Q3 2024 Essential Properties Realty Trust Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the essential properties Realty Trust third quarter 2024 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the topic. Please press star zero on your telephone keypad.
As a reminder, this conflicts being recorded and a replay of the call will be available three hours. After the completion of the call or the next two weeks.
Dollar details for the replay can be found in yesterday's press release.
Additionally, there will be an audio webcast available on essential property website at Ww Dot central properties, Dotcom and archive, which be available for 90 days on the call. This morning are Pete My body, President and Chief Executive Officer.
Mark Patten Chief Financial Officer.
So Rob Salisbury had capital markets next Gencon head of investments and E. J P. L head of asset management. It is now my pleasure to turn the call over to Rob Pattinson.
Rob Pattinson: Please proceed sir thank you operator, good morning, everyone and thank you for joining us today for our central properties third quarter 2024 earnings Conference call.
Rob Pattinson: During this conference call, we will make certain statements that may be considered forward looking statements under federal Securities law.
Rob Pattinson: 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.
Pete: Thank you Rob.
Pete: And thank you to everyone joining us today for your interest in essential properties.
Pete: On our last earnings call, we discussed how our portfolio continue to exhibit strong operating trends against a dynamic market backdrop.
Pete: This resilient portfolio performance continued during the third quarter with high occupancy healthy same store growth and improving credit trends.
Pete: As a long term capital provider focused on owning real estate at a conservative basis leased under our lease form to growing operators and service and experience based industries, we expect our portfolio to perform at a high level.
Pete: Maintaining relationships with and providing value to operators continue to drive investment activity as well.
Pete: In the third quarter, 79% of our investments were generated from existing relationships.
Pete: Underscoring the value of recurring business with our tenant base.
Pete: With quarter end pro forma leverage of three five times and liquidity of $1 2 million or.
Pete: Our balance sheet positions us well to continue to grow our portfolio by investing in our core industries at attractive spreads generating sustainably attractive earnings growth for our shareholders.
Pete: We are establishing our 'twenty 'twenty five a S F O per share guidance range of $1 84.
Pete: To one dollar and 89 cents.
Pete: Which implies a growth rate of over 7% at the midpoint.
Pete: Our guidance for 2025 reflects continued portfolio performance.
Pete: And the steady pace of investments.
Pete: With cap rates expected to compress modestly over the coming quarters as competition reemerge as due to the continued normalization of capital market conditions.
Pete: Specifically.
Pete: We expect to invest between 900 million.
And $1 1 billion in 2025, and approximately 25 basis points below the pricing achieved in 2024.
Pete: Additionally, we expect cash G&A expense to be between $28 million and $31 million.
Pete: Resulting in continued efficiency gains as a percentage of revenue.
Pete: As the company is able to invest in it and its infrastructure, while still scaling the platform to generate stronger margins for shareholders.
Speaker Change: We ended the quarter with investments in 2053 properties that were 99.9% leased to 407 tenants operating in 16 industries.
Speaker Change: Our weighted average lease term stood at 14.1 years at quarter end, which is up year over year.
Speaker Change: With only three 9% of annual base rent expiring through 2028.
Speaker Change: From a tenant health perspective, our weighted average unit level rent coverage ratio was three six times this quarter.
Speaker Change: Indicative of.
Speaker Change: The strong profitability of our tenants at the unit level.
Speaker Change: Same store rent growth in the third quarter was one 4%.
Speaker Change: Over the past month, two hurricanes hit the south Eastern United States.
Speaker Change: Our thoughts and prayers go out to the people business owners and operators impacted by these strong storms as they rebuild in the aftermath.
Speaker Change: Looking at our portfolio.
Speaker Change: 103 properties located in areas identified as severely impacted by FEMA.
Speaker Change: Of which five properties reported damage, causing substantial disruption and worrying and warranty and insurance claim.
Speaker Change: As a reminder, as.
Speaker Change: As a condition to providing our capital in a sale leaseback transaction our tenants are required.
Speaker Change: Acquired to enter into our lease agreement, which requires them to maintain property rent and business interruption insurance.
Speaker Change: This provides an important layer of safety for our portfolio in the event of property damage events such as Hurricanes.
Speaker Change: Yeah.
Speaker Change: The investment side during the quarter, we invested $308 million through 37 separate transactions at a weighted average cash yield of eight 1% up slightly from last quarter and up 50 basis points from a year ago.
Speaker Change: Our investment activity in the quarter was broad based across most of our top industries with no notable departures from our investment strategy.
Speaker Change: This quarter, our investments had a weighted average initial lease term of 17.2 years and a weighted average annual rental escalations of two 1%.
Speaker Change: Generating an average GAAP yield of nine 1%.
Speaker Change: Our investments this quarter at a weighted average unit level rent coverage of four seven times and the average investment per property was $4 1 million.
Speaker Change: The vast majority of the investments in this quarter were originated through direct sale leasebacks.
Speaker Change: Looking ahead to the fourth quarter, our investment pipeline remains solid, reflecting M&A and new unit expansion activity across a variety of our targeted industries.
Speaker Change: As we have discussed in the past, we expect the normalization of the capital markets to result in increased competition, causing a modest cap rate compression in the near term.
Speaker Change: We have not yet seen this in our current pipeline, which implies cap rates remaining similar to the past four quarters.
Speaker Change: From a tenant concentration perspective, our largest tenant represented four 3% of ABR at quarter end and our top 10 tenants now account for just 17, 7% of ABR.
Speaker Change: Tenant diversity is an important important risk mitigation tool and a differentiator for us and is a direct benefit of.
Speaker Change: Our focus on middle market operators, which offers an expansive opportunity set.
Speaker Change: Dispositions were in line with our trailing eight quarter average and Q3.
Speaker Change: We sold nine properties this quarter for $17 million in net proceeds.
Speaker Change: This represents an average of approximately $1 $9 million per property, highlighting the importance of owning fungible liquid properties, which allows us to proactively manage portfolio risks.
Speaker Change: The dispositions this quarter were executed at a six 8% weighted average cash yield.
Speaker Change: Over the near term, we expect our disposition activity to remain in line with our trailing eight quarter average driven by opportunistic asset sales and ongoing portfolio management activity.
Speaker Change: With that I'd like to turn the call over to Mark Patten, Our CFO, who will take you through the financials and balance sheet for the quarter.
Mark Patten: Thanks, Pete and good morning, everyone as Pete detailed we had a good third quarter highlighted by a strong level of investments and an eight 1% cash cap rate.
Mark Patten: Among the headlines from the quarter was or if a vote per share a 43 cents. That's an increase of 2% versus Q3 2023 on a nominal basis, sorry episode totaled $77 9 million for the quarter, which is up $11.6 million over the same period in 2023, an increase of 17%.
Mark Patten: The safe F. O performance was in line with our expectations as reflected in our guidance range provided last quarter.
Our stronger than anticipated investment volume was partially offset by incremental dilution from the treasury stock method on our unsettled forward equity.
Mark Patten: Total G&A in Q3, 'twenty 'twenty four was at point $6 million versus $7.6 million for the same period in 2023 with the majority of the increase relating to increased compensation expense as we continue to invest in our team.
Mark Patten: Our recurring cash G&A as a percentage of total revenue was five 1% for the quarter, which compares favorably to the five 5% in the same period a year ago.
Mark Patten: Our total G&A in recurring cash G&A were also in line with our expectations for the quarter and year to date.
Mark Patten: We continue to expect that on an annual basis, our cash G&A as a percentage of total revenue will decline as our platform generates operating leverage over a scaling asset base, enabling us to manage a larger portfolio and invest at higher levels.
Mark Patten: We declared a cash dividend of 29 cents in the third quarter, which represents an <unk> payout ratio of 67%.
Mark Patten: Our retained free cash flow after dividends continues to build reaching $26 $8 million in the third quarter equating to over $100 million per annum on a run rate basis.
Mark Patten: We continue to view, our retained free cash flow as an attractive source of capital to support our investment program.
Mark Patten: Turning to our balance sheet with a net investment activity. In Q3 2024 are income producing gross assets reached $5 8 billion at quarter end, the increasing scale of our income producing portfolio continues to build and we expect to approach and perhaps eclipsed $6 billion by year end significant diversity and increase.
Mark Patten: The scale of our asset base continues to improve our credit profile.
Mark Patten: Turning to capital markets. We remained active on our ATM program in the quarter completing the sale of approximately $312 million of stock all on a forward basis at an average price of $31.04 per share.
Mark Patten: With no settlements during the quarter, our balance of unsettled forward equity totaled $626 million a quarter and.
Mark Patten: We expect to begin drawing upon this unsettled forward equity in the fourth quarter as a source of funds for our investment activity and paying down any outstanding balance on our revolver.
Mark Patten: Similar to last quarter, our current share price remains well above the weighted average price of our unsettled forwards of $27 29 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.
Mark Patten: For the third quarter, our diluted share count of $179 6 million included an adjustment for $2 7 million shares from our unsettled forward equity related to this treasury stock calculation.
Mark Patten: This represents a headwind of approximately one set to F. A vote per share this quarter and we estimate the headwind to F O per share for the full year in 2024 will reach two sense as we begin to settle this equity in the near term, we expect the headwind to shrink too at the minimus amount in 2020 five.
Mark Patten: During the quarter, we closed on the previously announced $450 million term loan, which was fully drawn and swapped at an all in rate of approximately four 9%.
Mark Patten: Our pro forma net debt to annualized adjusted EBITDA.
Mark Patten: As adjusted for unsettled forward equity was three five times at quarter end.
Mark Patten: We remain committed to maintaining a well capitalized balance sheet with low leverage and significant liquidity to continue to fuel our external growth as.
Mark Patten: As we noted last quarter, our leverage has trended below average levels over the past year is heightened that costs and capital markets volatility warranted a more conservative posture.
With the first fed cut materializing in September and capital markets normalizing our funding costs have improved.
Mark Patten: Thus, we expect to carefully and prudently increase our leverage from here to leverage levels more consistent with.
Mark Patten: With our average over the past several years.
Lastly, as we noted in the earnings press release, we have reiterated reiterated our 'twenty 'twenty four F O per share guidance range of $1.72 to $1.75.
Speaker Change: Established as Pete mentioned, our 2025 per share guidance range of $1.84 to $1.89 representing over 7% growth at the midpoint.
Speaker Change: Importantly, both of these guidance ranges require minimal equity issuance in 2025, which we believe is a testament to our front footed approach to capital raising.
Speaker Change: I'll turn the call back over to Pete.
Pete: Thanks Mark.
Pete: We are pleased with our third quarter results and remain.
Pete: Optimistic about the prospects for the business operator, please open the call for questions.
Speaker Change: Thank you.
Speaker Change: We will now conduct a question and answer session. If you would like to ask a question. Please press star one.
Speaker Change: Oh.
Speaker Change: A confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the stocking okay.
Speaker Change: That star one at this time, one moment, while we poll poppers question.
Speaker Change: Okay.
Speaker Change: Our first question comes from content.
Speaker Change: Duke with physical security. Please proceed.
content. Duke: Hey, good morning, guys. Thanks for taking my question and also for their early read into 2025, Oh. My first question is on the guidance which includes acquisitions.
Speaker Change: The acquisition guidance for the first time ever I think so I guess I'm curious why.
Speaker Change: Why now and providing that acquisition guidance and what gives you the confidence to put out.
Speaker Change: Our forward your acquisition guidance at this point and then.
Speaker Change: Do you think the upper single digit seven 8% implied Apple growths in that guide is a sustainable multi year growth rate.
Speaker Change: <unk>.
Speaker Change: Great. Thanks al handle.
Speaker Change: You know listen I think providing acquisition guidance really just you know it.
Speaker Change: It's a natural evolution and the maturation of the company you know that we've.
Speaker Change: Growing our tenant base Expansively from 100 tenants to 400 tenants our acquisition team has now been in their seats and seasoned over.
Speaker Change: Five years, and there's just more predictability and our forward pipeline than we've seen in the past.
Speaker Change: We also have a much more stable our cost of capital that allows us to look at deploying capital more consistently and reliably and so I think it's just it's a natural evolution and I think as as you've been following us for many years, you've seen we've been pretty predictable, we've been pretty transparent and I.
Speaker Change: But supporting the guide with some acquisition guidance.
Speaker Change: Appropriate.
Speaker Change: As we think about the out years you know it is early right. You know, we're just guiding for 2025 and and.
Speaker Change: We have a very robust business plan, we have a very.
Speaker Change: You know a differentiated investment strategy that allows us to deploy capital Accretively and are well positioned to continue to do that but I would short I would stop short of trying to give them growth rates beyond next year.
Speaker Change: Well I had to try them appreciate the color.
Speaker Change: One more maybe I was hoping you could talk about your bad debt of tenant credit assumptions embedded in the outlook for next year I'm curious if there's any potential.
Speaker Change: Opportunity for upside or conservatism baked in and maybe you can add some color on the watch list categories, you're monitoring today. Thanks.
Speaker Change: Sure.
The watch list is easy and you know as.
Speaker Change: As we define that the intersection of tenant credit risk of single B and below in the unit level coverage of one five continues to be under 100 basis points and continues to be in a good spot.
Speaker Change: Yeah.
Speaker Change: Historically generally as I hope you've seen there tends to be conservatism in and all of our guidance and in all of the assumptions that support guidance and in past years. As we've indicated you know as we tightened guidance are increased guidance throughout the range. One of the main drivers is the lack of.
Speaker Change: The materials Asian of credit events, you know that.
Speaker Change: That we've.
Speaker Change: Budgeted for <unk>.
Speaker Change: <unk> four.
Speaker Change: You know we provided some good credit loss statistics in our NAREIT deck up 30 basis points per annum you now as is our historical experience.
Speaker Change: You can assume you know guidance has some conservative assumptions starting from there.
Speaker Change: And so we'll see how the year plays in and how we work through these scenarios that may come at us or if they come at us, but we feel like we're in a good spot and.
Speaker Change: Certainly have the appropriate level of conservatism built into our guidance.
Speaker Change: Great great. Thank you I'll yield the floor.
Speaker Change: Thanks.
Speaker Change: The next question comes from Caitlin Burrows with Goldman Sachs. Please proceed.
Caitlin Burrows: Hi, Good morning, everyone, maybe on the funding side you guys were active with your ATM in the quarter. Despite already having unsettled forward chairs that you went through so could you just go through the thought process of when to use the existing forward Sharon's first is continue to issue more.
Speaker Change: I think so when do you use the existing forward shares I think we may have mentioned in the in the remarks that or expect.
Speaker Change: And to the fourth quarter will begin to settle a.
Speaker Change: A fair amount of that ex the are going into the end of the year. That's both to address our investment pipeline as well as to pay down anything we have outstanding on the revolver.
Speaker Change: I think from there probably reference it as well in the remarks that you know that gets.
Speaker Change: We've got a fair amount of dry powder that dry powder is probably a good three and a half quarters worth of.
Speaker Change: Our liquidity to execute and still stay.
Speaker Change: Below end of our leverage range so call it four six.
Speaker Change: And I think.
Speaker Change: Good news embedded in that as well as debt.
Speaker Change: Our assumptions around equity needs in 2025, and Theyre pretty you know pretty low amount of equity needed in fact very little.
Speaker Change: It's something we think we can address them.
Speaker Change: Oh wonderful.
Speaker Change: Okay.
Speaker Change: You're kind of breaking up for me I don't know that for everybody else can you still hear me.
Speaker Change: Yeah, I can hear you.
Speaker Change: Okay, and then maybe just moving over to the disposition side, maybe also like the watch list. As you guys are looking to sell properties I guess, what's driving you to dispose of the properties you choose to pursue kind of who are the buyers. How deep is that pipeline of buyers and is it generally other third parties.
Speaker Change: Yes, it's always other third parties I'm.
Speaker Change: On occasion, it may be tenants coming back to us, but mostly it's third parties.
Speaker Change: Really there's three reasons, we're going to sell an asset one is to manage industry concentrations as you can see a carwash exposure has been high and so we've been proactively trying to lighten up on that industry exposure.
Speaker Change: Really to create some more capacity continue to invest in that industry lightening up on individual tenants in the quarter, we sold an equipment share and again, we really like that tenant, but yeah to the extent that we're able to sell some assets off in the low sixes mid sixes, we can redeploy that cash.
Speaker Change: Little Accretively to continue to support that tenant relationship and then lastly, just selling assets that don't work for for whatever reason and you know.
Speaker Change: We see risk of.
Speaker Change: Tenant continuing to be able to pay the rent or you know in our.
Speaker Change: Lack.
Speaker Change: A probability that they wouldn't renew as we see through the unit level coverage and so selling those assets is as important to our business plan.
Speaker Change: Granularity and Fungibility in our real estate is an important fundamental of our portfolio. So we have good liquidity in our assets and there's a deep pool to for us to dispose into two local and regional sometimes a 10 31 motivated buyers.
Speaker Change: And we've demonstrated that since coming public and we'll continue to do that.
Got it thanks, maybe just as an update I could get that response much better I don't know if you guys are together sitting in different places, but that was very clear. Thank you.
Speaker Change: Great.
Speaker Change: Tend to be more clear the market anyway [laughter].
Speaker Change: Next question comes from Eric Borden with BMO capital. Please quickly.
Speaker Change: Hey, good morning, guys. Thanks for taking my question.
Eric Borden: Maybe just on the remainder of the 2024 acquisitions, you mentioned some possible M&A opportunities, maybe some singles and doubles.
Speaker Change: Closed.
Speaker Change: A little over $50 million today, which is above where you were the same time last year and so investments seem to be tracking well you know maybe if you could talk about how much you have under LOI or Psa.
Speaker Change: Yes.
Speaker Change:
Speaker Change: It's there's a lot of a lot of time left in the quarter and the fourth quarter tends to you know.
Speaker Change: Hasnt about volatility.
Speaker Change: You know it could be.
Speaker Change: A lot of deal volume or a few in <unk>.
Speaker Change: Little and so.
Speaker Change: Thank you know our general guide to the eight quarter average is probably a good indicator in kind of 250 ish.
Speaker Change: But it's really too soon to put a pin in that when.
When we go out to NAREIT and update our investor deck and give a good snapshot then but it shouldn't be materially different from that.
Speaker Change: And to be clear on the M&A, it's really supporting our tenant relationships and M&A.
Speaker Change: <unk> not us.
Speaker Change: Seeking to endeavor in any M&A transactions.
Speaker Change: Alright, thank you.
Speaker Change: And then looking to the 2025 acquisition guidance that you provided if we square that with your trailing.
Speaker Change: Trailing 12 months.
Speaker Change: Eight quarter average it seems to be implying that the acquisitions are a little lighter than expected. So is there something that youre seeing in the market that is preventing you to acquire more or is it potential conservatism given that we're one month after closing the three quarter books.
Speaker Change: Yeah, I think you know the <unk>.
Speaker Change: Consistent over the last kind of three or four quarters. We've we've indicated it's been a unique buying environment with the dislocation in the capital markets and a lack of competition, where we really have been pressing our advantage to put capital to work at rates and levels that that really are historic.
Speaker Change: Highs in my 20 year, plus career of investing and so we've been aggressive this year and and so I think thats part of it another part of it is as we've always said we wanted to communicate a business strategy. That's de risked from an execution perspective, and so supporting guidance with flat <unk>.
Speaker Change: <unk> I think is conservative and appropriate you.
Speaker Change: We're not going to come to the market with guidance that's predicated on US you know growing our activity 25, 50%.
Speaker Change: We just don't think that's prudent so theres a number of factors going on there I would also say that as we've said you know with with the normalization of the capital markets, we expect competition to them.
Speaker Change: A return to the market.
Speaker Change: Which could lead to the mis pricing of risk.
Speaker Change: The aggressive competitors and and you know to the extent that.
Speaker Change: That gets deals get priced away from us we wanted to be in a position, where we can be patient and prudent and conservative and so.
Speaker Change: We put a lot of thought into building. This 2025 business case to support guidance and.
Speaker Change: We believe it's imminent.
Speaker Change: Imminently achievable and conservative.
Speaker Change: Alright, Thank you for the time I'll leave it there.
Speaker Change: Thank you.
Speaker Change: The next question Crystal City.
Speaker Change: Please proceed.
Speaker Change: Okay.
Speaker Change: Hi, Thank you I appreciate.
Speaker Change: The guidance around the our acquisition outlook and you mentioned that you expect cap rate compression I guess over the course of the year, but youre not seeing it yet and I was just wondering could you just talk a little bit about sort of cap rate sensitivity on the short end versus maybe what we're seeing with the upward movement in the 10 year at this point and maybe how you think that.
Speaker Change: It will play out for cap rates may be able to sort of the first half of 'twenty five.
Speaker Change: Yes sure.
We compete against.
Speaker Change: Alternative forms of capital on the short end of the curve bank debt and and and the like for our tenant relationships.
Speaker Change: More of our competitors on the investment side and in the sale leaseback and that lease side or am I really competing against we're competing against them based on the long end.
Speaker Change: The curve kind of 10 year and long term financing as they match funds these long dated assets.
Speaker Change: You know, it's a the 10 year has been volatile.
Speaker Change: Three weeks ago is in the mid threes now it's in the low fours and that's.
Speaker Change: That's that's.
Speaker Change: Pretty volatile I think are high.
Speaker Change: 10 year supports us in and limits competition, but to the extent that you see 10 year in the mid threes.
Speaker Change: I think the leveraged a private buyer is going to be more aggressive and.
Create competition and downward pressure on cap rates so.
Speaker Change: It's going to be awhile before the banks come back in the low end is really in play as an alternative form of competitive capital I think we're more sensitive to the 10 year and what that does for our private competitors.
Speaker Change: Okay, and then I just wanted to ask you on your.
Speaker Change: Our coverage levels the.
Speaker Change: Coverage of under one times declined sequentially to 3% from I think over 4% last quarter can you just talk about what's going on there if anything and its and its 3% sort of where you think it would sort of stabilize in terms of ADR under one times.
Speaker Change: Yeah, I would stop short of saying.
Speaker Change: Saying that that is our expectation that stabilized there there is always going to be idiosyncratic ebbs and flows in that.
Speaker Change: The bucket, it's going to be less than a dozen of tenants and you know when you have master leases it could be a multiple.
Speaker Change: Multiple properties, specifically in the quarter, we had a and early childhood education operator that.
Speaker Change: <unk> was a size.
Speaker Change: 1% ABR that was.
Speaker Change: Was executing a turnaround play on some some sites and we were glad to see them finally get traction and get those sites open and operating and profitable.
Speaker Change: It was a strong credit we supported multiple times over the year. So it wasn't really a credit concern for us.
It was just took them some time to to get those sites to the spot where.
Speaker Change: They are out of that sub one bucket and glad to see that but it's going to be a idiosyncratic.
Speaker Change: It really gives us too much pause.
Speaker Change: Because generally it's backed by strong.
Speaker Change: Strong credits and and solid real estate.
Speaker Change: We're likely to see some noise in that bucket.
Speaker Change: Great. Thank you guys.
Speaker Change: Thank you Smedes.
Speaker Change: The next question comes from John <unk> with Wells Fargo. Please proceed.
Speaker Change: Hi, Thank you so I'll start on the investment activity side, just looking at the the terms here so cap rates ticked up a bit.
Speaker Change: You know really strong on the lease Escalations of two one and then great rent coverage.
Speaker Change: What allowed you to kind of get those turns here, especially the rent coverage step up versus your trailing eight quarters.
Speaker Change: Yeah, I wouldn't read too much into the rent coverage step up that number is really an output of kind of the mix of the industries that we do in any given quarter and and and so some of our industries have have higher coverage just by the nature of the industries like medical dental.
Speaker Change: Equipment rental and and things like that and some have lower like gyms and and.
Speaker Change: And things like that and entertainment bucket, so I wouldn't read too much into that number that's really just an industry mix I'd say big picture.
Speaker Change: As been as has been the commentary.
You know theres, just not a lot of capital providers out there in the middle market sale leaseback space currently and we're able to drive attractive terms with our Counterparties and that's what you see going on.
Speaker Change: Got it and then maybe just jumping to your top 10 tenants are there seems to be a fair bit of shake up there quarter over quarter, maybe if you could just talk about strategically the new entrants and the exits and how you think about shaping your book moving forward.
Speaker Change: Yeah.
Speaker Change: We always want to.
Speaker Change: Maintain diversity and I think the bigger picture from my perspective as having.
Speaker Change: 17 <unk>.
Speaker Change: 7% in our top 10 represents good diversity in and more importantly, having.
Speaker Change: 112% exposures through a bunch of tenants is good diversity, but also creates a good opportunity set to continue to invest.
Speaker Change: The names that came into our top 10.
Speaker Change: Our operators that we've been investing with in a series of transactions over.
Speaker Change: Multiple years or years, and as we continue to invest they grow and as they grow other guys, where we've not invested just fall out. So every quarter, we're going to have ebbs and flows in that.
Speaker Change: You know undefeated drive the current Fisher front fitness operators, a great operator, we've been doing deals with him for a long time.
Speaker Change: And has done a great job and we continue to see opportunities to grow with him in and do that and and then and so it's been nice to see them up there and you know certainly a named like and are comfortable with.
Speaker Change: But just given our diversity, it's natural to see.
Speaker Change: Movements in that top 10.
Got it thank you.
Speaker Change: Thank you.
Speaker Change: Once again to ask a question. Please press star one on your telephone keypad. Our next question comes from Ben Kim with Choice Securities. Please proceed.
Speaker Change: Thank you good morning.
Speaker Change: I was wondering if you can just provide some data points on.
Ben Kim: On the ABS market and see MBS market pricing and typically in a normal year, how how much of it.
Ben Kim: Capital sources are competitors to your business.
Ben Kim: Kind of like market share.
Speaker Change: Yeah generally in my experience in the ABS market is structured bonds that are rated are going to trade anywhere from 25 to 50 basis points wide of <unk>.
Speaker Change: Similar similarly rated corporate unsecured so if you assume.
Speaker Change: The Triple B REIT index it.
Speaker Change: Five ABS is through a similar level should be $25 50 basis points why do that.
Speaker Change: Then you got to talk about attachment points and valuation and the like.
Speaker Change: Which is beyond my expertise certainly a lot of people are.
Speaker Change: Far more active in that market.
Speaker Change: <unk> had better insight than we do at this point.
Speaker Change:
Speaker Change: So that said we.
Speaker Change: We see those guys as competitors.
Speaker Change: You know.
And elevated 10 year end.
Speaker Change: Widespread or less competitive.
Speaker Change: As that market becomes more robust and tightens they become more competitive and.
Speaker Change: It's really it ebbs and flows I would say there has been a trend of more and more capital.
Speaker Change: Supporting net lease investing as the asset class has matured and demonstrated great cash flow stability. So there is more and more capital organizing to come into the space. So it's not static.
Speaker Change: Competitive set is very dynamic.
Speaker Change: But it really just depends they tend to be more competitive on the bigger transactions, which is why we're staffed and organized to transact.
Speaker Change: At the at the $10 million $8 million to $10 million chunks that we transact.
Speaker Change: Thanks, and on the cash G&A guidance for 'twenty five the flight increase.
Speaker Change: Is that driven by just more hiring on the staffing or kind of inflationary pressures just curious what's driving that.
Speaker Change: Yeah. Thanks, Kevin I think if you look at our the guide on cash G&A.
Speaker Change: It's really a reflection of us investing in our platform continuing to invest in our platform. You know, it's clearly going to season into a as a percentage of our total revenue obviously continue to season favorably.
Speaker Change: So we think about investing in really non executive hires.
Speaker Change: Sort of an embedded normal inflation for a lot of the other GNL G&A elements, even though we don't have a lot of G&A levers outside of.
Speaker Change: Our infrastructure.
Speaker Change: So I think you know if you think about the range, it's going to be issues around timing of the higher or hires and in some of those normal kind of puts and takes.
Speaker Change: Okay. Thank you guys.
Speaker Change: Thanks, Kevin.
Speaker Change: The next question comes from Josh <unk> with Bank of America. Please proceed.
Speaker Change: Yeah, Hey, guys I just wanted to follow up on Mark's comments that there was I guess some dilution from the Treasury stock method I guess, it's like one sent now about reaching two cents I guess could you just kind of give us more color on how that's showing up in the guide for this year.
Speaker Change: And then it sounds like if I heard correctly 2025 assumes no kind of dilution from that just trying to think through kind of like the trajectory of how those kind of fade out.
Speaker Change: Okay.
Speaker Change: So as Mark noted in the prepared remarks, the treasury stock method on forwards was about a penny.
Speaker Change: Based on our current share price, it's likely to be around that same level in the fourth quarter. So that's what's assumed.
Speaker Change: As we look out into 2025 of course, the calculation is based in part on where our share price will be which is inherently hard to project.
Speaker Change: But as we continue to settle these forwards into year end, we would expect our year end forward unsettled balance to be a lot smaller and so as you start the year in 2025, we would expect that headwind to us.
Speaker Change: Based on our expectations I think are one to two <unk> range.
Really reasonable and I think maybe from a modeling standpoint, two might be a good starting point as you think about building. Your 2025 estimate but again, we'll continue to update you as the share price fluctuates and.
Speaker Change: To go from there.
Speaker Change: Oh.
Speaker Change: Okay, sorry, Rob it's a little hard to hear you are breaking up.
Speaker Change: Ill follow up offline. So I appreciate that and then Pete you you mentioned.
Speaker Change: Lightening up on car wash is that just a pure diversification play or something kind of specific to maybe your existing car wash.
Speaker Change: Portfolio or maybe just the industry in general.
Yes, it's just portfolio management and portfolio construction, we generally have a soft ceiling of 15% for any individual industry concentration in our washes ticked above that given the opportunity set there is nothing inherently.
Challenging in that industry that we see and we have plenty of opportunities to continue to invest but it's just it's more portfolio construction than anything else.
Speaker Change: Okay I appreciate that thanks Pete.
Josh: Thanks, Josh.
The next question comes from Michael Goldsmith with UBS.
Michael Goldsmith: Good morning, Thanks, a lot for taking my questions.
Michael Goldsmith: First question's just on the acquisition guidance, you know you've done $300 million a quarter over the last four you're kind of pointing to 250 ish for the fourth quarter and the guidance implies $2 50 ish a quarter going forward now typically your fourth quarter is when you've acquired the most and in Europe.
Michael Goldsmith: And kind of a lower run rate going forward. So is this kind of like the turning point, where acquisition volumes will start to slow due to competition or is this just you know.
Michael Goldsmith: Again, you kind of think that's even though the calls just being.
Michael Goldsmith: Good.
Michael Goldsmith: Conservative approach just given the lack of visibility and a lot of moving pieces in it.
Michael Goldsmith: The market today.
Speaker Change: Yeah, I think it's certainly the latter.
Speaker Change: As we've always said, we generally don't have visibility in our pipeline beyond 90 days.
Speaker Change:
Speaker Change: That's the normal transaction cycle and.
Speaker Change: We do think we are.
Speaker Change: We're at an inflection point in the capital markets its going to change the competitive landscape and given that dynamic we wanted to be conservative relative to our investment volumes and.
Speaker Change: Historically, we haven't provided investment volume so it's safe to assume when we do start providing them, it's going to have the appropriate level of conservatism baked in.
Speaker Change: Got it and then.
Speaker Change: One thing we noted was that there was a decrease in the percentage of sale leaseback transactions. This quarter is there anything.
Speaker Change: Specifically within the market there is that the inspection that was like the greater competition.
Speaker Change: Just trying to get an understanding of the market overall.
Speaker Change: No nothing I mean.
Speaker Change: It's it's not material at 89% or 90%, we're still kind of vast majority of sale leasebacks. We just happen to have the opportunity to do some existing lease transactions that made sense during the quarter.
Speaker Change: I think if anything.
That's probably a more normalized level and that we've been heavy into sale leasebacks given the.
Speaker Change: The dislocation in the capital markets in the past quarters, and so there is theres nothing really.
Speaker Change: To read into that number is changing materially.
Speaker Change: Thank you very much good luck in the fourth quarter.
Speaker Change: Thank you much.
Speaker Change: Our next question comes from Greg Mcginniss Scotiabank. Please proceed.
Speaker Change: Hey, good morning.
Speaker Change: Just given the 10 year treasuries are back to levels not seen since.
Speaker Change: July.
Speaker Change: What are you seeing in the capital markets or amongst your competitive set that's leading you to believe you're going to have greater competition next year.
Speaker Change: Yeah.
Speaker Change: Yeah listen it's you know it.
Speaker Change: It seems like the 10 year's high it backed up.
Speaker Change: No.
Speaker Change: Three weeks goes in the mid.
Speaker Change: Mid threes and so there's certainly volatility in.
Speaker Change: I would expect.
Speaker Change: To level out and so.
Speaker Change: You know, we're being conservative and.
Speaker Change: We're assuming that the 10 year is going to move around and May move against us I lower such that competition reorganizes.
Speaker Change: I think the other part of it is spreads spreads have come in to historically tight levels across all fixed income instruments.
Speaker Change: Which as you know.
Speaker Change: And equally important component of that.
Speaker Change: So if the 10 year would stick around this level or potentially move higher do you think that leads to a more favorable competitive environment for you.
Speaker Change: I do yeah.
Speaker Change: Okay.
Speaker Change: Just last one for me.
Speaker Change: <unk> Q4 F O guidance fairly wide three cents is that just potential treasury share dilution and equity issuance timing or are there other factors being taken into consideration there.
Speaker Change: I think thats going to be the biggest driver.
Speaker Change: With $600 million of.
Speaker Change: Uh huh.
Speaker Change: Unsettled forwards.
Speaker Change: I'm not really sure about the timing of when that's going out you can assume there is some.
Speaker Change: The volatility in that.
Speaker Change: Okay. Thank you.
Speaker Change: Yeah.
Speaker Change: The next question will come from John Babcock with B Riley. Please proceed.
Speaker Change: Good morning.
Speaker Change: Hum on the competitive environment are you seeing anything kind of tangible at this point I mean, you mentioned, it's not impacting the pipeline but are there.
Speaker Change: Competitors either bidding for deals are talking to tenants that maybe you weren't in the space for the last couple of years or that.
Speaker Change: Good morning, maybe space before that and have now entered just given.
Speaker Change: And if volatility and volatility in the 10 year, but maybe where expectations of where rates are going to go.
Speaker Change: Yeah. It's just it's an overall feeling and sense when you're doing the negotiating 37 transactions in the quarter Theres a lot of different competitive dynamics in each of those transactions and.
Speaker Change: We're dealing with 37 different counterparties, who are out there sourcing capital through a variety of different Matt.
Speaker Change: Sources.
Speaker Change: It's it's not any one data point, but just the overall sense of the market and I think you can say.
Speaker Change: You can see that and feel it when.
Speaker Change: Spreads come in in the treasuries are in the mid threes people are feeling a lot more bullish than bidding more aggressively in.
Speaker Change: When spreads gap out in treasury rates gap out.
Speaker Change: They backup and so there's there's certainly natural ebbs and flows and competition in the capital markets and we live it on a day to day basis.
Speaker Change: Okay, and then maybe on the tenant partner side, I mean, what's kind of broadly speaking the general driver of them seeking your financing today and is it more kind of refinancing existing liabilities or is it kind of growth still.
Speaker Change: It's the vast majority is going to be growth.
Speaker Change: Either supporting them in individual M&A activity or them developing sites and providing development capital.
Speaker Change: Very little little of it is refinancing.
Speaker Change: Past liabilities.
Speaker Change: Some but not a ton.
Speaker Change: Okay, and then given some of the broad pressures, we're seeing in the restaurant industry, especially amongst smaller operators.
Speaker Change #100: I always tenant performance and coverage looking in the restaurant portion of the portfolio, both kind of on the <unk> side in the casual dining side.
Speaker Change #100: I would start by saying most of the pressure in the restaurant industry as we're seeing in large operators.
Speaker Change #100: The Red lobster.
Speaker Change #100: Right as you know these large systems that.
Speaker Change #100: Are able to get unsecured corporate debt, which really becomes the catalyst that trips a lot of these these companies.
Speaker Change #100: The smaller regional operators that we see are less likely to have that that lever and really are capitalized mostly with debt with equity capital and real estate financing.
Speaker Change #100: That said, we are seeing some pressures in the restaurant space.
Speaker Change #100: You know, but I would say that youre seeing topline sales pressures.
Speaker Change #100: So this is topline sales are off.
Speaker Change #100: But.
Speaker Change #100: Seeing some expansion in margins as the.
Speaker Change #100: <unk> asked the inflationary pressures of labor and cost of goods.
Speaker Change #100: Okay.
Speaker Change #100: Falloff, such that I would expect overall, our restaurant exposure to be roughly flat to maybe down.
Speaker Change #100: 10, or 20 basis points on coverage.
Speaker Change #100: Yeah.
Speaker Change #100: Okay I appreciate the color.
Speaker Change #101: Thank you.
Speaker Change #102: Thanks, Jeff.
Speaker Change #103: The next question comes from Ken <unk> with Evercore ISI. Please proceed.
Speaker Change #104: Thank you good morning, perhaps just building on that last topic, if possible. It looks like your overall at the portfolio level coverage unit level coverage has drifted down modestly let's call. It from the 394 times to three six here at 930 and were there other does that imply basically that.
Speaker Change #104: The unit unit level cash flows are growing a little slower than.
Speaker Change #104: Your average one 7% escalators across the portfolio or is it too generic and it's more specific to certain industries I'm, just curious which sectors are doing a little better than what you might be feeling a little more pressure.
Speaker Change #105: Yes, I think it's going to be.
Speaker Change #105: Specific to specific industries, particularly like.
Speaker Change #105: Building supply, which.
Speaker Change #105: It can go from a 22 of 10 and really have an impact or equipment rental sales equipment rentals and sales.
Speaker Change #105: Equipment share they can they can go from 12 to 10 or something along those lines generally and car washes.
Speaker Change #105: Flat to down 10 basis points early childhood is up 10 basis points my coverage medical dentals flat <unk> or down 10 basis points.
Speaker Change #105: Just taking down our industry list here, so mostly youre going to see it flat to up flat to either downtown or up 10.
Speaker Change #105: But some of those different industries like building materials and equipment supplier going to have more volatility.
Speaker Change #106: Thank you and then just real quickly that you go obviously 711 has been reported to be out there marketing a large portfolio.
Speaker Change #107: Do you feel you've added to your consistently to your convenience store sector segment.
Speaker Change #108: Do you think Theres more just a 711 issue regarding maybe their health of those particular stores and not much of a read through to the C store industry. Overall I'm, just curious what color or thoughts you might have there. Thank you.
Yes, I think the 711 and I think thats more just capital allocation for that company then.
Speaker Change #109: Things are going on systemically in the C store space, yes ways as a convenience store operator that populated our top 10, that's growing and seeking.
Speaker Change #109: Seeking capital to facilitate their growth.
Speaker Change #109: <unk> smart.
Speaker Change #109: C store operator that has been in our top 10, they're growing and so I don't there's nothing going on.
Speaker Change #109: In the space that gives me concern and we continue to deploy capital there I think the 711.
Speaker Change #109: Opportunity is more specific to that tenant.
Speaker Change #110: Great. Thank you.
Speaker Change #109: Thank you.
Speaker Change #111: The next question comes from Spenser alloy with Green Street. Please proceed.
Spenser alloy: Thank you.
Speaker Change #113: The lion's share of your deals concluded in the quarter was from recurring business can you just talk about some of the newer relationships in the quarter what industry, it's about ethane and based on our current portfolio.
Speaker Change #113: Just the fact that they're also going to become a perfect time does not.
Speaker Change #113: Yeah. That's that's our business model is sourcing new relationships in.
Speaker Change #113: Continuing to grow with those relationships.
Speaker Change #113: As I've said in the past relationships over time tend to outgrow us in.
Speaker Change #113: <unk>.
Speaker Change #113: Alternative sources of capital as they grow larger in and have more diverse funding options.
Speaker Change #113: Options.
Speaker Change #113: We generally source in all our industries, we conduct sourcing activity, we attend industry conference.
Speaker Change #113: Hence in and seek to build relationships and deploy capital in those industries and so those sourcing efforts are really what brings the incremental investment opportunities.
Speaker Change #113: Overtime.
Speaker Change #113: We expect that to kind of be an 80 20.
Speaker Change #113: Mix and so it's good to see 20% new relationships coming into your portfolio because.
Speaker Change #113: Certainly.
Speaker Change #113: Cohort of tenants that are kind of move on at transact it somewhere else.
Speaker Change #114: Okay, Great that makes sense and then just on your asset base continues to grow in your underwriting Martin Martin deals each quarter as you mentioned, it's quite an argument endeavor.
Speaker Change #114: Comfortable are you with your current headcount or does the acquisition and underwriting.
Speaker Change #114: We need to keep growing and when do you think that head.
Speaker Change #114: Head count would be added.
Speaker Change #116: Yeah, that's a that's a constant process Spencer, we're always hiring training new people online to build the organization to both underwrite and process clothes and manage a larger portfolio. So.
Speaker Change #116: It's very much a dynamic organization and infrastructure that we're constantly investing in and I think that I think you see that in our G&A guide.
Speaker Change #116: Thank you.
Speaker Change #117: Awesome. Thank you very much.
Thank you at this time to ask a question Thats Star one on your telephone keypad.
Speaker Change #118: There are no further questions at this time I would like to turn the floor back over to Pete My life for closing comments Kristen.
Speaker Change #119: Great. Thank you all very much for your time today, we look forward to meeting with you all that in Vegas for a REIT.
Speaker Change #119: Montana.
Speaker Change #119: Thanks very much.
Speaker Change #120: Thank you. This does concludes today's teleconference. We thank you for your participation you may disconnect your lines.
Speaker Change #120: [music].
Speaker Change #120: Hum.
Speaker Change #120: [music].
Speaker Change #120: Hum.
Speaker Change #120: Mhm.
Speaker Change #120: Okay.
Speaker Change #120: Yeah.
Speaker Change #120: [music].
Speaker Change #120: Okay.