Essential Properties Realty Trust, Inc. (NYSE:EPRT) Q2 2025 Earnings Call Transcript

Essential Properties Realty Trust, Inc. (NYSE:EPRT) Q2 2025 Earnings Call Transcript July 24, 2025

Operator: Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust’s Second Quarter 2025 Earnings Conference Call. [Operator Instructions] This conference call is being recorded, and a replay of the call will be available 3 hours after the completion of the call for the next 2 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; A.J. Peil, Chief Investment Officer; and Rob Salisbury, Head of Corporate Finance and Strategy. It is now my pleasure to turn the call over to Rob Salisbury. Please go ahead.

Robert W. Salisbury: Thank you, operator. Good morning, everyone, and thank you for joining us today for Essential Properties’ Second 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 forward-looking statements, and we may not release revisions to those forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company’s filings with the SEC and in yesterday’s earnings press release. With that, I’ll turn the call over to Pete.

Peter M. Mavoides: Thanks, Rob, and thank you to everyone joining us today for your interest in Essential Properties. In the second quarter, despite a macroeconomic backdrop that remains volatile, the operating environment was favorable for our business as our team continued to source attractive investment opportunities, focusing on middle market sale leasebacks with growing operators within our targeted industries. During the quarter, we continued to support our existing relationships, which contributed 88% of our $334 million of investments, underscoring the value of recurring business with our tenant base. Pricing was favorable in the quarter with a weighted average cash yield of 7.9% and a particularly strong average GAAP yield of 9.7%.

Our portfolio continued to perform well with tenant credit trends and same-store rent performance healthy and ahead of our budgeted credit losses. We further extended our capital position during the quarter, issuing $119 million of equity through our ATM Program. Our pro forma leverage is 3.5x, and we have $1.3 billion of liquidity. This positions us well to continue to invest, support our relationships and grow our portfolio while generating sustainable earnings growth for our shareholders. With the portfolio performance and investment activity ahead of budgeted expectations, we are increasing our 2025 AFFO per share guidance to a range of $1.86 to $1.89. On our first quarter earnings call, we discussed our expectation that competition could build as capital markets normalize, resulting in cap rate compression.

Though we have not yet seen this materialize in our opportunity set, we continue to expect our investment cap rates in 2025 to trend lower. Having closed $642 million of investments in the first half of the year, our pipeline today gives us conviction to also increase our investment guidance range by $100 million to a new range of $1 billion to $1.2 billion. Importantly, we do not need to raise any incremental capital to achieve our guidance range this year. If we executed at the midpoint of our investment guidance range and did not raise any additional equity capital, our year-end leverage would be under 4x, leaving us ample capital runway into next year. Turning to the portfolio. We ended the quarter with investments in 2,190 properties that were leased to over 400 tenants operating in our targeted core industries.

Our weighted average lease term stood at 14 years at quarter end, in line with a year ago, with just 4.9% of our annual base rent expiring over the next 5 years. From a tenant health perspective, our weighted average unit level coverage ratio was 3.4x this quarter, indicative of the profitability and cash flow generation by our tenants at the unit level. With that, I’ll 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.

R. Max Jenkins: Thanks, Pete. On the investment side, during the second quarter, we invested $334 million at a weighted average cash yield of 7.9%. Our investment activity in the quarter was broad-based across most of our top industries with no notable departures from our investment strategy. This quarter, our investments had a weighted average initial lease term of 19.5 years and a weighted average annual rent escalation of 2.2%, generating a strong GAAP yield of 9.7%. Our investments this quarter had a weighted average unit level rent coverage of 3.4x, reflecting a conservative rent level and healthy unit profitability for our operators. During the quarter, we closed 25 transactions comprising of 77 properties, of which 93% were sale leasebacks.

The average investment per property declined to $4 million this quarter as our deal activity was characterized by granular freestanding properties, which is one of the core elements of our strategy. Looking ahead, our investment pipeline remains strong across all of our targeted industries. Pricing in our pipeline is relatively consistent with our second quarter transactions with cap rates in the high 7% range and strong contractual escalations, which is supportive of our long-term growth trajectory. Combined with our investments of $642 million in the first half of the year, we have sufficient line of sight to support our increased full year investment guidance range of $1 billion to $1.2 billion. With that, I’ll turn the call over to A.J. Peil, our Chief Investment Officer, who will provide an update on our portfolio and asset management activities.

A. Joseph Peil: Thanks, Max. At a high level, our portfolio credit trends remain healthy with same-store rent growth in the second quarter of 1.4% and occupancy of 99.6%. As a reminder, the weighted average lease escalation in our same-store portfolio was lower than our overall portfolio as the higher lease escalations on investments executed over the past several quarters have not entered the same-store pool yet. While there were no noteworthy credit events during the second quarter, we received resolution regarding the Zips Car Wash bankruptcy. As a reminder, Zips filed for bankruptcy earlier this year, at which time we owned three properties representing approximately 20 basis points of ABR, down from a peak exposure in 2017 of 16 sites with over 5% of ABR.

Of the three sites that remain in our portfolio at the time of bankruptcy, we sold two and one remains leased to the operator. The overall recovery rate was consistent with our historical recoveries and in line with our budgeted credit loss assumptions. From a tenant concentration perspective, our largest tenant equipment share represents 3.7% of our ABR at quarter end. Our top 10 tenants account for just 17.6% of ABR and our top 20 account for 28.8% of ABR. Tenant diversity is an important risk mitigation tool, and it is a direct benefit of our focus on middle market operators. On the disposition front, we had an active second quarter, selling 23 properties for $46.2 million in net proceeds. This represents an average of approximately $2 million per property, highlighting the importance of owning fungible liquid properties, allowing us to proactively manage portfolio risk.

The dispositions this quarter were executed at a 7.3% weighted average cash yield. Over the near term, we expect our disposition activity to be more muted, 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 second quarter.

Mark E. Patten: Thanks, A.J. Overall, we were pleased with the second quarter results, highlighted by the strong level of investments that Pete and Max outlined at a 7.9% cash cap rate. Our AFFO per share totaled $0.46, which represents an increase of 7% versus Q2 2024. On a nominal basis, our AFFO totaled $93 million for the quarter, which is up 21% from the same period in 2024. This AFFO performance was consistent with our expectations and is reflected in our guidance range. Total G&A in Q2 2025 was $10.7 million versus $8.7 million for the same period in 2024, which is consistent with our budgeted expectations. The majority of the year-over-year increase is related to increased compensation expense as we continue to expand our team in support of driving our growth ambitions.

Our cash G&A was $7.2 million this quarter, which is consistent with our guidance range of $28 million to $31 million for the year and represents just 5.2% of total revenue, down from 5.6% in the same period a year ago. We declared a cash dividend of $0.30 in the second quarter, which represents an AFFO payout ratio of 65%. Our retained free cash flow after dividends, which we view as an attractive source of capital to support our growth, continues to build, reaching $34.4 million in the second quarter, equating to over $130 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 Q2 2025, our income-producing gross assets reached $6.6 billion at quarter end.

The increasing scale and diversity of our income-producing portfolio continues to build, improving our credit profile. On the capital markets front, we raised approximately $119 million of equity through our ATM Program and settled $20 million of forward equity in the quarter, leaving us with a balance of unsettled forward equity totaling $507 million at quarter end. We expect to utilize these funds in the near term to support our investment activities and preserve our balance sheet flexibility by repaying our revolving credit facility balance in the third quarter. Similar to last quarter, our share price remained above the weighted average price of our unsettled forward equity of $30.73 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 second quarter, our diluted share count of 199.6 million included an adjustment for 0.6 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, which was consistent with our budgeted expectations. Based on our current share price, we continue to expect a modest headwind again in the third quarter. Our pro forma net debt to annualized adjusted EBITDAre as adjusted for unsettled forward equity was 3.5x 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 our tenant relationships in this choppy capital market environment.

Lastly, as we noted in the earnings press release, we have increased our 2025 AFFO per share guidance to a new range of $1.86 to $1.89, representing 8% growth at the midpoint. Importantly, this guidance range requires no incremental equity issuance. With that, I’ll turn the call back over to Pete.

Peter M. Mavoides: Thanks, Mark. In summary, we are happy with our second quarter results. The portfolio is performing well. The investment market is exceptional and the capital markets are supportive. We remain excited about the prospects for our business. Operator, let’s please open the call for questions.

Operator: [Operator Instructions] We’ll take our first question from Eric Borden with BMO Capital Markets.

Q&A Session

Eric Martin Borden: Just with acquisitions year-to-date tracking above the midpoint of your raised guidance and positive commentary around the pipeline in your prepared remarks, I understand that you do expect some competition here. But just curious what’s preventing you from leaning more into the acquisitions just given the presumably strong fourth quarter, but also understand there’s some offset with seasonality in the third quarter.

Peter M. Mavoides: Yes. Listen, I think, we are leading strong into acquisitions. And as I said in the prepared remarks, the investment market continues to be pretty exceptional for us, was the word I used. So we are leading strong into acquisitions. I think, your question is more around guidance. And really, the guidance on investment volume more is just really conservatism, because we rarely have more than 90 days of visibility on the pipeline. But you’re correct. The fourth quarter tends to be elevated and we’ll see what the fourth quarter brings. From an earnings perspective, the fourth quarter investments don’t impact 2025 a lot and more impact the out years, and we’ll adjust the guidance accordingly throughout the year as we always do.

Eric Martin Borden: And then, just on the occupancy side, occupancy dipped slightly sequentially to still solid 99.6%. Is there anything specific to call out there? And then just taking a step back as it relates to the 40 bps of total vacancy. What is the quantum of assets that make up that bucket? And then can you provide an update on either leasing progressions or potential dispositions?

Peter M. Mavoides: Yes. Listen, there’s a lot in that and really just all goes to asset management. In terms of vacancy, we have nine properties at 2,100, and I think that was up from six. Is that correct, A.J.?

A. Joseph Peil: Correct.

Peter M. Mavoides: And you’re talking with average property value of $3 million, $27 million of value. It’s not really material. There’s always ebbs and flows, tenants who don’t no longer want to be in the properties or expiring leases and we’re selling those, engaging those. Anything specific you’d call out, A.J.?

A. Joseph Peil: No, I would say the majority of the vacant is in the restaurant space. And I think what you’ll see is the recoveries are consistent with our historical recoveries, which should be getting around $0.80 on the dollar when we relet those assets or sell them off. That’s really what makes up the vacant bucket today.

Eric Martin Borden: Got you.

Peter M. Mavoides: Nothing material there. And I think, the bigger point is the forward indicators of risk around coverage and recover and same-store sales. And back to the prepared remarks, the portfolio, credit health is very strong.

Operator: Our next question comes from Michael Goldsmith with UBS.

Michael Goldsmith: Just back to the competition piece, right? You noted on the first quarter call that you expected it could to show up and it hasn’t yet. So I guess what are you looking for in order for that to show up and start to drag cap rates down a little bit? Like is it — what is it exactly that you’re looking for? And when are you expecting that to start to impact cap rates?

Peter M. Mavoides: Yes. Listen, I’ve been saying it for almost a year now. And I really — I don’t control capital competition and when it comes, it comes. And we just know that there’s a substantial amount of capital that’s been raised and targeted towards net lease investments, and we expect it to impact us in the transaction market, but we continue to have an ample opportunity set. Our counterparties continue to value our consistency and reliability, and we continue to be very aggressive in deploying capital. And if you think about it, an average GAAP yield of 9.7% for the type of investing we do is pretty extraordinary. So I don’t know. I don’t know when it’s coming. I’ve been wrong, I guess, for the last 2 years, but I’ll stick to my guns and say it’s coming.

Michael Goldsmith: Got it. And as my follow-up, I think your bread and butter has been doing kind of individual deals, small properties right average acquisition size of a property value of $4 million. But now the past couple of quarters, you’ve done a couple of portfolio deals. So is that going to be an increase — as you get larger and need to continue to acquire more? Is that going to increasingly become part of your repertoire? Or is this just more just two opportunities that you have identified and you should get back to kind of doing a bunch of individual property deals going forward?

Peter M. Mavoides: Yes. So the average profile of our deal is going to be $10 million to $15 million involving two to five properties with an existing tenant and that hasn’t changed. And every quarter, that can flex up to a $50 million to $100 million or — and I think one of the reasons we provide the stats around our investments is to kind of give you a view as to our consistency there. And Max gave the commentary in the prepared remarks, and I think the second quarter was certainly consistent with past quarters. As we get bigger, we have the capacity to do bigger deals, whether it be $100 million or — and we did a $100 million deal in the second quarter without — sorry, that’s my fault — without blowing our concentration limits. But you should expect us to continue to be very granular in our investments in our properties.

Operator: Our next question comes from Caitlin Burrows with Goldman Sachs.

Caitlin Burrows: Maybe just back to the cap rate side. So like you mentioned the cash cap rate of 7.9% in 2Q is pretty consistent with the past 8 quarters, but then the cap rate — GAAP cap rate was higher. So can you go through what drove that higher? Is it due to industry mix, strategy on lease steps, some combination or something else?

Peter M. Mavoides: Yes. I think it’s really, Caitlin, it just comes down to the math when you have a longer average lease term, right, I mean, at 19.5 versus past quarters at 17, and then you have better bumps. And I think overall, our ability to negotiate longer lease terms and better bumps is just reflective of the competition that we’re facing in the market. And we’re always trying to get the best economic returns we can in a deal, and ultimately, competition drives our ability to drive those numbers, and we’re pretty happy with the results in the second.

Caitlin Burrows: I guess would you say then on the competition point that, because there was less competition, you were able to push it more in the second quarter?

Peter M. Mavoides: I think that’s accurate, yes.

Caitlin Burrows: Got it. And then, sticking on the competition point. So you mentioned that 88% was repeat business. So I guess when you think of the other 12%, could you go through some of like your strategy on how you identify that business? It seems like that could be a way to somewhat avoid the competition going forward as long as you have incremental new business to go after?

Peter M. Mavoides: Max, that’s your job. Why don’t you answer it?

R. Max Jenkins: Sure. Thanks, Pete. We kind of take a three-pronged approach. Number one, it’s always going to be repeat business and referrals. And in the middle market, our operators they all talk within their industries and the fact that we’ve been doing this consistently for years since inception and stick into our core thesis of providing growing capital through sale leaseback financing to middle market operators, that’s a strong sourcing method. We obviously do pulled out reach and visit industry conferences, and so that three-pronged approach continues to drive new operators and new relationships, and we’re continuing to do that, every quarter and have been since inception. And the percentage is kind of volume weighted. So we’re always adding new relationships every quarter and it just depends on the transaction side. And so sometimes that can be skewed one way or another.

Operator: Our next question comes from Haendel St. Juste with Mizuho.

Haendel Emmanuel St. Juste: Pete, I was hoping you could give us maybe some insight into your thought process on acquiring the portfolio the whistle car washes in the quarter. I think many of us have expected your car wash exposure to head lower. You’re sitting here around 15%. So maybe some color on that thought process? And also, if there’s any color you can share on the price pace for the portfolio cap rate, rent coverage bumps, any of those details?

Peter M. Mavoides: Thanks for the question, Haendel. I think, I’ll take the concentration question and then kick it to A.J., for the details on the transaction itself. But we always have articulated a soft ceiling of 15% on industry concentration, bringing carwash down through the fourth quarter into the first was very deliberate, because we had visibility on the whistle transaction. And so — we’re happy with our ability to manage that exposure, bring it down to fill up capacity to add new tenants with good investments. In terms of specifics, A.J., why don’t you not get too specific, but give an overview over the transaction.

A. Joseph Peil: Sure, Haendel. So as Peter mentioned, we’re working the exposure down and whistle is an existing tenant. And we have the opportunity to partner with them on the sale leaseback transaction as they acquire the carwash portfolio from Driven Brands. The assets we acquired were well-established seasoned sites. The portfolio coverage was greater than 2x. We feel we have really good economics on the lease escalations. We’re able to provide attractive sale-leaseback financing to an existing tenant, and we’re really happy with the transaction.

Peter M. Mavoides: Yes. Given the size of the operator and the quality of the assets, the cap rate on that investment was probably inside of the average for the quarter.

Haendel Emmanuel St. Juste: Okay. I appreciate the detailed comments. And just one more, just going back to the conversation around the competition set. Obviously, the list of folks who have entered the single tenant space here has been growing here in recent quarters. I guess I’m curios if there anything about their strategies that you are able to identify or ascertain that suggests that there may be less likely or perhaps less of a competitive threat to what some people might perceive. I’m just curious if any insight into what perhaps they might be doing or targeting differently that could suggest less of a threat.

Peter M. Mavoides: Yes. Listen, I can’t really speak to other shops and how they’re organized and what their competitive advantages are. I can certainly speak to ours. And I think our ability to consistently provide capital into these industries, our ability to do small transactions and our proprietary data around to support those investments is what differentiates us in the market. We tend to see the most acute competition on the bigger broadly marketed deals, and you see cap rates on those deals really getting away from us and well inside of we’re currently deploying capital. And I think it’s, you’re a new shop, you’re going to rely on the broker’s network and compete solely based upon your cost of capital, which is not how we go to market.

Operator: Our next question comes from Rich Hightower with Barclays.

Richard Allen Hightower: I think most of my questions have been asked and answered. But maybe I was just curious for a little more color on the credit side of things. It sounds like, maybe if we go back in time and think about expectations 90 days ago, I think sentiment was probably a little worse than it is today or it’s proven out to be. So why do you think that is? And what’s in the crystal ball from what you can sort of tell with your existing portfolio companies? And just what their — what the feedback is, what you’re seeing in the numbers? Just give us a little more color on the credit side.

Peter M. Mavoides: Yes. I think, I would start our position on the credit as a super senior secured landlord remains pretty durable, and we don’t see any erosion in our cash flows or delinquencies or things that give us concern. Looking at the operators and numbers and the industries, generally, we see flat trends with not sales that are — same-store sales that are growing at a high rate, and we’re seeing slightly improved margins. But I think overall, we’re encouraged by the stability that we’re seeing in our industries. And I don’t see — we don’t see any major concerns emerging.

Richard Allen Hightower: Okay. That’s good news. And then just to, I guess, ask another follow-up on the competition side. If you break down the typical deal between going in yield, escalators, WALT, industry exposure, that sort of thing? I mean, as more and more competition comes in, even if it’s not precisely in the sandbox that you guys typically play in. I mean, where would you expect deal terms to change out of kind of those mix of different elements of every deal?

Peter M. Mavoides: Yes. I think, the — you can certainly look back at our disclosure and where we’re deploying capital back in 2020 and 2021. I think the low on the initial cap rate was 6.9% and the low on the escalations was 1.4% and a low on lease term was, call it, 15%. We negotiate all of those economic terms. I think the point of most sensitivity is going in cap rate, followed by escalations with lease term being the least sensitive to these operators. And certainly, when we’re doing a deal, we want an operator who is committing to the property for long term. So I think the first place you’re going to see it is in the initial cap rate and then it will trickle down through escalations.

Operator: Our next question comes from Omotayo Okusanya with Deutsche Bank.

Omotayo Tejumade Okusanya: Congrats on the continued solid execution. A quick question on the acquisition front. So we kind of had the Starwood fundamental deal. Just curious, again, if something like that ends up being too large for you guys to look at, whether, again, pricing on deals like that becomes an issue. Just kind of curious, again, I know your wheelhouse is doing these smaller granular deals, but for something that’s bigger, but not too big, such as this deal. How do you guys kind of think through an opportunity set like that?

Peter M. Mavoides: Yes. Quite frankly, we didn’t even take a look at it. We have an ample opportunity set of freshly originated deals through our relationships. And I think the bar for me to buy someone else’s — underwriting someone else’s existing portfolio is pretty high. We would have to be wide of where we’re deploying capital. And ultimately, I don’t think that transaction was priced at a 7.9% was where we deployed capital in the second quarter. And I think anecdotally, the transaction priced closer to 7%.

Operator: Our next question comes from John Kilichowski with Wells Fargo.

William John Kilichowski: Maybe just on a topic we haven’t really touched. It’s been a quarter now since some tariffs have been in place. Some have been paused. I’m curious, as you look across the sectors where you’re getting unit-level coverage data, if you’re seeing any delta in performance by certain sectors being more impacted than others?

Peter M. Mavoides: We really aren’t. And it’s not — our portfolio is largely service and experience, right? 90-plus percent, and they’re not buying goods that are subject to tariffs that are then selling — reselling to the consumer. And so, as I mentioned earlier, the portfolio trends have been incredibly stable.

William John Kilichowski: And then maybe just on the guidance raise, I think you touched on this a little bit earlier, but how do you think about raising the low end versus the high end? Is that more of a product of better-than-expected credit performance? Or is that the outperformance on the acquisition side or some grouping of both? And why does that not impact the high end?

Peter M. Mavoides: It’s just what the model is saying. But Mark, do you want to?

Mark E. Patten: Yes. I mean listen, I think, John, the first two things you mentioned are probably right. We had a strong first and second quarter investment levels, strong cap rates to what we were expecting. So that gives us comfort on the bottom end of the range and credit loss, I think, was better than we were expecting. But when you’re at an 8% growth rate on the AFFO per share for the year, for us, I think it’s a function of — we just didn’t think as Pete said, the model was telling us we should bump the top end.

Operator: Our next question comes from Ryan Caviola with Green Street.

Ryan Caviola: Since that 15% ABR soft ceiling was nearly achieved for car washes, assuming those acquisitions in that segment slowed down, which other retail areas are most attractive and where you hope to grow exposure to close out the year?

Peter M. Mavoides: I think you’re going to see our investment activity be pretty pro rata and the portfolio grow ratably. We’ll continue to invest in car washes and really, I think, as I look at the end of the year, the percentages of our industry mix will be pretty consistent.

Ryan Caviola: Great. And then there are two industrial acquisitions over the quarter. I know that’s very small. But anything — any expanded interest there? Or is this just sort of opportunistic as you see them?

Peter M. Mavoides: Yes. I think, we don’t — we like industrial. We like doing sale leasebacks with middle-market tenants. We like servicing our relationship. And when we find good opportunities, we deploy capital there. I would say our industrial investments tend to be characterized by very fungible real estate asset — real estate assets, industrial assets that have ready alternative uses. We try to avoid big chunky special use assets, but we do see good opportunities there. And when we do, we take advantage of them.

Operator: And our next question comes from Ki Bin Kim with Truist.

Ki Bin Kim: Just a couple of follow-ups here. Can you just comment on any foot traffic or sales trends that you’ve noticed in your restaurants or entertainment segment?

Peter M. Mavoides: A.J., what do you got?

A. Joseph Peil: So anecdotally, I would tell you that we use Placer AI internally to monitor that. And we have noticed a marked increase, in particular in the entertainment sector as June rolled over on the calendar. I think that is flowing through the restaurant space as well. I wouldn’t want to call out any one specific restaurant or entertainment concept is where we’re noticing this, but we do keep an eye, and we have seen traffic increase.

Ki Bin Kim: Okay. And for the tenants that are in the under 1.5x coverage bucket, just curious, has that coverage been stable or improving over time?

Peter M. Mavoides: Yes. Listen, I would say it’s, we don’t really think about it as tenants. We think about it as properties. Those individual properties are sub-performing for some reason. And it tends to be very transitory. We have sites where it’s underperforming and the operator hires a new manager and gets the site performing well or sites that lose — lose a manager and tend to perform poorly. We also have sites that are pro forma sites that are coming online that tend to ramp and come in and out of that bucket. So it’s — there’s a lot of different situations going on within our 2,100 properties that kind of influence that.

Operator: Our next question comes from Smedes Rose with Citi.

Smedes Rose: I just wanted to ask you, you mentioned, I think, Mark, in your remarks that you guys will look to probably settle the forward equity over the balance of the year. And I was just wondering, as you think about next year, given your low pro forma leverage, would you anticipate using leverage as a higher percentage of external growth next year? And kind of maybe, kind of, how would you think about getting to sort of a more normal leverage level, I guess, since you’re kind of on the low end, I think, of where you would be over time?

Mark E. Patten: You know, what I appreciate that question, Smedes. I guess what I would say is, first and foremost, when you think about our capital sourcing, you could probably use a split of 50% to 55% equity, 35% debt, give or take, and then that 10% free cash flow, which is improving every quarter. So I think for us, every year, we’re going to be sourcing debt capital. And certainly, I think Pete said in his remarks, maybe I even did as well. The good news for us today is we don’t have to do anything on the equity side to achieve our ample dry powder to take us into 2026. For us, in terms of accessing debt capital, it’s opportunistic for us. But in terms of the mix, I think you should expect for us to do what we’ve been doing for, frankly, since we’ve come public, but certainly just used the last 12 quarters, that leverage is somewhere around 4.5x. So I think [indiscernible]

Operator: Our next question comes from Jana Galan with Bank of America.

Jana Galan: Just a quick question on the strong growth of the company and the team growing given Mark called out the compensation expense. How do you think about the scale of the platform? Are you targeting an overall G&A as a percent of revenue or assets? Or you’re just looking to meet the needs of the company with new hires?

Peter M. Mavoides: Yes. I think more than anything, we’re trying to drive sustainable earnings growth. And to do that, it requires one, we grow our investment teams to meet the growing investment opportunity set that we capitalize on and then growing the portfolio management team to manage the growing portfolio and then growing the finance and accounting team accordingly. And so, we’ve grown the company since coming public pretty steadily, both in terms of assets and people and we’ll continue to invest in our people to do that. G&A really is an output of that. we look at our infrastructure, we look at our organization. We look at what we need to execute the business plan that really is ultimately driven by growth and growth in earnings.

Operator: Our next question comes from Daniel Guglielmo with Capital One Securities.

Daniel Edward Guglielmo: Just one for me. You all are always nimble on the industries you invest into and there was an uptick in the convenience store space, with Allsup’s as a new top 10 tenant as well. What are some key characteristics you look for in that business type? Is it food — hot food option necessary? Or is fuel traffic and location most important? Anything you can give there would be helpful.

Peter M. Mavoides: A.J., what do you got?

A. Joseph Peil: Yes. So just a quick clarifying point. Allsup’s, we previously have branded that, Yesway. It’s a dual brand and they’re growing the Allsup’s platform. So we just put the new logo in. So that was not a new investment. It’s something we’ve owned for well over a year at this point. And then more broadly, just in the convenience store space, we’re looking for groups that have reasonable size and scale. We track gallons sold, inside store sales and then underwrite the underlying profitability of the unit and make sure that the corporate credit is stable. So when we make the investments, we’re generally looking for well-positioned C-stores with ample inside store sales and very strong gallons sold.

Operator: We will move next with Greg McGinniss with Scotiabank.

Greg Michael McGinniss: Pete, I appreciate your earlier commentary on the acquisitions of the industrial category. But given the size of the transactions with on average rents 4x portfolio average. Could you provide some more details on those and why you’re comfortable making bigger bets in that space?

Peter M. Mavoides: Yes. Listen, I don’t think it was a bigger bet. They were very granular investments, and we like the real estate and the tenants that we’re assigning long-term leases to be in that space.

Greg Michael McGinniss: So ABR was up $2.5 million with the two investments there. So it seems to imply they’re at least bigger on the rent side, no?

Peter M. Mavoides: Yes. I mean, part of that is the initial cap rate, too. And there’s three different investments. And so yes, they’re bigger assets, but still under $20 million. And certainly, with the size and scale of our portfolio, we have not outsized risk.

Greg Michael McGinniss: Okay. Then we understand there’s no necessarily a need to raise equity in order to hit acquisition guidance given the ample dry powder. But with the stock is not materially below where you issued last quarter. Is there any reason not to — is there any reason to expect that you wouldn’t use the ATM at this time to help continue to prefund investments?

Peter M. Mavoides: I would say, we’ll execute accordingly and see how the market performs. We’re in a great position from a liquidity and a leverage perspective. And if we see the opportunity to continue to maintain that position, we will or it will just depend on how the market reacts.

Operator: We will move next with John Massocca with B. Riley Securities.

John James Massocca: So how should we kind of feel about the cadence of transaction volume in the current quarter? Just kind of thinking about — I know, we’re early in 3Q, but you’ve only closed $8 million year-to-date — sorry, quarter-to-date, and you had a pretty decent amount, you’d think still left in kind of the PSA or LOI bucket even kind of netting out what you closed between the end of May and the end of 2Q. So just kind of curious if there’s something chunky out there? Is there stuff that’s kind of falling in and out of the pipeline? Just trying to get a feel for transaction volume maybe on a super short-term basis.

Peter M. Mavoides: Yes. Week over week.

Mark E. Patten: Sure. I wouldn’t look too much into it. The other pipeline, we’re happy with where it is. It’s pretty consistent and some timing with July 4 and the start of summer. But — so I wouldn’t look to read into the $8 billion. But overall, the pipeline is strong and consistent with prior quarters.

Peter M. Mavoides: What is the pipeline currently?

Mark E. Patten: Currently, we’re sitting at about $290 million, that is 7.8%.

John James Massocca: Great. Helpful. And then on the debt side, how are you thinking about maybe potentially raising some debt? I know you talked about the ability to use the in-place forward equity to fund the rest of the year’s investment activity, but you took $200 million out of the line. It seems like markets are getting pretty accommodative from a spread perspective. I mean, would that be something you would consider in 2H?

Mark E. Patten: Yes. I mean, I guess — thanks for that question, by the way. Look, we — I’d say we maintain our view regarding the merits of returning to the bond market. As a logical long-term source of permit debt capital, particularly that’s really optimizing the alignment with our weighted average lease term. And gratefully, since we last were on a call, the spread environment for us, if you use our current — one existing bond has gotten — has improved markedly. Obviously, the tenure remains somewhat volatile. And I guess what I’d say is the equity deal we did in March, a good quarter on the ATM in second quarter really puts us in a position where we [Technical Difficulty] but I would tell you that I’d expect in the [Technical Difficulty] we’d be looking for that spot too.

But I guess, I have said, and I think I did in my remarks, we don’t need the capital today. We’re in a great position in terms of liquidity and our dry powder runway. So that’s why we’re [Technical Difficulty]

John James Massocca: Sorry, is I breaking up or was you breaking up? I couldn’t hear the end of Mark’s remark there.

Peter M. Mavoides: He said you were a great analyst.

Mark E. Patten: I did say that right at the tail end. I don’t know if you heard the part about we still view the bond market as the logical long-term source for permanent debt capital going forward, lined up with our wall. And that the environment has improved, certainly, if you use our one issuance. I’m not sure if it’s still coming through. But our liquidity position today really puts us in a spot where we can be opportunistic, somewhere in the second half to your question, most likely.

John James Massocca: Is — I know just because you have only one piece of debt outstanding, unsecured debt outstanding or unsecured bond outstanding. Is term loan market even more accommodative than that, just given, is it a little bit of an orphan issuance at this point?

Mark E. Patten: Well, I guess I’d say it a different way, the term loan market, we think, is still open to us and obviously has an attractive all-in swap rate. But if you think about it, there’s a real benefit in the bond market where we think that’s the long-term solution. As I mentioned, in terms of the best long-term permanent — to perm out our debt needs, certainly align more closely with our weighted average lease term. So I guess what I’d say is there’s a benefit to continuing to build your complex in the unsecured bond market, which is why even though they might price a little higher, I’ll call it, in the high 5s. We just think long term, that’s going to be a better strategic solution for us in terms of accessing debt capital.

Operator: Thank you. And this concludes our Q&A session. I will now turn the call back to Pete Mavoides for closing remarks.

Peter M. Mavoides: Great. Well, thank you all for participating in today’s call. As we hopefully conveyed the business is in a great spot, and we look forward to engaging with you all in the coming months. Thank you.

Operator: Thank you. And this does conclude today’s program. Thank you for your participation. You may disconnect at any time.