Essential Properties Realty Trust, Inc. Q2 FY2026 earnings call

Investment Activity and Origination Platform

• The firm completed $332 million in accretive investments during Q2 2026, with an average initial cash yield of 7.8% and a gap yield of 9.1%, which represents a slight improvement in cap rates compared to the prior quarter, preserving strong spreads over the firm's cost of capital.
• 84% of Q2 2026 investment volume came from sale-leaseback transactions, which remain a compelling source of growth capital for middle market operators in the firm's target sectors. Investments were spread across 36 transactions covering 103 properties, with an average investment size of $3.1 million per property, consistent with the firm's focus on granular, diversified, fungible assets.
• The firm closed its first transaction partially funded via tax-efficient issuance of operating partnership (OP) units, adding a new flexible tool to its capital toolkit for future transactions.

Portfolio Fundamentals and Asset Management

• Portfolio fundamentals remained healthy in Q2 2026: same-store rent growth improved sequentially to 1.5%, occupancy stayed strong at 99.6% with only 9 vacant properties, and overall portfolio rent coverage held steady at 3.5x quarter over quarter.
• The percentage of annual base rent (ABR) with rent coverage below 1.5x declined 50 basis points sequentially, reflecting ongoing improvement in portfolio credit quality.
• The firm completed $54.3 million in proactive asset dispositions during the quarter, and expects future disposition activity to moderate back to its trailing 8-quarter average going forward.
• Portfolio diversification remains a core priority: the top 10 tenants represent only 15.2% of ABR, and the top 20 tenants represent just 25.4% of ABR. The firm reduced its largest single industry exposure by 40 basis points during the quarter, resulting in the top three industries (car wash, medical, dental, and early childhood education) each holding ~12% of ABR, creating a more balanced portfolio.

Balance Sheet and Capital Structure

• The firm successfully completed a $400 million 10-year unsecured bond offering during the quarter with a 5.375% coupon, strengthening liquidity, extending weighted average debt maturity, and deepening liquidity in the firm's bond complex.
• Pro forma leverage remains conservative at 3.5x net debt to adjusted EBITDARE, with total liquidity reaching $1.7 billion, enough to fund the firm's investment pipeline well into 2027.
• The firm raised ~$85 million in equity during Q2 2026 via its ATM program and the OP unit transaction, and had ~$575 million in unsettled forward equity at quarter end. Guidance incorporates a conservative 1-2 cent per share headwind for potential dilution from the Treasury stock method for unsettled forward equity.
• The firm declared a $0.32 per share cash dividend, representing a 64% AFFO payout ratio. Retained free cash flow after dividends totaled $43 million in Q2 2026 ($170 million annualized), providing substantial internally generated capital for future growth.

Essential Properties Realty Trust is a single-segment net lease real estate investment trust focused on diversified sale-leaseback investments. For Q2 2026, the firm reported GAAP net income of $74.5 million, AFFO of $110.1 million, and AFFO per share of $0.50, representing a 9% year-over-year increase in AFFO per share and an 18% year-over-year increase in nominal AFFO. Total G&A expense for the quarter was $10.9 million, with cash G&A of $7.2 million, equal to 4.4% of total revenue (down from 5.2% year-over-year). The firm disposed of $54.3 million of assets during the quarter, and completed $332 million in new accretive investments, 84% of which were sale-leaseback transactions. Pro forma net debt to annualized adjusted EBITDARE was 3.5x at quarter end, with $1.7 billion in total available liquidity. The portfolio had 99.6% occupancy, 3.5x portfolio rent coverage, and 2,493 properties leased to over 500 tenants as of quarter end.

• AFFO per share guidance for full-year 2026 was increased to a range of $2.01 to $2.05, implying year-over-year growth of over 7% at the midpoint and over 8% at the upper end of the range. This upward revision reflects stronger-than-expected portfolio performance and better-than-expected investment volume and pricing, offset slightly by incremental dilution from the Treasury stock method for unsettled forward equity.
• Full-year 2026 investment volume guidance was increased to a range of $1.2 billion to $1.5 billion, supported by a strong and growing pipeline of opportunities. The firm expects cap rates on future pipeline opportunities to remain in the mid-to-high 7% range, consistent with Q2 2026 results.
• Full-year 2026 cash G&A guidance is maintained at $30 million to $34 million, and Q2 2026 cash G&A is currently trending toward the bottom half of this range.

• Forward-looking statements are subject to inherent uncertainty, and actual future results may differ materially from current expectations, with detailed risk factors disclosed in the firm's SEC filings.
• The firm faces incremental headwind from potential dilution tied to unsettled forward equity under the Treasury stock method, currently expected to reduce 2026 AFFO per share by 1 to 2 cents, with current trends pointing closer to the 2 cent upper end of the range.
• The upcoming 2027 $2.3 billion term loan maturity will create a manageable 4 to 6 cent per share AFFO headwind in 2027, depending on the refinancing structure executed in the current higher interest rate environment.
• There is modest uncertainty around credit performance and bad debt expense, though management has incorporated conservative assumptions into guidance that align with long-term historical averages, with no material expected deviation from typical levels.
• Transaction closing timelines are partially dependent on counterparties, which can create quarter-to-quarter variability in investment volume timing.

Q: Can you share more about the Q2 OP unit transaction and whether you expect to do more of these deals going forward? Is OP unit issuance targeted at a specific tenant type? / A: The transaction was a standard sale-leaseback where the selling operator preferred tax-efficient OP units over cash to avoid tax leakage and retain upside exposure to EPRT. This transaction differentiated EPRT from competing bidders and allowed the deal to close smoothly. Opportunities for this structure are rare and only occur in specific seller circumstances, so management expects only episodic future use, not a frequent new activity.

Q: Early childhood education exposure ticked up 1% this quarter. Is this a sign of increased strategic focus on the sector, or just a one-off opportunity? / A: The uptick was driven by a single larger transaction in the sector during the quarter and does not reflect a change in strategic focus. EPRT remains agnostic to industry and continues to seek attractive investments across all of its target verticals, with a core priority of maintaining portfolio diversification. The firm will keep top industry exposures balanced around 12% going forward.

Q: Updated full-year investment guidance implies a meaningful slowdown in acquisition volume in the second half of 2026 relative to the first half. Is this intentional conservatism, or are there market factors driving the slowdown? How are geopolitical and macro volatility impacting cap rate negotiations with counterparties? / A: Cap rates have held steady in the mid-to-high 7% range, and macro volatility actually improves EPRT's negotiating leverage, allowing the firm to maintain higher yields, as seen in Q2 results. The pipeline remains very strong, and the updated guidance range incorporates conservative forecasting, leaving open potential upside to volume in the back half of the year.

Q: As EPRT continues growing at a sector-leading pace, how will headcount change over the medium term, and is the firm adopting AI to improve efficiency? / A: Headcount will continue to grow gradually to support higher investment volumes and larger portfolio size, with historical growth of 5-10 new professionals per year. Growth is expected to taper slightly as operational efficiency improves, and G&A as a percentage of revenue is expected to continue declining. EPRT is already investing in AI across its entire technology stack, from deal sourcing to asset and property management, to improve investment performance and operational efficiency.