Essential Properties Realty Trust, Inc. Q3 FY2025 earnings call

• Continued execution on focused investment strategy, sourcing attractive opportunities for middle market sale-leasebacks with growing operators.
• Portfolio credit trends remained healthy with same-store rent growth of 1.6%, occupancy of 99.8%, and a decline in ABR under 1x rent coverage by 120 basis points.
• Successful $400 million 10-year unsecured bond offering in August, improving weighted average debt maturity to 4.5 years.
• Raised approximately $14 million through ATM Program and utilized funds to support investment activities and preserve balance sheet flexibility.

In the third quarter, Essential Properties Realty Trust continued its focused investment strategy. Investments totaled $370 million, with 70% contributed by existing operators. Pricing was favorable with a weighted average initial cash yield of 8% and a strong average GAAP yield of 10%, representing a 450 basis point spread to the estimated weighted average cost of capital. The portfolio performance was strong with same-store rent growth of 1.6%, rent coverage increased to 3.6x, and a decline in the percentage of ABR under 1x rent coverage. The portfolio ended the quarter with 2,266 properties leased to over 400 tenants, with a weighted average lease term of approximately 14 years and 4.5% of ABR expiring over the next 5 years. Dispositions in the quarter included selling 7 properties for $11.5 million in net proceeds, executed at a 6.6% weighted average cash yield.

• Increased 2025 AFFO per share guidance to $1.87 to $1.89 and investment volume guidance to $1.2 billion to $1.4 billion.
• Established 2026 AFFO per share guidance range of $1.98 to $2.04 (6%-8% growth).
• Expect to invest between $1 billion and $1.4 billion in 2026, with cash G&A expense expected to be between $31 million and $35 million.
• Cap rates expected to compress modestly over the coming quarters due to a lower and stable interest rate environment.

• Factors causing actual results to differ from forward-looking statements disclosed in SEC filings and earnings press release.
• Tenant concentration risk, though tenant diversity mitigates this as a risk mitigation tool.
• Competition in the net lease market affecting deal negotiation and underwriting processes.

Q: Haendel St. Juste asked about cap rates, competition, and new industrial assets.

A: Peter Mavoides responded that cap rates are driven by stable interest rates, the company can compete with any competition, and they've been investing in industrial outdoor storage sites with service-based companies.

Q: Michael Goldsmith inquired about cap rate flow-through and disposals.

A: Peter Mavoides said cap rates are expected to compress with stable interest rates and that disposals of less than 1x rent coverage assets are due to general improvement in operating conditions.

Q: John Kilichowski asked about guide drivers and credit loss.

A: Peter Mavoides and Max Jenkins discussed that guide drivers include timing of investments and capital markets activities, and credit loss assumptions are based on historical experience and deep portfolio dives.

Q: Smedes Rose asked about 4th quarter activity.

A: Peter Mavoides said the fourth quarter typically picks up seasonally, and they expect activity similar to the trailing 8-quarter average.

Q: Caitlin Burrows asked about platform growth and equity issuance.

A: Peter Mavoides and Mark Patten discussed that the platform is growing but they focus on derisked execution for sustainable growth, and share price moves impact equity issuance selectively.

Q: Jay Kornreich asked about new tenants and lease escalations.

A: Peter Mavoides said lease escalations are a key term, and they compete on reliability and execution, with escalations expected to face downward pressure over time.

Q: Richard Hightower asked about market competition.

A: Peter Mavoides stated that they compete on reliability and certainty, and new market participants may face misstarts.

Q: Eric Borden asked about bad debt watch list.

A: A. Peil said the watch list sits at 1.2x, down 40 basis points quarter-over-quarter.

Q: Daniel Guglielmo asked about lease escalations and risks.

A: Peter Mavoides said rent escalations are a balance, considering tenant ability to service obligations over lease life.

Q: James Kammert asked about credit loss assumptions.

A: Peter Mavoides said assumptions are consistent with historical processes, based on current data and idiosyncratic risks.

Q: Omotayo Okusanya asked about 1x rent coverage tenants.

A: Peter Mavoides said it's idiosyncratic risk across various assets and industries, not material.

Q: Greg McGinniss asked about investment opportunities and competition.

A: Peter Mavoides said the opportunity set is growing, and they continue to execute well despite competition.

Q: Ryan Caviola asked about industrial yields and auto distress.

A: Peter Mavoides said cap rate compression applies across all assets, and auto exposure in their portfolio is not affected by retail auto distress.

Q: John Massocca asked about private equity-backed tenants.

A: Peter Mavoides said they focus on real estate and unit-level economics, agnostic to equity source.