Essential Properties Realty Trust, Inc. 2026 Q3 Earnings Call

Thank you, operator. Good morning, everyone, and thank you for joining us today for Essential Properties Third Quarter 2026 earnings conference call. During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to those forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in yesterday's earnings press release. In our earnings release last night, for the quarter, we reported GAAP net income of $60.7 million and AFFO of $111.9 million. With that, I'll turn the call over to Pete.

Thank you, Sheryl. Thank you to everyone joining us today for your interest in Essential Properties. In the third quarter, we continued to execute on our goal of driving compelling earnings growth for shareholders through owning a diverse portfolio with an increasing revenue stream and creatively deploying capital to grow and diversify that portfolio. On the external growth front, we invested $342 million into 100 properties at an average initial cash yield of 7.7% and a GAAP yield of 9.4%. 91% of our investments in this quarter were sale-leaseback transactions, which continues to be a compelling source of growth capital for middle-market operators across our targeted industries. In an elevated cost of capital environment, our ability to deliver reliable, permanent capital to operators gives us compelling pricing and structuring leverage, and that is showing up in our pipeline.

Our investments team continues to find attractive opportunities across our targeted industries. That said, we are being deliberately selective, prioritizing transactions where pricing reflects a meaningful spread to our cost of capital, supporting long-term earnings growth for our shareholders. As Max will discuss later, we are achieving pricing power real time with new investments being struck at higher cap rates than the third quarter investments, which were largely contracted over the summer. Importantly, our methodical approach to deployment protects our capital runway and preserves our corporate liquidity in a period of capital markets choppiness. Our capital position remains strong, with pro forma leverage of 3.8 times and liquidity of $1.3 billion, providing ample financial capacity to execute our business plan, as Rob will discuss later. Turning to the portfolio, we ended the quarter with investments in 2,580 properties that were leased to tenants operating over 700 concepts.

Our weighted average lease term is over 14 years, our weighted average lease escalations are 1.9%, and just 2% of our annual base rent is expiring through 2028. Our portfolio continued to deliver solid and consistent performance this quarter, with same-store rent growth of 1.4%, healthy rent coverage of 3.5 times, and occupancy of 99.6%, and a reduction in our tenant credit watchlist. With investment activity and portfolio performance tracking ahead of our budgeted expectations, we are increasing our 2026 AFFO per share guidance to a new range of $2.02 to $2.05, and our investment volume guidance to a range of $1.3 billion to $1.5 billion. Our revised AFFO per share guidance implies a growth rate of almost 8% at the midpoint.

We are establishing our initial 2027 guidance with an AFFO per share range of $2.10 to $2.18, investment volume of $1 billion to $1.5 billion, and cash G&A expense of $32 million to $37 million. Our operating plan calls for a slower pace of deployment over the next two to three quarters as our investment teams remain disciplined on pricing, allowing us to retain balance sheet capacity. Historically, asset pricing adjustments tend to lag the rapid movement of pricing in the capital markets. Based on our current weighted average cost of capital, dispositions have become an accretive source of capital and are likely to trend higher in the near term to alleviate capital markets funding requirements. Lastly, I'd like to congratulate Max and Rob on their recent promotions, which recognize the meaningful contributions they have made to the company and position them with greater responsibilities going forward.

I'd also like to welcome Craig Vachris to the company as our new Chief Investment Officer. These management changes reflect the continued evolution of management team as we pass our 10-year anniversary. With that, I'll turn the call over to Craig, who will provide an update on our portfolio and asset management activities. Craig? Thanks, Pete. Overall, our portfolio fundamentals remained healthy during the quarter and continued to perform in line with our expectations.

Same-store rent growth was 1.4%, consistent with recent quarters. Occupancy remained strong at 99.6%, with only 11 vacant properties. Portfolio rent coverage remained at a very healthy level of 3.5 times. The percentage of ABR with rent below one times was consistent quarter-over-quarter, and our watchlist improved, reflecting continued stability in tenant credit. On the disposition front, we sold 11 properties for $17.9 million at a weighted average cap rate of 6.1%. The dispositions were primarily driven by opportunistic sales led by restaurant and car wash properties. Notably, these dispositions were transacted at cap rates that were accretive to our weighted average cost of capital, highlighting the value of owning granular, fungible properties with a deep buyer pool.

Additionally, healthy buyer demand enables us to have the flexibility to scale our disposition activity should we choose to lean further into capital recycling. Our portfolio continues to benefit from broad diversification as our top 10 tenants represent just 15.2% of ABR at quarter end, while our top 20 tenants account for only 25.1%, reflecting our continued focus on partnering with a broad base of middle-market operators and limiting concentration risk. We also reduced our car wash exposure by 60 basis points during the quarter to 12% of ABR, and our portfolio construction remains healthy. Lastly, you may have noticed that we relabeled certain industry categories in our supplemental to better reflect the businesses in our portfolio. This was simply a name change. For example, medical/dental is now health and wellness, and health and fitness is now fitness.

With that, I'll turn the call over to Max Jenkins, our President and Chief Operating Officer, who will provide an update on our investment activities and the current market dynamics.

Thanks, Craig. On the investment side, during the third quarter, we invested $342 million at a weighted average initial cash yield of 7.7%. Our investments in the quarter had a weighted average initial lease term of 17.9 years and a weighted average annual rent escalations of 2.3%, generating a strong average GAAP yield of 9.4%. Our capital deployment during the third quarter was broad-based across most of our top industries as we completed 31 transactions totaling 100 properties. With alternative financing sources becoming more difficult to access for many companies, operators continue to monetize their own real estate through sale-leasebacks, which encompass 91% of our investment volume in the quarter. Our average investment size was $3 million per property during the quarter, reflecting our focus on granular, highly fungible assets that provide attractive risk-adjusted returns. As Pete mentioned, pricing is front and center for us.

As our cost of capital has moved higher, we have been proactive in managing our pipeline and pushing for higher returns reflective of the current environment, without taking on any incremental risk. Diminished competition from private players in a more restrictive middle-market lending landscape are factors contributing to our pricing power. Consequently, our forward pipeline has cap rates around 8% with GAAP yields in the high 9s. With over $1 billion of investments closed year to date, we have again increased our full year investment guidance to a new range of $1.3 billion-$1.5 billion. With that, I'd like to turn the call over to Rob Salisbury, our CFO and Chief Strategy Officer, who will take us through the financials for the third quarter.

Thanks, Max. Overall, we delivered another strong quarter of operating and financial performance. Our AFFO per share was $0.51, representing an increase of 6% versus the year ago period, while nominal AFFO increased 16% year over year to $112 million. This AFFO performance was ahead of our expectations, driven by strong investment volume and a modest benefit from the lack of treasury stock method dilution on our unsettled forward equity balance. Total G&A in the quarter was $14.1 million. Our cash G&A was $7.3 million, which is trending favorably towards the lower half of our guidance range of $30 million-$34 million for the year and represents just 4.3% of total revenue, down from 4.6% in the same period a year ago. We declared a cash dividend of $0.32 in the third quarter, which represents an AFFO payout ratio of 63%.