Essential Properties (EPRT) Q3 2026 Earnings Call Transcript

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DATE

Thu, Oct. 22, 2026

CALL PARTICIPANTS

• chief executive officer - Peter Mavoides
• CFO and chief strategy officer - Robert W. Salisbury
• president and chief operating officer - Robert Max Jenkins
• chief investment officer - Craig J. Vachris
• director of financial planning and data analytics - Sheryl Kaul

TAKEAWAYS

• Net Income -- $60.7 million ($0.27 per share), representing an 18% decrease compared to the third quarter of 2025 due to higher interest expense and asset impairment charges.
• AFFO -- $111.9 million ($0.51 per share), representing a 6% increase from the prior year period.
• Investment Volume -- $342.2 million across 100 properties, with 91% of the volume coming from sale-leaseback transactions.
• Investment Yields -- 7.7% average initial cash yield and a 9.4% average GAAP yield for new acquisitions completed in the quarter.
• Portfolio Occupancy -- 99.6% at quarter end, with only 11 properties vacant in the 2,580-property portfolio.
• Weighted Average Lease Term (WALT) -- 14.2 years for the total portfolio, while new investments in the quarter had a WALT of 17.9 years.
• Unit-Level Rent Coverage -- 3.5x weighted average, reflecting healthy tenant profitability across the diversified portfolio.
• Same-Store Rent Growth -- 1.4% during the quarter, driven by contractual rent escalations.
• 2026 AFFO Guidance -- Increased to a range of $2.02 to $2.05 per share, reflecting investment activity and portfolio performance tracking ahead of budgeted expectations.
• 2026 Investment Guidance -- Raised to a range of $1.3 billion to $1.5 billion, supported by a strong pipeline of middle-market opportunities.
• 2027 AFFO Guidance -- Established at a range of $2.10 to $2.18 per share, representing approximately 5% growth at the midpoint.
• 2027 Investment Guidance -- Set between $1 billion to $1.5 billion, with deployment expected to be back-end loaded to preserve balance sheet capacity.
• Disposition Activity -- $17.9 million in proceeds from 11 properties sold at a 6.1% weighted average cash cap rate, primarily from the restaurant and car wash segments.
• Tenant Concentration -- 15.2% for the top 10 tenants and 25.1% for the top 20, demonstrating limited exposure to individual operators.
• Pro Forma Leverage -- 3.8x net debt to annualized adjusted EBITDAre, maintaining the company's commitment to a low leverage profile.
• Available Liquidity -- $1.3 billion, consisting of $809 million in revolver capacity and $483 million in unsettled forward equity.
• Debt Management -- Prepayment of a $430 million term loan maturing in 2027, leaving the company with no debt maturities until 2028.
• Cash G&A Expense -- $7.3 million for the quarter, representing 4.3% of total revenue and trending toward the lower half of the annual guidance range.
• Free Cash Flow -- $42 million retained after dividends during the quarter, supported by a low AFFO payout ratio of 63%.
• Tenant Watch List -- 1.1% of the portfolio, representing a 50 basis point reduction sequentially.
• Asset Impairment -- $15.0 million, primarily driven by a single vacant property formerly occupied by a home furnishing retailer.
• Forward Pipeline Yields -- Approximately 8% for initial cash cap rates and high 9% range for GAAP yields, reflecting increased pricing power in the middle-market lending landscape.
• 2027 Cash G&A Guidance -- Established at a range of $32 million to $37 million.
• Rent Escalations -- 2.3% for new investments and 1.9% for the total portfolio on a weighted average basis.
• Internal Capital Generation -- Approaching $200 million in annual free cash flow after dividends to fund future growth initiatives.

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RISKS

• Peter Mavoides stated, "given the capital markets choppiness, I would say that [the probability to close] is probably closer to 70 percent or 65 percent in the current market," reflecting increased volatility in the transaction pipeline.
• Robert W. Salisbury stated, "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," as the company evaluates options to term out its revolver balance.

SUMMARY

Essential Properties Realty Trust, Inc. (NYSE:EPRT) reported third quarter results that included an increase in full-year 2026 AFFO per share and investment volume guidance. The company established 2027 targets that rely on internal cash flow, dispositions, and settled forward equity, assuming no need for new external common equity. Management executed a strategic debt prepayment to eliminate 2027 maturities, positioning the balance sheet for a more restrictive lending environment while achieving higher yields on new acquisitions. Deployment remains focused on granular, service-oriented sale-leaseback transactions with middle-market operators.

• CFO Salisbury confirmed the 2027 funding plan is fully covered by existing sources: "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."
• Management indicated that dispositions have become an accretive capital source, with CEO Mavoides noting, "dispositions have become an accretive source of capital and are likely to trend higher in the near term to alleviate capital markets funding requirements."
• President Jenkins highlighted that 91% of quarterly investment volume consisted of sale-leaseback transactions, providing the company with pricing and structuring leverage over operators seeking reliable capital.
• The company relabeled certain industry categories in its reporting, with CEO Mavoides stating the change to health and wellness and fitness was made "to better reflect the businesses in our portfolio."
• Management signaled a deliberately selective approach to the pipeline, with Peter Mavoides noting that deployment over the next two to three quarters would be methodical to protect balance sheet capacity until asset pricing fully adjusts.

INDUSTRY GLOSSARY

• AFFO: Adjusted Funds From Operations, a non-GAAP financial measure used by REITs to estimate the cash flow available for dividends.
• Cash ABR: Annualized Base Rent, representing the total contractual cash rent a company expects to receive over a 12-month period.
• Cash Cap Rate: The initial annual cash rent from a property divided by its purchase price.
• EBITDAre: Earnings Before Interest, Taxes, Depreciation, and Amortization for Real Estate, a standard performance metric used to evaluate REIT operations.
• Master Lease: A single lease that covers multiple properties, treating them as one collective investment to mitigate individual property default risk.
• WALT: Weighted Average Lease Term, measuring the average time remaining on all leases in a portfolio.

Full Conference Call Transcript

Operator: Thank you for choosing Education. You may be calling again shortly. Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help. Good morning, ladies and gentlemen. And welcome to Essential Properties Realty Trust Third Quarter 26 Earnings Conference Call. At this time, all participants are in a listen-only mode. During the question and answer session. To register to ask a question at any time, please press star 1 on your telephone keypad. 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.essentialproperty.com, an archive of which will be available for 90 days. are Pete Mavoides, chief executive officer Robert W. Salisbury, CFO and chief strategy officer Max Jenkins, president and chief operating officer Craig J. 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.

Sheryl Kaul: Thank you, operator. Good morning, everyone. And thank you for joining us today for Essential Properties Third Quarter 26 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 will turn the call over to Peter.

Peter Mavoides: 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%. 90-1 percent 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 in real time with new investments being struck at higher cap rates than the third quarter investments, which were largely contracted over the summer.

Importantly, a 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 2.58 thousand 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 percent 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 percent healthy rent coverage of 3.5x, and occupancy of 99.6 percent. 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 of almost 8 percent at the midpoint.

We are establishing our initial 2027 guidance with an AFFO per share range of 2 dollars and 10 cents to 2 dollars and 18 cents 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 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 would like to congratulate Max and Robert on the recent promotions. Which recognize the meaningful contributions they have made to the company and position them with greater responsibilities going forward. I would also like to welcome Craig J. Vachris to the company as our new Chief Investment Officer. These management changes reflect the continued evolution of the management team as we pass our 10-year anniversary.

With that, I will turn the call over to Craig, who will provide an update on our portfolio and asset management activities. Craig?

Craig J. Vachris: Thanks, Peter. 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 3.5 times The percentage of ABR with rent coverage 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 percent of ABR at quarter end. While our top 20 tenants account for only 25.1 percent, 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 percent 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 slash dental is now health and wellness. And health and fitness is now fitness. With that, I will 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.

Robert Max Jenkins: Thanks, Craig. On the investment side, during the third quarter, we invested 3 hundred 42 million dollars 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 escalations of 2.3 percent. 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 we completed 31 transactions totaling 100 properties. With alternative financing sources becoming more difficult for many companies, operators continue to monetize their own real estate through sale leasebacks, which encompass 91% of our investment volume in the quarter.

Our average investment size was 3 million dollars 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 in a more restrictive middle market lending landscape, are factors contributing to our pricing power. Consequently, our forward pipeline has cap rates around 8 percent with gap yields in the high 9s.

With over 1 billion dollars 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 would like to turn the call over to Robert W. Salisbury, our CFO and Chief Strategy Officer, who will take us through the financials for the third quarter.

Robert W. Salisbury: 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 percent versus the year ago period, while nominal AFFO increased 16 percent year over year $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 point 1 million dollars 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 percent of total revenue, down from 4.6 percent in the same period a year ago. We declared a cash dividend of 32 cents in the third quarter, which represents an AFFO payout ratio of 63 percent. This low payout ratio enabled us to retain free cash flow totaling 42 million dollars 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 point 1 billion dollars 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 3 hundred million dollars to 1 point 3 billion dollars We would like to thank our entire bank group for their overwhelming support in this successful transaction. We utilize this extra liquidity to support the prepayment of our sole 2027 maturity a 4 hundred 30 million dollars 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 to term out our revolver balance and extend our robust liquidity profile. With 4 hundred 83 million dollars of unsettled forward equity, at an average price of 30 dollars and 50 cents per share, and 8 hundred 9 million dollars 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 form a net debt to annualized adjusted EBITDAre remains low at 3.8 times 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 dollars and 20 cents to 2 dollars and 50 cents reflecting a growth rate of approximately 8 percent at the midpoint. We also established an initial AFFO per share guidance range for 2027 of 2 dollars and 10 cents to 2 dollars and 18 cents reflecting our expectation of another year of best in class earnings growth. The guidance range includes investment volume of 1 billion dollars to 1 point 5 billion dollars 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 2 hundred million dollars and our guidance assumes approximately 2 hundred million dollars 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 will turn the call back over to Peter.

Peter Mavoides: Thanks, Robert. 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: Thank you. And we will take our first question from Michael Goldsmith with UBS. Your line is open.

Michael Goldsmith: Good morning. Thanks a lot for taking my questions. First, on the 2027 guidance, I think you started to touch on it, but can you provide us the building blocks for how you are going to achieve that? And then as also, what are you assuming on the debt refinancing and, how you are 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?

Peter Mavoides: I will let Rob handle that.

Robert W. Salisbury: Hey, Michael. Good morning. 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 4 hundred 30 million dollars 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 would that about a month ago, but we went ahead and, expanded our revolver capacity that helps support taking that down a little bit early. Just as a reminder, we kept that swap in place. You can see some expanded disclosure in our supplemental to show you where that is 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, you know, clearly, we do not want to leave it floating and seek to have as low variable rate debt exposure as we can. So as we sit here today, we are 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 would probably price in the high 6s. A convert would probably price south of a 5.

On the. On a coupon basis, I should say. And then bank debt would probably be somewhere in between, in the 5.6% to 5.7% range. We are looking at all of those. You know, as a general comment, we are always looking to extend the duration on our liability stack. We recently did a 10-year bond offering back in June. So, strategically, we are continuing to focus on that understanding, of course, that we do have a hole in our ladder at both the 5- and 7-year maturity. So we would consider shortening up just a little bit, you know, support the refinancing of that obligation.

And I should say that we have included a range of, scenarios for that baked into our guidance range. 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 will probably have more to talk about in a month or 2 as we continue to assess those options. But, know, clearly, interest rates are evolving, dynamically, and, we will see where that shakes out.

Peter Mavoides: Yeah. Thanks for the answers. Yeah. Mike, the other building blocks for, you know, 2027. Obviously, we have the investment guidance out there. A billion to a $1.5 billion, which is a conservative range relative to our historical performance. And then all of that guidance kind of predicated on continued solid portfolio performance and our compelling growth within the portfolio. So Thanks for that.

Michael Goldsmith: 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 you are sub 1 time coverage bucket was flat last quarter. So just trying to get a sense of, you know, is there any change in the watch list, how you think about your tenant base and how they have been able to navigate the macro? Thanks.

Peter Mavoides: Hey, Max. Why do not you handle that?

Robert Max Jenkins: No problem. Thanks, Peter. it is been very consistent. We do not really see any trends or movement 1 way or another. Obviously, it is. I guess that it is going to be pretty consistent We are happy with the way our tenants are performing. Coverage remains strong.

Robert W. Salisbury: And Michael on that, specifically the watch list, it is actually down 50 basis points quarter over quarter and sits at 1 point 1 percent. And as Max noted, the portfolio continues to operate within the guidance range. And no trends, nothing material to report, and we are happy with how our tenants are performing.

Michael Goldsmith: Thank you very much. Good luck in the fourth quarter.

Peter Mavoides: Thank you.

Operator: We will take our next question from Haendel St. Juste with Mizuho. Your line is open.

Analyst: Hey there, guys. Good morning. Wanted to follow-up on this. Love it. I wanted to follow-up on the 2027 line of questioning for Michael before. Can you talk a bit more about capital deployment strategy and balance sheet management a bit more? Sounds like Peter, you mentioned investments may be back end loaded. Should we expect to see leverage tick up a little bit here over the course of 2027? Maybe some color on the key swing factors for the upper and lower end of the of the range for next year. Is it basically volume spreads and debt refis or anything else we should consider? Thanks.

Peter Mavoides: Yeah. Listen. I think, you know, we are going through a period of time here, as we said in the call, where there is been a rapid movement in our weighted average cost of capital. And that, you know, we are 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 you know, there to be a lower level of transaction opportunities.

But, you know, I think on a bigger picture, we would expect a more than commensurate lower level of competition that you know, continues to afford us ample opportunities to invest But it is it is a very dynamic time, and we are gonna react to the market as it evolves. You know, and as we are, you know, we are focusing on achieving attractive spreads and price. Pricing transactions appropriately for the risk in the current market. And you know, we are we are uncertain, you know, what that looks like as we think about you know, certainly, 2Q and 3Q and add into 4Q. So there is a wide range of scenarios supporting our guidance.

And I guess it really just depends on, 1, our cost of capital and 2, the pricing of assets and our ability to maintain spread We are pretty optimistic. The pipeline is strong, and we have gone through and repriced a large proportion of the opportunities in the pipeline. And those transactions have held together and are consummating at attractive rates. But it is early days, and, we will see what happens.

Robert W. Salisbury: Just on. I would add on the capital side, Haendel, we are not assuming a dramatic re leveraging of the sheet. We are gonna continue to run at a low leverage point. And we are assuming really nothing on the ATM in the very near term just to recognition of where our share price is today. So no common equity in the near term.

Analyst: Got it. Got it. Super helpful. Gracias. And maybe 1 follow-up if I could on the dispositions. Certainly seems like there is an opportunity out there, as you alluded to, to sell some assets at good pricing and perhaps accretively recycle 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. Thanks.

Peter Mavoides: Yeah. I think we will take a deep look at the portfolio. And I think we have good liquidity across most of our industry verticals, and we will probably try to sell a representative sample of those assets. Certainly, we would not wanna cherry pick the portfolio. Solely to achieve, you know, pricing. We would probably sell a representative sample and overall try to improve our hold positions. You know, historically, we have been about 2 hundred 25 million dollars a quarter. I think it is. We could conceivably you know, ramp that up very easily to 50 million dollars a quarter. And I would expect us to be able to achieve in the mid- to high- 7s cap.

Excuse me, mid to high 6% cap rate range on those transactions.

Analyst: Got it. Got it. Very helpful. Thank you, guys.

Operator: We will take our next question from Jana Galan with Bank of America. Your line is open.

Jana Galan: Thank you. Good morning and congrats on a strong quarter. Just going back to the investment guide for 2027, Curious, is that gross or net?

Robert W. Salisbury: I think, Robert, you mentioned 2 hundred million dollars of potential dispositions next year.

Peter Mavoides: Yeah. We tend to. We guide to a gross investment number.

Jana Galan: Thank you. And then on the activity in the quarter, we noticed early childhood education picked up. Just curious if there is any tenant categories that look more attractive today, anything that you are, you know, looking to lean into.

Robert Max Jenkins: Hey. Thanks for the question. This is Max. Our investment strategy has not changed in the last decade. And we 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.

Jana Galan: Thank you.

Operator: We will take our next question from Caitlin Bowers with Goldman Sachs. Your line is open.

Analyst: Good morning, everyone. Peter, you mentioned earlier, now that we have talked about it a bunch about how you are 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 is 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 that, call it, it upper hand? Or, yeah, how can you continue to achieve that outcome?

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

So we have always focused on a value added investment strategy by providing capital to middle market operators. That are not that price sensitive and, you know, through those relationships, we have been able to, you know, kinda price our deals. On the flip side of that, those operators are getting transactions and opportunities that are attractive to them, you know, in the current market environment too, such that the overall transaction can hire 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 different industries.

You did not expect to really change that. Guess a lot has happened in the past quarter. So as you think of the investment volume in the next 12 months or through 2027 and maintaining attractive spreads, would you consider some shift in, like, industry focus where you could get that larger spread? Are you still expect it to be, like, ratable? Yeah. I would expect it to be more ratable, and we certainly built the business plan that way. You know, I would not wanna look at a business plan that focus up solely on out the risk spectrum on the wider industries or the or the more risky transactions.

We generally follow our relationships with 80% to 90% repeat business and I would expect the composition of our 2020 investment pipeline to be very ratable to the overall portfolio.

Analyst: Thanks.

Operator: We will take our next question from Smedes Rose with Citigroup. Your line is open.

Bennett Rose: Hi. Thanks. 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?

Peter Mavoides: Yeah. You know, I. The flip side of that to me is that I would expect seller expectations in the auction market of existing net lease product to adjust less rapidly. You know, I think where we focus providing capital to middle market operators and sale leasebacks that is very dynamic and those operators are less price sensitive. But if you are sitting on a portfolio of net lease assets that are cash flowing you know, your sole motivation is gonna be price. And unless you have a debt financing or some maturity or some artificial catalyst that forces you to effectuate a sale, you are gonna hold on for the best price.

And so that market tends to be the slowest to adjust. But, you know, with our granular middle market operators, you know, that adjustment has happened really in a matter of a month and a half.

Bennett Rose: Okay. And then I was just wondering, we heard from other reports, either deals being canceled in the fourth quarter or 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 of line of sight is on your on your pipeline? Relative to your September update?

Peter Mavoides: Yeah, Max, why do not you tackle that?

Robert Max Jenkins: Hey, Bennett. You know, we took a pretty granular and tactical approach. We took all 60 to 90 deals in the pipeline and when you have relationship investing, you wanna be proactive and reach out to those partners and those operators. And so it is a mixed bag. Some deals you know, are M&A related, and so the financing just did not come together, and they naturally fell out in a volatile environment.

But you know, generally, we are pretty happy with how quickly we have kind of been able to, to move cap rates to make investments accretive, and I think that is just a testament to the you know, the pipeline engine that we built over the last decade and a lot of repeat business. And so we are focused on, you know, maintaining those relationships, but as Peter said, when you are providing a service and you are provide. You are 1 of the only capital providers in the middle market right now in this volatile period. We are encouraged by where the pipeline sits and where we have been able to move cap rates.

Peter Mavoides: I would add, Bennett, you know, the complexion of our pipeline is, call it, 3 to 10 million dollars deals in any given quarter that are being priced, you know, 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 percent to 95 percent expected probability to close within our pipeline, And. but given the capital markets choppiness, I would say that is probably closer to 70 percent or 65 percent in the current market.

So there is more volatility, but that is offset by the number of opportunities and the diminished competition.

Bennett Rose: Great. Thank you.

Operator: Thank you, Steve. And we will take our next question from Eric Borden with BMO. Your line is open.

Eric Borden: Hey. Good morning. Thanks for taking the question. I know you do not provide specific credit loss guidance, but with tenant performance stable and the watch list improving, should we think about the credit loss assumption embedded in 2027? Relative to what you have actually experienced this year? I know I think you had talked 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 2027, 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?

Robert W. Salisbury: Eric, it is Robert. Thanks for the questions. 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 had historically been. Just as a reminder, that is, that realized loss has been, just under 30 basis points per year since the inception of this portfolio. And so while we do not give a specific number out, you know, the assumption that is baked in into that guidance range is well in excess of that roughly 30 basis point range. So that. that is where credit loss starts today.

And, yeah, as you noted, all the indicators that we monitor are very healthy right now. So, know, 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 guess we have discussed in the past, a lot of these situations are much more idiosyncratic in nature. It relates to this 1 specifically, you know, we have a robust quarterly impairment testing process well established. it is been in place for a very long time.

And part of that rigorous process, we are constantly testing on a quarterly basis. This quarter specifically is driven primarily by 1 site that is on a former ArtVan location. it is in the home furnishing retailer segment. We have 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 this specific property from Q3 had been vacant We have 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 is an industry that we have not invested in for many years. We are down to 1 location now, which represents effectively a rounding error terms of the exposure to the portfolio broadly. So it is not a surprise in terms of where the exposure is there. And all of that is outlined in Footnote 12 of our 10 Q if you want to dig into more of the details behind those assumptions.

Peter Mavoides: Thanks, Robert. Great job.

Eric Borden: Thank you. And then just 1 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?

Peter Mavoides: You know, we are not tying dispositions to acquisitions. Our disposition activity is very granular, single $3 million dollars average assets, and our investments are, tend to be, you know, $10 million dollars. And so, you know, both are very granular. And really, you know, it is not tied 1 for 1. As I said, we are maybe taking 25 million a quarter to 50 million dollars a quarter, and they are both, you know, kind of be very much on a flow basis.

Eric Borden: Great. Thank you very much.

Operator: Thank you. We will move next to Richard Hightower with Barclays. Barclays. Your line is open.

Richard Hightower: Hi. Good morning, guys. Just 1 for me. Robert, I think you mentioned in your prepared comments that the acquisition volume target for 2027 is back end loaded. Presumably kind of related to some of the capital markets choppiness we have 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 you know, expected activity and, you know, is 2027 fully covered? Is it kinda covered through the first half? Does the back end loading affect that calculation? Just help us think through that.

Robert W. Salisbury: Yeah. Hey, Richard. Good question. Yes. We are fully covered in terms of funding for next year, and that is maybe from a liquidity standpoint. We would also add from a leverage capacity standpoint. We are also covered, you know, That would end the year assuming no common equity that we would be in the low to mid fours in terms of net debt to annualized adjusted EBITDAre on a pro form a 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 you know, 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 does not make a whole lot of sense to issue common, which is why we noted earlier we are not, assuming any ATM equity in the near term. And then, you know, as it relates to the sources on that, think we mentioned earlier about the dispositions as 1 lever. You know, we are trading at a 7.3% cap rate right now. And, you know, as Peter noted, we are able to dispose in the 7-cap or even better than 7-cap territory.

Something that is new. We have not really talked about sourcing that capital because it is been dilutive relative to our weighted average cost of capital over the last several years. But, you know, obviously, to the extent that, we are able to source more that is a potential lever that we could pull, to And so that is the quick picture on where it sits today. In terms of the cadence, you know, 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 are moving through the year.

And as you think about the high end of the guidance range, you know, that. that is 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 is kind of the scenario that we are outlining at the high end.

Peter Mavoides: All right. that is great.

Richard Hightower: Thanks so much.

Operator: We will take our next question from Linda Tsai with Truist. Your line is open.

Analyst: Thanks for taking my question. What is driving the lower credit loss in your portfolio? Do you attribute it to how you are operating the portfolio? Or are you seeing lower tenant distress for the tenants in which you are investing in I would say it is certainly more the latter.

Peter Mavoides: You know, we buy these assets and make an investment decision, you know, we have 15 years away at average lease term. You know, there is a little we can do to effectuate change, you know, 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 2027 versus 2026 since your funding for next year is in place? Yeah.

You know, we have historically invested anywhere as tight as 100 basis points to as wide as 300 basis points. I would say, you know, that is an output, not an input. And as we move cap rates, you know, obviously, spread will improve relative to the capital that we have raised. And hopefully relative to the capital that we continue to raise. But as Robert just said, you know, our business plan in 2027 is not predicated on raising new capital And then, you know, generally, cap rates cap rate movements lag the movements in cost of capital, and that is why we are in a compressed cap rate 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 is it is early as we sit here in the fourth quarter of 2026. To make a prediction on our net investment spread in 2027. But I would say, it would be about the same.

Analyst: Thanks.

Operator: We will take our next question from Jim Kamert with Evercore. Your line is open.

Analyst: Good morning. Thank you I think it was mentioned earlier that kind of 8 percent is the new floor for going in transaction cap rates. Obviously, that is the cash cap rate. And I am wondering can you still extract portfolio average of 1.9% escalators on that type of cap rate? Or is there a bit of a trade off going on? Thank you.

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

Peter Mavoides: Yeah, James. I would not want it to be lost, you know, last quarter, we were at 2 point 3 percent on our new deals. And a and a gap yield, you know, well into the 9s. So, you know, the overall economic package we negotiate with tenants is fluid. You know, I think the highest sense of sensitivity is on initial cap rate. But, you know, we continue to do the best we can on that front.

Analyst: Thank you.

Operator: And we will move next to Greg McGinniss with Scotiabank. Your line is open. Greg, you may need to check the mute function on your device.

Greg McGinniss: Sure do. Thanks you for that. 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?

Peter Mavoides: Yeah. it is it is not our team adjusting underwriting. It could be our team adjusting pricing. You know, we do not have not changed the way we look at credit or the way we underwrite credit. But I would say it is equally balanced between deals not closing because of the choppy capital markets backdrop our deal is not closing because of the pricing that, we are offering.

Greg McGinniss: Okay. And then looking forward, is there a targeted investment spread where you feel more comfortable transacting? I am trying to get some sense of 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 have kind of previously raised versus what you could do today. When you are evaluating these investment spreads?

Peter Mavoides: Yeah. I will let Robert tackle the cost of capital end of it. We do not necessarily have a targeted spread. it is 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, you know, it is been about 100 on the low end, 300 on the wide end, and, you know, we are just working hard to make it as wide as possible both on initial cap rate and the GAAP cap rate. Basis. So, you know, it is not that formulaic because the markets are not that efficient.

But Rob, from a weighted average cost of capital, how are we looking at that. Yeah.

Robert W. Salisbury: So on the capital that we have raised, where we have, an unsettled forward equity balance that is struck at $30.50, and a 10-year debt issuance that we did in June in the low 5s. Looking at a spread that is over 2 hundred basis points in Q3, Q4. Obviously, that is not where our spot cost of capital is now, So, you know, that is probably what you will see pull through the model in the back half of 26. 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.

Depends a little bit on which debt instrument you wanna choose for that calculation. But that would get you to a range of a 100 to 150 basis points of spread is Peter noted, I think, on an earlier question. Is within the range of a 1 hundred to 3 hundred basis points that we have enjoyed historically, but obviously, that lower end. So, you know, 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.

Greg McGinniss: Great. Thank you.

Operator: Thanks, Greg. And we will take our next question from James Feldman with Wells Fargo. Your line is open.

Analyst: Great. Thanks for taking the question. I was hoping you can dig deeper into the bonus depreciation market. You know, we keep hearing from brokers that there is a pretty healthy appetite. You know, concerns about maybe rules eventually changing if there is a change in administration in a couple years. Can you just provide more color on how deep it is, how sticky it is? 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 kinda get your latest thoughts on that. And, you know, especially given the moving rates. Yeah.

Peter Mavoides: You know, we. We have got a lot of demand for products from that market. Historically, we have not delved into it too deeply. But it is certainly there, and it is certainly there at attractive cost given the massive tax incentives that could benefit that capital. Given the fact that the tax benefits are, you know, pretty dramatic. It tends to be pretty sticky. There tends to be pretty big penalties for selling those assets, you know, once you fully depreciated them So it is a market we can look at.

It tends, you know, as you would imagine, given any sort of tax-motivated capital tends to be more robust in the fourth quarter than the first and the second quarter. And, you know, I would say our guidance and our disposition plan has not really, leaned into that too much. But it is certainly out there as a attractive source of capital, should we wanna tap it deeper.

Analyst: Okay. Thanks for that. 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 pruning car washers? or are you leaning more into truck stops and C stores? And then, also, it looks like you bought another Dave and Buster's. what is your appetite to increase exposure with that tenant given their credit outlook from S&P?

Robert Max Jenkins: Hey. Thanks. This is Max. First, I would point out that our top 10 concentration of 15.2% is among the most diversified across the space. And you are 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 wanna look too much into you know, each quarter over quarter, slight changes. But, you know, TA Express, we have been working with the largest franchisee in the space that operates over a 100 truck stops in convenience stores, you know, 2 asset classes that we have invested in since inception, and this was just a follow on transaction.

We have done multiple deals over the past couple years. And so they are a great operator, great partner. You mentioned Dave and 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 as a lower basis that improved our collateral position. And the cap rate was accretive to the Q3 overall cap rate. So it is a good deal for us, but, it is unlikely we would probably add more exposure to that name on a go-forward basis. that is what I would say.

Peter Mavoides: You know, we, We do not follow S&P as a to guide our investment activity or underwriting. And so, you know, S&P certainly did not drive our decision there. You know, it is more just managing exposures and assets and we remain, you know, we remain confident in our master lease there and our coverage and think that company will be a great tenant long term. Okay. Thanks for that. I mean, are you are you changing your perspective at all on the consumer heading into next year? Or areas where you would feel less and have less appetite? No. Listen, we know our industry as well. We have deep data and experience to support our investment in these industries.

Ultimately, we are real estate investors in these industries, and we specifically know and like and know the real estate assets in these industries. And as we as we study our portfolio performance, our tenant performance, there is there are no trends that alarm us. Generally, the consumer is doing okay. You know, the worst, we have modest same store sales down 2% to 3% with margin expansion, which results in 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. Okay. Thank you

Operator: Thank you. We will take our next question from Spenser Allaway with Green Street. Your line is open.

Analyst: Thank you. On the releasing front, I realized you guys have very little coming due in the near term just given the long 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. 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?

Peter Mavoides: Generally, inherent in our lease are renewal options that the tenants have, Typically, it is either 10-year renewal options or 4, 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 you know, if there is a higher than 2 times coverage, if there is a 98% probability that tenant is going to exercise those options.

Analyst: That makes sense. that is it for me, guys. Thank you.

Operator: Thank you, Spenser Allaway. And we will take our next question from John Massocca with B. Riley Securities. Your line is open.

John Massocca: Good morning, everyone. You kind of the step up in cap rate in the pipeline versus what you closed in 3Q. I mean how fast should we expect that to flow through closed transactions?

Robert Max Jenkins: Hey, John. it is Max. We put out the pipeline early in Q3 before conference season and that showed a 6% handle. And, you know, in the prepared remarks, we said cap rates are around an 8. And as we have always said, you know, our pipeline is about a 90-day forward look. So you can kind of infer from there. And as Peter said, it is a volatile market, and, you know, it seems you know, rate environment, cost of capital is changing pretty rapidly and we are taking along duration, you know, long term hold, 20-year investment horizon. So, you know, we will continue to invest in price deals as they come in.

But that is about as best as I can give you right now.

John Massocca: 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 you know, is that something that could accelerate as soon as Q4 I know you have earned 22 million. Just kinda trying to think about how fast you kind of push on that lever for proceeds.

Peter Mavoides: Just to be clear, we did not guide the 200. Is that. Is it is it an indicative level. We are constantly marketing assets. Generally, you know, there is a 30 day premarket period, a 30 day market period, and then it could be a 30-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 you know, And you know, going from a 25 to a 50 or 75 is you know, it could happen over, you know, a couple quarters, but it is not gonna be a material change immediately.

John Massocca: Okay. And then, you know, in terms of. I am trying to kinda think about the lower kinda 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, you seeing some of your counterparties maybe, you know, at current prices or yields just not being able to kinda pencil in the growth opportunities that maybe traditionally had kind of catalyzed them to seek out your financing?

Peter Mavoides: Yeah. I think I said in an earlier comment, John, you know, 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 is. There should be plenty of opportunities for us to invest. So I guess the why would deal volume be so back end loaded next year? You know, and part of part of that it is not driven by the opportunity set. You know, we have always maintained that our opportunity set is ample. And we have plenty of deals to do. And, you know, I think as we said in the prepared remarks, part of that is preserving our capital runway.

And, you know, waiting for asset pricing to catch up with the movement in capital pricing. And, you know, we are sitting at a pretty wide level of capital pricing that we would expect to normalize over time as well. So it is more the capital front driving that than the opportunity set driving that.

John Massocca: Okay. that is it for me. Thank you very much.

Operator: Thanks, John. Thank you. At this time, there are no further questions in queue. I will now turn the meeting back to Peter Mavoides for any additional or closing remarks.

Peter Mavoides: Great. Well, thank you all for your time today. You know, as we try to indicate, it is certainly an interesting time for the capital markets, the net lease industry, our company, but we are excited about our, the opportunity. We are 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.

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

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