Essential Properties(EPRT) - 2025 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported an AFFO per share of $0.48 for Q3 2025, representing a 12% increase compared to Q3 2024 [16] - Total AFFO for the quarter was $96.2 million, up 24% from the same period in 2024 [16] - Cash G&A expenses were approximately $6.7 million, consistent with the guidance range for the full year [17] - The company declared a cash dividend of $0.30, resulting in an AFFO payout ratio of 63% [17] - The pro forma net debt to annualized adjusted EBITDAre remained low at 3.8 times as of quarter end [20] Business Line Data and Key Metrics Changes - The company executed $370 million in investments during the quarter, with a weighted average initial cash yield of 8% and a strong average gap yield of 10% [7][13] - Same-store rent growth was reported at 1.6%, an increase from 1.4% in the previous quarter [11] - The overall portfolio rent coverage increased to 3.6 times from 3.4 times last quarter [11] - The percentage of annual base rent under one times rent coverage declined by 120 basis points [11] Market Data and Key Metrics Changes - The company ended the quarter with investments in 2,266 properties leased to over 400 tenants, maintaining a weighted average lease term of approximately 14 years [10] - The investment pipeline remains strong, with cap rates in the mid to high 7% range expected [15][54] Company Strategy and Development Direction - The company continues to focus on middle-market sale-leasebacks with growing operators, sourcing 70% of its $370 million investments from existing relationships [7] - The company is targeting an AFFO per share growth of 6% to 8% for 2026, with an initial guidance range of $1.98 to $2.04 [9][21] - The company aims to maintain a well-capitalized balance sheet with low leverage and significant liquidity to support growth [20] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the investment market and capital markets, noting that the interest rate environment is more stable, contributing to lower cap rates [25][54] - The company anticipates continued strong portfolio performance and a pace of investments consistent with historical averages [9] - Management highlighted that credit loss assumptions remain consistent with previous years, reflecting a disciplined investment strategy [42][102] Other Important Information - The company successfully executed a $400 million 10-year unsecured bond offering, improving its weighted average debt maturity by approximately 18% to 4.5 years [18] - The company expects to utilize funds from the bond offering to support investment activities and maintain balance sheet flexibility [19] Q&A Session Summary Question: Expectations for cap rates going forward - Management indicated that lower cap rates are expected due to a stable interest rate environment and strong competition, but they can compete effectively in the market [25] Question: New industrial assets and future investments - Management confirmed ongoing investments in industrial outdoor storage sites and expects to continue this trend, focusing on granular, fungible assets [27] Question: Credit loss assumptions for 2026 - Management stated that credit loss assumptions for 2026 are consistent with previous years, based on a deep dive into the portfolio [42][102] Question: Activity in the fourth quarter - Management expects fourth-quarter activity to align with historical averages, estimating around $300 million in investments [48] Question: Tenant credit watch list update - The tenant credit watch list has improved, with the current coverage at 1.2 times, down 40 basis points quarter over quarter [91] Question: Differences in yields between retail and industrial properties - Management noted that cap rate compression is expected across all property types, driven by credit and real estate pricing rather than property type [118]