Essential Properties Realty Trust Inc

NYSE:EPRT

Earnings Call Analysis

Steady Growth Amid Volatile Markets

Essential Properties Realty Trust showcased solid results for Q2 2024, driven by $334 million in investments and a 5% growth in AFFO per share. The company’s portfolio remains strong, with 99.8% occupancy across 2009 properties and an average lease term of 14.1 years. Despite slight rent growth dip due to Red Lobster's bankruptcy, investments averaged an 8% yield. Looking ahead, Essential Properties maintains a robust investment pipeline and anticipates slight cap rate compression. AFFO per share guidance for 2024 remains at $1.72 to $1.75, with expectations for continued earnings growth beyond 2025.

Solid Performance and Increased Investments

In the second quarter of 2024, Essential Properties Realty Trust demonstrated robust performance marked by a significant increase in investments and strong tenant metrics. The company invested $334 million through 35 transactions, achieving an 8% cash yield and a GAAP yield of 9.1%. This investment activity was consistent with their strategic focus on sale-leasebacks, and the weighted average initial lease term for these investments was an impressive 17.8 years.

Financial Highlights and Guidance

The company reported an Adjusted Funds from Operations (AFFO) per share of $0.43, a 5% increase from the same period last year. Total AFFO for the quarter was $77.1 million, up 25% year-over-year. Essential Properties has maintained its AFFO per share guidance range of $1.72 to $1.75 for 2024, suggesting confidence in continued growth. The company declared a cash dividend of $0.29 per share, representing a payout ratio of 67% of AFFO.

Balance Sheet Strength and Capital Management

The company’s balance sheet remained strong, with income-producing gross assets reaching $5.5 billion by the end of the quarter. Essential Properties expects this to grow to $6 billion by year-end. The company issued $137 million of stock through their ATM program and maintained a low leverage ratio of 3.8x net debt to annualized adjusted EBITDAre. They also secured a $450 million term loan, demonstrating robust liquidity and a conservative approach to leverage.

Tenant Diversity and Risk Management

Tenant diversity continues to be a key strength for Essential Properties. The largest tenant represents only 4.7% of annual base rent (ABR), and the top 10 tenants account for just 18.6% of ABR. The company’s portfolio boasts a weighted average lease term of 14.1 years, with a minimal 4.1% of ABR expiring through 2028. This diversity and the long-term nature of leases provide a strong foundation for stable cash flows.

Operational and Strategic Initiatives

Operationally, the company demonstrated effective portfolio management by completing opportunistic asset sales totaling $4.8 million at a 7.3% weighted average cash yield. These dispositions were part of ongoing strategies to optimize the portfolio and manage risk. The company remains committed to leveraging its balance sheet to support external growth and maintain a competitive cost of capital, positioning itself for continued success in 2025 and beyond.

Market Position and Future Outlook

Despite volatility in capital markets, Essential Properties has cemented its position as a reliable capital provider in targeted industries. With 82% of second-quarter investments sourced from existing relationships, the company underscored the value of its middle-market tenant base. Looking ahead, the investment pipeline remains solid, and the company anticipates continued robust acquisition activity, albeit with potential moderations in cap rates as market conditions evolve.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust Second Quarter 2024 Earnings Conference Call. [Operator Instructions] This conference is being recorded, and a replay of the call will be available 2 hours after the completion of the call for the next few 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; Rob Salisbury, Head of Capital Markets; Max Jenkins, Head of Investments; and A.J. Peil, Head of Asset Management.

It is now my pleasure to turn the call over to Rob Salisbury.

[Robert Salisbury, executive]

Thank you, operator. Good morning, everyone, and thank you for joining us today for Essential Properties' Second Quarter 2024 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 Mavoides, executive]

Thank you, Rob, and thank you to everyone joining us today for your interest in Essential Properties. On our first quarter earnings call, we discussed how our business is well suited for the current market environment, which has been characterized by tight lending standards and volatile capital markets. Our position as a reliable and consistent long-term capital provider to our middle market relationships is highly valued. Against this backdrop, our second quarter results continued to showcase the strengths of our business model with a well-capitalized balance sheet, and a value proposition of providing growth capital in our targeted industries.

This quarter's results were driven by a healthy portfolio and $334 million of investments, resulting in AFFO per share growth of 5%. In the second quarter, 82% of our investments were generated from existing relationships, underscoring the value we provide to our middle market tenant base. With quarter end pro forma leverage of 3.8x and liquidity of over $1.1 billion, our balance sheet positions us well to continue to grow our portfolio by investing in our core industries at attractive spreads.

The business is performing well with solid tenant credit trends and strong investment volumes. However, these positives are offset in the short term by the earnings per share headwinds of the conservative posture on leverage we elected to take given the capital markets volatility discussed above.

Mark will review this in more detail, but we believe our balance sheet capacity and competitive cost of capital will allow us to continue to drive strong earnings growth in 2025 and beyond. For 2024, we have reiterated our AFFO per share guidance range of $1.72 to $1.75.

As our second quarter results indicate, our portfolio continues to operate at a strong level. We ended the quarter with investments in 2009 properties that were 99.8% leased to 395 tenants operating in 16 industries. Our weighted average lease term stood at 14.1 years at quarter end, which is up year-over-year with only 4.1% of annual base rent expiring through 2028.

From a tenant health perspective, our weighted average unit level rent coverage ratio was 3.7x this quarter, down slightly from last quarter. Same-store rent growth in the second quarter was 1.4%, down slightly from last quarter as the portfolio absorbed a small headwind from the five properties that we own that were impacted by the Red Lobster bankruptcy. Two of these properties were rejected as part of the Chapter 11 process, while the remainder are occupied and leased.

During the second quarter, we invested $334 million through 35 separate transactions at a weighted average cash yield of 8%, relatively consistent with our last quarter and up 60 basis points from a year ago. 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 at a weighted average initial lease term of 17.8 years, and a weighted average annual rent escalation of 1.9%, generating an average GAAP yield of 9.1%.

Our investments this quarter had a weighted average unit level rent coverage of 3.0x and the average investment per property was $3.4 million. The vast majority of the investments this quarter were originated through direct sale-leasebacks, which are subject to our lease form with ongoing financial reporting requirements. Additionally, 76% contained master lease provisions.

Looking ahead to the third quarter, our investment pipeline remains solid and up year-over-year in the context of what is typically a seasonally slower period in the calendar. As we have discussed in the past, we expect that the recently rejuvenated expectation of Fed easing could result in modest cap rate compression later in the year. However, we have not seen this in our current pipeline, which currently suggests a cap rate similar to the second quarter.

From a tenant concentration perspective, our largest tenant represents 4.7% of ABR at quarter end and our top 10 tenants now account for only 18.6% of ABR. Tenant diversity is an important risk mitigation tool and a differentiator for us and it is a direct benefit of our focus on middle market operators, which offers an expansive opportunity set.

Dispositions were below our trailing 8-quarter average in 2Q, reflecting a persistently wide Bid/Ask spread in the market. We sold six properties in this quarter for $4.8 million in net proceeds. This represents an average of approximately $800,000 per property, highlighting the importance of owning fungible liquid properties which allows us to proactively manage portfolio risks.

The dispositions this quarter were executed at a 7.3% weighted average cash yield, with a weighted average unit level rent coverage ratio of 0.5x. Over the near term, we expect our disposition activity to remain relatively in line with our trailing 8-quarter average, driven by opportunistic asset sales and ongoing portfolio management activities.

With that, I'd like to turn the call over to Mark Patten, our CFO, who will take you through the financials and the balance sheet for the second quarter. Mark?

[Mark Patten, executive]

Thanks, Pete, and good morning, everyone. As Pete noted, we had a solid second quarter, which was highlighted by a strong level of investments at an 8% cash cap rate. Among the headlines from the quarter was our AFFO per share of $0.43, which is an increase of 5% versus Q2 2023. On a nominal basis, our AFFO totaled $77.1 million for the quarter, that's up $15.2 million over the same period in 2023, an increase of 25%.

This AFFO performance was in line with our expectations, underlying the updated guidance range we provided last quarter. A stronger-than-anticipated investment volume was partially offset by later timing of closing those investments within the quarter.

Additionally, of note, we recognized $1.5 million of other income this quarter related to cash proceeds we received from a legal settlement. Because this settlement represents the recruitment of our legal and other expenses that negatively impacted AFFO in prior periods, we included these proceeds within AFFO this quarter. Resolution of this matter and commensurate recognition of other income was anticipated in our updated guidance range.

Total G&A in Q2 2024 was $8.7 million versus $7.6 million for the same period in 2023, with the majority of the increase relating to increased compensation expense as we continue to invest in our team. Our recurring cash G&A as a percentage of total revenue was 5.6% for the quarter, which compares favorably to the 6.1% in the same period a year ago. Our total G&A and recurring cash G&A were also in line with our expectations for the quarter. We continue to expect that on an annual basis, our cash G&A as a percentage of total revenue will decline as our platform generates operating leverage over a scaling asset base to enable us to manage a larger portfolio and invest at higher levels.

We declared a cash dividend of $0.29 in the second quarter, which represents an AFFO payout ratio of 67%. Our retained free cash flow after dividends continues to build, reaching $26.9 million in the second quarter, equating to over $100 million per annum. We continue to view our retained free cash flow as an attractive source of capital to support our investment program.

Turning to our balance sheet. With our $334 million in Q2 2024 investments, our income-producing gross assets reached $5.5 billion at quarter end. The scale of our income-producing assets continues to build, and we expect to approach $6 billion by year-end. The significant diversity and increasing scale of our asset base continues to be a favorable underpinning of the reliability and durability of our cash flows and provides an increasing level of risk mitigation.

On the capital markets side, it was a productive second quarter. Through our ATM program, we completed the sale of approximately $137 million of stock, all on a forward basis. With no settlements during the quarter, our balance of unsettled forward equity totaled $319 million at quarter end. One element of our second quarter results that's also worth highlighting is our current share price being materially above the weighted average price of our unsettled forwards, which was $24.75 at quarter end.

Under the treasury stock method, we account for the potential dilution from these forward shares in our diluted share count. For the second quarter, our diluted share count of 177.6 million shares included an adjustment for 904,000 shares from our unsettled forward equity related to this treasury stock calculation. At a high level, we view the impact of the accounting treatment for this unsettled forward equity as a matter of timing as these shares will ultimately be settled to fund the business, notably as investments are closed later this year. Therefore, while this calculation creates a near-term headwind to our current earnings per share metrics, it should have little to no impact to our AFFO per share in 2025 and beyond.

Our pro forma net debt to annualized adjusted EBITDAre, as adjusted for unsettled forward equity was 3.8x 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. With the recent backdrop of capital markets volatility, we have maintained a pro forma leverage profile substantially below our historical average of the mid-4x range. We believe our conservative approach has been prudent, particularly in light of elevated prevailing debt costs.

With the prospect for Central Bank easing later this year, our leverage metrics may drift higher to more normalized levels. Subsequent to quarter end, we closed on a $450 million term loan with a delayed draw of features. We are very appreciative of the continued support of our core banking relationships and we were pleased to have 4 new banks join our bank group as part of executing this transaction. We drew $320 million at closing, a portion of which was used to fully repay the outstanding balance on our revolving credit facility.

Assuming we exercise the extension options available to us, the term loan would mature in January 2030. We expect to draw the remaining $130 million over the coming months as a source of funding for our investment pipeline. Consistent with our capital goals of efficiently match funding our assets, we swapped the initial $320 million draw for the fully extended term of the debt commitment at a weighted average fixed rate of 4.99%. At quarter end, our liquidity stood at over $1.1 billion, pro forma for our net unsettled forward equity and our 2030 term loan.

With our equity and debt capital needs met for the year, our strong balance sheet and conservative leverage positions the company well to execute on our growth plans for 2024 and into 2025. Lastly, as we noted in the earnings press release, we have reiterated our 2024 AFFO per share guidance range of $1.72 to $1.75, which implies an over 5% growth rate at the midpoint.

With that, I'll turn the call back over to Pete.

[Peter Mavoides, executive]

Thanks, Mark. In summary, we are very pleased with our second quarter results and remain optimistic about the prospects for the business. Operator, please open the call for questions.

[Operator]

[Operator Instructions] Our first question comes from Haendel St. Juste with Mizuho.

[Haendel St. Juste, analyst]

First question, I guess, is on the guide. I'm curious why not raise it even a little bit at this point? It seems like everything is firing at all cylinders, strong volumes, a larger pipeline, as you noted, and improved cost of capital. So maybe you can talk through or even quantify some of the potential headwinds that are built in here? And maybe give some color on the treasury stock method accounting dilution that it's embedded in the guide? And any factors that perhaps we're not aware of that might be keeping you from raising the guide.

[Peter Mavoides, executive]

Yes. I would say, Haendel, you're certainly right. Things are firing on all cylinders. The pipeline continues to build, and we continue to deploy capital clearly, as we said in the statements. Our capital position is really the majority of the headwind that we're seeing in our earnings. And given that, it really -- it just doesn't give us the visibility to drive the guidance up. But Mark, if you want to provide some color on that, you can.

[Mark Patten, executive]

Yes. Haendel, basically, not to get too granular about it. But if you think about the treasury stock method, what you're really doing is you're assuming the execution of the settlement, which comes in at $24.75 a share, and the treasury stock as you go out and buy as many shares as you can with those proceeds that at $30 means you're going to get fewer shares brought back into treasury. So you've got a net dilutive amount of shares from the issuance. And that's really -- we tried to kind of quantify it, but if you think about the headwind, it's probably $0.005.

[Haendel St. Juste, analyst]

Got it. Got it.

[Mark Patten, executive]

By the way, Haendel, that's for the full year.

[Haendel St. Juste, analyst]

Full year, yes. Got it. Got it. Also, I guess, you guys noted, I think, in the release that this was the maybe the highest -- I think, is the highest acquisitions volume quarter to date. So maybe you could discuss some of the dynamics you're seeing in the market. Are you seeing more sellers willing to engage? Or are you just better cost of capital? And then maybe is this a run rate that we can expect to stay at going forward near term?

[Peter Mavoides, executive]

Yes, I would continue to guide you to our 8-quarter average is a good indicator of the run rate. As we have said in the last couple of quarters, it's a good market for us to invest really given the lack of capital alternatives that many of the middle market tenants we work with are facing or the cost of relative financing options, and we're working very hard to transact and put capital to work. But the way we go to market doing $10 million deals into $2 million, $3 million assets, it's, there's only so much we can put through the system.

And we're fortunate this quarter to have some bigger transactions. As we said on the call, our pipeline remains full, and we continue to work hard, which may suggest a robust third quarter here, but it's kind of too early to really tell, but we feel good about the investment market. We continue to have a relatively strong competitive advantage, and we're working hard to put capital at work.

[Operator]

Our next question is from Greg McGinniss with Scotiabank.

[Greg McGinniss, analyst]

Just another one on the acquisition guidance. I appreciate looking at the trailing 8 quarters, which, following Q2, went up $30 million to around $275 million. I just want to make sure that's kind of where you're thinking from a target standpoint? And then how much you have under LOI PSA today? Because I think closed to date is not too much, but it sounds like you're confident that you're going to get a significant amount more done this quarter. So any color would be appreciated.

[Peter Mavoides, executive]

Yes. Obviously, third quarter is always tough. You work hard to get your second quarter deals closed at the end of June and then people kind of go away on vacation, and it's hard to get people on the other end of the phone, engaged and working. And then they come back in September, eager to put deals to bed. So it's one of the hard course to forecast.

One of the reasons why it starts off seasonally slow. As we said in the call, our pipeline currently is ahead of where it was last year, roughly in the, I would say, somewhere between 2 and 2.50 range. there's always some variability into what closes in the quarter, depending upon timing, and we don't always control the timing of the transactions as we're supporting M&A transactions often. So it's early in the quarter. We got a lot of work left to do. We think the pipeline supports an active quarter, and we'll see where it shakes out.

[Greg McGinniss, analyst]

And could you also give some details around some of the large -- maybe larger portfolio transactions that you were able to get done this quarter and then also whether we can -- you can -- are looking to acquire more equipment shares? I know that you're kind of targeting 5% as a cap. So maybe there's a little bit more space there, but just curious if you'd go over that for that company?

[Peter Mavoides, executive]

Yes. When we say larger portfolio deals, it's just bigger $30 million, $50 million, $60 million sale-leasebacks within our targeted industries. So it's not a bigger portfolio of kind of existing lease assets. And so it's just bigger operators with more assets to sell and we did a sizable carwash sale-leaseback in the quarter as well as the sizable childcare sale-leaseback in the quarter and sizable, I would say, greater than $50 million. In terms of equipment share, we continue to have tenant diversity discipline around not wanting to have a tenant above 5%. That company continues to grow and continues to present us opportunities. We feel very comfortable with them as our largest tenant, but we're unlikely to run them above that 5% number.

[Operator]

Our next question comes from Eric Borden with BMO Capital Markets.

[Eric Borden, analyst]

I appreciate the color around being fully funded for the year and plenty of liquidity. But just given where your shares are today, would you be willing to issue forward equity here in order to just to lock in that price and kind of set yourself up for 2025? Or are you just potentially trying to mitigate any future treasury stock dilution?

[Peter Mavoides, executive]

Yes. We -- and I'll let Mark and Rob take a stab at that. But certainly, we had an active quarter in the second quarter in terms of the ATM, and we've been very aggressive in terms of putting -- getting our capital raised and behind us and allowing us to execute if we were willing to issue shares at $24.75. Certainly, north of $30 is pretty compelling, but there is some seller's remorse when you look back. And I clearly think as we get closer to $25 and we get 2025 guidance out there, there's upside to our shares. So we will continue to be opportunistic on the equity side. We will continue to stay in a good capital position. But Mark, Rob, do you add anything to that?

[Mark Patten, executive]

Yes. I think what I'd say first is. We've got ample liquidity to address sort of our opportunities. So if you think about it from the standpoint of the unsettled equity, we have free cash flow we're generating. And otherwise, the remainder of the term loan, we've got $700 million liquidity easily to get us to even there, you would be still pretty low levered in terms of the bottom end of our -- the range we've articulated.

So in one respect, we don't have to do anything as we've sort of said in the remarks. But then again, we've been opportunistic on the ATM. I certainly wouldn't think, we would move away from that approach. And then, the other thing we've been pretty consistent that if we start seeing visibility into a strong pipeline that tends to be a good indicator that we could have an opportunity there. And as Pete said, the price is in a good spot. So -- but right now, the good news is we don't have things so we can be very opportunistic.

[Robert Salisbury, executive]

Yes. I'd just add with $750 million to $1 billion of leverage capacity today, there's plenty of flexibility for us to execute on the current business plan. And that being said, we're always mindful of extending our equity runway and being ahead of not having to do anything defensively, but we're in a good offensive position.

[Eric Borden, analyst]

That's helpful. Maybe just turning to the acquisition outlook. How do you think the next 6 to 12 months plays out for you with rate cuts seemingly on the table? Do you think the mix will remain heavily weighted towards sale leasebacks? Or do you foresee traditional acquisitions becoming a bigger part of the picture here?

[Peter Mavoides, executive]

Yes. Our portfolio has been 80% to 90% constructed with sale leasebacks. We believe in putting capital to work in the context of the sale-leaseback where your counterparty is and an operator filling a capital need. It's just a higher value-added way to deploy capital. And that's that viewpoints independent of the rate environment. We prefer to structure our own leases and underwrite our own deals and not by existing lease deals. So going forward, I think you should expect us to continue to be largely focused on executing sale-leaseback transactions.

[Operator]

Our next question is from Caitlin Burrows with Goldman Sachs.

[Caitlin Burrows, analyst]

Maybe just a follow-up to that last one. And I know previously, you mentioned how it's a good market for EPRT given the lack of alternatives for your customers, but maybe asked another way is like how do you expect your business and opportunity could change as rates come down? Maybe what could get worse for EPRT but what gets better?

[Peter Mavoides, executive]

Yes. I think, there's always a value-add proposition to sale-leaseback capital regardless of the capital markets condition. It just happens to be better in a tighter capital markets. As rates come down, we expect competition and normalized, and we've seen some of that already with the prospects of rate cuts and competitors coming back to the market, the leveraged buyers becoming more competitive and more -- and all that manifests itself in downward pressure on terms and cap rate in terms of being lease term and bumps and everything that goes along with that.

And it's imperative for us to be reliable and be a value-added capital partner to relationships to differentiate ourselves from other capital providers, and that's what we intend to do. So over the -- since bringing this company public, we've invested across a hyper competitive market set, and there's a little less competition today, but we're certainly prepared to add value and continue to transact when competition normalizes.

[Caitlin Burrows, analyst]

Okay. And then on the unit level rent coverage side, it looked like that declined a little bit in the quarter still 3.7x, but the exposure to the under 1x increased slightly, so to the 1 to -- basically 1.5x. So could you talk about who's in that bucket? And whether there's anything proactive you can or want to do about that?

[Peter Mavoides, executive]

Yes. I would start by saying coverage, it is one risk factor, and we tend to look at coverage and couple it with credit risk, because coverage alone isn't going to result in a defaulted lease or recognition. And so, as we disclose our credit watch list every quarter, which is the intersection of credit risk and coverage risk, that is actually down quarter-over-quarter, by down, about 10 basis points from 100 basis points to 90 basis points.

As we think about the under one bucket and what you see there is a lot of our development sites coming online where the tenant has cash pay rent against the sites that aren't fully stabilized or even open and operating. So that's going to make that number a little artificially high. And if we see an asset that we think is permanently impaired and there's a credit that we don't have confidence in being able to weather that impairment or fix the problem at the unit, we'll look to sell it. And that's been an active part of our business plan and our business strategy and we'll continue to do that. And so I think that as we said in the call, the portfolio is in great shape. These minor tweaks at the margin really doesn't change that macro perspective that the portfolio is performing very well, and we're operating from a strong base.

[Operator]

Our next question is from Smedes Rose with Citibank.

[Bennett Rose, analyst]

I think, I just wanted to follow-up a little bit on the last question around your tenant base, because we're starting to see in other sectors you have some weakness not just to low-end consumers, but kind of flowing through to higher end consumers. I'm wondering if you're hearing any feedback along those lines from your tenants in general?

[Peter Mavoides, executive]

We aren't, Smedes. And keep in mind that we are passive landlords and we collect data on a one quarter lag. And so I think those sort of sentiments that you're hearing very real time, we wouldn't really see in our numbers for 90 to 120 days. Generally, across the board are industries that are up from a coverage perspective, with few exceptions in the portfolio and our tenants are operating pretty strongly. And I think that's really tied to being in largely service and experience-based industries that aren't subject to discretionary spending.

[Bennett Rose, analyst]

Okay. And then sorry if you covered this. I got on the call a little bit late. But are you still sort of expecting probably a little bit of a downward drift in cap rates as we move through the year at this point? Or has that changed at all?

[Peter Mavoides, executive]

I think, that's right, Smedes. As competition normalizes and interest rates start coming down, we would expect to see some pressure on our initial cap rates off of these historically high levels.

[Operator]

Our next question is from Ki Bin Kim with Truist Securities.

[Ki Bin Kim, analyst]

Just a couple of follow-ups. On the unit level coverage that decreased a little bit. I appreciate your comments around some newly developed assets that might be a drag on that as they stabilize cash flow. But maybe you can help us just break that down a little bit further, under 1x coverage increase, but 50 basis points in this quarter. Was that -- like how much of that was driven by development versus some tenant categories that might have seen some deterioration?

[Peter Mavoides, executive]

Yes. I would say we're not going to split it that finely, 40 basis points, 50 basis points. What I would say is the guys going into that group in the non-development sector are really situational specific to those industries, like movies or just an operator having some challenges, but there's nothing systemic or thematic about that across our industries, it's really operators that are struggling for whatever reason.

[Ki Bin Kim, analyst]

Okay. And going back to the competitive landscape, which has been favorable for you guys. Just curious, given your long history in the sector. If rates start to decline further, how quickly does -- how quickly do competitors start to rise up in your sector?

[Peter Mavoides, executive]

Yes. I think, it's really -- when they have a cost of capital or visibility to the cost of capital, right, and I think, you think of public peers, their cost of capital prices on a daily basis. And the for private guys, visibility is really a bond market that supports them. So the private guys will lag a little bit until you get some more stability into the bond market. But the public guys, they'll go get right back into it and start bidding. And we've already seen some of that. And so I think it will be quick.

[Operator]

Next question is from [ Cheryl Cole ] with Wells Fargo.

[Unknown Analyst]

This is John here for Cheryl. So kind of going to your portfolio breakout here. You mentioned last quarter, there was a 15% soft cap for any industry, and you're kind of hitting that with carwashes. How does that impact your ability to grow the pipeline moving forward, if you maybe get into a point where you can't really consider those deals as much?

[Peter Mavoides, executive]

Yes. We have a robust opportunity set, and it's incumbent upon our investment professionals to source adequate volume to support our investment needs. We continue to invest in carwash, and if we do $300 million in the quarter, that gives us $45 million incremental just to stay flat and then you price those deals accordingly. And so our opportunity set is robust and the cap on car washes isn't constrained in that in any way.

[Unknown Analyst]

Got it. And then just a follow-up to the last question on the unit-level coverage. Is there anything there that is more of like a same-store metric so that we could sort of parse out what may be development that's kind of artificially driving those numbers lower?

[Peter Mavoides, executive]

Not really. I mean, that's -- it's -- and that's why we disclosed our credit watch list. I think, the disclosure around unit level coverage is informative, but that's a leading indicator of risk and we disclosed the same-store sales number in our sub, which was up 1.4%, that's a quarter-over-quarter number. We disclosed our watch list, and we disclosed our recoveries, and we think those are adequate kind of data points and that coverage is just one indicator and that's going to ebb and flow over the quarters.

[Operator]

Our next question is from Michael Goldsmith with UBS.

[Michael Goldsmith, analyst]

It's been touched on a couple of times on the call on the mixed data points on the consumer. Recognize you have low exposure to low-end consumer, but just given the uncertain backdrop, does that change how you think about different tenant categories or individual tenants? Would you lean into certain categories or shy away from others in the current macro backdrop?

[Peter Mavoides, executive]

It really hasn't. And we've been very focused as we've built this platform on service and experience-based industries that operate out of granular in fungible real estate properties, and we make 20-year investments and this investment thesis has been developed over 20 years. And so year-over-year ebbs and flows really don't materially change our underlying long-dated investment thesis.

[Michael Goldsmith, analyst]

And as a follow-up, can you talk a little bit about the time horizon for G&A to -- as a percentage to trend down? You've mentioned compensation and expense as a fact there. So any sort of notable developments to your platform or anything that you can see, I think, you can provide us insight into how G&A percentage kind of goes down over time?

[Peter Mavoides, executive]

Yes. It's been pretty linear as we've grown our assets. Our G&A as a percent of revenue has trended downward. And we think just looking at the comps in the industry can give you a pretty good picture of how to run a platform like this efficiently. And there's data points that $2 billion, $6 billion, $9 billion and $50 billion to kind of give you a sense of what that trend might look like. Our ambition is to run as efficiently as possible and better than market. And as we look at our peers and the other competitors in the market. So it's gone down. I don't know the exact numbers, but I think when we came public, it was probably about $11 billion. And today, it's $6 billion, $7 billion...

[Mark Patten, executive]

It's under $6 billion.

[Peter Mavoides, executive]

And it's going to continue to go down. And there's a very large competitors. You can assume that's a floor.

[Operator]

Our next question comes from John Massocca with B. Riley Securities.

[John Massocca, analyst]

I know you've already covered a lot of ground, so just kind of two quick detailed ones from me. The Red Lobsters that were handed back, was that in the quarter? And is that kind of reflected in the vacancy metrics that were reported? And I guess, what else is kind of in the property similar to lease termination if it did include Red Lobster?

[Peter Mavoides, executive]

Well, the Red Lobsters were fitted to the vacant bucket and part of our five vacant assets during the quarter. Anything else, A.J.?

[AJ Peil, executive]

In the vacant bucket, the two shares are property and [indiscernible]

[Peter Mavoides, executive]

Yes. So just a couple of three other assets. So hopefully, that answers your question, John. Was there something else on it?

[John Massocca, analyst]

That makes sense. That was it. And I guess, because you haven't historically had a ton of this in the portfolio, but what's the look towards repositioning those properties? Are you still kind of inclined to sell them? Or is there any possibility of retenanting those assets?

[Peter Mavoides, executive]

Yes. Our process is basically higher qualified and experienced local broker to find the best economic outcome for lease or sale. And we tend to be different, and we just try to find works best for the asset. And so generally, selling to a developer who is then going to try to re-tenant is a less attractive outcome. And so we're really only selling assets after we've not been able to find a tenant to take them. So we're working hard on a dual track to find solutions for all five of those assets in our vacant bucket.

[John Massocca, analyst]

Okay. And then, Mark, sorry if I missed this earlier in the call, but what's the plan for swapping out or not swapping out the kind of remaining draw on the new term loan? Are you going to like swap that once drawn? Or is there any potential thoughts leaving that floating just given where the interest rate environment is today?

[Mark Patten, executive]

Yes, I appreciate that. I think, our primary intent is that we would swap it out when we drew it, haven't really looked at, thinking to leaving it floating. I just don't think there's -- despite your appropriate point that there might be some reduction in rates, just our plan is to swap it.

[Operator]

[Operator Instructions] Our next question comes from Josh Dennerlein with Bank of America.

[Joshua Dennerlein, analyst]

I was curious for the deals that you're pricing today. How is spread the cost of capital compared to maybe what you're considering as normal? And how much has that changed just given kind of rally that you've seen over the past month?

[Peter Mavoides, executive]

Yes. I would start by saying we don't price deals based upon our cost of capital, we price deals based upon the market dynamic and our perception of the appropriate risk-adjusted returns for each individual investment. And the spread to our cost of capital is kind of an output, not an input. We've seen that spread fluctuate from as low as 150 basis points to as high as 300 basis points or plus. Currently, depending on where you peg our cost of capital, it's somewhere in the 2s and certainly adequate and healthy for us to continue to invest.

[Mark Patten, executive]

Yes. We've certainly gotten the benefit from, a, the stock price movement and then also a much more favorable spread on our current 10-year bond issuance. So yes, to Pete's point, we've probably seen a 50 basis point kind of appreciation in our net investment spread.

[Joshua Dennerlein, analyst]

Great. And also, just thinking about the acquisitions kind of going forward, how much can you buy before hitting your leverage targets?

[Peter Mavoides, executive]

As Rob said earlier, we have somewhere between $700 million to $1 billion in dry powder depending within our targeted range.

[Joshua Dennerlein, analyst]

And I guess just quickly, I know we were talking a little bit about the watch list. If there's been any updates either on individual tenants? Or if you can also make any comments on -- I think, it was brought up on the last earnings call, Red Robin, only just because of some credit downgrades going across them.

[Peter Mavoides, executive]

Yes. I go back to the commentary that the portfolio is in great shape and performing well. Our Red Robin investment, back to my earlier comment of we're making 20-year investments and certainly I don't think our perspective on Red Robin is going to change in a quarter. They continue to -- our assets continue to perform well. There may be some noise around the equity story of that company, but the restaurant assets that we own are doing fine.

[Operator]

Our next question comes from Spenser Allaway with Green Street Advisors.

[Spenser Allaway, analyst]

Maybe just one more on your opportunities set. Acquisitions continue to fall within your targeted industries, as you mentioned, but just curious if there's been anything you've looked at that would be an interesting new venture for EPRT.

[Peter Mavoides, executive]

Sorry to disappoint you, Spenser. But no, we're sticking to what we do. We conduct sourcing activities in our verticals to identify high-quality operators that are growing and who value us and that's really where we spend our energy and where our opportunity set comes from. So we're fortunate we don't need to really expand the box, and we're continuing to kind of invest in our core industries with our core thesis.

[Spenser Allaway, analyst]

Okay. And then Pete, you also mentioned the persistent bid-ask spread that weighed on dispositions in 2Q. Can you just comment on how wide that spread was in the quarter? And has that changed at all thus far into 3Q?

[Peter Mavoides, executive]

It hasn't changed in 3Q. And I would say it's probably anywhere between 25 to 75 basis points between where we would sell a well-leased performing asset and where the market would buy it. And if you think about our dispositions in the quarter, at a [ 7 3 ] of really at-risk assets. I think you see that in the coverage, it was high-quality, well-performing asset. I think our strike price would be in the low 6s. So I think that's kind of where the bid-ask would be.

[Operator]

Our next question comes from Greg McGinniss with Scotiabank.

[Elmer Chang, analyst]

This is Elmer Chang on with Greg. We just had a couple of follow-up questions. So most of your top tenant industry exposure seem to be highly fragmented industries, whereby you can jump in on an investment in a consolidation event. What has M&A activity been like year-to-date in your top tenant industries? And how do you see that playing out in the rest of the year?

[Peter Mavoides, executive]

M&A activity is generally down. And with -- obviously, with capital harder to come by. And so we're transacting at a higher level despite a depressed level of M&A activity, which is really an indicator of the challenging -- challenges to get alternative financing. And so we would think M&A would pick up as capital markets normalize and rates start coming down. And multiples expand and more sellers are willing to sell, and that should create more opportunities for us. That will be offset by a broader range of capital alternatives for people transact. So on balance, we think it will be neutral, but there should be more consolidation and M&A activity in the back half of the year.

[Elmer Chang, analyst]

Got it. That makes sense. And then, similar question to those asked earlier about expectations of a rate cut increasing. I think, you just mentioned it as well. But do you see -- with competition starting to come back to the market, do you see that impacting lease term and rent bumps in your current pipeline that is further along in negotiations or more so in your newer negotiations?

[Peter Mavoides, executive]

Yes, I would say the current pipeline is relatively consistent with what we experienced in the second quarter and that we would expect the competition to impact cap rate and terms into probably the fourth quarter and first quarter of next year.

[Operator]

We have reached the end of the question-and-answer session. I would now like to turn the call back over to Pete Mavoides for closing comments.

[Peter Mavoides, executive]

Great. Well, thank you all for your time today. We look forward to the rest of the summer and engaging with you all in September as we're on the road with several investor conferences coming up. And so thank you for your support. Have a great day.

[Operator]

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.