Q1 2025 Essential Properties Realty Trust Inc Earnings Call
Speaker Change: Good morning, ladies and gentlemen, and welcome to the Essential Properties Realty Trust's First Quarter 2025 Earnings Conference Call. This conference call is being recorded, and a replay of the call will be available three hours after the completion of the call for the next two weeks.
Speaker Change: On the call. This morning are Pete and avoid he's president and Chief Executive Officer, Mark Patten, Chief Financial Officer, Max Jenkins, Chief Operating Officer, a J P L Chief investment Officer, and Rob Salisbury head of corporate finance and strategy.
Rob Salisbury: It is now my pleasure to turn the conference over to Rob Salisbury.
Rob Salisbury: Thank you operator, good morning, everyone and thank you for joining us today for our Central properties first quarter 2025 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.
Rob Salisbury: We're looking statements and we may not release revisions to these forward looking statements to reflect changes after the statements were made.
Rob Salisbury: 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.
Pete: With that I'll turn the call over to Pete.
Pete: Thank you Rob and thank you to everyone for joining us today for your interest in essential properties in the first quarter. Despite a choppy capital markets backdrop. The operating environment has remained favorable for our business as our team continues to source attractive investment opportunities focusing on middle market sale leasebacks with growing.
Pete: Operators within our targeted industries.
Pete: During the quarter, we invested $308 million as we continue to support our existing relationships, which contributed 86% of our investments.
Pete: Underscoring the value of recurring business within our tenant base.
Pete: Our portfolio also continued to perform well with tenant credit trends and same store rent performance healthy and in line or slightly ahead of our expectations.
Pete: We further solidified our capital position during the quarter issuing over $300 million of equity and upsizing our credit facility.
Pete: Leaving us with pro forma leverage of three four times and liquidity of $1 5 billion.
Pete: Which positions us well to continue to grow our portfolio.
Pete: And continue to generate sustainable earnings growth for our shareholders.
Pete: Continued healthy portfolio trends and the attractive investment environment remains supportive of our 2025 business plan.
Pete: As a result, we have reaffirmed our 2025 <unk> per share guidance range of $1 85 to $1.89.
Pete: On our fourth quarter earnings call, we discussed our expectation that competition could build as capital markets normalized resulting in modest cap rate compression.
Pete: We continue to expect our investment cap rates in 2025 to be slightly lower than 2024.
Pete: However, the recent heightened volatility in the capital markets has resulted in less competition than we had anticipated at the beginning of the year.
Pete: Overall, our investment pipeline is supportive of the upper half of articulated investment guidance of $900 million to $1 1 billion.
Pete: Importantly, we do not need to raise any incremental capital to achieve our guidance range. This year.
Pete: Turning to the portfolio, we ended the quarter with investments in 2138 properties that were leased to 423 tenants operating in 16 industries or.
Pete: Our weighted average lease term stood at 14 years at quarter end in line with a year ago with just five 4% of annual base rent expiring over the next five years from a tenant health perspective, our weighted average unit level coverage ratio was three five times this quarter.
Pete: Indicative of the profitability and cash flow generation by our tenants at the unit level.
Pete: With that I'd like to turn the call over to Max Jenkins, Our Chief operating officer, who will provide an update on our investment activities in the current market dynamics Max Thanks.
Max Jenkins: Thanks, Pete on the investment side during the first quarter, we invested $308 million through 21 separate transactions at a weighted average cash yield of seven 8%.
Max Jenkins: Our investment activity in the quarter was broad based across most of our top industries with no notable departures from our well defined investment strategy.
Max Jenkins: This quarter, our investments had a weighted average initial lease term of 17 five years.
Max Jenkins: Weighted average annual rent escalation of two 2% generating a strong average GAAP yield of nine 4%.
Max Jenkins: Our investments this quarter had a weighted average unit level rent coverage of three times and the average investment per property was $5 5 million.
90% of the investments this quarter were sale leaseback transactions.
Max Jenkins: Looking ahead, our investment pipeline remains strong across all of our targeted industries.
Max Jenkins: <unk> and our pipeline is relatively consistent with our first quarter transactions with cap rates in the high 7% range and strong contractual escalations, which is supportive of our long term growth trajectory.
Max Jenkins: Including $135 million of investments closed subsequent to quarter end, we have invested $443 million year to date, providing a line of sight to our guidance range that is encouraging at this early point in the year.
Jay: With that I'll turn the call over to a J P O our chief investment Officer, who will provide an update on our portfolio and asset management activities Hey, Jay.
Jay: Thanks, Max at a high level, our portfolio credit trends remain healthy with same store rent growth in the first quarter at one 5% up slightly from last quarter Tennant.
Jay: Tenant credit events remain muted with occupancy of 99, 7% and collections are effectively 100%.
Jay: There were no noteworthy credit events during the first quarter, we continue to work through the Zips car wash bankruptcy, which impacts three of our properties and approximately 20 basis points of our ABR.
Jay: Given the ongoing nature of the bankruptcy. This is premature to discuss any expectations around our lease on these three properties. However, as an update I would note that this tenant remains current on their rental obligations.
Jay: From a tenant concentration perspective, our largest tenant represents three 9% of our ABR at quarter end and our top 10 tenants now account for just 17, 3% of our ABR.
Jay: That diversity is an important risk mitigation tool and differentiator for us.
Jay: It is a direct benefit of our focus on middle market operators, which offers an expansive opportunity set.
Jay: Our car wash industry exposure further rationalized to 13, 9% of ABR comfortably below our soft ceiling of 15%.
On the disposition front after a busy fourth quarter, our asset sale activity normalize in the first quarter. We sold 11 properties. This quarter for $24 3 million in net proceeds. This represents an average of approximately $2 2 million for property highlighting the importance of owning fungible liquid properties, which allows us to proactively manage portfolio risk.
Jay: The dispositions this quarter were executed at six 9% weighted average cash yield over the near term, we expect our disposition activity to be consistent with our trailing eight quarter average driven by opportunistic asset sales and ongoing portfolio management activity.
Jay: With that I'd like to turn the call over to Mark Patten, Our Chief Financial Officer, who will take you through the financials the balance sheet for the first quarter.
Mark Patten: Thanks, a J overall, we had a good first quarter highlighted by the strong level of investments that Max outlined at a seven 8% cash cap rate.
Mark Patten: <unk> per share of 45 cents represented an increase of 7% versus Q1 of 2024.
Mark Patten: On a nominal basis, our <unk> totaled $85 7 million for the quarter.
Mark Patten: Which is up $14 $6 million over the same period in 2024, an increase of 21%.
Mark Patten: <unk> performance was consistent with our expectations as reflected in our guidance range updated last quarter.
Mark Patten: Total G&A in Q1, 2025 was $11 $5 million versus $9 4 million for the same period in 2024, which is consistent with our expectations. The majority of the year over year increases related to increased compensation expense as we continue to invest in our team.
Mark Patten: Our recurring cash G&A was $7 $6 million this quarter.
Mark Patten: Which is consistent with our guidance range of $28 million to $31 million for the year and represents a five 9% of total revenue, which compares favorably to the six 2% in the same period a year ago.
Mark Patten: We declared a cash dividend of <unk> 29, five cents in the first quarter, which represents an <unk> payout ratio of 66%.
Mark Patten: Our retained free cash flow after dividends, which we view as an attractive source of capital to support our growth goals continues to build reaching $30 $1 million in the first quarter equating to over $120 million per annum on a run rate basis.
Mark Patten: Based on our investment guidance for 2025 that would represent more than 10% of our capital needs to fund our external growth.
Mark Patten: Turning to our balance sheet with a net investment activity. In Q1 2025 are income producing gross assets reached $6 3 billion at quarter end, the increasing scale of our income producing portfolio continues to build.
Mark Patten: Proving our credit profile on.
Mark Patten: On the capital markets front, we issued $292 million in an equity offering in March which complemented our ATM activity of approximately $21 million.
Mark Patten: Giving us a total of $313 million of equity raised in the quarter.
Mark Patten: We settled $279 million of forward equity in the quarter with a portion of the proceeds utilized to repay our revolving credit facility balance.
Mark Patten: Our balance of unsettled forward equity totaled $410 million at quarter end, which we expect to utilize to fund our near term investment activities, while preserving our flexibility by keeping our $1 billion revolver fully available.
Mark Patten: Similar to last quarter, our share price remained above the weighted average price of our unsettled forward equity.
Mark Patten: $30.51 at quarter end.
Mark Patten: 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 first quarter, our diluted share count of 191 million shares included an adjustment for $1 1 million shares from our unsettled forward equity related to this treasury stock calculation.
Mark Patten: This represented a modest headwind to our <unk> per share for the quarter.
Mark Patten: Based on our current share price, we continue to expect a modest headwind again in the second quarter.
Mark Patten: Our pro forma net debt to annualized adjusted EBITDA as adjusted for unsettled forward equity was three four 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 and allow us to service and protect our tenant relationships. Despite the choppy capital market environment.
Mark Patten: Our liquidity was bolstered this quarter with the previously announced closing of our amended $2 $3 billion senior unsecured credit facility, which provides $1 billion of capacity on our revolver along with the aforementioned equity activity.
Mark Patten: Lastly, as we noted in the earnings press release, we have reaffirmed our 2025 <unk> per share guidance range of $1 85 to $1 89.
Mark Patten: Representing over 7% growth at the midpoint importantly, this guidance range requires no incremental equity issuance, which we believe is a testament to our front footed approach to both investments and capitalization.
Pete: I'll turn the call back over to Pete Thanks.
Pete: Thanks Mark.
Pete: In summary, we are happy with our first quarter results and remain excited about the prospects for the business.
Speaker Change: Operator, please open the call for questions.
Speaker Change: At this time, if you would like to ask a question. Please press the star and one on your telephone keypad.
Speaker Change: With draw yourself from the queue at any time by pressing star two.
Speaker Change: Again that is star one.
Speaker Change: And we will take our first question from Spencer Glimcher with Green Street. Your line is open.
Spencer Glimcher: Thank you and good morning.
Spencer Glimcher: Can you comment on how youre thinking about the ongoing tariff situation in regards to tenant health or are you guys expecting any impact attendance and portfolio.
Spencer Glimcher: So we are not.
Spencer Glimcher: Obviously, we're watching it closely as it unfolds, but given the fact that we're 93% service and experience based.
Spencer Glimcher: And not really a lot of goods.
Spencer Glimcher: The tariff impacts will be very tangential to our operators.
Spencer Glimcher: But obviously, we pay close attention to the credits in the portfolio, but I think we'll be in a pretty good spot.
Speaker Change: Okay. Thank you and then I know you mentioned, there's been less competition than expected thus far in 'twenty five is it fair to say that that's a one.
Spencer Glimcher: <unk> spread.
Across all of your targeted industries are there any.
Spencer Glimcher: Market.
Spencer Glimcher: Portfolio, where you're seeing outsized competition.
Spencer Glimcher: Yeah, I wouldn't really characterize it across industries, we're certainly finding.
Spencer Glimcher: More competition and bigger transactions.
Spencer Glimcher: The larger the deal the more eyes that are on it and larger credits the bigger bigger the credit the more eyes are on it and the more comp comp.
Spencer Glimcher: Competitive to those opportunities become so small granular transactions you know in the $5 million to $10 million range in the mid size operators that we deal with day in day out is it hasnt been as competitive.
Spencer Glimcher: Great. Thank you so much.
Spencer Glimcher: Thank you Spencer.
Speaker Change: We'll move next to Eric <unk> with BMO capital markets. Your line is open.
Eric: Hey, good morning, everyone.
Speaker Change: Just given the strong acquisition volumes in the first quarter and a solid start to the second quarter.
Speaker Change: Liquidity is full and the balance sheet continues to improve what's what's really the governing factor from raising the acquisition guidance today.
Speaker Change: Yes, hi, guys.
Rob Salisbury: Rob to handle that one.
Speaker Change: Hey, Eric.
Speaker Change: So youre right to point out that we're off to a great start to the year on volume cap rates have been coming in pretty favorably as well and I think as we've talked about our portfolio tenant credit continues to evolve very favorably as well.
Speaker Change: We hiked guidance last quarter.
Speaker Change: And while we're off to a great start in the balance sheet is fully loaded.
Speaker Change: Still pretty early in the year and we have visibility on the pipeline for call. It 60 to 90 days and typically there's a little bit of a lull in the summertime and then people come back to school in September and there was more transaction volume into year end. So while we have some great visibility into <unk>, it's still pretty early in the year and we'll just see how it evolves from here.
Speaker Change: Yes.
Speaker Change: Okay, great. Thanks, and then.
Speaker Change: I appreciate that.
Speaker Change: Then Dave <unk> Buster's saw that had moved into the top 10, just curious on the investment thesis there was it strong.
Speaker Change: Strong sponsor relationship or.
Speaker Change: Just curious on any color incremental detail you can provide on the Dave <unk> Buster's at acquisition.
Speaker Change: Hey, Jay why don't you tackle that one point or so.
Speaker Change: Dave and Busters as a management team or a company that we've known prices Theyre part of 15 years. So we were presented with the opportunity to do a sale leaseback.
Speaker Change: We structured our lease form which provides ongoing unit level reporting.
Speaker Change: The rents that we're generating greater than two times coverage went into it and we invest in submarkets that we really like the real estate debt position your other national retailers.
Speaker Change: It seemed like a really good risk adjusted opportunity to make an investment and then do you have anything to add on on kind of how the deal came to US sure. Eric I note that we participated in various sale leaseback transactions over the years with the main event, Dave <unk> Buster's team and.
Speaker Change: And historically, they always price away from us and in Q1 were presented a unique opportunity and less competition because of the volatility in the capital markets.
Speaker Change: We were able to generate some pretty attractive pricing and terms and.
Speaker Change: It was kind of a unique opportunity for us to transact there.
Speaker Change: Right.
Speaker Change: I would add given our diversity through to top 10 at one 7%.
Speaker Change: It has higher prominence than than probably warranted and.
Speaker Change: Many of our competitors that would be down around a 15% to 20.
Speaker Change: Tenants so good investment known for a while while structured good pricing and we feel good about it.
Speaker Change: Well. Thank you very much I will leave it there.
Speaker Change: Okay. Thank you.
Speaker Change: We'll take our next question from Michael Goldsmith with UBS. Your line is open.
Michael Goldsmith: Good morning, Thanks, a lot for taking my question, maybe just a follow up on the Dave and Busters.
Speaker Change: Thank you have a good relationship there, though it does seem right.
Speaker Change: Operating metrics for the company had been a bit softer with negative comparable sales in and some declining traffic. So just kind of get a sense of.
Speaker Change: It sounds like you've got good rent coverage and you're comfortable with the markets, but just trying to get a sense of.
Speaker Change: Your comfort level overall with the business.
Speaker Change: In this environment.
Speaker Change: Sure and listen we we've been investing in the family Entertainment space for a long time and have strong conviction there.
Speaker Change: We're making 20 year investments and so you know.
Speaker Change: Six months operating environment really has limited impact on that long duration.
Speaker Change: Investment in and you know ultimately, we we own the real estate that generates the cash flows and we're seeing your to the debtholders and were senior to the equity and while there may be some noise around the equity story.
Speaker Change: There isn't noise around the landlord collecting rent story.
Speaker Change: In fact in our diligence.
Speaker Change: Found in Dave <unk> Buster's is only closed two sites.
Speaker Change: And it's a history and we feel eminently comfortable with the real estate that we own.
Speaker Change: That's very helpful context, and then.
Speaker Change: Beyond <unk> is there anything else on the watch list or any sort of notable movement on and off I also know you Randy you have very good visibility into your tenants.
Speaker Change: Any sort of evolving dynamics that you're noticing are keeping an eye on.
Yes.
Speaker Change: AJ, what's apparent watch list, so a one 6% down 50 basis points quarter over quarter. So the watchlist is in a good spot. The watch list tends to be comprised of a bunch of idiosyncratic.
Speaker Change: Operator.
Speaker Change: Level events, nothing really thematic across industries or property types and so it's in a good spot that's down quarter over quarter.
Speaker Change: You should expect any sort of credit events or are well baked into our guidance and.
Speaker Change: Overall, we feel good about where the portfolio sits today.
Speaker Change: Thank you very much good luck in the second quarter.
Speaker Change: Great. Thank you.
Speaker Change: Yes.
Speaker Change: We'll take our next question from Heimdall site Q stay with Mizuho.
Speaker Change: Mizuho Your line is open.
Speaker Change: Thanks, Good morning, guys.
Speaker Change: Yeah.
Yes.
Speaker Change: Good to hear from you. So I had a couple of quick ones first.
Speaker Change: Just a follow up one more on the David Busters, you've mentioned in the coverage with more than two X I was hoping we could get a bit more from you guys in light of some of the.
Speaker Change: Question is we've heard from investors about the discretionary nature in history of this tenant so maybe any color on.
Speaker Change: If you can get a bit more specific with the coverage and then maybe color on the rent bumps and that term.
Speaker Change: What's of these leases.
Speaker Change: Yes.
Speaker Change: Yes.
We generally don't disclose tenant specific.
Speaker Change: <unk>.
Speaker Change: Coverage in the lease term would generally be consistent.
Speaker Change: 15% to 20 years with.
Speaker Change: 2% plus bumps.
Speaker Change: And the master leases north of two times.
Speaker Change: Absent of getting specific.
Speaker Change: Okay.
Speaker Change: Fair enough I appreciate that Pete and then one more maybe you guys could perhaps give us a bit more color on the transaction environment broadly out there last quarter Youre seeing more competition from private equity this quarter less.
Speaker Change: Curious if you think theyre waiting on the sideline for more stability and will be perhaps more active in the second half I know a lot of them are raised capital. So.
Speaker Change: They need to deploy.
Speaker Change: Our deals taking longer any re trading any any thoughts on cap rates in the second half would appreciate just more context and color on the transaction environment. Thank you.
Max Jenkins: Sure Max why don't you tackle that please Cherokee and when we early in the year.
Speaker Change: Spreads are pretty tight and we noted increased competition.
Max Jenkins: There was less volatility.
Max Jenkins: But then.
Speaker Change: The volatility has continued to persist in.
Speaker Change: And so some of that competition is being noted has has diminished.
Speaker Change: However, with larger portfolio as broadly marketed deals.
Speaker Change: We still see it there and some pretty more efficient pricing. However, our bread and butter has always been those kind of smaller follow on repeat business sale leaseback transactions with our tenant partners and and so there were still generating adequately attractive risk adjusted returns and the pipeline remains strong for us and we're focused on servicing.
Speaker Change: Our relationships and providing that surety of close with our tenant partners.
Speaker Change: As the markets normalize we do expect competition to continue to compress cap rates, but we're frankly not seeing that right now, but we do expect it to probably happen once the markets normalize.
Speaker Change: I would add I think there is a growing appreciation for the asset class and the durability of the asset class.
Speaker Change: The longer.
Speaker Change: <unk>.
Speaker Change: There is an operating track record of solid stable performance I think over time, it's going to continue to attract capital in and make the market more efficient.
Speaker Change: That's great guys. If I could ask a quick follow up on just if this would lead you to perhaps be more active in the first half of the year or maybe the first.
Speaker Change: Two to three quarter than you were historically would have been just.
Speaker Change: In this scenario, where you seem to have just more of an opportunity in front of you and as you outlined lots of capital at your disposal.
Speaker Change: Yes, I think I think you see that you certainly see it in the numbers you see it and this.
Speaker Change: This is Laura our largest first quarter print.
Speaker Change: And going along with that is our highest GAAP yield at 94, right. So let's not ignore the fact that.
Speaker Change: Right.
Speaker Change: Gone, losing 10 to 20 basis points on the initial cap rate we gained.
Speaker Change: Significant economics throughout the license to the life of these leases and so the narrative that this is a great buying environment for us.
Speaker Change: I was talking about.
Speaker Change: Pretty much all through last year continues and we are working very hard to capitalize on it.
Speaker Change: Great.
Speaker Change: Thank you appreciate it.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: We'll move next to Caitlin Burrows with Goldman Sachs. Your line is open.
Caitlin Burrows: Hi, Good morning, maybe just following up on that investment volume opportunity. It does seem like your business could be somewhat reliant on your operators expanding so just wondering what impact you've seen or expect could be seen on any of your tenants and like their interest or ability to expand and how that could impact your volumes.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Theres been a consistent sources of opportunities for us are our tenants continue to engage with us on expansion and M&A.
Speaker Change: M&A and development opportunities in these industries that we've targeted.
Speaker Change: <unk>.
Speaker Change: While that activity May day.
Speaker Change: Diminish at the margin I think the lack of competition.
Speaker Change: Diminish as well such that we continue to be well positioned as the first and last call and Val.
Speaker Change: <unk> will partner to these guys and so it's a steady flow of business and we provide great disclosure around.
Speaker Change: Our investment activity on a quarterly basis, and there has not been a ton of variability nor do we expect it.
Speaker Change: Yes, no definitely seems like a steady business, which is surprising but great maybe.
Speaker Change: Maybe on the leverage side.
Speaker Change: Guys are at three four times like you mentioned, which for <unk> is quite low. So I was wondering if you could go through if there are any circumstances.
Speaker Change: Inc could come up not that they're necessarily likely but in what scenario would that leverage go up.
Speaker Change: Yes, I'm wondering what you can talk about on the leverage side.
Mark Patten: Mark why don't you tackle that please yes, I mean look I guess.
Mark Patten: Historically, we've been at about call. It 45 46 times.
Speaker Change: We have been.
Mark Patten: Thoughtfully over <unk>, probably over the last year and a half.
Speaker Change: Given just the dynamics between the cost of our equity and the cost of debt.
Mark Patten: As we think about it all.
Mark Patten: Ill kind of come at it maybe slightly differently for you. If you think about that four six times.
Mark Patten: I've probably got.
Mark Patten: We've probably got 445 quarters worth of liquidity.
Mark Patten: We would reach that four six times. So if you think about that that kind of gets you through kitchen into 2026.
Mark Patten: Say it another way.
Mark Patten: You think about our unsettled forward equity at $410 million, how you think about R. R.
Mark Patten: Recurring free cash flow through the next three quarters at about 90, even at the pace of dispositions.
Mark Patten: I referenced that is a good $560 million worth of liquidity before you're using leverage so we anticipate remaining pretty conservative on the leverage front.
Mark Patten: Alright. Thanks.
Speaker Change: We will take our next question from John Keller Celski with Wells Fargo. Your line is open.
Speaker Change: Got it.
Speaker Change: Thank you good morning.
Speaker Change: Maybe just on the credit side would you mind talking us through the increase in the sub one times coverage bucket I think there is.
Speaker Change: 70 bps quarter over quarter.
Speaker Change: Yes, I think it's all going to be kind of idiosyncratic stuff, but any call outs. There that you would point to I wouldn't call anything out.
Speaker Change: It's certainly a data point that we pay attention to but.
Speaker Change: That in and of itself does not indicate.
Speaker Change: A default scenario necessarily and what we really think about is how how that bucket.
Speaker Change: Coupled with the overall corporate credit.
Speaker Change: What I would suggest is if you think about our watches being down 50 basis points quarter over quarter.
If you think about the shadow rating, we provided the histogram the single B bucket and lowers down 420 basis points sequentially. So.
Speaker Change: Our unit level coverage ebbs and flows over time.
Speaker Change: But it is moving to $3 seven doesn't necessarily.
Speaker Change: A theme or some type of risk.
Speaker Change: But to get ahead of and will encourage us to do is.
Speaker Change: To think about those.
Speaker Change: Those assets in a permanently impaired we're going to go to the disposition market.
Speaker Change: I think thats, how you can see it.
Speaker Change: React over time okay.
Speaker Change: Got it and then I guess have your credit loss or non reimbursable assumptions changed at all given any of the volatility we've seen.
Speaker Change: Okay.
Speaker Change: <unk>.
Speaker Change: Listen we make a spot estimate is baked into guidance and then adjust throughout the year.
Speaker Change: Any changes things situations get better than we anticipated in other situations crop up that.
Speaker Change: Worse.
Speaker Change: But overall I think the performance the portfolio is pretty consistent with what's built into guidance.
Speaker Change: Really a a one five same store sale growth would indicate strong kind of.
Speaker Change: Performance of the portfolio with lack of <unk>.
Speaker Change: Credit events.
Speaker Change: John I'm sure you'll notice by the way that the under one five times, so that one five to one in the under one actually dropped 90 basis.
Speaker Change: So at $12 three.
Speaker Change: <unk>.
Speaker Change: That is lining up to be a pretty good data point for us relative to the portfolio.
Speaker Change: Understood I appreciate the color. Thank you.
Speaker Change: Great. Thank you.
Speaker Change: We will take our next question from Jay Kornreich with Wedbush Securities. Your line is open.
Speaker Change: Okay.
Jay Kornreich: Hi, Thanks, good morning.
Jay Kornreich: If I could just do one more follow up on the transaction market I guess, besides competition being down as you think about new potential tenants <unk> been targeting to transact for the first time are they being any more cautious are slower to conduct sale leaseback transactions. They await more clarity on the economy.
Jay Kornreich: Are those types of conversations still progressing at a normal pace.
Jay Kornreich: Yes.
Jay Kornreich: I forget the number but it was in the mid eighties percentage of repeat business in the first quarter. So.
Jay Kornreich: As we said in the past our existing relationships drive a good good proportion of our investment opportunity and we focus on those first and foremost.
Jay Kornreich: On an ideal run rate.
Jay Kornreich: We're sourcing maybe 75% from our existing relationships and 25% new so I think the fact that.
Jay Kornreich: We're skewed off of that.
Jay Kornreich: Deal would suggest.
Jay Kornreich: As our existing relationship coming to us.
Jay Kornreich: And we're servicing those and they are placing a high premium on our reliability.
Jay Kornreich: And there still remains active dialogue and new relationships, but.
Jay Kornreich: The lack of new relationships really is more our focus than their cautiousness.
Jay Kornreich: I'd also add ons.
Jay Kornreich: Ongoing.
Jay Kornreich: <unk> with our tenants said, yes, so maybe a little bit more cautious on growth it ebbs and flows on the specific business and industry, but whereas they might slow down growth they'll look to monetize the real estate on balance sheet too to strengthen their liquidity position. So.
Jay Kornreich: Using real estate to monetize those discussions have not slowed down and we're working with our tenant partners to help them achieve success and maximize EBITDA growth for their specific company.
Jay Kornreich: Okay.
Jay Kornreich: Okay.
Speaker Change: Okay I appreciate that and then just for one follow up I guess as you look at your current portfolio segment exposures. If in the current environment are there any areas, where I guess you really light then maybe you want to drive exposure higher or on the flip side.
Speaker Change: Maybe on increased dispositions and get some lower exposure just given the volatility.
Speaker Change: Yes.
Speaker Change: As I said kind of earlier.
Speaker Change: We're taking a 20 year investment a view in this.
Speaker Change: This industry list has been curated due to the real estate fundamentals that we like in these industries and the service and experience base.
Speaker Change: So and then secondarily, we conduct sourcing activities.
Speaker Change: All of these sectors and so.
Speaker Change: My General response to that question is you should expect.
Hi to grow Ratably.
Speaker Change: But for.
Speaker Change: Obviously, we've lightened up in casual dining.
Speaker Change: We continue to not invest in movie theaters and home furnishings.
Speaker Change: 30 basis points and home furnishings.
Speaker Change: Maybe we can just get rid of that little slice there at this point.
Speaker Change: But generally it should grow ratably in.
Speaker Change: That's very purposeful on our part.
Speaker Change: Okay. Thank you very much I'll stop there.
Speaker Change: Thanks.
Speaker Change: And we'll move next to Smedes Rose with Citi. Your line is open.
Speaker Change: Hi, Thanks, I just wanted to ask a little bit about the carwash disclosure as expected it came down from fourth quarter with some of the sales that you highlighted could you just speak to a little bit about how trends were for your car wash tenants in the quarter.
Speaker Change: Sure.
Speaker Change: The.
Speaker Change: Just looking at the operators.
Speaker Change: <unk> were flat and coverage was flat.
Speaker Change: For all our operators across the board.
Generally.
Speaker Change: No there is not a material movement can see across adhere from here it's flat.
Speaker Change: Okay, and then you've talked about 20 year outlook et cetera, and that gas prices are adjusting within the various segments like <unk> and <unk>.
Speaker Change: Back then but with the U S economy.
Speaker Change: Now people very much split as to whether or not we can head into a fairly severe recession here.
Speaker Change: Find that pricing for say like your David Buck Jerking back limit, which would certainly be susceptible to any kind of U S recession.
Speaker Change: What was the cap rate adjusting enough clearly thank you there, but maybe you could just talk a little bit about.
Speaker Change: Decision to move into that kind of space more than maybe within your portfolio looks slightly more defensive like I would think correct medical and dental or even convenient stores just trying to think about how you're looking at the acquisition landscape given what we are also in the broader economy.
Speaker Change: Yes, I think ultimately these deals are being priced in the competitive market and we're finding the pricing that.
Speaker Change: Clears in each individual market and then looking at those risk adjusted returns.
Speaker Change: <unk> to our experience and our credit loss within those sectors over 20 years of investing.
Matt: As Matt said in his commentary.
Speaker Change: We've seen a lot of Dave and busters deals in over.
Matt: Over the over the years, they've priced away from us and so I think the recent noise in that sector.
Matt: Tempered a lot of investors' appetite for entertainment space, such that it priced at a risk adjusted return that made sense for us and ultimately we transacted.
Matt: That said, we didn't make any casual dining investments in the quarter.
Matt: And we actually lightened up but.
Matt: We look at each individual transaction relative to the market clearing pricing in our experience and our opportunity set.
Matt: Make pricing decisions.
Matt: And I would say yes.
Matt: The industry is having an impact but.
Matt: Impacts are more idiosyncratic to those investment opportunities.
Matt: Quality of the credit the location of the real estate the pricing of the real estate and remember we're in 93% service and experience base. So.
Matt: Most of these businesses are not really getting hit by the tariffs and the recent volatility.
Right, Yeah, no I think we understand it one tariff issue, but it is an issue.
Matt: As it relates to the broader U S economy, and discretionary income, but I appreciate the extra.
Matt: Extra discussion.
Matt: Yes, great to me thank you.
Speaker Change: We will take our next question from Jana Galan with Bank of America. Your line is open.
Speaker Change: Thank you good morning.
Speaker Change: Question for Mark and thank you for quantifying the impact of the Treasury stock method in the first quarter and expectations for it to be similar and QQ.
Speaker Change: Can you, let us know how much of a headwind you had in your.
Speaker Change: <unk> guidance for the year because of the accounting treatment on the forward shares.
Speaker Change: Yes, I think the guidance of the way we put it together the headwinds was no more than I think a penny or two.
Speaker Change: In terms of the treasury stock and by the way.
Speaker Change: Just to put a finer point on my remarks.
Speaker Change: That headwind was sort of taking the current stock price and sort of assuming that it stays the same.
Speaker Change: That was how I kind of referenced.
Speaker Change: Thank you Robert.
Speaker Change: Just going to add to that if you look at page 25 of our supplemental package. We have recently added some disclosure on slide two.
Speaker Change: From the shares from that dilution.
Speaker Change: So you can see for the first quarter was $1 1 million shares. So hopefully thats helpful from a modeling standpoint.
Speaker Change: Great. Thanks.
Speaker Change: We will take our next question from Jim Cameron with Evercore. Your line is open.
Jim Cameron: Hi, Good morning, Thank you going back to Dave and Busters, how long have they operated in these five locations that you've picked up.
Speaker Change: Okay.
Speaker Change: Tough one.
Speaker Change: It varies.
Speaker Change: They all have operating history and cash flowing in there and as we said the master lease coverage is north of two times, but on.
Speaker Change: On the individual locations the opening date would vary across the portfolio.
Speaker Change: We're talking several years in each instance.
Speaker Change: Yes, yes, I would imagine somewhere between three and 10, but we can do the math and get back to you.
Speaker Change: These aren't brand new locate no I got it because you said and then you've got obviously play here with Dave and Busters and circle K could you remind me what percentage of your portfolio ABR is from public companies and I'm. Just wondering is there enough assets out in the markets that.
Speaker Change: A way for your traditional private middle market tenants are there more opportunities for <unk> with public tenants.
Speaker Change: Yes.
Speaker Change: Generally.
Speaker Change: I am completely agnostic to the source of equity, whether it's public markets or private credits credit and generally.
Speaker Change: Public credits create a little more noise.
Speaker Change: And then the private credits but that.
Speaker Change: That noise doesn't correlate to risk.
Speaker Change: And so it's not really a major consideration.
Speaker Change: But just off the top of my head, we have Dave and Busters, We got Red Robin We add circle K, we got Mister car wash.
Speaker Change: Kindercare their public know anyone else.
Speaker Change: Okay.
Speaker Change: AMC Cinemark, obviously not major exposures, but.
Speaker Change: It's not really something that factors into our.
Speaker Change: Our calculus around credit.
Speaker Change: Understood. Thank you.
Speaker Change: We'll move next to Greg Mcginniss with Scotiabank. Your line is open.
Greg Mcginniss: Hey, good morning, Peter.
Speaker Change: Pete I just wanted to follow up on that reduction in casual dining exposure.
Speaker Change: Solid fell by 17 properties and $3 million of ABR during the quarter, but you only sold 11 properties thats around one $5 million of ABR during the quarter.
Speaker Change: Suck USR exposure went up by 17 properties. So I'm wondering if there was actually dispositions there or if it was just a reclassification or mix.
Speaker Change: It was a mix.
When you start defining.
Speaker Change: Restaurants in the.
Speaker Change: The fast casual kind of in the middle there it was a re class in the quarter.
Speaker Change: Some of those properties, we also sold some and we didn't buy something.
Speaker Change: Okay and then.
Speaker Change: Is lending environment were to worsen from here does that.
Speaker Change: And then maybe create an opportunity to do more deals as a financing option that otherwise wouldn't have been utilized or do you expect kind of middle market M&A deals to slow and negatively influence the level of available transactions.
Speaker Change: Yeah listen I think we're coming off a very long period of difficult.
Speaker Change: Financing alternatives for middle market credits.
Speaker Change: We've got better for a period of time late in the third into the fourth and here in the first it's gotten worse.
Speaker Change: So I don't know.
Speaker Change: And then you have.
Speaker Change: The impact of less transactions, coupled with less competition and so it's hard to say I think.
Speaker Change: Challenging financial markets do create more opportunities.
Speaker Change: From a tenant demand perspective, but that's also mitigated by less overall transaction activity.
Speaker Change: So.
Speaker Change: I guess I would say the year's off to a great start we got a well on our way against.
Speaker Change: Our investment guidance for the year and we remain aggressive on deploying capital.
Speaker Change: Okay. Thank you.
Speaker Change: Yeah.
Speaker Change: And once more for your questions that is star one.
Speaker Change: Again that is star and one will move next to Daniel Guglielmo with capital One Securities. Your line is open.
Daniel Guglielmo: Hi, everyone. Thank you for taking my question.
Daniel Guglielmo: Just one from me in the industry diversification tables, the entertainment bucket increased to nine 5% of cash ABR.
Daniel Guglielmo: Dave and Busters as I mentioned multiple times, but it feels like Thats a pretty broad.
Speaker Change: <unk> Street grouping can you just give us a sense of what other kinds of businesses are in there and would there be potential for breaking that up into more detailed lines over time.
Daniel Guglielmo: Yes, I mean, theres not theres not.
Daniel Guglielmo: Ton of variability the vast majority of that entertainment.
Daniel Guglielmo: Bucket is going to be.
Speaker Change: Peter came in.
Speaker Change: Outlets like Dave and Busters, like chicken and pickle.
Speaker Change: Like Boeing family Entertainment centers.
Speaker Change: And so.
Speaker Change: We try to think about that.
Speaker Change: Really.
Speaker Change: Food driven entertainment experience with real estate beds.
Speaker Change: Relatively fungible.
Speaker Change: And well located and so there is.
Speaker Change: There's a lot in it but.
Speaker Change: I don't think calling it out would it would materially enhance our disclosure.
Speaker Change: Great. Thank you and I guess, just one follow up to that.
Speaker Change: That's like <unk>, 15% cap.
Speaker Change: Okay.
Speaker Change: For that line would that be in effect then.
Speaker Change: Yes, I think I think I think we think about it that way.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Speaker Change: Well move next to our motto.
Speaker Change: <unk> with Deutsche Bank. Your line is open.
Speaker Change: Yes. Good morning, everyone wanted to talk a little bit about the acquisition.
Speaker Change: Sorry, Matt.
Speaker Change: And then clearly you mentioned you are seeing less competition.
Speaker Change: Also note that the lending environment is getting tougher.
Nicole: Nicole Middle market company.
Speaker Change: Curious if you're looking at.
Speaker Change: Opportunities to do more kind of like structured finance deals with your tenants rather than simple deals.
Speaker Change: Nick you're moving in that direction, how you would think about how you think about that if at all.
Speaker Change: Yes, I mean, ultimately our our goal as a company is to own real estate with a durable cash flow that grows over time.
Speaker Change: We have done some structured finance lending products over the years.
Speaker Change: Our loan book has not grown materially.
Speaker Change: Never really been a material part of our business given our focus on acquiring fee simple assets with long dated leases supporting the cash flows and so.
Speaker Change: We look at it we consider it we provide it on a.
Speaker Change: Kind of.
Special situations for tenant relationships that we want to support.
Speaker Change: And when we do provided we want to get.
Speaker Change: Compensated for it relative to our core business that we're buying real estate and owning it and so.
Speaker Change: I wouldn't expect a material shift in our mix of fee.
Speaker Change: Fee ownership and loans.
Speaker Change: We will do it supported relationship, but ultimately look to get paid for it but.
Speaker Change: Don't expect us to change what we're doing.
Speaker Change: Okay, that's great and if I may ask just one other quick one.
Speaker Change: Just again.
Speaker Change: The comments about pilots.
Being more services oriented than that that's helpful. But again curious.
Speaker Change: We will be setting up or whether it's a recession or slowdown in the economy. However, you want to.
To find that.
Speaker Change: For longer rate environment stubbornly high Lee Chen.
Speaker Change: I guess, how do we think about the middle market.
Speaker Change: Again that backdrop.
Speaker Change: In general would there be potential areas of risk or what have you.
Speaker Change: Just kind of look at that.
Speaker Change: And then they can pass on the call. So there should be no impact.
Speaker Change: I'm curious how you also kind of thinking about that.
Speaker Change: That scenario and how does that impact the tenant.
Yeah.
Speaker Change: We start with the industries, we selected.
Speaker Change: Which are for services and experience base largely.
Speaker Change: And necessity.
Speaker Change: This necessity.
Speaker Change: And then we focus on our position as the landlord, which as I pointed out earlier in the call is senior to the debt and senior to the equity.
Speaker Change: Most of our operators many of our operators are.
Speaker Change: Really sale leaseback capital and equity in their capital stack and so.
Speaker Change: There will be operating pressures, but we.
Speaker Change: We do not expect them to materialize into situations, where tenants are looking for rent relief.
Speaker Change: Given our three five times coverage of rent across the portfolio.
Speaker Change: <unk>.
Speaker Change: It would take real.
Speaker Change: Prolonged dislocation.
Speaker Change: To create a scenario where you guys are not paying their rent.
Speaker Change: Yes.
Speaker Change: I appreciate that thank you.
Speaker Change: Awesome. Thank you.
Speaker Change: And it does appear that there are no further questions. At this time I would now like to turn the call back to Peter <unk> for any additional or closing remarks.
Speaker Change: Great well first thanks to the team great job this quarter.
Speaker Change: Great great momentum here into the second.
Speaker Change: We're going to be on the road quite a bit in the coming weeks and months with the bank of Montreal Conference and the Wells Fargo Conference in the NAREIT. So.
Speaker Change: We certainly look forward to the opportunity to engage with investors and continue to talk about the business. Thank you all for your time today.
Speaker Change: Yes.
Speaker Change: This does conclude today's program. Thank you for your participation you may disconnect at any time and have a wonderful rest of your day.
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