Essential Properties Realty Trust - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 beat consensus on revenue and EPS; revenue was $129.35M vs $124.54M consensus and EPS (Primary/normalized) was ~$0.30 vs ~$0.29 consensus, while AFFO/share was $0.45 (+7% YoY). Guidance was reaffirmed at $1.85–$1.89 for FY 2025 AFFO/share, supported by $308M of Q1 investments at a 7.8% cash cap rate and resilient portfolio metrics. Estimates marked with * are from S&P Global and shown below.*
• Balance sheet strength and liquidity were key positives: pro forma net debt/Annualized Adj. EBITDAre 3.4x and total available liquidity ~$1.5B, underpinned by a March forward equity offering and expanded $2.3B unsecured credit facility.
• Portfolio quality remained resilient: 99.7% occupancy, 14.0-year WALT, 3.5x rent coverage; watchlist fell to ~1.6% of ABR (down 50 bps QoQ), with Zips bankruptcy (~20 bps ABR) incorporated in guidance expectations.
• Stock reaction catalysts: reaffirmed outlook without incremental equity needs in 2025, strong early-year deal flow with pricing in the high-7% cap range, and visible capital deployment runway given forward equity and revolver capacity.

What Went Well and What Went Wrong

• What Went Well

  • Strong top-line and EPS vs consensus and YoY AFFO growth; revenue $129.35M and diluted EPS $0.29; AFFO/share $0.45 (+7% YoY). “We have reaffirmed our 2025 AFFO per share guidance range of $1.85 to $1.89.”. EPS and revenue beat consensus (see table).*
  • Robust external growth at attractive terms: $307.7M of Q1 investments at 7.8% cash / 9.4% GAAP cap rates; 90% sale-leasebacks; WALT 17.5 years; 86% from existing relationships, signaling durable pipeline.
  • Capital position improved: $292.3M forward equity offering in March plus $20.6M ATM; pro forma leverage 3.4x and ~$1.5B liquidity; amended/upsized revolver to $1.0B (maturity to Feb 2030).

• What Went Wrong

  • Non-cash and credit-related items persist: $5.9M real estate impairment expense and elevated D&A with portfolio growth; property expenses also increased YoY with scale.
  • Forward equity dilution is a modest headwind: ~1.1M treasury-stock-method shares added to diluted count in Q1; CFO reiterated ~$0.01–$0.02 annual headwind assumption depending on share price.
  • Macro/cycle uncertainties: management noted choppy capital markets and potential normalization-driven cap rate compression ahead; competition more pronounced in larger transactions, though small/mid deals remain less competitive.

Transcript

Speaker 4

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. The dial-in details for the replay can be found in yesterday's press release. Additionally, there will be an audio webcast available on Essential Properties' website at www.essentialproperties.com, an archive of which will be available for 90 days. On the call this morning are Pete Mavoides, President and Chief Executive Officer; Mark Patten, Chief Financial Officer; Max Jenkins, Chief Operating Officer; AJ Peale, Chief Investment Officer; and Rob Salisbury, Head of Corporate Finance and Strategy. It is now my pleasure to turn the conference over to Rob Salisbury.

Speaker 6

Thank you, Operator. Good morning, everyone, and thank you for joining us today for Essential Properties' first quarter 2025 earnings conference call. During this conference call, we'll 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 these 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.

Speaker 0

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 operators within our targeted industries. During the quarter, we invested $308 million as we continued to support our existing relationships, which contributed 86% of our investments, underscoring the value of recurring business within our tenant base. 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.

We further solidified our capital position during the quarter, issuing over $300 million of equity and upsizing our credit facility, leaving us with pro forma leverage of 3.4 times and liquidity of $1.5 billion, which positions us well to continue to grow our portfolio and continue to generate sustainable earnings growth for our shareholders. The continued healthy portfolio trends and the attractive investment environment remain supportive of our 2025 business plan. As a result, we have reaffirmed our 2025 AFFO per share guidance range of $1.85-$1.89. On our fourth quarter earnings call, we discussed our expectation that competition could build as capital markets normalized, resulting in modest cap rate compression. We continue to expect our investment cap rates in 2025 to be slightly lower than 2024.

However, the recent heightened volatility in the capital markets has resulted in less competition than we had anticipated at the beginning of the year. Overall, our investment pipeline is supportive of the upper half of our articulated investment guidance of $900 million-$1.1 billion. Importantly, we do not need to raise any incremental capital to achieve our guidance range this year. Turning to the portfolio, we ended the quarter with investments in 2,138 properties that were leased to 423 tenants operating in 16 industries. Our weighted average lease term stood at 14 years at quarter end, in line with a year ago, with just 5.4% of annual base rent expiring over the next five years. From a tenant health perspective, our weighted average unit level coverage ratio was 3.5 times this quarter, indicative of the profitability and cash flow generation by our tenants at the unit level.

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 and the current market dynamics. Max.

Speaker 2

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 7.8%. 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. This quarter, our investments had a weighted average initial lease term of 17.5 years and a weighted average annual rent escalation of 2.2%, generating a strong average gap yield of 9.4%. 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. Looking ahead, our investment pipeline remained strong across all of our targeted industries.

Pricing in 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. 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. With that, I'll turn the call over to AJ Peale, our Chief Investment Officer, who will provide an update on our portfolio and asset management activities. AJ.

Speaker 5

Thanks, Max. At a high level, our portfolio credit trends remain healthy, with same-store rent growth in the first quarter of 1.5%, up slightly from last quarter. Tenant credit events remain muted, with occupancy of 99.7% and collections of effectively 100%. While there were no noteworthy credit events during the first quarter, we continue to work through the Zipps Carwash bankruptcy, which impacts three of our properties and approximately 20 basis points of our ABR. Given the ongoing nature of the bankruptcy, it 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. From a tenant concentration perspective, our largest tenant represents 3.9% of our ABR at quarter end, and our top 10 tenants now account for just 17.3% of our ABR.

Tenant diversity is an important risk mitigation tool and differentiator for us, and it is a direct benefit of our focus on middle market operators, which offers an expansive opportunity set. Our carwash industry exposure further rationalized to 13.9% of ABR, comfortably below our soft ceiling of 15%. On the disposition front, after a busier fourth quarter, our asset sale activity normalized 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 per property, highlighting the importance of owning fungible, liquid properties, which allows us to proactively manage portfolio risk. The dispositions this quarter were executed at a 6.9% 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.

With that, I'd like to turn the call over to Mark Patten, our Chief Financial Officer, who will take you through the financials and balance sheet for the first quarter.

Speaker 3

Thanks, AJ. Overall, we had a good first quarter highlighted by the strong level of investments that Max outlined at a 7.8% cash cap rate. AFFO per share of $0.45 represented an increase of 7% versus Q1 of 2024. On a nominal basis, our AFFO totaled $85.7 million for the quarter, which is up $14.6 million over the same period in 2024, an increase of 21%. This AFFO performance was consistent with our expectations as reflected in our guidance range updated last quarter. 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 increase is related to increased compensation expense as we continue to invest in our team.

Our recurring cash G&A was $7.6 million this quarter, which is consistent with our guidance range of $28 million-$31 million for the year and represents 5.9% of total revenue, which compares favorably to the 6.2% in the same period a year ago. We declared a cash dividend of $0.295 in the first quarter, which represents an AFFO payout ratio of 66%. 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. Based on our investment guidance for 2025, that would represent more than 10% of our capital needs to fund our external growth.

Turning to our balance sheet, with the net investment activity in Q1 2025, our income-producing gross assets reached $6.3 billion at quarter end. The increasing scale of our income-producing portfolio continues to build, improving our credit profile. On the capital markets front, we issued $292 million in an equity offering in March, which complemented our ATM activity of approximately $21 million, giving us a total of $313 million of equity raised in the quarter. We settled $279 million of forward equity in the quarter, with a portion of the proceeds utilized to repay our revolving credit facility balance. 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.

Similar to last quarter, our share price remained above the weighted average price of our unsettled forward equity of $30.51 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. 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. This represented a modest headwind to our AFFO per share for the quarter. Based on our current share price, we continue to expect a modest headwind again in the second quarter. Our pro forma net debt to annualized adjusted EBITDA as adjusted for unsettled forward equity was 3.4 times at quarter end.

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. 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 the revolver along with the aforementioned equity activity. Lastly, as we noted in the earnings press release, we have reaffirmed our 2025 AFFO per share guidance range of $1.85-$1.89, 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. With that, I'll turn the call back over to Pete.

Speaker 0

Thanks, Mark. In summary, we are happy with our first quarter results and remain excited about the prospects for the business. Operator, please open the call for questions.

Speaker 4

At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may withdraw yourself from the queue at any time by pressing star two. Again, that is star and one. We will take our first question from Spencer Glimcher with Green Street. Your line is open.

Speaker 1

Thank you. Good morning. Can you comment on how you're thinking about the ongoing tariff situation in regards to tenant health? Are you guys expecting any impacts to tenants in the portfolio?

Speaker 0

You know, Spencer, we are not. I mean, obviously, we're watching it closely as it unfolds, but given the fact that we're 93% service and experience-based and not really a lot of goods, the tariff impacts will be very tangential to our operators. Obviously, we pay close attention to the credits in the portfolio, but I think we'll be in a pretty good spot.

Speaker 1

Okay. Thank you. I know you mentioned there's been less competition than expected thus far in 2025. Is it fair to say that that's a widespread theme across all of your target industries, or are there any pockets of the portfolio where you're seeing outsized competition?

Speaker 0

Yeah. I wouldn't really characterize it across industries. We're certainly finding more competition in bigger transactions. The larger the deal, the more eyes that are on it, and larger credits. The bigger the credit, the more eyes are on it, and the more competitive those opportunities become. The small granular transactions in the $5-$10 million range and the mid-size operators that we deal with day in, day out, it hasn't been as competitive.

Speaker 1

Great. Thank you so much.

Speaker 0

Thank you, Spencer.

Speaker 4

We'll move next to Eric Borden with BMO Capital Markets. Your line is open.

Speaker 7

Hey, good morning, everyone. Just given the strong acquisition volumes in the first quarter and a solid start to the second quarter, and liquidity is full and the balance sheet continues to improve, what's really the governing factor from raising the acquisition guidance today?

Speaker 5

Yeah, I'd ask Rob to handle that one.

Speaker 7

Hey, Eric. You're 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. I think, as we've talked about, our portfolio tenant credit continues to evolve very favorably as well. We hiked guidance last quarter. While we're off to a great start and the balance sheet's fully loaded, it's still pretty early in the year, and we have visibility on the pipeline for, call it, 60-90 days. Typically, there's a little bit of a lull in the summertime, and then people come back to school in September, and there's more transaction volume into year-end. While we have some great visibility into Q2, it's still pretty early in the year, and we'll just see how it evolves from here. Helpful.

Speaker 0

Thanks.

Speaker 7

We appreciate that. Dave & Busters, saw that it moved into the top 10. Just curious on the investment thesis there. Was it a strong sponsor relationship or just curious on any color or incremental detail you can provide on the Dave & Busters acquisition?

Speaker 5

Hey, Jay, why don't you tackle that one for me?

Speaker 7

Sure. Dave & Busters is a management team or a company that we've known probably for the better part of 15 years. We were presented with the opportunity to do a sale lease back. We structured on our lease form, which provides ongoing unit-level reporting. We structured the rent so that we're generating greater than two times coverage going into it. We invested in sub-markets that we really like with the real estate that's positioned near other national retailers. For us, it seemed like a really good risk-adjusted opportunity to make an investment. Max, I don't know if you have anything to add on kind of how the deal came to us. Sure. Eric, I note that we participated in various sale lease back transactions over the years with the Main Event, Dave & Busters team.

Historically, they always price away from us. In Q1, we were presented a unique opportunity and less competition because of the volatility in the capital markets. We were able to generate some pretty attractive pricing and terms, and it was kind of a unique opportunity for us to transact there.

Speaker 0

Great. I would add that given our diversity through the top 10 at 1.7%, it has higher prominence than probably warranted. In many of our competitors, that would be down around the 15-20 tenants. Good investment, known for a while, well-structured, good pricing, and we feel good about it.

Speaker 7

Thank you very much. I will leave it there.

Speaker 0

Thank you.

Speaker 4

We'll take our next question from Michael Goldsmith with UBS. Your line is open.

Speaker 0

Good morning. Thanks a lot for taking my question. Maybe just to follow up on the Dave & Busters. It seems like you have a good relationship there, though it does seem that the operating metrics for the company have been a bit softer with negative comparable sales and some declining traffic. Just trying to get a sense of it sounds like you've got good rent coverage and you're comfortable with the markets, just trying to get a sense of your comfort level overall with the business in this environment.

Sure. Listen, we've been investing in the family entertainment space for a long time and have strong conviction there. We're making 20-year investments. A six-month operating environment really has limited impact on that long-duration investment. Ultimately, we own the real estate that generates the cash flows, and we're senior to the debt holders, and we're senior to the equity. While there may be some noise around the equity story, there isn't noise around the landlord collecting rent story. In fact, in our diligence, we found Dave & Busters has only closed two sites in its history, and we feel imminently comfortable with the real estate that we own.

It's very helpful context. Beyond Zips, is there anything else on the watchlist or any sort of notable movement on and off? I also know you have very good visibility into your tenants. Any sort of evolving dynamics that you're noticing or keeping an eye on?

Speaker 7

Yeah. AJ, what's the current watchlist?

Speaker 0

1.6%, down 50 basis points quarter over quarter.

Speaker 7

Yeah. The watchlist is in a good spot. The watchlist tends to be comprised of a bunch of idiosyncratic operator-level events, nothing really thematic across industries or property types. It is in a good spot. It is down quarter over quarter. You should expect any sort of credit events are well baked into our guidance. Overall, we feel good about where the portfolio sits today.

Speaker 0

Thank you very much. Good luck in the second quarter.

Speaker 7

Great. Thank you.

Speaker 4

We'll take our next question from Haendel St. Juste with Mizuho. Your line is open.

Speaker 7

St. Juste. I love it. Good morning, guys.

Speaker 0

Yeah.

Speaker 7

Good to hear from you. I had a couple of quick ones. First, just to follow up one more on the Dave & Busters. You mentioned the coverage was more than 2x. I was hoping we could get a bit more from you guys in light of some of the questions we've heard from investors about the discretionary nature and history of this tenant. Maybe any color on if you can get a bit more specific with the coverage, and then maybe color on the rent bumps and the term Waltz of these leases. Thanks.

Speaker 0

Yeah. Yeah. We generally do not disclose tenant-specific coverage, and the lease term would generally be consistent, 15-20 years with 2% plus bumps. The master lease is north of two times, absent of getting specific.

Speaker 7

Okay. Fair enough. I appreciate that, Pete. One more, maybe if you guys could perhaps give us a bit more color on the transaction environment broadly out there. Last quarter, you're seeing more competition for private equity. This quarter, less. Curious if you think they're waiting on the sideline for more stability and will be perhaps more active in the second half. I know a lot of them are raising capital, so they need to deploy. Are deals taking longer? Any retrading? Any thoughts on cap rates in the second half? Would appreciate just some more context and color on the transaction environment. Thank you.

Speaker 0

Sure. Max, why don't you tackle that, please?

Speaker 7

Sure, Pete. Haendel, early in the year, spreads were pretty tight, and we noted increased competition, and there was less volatility. The volatility has continued to persist. Some of that competition, as Pete noted, has diminished. However, with larger portfolios, broadly marketed deals, we still see it there in some pretty more efficient pricing. Our bread and butter has always been those kind of smaller follow-on, repeat business, sale leaseback transactions with our tenant partners. There, we're still generating adequately attractive risk-adjusted returns, and the pipeline remains strong for us. We're focused on servicing our relationships and providing that surety of close with our tenant partners. As the markets normalize, we do expect competition to continue to compress cap rates, but we're frankly not seeing that right now. We do expect it to probably happen once the markets normalize.

Speaker 0

Yeah. Haendel, I would add, I think there's a growing appreciation for the asset class and the durability of the asset class. The longer there's an operating track record of solid, stable performance, I think over time it's going to continue to attract capital and make the market more efficient.

Speaker 7

No, 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 two to three quarters than you historically would have been, just 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 0

Yeah. I think you see that. You certainly see it in the numbers. You see it in our this is our largest first-quarter print. Going along with that is our highest gap yield at 9.4%, right? Let's not ignore the fact that despite losing 10-20 basis points on the initial cap rate, we gained significant economics throughout the life of these leases. The narrative that this is a great buying environment for us that I was talking about pretty much all through last year continues, and we are working very hard to capitalize on it.

Speaker 7

Great. Thank you. Appreciate it.

Speaker 0

Thank you.

Speaker 4

We'll move next to Caitlin Burrows with Goldman Sachs. Your line is open.

Speaker 1

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. Just wondering what impact you've seen or expect could be seen on any of your tenants and their interest or ability to expand and how that could or would not impact your volumes.

Speaker 0

Yeah. There has been a consistent source of opportunities for us. Our tenants continue to engage with us on expansion and M&A and development opportunities in these industries that we have targeted. While that activity may diminish at the margin, I think the lack of competition will diminish as well, such that we continue to be well-positioned as the first and last call and a valuable partner to these guys. It is a steady-flow business, and we provide great disclosure around our investment activity on a quarterly basis. There has not been a ton of variability, nor do we expect it.

Speaker 1

Yeah. No, definitely seems like a steady business, which is surprising but great. Maybe on the leverage side, you guys are at 3.4 times, like you mentioned, which versus other REITs is quite low. I was wondering if you could go through if there are any circumstances that you think could come up, not that they're necessarily likely, but in what scenario would that leverage go up? Yeah. Wondering what you can talk about on the leverage side.

Speaker 7

Mark, why don't you tackle that, please?

Speaker 0

Yeah. I mean, look, I guess historically, we've been at about, call it 4 or 5, 4.6 times. We have been thoughtfully over-equitized probably over the last year and a half, given just the dynamics between the cost of our equity and the cost of debt. I think as we think about it, I'll kind of come at it maybe slightly differently for you. If you think about that 4.6 times, we've probably got four and a half quarters' worth of liquidity before we'd reach that 4.6 times. If you think about that, that kind of gets you through, gets you into 2026. I'll say it another way. If you think about our unsettled forward equity at $410 million, you think about our recurring free cash flow through the next three quarters at about $90 million.

Even at the pace of dispositions they referenced, that's a good $560 million worth of liquidity before you're using leverage. We anticipate remaining pretty conservative on the leverage front.

Speaker 1

Got it. Thanks.

Speaker 4

We'll take our next question from John Kilowatt with Wells Fargo. Your line is open.

Speaker 0

Thank you. Good morning. Maybe just on the credit side, would you mind talking us through the increase in the sub-one times coverage bucket? I think there was 70 basis points quarter over quarter.

Speaker 7

Yeah. I think it's all going to be kind of idiosyncratic stuff. AJ, any callouts there that you would point to?

Speaker 0

Yeah. I would not call anything out. It is certainly a data point that we pay attention to, but that in and of itself does not indicate a default scenario necessarily. What we really think about is how that bucket kind of couples with the overall corporate credit. What I would suggest is if you think about our watchlist being down 50 basis points quarter over quarter, and if you think about the shadow rating that we provide in the histogram, the single B bucket and lower is down 420 basis points sequentially. Our unit-level coverage ebbs and flows over time, but it just moving to 3.7 does not necessarily indicate that there is a theme or some type of risk that we need to get ahead of. What it will encourage us to do is to think about those assets.

If they're permanently impaired, we're going to go to the disposition market. I think that's how you'll see us react over time.

Speaker 7

Okay. Got it. I guess, have your credit loss or non-reimbursable assumptions changed at all, given any of the volatility we've seen?

Speaker 0

Listen, we make a spot estimate and bake it into guidance and then adjust throughout the year. It changes. Situations get better than we anticipated, and other situations crop up that are worse. Overall, I think the performance of the portfolio is pretty consistent with what's built into guidance. Certainly, a 1.5% same-store sale growth would indicate strong kind of performance of the portfolio with lack of credit events. John, I'm sure you noticed, by the way, that the under one and a half time. That one and a half to one and the under one actually dropped 90 basis points. At 12.3%, that's lining up to be a pretty good data point for us relative to the portfolio.

Speaker 7

Understood. Appreciate the color. Thank you.

Speaker 0

Great. Thank you.

Speaker 4

We'll take our next question from Jay Kornreich with Wedbush Securities. Your line is open.

Speaker 7

Hi, thanks. Good morning. 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 you've been targeting to transact with for the first time, are they being any more cautious or slower to conduct sale leaseback transactions as they wait more clarity on the economy? Or are those types of conversations still progressing at a normal pace?

Speaker 0

Yeah. Listen, I forget the number, but it was in the mid-80% of repeat business in the first quarter. As we've said in the past, our existing relationships drive a good proportion of our investment opportunity, and we focus on those first and foremost. On an ideal run rate, we're sourcing maybe 75% from our existing relationships and 25% new. I think the fact that we're skewed off of that ideal would suggest our existing relationships are coming to us, and we're servicing those, and they're placing a high premium on our reliability. There still remains active dialogue and new relationships, but I think the lack of new relationships really is more our focus than their cautiousness.

Speaker 7

Jay, I'd also add with the ongoing discussions with our tenants that, yes, some may be a little bit more cautious on growth. It ebbs and flows on the specific business and industry. Whereas they might slow down growth, they'll look to monetize the real estate on balance sheet to strengthen their liquidity position. 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. I appreciate that. And then just for one follow-up, I guess as you look at your current portfolio segment exposures, I guess in the current environment, are there any areas where I guess you really like that maybe you want to drive exposure higher?

Or on the flip side, maybe you want to increase dispositions and get some lower exposure given the volatility?

Speaker 0

Yeah. As I said kind of earlier, we're taking a 20-year investment view, and this industry list has been curated due to the real estate fundamentals that we like in these industries and the service and experience base. Secondarily, we conduct sourcing activities across all these sectors. My general response to that question is you should expect the pie to grow radically. Obviously, we've lightened up in casual dining. We continue to not invest in movie theaters and home furnishings at 30 basis points in home furnishings. Maybe we can just get rid of that little slice there at this point. Generally, it should grow radically, and that's very purposeful on our part.

Speaker 7

Okay. Thank you very much. I'll stop there.

Speaker 0

Thanks.

Speaker 4

We will move next to Smedes Rose with Citi. Your line is open.

Speaker 0

Hi, thanks. I just wanted to ask a little bit about the car wash exposure. As expected, it came down from fourth quarter with some of the sales that you've highlighted. Could you just speak to a little bit about how trends were for your car wash tenants in the quarter?

Sure. Just looking at the operators, AUVs were flat, and coverage was flat for all our operators across the board. Generally, there is not a material movement I can see across any of them here. It is flat.

Okay. Then you've talked about your 20-year outlook, etc., and I guess prices are adjusting within the various segments that you invest in. With the U.S. economy, people very much split as to whether or not we could head into a fairly severe recession here. I mean, do you find that pricing for, say, your gave investors investment, which would certainly be susceptible to any kind of U.S. recession? I mean, is the cap rate adjusting enough? You clearly think it is. Maybe you could just talk a little bit about decisions to move into that kind of space more than maybe within your portfolio of something slightly more defensive, like I would think like medical and dental or even convenience stores. Just trying to think about how you're looking at the acquisition landscape given what we are all seeing in the broader economy.

Yeah. I think ultimately, these deals are being priced in a competitive market, and we're finding the pricing that clears in each individual market. And then looking at those risk-adjusted returns compared to our experience and our credit loss within those sectors over 20 years of investing. As Max said in his commentary, we've seen a lot of Dave & Busters deals, and over the years, they've priced away from us. I think the recent noise in that sector 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. That said, we didn't make any casual dining investments in the quarter, and we actually lightened up. We look at each individual transaction relative to the market-clearing pricing and our experience and our opportunity set and make pricing decisions.

I would say the industries have an impact, but bigger impacts are more idiosyncratic to those investment opportunities: the quality of the credit, the location of the real estate, the pricing of the real estate. Remember, we're in 93% service and experience base. Most of these businesses are not really getting hit by the tariff and the recent volatility.

Right. Yeah. No, I think we understand it's not a tariff issue, but it is an issue related to the broader U.S. economy and discretionary income. I appreciate the extra discussion.

Yeah. Great to meet you. Thank you.

Speaker 4

We'll take our next question from Jana Gallant with Bank of America. Your line is open.

Thank you. Good morning. Question for Mark. Thank you for quantifying the impact of the Treasury stock method in the first quarter and expectations for it to be similar in Q2. Can you let us know how much of a headwind you have in your AFFO guidance for the year because of the accounting treatment on the forward shares?

Speaker 0

Yeah. I think the guidance, or the way we put it together, the headwinds was no more than, I think, a penny or two in terms of the Treasury stock. By the way, Jana, just to put a finer point on my remarks, that headwind was sort of taking the current stock price and sort of assuming that it stays the same. That was how I kind of referenced.

Speaker 4

Thank you.

Speaker 0

Thank you, Jana. It's Rob. I was just going to add to that. If you look at page 25 of our supplemental package, we've recently added some disclosure on the impact from the shares from that dilution. You can see for the first quarter, it was 1.1 million shares. Hopefully, that's helpful from a modeling standpoint.

Speaker 4

Great. Thanks.

We'll take our next question from Jim Cammart with Evercore. Your line is open.

Speaker 7

Good morning. Thank you. Going back to Dave & Busters, how long have they operated in these five locations that you picked up?

Speaker 0

Come on. That's a tough one. What do we have?

Speaker 7

It varies. They all have operating history and cash flowing. As we said, the master lease coverage is north of two times. On the individual locations, the opening date would vary across the portfolio. We're talking several years in each instance?

Speaker 0

Yeah. Yeah. I would imagine somewhere between 3 and 10, but we can do the math and get back to you.

Speaker 7

No. These aren't brand new locations. No, I got it because you said and then you've got obviously play here with Dave & Busters and Circle K. Can you remind me what % of your portfolio ABR is from public companies? And I'm just wondering, is there enough adjective in the markets that away from your traditional private middle market tenants, are there more opportunities for EPRT with public tenants?

Speaker 0

Generally, I'm completely agnostic to the source of equity, whether it's public markets or private. Credit's credit. Generally, the public credits create a little more noise than the private credits, but that noise doesn't correlate to risk. It's not really a major consideration. Just off the top of my head, we have Dave & Buster's. We got Red Robin. We got Circle K. We got Mister Car Wash. KinderCare, they're public now. Anyone else? AMC, Cinemark. AMC, Cinemark. Obviously, not major exposures. It's not really something that factors into our calculus around credit.

Speaker 7

Understood. Thank you.

Speaker 4

We'll move next to Greg McGinnis with Scotiabank. Your line is open.

Speaker 3

Hey. Good morning. Pete, I just wanted to follow up on that reduction in casual dining exposure. We saw it fell by 17 properties and $3 million of ABR during the quarter, but you only sold 11 properties. That's around $1.5 million of ABR during the quarter. We saw QSR exposure went up by 17 properties. We are wondering if there were actually dispositions there or if it was just a reclassification or a mix.

Speaker 0

It was a mix. When you start defining restaurants and the fast casual kind of in the middle there, it was a reclass in the quarter of some of those properties. We also sold some, and we did not buy some.

Speaker 3

Okay. If the lending environment were to worsen from here, does that maybe create an opportunity to do more deals as a financing option that otherwise would not have been utilized? Do you expect kind of middle market M&A deals to slow and negatively influence the level of available transactions?

Speaker 0

Yeah. Listen, I think we're coming off a very long period of difficult financing alternatives for middle market credits. It got better for a period of time, late in the third into the fourth. Here in the first, it's gotten worse. I do not, and then you have the impact of less transactions coupled with less competition. It's hard to say. I think challenging financial markets do create more opportunities from a tenant demand perspective, but that's also mitigated by less overall transaction activity. I would say the year's off to a great start. We got a well on our way against our investment guidance for the year, and we remain aggressive on deploying capital.

Speaker 3

Okay. Thank you.

Speaker 4

Once more for your questions, that is star and one. Again, that is star and one. We'll move next to Daniel Gugliamo with Capital One Securities. Your line is open.

Speaker 0

Hi everyone. Thank you for taking my question. Just one from me. In the industry diversification table, the entertainment bucket increased to 9.5% of cash ABR. Dave & Buster's has been mentioned multiple times, but it feels like that's a pretty broad sub-industry 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?

Yeah. I mean, there's not a ton of variability. The vast majority of that entertainment bucket is going to be entertainment outlets like Dave & Busters, like Chicken & Pickle, like bowling, family entertainment centers. We try to think about that really as a food-driven entertainment experience with real estate that's relatively fungible and well located. There's a lot in it, but I don't think calling it out would materially enhance our disclosure.

Great. Thank you. I guess just one follow-up to that. Would that soft 15% cap, would that be for that line, would that be in effect then?

Yeah. Yeah. I think we would think about it that way.

Great. Thank you.

Thank you.

Speaker 4

We'll move next to Omoteo Okuzonya with Deutsche Bank. Your line is open.

Speaker 0

Yes. Good morning, everyone. I wanted to talk a little bit about the acquisition environment. Clearly, you mentioned you're seeing less competition. We also know that the lending environment is getting tougher for a typical middle market company. Just curious if you're looking at opportunities to do more kind of structured finance deals with your tenants rather than fee simple deals. If you're moving in that direction, how you would think about that, if at all?

Yeah. I mean, ultimately, our goal as a company is to own real estate with a durable cash flow that grows over time. We have done some structured finance lending products over the years. Our loan book has not grown materially, and it's 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. We look at it. We consider it. We provide it on a kind of special situations for tenant relationships that we want to support. When we do provide it, we want to get compensated for it relative to our core business of buying real estate and owning it. I wouldn't expect a material shift in our mix of fee ownership and loans.

We'll do it to support a relationship, but ultimately, look to get paid for it. Don't expect us to change what we're doing.

Okay. That's great. If I may ask just one other quick one. I appreciate the comments about tariffs and you guys being more services-oriented, and that's helpful. Again, curious if you really are setting up for whether it's a recession or slowdown in the economy, however you want to define that, and a higher for longer rate environment due to stubbornly high inflation. I guess, how do we think about the middle market sector against that backdrop in general? Will there be potential areas of risk, or do you just kind of look at that as, again, they can pass on the cost, so there should be no impact? Just again, just kind of curious how you're also kind of thinking about that scenario and how it could impact the tenant base.

Yeah. I mean, we start with the industries we selected, which are service and experience-based, largely necessity. Then we focus on our position as a landlord, which, as I pointed out earlier in the call, is senior to the debt and senior to the equity. Most of our operators, many of our operators, are really sale leaseback capital and equity in their capital stack. There will be operating pressures, but we do not expect them to materialize into situations where our tenants are looking for rent relief. Given our three and a half times coverage of rent across the portfolio, it would take real prolonged dislocation to create a scenario where our guys are not paying their rent.

Appreciate that. Thank you.

Awesome. Thank you.

Speaker 4

It does appear that there are no further questions at this time. I would now like to turn the call back to Pete Mavoides for any additional or closing remarks.

Speaker 0

Great. First, thanks to the team. Great job this quarter and great momentum here into the second. We are 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 and the NAREIT. 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 4

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.