of assets and our ability to maintain spread. We're pretty optimistic. The pipeline is strong, and we've gone through and repriced a large portion of the opportunities in the pipeline, and those transactions have held together and are consummating at attractive rates. But it's early days, and we'll see what happens.

And just on -- I'd add on the capital side, Haendel, we're not assuming a dramatic releveraging of the balance sheet. We're going to continue to run at a low leverage point. And we're assuming really nothing on the ATM in the very near term just in recognition of where our share price is today. So no common equity in the near term.

Got it. Got it. Super helpful. And maybe one follow-up, if I could, on the dispositions. It certainly seems like there's an opportunity out there as you alluded to, to sell some assets at good pricing and perhaps accretively recycled into investments. So maybe color on the market, the demand, your ability to sustain low 6 cap rates or maybe the range of expectations for cap rates as well as you look at the marketplace and any color on verticals you may lighten up as well?

Yes. I think we'll take a deep look at the portfolio, and I think we have good liquidity across most of our industry verticals, and we'll probably try to sell a representative sampling of those assets. Certainly, we wouldn't want to cherry pick the portfolio solely to achieve pricing. We probably sell a representative sample and overall try to improve our hold positions. Historically, we've been about $25 million a quarter. I think we could conceivably ramp that up very easily to $50 million a quarter. And I would expect us to be able to achieve in the mid- to high 7s -- excuse me, mid- to high 6% cap rate range on those transactions.

We'll take our next question from Yana Galan with Bank of America.

Congrats on a strong quarter. Just going back to the investment guide for 2027. Curious, is that gross or net? I think, Rob, you mentioned $200 million of potential dispositions next year.

Yes, we tend to -- we guide to a gross investment number.

And then on the activity in the quarter, we noticed early childhood education picked up. Just curious if there's any tenant categories that look more attractive today, anything that you're looking to lean into?

This is Max. Our investment strategy hasn't changed in the last decade, and we're going to price deals within each industry based on the appropriate risk-adjusted returns and maintaining an attractive spread in this environment. You know notably about early childhood education, it was 5 different portfolio transactions within the quarter with different tenants. And so no large portfolio, just our normal right-of-way relationship-based investing.

We'll take our next question from Caitlin Burrows with Goldman Sachs.

Pete, you mentioned earlier, and now we've talked about it a bunch about how you're continuing to find attractive opportunities but are being deliberately selective and getting a meaningful spread. So I was just wondering if you can talk a little bit more about how that's possible. Is it that you look at more deals so then you can be more selective? Is it that your customers need you, so you have it, have that, call it, upper hand? Or yes, how can you continue to achieve that outcome?

Yes. I think part of it the -- looking at a lot of deals, having a lot of throughput. We have a very granular portfolio where we're investing in $5 million to $10 million chunks. And so that granularity gives us good optionality. I think the bigger picture is that we're negotiating and doing -- providing capital to operators who are motivated by accessing capital and growing their business. And so an extra 25 basis points, 50 basis points, 75 basis points on cap rate doesn't change the complexion of their overall business plan and they're more focused on expanding units, growing sales and improving margins and having that access to capital is important to them.

So we've always focused on a value-added investment strategy by providing capital to middle market operators. that are not that price sensitive. And through those relationships, we've been able to kind of price our deals. On the flip side of that, those operators are getting transactions and opportunities that are attractive to them in the current market environment, too, such that the overall transaction can higher -- can handle a higher cost of capital supporting it.

Got it. And then just as you think of industries going forward, I think last quarter, we talked a lot about how you guys have your kind of split of different industries. You didn't expect to really change that. I guess a lot has happened in the past quarter. So as you think of the investment volume in the next 12 months or through '27 and maintaining attractive spreads, would you consider some shift and like industry focus where you could get that larger spread? Or you still expect it to be like ratable?

Yes, I would expect it to be more ratable, and we certainly built the business plan that way. I would not want to look at a business plan that focuses us solely on out the risk spectrum on the wider industries or the more risky transactions. We generally follow our relationships with 80%, 90% repeat business. And I would expect the composition of our 2027 investment pipeline to be very ratable to the overall portfolio.

We'll take our next question from Smedes Rose with Citigroup.

I just wanted to ask a little bit just in your experience in the space, are there any segments where you might expect to see kind of seller expectations adjusting maybe more quickly, more rapidly, I guess, as expectations do reset over the next several months or quarters? Or is it generally kind of similar across all categories?

The flip side of that, Smedes, I think I would expect seller expectations in the auction market of existing net lease product to adjust less rapidly. I think where we focus, providing capital to middle market operators and sale leasebacks, that's very dynamic and those operators are less price sensitive. But if you're sitting on a portfolio of net lease assets that are cash flowing, your sole motivation is going to be price. And unless you have a debt financing or some maturity or some artificial catalyst that forces you to effectuate a sale, you're going to hold on for the best price. And so that market tends to be the slowest to adjust. But with our granular middle market operators, that adjustment has happened really in a matter of a month, 1.5 months.

Okay. And then I was just wondering, we heard from other reports, either deals being canceled in the fourth quarter or kind of an aggressive efforts to reprice deals that were underway. Is that something that you are, I guess, currently doing now? And could you maybe just sort of update us on where the kind of total sort of line of sight is on your pipeline relative to your September update, I guess?

Yes, Max, why don't you tackle that?

Smedes, we took a pretty granular and tactical approach. And so we took all 60 to 90 deals in the pipeline. And when you're relationship investing, you want to be proactive and reach out to those partners and those operators. And so it's a mixed bag. Some deals are M&A related, and so the financing just didn't come together and they naturally fell out in a volatile environment. But generally, we're pretty happy with how quickly we've kind of been able to move cap rates to make investments accretive. And I think that's just a testament to the -- the pipeline engine that we've built over the last decade and a lot of repeat business. And so we're focused on maintaining those relationships. But as Pete said, when you're providing a service and you're one of the only capital providers in the middle market right now in this volatile period, we're encouraged by where the pipeline sits and where we've been able to move cap rates.

Yes. I would add, Smedes, the complexion of our pipeline is, call it, $30 million, $10 million deals in any given quarter that are being priced every week. And so we have a very real-time ability to price transactions and react to our movements in cost of capital, and we certainly have done that on a go-forward basis. That said, we generally operate with a 90% to 95% expected probability to close within our pipeline. And -- but given the capital markets choppiness, I would say that's probably closer to 70% or 65% in the current market. So there's more volatility, but that's offset by the number of opportunities and the diminished competition.

And we'll take our next question from Eric Borden with BMO.

I know you don't provide specific credit loss guidance, but with tenant performance stable and the watch list improving, how should we think about the credit loss assumption embedded in 2027 relative to what you've actually experienced this year? I know I think you had talked about previously that the credit loss assumption within guidance was trending a little bit higher. So if you could just provide a little bit more color on '27, that would be great. And then just to follow up on the impairment this quarter. Can you just talk about what drove that? Was it primarily related to dispositions? Or was there other factors?

Eric, it's Rob. Thanks for the question. Yes. So credit losses generally are trending slightly better than we had guided to for this year. And as we think about 2027, similarly, we tend to guide well in excess of where our realized losses have historically been. Just as a reminder, that's -- that realized loss has been just under 30 basis points per year since the inception of this portfolio. And so while we don't give a specific number out, the assumption that's baked into that guidance range is well in excess of that rough to 30 basis point range. So that's where credit losses are today. And yes, as you noted, all the indicators that we monitor are very healthy right now.

So hopefully, that will prove to be conservative again next year, but our starting point is a conservative posture as we do on a lot of lines in our guidance range. And then on your second question as it relates to the impairments, I think as we've discussed in the past, a lot of these situations are much more idiosyncratic in nature. As it relates to this one specifically, we have a robust quarterly impairment testing process. It's well established. It's been in place for a very long time. And as part of that rigorous process, we're constantly testing on a quarterly basis. This quarter specifically, it was driven primarily by one site that's on a former Art Van location. It's in the home furnishing retailer segment. As we've talked about in quarters past, the tenant that went bankrupt in the fourth quarter of last year that used to be in those sites, we owned 2 sites at that time.

And the specific property from 3Q had been vacant. We've been assessing sale and leasing alternatives for the site. We received more leasing information this quarter, which triggered the impairment testing process. But in general, we have not been bullish on the home furnishing industry. That's an industry that we've not invested in for many years. And we're down to one location now, which represents effectively a rounding error in terms of the exposure to the portfolio broadly. So it's not a huge surprise in terms of where the exposure is there. And all of that's outlined in footnote 12 of our 10-Q, if you want to dig into more of the details behind those assumptions.

And then just one on the disposition timing. Sorry if I missed this earlier, but just how should we be thinking about the dispositions as it relates to acquisitions? Would you be looking to match fund those? Or would there be some sort of delay between the 2?

Yes. We're not tying dispositions to acquisitions. Our disposition activity is very granular single $3 million average assets and our investments are -- tend to be $10 million. And so both are very granular. So -- and really, it's not tied one for one. As I said, we're maybe taking $25 million a quarter to $50 million a quarter, and they both kind of be very much on a flow basis.

We'll move next to Rich Hightower with Barclays.

Just one for me. Rob, I think you mentioned in your prepared comments that the acquisition volume target for '27 is back-end loaded, presumably kind of related to some of the capital markets choppiness we've been discussing. But when I think about sources of funding and kind of adding up all available sources as they exist today, can you express that as sort of a runway to complete 2027 expected activity? And is '27 fully covered? Is it kind of covered through the first half? Does the back-end loading affect that calculation? Just help us think through that.

Yes, we're fully covered in terms of funding for next year, and that's maybe from a liquidity standpoint. We also had from a leverage capacity standpoint, we're also covered. That would end the year assuming no common equity that we'd be in the low to mid-4s in terms of net debt to annualized adjusted EBITDA on a pro forma basis, which is in line with our historical average. That being said, we have run at a lower leverage point over the last several years. And so clearly, should our share price get to a more attractive level, that would be something that we would think about to build more dry powder. But obviously, where we are today, the math doesn't make a whole lot of sense to issue common, which is why we noted earlier, we're not assuming any ATM equity in the near term. And then as it relates to the sources on that, I think we mentioned earlier about the dispositions as one lever. We're trading at a 7.3% cap right now.

And as Pete noted, we're able to dispose in the 7 cap or even better than 7 cap territory. That's something that's new. We haven't really talked about sourcing that capital because it's been dilutive relative to our weighted average cost of capital over the last several years. But obviously, to the extent that we're able to source more opportunities, that is a potential lever that we could pull. And so that's the quick picture on where it sits today.

In terms of the cadence, part of that is really just making sure that we extend the runway, not just over the next quarter or 2, but really as we're moving through the year. And as you think about the high end of the guidance range, that's assuming that we have a much higher investment volume activity level. And so obviously, that would be a world where our cost of capital has improved as well. So that's kind of the scenario that we're outlining at the high end.

We'll take our next question from Linda Tsai with Truist.

What is driving the lower credit loss in your portfolio? Do you attribute it to how you're operating the portfolio? Or are you seeing lower tenant distress for the tenants in which you're investing in?

I would say it's certainly more of the latter. We buy these assets and make an investment decision, and we have 15 years of weighted average lease term. There's little we can do to effectuate change after our initial investment. And so the vast majority of our low level of credit losses can be attributed to the investment decisions we make at the outset.

And then in terms of achieving more favorable disposition cap rates and seeing expansion in acquisition cap rates, could we expect investment spreads to improve in '27 versus '26 since your funding for next year is in place?

Yes. We have historically invested anywhere as tight as 100 basis points to wide as 300 basis points. I would say that is an output, not an input. And as we move cap rates, obviously, our spread will improve relative to the capital that we've raised and hopefully relative to the capital that we continue to raise. But as Rob just said, we don't our business plan in 2027 isn't predicated on raising new capital.

And then generally, cap rate movements lag the movements in cost of capital, and that's why we're in a compressed cap spread environment today. And it really just depends on what happens to interest rates and what happens to our cost of capital and our ability to move the pipeline. So it's early as we sit here in the fourth quarter of '26 to make a prediction on our net spread in '27, but I would say it would be about the same.

[Operator Instructions] We'll take our next question from Jim Kammert with Evercore.

I think it was mentioned earlier that kind of 8% is the new floor for going in transaction cap rates. Obviously, that's the cash cap rate. And I'm wondering, can you still extract portfolio average now 1.9% escalators on that type of cap rate? Or is there a bit of a trade-off going on?

Jim, this is Max. I would say you've seen over the last year or 2 that we've been able to push the escalations, and they've kind of increased, and we're sitting at 1.9%. And I would say the forward pipeline is pretty consistent with that and internal growth has been a focus for us as we're striking new deals. And -- like we said in the prepared remarks, forward pipeline has an 8 in front of it and the GAAP yields will be approaching the mid- to high 9s at this point. So we're happy with the pricing and making sure we're investing at accretive spreads.

I wouldn't want it to be lost. Last quarter, we were at 2.3% on our new deals and a GAAP yield well into the 9s. So the overall economic package we negotiate with tenants is fluid. I think the highest sensitivity is on initial cap rate, but we continue to do the best we can on that front.

And we'll move next to Greg McGinniss with Scotiabank.

I just wanted to go back and touch on your commentary regarding the change in the percentage of deals closing and how it related to this year. Is that entirely the seller backing away after not getting financing or whatever other reason they may have? Or is that your team adjusting underwriting and stepping away from deals that no longer make sense?

Yes. It's not our team adjusting underwriting. It could be our team adjusting pricing. We don't -- haven't changed the way we look at credit or the way we underwrite credit. But I would say it's equally balanced between deals not closing because of the choppy capital markets backdrop or deals not closing because of the pricing that we're offering.

Okay. And then looking forward, is there a targeted investment spread where you feel more comfortable transacting? Trying to get some sense how much cap rates need to adjust before you guys kind of hit the accelerator again. And then how are you thinking about cost of capital as it relates to what you've kind of previously raised versus what you could do today when you're evaluating these investment spreads?

Yes. I'll let Rob tackle the cost of capital end of it. We don't necessarily have a targeted spread. It's not that mathematical. We try to negotiate the best deals we can with our counterparties, and we try to source the cheapest capital that we can from the market. And as I said earlier, it's been about -- on the low end, 300 basis points on the wide end, and we're just working hard to make it as wide as possible, both on initial cap rate and the GAAP cap rate basis. So it's not that formulaic because the markets aren't that efficient. But Rob, weighted average cost of capital, how are we looking at it?

Yes. So on the capital that we've raised, where we have an unsettled forward equity balance that's struck at $30.50 and a 10-year debt issuance that we did in June in the low 5s, we're looking at a spread that's over 200 basis points in 3Q, 4Q. Obviously, that's not where our spot cost of capital is now. So that's probably what you'll see pull through the model in the back half of 2026.

But for the incremental deal and the incremental dollar that goes out the door, our cost of capital today is in the mid- to high 6s. It depends a little bit on which debt instrument you want to choose for that calculation. But that would get you to a range of 100 basis points to 150 basis points of spread, which as Pete noted, I think, on an earlier question, is within the range of 100 basis points to 300 basis points that we've enjoyed historically, but obviously towards that lower end. So we would hope to continue to achieve good pricing power to widen that spread out over time without maybe giving any guidance on where that might ultimately shake out.

And we'll take our next question from Jamie Feldman with Wells Fargo.

I was hoping you can dig deeper into the bonus depreciation demand market. We keep hearing from brokers that's a pretty -- there's a pretty healthy appetite, concerns about maybe rules eventually changing if there's a change in administration in a couple of years. Can you just provide more color on how deep it is, how sticky it is? It sounds like you and some of your peers are saying the same thing in terms of that should be a pretty good source of funds going forward. Just wanted to kind of get your latest thoughts on that and especially given the move in rates.

Yes. We've got a lot of demand for product from that market. Historically, we haven't delved into it too deeply. But it is certainly there, and it is certainly there at attractive costs given the massive tax incentives that kind of benefit that capital. Given the fact that the tax benefits are pretty dramatic, it tends to be pretty sticky. There tends to be pretty big penalties for selling those assets once you fully depreciate them. So it's a market we can look at. It tends -- as you'd imagine, given any sort of tax motivated capital, it tends to be more robust in the fourth quarter than the first and the second quarter.

And I would say our guidance and our disposition plan hasn't really leaned into that too much, but certainly out there as an attractive source of capital should we want to tap it deeper.

Okay. And then I guess just focusing a little bit more on some of the tenant moves. So we saw Flagstop Car Wash fall out of the top 10. TA Express is in. Was that primarily a function of printing car wash? Or is there -- are you leaning more into truck stops and C-stores? And then also, it looks like you bought another Dave & Buster's. What's your appetite to increase exposure to that tenant given their credit outlook from S&P?

This is Max. First, I'd point out that our top 10 concentration of 15.2% is among the most diversified across the space. And when you're talking about tenants that are less than 200 basis points of exposure, we do a ton of repeat business, relationship investing. Every quarter, we have movement. So we never want to look too much into each quarter-over-quarter slight changes. But TA Express, we've been working with the largest franchisee in the space that operates over 100 truck stops and convenience stores, 2 asset classes that we've invested in since inception. And this was just a follow-on transaction.

We've done multiple deals over the past couple of years. And so they're a great operator, a great partner. You mentioned Dave & Buster's. It was a single transaction that was added to the master lease. It was extremely accretive, both from a master lease coverage standpoint. It was a lower basis that improved our collateral position and the cap rate was accretive to the Q3 overall cap rate. So it's a good deal for us, but it's unlikely we'd probably add more exposure to that name on a go forward.

And I would say that's -- we don't follow S&P as a guide for our investment activity or our underwriting. And so the S&P certainly didn't drive our decision there. It's more just managing exposures and assets. And we remain confident in our master lease there and our coverage and think that, that company will be a great tenant long term.

Okay. I mean are you changing your perspective at all on the consumer heading into next year or areas where you feel less -- have less appetite?

No. Listen, we know our industries well. We have deep data and experience to support our investment in these industries. Ultimately, we're real estate investors in these industries, and we specifically know the like and know the real estate assets in these industries. And as we study our portfolio performance, our tenant performance, there's no trends that alarm us. Generally, the consumer is doing okay. At the worst, we have modest same-store sales down 2%, 3% with margin expansion, which results in a flat unit level coverage. And that kind of commentary runs across a lot of our sectors. So do not expect any material shift in our capital allocation strategy.

We'll take our next question from Spenser Glimcher with Green Street.

On the re-leasing front, I realize you guys have very little coming due in the near term, just given the long lease term of the portfolio. But just curious how you think about the high rent coverage on the leases coming due in the next few years. Do you see this as an opportunity to step up the rent at all? Or is it a priority to keep these coverage levels close to the portfolio average?

Generally, inhering our leases are renewal options that the tenants have. Typically, it's either 2 10-year renewal options 4 or 5-year renewal options. And that option is at the tenant's discretion. So we do not have the ability to mark these assets to market. So -- and generally, we assume if there's a higher than 2x coverage that there's a 98% probability that tenant is going to exercise those options.

And we'll take our next question from John Massocca with B. Riley Securities.

You kind of mentioned the step-up in cap rate in the pipeline versus what closed in 3Q. I mean, how fast should we expect that to flow through closed transactions?

John, it's Max. We put out the pipeline early in Q3 before conference season, and that showed a 7.6%. And in the prepared remarks, we said cap rates are around an 8%. And as we've always said, our pipeline is about a 90-day forward look. So you can kind of infer from there. And as Pete said, it's a volatile market, and it seems the rate environment, cost of capital is changing pretty rapidly, and we're taking a long duration, long-term hold 20-year investment horizon. So we'll continue to invest in price deals as they come in, but that's about as best I can give you right now.

Okay. And then on the disposition front, I mean, how fast should we expect those to potentially accelerate? You mentioned $200 million being kind of in the guidance for '27. But is that something that could accelerate as soon as 4Q? I know you've already done $22 million. Just kind of trying to think about how fast you kind of push on that lever for proceeds.

Just to be clear, we didn't guide to $200 million as an indicative level. We're constantly marketing assets. Generally, there's a 30-day premarket period, a 30-day market period and then it could be a 60-day close. So there is some typical lag in ramping those up. But we are in the market. We have listed assets for sale. And so -- and going from a 25 basis points to 50 basis points or 75 basis points is it could happen over a couple of quarters, but it's not going to be a material change immediately.

Okay. And then in terms of -- maybe trying to kind of think about the lower kind of close percentage on deals in the pipeline and the call for kind of investment volumes to be back-end loaded next year. I mean, how much of that, if any, reflects kind of like demand destruction for kind of the net lease offering? Like are you seeing some of your counterparties maybe at current prices or yields just not being able to kind of pencil in some of the growth opportunities that maybe traditionally had kind of catalyzed them to seek out your financing?

Yes. I think I said in an earlier comment, John, we would expect overall transaction volumes to be down, but we also expect diminished competition to be down on a greater level such that overall, there should be plenty of opportunities for us to invest.

I guess why would deal volume be so back-end loaded next year?

And part of that it's not driven by the opportunity set. We've always maintained that our opportunity set is ample, and we have plenty of deals to do. And I think as we said in the prepared remarks, part of that is preserving our capital runway and waiting for asset pricing to catch up with the movement in capital pricing. And we are sitting at a pretty wide level of capital pricing that we would expect to normalize over time as well. So it's more the capital front driving that than the opportunity set driving that.

At this time, there are no further questions in queue. I will now turn the meeting back to Pete Mavoides for any additional or closing remarks.

Great. Well, thank you all for your time today. As we tried to indicate, it's certainly an interesting time for the capital markets, the net lease industry and our company, but we're excited about the opportunity. We're excited about our abilities to execute in this backdrop and continue to drive earnings growth for shareholders, and we look forward to seeing everyone in the coming months at the conferences. Thank you all, and have a great day.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust Second Quarter 2026 Earnings Conference Call. This conference call is being recorded, and a replay of the call will be available 3 hours after the completion of the call for the next 2 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; Rob Salisbury, Chief Financial Officer; Max Jenkins, Chief Operating Officer; A.J. Peil, Chief Investment Officer; and Sheryl Kaul, Director of Financial Planning and Data Analytics.

It is now my pleasure to turn the call over to Sheryl Kaul.

Thank you, operator. Good morning, everyone, and thank you for joining us today for Essential Properties Second Quarter 2026 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. In our earnings release last night, for the quarter, we reported GAAP net income of $74.5 million and AFFO of $110.1 million.

With that, I'll turn the call over to Pete.

Thanks, Sheryl. Thank you to everyone joining us today for your interest in Essential Properties. In the second quarter, we accretively invested $332 million, reflecting the strength of our deal sourcing engine and the deep relationships we have built with middle market operators in our targeted industries. As transaction activity accelerated through the quarter, our team effectively converted a strong pipeline of opportunities into closed sale-leaseback investments, demonstrating our execution capabilities and the competitive advantage of our relationship-driven origination platform.

Cap rates came in slightly better versus prior quarter at an average initial cash yield of 7.8% and a GAAP yield of 9.1%, preserving a meaningful spread to our cost of capital that is a key driver of our earnings growth. This also reflects our ability to consistently source and close attractive opportunities even in a dynamic transaction environment. 84% of our investments were structured as sale leasebacks and sale-leaseback liquidity continues to be a compelling source of growth capital for middle market operators across our targeted industries.

Our capital position remains robust with pro forma leverage of 3.5x and $1.7 billion of liquidity, which was bolstered by our unsecured bond issuance during the quarter. With our capital needs largely addressed for the balance of 2026 and well into 2027, we are well funded to continue to execute on our growth strategy and drive durable and compelling earnings growth. Investment activity and portfolio operating trends are tracking ahead of budgeted expectations, allowing us to once again increase our 2026 AFFO per share guidance to a new range of $2.01 to $2.05 and our investment volume guidance to a range of $1.2 billion to $1.5 billion. Our revised AFFO per share guidance implies a growth rate of over 7% at the midpoint and over 8% at the high end.

Turning to the portfolio. We ended the quarter with investments in 2,493 properties that were leased to over 500 tenants. Our weighted average lease term is over 14 years. Our weighted average lease escalations are 1.9% and just 2.3% of our annual base rent is expiring through 2028.

With that, I'll turn the call over to A.J. Peil, our Chief Investment Officer, who will provide an update on our portfolio and asset management activities. A.J.?

Thanks, Pete. Overall, our portfolio fundamentals remained healthy during the quarter and continued to perform in line with our expectations. Same-store rent growth improved sequentially to 1.5%, while occupancy remained strong at 99.6% with only 9 vacant properties. Portfolio rent coverage was stable since last quarter at 3.5x and the percentage of ABR with rent coverage below 1.5x declined 50 basis points sequentially, reflecting continued improvement in credit quality.

During the quarter, we disposed $54.3 million of assets at a weighted average cap rate of 7.3%. The dispositions were largely driven by ongoing proactive asset management decisions during the quarter. Going forward, we expect our disposition activity to moderate to our trailing 8-quarter average. Our portfolio benefits from broad diversification as our top 10 tenants represent just 15.2% of ABR at quarter end, while our top 20 tenants account for only 25.4%, reflecting our continued focus on partnering with a broad base of middle market operators and limiting concentration risk.

We also reduced our top industry exposure by 40 basis points during the quarter to 12.6% of ABR. As a result, our portfolio construction remains healthy with our top 3 industries, car wash, medical/dental and early childhood education, each now representing approximately 12% of ABR.

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, A.J. On the investment side, activity picked up over the course of the second quarter, culminating in $332 million of investments at an average initial cash yield of 7.8%. Notably, pricing remained stable with cap rates coming in modestly better than our expectations. Our investments in the quarter had a weighted average initial lease term of 16 years and a weighted average annual rent escalations of 1.9%, generating a strong average GAAP yield of 9.1%.

Our capital deployment during the second quarter was broad-based across most of our top industries as we completed 36 transactions totaling 103 properties with approximately 84% of investment volume sourced through sale-leaseback transactions. One of our sale-leaseback transactions this quarter in the early childhood education sector was partially funded in a tax-efficient execution through the issuance of operating partnership units. This is the first OP unit transaction for EPRT. And while such deals tend to be episodic, it represents another tool in our toolkit for servicing our valuable relationships.

Our average investment size was $3.1 million per property during the quarter, which continues to reflect our focus on acquiring granular, highly fungible assets that provide attractive risk-adjusted returns. Pricing in our forward pipeline continues to produce cap rates in the mid-to-high 7% range. And with over $1 billion of closed plus identified opportunities year-to-date, we are well positioned to execute on our increased full year investment guidance range of $1.2 billion to $1.5 billion.

With that, I'd like to turn the call over to Rob Salisbury, our Chief Financial Officer, who will take us through the financials for the second quarter.

Thanks, Max. Overall, we delivered another quarter of strong financial performance, supported by a large, diverse portfolio of leased properties, disciplined capital deployment and continued balance sheet strength. Our AFFO per share was $0.50 representing an increase of 9% versus the second quarter of 2025, while nominal AFFO increased 18% year-over-year to $110.1 million. This AFFO performance came in modestly ahead of our expectations, driven by stronger than underwritten portfolio performance and better investment volume and pricing.

This offset slightly later timing of closings during the quarter, allowing us to increase both our investment guidance and AFFO per share guidance for the full year. Total G&A in the quarter was $10.9 million. Our cash G&A was $7.2 million, which is trending towards the bottom half of our guidance range of $30 million to $34 million for the year and represents just 4.4% of total revenue, down from 5.2% in the same period a year ago. We declared a cash dividend of $0.32 in the second quarter, which represents an AFFO payout ratio of 64%.

Our retained free cash flow after dividends totaled $43 million in the quarter, equating to approximately $170 million on an annualized basis, representing a substantial source of internally generated capital to support our future growth.

Turning to the balance sheet. Our financial position remains robust. During the quarter, we successfully completed a $400 million 10-year unsecured bond offering with a coupon of 5 and 3/8ths. This transaction supports our growth plan for 2026 while further extending our weighted average debt maturity and creating more liquidity in our bond complex. We have been modestly active on the equity side in support of extending our equity runway, raising approximately $85 million of equity during the second quarter and subsequent to quarter end through the ATM program and the OP Units transaction that Max discussed earlier.

Given the excess liquidity generated by our bond offering, we did not settle any forward equity during the quarter, leaving us with approximately $575 million of unsettled forward equity at quarter end. As a result, our pro forma net debt to annualized adjusted EBITDA remained low at 3.5x at quarter end and total available liquidity increased to $1.7 billion, providing us with ample capacity to execute on our investment pipeline well into next year. At quarter end, income-producing gross assets totaled $7.8 billion and the continued growth and diversification of our portfolio further strengthened our credit profile.

Our AFFO per share guidance continues to incorporate a conservative assumption for treasury stock method dilution on our unsettled forward equity balance, totaling approximately underscoring the strength of our operating performance and investment execution year-to-date. As we noted earlier, we increased the low end of our 2026 AFFO per share guidance by $0.01 to a new range of $2.01 to $2.05. This reflects a growth rate of over 7% at the midpoint and over 8% at the high end.

With that, I'll turn the call back over to Pete.

Thanks, Rob. In summary, we are happy with our second quarter results. The diversified portfolio and ample balance sheet capacity, we remain confident in our long-term growth trajectory and our ability to deliver best-in-class total shareholder return.

Operator, please open the call up for questions.

[Operator Instructions]

We'll take our first question from Greg McGinniss with Scotiabank.

I was hoping you could touch on the utilization of OP Units in Q2, whether you plan on doing more of those, whether that's the type of tenant you're trying to bring into the portfolio more so? Any details would be appreciated.

Sure. It was a traditional sale leaseback with an operator who had owned real estate on balance sheet that they were looking to monetize. And there was not a cash out or a business need for the cash, and it was tax efficient for them to take OP Units and participate in the OP and have ownership in EPRT going forward. And it was a valuable currency in the transaction.

It differentiated us from competitors, and it was an efficient way for us to close that transaction without tax leakage for the seller. There's not a lot of situations where that comes to play. There's certainly -- they come in from time to time, and we like to utilize that currency and the tax efficiency of it. And so to the extent that there is further opportunities, great. But I'm not optimistic that there are, it takes a pretty unique seller.

Okay. And then just looking at the category exposure, early childhood education ticked up 1% this last quarter. Is that an area where you're having more increased focus? Or was it a single onetime kind of transaction that looked attractive? Obviously, you've done a good job in terms of diversification of the top 3, but just curious where you're seeing the best opportunities for investment right now?

Yes, I wouldn't read too much into that, Greg. We maintain and seek investments across all our industries. And obviously, as you've seen, they ebb and flow. There was a larger opportunity in the childcare space during the quarter, but we'll seek to maintain that diversity going forward.

Our next question will come from Caitlin Burrows with Goldman Sachs.

I was wondering if you could first talk a bit about your acquisition process from the standpoint of what was the industry mix of deals in 2Q and what drove that? Does it end up being yield-driven, portfolio construction? Like why that mix in 2Q?

Yes. In the second quarter, it was 36 individual transactions. The vast majority of those, 72% were existing relationships. We maintain relationships and seek to build relationships in all our industry verticals and grow our portfolio ratably. Each industry has different risk return parameters, different competitive parameters, and we price deals in each industry in part based upon our credit performance and recovery experience within those industries.

And so as investing as granular as we do in $3.1 million assets and 30 transactions in the quarter, it's going to be broad-based across all our industries, and we're pricing each deal based upon that individual risk profile of that opportunity. So we're agnostic as to which industries we invest in. We want to service profitable relationships overall and ultimately maintain the diverse portfolio.

Okay. Got it. And then maybe from a coverage perspective, I think last quarter, you mentioned that perhaps we could see some headwinds on the restaurant side. Wondering, a, if you've seen that play out? And then, b, it looks like your exposure to the under 1x bucket ticked up a bit. So wondering if you could comment on that?

Sure. Generally, what we've seen in the restaurant space is the restaurant operators are flat and same-store flat margins resulting in pretty flat coverage. So I haven't really seen a material drop-off in the coverage within that cohort. As it pertains to the under 1x bucket, as is the case most times, it tends to be pretty idiosyncratic and not industry related. And there's just normal ebbs and flows within that bucket. Overall, the under 1.5x bucket came down 50 basis points. And so we think the portfolio is sitting in a good spot.

Our next question will come from Haendel St. Juste with Mizuho.

So just looking at the volume you've accomplished in the first half of the year on acquisitions and what your updated guide is suggest a pretty meaningful decel or slowdown in volume in the back half of the year. I'm curious if that's conservatism. Is it something maybe that we're missing? And maybe can you shed some light on the pipeline, your expectations for cap rates amid the geopolitical macro volatility and if that's impacting your conversation with counterparties at all?

Yes, Haendel. The cap rates, as Max said in his comments, remain in kind of the mid-to-high 7%. Overall, the capital markets volatility that we're seeing helps our negotiating leverage relative to our counterparties and allows us to keep rates higher. I think you see that in the second quarter print. As it pertains to volume, Max had some commentary around that. In general, we bumped our investment guidance for the year and the pipeline is in a really good spot.

Okay. Fair enough. So maybe there's a little bit of upside. We'll see how the year plays out. And then secondly, I was hoping you could share some color on treasury stock method, kind of what's embedded in the updated guide versus prior quarter?

It's on you, Peil.

Haendel, yes. So we traditionally have incorporated very conservative assumptions around the treasury stock method dilution just so that we can put ourselves in a good position for conservatism on guidance. That has changed this quarter. As we updated our modeling, the stock has moved up recently, which creates a little bit of incremental dilution. As we mentioned in my prepared remarks today, we see $0.01 to $0.02 of headwind to AFFO per share this year from the treasury stock method dilution.

I'd say we're probably trending closer to the high end of that range currently whereas we're close to the low end of that range last quarter when we gave you an update. And so we'll see how the rest of the year progresses on that front, not a massive headwind, but relative to our guidance range, we would have been able to hike by more, but for a slight amount of headwind incrementally from that.

Our next question will come from Michael Goldsmith with UBS.

First question is, as of NAREIT, the acquisition volumes were pretty muted through the quarter, but clearly picked up through the back half of June. So can you just talk a little bit about just the cadence of acquisitions and closings through the quarter? Is that typical of what you see? Did you push hard to get this volume in the period? Just trying to get a sense of what has changed through the quarter to achieve this high volume of acquisitions?

Yes. And I would say it's certainly not out of the norm. The total volume in the quarter is relatively consistent with past quarters, albeit the timing may have been slightly delayed. When you're thinking about 36 transactions with counterparties that we don't always control, it just -- we drive the process and try to make it as efficient as possible. But ultimately, we don't control the closing. And then you layer in a chunky $50 million to $100 million deal that's really going to affect your weighted average close date.

So nothing abnormal during the quarter. Generally, our closing team strives to be as efficient as possible and close deals as quickly as possible. But we're often subject to the timing of the counterparty that we don't control. So nothing unusual. We'll continue to close deals as quickly as possible and be as efficient as possible.

Got it. And then as a follow-up, continue to push further into the health and fitness space. I think with fitness ventures kind of moving their way up into the top 10 tenants and then you also have undefeated tribe maybe with a little bit of a logo change in your deck. But can you just talk a little bit about that category, the opportunities there and where you ultimately would like to get that as a category within the mix?

Sure. I mean those 2 tenants are both tenants operating within Crunch Fitness franchise system. They're both great operators. We really like the Crunch model, kind of a high volume, low price point, high-quality service, coupled with an investment that is not astronomically large on average, anywhere between $7 million to $12 million for a gym compared to some of the higher-end models, which can range up to $60 million.

And so we really like Crunch. We like that system. We particularly like these operators. It provides us an opportunity. We generally invest through new development which is typically repositioning of old boxes with a nice mark-to-market on those boxes and attractive yield for construction financing and ultimately, coverages that work and make a lot of sense for us. So we like the space. We don't see a ton of opportunity within the space. So I would not expect it to grow disproportionately, but it should continue to grow ratably.

Our next question will come from Eric Borden with BMO Capital Markets.

Understanding that you don't guide to bad debt, but just thinking about the restaurant vacancy in the first quarter and then maybe coupled with an increase in the subtimes -- 1x coverage in the second quarter, do you expect bad debt expense to remain near your long-term average of roughly 28 basis points? Or is there a risk it trends modestly above that level?

Yes. And that really isn't necessarily bad debt. It's really just lost -- credit loss, lost ABR. We generally take a more conservative estimate relative to our historical average as you would expect. And we would expect the portfolio to perform relatively consistently. But I would suggest there's probably a more conservative assumption supporting guidance. But we do not see anything out of the normal in the credit performance of the portfolio that would suggest outsized credit performance or loss.

Great. And then my follow-up question is around the loan book. Just with loan repayments occurring at 9.3% yield, how attractive does that lending opportunity set look today? Can you replace those repayments with similar yielding loans? Or would you rather redeploy that capital into traditional net lease acquisitions?

Generally, we do loans purely as an accommodation to the counterparty. Our preference is to do a sale leaseback. We structure the loans with similar economics to our sale-leaseback transactions. And so any cash flow from loan repayments will generally be redeployed into our investment pipeline, which generally has a percentage of loan consistent with the overall portfolio, which is right around 5%. So not a meaningful driver or mover of the needle, but we'll continue to do loans as they come available and when we can't get true ownership of the real estate, but our focus will be continuing to build our owned real estate portfolio.

[Operator Instructions] Our next question will come from Jana Galan with Bank of America.

This is [indiscernible] on for Jana Galan. For my first question, looking at 2Q investments, it looks like master leases up around 50% in the last 2 quarters. Is this more of a function of deal mix? Or does it reflect the broader evolution of the opportunities you're seeing today?

Dan, thanks for the question. I wouldn't read too much into it. It's just an industry tenant preference, and we're pricing individual versus master leases into every transaction. But overall, the portfolio is pretty consistent kind of around that 60%. So nothing meaningful there in Q2.

And then just a follow up here. Your February 2027 term loan is your nearest maturity at around 2.3%. Given current rates, like how are you thinking about hedging or terming that out and then potentially maybe add color on the AFFO impact for 2027?

Sure. Yes. Thanks. So yes, that's the next maturity that's coming up on the ladder. We have a number of alternatives to address it. But yes, as you pointed out, at a 2.26% all-in rate, it's already hedged at that rate. It will very likely be dilutive under most scenarios that we would entertain. And as we look to the bond market or the term loan market, when you look at current pricing today, the dilution would probably be somewhere in the order of $0.04 to $0.06 depending on what we end up doing. In general, our preferred method is to go into the bond market. You saw that we just did a long 10-year bond in June, and we would probably look to do something similar to that.

However, when you look at our ladder, we do have some opportunities to do a 5- or 7-year as well. So as you guys all know on the call, the rate environment changes by the minute. So we'll see what the world looks like later this year. We would certainly look to address it well ahead of time, and we have plenty of available liquidity and resources between our credit facility, our forward equity balance and, of course, internally generated cash flow. So a lot of options there, certainly a manageable headwind, but important to think about that as we move into 2027.

Our next question will come from Smedes Rose with Citi.

We were just wondering it looks like the provision for credit losses in the quarter was maybe a little higher than what you typically booked. I was just wondering if you could speak to anything going on there?

Smedes, it's Rob. Yes. So when you look at our loan portfolio, we have a balance today of approximately $400 million. And as Pete mentioned earlier, just as a reminder, although these loans are characterized and accounted for as loans, they're generally the same structure as our sale-leaseback investments with long duration and annual escalators. Similar to our impairment review process that we undergo each quarter, we review these loan investments to assess their carrying value under GAAP accounting principles.

The loan loss reserve was a little larger this quarter, reflecting some management conservatism, but this reserve is a noncash item in our income statement. Overall, the loan book is current today with nothing on nonaccrual, and that's consistent with our broader commentary that tenant credit trends remain favorable in our portfolio overall.

Okay. All right. Fair enough. And then I just wanted to clarify something. Maybe I'm not looking at the right numbers here, but you said a couple of times that the under 1x bucket improved sequentially by 50 basis points. But if I list the numbers we're looking at, it looks like it went up by 50 basis points from 3.4% to 3.9%. Is that correct?

Smedes, I was referring to the under 1.5x bucket, and we kind of...

I'm sorry. Yes. So the under 1x bucket went up, what you've talked about a little bit. Do you see that as just sort of the normal ebb and flow? I think you've talked before about sometimes newer tenants coming on to their business is still ramping. Is that kind of what you're seeing? Or is there anything else you can talk about in that category?

And it's -- I would start, it's not material, and it is certainly just the normal ebbs and flows and of various businesses and various tenants, and there's certainly a component of that, which is sites coming online that are in the ramping period. But nothing out of the ordinary and nothing that's given us a credit concern. And as we usually say, any sort of concerns would be baked into our guidance.

Our next question will come from Spenser Glimcher with Green Street.

As you guys continue to grow at a sector-leading pace, so double-digit expansion each year, how do you foresee headcount changing, if at all, over the medium term?

Yes, Spenser, we've grown the firm substantially since coming public in 2018. And as we continue to invest in our investment volumes, sourcing and processing and underwriting deals takes incremental personnel as well as managing additional assets. And so our headcount will grow. We've tended to grow 5 to 10 professionals a year. I would anticipate that kind of tapering off as we get more efficient. But we'll continue to grow, albeit our G&A will continue to rationalize would be our expectation.

Okay. Great. And you kind of got to my second question, which was, is EPRT using AI at all to help with sourcing or vetting your acquisition pipeline and/or on the asset management front? You noted that both obviously are people intense right now. Just curious if you guys have leaned into that capacity yet.

Spenser, this is Max. Short answer is yes. We're investing in our technology platform and our tech stack with AI across the board from the front end of sourcing through management, property management, asset management and utilizing it wherever we can, as Pete said, just to continue to be better investors and be as efficient as possible.

Our next question will come from Rich Hightower with Barclays.

Just really one from me this morning. But just to go back to the dispositions in the quarter. I know, A.J., you said it was more of an asset management kind of idiosyncratic method there. But just tell us a little more about what were the situations, who's buying? What's the outlook for further dispositions? And does anything sort of change going forward?

Yes. Listen, dispositions has always been a part of our business. We very deliberately have a fungible portfolio so that we can readily manage risks, whether it be concentration risks or individual credit risks. And that was certainly what you saw during the quarter. As today A.J. said on the call, you should expect those to moderate back to a normalized level of, call it, $20 million to $30 million a quarter, but we'll continue to prune the portfolio at the edges, manage forward credit risk and industry and tenant exposures as part of our normal asset management discipline.

I guess just a follow-up. I mean, is there anything about -- it doesn't sound like it, but just to clarify, increasing prepayment or lease termination fees or anything like that, that we should be modeling going forward? Or does it all kind of move in a similar percentage to the overall just on that particular point?

Yes, there's nothing abnormal or out of the norm going on in the portfolio that would impact earnings that you should be thinking about.

[Operator Instructions]

We'll take our final question from John Massocca with B. Riley Securities.

I know we've talked probably more about your loan receivable book than any earnings call I can remember. But it seems like a lot of the repayments were actually kind of prepayments. Is that something that's pretty extensive throughout that kind of portion of your investment portfolio? And I guess, how sensitive is that moves we have in interest rates or maybe just timing as things may become prepayable? Just kind of curious if we could see that bucket of kind of effective dispositions increase over time or even near term?

Yes. So most of our loans are multi-property loans supporting similar assets to which we own in the portfolio, and those loans generally carry prepayment rights when an individual asset is sold and those prepayments tend to come with prepayment penalties and tend to be constrained and limited. To the extent that the rates go down and there's a very liquid market for retail disposition of properties, you might expect that to pick up. But in general, I would expect it to be pretty consistent.

Okay. And then maybe on the investment side, thinking back to kind of disclosure ahead of the NAREIT Conference, you said you had between -- sorry, acquisitions that were closed and stuff under LOI or PSA, roughly $430 million of transactions, and you've kind of done $350 million since the end of 1Q. So just kind of curious, is that reflective of just purely timing and we should maybe expect that delta to close over the coming months? Or were there things that kind of fell out of the pipeline, understanding it includes a pretty broad deals and kind of a broad level of kind of where they are in terms of closing?

Yes. Generally, when we flash our portfolio, it's a forward 90-day look, I would say, to our pipeline. And to the extent it's in our pipeline, I would say there's a 90-plus percent chance of that transaction closing. We don't spend a lot of time working on deals or putting in our pipeline if we don't think they're going to close. And so if we're flashing a number in the second month of a quarter, you can expect that there's going to be some hangover into the next quarter.

Okay. And then lastly, given the amount of cash on hand today, how should we think about timing of forward equity pull downs? Is that something you're going to wait until 4Q maybe to complete? Or could that kind of restart here in the third quarter?

John, it's Rob. Good question. So if you go back in the first quarter, we did a fair amount of settlement activity funding the investment pipeline. And we had planned on doing more settlements in 2Q, but then we did our unsecured bond offering in June, which created excess liquidity. So we ended the quarter with some excess cash. So that meant there was no need for us to settle in 2Q. As we move through 3Q, and Max mentioned earlier that we have a great pipeline heading into the summer. We'll start to consume that capital. And I think you should expect some settlement activity later in 3Q.

As we get to 4Q, we'll probably still have some unsettled forwards that are available to us. And in addition to that, we'll also look to the bond market as we start thinking about taking out the 2027 term loan. That doesn't mature until February, of course, but we could potentially prepay that as well. So from a capital plan standpoint, I expect some settlements in 3Q. And then in 4Q, it should probably be a mix of bond and equity.

And it appears we have no further questions. I'll turn the program back over to Pete Mavoides for any additional or closing remarks.

Great. Thank you very much, operator. Good job today. And thank you all for your questions and participating in our call, and I hope you all have a great summer.

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

Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust First Quarter 2026 Earnings Conference Call. This conference call is being recorded, and a replay of call will be available 3 hours after completion of the call for next 2 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; Rob Salisbury, Chief Financial Officer; Max Jenkins, Chief Operating Officer; A.J. Peil, Chief Investment Officer; and Sheryl Kaul, Director of Financial Planning and Data Analytics. It is now my pleasure to turn the call over to Sheryl Kaul.

Thank you, operator. Good morning, everyone, and thank you all for joining us today for Essential Properties First Quarter 2026 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. In our earnings release last night, for the quarter, we reported GAAP net income of $60 million and AFFO of $105.8 million.

With that, I'll turn the call over to Pete.

Thanks, Sheryl, and thank you to everyone joining us today for your interest in Essential Properties. We had a productive first quarter, deploying $389 million into 126 properties and raising $419 million of equity in support of our pipeline while growing our AFFO per share by 11% year-over-year. Despite a macro backdrop characterized by heightened volatility, our teams continue to source and execute attractive investment opportunities as our ability to deliver capital is highly valued in this environment.

Our focus on servicing relationships and providing sale-leaseback capital to growing middle market operators across our targeted industries continues to be a differentiator for our company. Investment cap rates were stable this quarter with an initial cap rate of 7.7% and a GAAP yield of 8.8%. This meaningful spread to our cost of capital is a key driver of our earnings growth. With $1.5 billion of available liquidity, and low leverage of 3.5x pro forma net debt to annualized adjusted EBITDAre, our balance sheet positions us well to continue to deliver compelling growth.

Overall, investment activity and portfolio credit trends have started the year ahead of our budgeted expectations. Coupling this with our investment trajectory, drives our ability to increase our 2026 AFFO per share guidance to a new range of $2 to $2.05. We commensurately increase our investment volume guidance range by $100 million to a new range of $1.1 billion to $1.5 billion, and our cash G&A guidance has improved by $1 million as a result of cost discipline as the platform continues to scale.

Turning to the portfolio. We ended the quarter with investments in 2,417 properties that were leased to over 400 tenants. Our weighted average lease term increased to approximately 15 years with just 2.8% of our annual base rent expiring over the next 3 years.

With that, I'll turn the call over to A.J. Peil, our Chief Investment Officer, who will provide an update on our portfolio and asset management activities. A.J.?

Thanks, Pete. Overall, our portfolio credit trends remain healthy with same-store rent growth in the first quarter of 1.4% and occupancy of 99.7% and just 7 vacant properties. Portfolio rent coverage remained strong at 3.5x and the percentage of ABR under 1.5x rent coverage declined by 140 basis points. Disposition volume moderated to $10.2 million at a cap rate of 6.9% and following an elevated fourth quarter of Car Wash property sales.

Looking ahead, we continue to expect modest disposition activity, driven by proactive asset management as well as overall portfolio construction shaping. Our focus on middle market operators continues to yield a highly diversified tenant base, with our top 10 tenants comprise only 15.8% of ABR and our top 20 representing only 26% of ABR at quarter end. We remain disciplined in actively managing the portfolio towards long-term credit stability and broad diversification is a pillar of our risk management framework.

On the credit event side, during the quarter, one of our restaurant tenants filed for bankruptcy. We own 7 properties that were leased to this tenant, which represented approximately 30 basis points of ABR. With identified backfill tenants on 5 sites and 2 locations under contract for sale, our expected recovery rate is consistent with our historical range of approximately 80%, which is better than our budgeted expectations. The relatively quick resolution time line and a reasonable recapture rate demonstrates the inherent fungibility of our restaurant assets. As is typical, this situation was operator specific in nature and looking at our restaurant exposure overall, operator revenue and margin trends remain healthy and consistent with recent experience.

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, A.J. On the investment side, during the first quarter, we invested $389 million at a weighted average cash yield of 7.7%. Our capital deployment was broad-based across most of our top industries with no notable departures from our investment strategy. During the first quarter, our investments had a weighted average initial lease term of 17.7 years and a weighted average annual rent escalation of 2.1%, generating a strong average GAAP yield of 8.8%.

Our investments this quarter had a weighted average unit level rent coverage of 3.1x reflecting a conservative rent level and healthy unit profitability for our operators. We closed 22 transactions comprising of 126 properties, of which 100% were sale leasebacks. The average investment per property was $2.9 million this quarter, consistent with our historical range, reflecting our focus on investing in fungible assets. Though we don't normally comment on specific investments, this quarter, we closed on a large portfolio that is noteworthy and was reported publicly by this tenant.

In January, we acquired 74 properties and a $147 million sale-leaseback with [ Denny's ] as part of their privatization transaction. With an average price of under $2 million per asset and strong unit-level coverage, the property profile exhibits the high level of fungibility that we seek in our restaurant investments. The transaction is a great example of how we add value to our relationships with a reliable and transparent closing process. It also shows how our deep industry expertise, especially in the restaurant sector, enables us to leverage proprietary data to drive an efficient underwriting process.

Looking ahead, pricing in our pipeline remains constructive, with cap rates in the mid- to high 7% range, representing an attractive spread to our cost of capital, which is supportive of our long-term growth trajectory. After a great start to the year on the investment side, we increased our full year investment guidance by $100 million to a new range of $1.1 billion to $1.5 million. With that, I'd like to turn the call over to Rob Salisbury, our Chief Financial Officer, who will take us through the financials for the first quarter.

Thanks, Max. Overall, we were pleased with our first quarter results. The company generated AFFO per share totaling $0.50, representing an increase of 11% versus the first quarter of last year. On a nominal basis, our AFFO totaled $105.8 million for the quarter. This AFFO performance was slightly above our expectations, driven by a combination of earlier deployment timing, lower cash G&A and favorable portfolio credit trends.

Total G&A in the quarter was $12.3 million and cash G&A was $8 million, representing just 5% of total revenue, down from 5.9% in the same period a year ago. As a result of continued cost discipline, we reduced our cash G&A guidance for the year by $1 million to a new range of $30 million to $34 million. We declared a cash dividend of $0.31 in the first quarter, which represents an AFFO payout ratio of [ 62% ]. Our retained free cash flow after dividends reached $40 million in the first quarter equating to approximately $160 million per annum and represents a substantial source of internally generated capital to support our future growth.

Turning to our balance sheet. Our income-producing gross assets increased to over $7.5 billion at quarter end. The increasing scale and diversity of our portfolio continues to enhance our credit profile. On the capital markets front, we completed an overnight equity offering in February, raising over $402 million. We also raised approximately $17 million of equity on our ATM program. All of our equity issuance this quarter was completed on a forward basis. We settled $193 million of forward equity during the quarter with a portion of the proceeds utilized to partially repay our revolving credit facility balance.

Our balance of unsettled forward equity totaled $541 million at quarter end. The weighted average price of our unsettled forward equity was $30.55 at quarter end. During the quarter, our share price was modestly above this level. 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 212 million shares included an adjustment for 671,000 shares related to this treasury stock calculation representing a minimal headwind to our AFFO per share for the quarter. Looking forward, our updated AFFO per share guidance range continues to include a conservative assumption for treasury stock method dilution of approximately $0.01 to $0.02 for the full year.

Our pro forma net debt to annualized adjusted EBITDAre remained low at 3.5x at quarter end, which is well below our long-term average in the mid-4s leaving us with ample dry powder to execute our 2026 business plan. We remain committed to maintaining a conservative balance sheet with low leverage and significant liquidity. As we have previously discussed, we continue to anticipate an unsecured debt issuance in the middle of the year to fund our growth pipeline and extend the weighted average maturity of our liabilities.

Lastly, as we noted earlier, we have increased our 2026 AFFO per share guidance to a new range of $2 to $2.05, reflecting a growth rate of 7% at the midpoint and over 8% at the high end. With that, I'll turn the call back over to Pete.

Great. Thanks, Rob. In summary, we are happy with our first quarter results. Our high-quality portfolio is performing well with a compelling 15-year weighted average lease term, sector-leading diversity and a deliberate commitment to fungibility that allows us to effectively and efficiently manage the potential risks in the portfolio. .

On the investment side, our differentiated sourcing and underwriting discipline, focus on delivering value to our long-standing relationships and a well-capitalized balance sheet, position us well to continue to generate best-in-class total shareholder returns.

Operator, please open the call for questions.

[Operator Instructions]

We'll take our first question from Caitlin Burrows with Goldman Sachs.

Maybe just looking at the acquisition volume and cap rates in the quarter, volume was high. You mentioned cap rates were stable. I think they were maybe a little lower than recent quarters. So the cap rate side, could you just go through what drove that decline? Is it just a reality of business today, industry mix, the portfolio deal something else? And would you expect that level to continue?

And thank you for the question. As we communicated on our last call, we expect cap rates in the mid- to high 7 range, obviously, coming down from the 8 that we saw last quarter. Some of that is capital markets and competition. Some of that is industry mix. But certainly, the 7.7% is a healthy rate, and we feel pretty good about that.

Got it. Okay. And then maybe just on the kind of macro side, as you think of the macro volatility that is going on, can you go through how that impacted EPRT in the quarter or not? And maybe how it impacts competition?

Yes. I think most of the volatility that we see today is going to impact us in next quarter, right? And so the deals that are closing and pricing in Q1 were really baked in Q4, and it was much more stable in Q4. I think as we think about the current market volatility higher 10-year, I think, all on balance help us as we are a consistent reliable capital provider with a lot of liquidity and a long track record of reliably closing transactions and counterparties value that in an uncertain and volatile market. And so on balance, I think it helps. Obviously, the volatility as it persists is going to put some strain on the consumer and that puts strain at the margins on the portfolio, but certainly nothing that is outsized or gives us pause, which is one of the drivers of raising guidance here on this call.

Our next question comes from John Massocca with B. Riley Securities. .

Maybe walk -- provide a little more detail on the Dennis transaction. I guess, I mean how is that sale-leaseback structured -- is everything kind of maybe uniform distribution in terms of lease maturity? Or is there some kind of variance there? And I guess to be a bigger picture, what kind of made you comfortable with the tenant, given some of the news that's been out there about location closures and you take private transaction, but obviously, maybe potentially using the outside from having new owners in place?

Yes. I'll have Max tackle that question, but I would start. First and foremost, as a real estate investor, we take comfort in the properties that we're buying and the lease and then the tenant comes into consideration. But Max, why don't you get into that deal a little bit for [ him ].

Sure. Thanks for the question, John. I think to start, at the end of the day, these are small bite-size granular fungible restaurant properties, which we've had tremendous success investing in over the years here. And so you have 74 properties, less than $2 million per asset. And the key thing here was the average operating history was over 40 years across our portfolio. And so you have durable, strong unit-level coverage, stable performance across the board an attractive yield. And so that's what we look for in restaurant investments.

To your question about the structure, it was a combination of both corporate owned and operated stores as well as multiple franchisees, which is good for us because we have a geographically diversified, we have a tenant credit diversification. And so you put that all together, and we are very happy with the process. And we've known the equity group for a few years, and so a strong relationship. They relied on our certainty of close, and so we're happy with how that transaction played out.

Okay. And then relatively small numbers in terms of the overall ABR, but it seemed like there was a bit of an increase in rent and some kind of shorter lease maturity years, particularly 2026. Is there something driving that? Is it re-leasing? Or is it something with one of the transactions that closed? Just kind of curious if that number came up versus kind of prior quarters?

Yes. I would point to our weighted average lease term for our investments in the quarter was 17 years. So that's unlikely.

John, that was attributed -- some of that a little bit was in the Denny's portfolio. So we got created with some of the franchisee stores. And so it was in a contiguous lease termination, which is 1 of the reasons why we won the deal is because we were able to get creative and underwrite every individual property, every franchise the corporate credit as well. And so there's a little bit of noise, but I wouldn't look too deep into it.

Okay. And then the number of kind of relationship transactions was a little bit -- or prior relationship transactions was lower this quarter. Was that all primarily tied to Denny's or was there any other transactions that are kind of with new kind of sale-leaseback partners?

Yes, I would say that decline is mostly related to Denny's. .

Our next question comes from [ John Kilechowski ] with Wells Fargo. .

It's Jamie Feldman, filling in for John here. A couple of questions for you. So I guess, number one, I mean, Denny's was the result of take private of a public company, certainly seeing a lot of activity in the in the capital markets, whether it's IPOs, take privates. We've got a lot going on in the private credit world -- what do you -- what are your thoughts on just larger scale deals going forward versus one-offs? I know the one-offs have been a little bit more of a sweet spot. But as you think about the pipeline and the conversations you're having with your seller-type clients. What do you think the world looks like over the next 12, 18 months, given all the movement we're seeing?

Yes. I don't think we're going to see a ton of ripple-down effect into the middle market tenants we're dealing with. Our larger transactions tend to be very episodic. Certainly, Denny's is an outsized 1 -- but I would expect our portfolio going forward to still be predominantly small granular deals and not the larger kind of M&A type transactions. It's rare that they have been in our industries and with size and with real estate that really gives us an opportunity to get in there. And so I would imagine our pipeline going forward remains very granular. .

Okay. And I know your response to a prior question on cap rates was more competition there coming in a little bit. But how do you just think about your investment spread to your cost of capital going forward, given your different capital sources and just the ability to create the same level of accretion for same dollar amount?

Rob.

As we've talked about in quarters past, the investment spread is really more of an output than an input. We tend to price deals in the marketplace based on where the facts and circumstances shake out for each individual deal. And of course, on the capital side, our weighted average cost of capital hasn't moved that materially relative to the last time we gave an update. So if you look at where our unsecured debt trades today, it's probably in the mid- to high 5s. At our cost of equity, which we tend to use our AFFO yield as a proxy for that. It's in the mid- to high 6s.

And as you know, we retained nearly $160 million now of annualized free cash flow after paying out dividends. which is a free source of capital for funding our investment pipeline. So when you throw all those sources of capital into the blender, we're in the mid-5s on a WAC basis today. compare that to where we're deploying capital in the mid- to high 70s, a healthy spread of 200 basis points plus and very supportive of our long-term growth algorithm. So where we sit today, we certainly would love to see our share price at a higher level, but we're very much in business deploying capital accretively for shareholders.

Okay. And if I could just ask one more. I mean we're all kind of trying to make sense to the headlines, higher fuel costs, higher food costs now, a lot of talk lately about fertilizer costs. Just as you guys are all digesting the headlines and thinking about what could change in the next months, quarters, like as you look at your tenant base, like where do you think you'll see the most flow-through or impact? I know your credit quality is all very good. But like what are you just watching the most as you think about your portfolio?

Yes. I think the casual dining and the entertainment space has seen and we expect to continue to see the most weakness -- and that weakness really manifests itself in kind of sort of flat to down-ish, 2%, 3% sales and some margin pressure, maybe 100, 200 basis points. where that kind of flows through to maybe 10, 20 basis points on rent coverage. And so thematically, we don't expect major shifts in our industries and then you dig down to the idiosyncratic risk with specific operators that are either growing or over-levered or grew too fast or a lot of development and really understanding how they're performing and how our sites within those credits are performing. .

So we're watching it. Obviously, the portfolio is performing well. I can guidance here today early in the year. As we said, our credit performance is coming in better than anticipated. So we don't expect material flow-throughs to our portfolio performance, but we're watching the consumer and specifically our casual dining and entertainment space.

Our next question comes from Michael Goldsmith with UBS.

First question is just on the bad debt in the period. I think you mentioned a restaurant property group of resumes the Applebee's franchise -- and in addition, I think I saw that there was an impairment on that in the income statement. So just can you just talk a little bit about what you're seeing from your tenants and if the environment has gotten particularly challenging for any of them? .

Yes, I would say I'll let A.J. tackle the specific impairments. But in general, much like my earlier comments, people performing and credit is coming in better than anticipated, which was supportive of our guidance increase this quarter. it tends to be very idiosyncratic events that drive impairments and bad debt, but on the impairment for the quarter. A.J., you got some commentary? .

Yes. And more broadly, just kind of on the health of the portfolio. the question probably that people is addressing, we're paying a little bit closer attention to the entertainment and casual dining space. And you referenced in your question, the casual diner we called out in the prepared remarks. -- that was significantly more episodic than it was kind of a trend line. I would say, broadly speaking, our restaurant portfolio has generated 2.5x plus coverage across the board. So we feel good about the portfolio. But specifically on the impairment, Rob just kind of opine on what happened on the balance sheet.

Yes. Thanks, A.J. As A.J. just mentioned, a lot of these situations are much more diosyncratic in nature. And as it relates to the impairment itself, have a pretty robust quarterly impairment testing process that's well established and been in place for a long time. And as part of that rigorous process, we are constantly testing on a quarterly basis. for the impairment this quarter, it was driven primarily by one site on a former American Signature location. Because I think we've talked about in quarters past, that tenant went bankrupt in the fourth quarter, and it was paying rental lease had not been rejected until a time during the first quarter. And so that triggered the impairment testing process. .

In general, we have not been bullish on the home furnishing industry. That's an industry that we have not invested in for many years. and we are into 1 location now, representing effectively rounding air in terms of exposure to the portfolio broadly. So it's not a huge surprise in terms of where the exposure is there, but happy to report that not a material impact going forward.

And as a follow-up question, you have a term loan that's expiring in early February at a particularly low rate. I just wanted to get a sense of how you're thinking about attacking that and refinancing that? And then also the refinancing would be a bit of a headwind for your 2027 earnings. So would you look to accelerate transaction activity to kind of maintain that really strong growth that you have generated over the last several years? Or is that just kind of -- is that like a way that you think about and you just kind of foresee it as normal?

Yes, I'll tackle that. Obviously, we've talked a lot about terming out our debt and getting long term on the balance sheet to match fund our assets. So we're likely to move to the unsecured bond market at some point to take out that term loan, and there will be some incremental dilution as a result of that rate falling off. We think about our investment trajectory on a much longer-term basis and make investments in our team be able to do more and source more and process more transactions, much to my earlier comment that are granular, which is where we think we add value.

So when we come into developing a business plan for 2027, we'll look at that. Our ambition has been and continues to be to offer total compelling shareholder return in the net lease space. I think we have a lot of room to where we're performing to do that. And so we'll address that as it comes upon us. And so I would not say the automatic tools to build buy more, just to cover up with a little bit of the earnings, but we'll certainly look at a fulsome business plan in 2027 to position ourselves as a best-in-class grower.

Our next question comes from Handel St. Juste with Mizuho.

A couple of quick ones left here for me. So I guess, first, on the coverage for the investments in the quarter, down a bit versus last quarter when I think you had more industrial deals and below your overall portfolio average. I know this bounces around a bit, but just curious on how we should think about your coverage levels on deals going forward in this environment if indeed this past quarter should prove more of an anomaly?

Yes. I wouldn't read too much into that subset of deals. It's highly influenced by select by the mix of industries and the individual transactions and -- that's going to vary quite a bit, and it's not really indicative of much because it is such a wide variety of investments. We had 22 investments in the quarter and across most of our industries. So there's always going to be a wide variation in that number. I would say restaurants tend to have some of the lower coverage. So the Dennis in the mid- to high 2s would certainly kind of drag that down a little bit.

Got it. Got it. That's helpful. And then maybe some color on Chicken & Pickle, top 10 of years. There have been some reports that some of their assets may be lagging a bit in terms of sales. Curious on your comfort level with that exposure and anything within the sales trends or credit overall that perhaps might be changing your view on your exposure to that particular tenant?

Yes. I don't know where they're a private company, and I don't know where there'd be public commentary around their sales. But as we said, the entertainment space has seen some challenge and certainly, chicken and pickle sits within that bucket. We remain we continue to believe we have good assets on by that operator. We have seen some flat top line. Our coverage remains healthy and it's a good relationship, but we'll continue to watch the trends in overall our entertainment bucket.

Got it. And then if I could just squeeze one in, just on Car Wash, I think your exposure there in the quarter was down down a bit. Is that just by virtue of other investments in the quarter? Is there more of an effort to get that exposure down a bit? And maybe remind us on kind of where you see the long-term exposure target for that particular segment?

Yes. We continue to think car wash is a very compelling industry with great cash flow dynamics and strong margins and the real estate within that industry presents a compelling investment opportunity. As we have said in the past, we have a soft ceiling for any 1 industry at 15%. We certainly have run car wash up to that level or above it, and we have comfort doing that given our deep experience and our deep data within that space to underwrite incremental investments. .

As we disclosed in the past, we sold a bunch of car washes in the fourth quarter where we saw an attractive bid for our assets, really with investors looking to take advantage of accelerated bonus depreciation. So you're likely to see that bounce around. I don't know that it's going to go up or down, it will depend upon the opportunity set, but we're happy where it is, and we'd be happy taking it up if we saw compelling investment opportunities.

Our next question will come from Rich Hightower with Barclays.

Just a couple of quick ones for me. But back to the impairment charge that was booked in the first quarter. I didn't catch this. Was it just the 1 furniture location that led to the entire $16-plus million. And then just help us understand the mechanics of how any potential sale of a vacant box or backfilling with a cash rent-paying tenant. How does that affect any potential change to that number going forward? Just help us understand the mechanics there.

Yes. We -- a good chunk of that was the furniture store, but there certainly was others. We operate an almost 2,500 property portfolio, and there's multiple scenarios happening in any given quarter, take an impairment when it becomes apparent, the value has changed from what's on your balance sheet. You tend not to market up once something subsequent happens, but we'll see what happens with that property. And our accountants will tell us we will evaluate what to do accordingly. .

Okay. That's helpful. And then I think you guys have a relatively muted, I guess, official watch list, lower than even some other peers in the space in terms of, I guess, everybody can define it how they like. But maybe walk us through how you define your watch list and kind of where that stands today even relative to a couple of quarters ago, if you don't mind.

Yes. So we define our watch list and we have a pretty defined definition so that investors can understand and track it. What we do on an actual portfolio management perspective is slightly more encompassing, but we define our wash credit risk of single B and unit level coverage risk of 1.5. And that's tended to hover around 1%. And I think it's slightly up, maybe 20 basis points within the quarter. A.J., what is it? .

1.3% today.

So it's 1.3%.

[Operator Instructions]

Our next question will come from [ Jay Kornreich ] with Cantor Fitzgerald.

You mentioned that volatility could cause some strain in the consumer, yet you still feel confident in the investment pipeline as you increased guidance to $1.3 billion at the midpoint. So I just wanted to drill further into just kind of how the pipeline looks and what industry segments, I guess, beyond car washes that you may want to expand in as the year goes on?

Yes. So we focus a large part of our investment activity on our relationships and our relationships exist within our targeted industries. So our investment pipeline and our opportunity set comes from there. And so generally, we anticipate growing our pie ratably across all our industries. Clearly, we had an outsized transaction in Q1 within the restaurant space, and you see that flowing through. But overall, I would expect it to grow ratably and we're pricing long-term investments, 20-year deals. And it's taking a long view of performance, a long view of coverage and sales to develop that pricing and that doesn't change with short-term volatility that we're seeing today. .

Okay. And then just looking a little bit more into the -- just the casual dining, where you referenced maybe some weakness there. It looks like your exposure to casual dining actually declined 20 basis points this quarter, even though you did the Denny's portfolio acquisition. So just curious are those dynamics? Was there may be some movement in getting out of some less favorable operators while you're moving into Denny's or kind of what was going on there?

Well, Denny's is in the family dining category, given their focus on breakfast and lunch. And then we had some commentary around a casual diner on our prepared remarks, which is roughly 30 basis points of ABR which we work through. And so that's probably what you saw flowing through the casual dining spot. .

Our next question will come from Smedes Rose with Citi.

I wanted to ask you just in general, as you're working with these middle market operators, either existing or potentially new clients, do you get the feeling that their access to capital from other sources is maybe more constrained now than it was a year ago, either through direct competitors to yourselves or maybe more traditional financing like through regional banks, et cetera? Have you just -- have you seen any changes there?

Smedes, thanks for the question. At the margin, I would say. And clearly, with 20 transactions during the quarter, there's a lot of different scenarios. But I think overall, the capital market environment is a little more constrained, but not materially so. .

Okay. And then I just wanted to clarify, you mentioned of the 7 properties that were in that bankruptcy, I think they were all Applebee's for backfill. Are they now open or they're just scheduled to have a new tenant come online at some point?

They had a new Applebee's kind of come right in step in to at least. And so they're open operating and selling hamburgers.

Our next question will come from Greg McGinniss with Scotiabank. .

Denny's now a top 5 concept in the portfolio at around 1.6% of ABR. Are you able to disclose the split between corporate and franchise owned exposure? And then how many different franchisees of Denny's are now tenants as well? .

Yes. I don't -- we're not disclosing the split between corporate and franchisees, but it's pretty diverse. I think we have up to 15 franchisees. .

Okay. And then for a company with your expected earnings growth, we were a bit surprised to see cash G&A guidance actually lowered. Could you talk about the drivers of that reduction?

Robert?

So as we look to the guidance ranges this quarter, a number of moving parts on the cash G&A front, -- we had initial budget that included a range of assumptions around hiring, technology spend and other initiatives throughout the company. And in general, we're just trying to be as efficient as we can as we move through the year. So that was on the cash G&A side. And then I think you saw the other drivers in the press release.

Our next question comes from Eric Borden with BMO Capital Markets. .

Just one for me. On the disposition front, are there any tenants or verticals where disposition yields in the market are tighter than your internal view and where you become more inclined to recycle capital, just given the current market yields there. .

Yes. Pricing is very idiosyncratic. As Rob walked through earlier in the call, our weighted average cost of capital is in the mid- to high 5s. We do not see a lot of properties within our portfolio that would trade below that. And so generally, our disposition activity is focused on derisking sales. And obviously, as you think about selling a more risky asset, it's not going to go on a premium pricing. So as we think about disposition, it's more portfolio shaping, and we're not using that to drive an accretive across the source of capital. .

Our next question will come from Jana Galan with Bank of America.

Maybe just quickly following up on the dispositions. It's a funny to see 2Q to date activity dispositions higher than acquisitions. Can you just comment on if you think disposition activity will be elevated this year? Or is this just a little bit more first half heavy?

Yes. I wouldn't read too much into that. It's really just timing. The closing time line on our dispositions tends to be unpredictable. And we just don't control when the buyer is actually going to close. But I wouldn't read too much into it. I would expect normalized disposition activity in the $20 million quarter type range. .

Our next question comes from Daniel Guglielmo with Capital One Securities.

Just one for me. On the previous call, you mentioned that 10-year yields in the mid- to high 3s would be a spot where competition could increase and in true [Technical Difficulty]?

Daniel, you broke up. I didn't catch your question. Can you repeat it? And hopefully, it doesn't break up again. .

I took my head. So on the previous call, you mentioned that 10-year yield, the midsize spot were competition could increase, and in true markets fashion, yield still down towards 4% [indiscernible], but have come up since in that short period, are there any changes to the transaction as it really too quick to glean anything there?

Yes. I would say it's too quick. With a 90-day transaction cycle, we're constantly pricing and closing on deals and the 2-week 30-day volatility really doesn't come into play. .

We do have a follow-up question from Caitlin Burrows with Goldman Sachs.

Maybe just 2 more modeling or smaller questions, but it just seems that I realized you increased full year acquisition guidance. So it seems like you're pretty confident, but it also looks like the start to 2Q has been slow. So do you think 2Q will end up being a lower volume quarter or not necessarily?

Yes. I think it will be likely to be lower than the first quarter, just given the start to the quarter, but generally, the pipeline is full. And without putting too fine a point on it as something in the [ 300 range -- 275 to 325 ]. It's too early to tell. .

Okay. And then just another specific one. On the straight-line adjustment, it was $15.5 million in 1Q. It does seem like that's higher than it has been. So is that just the new normal? Or was there something onetime in that? .

Calin, it's Rob. I appreciate you getting the weeds on the straight-line rent adjustment. Actually, into the fourth quarter, we had a couple of onetime items that had moved that around. If you look back to the trend line prior to fourth quarter, the number in 1Q is a little bit more in line with that trend. I would say in general, the 1Q number is a pretty good run rate. absent any acquisition activity, which would obviously impact with the straight line would go from here, booking GAAP cap rates in excess of our cash cap rates. So hopefully, you can use that as a good run rate going forward. .

It appears we have no further questions at this time. I'll turn the call over to Pete Mavoidi for any additional or closing remarks. .

Great. Well, thank you all for your participation in the call today and your questions. We look forward to seeing you all in the upcoming conferences, and have a great day. Thank you. .

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

Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust's fourth quarter 2025 earnings conference call. This conference call is being recorded, and a replay of the call will be available 3 hours after the completion of the call for the next 2 weeks.

[Operator Instructions]

On the call with us this morning are Mr. Pete Mavoides, President and Chief Executive Officer; Rob Salisbury, Chief Financial Officer; Max Jenkins, Chief Operating Officer; A.J. Peil, Chief Investment Officer; and Sheryl Kaul, Director of Financial Planning and Data Analytics.

It is now my pleasure to turn the conference over to Sheryl Kaul. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone, and thank you for joining us today for Essential Properties' fourth 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. In our earnings release last night, for the quarter, we reported GAAP net income of $68.3 million and AFFO of $99.7 million.

With that, I'll turn the call over to Pete.

Thanks, Sheryl, and thank you to everyone joining us today for your interest in Essential Properties. The fourth quarter capped off another year of solid performance by the team that delivered compelling earnings growth and solid returns for shareholders. It has been 10 years since we started this company, and I'm extremely proud of the team that we have developed, the dominant position that we have established as a real estate capital provider to middle-market operators that are growing in our targeted industries, and most importantly, the returns that we have delivered for shareholders, and over 200% total shareholder return since our IPO in 2018.

In the fourth quarter, we continued to execute our differentiated investment strategy, sourcing 85% of our $296 million of investments through existing relationships, while continuing to add new operator relationships to our platform. This robust investment volume was generated with a disciplined pricing, including an average initial cash yield of 7.7% and a compelling GAAP yield of 9.1%. This large spread to our cost of capital is a key driver of our earnings growth.

Our portfolio once again demonstrated resilient tenant credit trends, with same-store rent growth of 1.6%, strong rent coverage of 3.6x, and an improvement in our watch list. With better-than-budgeted credit trends and a large investment pipeline, with cap rates consistent with past quarters, we have increased our 2026 AFFO per share guidance range to $1.99 to $2.04, which implies a growth rate of about 7% at the midpoint and 8% at the high end.

Our year-to-date closed investments and our current pipeline are supportive of our previously communicated investment guidance of $1 billion to $1.4 billion. While we continue to expect modest cap rate compression in the back half of 2026, competition appears to be stabilizing based upon our current visibility. Regarding our capital position, we started the year with pro forma leverage of 3.8x and liquidity of $1.4 billion, providing ample runway to fund our investment pipeline.

Turning to the portfolio, we ended the quarter with investments in 2,300 properties that were leased to over 400 tenants. Our weighted average lease term continued to be approximately 14 years for the 19th consecutive quarter, with just 5.2% of annual base rent expiring over the next five years.

With that, I'll turn the call over to A.J. Peil, our Chief Investment Officer, who will provide an update on our portfolio and asset management activities. A.J.?

Thanks, Pete. Overall, our portfolio credit trends remain healthy, with same-store rent growth in the fourth quarter of 1.6%, consistent with last quarter, and occupancy of 99.7%, with only 6 vacant properties. Portfolio rent coverage remains robust at 3.6x, reflecting durable cash flow generation across our asset base. Additionally, our credit watch list declined from last quarter to under 1%, and the tenants within our watch list remain current on all obligations. Realized credit events in the quarter were limited, with just one notable tenant issue in the home furnishing industry, American Signature, which represented about 20 basis points of our ABR as of September 30 across 2 sites.

We expect our recovery to be within the normal range of outcomes, having fully anticipated this situation and incorporated it into our guidance range provided last quarter. On dispositions, during the fourth quarter, we sold 19 properties for $48.1 million in net proceeds at a 6.9% weighted average cash yield. Disposition activity increased as we opportunistically capitalized on elevated buyer demand created by the reinstatement of bonus depreciation tax benefits for car wash properties, resulting in a continued reduction in our exposure to this industry to 13.7%. Over the near term, we expect our disposition activity to normalize and align with our trailing eight-quarter average, driven by opportunistic asset sales and ongoing portfolio management activity.

Tenant concentration continues to decline, with our top 10 tenants comprising only 16.5% of ABR, and our top 20 representing only 27.1% of ABR quarter end, which is industry-leading. Tenant diversity is an important risk mitigation tool and a direct benefit from our focus on middle-market operators.

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, A.J. On the investment side, during the fourth quarter, we invested $296 million at a weighted average cash yield of 7.7%. Our capital deployment was broad-based across most of our top industries with no notable departures from our investment strategy. During the fourth quarter, our investments had a weighted average initial lease term of 19.4 years and a weighted average annual rent escalation of 2%, generating a strong average gap yield of 9.1%.

Our investments this quarter had a weighted average unit-level rent coverage of 4.7x, reflecting a conservative rent level and healthy unit profitability for our operators. We closed 34 transactions comprising 58 properties, of which 100% were sale-leasebacks. The average investment per property was $4.6 million this quarter, consistent with our historical range, with our deal activity characterized by granular, freestanding properties, one of the core elements of our strategy.

Looking ahead, our investment pipeline remains strong, supported by record subsequent quarter investment activity of over $200 million. The cap rate environment remains stable today, with our pricing and our pipeline in the high 7% range, which represents a compelling spread to our cost of capital and is consistent with our updated guidance range.

With that, I'd like to turn the call over to Rob Salisbury, our new Chief Financial Officer, who will take you through the financials for the fourth quarter.

Thanks, Max. Before I begin my prepared remarks, I would like to thank the board of directors for the exciting opportunity to lead the company's finance group alongside my partner, the company's Chief Accounting Officer, Tim Earnshaw.

As Pete mentioned earlier, our well-established platform is in a great position to deliver shareholder value, with the largest net investment spread in the industry today. And half of our value creation comes from optimizing our cost of capital, which is something my team has been, and will continue to be, laser-focused on over the coming years, in service to our focus on shareholder value creation over the long term.

Turning to the fourth quarter results, our AFFO per share totaled $0.49, which represents an increase of 9% versus the fourth quarter of 2024. This performance was consistent with the high end of our expectations, as reflected in our previous guidance range. Total G&A in the quarter was $8.4 million, representing a sequential decline due to a one-time compensation reversal related to an executive departure. Notably, this one-time benefit to net income of $2.4 million is reversed out of our core FFO, AFFO, and cash G&A as a non-core item.

For the year 2025, cash G&A was $28.8 million, which ended near the low end of our guidance range and represents just 5.1% of total revenue, down from 5.4% in 2024. We declared a cash dividend of $0.31 in the fourth quarter, which represents an AFFO payout ratio of 63%. Our retained free cash flow after dividends continues to build, reaching nearly $40 million in the fourth quarter, representing a substantial source of internally generated capital to support our future growth.

Turning to our balance sheet, our income-producing gross assets increased to over $7 billion at quarter end. The increasing scale and diversity of our portfolio continues to build, enhancing our credit profile. On the capital markets front, we remained active on our ATM program in the quarter, completing the sale of approximately $170 million of equity, all on a forward basis. We settled $359 million of forward equity in the fourth quarter, with a portion of the proceeds utilized to repay our revolving credit facility balance. Our balance of unsettled forward equity totaled $332 million at quarter end. We expect to utilize these funds in the near term to support our investment program and retain balance sheet flexibility by keeping capacity available on our revolver. Our pro forma net debt to annualized adjusted EBITDA RE remained low at 3.8x at 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.

Lastly, as we noted earlier, we have increased our 2026 AFFO per share guidance to a new range of $1.99 to $2.04, reflecting a growth rate of approximately 7% at the midpoint and 8% at the high end.

With that, I'll turn the call back over to Pete.

Thanks, Rob, and congratulations on your promotion to CFO. I've appreciated your partnership over the last two and a half years, and we're all grateful for your leadership in the finance group and across the broader organization.

In summary, we are happy with the fourth quarter and full year results. The portfolio is performing well, the investment market remains compelling, and the capital markets continue to be supportive.

Operator, please open the call for questions.

[Operator Instructions] We go first this morning to Michael Goldsmith of UBS. Michael, please go ahead.

Rob, you took the guidance range slightly higher at the bottom end. So can you just walk through, you know, what has changed over the, you know, month or so since you or since the third quarter, I guess, since you put out your initial guidance and how that has impacted the outlook for this year?

Thanks for the question. So, you know, as we've talked about in prior years, it's still really early in the year to do a whole lot of changes with our guidance range, just given we still got 10.5 months to go. That being said, as we updated all of our numbers and reviewed our credit, our portfolio credit trends, everything had been coming in a lot better on the portfolio credit side, relative to our initial guidance back in October.

We tend to be pretty conservative when we build that initial range, and so as a result, we're just feeling a lot better about the health of the portfolio. I think you saw some of the stats in the fourth quarter of the same store rent growth of 1.6%. Credit watch list is down sequentially. So it was really in recognition of that. You saw the subsequent events that we have a lot of acquisitions that we closed in the early part of this year, but it's still early in the year, and so it felt appropriate to take the bottom end of the prior range off the table, just given where portfolio credit is. But we'll see how the rest of the year develops in terms of the pipeline and deployment.

Thanks for that. And just quickly, you know, the initial remarks, you mentioned that the expected competition or you're seeing competition stabilize. So does that -- what is the impact of that? Do you see cap rates stabilizing from here? Or, and then, like, I guess, also, does that mean that you would be willing to, you know, I guess, with the stabilizing cap rates or less competition, you could also go with a safer tenant base and, so just trying to understand, like, what are the implications of that stabilizing competition comment made at the opening of the call?

Yes, and Michael, this is Pete. I would say I certainly reject your premise that we're going with a safer tenant base. We feel pretty good comfort in our tenant base and the guys we're investing with and the risk-adjusted returns we're getting, and we think the durability of the portfolio has certainly proven that out. But you're right, I think the stabilization in competition has really resulted in you know, a slower decrease in cap rate than we have anticipated. You know, certainly we model some conservatism into our future cap rates, particularly as the ten-year comes in and capital markets stabilize. And, you know, as we indicated on the call, we're seeing cap rates kind of stable, which is great for us. You know, I think that's certainly going to help drive earnings, but it's not going to change the way we invest or how we think about risk.

Thank you very much. Good luck in 2026.

We go next now to Greg McGinniss at Scotiabank.

Hey, this is Greg McGinniss at Scotiabank, still. For the acquisitions -- sorry -- you've had a busy beginning to the year. Should we not be reading anything into that? Is that, you know, holdovers from Q4 that fell into the early part of this year? I mean, you know, at this trend, you're well over $1.5 billion for the year and above the guidance range. I know you're telling us not to necessarily read too much into that, but this is a pretty strong start so far. So just kind of curious what the driver was to date on some of those transactions.

Yes, and again, I think if we saw something different in our investment expectations, we would have bumped the guidance range. And to Rob's comment earlier, certainly early in the year, you know, the fourth quarter was kind of a little light relative to our trailing average, and so there's certainly some deal slippage that you would see. And so, you know, we feel great. We feel good that we have a good start to the year. But, you know, we have a lot of year left to play. I think more encouraging driving you know earnings is just the stabilization and the cap rate.

Just to dig into that a little bit more, are you seeing that stabilization in cap rate across all the industries that you tend to invest in, or are there certain industries that are deviating from that norm? And on top of that, is there anything that you're kind of particularly looking to increase acquisitions in from an industry perspective?

Yes, you know, I think it's stabilization against the, across the entire industry set that we invest in. Obviously, there's a range of cap rates across our industries, from a low of 7 to a high of, you know, call it 8.5, depending on the specific industry. But there's good stabilization there, and I think that speaks to the broader capital markets.

In terms of our targeted growth, you know, we're really following our relationships, which mirror our portfolio. You know, with 85% plus relationship business, we're going to go where our relationships take us and where our reliability as a counterparty is rewarded. So I wouldn't expect a material shift in the portfolio composition as we think about, you know, 2026.

We'll go next now to Caitlin Burrows at Goldman Sachs.

I guess maybe just on portfolio credit, the prepared remarks mentioned that you guys are feeling good on that topic right now. You also mentioned that American Signature was the only credit event in Q4. Could you give us any detail on how that played out versus your expectation and what that can kind of tell us about your process and your visibility?

Yes, you know, I would start by. That's still playing out. You know, I think it certainly will come in within our expectations as we tend to be conservative. But A.J., you want to tackle that?

Yes. As Pete mentioned, that bankruptcy happened late in Q4, and so we're early in the process of marketing the asset. I do believe, based on what we're seeing in the marketplace, that it's going to be a normal outcome for us, and the recovery should be well within the range of which we historically have disclosed. I wouldn't expect that asset to be on our balance sheet as vacant for too long.

Okay, got it. And then, Rob, you mentioned how EPRT generates, I think it was $40 million of free cash flow now. So how do you think about or balance retaining more cash versus increasing the dividend? Would you expect dividend to grow in line with AFFO per share from here, or more, or less?

Yes, thanks, Caitlin. So as you point out, the retained free cash flow is certainly a great source of internally generated capital for our very accretive investment program. I think it's, it's going to be a board decision as to where the dividend goes over time. But from a broad standpoint, you know, it's certainly a balance between delivering current return to shareholders and retaining that capital. I think a reasonable expectation would be that our dividend payout ratio probably doesn't go down from here at 63%. And you know, we seek to have a good balance between those two things. And as you know, having followed the REIT space for a long time, dividends are an important part of total shareholder return, and we certainly recognize that. I would expect the dividend to grow, but don't have a lot of guidance for you at this point.

We'll go next now to Jana Galan at Bank of America.

You know, just good to hear about that you're seeing this cap rate stabilization. And just wanted to ask about your comment where you're saying you may see modest cap rate compression in the back half of the year. And then also curious on if there's anything else within the kind of sale-leasebacks you're discussing with your relationships in terms of term or escalators or other type of changes.

Yes, I think, you know, we've been expecting a normalization in the capital markets, you know, a slight decline in the 10-year and an increase in competition to drive cap rates down. We've been expecting that for quite some time now, and, you know, as we sit today, we just really haven't experienced it in a material way, which is great. But we continue to have some conservatism around those factors as we think about the business plan going forward. And as we've said, that, you know, shades from a high 7s to a mid-7s sort of cap rate in our expectations. But, you know, obviously, where the market goes and capital markets in the 10-year will ultimately drive that.

You know, competition drives cap rate. It also drives the other terms that you referred to, Jana, like term and escalations. These are all sensitive terms to tenants, and they're also a key part of our economics, and you can see those kind of ebb and flow over time. I would expect you know, some compression in our weighted average escalations. You know, certainly you know, when we were seeing 2.2%, 2.3%, that's you know, kind of pretty high relative to historical averages, and you know, with the historical average kind of being 1.6-ish. So we're seeing some you know, downward pressure there, but again nothing material.

We'll go next now to Eric Borden at BMO Capital Markets.

Great. Thanks. Pete, I just want to go back to your comments around the stabilization and competition. You know, in your view, what factors are driving this stabilization, and what would need to change for the competitive intensity to increase from here?

You know, I think it's really driven by the access to debt capital and which is, you know, going to be driven by the cost of that capital and the availability of that capital. And ultimately, you know, that's pricing. You know, these are long-dated assets and that people tend to finance in the ABS market. And so, I think a large driver that's going to be the 10-year treasury rate. So as we've said on prior calls, higher for longer on the 10-year is probably a better scenario for us. And certainly, you know, [ 4.2, 4.3, you know, 4.1s ] helping. I think if you saw, you know, a mid- to high 3s on the 10-year, you know, we would see material amount of increase in competition.

All that said, you know, we very much, you know, go to market with an investment strategy to avoid, deliberately designed to avoid competition by doing granular deals, follow-on transactions with relationships, leaning into sale-leasebacks to deliver capital to operators that have a capital need. And so I think, you know, you know, hopefully, we have built ourselves a moat around that competition by transacting in a differentiated, value-added way, and we'll continue to focus on that.

Thank you. And one for Rob. Congrats, by the way. How should we be thinking about the cadence of forward equity issuance this year, you know, as you manage that cushion between, you know, the unsettled shares and acquisitions? And then with the remaining $322 million of unsettled equity, is there any near-term expiration or settlement constraints that we should be aware of? Thank you.

Thanks for the comments, Eric. Yes, we don't have anything in the very near term from an expiration standpoint, so that's probably not going to be a consideration. From a funding standpoint, we tend to make an assumption that we fund equity first and then do debt later. However, as we sit here today with 3.8x leverage at the end of the year and a ton of liquidity, I think as we've mentioned on prior calls, having just reentered the unsecured bond market over this past summer, we're very much focused on the unsecured bond market. That pricing today is pretty attractive relative to the high-7 cap rate that Max mentioned in his prepared remarks on the pipeline right now.

So, you know, in the 5.3%, 5.5% territory for a cost of debt, really big spread. So, you know, we'll certainly be spending some time focusing on the unsecured bonds over the course of this year. And then, you know, from an equity standpoint, you know, with the leverage capacity that we have right now, we really could go through the entire year without issuing any more equity, and hit the midpoint of our acquisition targets. And that's a combination of just starting the year at such a low point. But then we also have, you know, as you mentioned, the prepared remarks, over $150 million of retained free cash flow after dividends.

We tend to do about $100 million a year of dispositions. You know, you know, we have lots of forward equity as well. So, from a liquidity and a leverage standpoint, we're in a really good spot. And from a modeling standpoint, you know, we would assume that, that gets settled in the near term, just as a conservative point, but we'll see how everything plays out.

We'll go next now to Smedes Rose at Citi.

Thanks. It's Nick Joseph here with Smedes Rose. Maybe just following up on that, Rob. Obviously, balance sheet's in a really good position, robust acquisition pipeline and volume thus far in the first quarter. Have you issued any ATM equity or forward ATM equity year to date?

Yes, we did a little bit earlier in the year. I don't think it's part of our disclosure package, but you know, there are a few days before we go into the blackout period, so it tends to never really be a huge amount in a particular quarter, but it was about $10 million that we did at the beginning of the year. So extended the runway a little bit, but again, as we sit here today with such a low leverage point, we just didn't feel like we needed a whole lot.

Got it. Thanks. And then just on rent coverage, obviously, it was flat sequentially, well covered at 3.6x. But the sub-1 and sub-1.5 buckets moved up a bit. What drove that? You know, what moved into those buckets?

A.J., what do you got on that?

Yes, so it's a good question. On the sub-1 bucket, it really is within the range over the previous four quarters, where we've been as low as 2.7%, as high as 3.9%. So there's a few tenants that are always kind of migrating in and out of that category. More on the 1, 1.5 bucket, over the last few years, you've noted that we've done a lot of development deals, and as those deals come online and are entered into, oftentimes added to a master lease, it creates some noise around that coverage. So we had a couple of tenants where we had assets come online, pulled the coverage out of the 1.5, 2 bucket into the 1, 1.5.

But I think what you'll see over the coming quarters is they ramp, and stabilize, and we revert back to our historical norm, where that, that cohort tends to kind of range between 7% to 11%. So it's more of a timing issue.

What I would say, to add to that is it's a data point, but what you would really see if, if the credit was starting to erode, is our watch list would be increasing. And actually, quarter-over-quarter, it decreased by about 35 basis points. And to refresh you, the watch list is the intersection of shadow rate B minus and less than 1.5x unit level coverage. So, the 1, 1.5 bucket certainly increased, but it tends to be more of a timing issue of when assets are coming online out of development than anything else.

We'll go next now to Rich Hightower with Barclays.

So I want to go, I guess, back to the transaction environment. I'm just curious, you know, as we've kind of seen some hiccups in the broader private credit market, kind of, you know, in different pockets, you know, does that help or hurt your business? Does it create opportunities that didn't previously exist? Does it reduce, you know, sort of sponsor-backed deal flow in any way? How do we figure that out for your business?

We really haven't seen an impact over the last couple of years with the kind of advent and proliferation of private credit. I would say those borrowers tend to be of a size and a scale that's a little larger than we're focusing on and not generally in our industries. You know, certainly, you know, we're real estate investors, and we're senior, and, you know, our leases are in front of unsecured debt, but it really hasn't driven incremental investment opportunities. You know, to the extent that it dries up, I don't think it's going to change our investment market.

Okay. That's helpful. And then you made a point to point out that you did dispose of a little more of your car wash exposure last quarter, and I would probably expect that to continue again, you know, based on some of the tax law particulars that kicked in on January 1. So where do you see that exposure ticking down to over time? What's sort of a longer-term target there? Thanks.

Yes, I wouldn't create the expectation that's going down materially. You know, we've always operated with a soft ceiling of 15% for any one industry. Car wash has been a great industry from a risk-adjusted return for us perspective. You know, so I wouldn't expect it to, you know, we're not driving that down to 10%. And, you know, to the extent that we find compelling risk-adjusted opportunities in that sector, we can continue to grow it. So, you know, we'll just have to see what the market brings.

We'll go next now to Haendel St. Juste with Mizuho.

This is Ravi Vaidya on the line for Haendel. Hope you guys are doing well. Can you please describe the impact of the one big beautiful bill on the single-tenant transaction market? How do you think that's going to impact broader industry pricing and volumes, and how are you guys seeing it within the sandbox that you're operating in, going forward?

Did Haendel write that question for you?

No, I wrote it. I sent it to him.

Come on.

But he approved it.

Listen, you know, it's you know, the bonus depreciation that we mentioned earlier certainly had an impact. You know, I don't think that bill really is going to have a material impact on our business or the way we operate. And so I really don't see anything material coming out of that, that will impact us.

Is it creating maybe more liquidity in transaction markets? Are there buyers that are looking to take advantage of maybe bonus depreciation or anything like that, that is leading to moves in cap rates?

Not materially. I mean, as A.J. mentioned in his remarks, we were able to sell some car washes to tax-motivated buyers at the margin. But that's, you know, it's really at the margin and not a driver of our industry.

We'll go next now to John Kilichowski at Wells Fargo.

I'd like to start by saying that Sheryl did a great job on the opening remarks, and Rob, congrats on the new role. My first one is for you, Pete. You know, we've talked about the competitive landscape a lot on this call, but I guess I'm curious, who are the entrants that maybe you thought you'd be seeing, that you aren't seeing right now?

You know, it's, I would start. I don't want to name specifics, you know, because we just don't know. You see platforms stand up, you see, you know, capital commitments to those platforms, whether it's, you know, Apollo, TPG, Angelo Gordon, Blackstone. You go down the list of big asset managers, and you're just conservative about their ability around your assumptions of driving your business and their ability to, you know, take business away from you. And, you know, it's we fight hard to win deals. We fight hard to add value to our counterparties such that they choose to do business with us. And, you know, we're very protective of our relationship. So, you know, there, there's a bunch of new platforms out there. You saw Starwood bought a platform, and you know, it's just broad-based.

Got it. And then my second one is just, given the current macro environment, how is that affecting the way you're underwriting or influencing sectors you might be pivoting more towards or away from?

Yes, you know, as I mentioned earlier, with 85% repeat business, our relationships really drive our opportunity set. And, you know, we starting this platform, you know, 10 years ago, we had a very focused service and experience base, leaseback, middle-market model, and we're really sticking to that. And, you know, current trends in the market really hasn't shifted that materially one way or the other.

We'll go next now to Ryan Caviola with Green Street Advisors.

Thank you. Good morning, everyone. It looks like the average investment per unit was record high for this quarter. I know you mentioned still close to historical norms, but could you share any details there? Was that simply a function of acquisition mix, or is there a slight appetite to purchase larger asset classes going forward? What led to that?

Yes, it's really going to be transaction mix and industry mix. You know, some of our sectors, like, early childhood education, our industrial outdoor storage sites and service sites, tend to have a higher price point than, you know, our QSR sites, or our casual dining sites. And so it's not a material move, and it's really, and it really isn't indicative of our change in our underwriting or our risk appetite for larger assets. It's more just industry mix in that quarter.

Got it. Appreciate it. And then just a quick one. Could you remind us of the tenant credit assumptions included in the 2026 guide? And just any, you know, color on, if there's industries specific in there or if it's broad-based, anything you can share on, on tenant credit. Thanks.

Yes. So, we don't guide to tenant credit losses. You know, we guide to AFFO growth and investments. I would say we take a very sharp pencil to our credit assumptions, really looking at specific situations and properties where we may have a credit event that results in a loss in ABR. And that tends to be around our historical average and our norm, and then we make a generic assumption for unknown events that may come at us. And we run a range of scenarios through the credit loss that support our guidance. So, you know, with a historical credit loss of 30 basis points, you can probably assume we're a little more conservative than that, but you know, there's a wide range of scenarios in underlying guidance.

We'll go next now to Jay Kornreich with Cantor Fitzgerald.

All right, thanks so much. I guess just following up on your comments about sticking to your relationships, which make up 85% of business, I guess, how do you assess kind of that balance between growing with current partners and forming new ones? If, you know, really the point is, does the 85% provide enough runway for investment and earnings growth for multiple years into the future that you don't need to rely on new relationships?

No, listen, as I said in the past, we like to kind of be a 75%, 25% ideally, and we spend a lot of effort and make a lot of investments to source and develop and build new relationships that we can grow with over time. Because we certainly see relationships grow out of us as they get bigger and establish, you know, access to more alternative forms of capital. So it's a balance, and you know, I think we've done a good job of balancing that, and we have an ample pipeline of opportunities, and I think we've demonstrated, you know, great ability to continue to source and deploy capital.

Okay. And I guess just following up on that, you know, the strong sourcing and ample opportunities. You know, you also referenced, you know, some deal slippage in the fourth quarter. So I guess just wondering about the overall investment pipeline outlook, you know, if your cost of capital were to improve throughout the year, you know, do you feel like there's ample opportunity to expand the investment volume, or is it a little bit more constrained as the outlook may have it?

As we always say, you know, the opportunity set isn't what's driving our investment volume. Our desire to create compelling growth for shareholders is what drives it, and what we believe to be compelling is, you know, our current guidance, both in terms of AFFO per share, with growth of, you know, call it 6% to 8%, supported by investments of, you know, conservative investments of, you know, $1 billion to $1.4 billion. And which is, you know, frankly, at the midpoint, down from what we did last year. So, the opportunity set is not a constraint of ours. You know, really our appetite and our desire to create stable growth over a prolonged period of time is what's driving that.

[Operator Instructions] We'll go next now to Dan Guglielmo with Capital One Securities.

I know based on our conversation at REIT World, that you all are focused on same-store metrics for your tenants. Have there been any diverging trends in kind of same-store between tenant types or any changes that you've noticed this year versus last?

Yes, well, same-store ABR and same-store rent is really driven by the contracts and the leases that we have and that can vary from, you know, low of 1.5 to a high of 2.3. And that really more depends upon what we negotiate going into those deals and when we negotiated those deals than anything on an industry-specific basis.

In terms of, you know, same-store, improvement in sales and margin and EBITDA, you know, that's something we track across all our industries and all our tenants. And there, you know, there's a lot of ebbs and flows with in each sector and each specific operator. I would say most of those ebbs and flows are idiosyncratic around the operator and less around the industry. But then there's nothing really I would call out, materially changing in that.

Okay, great. Appreciate that color. And then.....

I would make....

Okay.

I would make a point on that. You know, with public comps in most of our industries, whether it be Mister Car Wash and car wash or some of the restaurant operators or KinderCare and childcare, you know, investors can look at those public comps and get a general read-through about what's going on in the overall industries that we invest. You know, there tends to be a very strong correlation between those public comps and their performance and what's going on in our portfolio.

Great. Yes, that's very helpful. And then as a follow-up from one earlier, thinking about the size of the company with the kind of mid- to high single-digit growth each year, is there a certain size down the road where it gets harder to source the right deals, that kind of the volumes needed? And when you think about that, how far out is that?

Yes, I wouldn't put a number on that. I think we have, you know, 5 to 10 years of solid performance and opportunity in front of us to continue to grow our relationships and our investable universe and our portfolio and generate that sort of growth. You know, as you get bigger, you gotta do more. And you know, I think we continue to invest in the team and the infrastructure to do that, but I think this company has great runway without really too much concern around that. Particularly, because as we've done, you know, not growing too fast, right? And, you know, growing moderately at a very measured pace over a long period of time has been our ambition, and I think we've got great runway in front of us.

We'll go next now to John Massocca at B. Riley Securities.

Good morning. We talked about it a little bit last quarter, but you added again to kind of the other industrial bucket. But it seems like the assets had a bit of a different kind of rent and square footage profile per property. Just kind of curious maybe what those were in terms of acquisitions during the quarter. And I guess, you know, with a couple of subsequent quarters of you know, strong investment in that particular industry sector, kind of what do you think is driving that as a growth vehicle, in the current market?

Yes, you know, we just see good opportunities in the industrial outdoor storage space. Those assets tend to be granular, tend to have a large land component, and, you know, that the rent per square foot in that space varies wildly, depending upon the amount of building prorated over the size of the land. And so, you know, a 10-acre lot with a 20,000 square feet building is a whole lot different than a 5-acre lot with a 20,000 square feet building. And so we see good opportunities there with middle-market operators, and, you know, I don't -- It's not growing at an outsized pace. And we'll continue to invest there, and we certainly like that space.

The assets that were kind of acquired in the quarter were those kind of industrial outdoor storage type properties?

Yes, sir.

Okay. And then, I -- may have mentioned before, so apologies, but given the size of the subsequent to kind of quarter investment volume and maybe kind of characterization of that being a little bit of a, you know, transactions that maybe slipped from a 4Q closing, what was kind of the rough timing on that as we're thinking about modeling? Was it a little bit front-end loaded in the year, or was it kind of spread out over the quarter to date?

January 21, John.

I need an hour, Pete.

I'm just kidding. Rob, you got a response to that?

You know, we're a month -- almost 1.5 months into the year. I would just assume the middle of January is probably a reasonable ballpark estimate.

So we're done?

We are, Mr. Mavoides. I'll turn it back to you, sir, for any closing comments.

Great. Well, thank you, all. We look forward to seeing you all. I know Citi's Conference is right around the corner, and we'll have a very active calendar down there. Stay warm. Talk to you soon.

Thank you, ladies and gentlemen. Again, that will conclude the Essential Properties Realty Trust fourth quarter earnings conference call. Again, thanks so much for joining us, everyone. We wish you all a great day. Goodbye.

Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust Third Quarter 2025 Earnings Conference Call.

This conference call is being recorded, and a replay of the call will be available 3 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 Patten, Chief Financial Officer; Max Jenkins, Chief Operating Officer; A.J. Peil, 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 continued 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 GAAP 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 3.6x, a 120 basis point decline in the percentage of ABR under 1x 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 3.8x 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 8-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 $1 billion 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 continue to be approximately 14 years for the 18th consecutive quarter, which is 4.5% of our annual base rent expiring over the next 5 years. With that, I'll turn the call over to A.J. Peil, 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 and occupancy of 99.8% with only 5 vacant properties. Overall portfolio rent coverage increased to 3.6x from 3.4x last quarter, and the percentage of ABR under 1x 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 budgeted 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 7 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 8-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, A.J. 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 GAAP 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 billion to $1.4 billion.

With that, I'd like to turn the call over to Mark Patten, 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 $0.48, 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 $0.30 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, including 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 EBITDAre as adjusted for unsettled forward equity remained low at 3.8x 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 4x, 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 results. The portfolio is performing well. The investment market is exceptional, and the capital markets are supportive. Operator, please open the call for questions.

[Operator Instructions] We'll take our first question from Haendel St. Juste with Mizuho.

First, congrats 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?

Sure. Thanks, Haendel, and thanks for the compliment on the quarter. It was a great quarter, and we feel pretty good about it. 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 the stability in the interest rate environment, and we have an ample opportunity set.

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

Yes, sure. We've been investing in industrial outdoor storage sites with service-based companies for quite some time now. 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 we like it. We like the sale leaseback where we can structure master leases on our lease, and 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 ratably.

Our next question comes from Michael Goldsmith with UBS. .

Maybe to follow up on Haendel's first question on the expectation for cap rates to come down. When you marry that with your initial 2026 outlook, are you contemplating compressing spreads in that? I'm just trying to understand the flow through? Just trying to understand the flow-through of cap rates going down.

Yes. I mean, I've been saying this consistently for the past 2 years that we expect cap rates to come down. Certainly, as we look at the business, we did in the third quarter, initial cap rate of 8%, with a 10% GAAP yield. As I've said in past calls, that's pretty much as good as it gets. As I said earlier, 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, there's generally going to be a 60- to 90-day lag between movements in underlying interest rates and movements in cap rates. 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, and as we think about the forward yield curve, I think it really results in the static spread, if anything, maybe some compression in spread, I certainly feel like there's some room for that with our historically wide spreads. But there's certainly -- as there always is a certain amount of conservatism baked into our forward assumptions because it is pretty early. .

And as a follow-up, the percentage of ABR was less than 1% -- or net rent coverage came down. It looks like you sold some -- 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 last a 1x coverage? And if you have plans for further disposals of that type of product?

Yes, selling 7 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 we expect to come out of that bucket over time. And so we've taken 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 a decrease in that bucket is just general improvement in some of the underlying operating conditions.

Our next question comes from John Kilichowski with Wells Fargo.

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 2 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 looks 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.

Yes. I would say -- I would start by saying we build up our guide really targeting an AFFO per share range and looking at what we need to do to achieve that. As we said on the call, 6, 8 is implied in our guide and the investment volumes are there to support it. As we think about cap rates, ironically, the cap rate assumptions are pretty similar to what we're looking at 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, and we anticipate cap rates to be a little sticky on the way down. And just to frame that, I wouldn't expect something in the, I don't know, mid- to low 7s 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 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 set, again, it's very similar to what we were looking at and thinking about this time last year. And we would be hopeful that as the year progresses, the credit loss experience turns out to be favorable to our underlying assumption. I don't know Rob -- Mark, you add anything to that?

Yes. 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 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 that's the main flux in the bottom versus the high end. .

Okay. That's very helpful. And then maybe just on 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 on the credit side as it relates to the migration out of that sub 1x coverage bucket and just your overall coverage?

Yes. And I would really look at the outperformance in our same-store rent growth right, which at 1.6 reflects 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 focusing on service and experience-based industries that are a little less volatile than general retailing focusing on owning assets at a conservative basis and owning granular fungible assets that 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 attribute to the team and the discipline in the underwriting and attribute to the assets that we own.

Our next question comes from Smedes Rose with Citi.

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 the -- maybe the LOI pipeline looks like?

Sure, Smedes. And listen, I think with our revised guidance, we provided a pretty good landing zone of what the fourth quarter might look like. And 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 pretty similar to our 8-quarter trailing average, and that kind of $300 million range. And there's events that could be a lot bigger. It could be a little smaller, but it's kind of where we're guiding at this point.

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

Yes. Actually, thanks, Smedes. So that actually is reflected still in our 2025 guide as well. So that's -- 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 -- and then utilize forward to wipe that off the balance sheet.

Our next question comes from Jana Galan with Bank of America.

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?

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

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?

Rob, Mark?

Yes. I mean, Jana, as you might have suspected, range in our guidance, and I'll let Rob dig into it. But the range of our guidance 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 as Pete said, we do a deep dive on the portfolio and just look at both just kind of a general assumption. And some 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 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...

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

No, we're here. We're here. So we don't guide specific credit loss assumptions and there's a wide range in there, Jana.

And Jana, 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 over the...

Our next question comes from Caitlin Burrows with Goldman Sachs.

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?

Yes. I think as I said a little earlier, it's -- we targeted an AFFO per share growth and try to present a business plan that is derisked 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, we're fighting the desire to just do more and to get bigger. So we're more trying to execute a business plan that gives us outsized sustainable growth for a long period of time. So the platform is growing. Our relationship base is growing. Our ability to close transactions is improving, but we certainly feel 6% to 8% guide to our AFFO per share growth is ample and adequate and derisked 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? .

Yes. I guess what I'd say is I'd sort of flip that around. We were -- I'd say, in any given year, if you think about our equity and debt issuance, capital raising, it might be anywhere from 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 you -- 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.

Our next question will come from Jay Kornreich with Cantor Fitzgerald.

Just curious, you added a new top 10 tenant this quarter with [ Primero ] schools. And as the majority -- the majority of your deal flow comes from repeat business, 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?

Yes. Max, why don't you tackle that?

Sure. Thanks, Pete. Primrose is a premium 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 5 and 10 new tenants and -- but then we're obviously focused on repeat business and growing ratably 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 take 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?

Yes. 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, a 10% average cap rate over the life of these leases is as high as we've seen and pretty aren't compelling. If you look back to 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.

Our next question comes from Rich Hightower with Barclays.

I guess just to maybe follow up on the same theme. I mean, obviously, one of the big, I guess, headlines and 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?

Yes. I mean it's always a competitive market. It'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 I think when you have a lot of new entrants, there's a lot of footfalls and a lot of misstarts. And 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 it, Peter. Maybe just a 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?

Yes, we're going to lose on price. We're going to lose on -- I think the initial cap rate is ultimately the highest point of sensitivity. And 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 a different risk-adjusted return dynamic and up to deploy our capital somewhere else. So it's not necessarily losing a deal, it's just deciding to invest somewhere else.

Our next question comes from Eric Borden with BMO Capital Markets.

Just a quick question on the bad debt watch list. I understand that it's coming in above your underwriting. 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.

A.J., that's something your

Yes. So our watch list and again, just to refresh, is the intersection of B- and less than 1.5x coverage. Today, that's 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.

Our next question comes from Dan Guglielmo with Capital One Securities.

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?

Yes. As we think about it, geography is always an output, not an input, and we go where our tenant relationships bring us in the United States. And so there's certainly good opportunities across all states, and 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.

Okay. 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?

Yes, listen, rent escalations are a key economic term. One of the benefits of lower escalations is a more compelling rent basis for the counterparty, right? And 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, kind of roughly CPI-ish. But to the extent that your lease rates are growing faster than CPI, 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 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.

Our next question comes from James Kammert with Evercore.

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 expectation for credit loss for '26 given the economy or the portfolio or read too much into this? Or is very similar to what you've kind of started to 2025 outlook for when in late '24?

Yes. 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're looking at last year at this time. But the risks in the portfolio tend to be very idiosyncratic and not really driven by macro trends. It's more just specific operators who are not operating the way we would expect. So it's a consistent process. The result just happens to be very consistent to last year as we sit today, but nothing out of norm.

[Operator Instructions] We will take our next question from Omotayo Okusanya with Deutsche Bank.

The group of tenants where the rent coverage is less than 1x, could you just kind of a high level, let us tell us like who that is, whether you can't mention the specific client or tenant kind of what sector or what industry it is?

Yes. It's a group of assets, first and foremost, is focused 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 it's just specific sites that aren't working. And it could be very idiosyncratic is a child care center lost an operator or a manager and -- or it could be a restaurant where there's a road widening and the access is off-line or it can be a car wash just opened and really ramping into its membership base. So very idiosyncratic stuff, not terribly material. Certainly, we're happy that it's come down, but nothing thematic that I would point out.

Our next question comes from Greg McGinniss with Scotiabank. .

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 EPRTs name as a source of capital? Or how do those nonrelationship deals come about? Is it market deals, the seller approaching you? I'm just trying to understand if you start having more investment opportunities as you grow.

Yes. 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 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. I 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.

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

Yes. There's other buyers out there. We're seeing a 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.

Our next question comes from Ryan Caviola with Green Street.

Is there any color you could share on the differences in yield between your traditional retail portfolio versus the industrial properties that you 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?

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

Great. 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 '26?

Yes, 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. 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-size, well-located boxes. And so we'll most likely continue to invest ratably across that industry as we think about 2026.

Our next question comes from John Massocca with B. Riley.

Sticking with the industrial assets and sorry if I missed this earlier in the call, did 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?

Yes, they're not -- I mean, they're industrial properties, industrial outdoor storage yards where service-based operators are running their business. And 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 retail box like a restaurant but those sites are still essential to that operator's business and switching costs are very high, such that we would expect durable tenancy in those assets.

But are they selling 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? I mean, especially in the current environment where private equity capital raising and liquidity events are a little bit more uncertain versus in years past?

Yes. 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 I tend to be agnostic to the equity source. It could be private. It could be large private equity and credit, credit, and we ultimately hang our hat on owning a good piece of real estate at the appropriate basis with the good lease structure supported -- with rents 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. There's good big operators and bad big operators, and there's good small operators and bad small operators, and we really focus on our history and our relationships and -- the bigger the operator, the -- we find the more use of leverage. And so we certainly take that into consideration. But it's underwriting credit.

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.