Essential Properties Realty Trust, Inc. Q2 FY2025 earnings call

• During the quarter, the company sourced attractive investment opportunities, focusing on middle market sale leasebacks with growing operators. - 88% of investments came from existing relationships, highlighting the value of recurring business. - Pricing was favorable with a weighted average cash yield of 7.9% and GAAP yield of 9.7%. - Portfolio performed well with healthy tenant credit trends and same-store rent performance. - Issued $119 million of equity through ATM Program, pro forma leverage 3.5x, liquidity $1.3 billion. - Increased 2025 AFFO per share guidance to $1.86-$1.89 and investment guidance to $1 billion-$1.2 billion.

In the second quarter, Essential Properties Realty Trust invested $334 million. 88% of these investments came from existing relationships. The weighted average cash yield was 7.9% and the weighted average GAAP yield was 9.7%. The portfolio ended the quarter with 2,190 properties leased to over 400 tenants in targeted core industries. The weighted average lease term was 14 years, and the weighted average unit level coverage ratio was 3.4x. Revenue contribution from repeat business was 88% of the $334 million investments.

• Increased 2025 AFFO per share guidance to a range of $1.86 to $1.89. - Increased investment guidance range by $100 million to $1 billion to $1.2 billion. - No need to raise incremental capital to achieve guidance range; year-end leverage would be under 4x if executing at midpoint of investment guidance. - Expect investment cap rates in 2025 to trend lower despite not seeing cap rate compression materialize yet.

• Competition could build as capital markets normalize, leading to cap rate compression. - Tenant concentration risks with top 20 tenants accounting for 28.8% of ABR. - Macro economic volatility impacting the operating environment.

Q: Just with acquisitions year-to-date tracking above the midpoint of your raised guidance and positive commentary around the pipeline in your prepared remarks, I understand that you do expect some competition here. But just curious what's preventing you from leaning more into the acquisitions just given the presumably strong fourth quarter, but also understand there's some offset with seasonality in the third quarter?

A: Yes. Listen, we are leading strong into acquisitions. And as I said in the prepared remarks, the investment market continues to be pretty exceptional for us, was the word I used. So we are leading strong into acquisitions. I think, your question is more around guidance. And really, the guidance on investment volume more is just really conservatism, because we rarely have more than 90 days of visibility on the pipeline. But you're correct. The fourth quarter tends to be elevated and we'll see what the fourth quarter brings. From an earnings perspective, the fourth quarter investments don't impact 2025 a lot and more impact the out years, and we'll adjust the guidance accordingly throughout the year as we always do.

Q: Just back to the competition piece, right? You noted on the first quarter call that you expected it could to show up and it hasn't yet. So I guess what are you looking for in order for that to show up and start to drag cap rates down a little bit? Like is it -- what is it exactly that you're looking for? And when are you expecting that to start to impact cap rates?

A: Yes. Listen, I've been saying it for almost a year now. And I really -- I don't control capital competition and when it comes, it comes. And we just know that there's a substantial amount of capital that's been raised and targeted towards net lease investments, and we expect it to impact us in the transaction market, but we continue to have an ample opportunity set. Our counterparties continue to value our consistency and reliability, and we continue to be very aggressive in deploying capital. And if you think about it, an average GAAP yield of 9.7% for the type of investing we do is pretty extraordinary. So I don't know. I don't know when it's coming. I've been wrong, I guess, for the last 2 years, but I'll stick to my guns and say it's coming.