Essential Properties Realty Trust Inc

NYSE:EPRT

Earnings Call Analysis

Strong results and future growth prospects for Essential Properties Realty Trust.

In Q3 2024, Essential Properties Realty Trust reported an AFFO per share of $0.43, a 2% increase year-over-year, totaling $77.9 million—a 17% rise. They established 2025 AFFO guidance of $1.84 to $1.89, suggesting over 7% growth. Investments totaled $308 million at an 8.1% cash yield, with an anticipated $900 million to $1.1 billion allocated for 2025. The company is well-positioned with a gross asset value nearing $6 billion. Their strategic focus on tenant diversity paid off, with high occupancy and sound credit metrics amid a competitive landscape.

Strong Performance Amidst Economic Dynamics

In the third quarter of 2024, Essential Properties Realty Trust demonstrated resilience against a backdrop of dynamic market conditions. The company reported an Adjusted Funds From Operations (AFFO) per share of $0.43, reflecting a 2% increase year-over-year. This growth was driven by a notable increase in total AFFO, which reached $77.9 million, up 17% from the prior year. Despite macroeconomic uncertainties, the company’s investment activity remained strong, focusing on sectors with robust demand.

Steady Investment Strategy and Portfolio Expansion

The company's investment strategy remains robust, with $308 million deployed in the quarter across 37 transactions at a weighted average cash yield of 8.1%. This represents a slight uptick in yield compared to previous quarters, showcasing the firm's ability to secure attractive terms despite ongoing competition in the capital markets. The portfolio currently encompasses 2,053 properties, with a lease term average of 14.1 years and an impressive occupancy rate of 99.9%, indicating strong tenant health.

Future Growth Projections and Guidance

Essential Properties is guiding for 2024 AFFO per share in the range of $1.72 to $1.75. Looking ahead, for 2025, the firm has set an ambitious AFFO per share projection of $1.84 to $1.89, implying over 7% growth at the midpoint. The executive team anticipates investing between $900 million and $1.1 billion in 2025, with a modest expectation of cap rate compression as competitive dynamics normalize in the real estate market.

Dividend Policy and Capital Management

The company declared a cash dividend of $0.29 in Q3 2024, leading to an AFFO payout ratio of 67%. This disciplined approach to capital management, alongside a retained free cash flow of $26.8 million for the quarter, ensures that Essential Properties can sustain its investment strategy while maintaining shareholder returns. With a liquidity cushion of approximately $1.2 billion, the firm is well-positioned for continued growth.

Portfolio Risk Mitigation Strategies

Tenant concentration remains a focus for risk mitigation, with the largest tenant accounting for only 4.3% of Annual Base Rent (ABR). This diversification strategy positions Essential Properties favorably against market fluctuations. Moreover, the weighted average unit-level rent coverage stands at 3.6x, indicating robust tenant profitability and minimizing exposure to potential defaults.

Challenges and Market Conditions

Despite the strong operational metrics, the firm acknowledges challenges ahead, particularly related to increased competition in capital markets as economic conditions improve. The management has observed signs of cap rate compression on the horizon but notes that they have not yet materialized in their current pipeline. The potential for increased competition may necessitate a cautious approach in upcoming investment decisions.

Conclusion: A Focused Path Forward

In summary, Essential Properties Realty Trust is navigating a complex economic landscape with a resilient portfolio, competitive investment returns, and a clear path to future growth. As they continue to build on their existing tenant relationships and enhance their portfolio, the firm appears well-positioned to capitalize on the opportunities ahead, even amidst potential economic headwinds.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Essential Properties Realty Trust Third Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference being recorded. And a replay of the call will be available 3 hours at 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 we are 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 AJ Peil, Head of Asset Management.

It is now my pleasure to turn the call over to Rob Salisbury. Please proceed, sir.

[Robert Salisbury, executive]

Thank you, operator. Good morning, everyone, and thank you for joining us today for Essential Properties' Third Quarter 2021 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 last earnings call, we discussed how our portfolio continued to exhibit strong operating trends against a dynamic market backdrop. This resilient portfolio performance continued during the third quarter with high occupancy, healthy same-store growth and improving credit trends. As a long-term capital provider focused on owning real estate on a conservative basis leased under our lease form to growing operators in service and experience-based industries, we expect our portfolio to perform at a high level.

Maintaining relationships with and providing value to operators continues to drive investment activity as well. In the third quarter, 79% of our investments were generated from existing relationships, underscoring the value of recurring business with our tenant base.

With quarter end pro forma leverage of 3.5x and liquidity of $1.2 billion, our balance sheet positions us well to continue to grow our portfolio by investing in our core industries at attractive spreads, generating sustainably attractive earnings growth for our shareholders.

We are establishing our 2025 AFFO per share guidance range of $1.84 to $1.89, which implies a growth rate of over 7% at the midpoint. Our guidance for 2025 reflects continued portfolio performance and a steady pace of investments with cap rates expected to compress modestly over the coming quarters as competition reemerges due to the continued normalization of capital market conditions.

Specifically, we expect to invest between $900 million and $1.1 billion in 2025 and approximately 25 basis points below the pricing achieved in 2024. Additionally, we expect cash G&A expense to be between $28 million and $31 million, resulting in continued efficiency gains as a percentage of revenue as the company is able to invest in its infrastructure while still scaling the platform to generate stronger margins for shareholders.

We ended the quarter with investments in 2,053 properties that were 99.9% leased to 407 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 3.9% of annual base rent expiring through 2028.

From a tenant health perspective, our weighted average unit level rent coverage ratio was 3.6x in this quarter, indicative of the strong profitability of our tenants at the unit level. Same-store rent growth in the third quarter was 1.4%.

Over the past month, 2 hurricanes hit the Southeastern United States. Our thoughts and prayers go out to the people, business owners and operators impacted by these storms as they rebuild in the aftermath.

Looking at our portfolio, we own 103 properties located in areas identified as severely impacted by FEMA, of which 5 properties reported damage causing substantial disruption and warranting an insurance claim. As a reminder, as a condition to providing our capital in a sale-leaseback transaction, our tenants are required to enter into our lease agreement, which requires them to maintain property, rent and business interruption insurance. This provides an important layer of safety for our portfolio in the event of property damage events such as hurricanes.

On the investment side, during the quarter, we invested $308 million through 37 separate transactions at a weighted average cash yield of 8.1%, up slightly from last quarter and up 50 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 had a weighted average initial lease term of 17.2 years and a weighted average annual rental escalation of 2.1%, generating an average GAAP yield of 9.1%.

Our investments this quarter at a weighted average unit level rent coverage up 4.7x, and the average investment per property was $4.1 million. The vast majority of the investments in this quarter were originated through direct sale-leasebacks.

Looking ahead to the fourth quarter, our investment pipeline remains solid, reflecting M&A and new unit expansion activity across a variety of our targeted industries. As we have discussed in the past, we expect the normalization of the capital markets to result in increased competition, causing modest cap rate compression in the near term. We have not yet seen this in our current pipeline, which implies cap rates remaining similar to the past 4 quarters.

From a tenant concentration perspective, our largest tenant represents 4.3% of ABR at quarter end, and our top 10 tenants now account for just 17.7% of ABR. Tenant diversity is an important risk mitigation tool and a differentiator for us, and is a direct benefit of our focus on middle market operators, which offers an expansive opportunity set.

Dispositions were in line with our trailing 8-quarter average in Q3. We sold 9 properties this quarter for $17 million in net proceeds. This represents an average of approximately $1.9 million 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 6.8% weighted average cash yield. Over the near term, we expect our disposition activity to remain in line with our trailing 8-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 CFO, who will take you through the financials and the balance sheet for the quarter.

[Mark Patten, executive]

Thanks, Pete, and good morning, everyone. As Pete detailed, we had a good third quarter, highlighted by a strong level of investments at an 8.1% cash cap rate. Among the headlines from the quarter was our AFFO per share of $0.43. That's an increase of 2% versus Q3 2023. On a nominal basis, our AFFO totaled $77.9 million for the quarter, which is up $11.6 million over the same period in 2023, an increase of 17%. This AFFO performance was in line with our expectations, as reflected in our guidance range provided last quarter. A stronger-than-anticipated investment volume was partially offset by incremental dilution from the treasury stock method on our unsettled forward equity.

Total G&A in Q3 2024 was [ $0.6 ] 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 5.1% for the quarter, which compares favorably to the 5.5% 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 and year-to-date. 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, enabling us to manage a larger portfolio and invest at higher levels.

We declared a cash dividend of $0.29 in the third quarter, which represents an AFFO payout ratio of 67%. Our retained free cash flow after dividends continues to build, reaching $26.8 million in the third quarter, equating to over $100 million per annum on a run rate basis. 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 the net investment activity in Q3 2024, our income producing gross assets reached $5.8 billion at quarter end. The increasing scale of our income-producing portfolio continues to build, and we expect to approach and perhaps eclipse $6 billion by year-end. The significant diversity and increasing scale of our asset base continues to improve our credit profile.

Turning to Capital Markets, we remained active on our ATM program in the quarter, completing the sale of approximately $312 million of stock, all on a forward basis at an average price of $31.04 per share. With no settlements during the quarter, our balance of unsettled forward equity totaled $626 million at quarter end. We expect to begin drawing upon this unsettled forward equity in the fourth quarter as a source of funds for our investment activity and paying down any outstanding balance on our revolver.

Similar to last quarter, our current share price remains well above the weighted average price of our unsettled forwards of $27.29 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 third quarter, our diluted share count of 179.6 million included an adjustment for 2.7 million shares from our unsettled forward equity related to this treasury stock calculation. This represents a headwind of approximately $0.01 to AFFO per share this quarter, and we estimate the headwind to AFFO per share for the full year in 2024 will reach $0.02. As we begin to settle this equity in the near term, we expect the headwind to shrink to a de minimis amount in 2025.

During the quarter, we closed on the previously announced $450 million term loan, which was fully drawn and swapped at an all-in rate of approximately 4.9%. 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.

As we noted last quarter, our leverage has trended below average levels over the past year as heightened debt costs and capital markets volatility warranted a more conservative posture.

With the first Fed cut materializing in September, and capital markets normalizing, our funding costs have improved. Thus, we expect to carefully and prudently increase our leverage from here to levels more consistent with our average over the past several years.

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, and established, as Pete mentioned, our 2025 AFFO per share guidance range of $1.84 to $1.89, representing over 7% growth at the midpoint. Importantly, both of these guidance ranges require minimal equity issuance in 2025, which we believe is a testament to our front-footed approach to capital raising.

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

[Peter Mavoides, executive]

Thanks, Mark. We are pleased with our third 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 Securities.

[Haendel St. Juste, analyst]

Thanks for for the early read into 2025. My first question is on the guidance, which includes acquisitions, and acquisition guidance for the first time ever, I think. So I guess I'm curious why now in providing that acquisition guidance? And what gives you the confidence to put out the forward year acquisition guidance at this point? And then do you think the upper single-digit 7%, 8% implied AFFO growth in that guide is a sustainable multiyear growth rate?

[Peter Mavoides, executive]

Great. I think providing the acquisition guidance really just is a natural evolution in the maturation of the company. We've growing our tenant base expansively from 100 tenants to 400 tenants. Our acquisition team has now been in their seats and seasoned over 5 years and there's just more predictability in our forward pipeline than we've seen in the past. We also have a much more stable cost of capital that allows us to look at deploying capital more consistently and reliably. And so I think it's just -- it's a natural evolution. And I think, as you've been following us for many years, you've seen we've been pretty predictable. We've been pretty transparent. And I thought supporting the guide with some acquisition guidance was appropriate.

As we think about the out years, it's early, right? We're just guiding for 2025. And I would say we have a very robust business plan. We have a very differentiated investment strategy that allows us to deploy capital accretively and are well positioned to continue to do that, but I would stop short of trying to give growth rates beyond next year.

[Haendel St. Juste, analyst]

Well, I had to try. [indiscernible]. One more maybe I was hoping you could talk about your bad debt credit assumptions embedded in the outlook for next year. I'm curious if there's any potential opportunity for upside or conservatism baked in? And maybe you can add some color on the watch listing categories you're monitoring today?

[Peter Mavoides, executive]

Sure. Well, the watch list is easy. As we define that the intersection of tenant credit risk of B and below and the unit level coverage of 1.5 continues to be under 100 basis points and continues to be in a good spot historically. Generally, as I hope you've seen, there tends to be conservatism in all of our guidance and all of the assumptions that support guidance. And in past years, as we've indicated, as we tightened guidance or increased guidance throughout the range, one of the main drivers is the lack of the materialization of credit events that we've budgeted for or provisioned for.

We provided some good credit loss statistics in our net NAREIT deck of 30 basis points per annum is our historical experience. You can assume guidance has some conservative assumptions starting from there. And so we'll see how the year plays, and how we work through these scenarios that may come at us or if they come at us, but we feel like we're in a good spot, and we certainly have the appropriate level of conservatism built into our guidance.

[Operator]

The next question comes from Caitlin Burrows with Goldman Sachs.

[Caitlin Burrows, analyst]

Maybe on the funding side, you guys were active with your ATM in the quarter despite already having unsettled forward shares that you went through. So could you just go through the thought process of when to use the existing forward shares versus continue to issue more?

[Mark Patten, executive]

So when to use the existing forward share, I think we may have mentioned in the remarks that our expectation [indiscernible] fourth quarter we will begin to settle a fair amount of that equity going into the end of the year, that's both to address our investment pipeline as well as to pay down anything we have outstanding on the revolver. I think from there, I probably referenced it as well in the remarks that, that we've got a fair amount of dry powder. That dry powder is probably a good 3.5 quarters worth of liquidity to execute and still stay below end of our leverage range [indiscernible] And I think good news embedded in that as well is that [indiscernible] assumptions around equity needs in 2025 and they're pretty low amount of equity needed. In fact, very little [indiscernible] that's something we think we could address [indiscernible].

[Caitlin Burrows, analyst]

Got it. You're kind of breaking up for me. I don't know about for everybody else, can you still hear me?

[Mark Patten, executive]

Yes, I can hear you.

[Caitlin Burrows, analyst]

Okay. Okay. And then maybe just moving over to the disposition side, maybe also like the watch list. As you guys are looking to sell properties, I guess, what's driving you to dispose of the properties you choose to pursue? Kind of who are the buyers? How deep is that pipeline of fires? And is it generally other third parties?

[Peter Mavoides, executive]

Yes. It's always other third parties. On occasion, it may be a tenant coming back to us, but mostly it's third parties. Really, there's 3 reasons we're going to sell an asset. One is to manage industry concentrations. As you can see, our carwash exposure has been high. And so we've been proactively trying to lighten up on that industry exposure really to create some more capacity to continue to invest in that industry. Lightening up on individual tenants in the quarter, we sold an equipment share. And again, we really like that tenant. But to the extent that we're able to sell some assets off in the low 6s, mid-6s, we can redeploy that capital accretively to continue to support that tenant relationship.

And then lastly, just selling assets that don't work for whatever reason, and we see risk of tenant continuing to be able to pay the rent or a lack of probability that they wouldn't renew as we see through the unit level coverage. And so selling those assets is important to our business plan. Granularity and fungibility in our real estate is an important fundamental of our portfolio. So we have good liquidity in our assets, and there's a deep pool to -- for us to dispose into to local and regional sometimes the 1031 motivated buyers. And we've demonstrated that since coming public, and we'll continue to do that.

[Caitlin Burrows, analyst]

Got it. Maybe just as an update, I could get that response much better. So I don't know if you guys are together sitting in different places or what, but that was very clear.

[Peter Mavoides, executive]

Great. I tend to be more clear than Mark anyway.

[Operator]

The next question comes from Eric Borden with BMO Capital.

[Eric Borden, analyst]

Maybe just on the remainder of the 2024 acquisitions. You mentioned some possible M&A opportunities, maybe some singles and doubles. You've closed a little over $50 million today, which is above where you were at the same time last year and so investments seem to be tracking well. Maybe you could talk about how much you have under LOI or PSA?

[Peter Mavoides, executive]

Yes. We it's -- there's a lot of time left in the quarter and the fourth quarter tends to -- has involved volatility. It could be a lot of deal volume or a few or a little. And so I think our general guide to the 8-quarter average is probably a good indicator in kind of [ 250-ish ], but it's really too soon to put a pin in that. When we go out to NAREIT, we'll update on our investor deck and we give a good snapshot then, but it should be materially different from that. And to be clear, on the M&A, it's really supporting our tenant relationships in M&A not us seeking to endeavor in any M&A transactions.

[Eric Borden, analyst]

All right. And then looking to the 2025 acquisition guidance that you provided, if we square that with your trailing 12 -- or trailing 8-quarter average, it seems to be implying that acquisitions are a little lighter than expected. So is there something that you're seeing in the market that is preventing you to acquire more? Or is it potential conservatism given that 1 month after closing the 3 quarter books?

[Peter Mavoides, executive]

Yes. I think consistent over the last kind of 3 or 4 quarters, we've indicated it's been a unique buying environment the dislocation in the capital markets and a lack of competition where we really have been pressing our advantage to put capital to work at rates and levels that really are historic highs in my 20-year plus career of investing. And so we've been aggressive this year. And so I think that's part of it.

Another part of it is, as we've always said, we want to communicate a business strategy that's derisked from an execution perspective. And so supporting guidance with flat investments, I think, is conservative and appropriate. We're not going to come to the market with guidance that's predicated on us growing our activity 25%, 50%. We just don't think that's prudent. So there's a number of factors going on there.

I would also say, as we've said, with the normalization of the capital markets, we expect competition to return to the market, which could lead to the mispricing of risk by aggressive competitors. And to the extent that, that gets -- deals get priced away from us, we want to be in a position where we can be patient and prudent and conservative. And so we put a lot of thought into building this 2025 business case to support guidance, and we believe it's imminently achievable and conservative.

[Operator]

The next question comes from Smedes Rose with Citi.

[Smedes Rose, analyst]

Appreciate the guidance around the acquisitions outlook, and you mentioned that you expect cap rate compression, I guess, over the course of the year, but you're not seeing it yet. And I was just wondering, could you just talk a little bit about sort of cap rate sensitivity on the short end versus maybe what we're seeing with an upward movement in the 10-year at this point? And maybe how you think that will play out for cap rates maybe with sort of the first half of '25?

[Peter Mavoides, executive]

Yes, sure. We compete against alternative forms of capital on the short end of the curve, bank debt and the like for our tenant relationships. More of our competitors on the investment side and the sale-leaseback and net lease side are really competing against -- we're competing against them based on the long end of the curve kind of 10-year and long-term financing as they match funds these long-dated assets. It's -- the 10-year has been volatile. I guess, 3 weeks ago, it was in the mid-3s, now it's in the low 4s, and that's pretty volatile. I think a high 10-year supports us and limits competition. But to the extent that you see 10-year in the mid-3s, I think the leverage to private buyer is going to be more aggressive and create competition and downward pressure on cap rates.

So it's going to be a while before the banks come back and the low end is really in play as an alternative form of competitive capital. I think we're more sensitive to the 10-year and what that does for our private competitors.

[Smedes Rose, analyst]

Okay. And then I just wanted to ask you on your ABR coverage levels. The coverage at under 1x, declined sequentially to 3% from, I think, over 4% last quarter. Can you just talk about what's going on there, if anything? And is it 3% sort of where you think it would sort of stabilize in terms of ABR at under 1x?

[Peter Mavoides, executive]

Yes. I would stop short of saying that, that's our expectation to stabilize there. There's always going to be idiosyncratic ebbs and flows in that bucket. It's going to be less than a dozen of tenants. And when you have master leases, it could be multiple properties. Specifically in the quarter, we had an early childhood education operator that was of size, i.e., 1% ABR that was executing a turnaround play on some sites, and we were glad to see him finally get traction and get those sites open and operating and profitable. It was a strong credit we supported multiple times over the years. So it wasn't really a credit concern for us, and it just took them some time to to get those sites to the spot where they're out of that sub 1 bucket and glad to see that.

But it's going to be idiosyncratic. It never really gives us too much pause because generally, it's backed by strong credits and solid real estate, and we're likely to see some noise in that bucket.

[Operator]

Next question comes from John Kilichowski with Wells Fargo.

[William John Kilichowski, analyst]

So I'll start on the investment activity side. Just looking at the terms here. So cap rates ticked up a bit, really strong on the lease escalations at [ 2.1 ] and then great rent coverage. What allowed you to kind of get those terms here, especially the rent coverage step-up versus your trailing 8 quarters.

[Peter Mavoides, executive]

Yes. I wouldn't read too much into the rent coverage step up. That number is really an output of kind of the mix of industries that we do in any given quarter. And so some of our industries have higher coverage just by the nature of the industries like medical, dental, equipment rental and things like that and some have lower like gyms and things in that entertainment bucket. So I wouldn't read too much into that number. That's really just an industry mix. I'd say big picture, as has been the commentary, there's just not a lot of capital providers out there in the middle-market sale-leaseback space currently, and we're able to drive attractive terms with our counterparties, and that's what you see going on.

[William John Kilichowski, analyst]

Got it. And then maybe just jump into your top 10 tenants. There seems to be a fair bit of shakeup there quarter-over-quarter. Maybe if you could just talk about strategically the new entrants and the exits and how you think about shaping your book moving forward.

[Peter Mavoides, executive]

Yes. We always want to maintain diversity. And I think the bigger picture from my perspective is having 17.7% in our top 10 represents good diversity and more importantly, having kind of 1% to 2% exposures through a bunch of tenants is good diversity, but also creates a good opportunity set to continue to invest.

The names that came into our top 10 are operators that we've been investing with in a series of transactions over multiple years over years. And as we continue to invest, they grow. And as they grow other guys where we've not invested just fall out. So every quarter, we're going to have ebbs and flows in that. Undefeated Tribe, the front fitness operator is a great operator. We've been doing deals with them for a long time and has done a great job, and we continue to see opportunities to grow with him and do that. And so it's been nice to see them up there and certainly a name that we like and are comfortable with. But just given our diversity, it's natural to see movements in that top 10.

[Operator]

[Operator Instructions] Our next question comes from Bin Kim with hot Securities.

[Ki Bin Kim, analyst]

I was wondering if you can just provide some data points on the ABS market and CMBS market pricing. And typically, in a normal year, how much of these capital sources of our competitors to your business in terms of like market share?

[Peter Mavoides, executive]

Yes. Generally, in my experience in the ABS market is structured bonds that are rated are going to trade anywhere from 25 to 50 basis points wide of similarly rated corporate unsecured. So if you assume the BBB index at 1.5, ABS's through a similar level, should be 25 to 50 basis points wide of that. And then you got to talk about attachment points and valuation and the like, which is beyond my expertise. Certainly, a lot of people are more active in that market and have better insight than we do at this point.

So that said, we see those guys as competitors. With an elevated 10-year and wide spreads are less competitive. As that market becomes more robust and tightens, they become more competitive. And it's really -- it hasn't flows. I would say there's been a trend of more and more capital supporting net lease investing as the asset class has matured and demonstrated great cash flow stability. So there is more and more capital organizing to come into the space. So it's not a static competitive set. It's very dynamic, but it really just depends.

They tend to be more competitive on the bigger transactions, which is why we're staffed and organized to transact at the $10 million -- $8 million to $10 million chunks that we transact.

[Ki Bin Kim, analyst]

And on the cash G&A guidance for '25, the slight increase, is that driven by just more hiring on the staffing or kind of consolation pressure, just curious what's driving that?

[Mark Patten, executive]

Yes. Kim, if you look at our -- the guide on cash G&A, it's really a reflection of us investing in our platform, continuing to invest in our platform. It's clearly going to season into a -- as a percentage of our total revenue, obviously continue to season favorably. So we think about investing in really nonexecutive hires sort of an embedded normal inflation for a lot of the other G&A elements even though we don't have a lot of G&A levers outside of our infrastructure. So I think if you think about the range, it's going to be issues around timing of the hire or for hires and some of those normal kind of puts and takes.

[Operator]

The next question comes from Josh Dennerlein with Bank of America.

[Joshua Dennerlein, analyst]

I just want to follow up on Mark's comments that there's, I guess, some dilution from the treasury stock method. I guess it's like $0.01 now, but reaching $0.02. I guess can you just kind of give us more color on how that's showing up in the guide for this year? And it sounds like, if I heard correctly, 2025 assumes no kind of dilution from that. Just trying to think through kind of like the trajectory of how this kind of pays out?

[Robert Salisbury, executive]

This is Rob Salisbury. As noted in the prepared remarks, the treasury stock method forwards was about $0.01 [indiscernible] based on our current share price, it's likely to be around that same level in the fourth quarter. So that's what's assumed [indiscernible]. As we look out into 2025, of course, the calculation is based in part on where our share price will be, which is inherently hard to project. But as we continue to settle these forwards into year-end, we would expect our year-end forward unsettled balance to be a lot smaller. And so as you start the year in 2025, we would expect that headwind to [indiscernible] based on our expectations, I think a $0.01 to $0.02 range is probably reasonable. And I think maybe from a modeling standpoint, $0.02 might be a good starting point. as you think about building your 2025 estimate. But again, we'll continue to update you as the share price fluctuates, and we'll go from there.

[Joshua Dennerlein, analyst]

Okay. Sorry, Rob. It's a little hard to hear you breaking up. I'll follow up offline. So I appreciate that. And then, Pete, you mentioned lightening up on carwashes. Is that just a pure diversification play or something kind of specific to any of your existing car wars portfolio or maybe just the industry in general?

[Peter Mavoides, executive]

Yes, it's just portfolio management, portfolio construction. We generally have a soft ceiling of 15% for any individual industry concentration and carwashes ticked above that given the opportunity set. There's nothing inherently challenging in that industry that we see, and we have plenty of opportunities to continue to invest, but it's just -- it's more portfolio construction than anything else.

[Operator]

The next question comes from Michael Goldsmith FROM UBS.

[Michael Goldsmith, analyst]

First question just on the acquisition guidance. You've done $300 million a quarter over the last you're kind of pointing to [ $250-ish million ] for the fourth quarter, and the guidance implies [ $250-ish million ] a quarter going forward. Now typically, you fourth quarter is when you've acquired the most and you're expecting kind of a lower run rate coming going forward. So like is this kind of like the turning point where acquisition volumes will start to slow due to competition? Or is this just again, kind of like to see on the call is just the prudent conservative approach just given the lack of visibility and a lot of moving pieces in the market today?

[Peter Mavoides, executive]

Yes. I think it's certainly the latter. As we've always said, we generally don't have visibility in our pipeline beyond 90 days. That's the normal transaction cycle. And we do think we are at an inflection point in the capital markets that's going to change the competitive landscape. And given that dynamic, we wanted to be conservative relative to our investment volumes. And historically, we haven't provided investment volumes so it's safe to assume when we do start providing them, it's going to have an appropriate level of conservatism baked in.

[Michael Goldsmith, analyst]

Got it. And then 1 thing we noted was that there was a decrease in the percentage of sale leaseback transactions this quarter. Is there anything changing specifically within the market there? Is that a reflection of the greater competition, just trying to get understanding of the market overall?

[Peter Mavoides, executive]

No, nothing. I mean it's not material at 89%. We're at 90%. We're still kind of vast majority of sale leasebacks. We just happen to have the opportunity to do some existing lease transactions that made sense during the quarter. I think, if anything, that's probably a more normalized level and that we've been heavy into sale-leasebacks given the dislocation in the capital markets in the past quarters. And so there's nothing really to read into that number changing materially.

[Operator]

The next question comes from Greg McGinniss with Scotiabank.

[Greg McGinniss, analyst]

I guess given that 10-year treasuries are back to levels not seen since July, what are you seeing in the capital markets or amongst your competitive set that's leading you to believe you're going to have greater competition next year?

[Peter Mavoides, executive]

Yes. Listen, it seems like the 10 year is high. It backed up 3 weeks ago in the mid-3s and so there's certainly volatility. And I would expect it to level out. And so we're being conservative, and we're we're assuming that the 10-year is going to move around and may move against us, i.e., lower such that competition reorganizes.

I think the other part of it is spreads. Spreads have come in to historically tight levels across all fixed income instruments, which is an equally important component of that.

[Greg McGinniss, analyst]

So if the 10-year were to stick around this level or potentially move higher, do you think that leads to a more favorable competitive environment for you?

[Peter Mavoides, executive]

I do. Yes.

[Greg McGinniss, analyst]

Okay. Just last 1 for me. Implied Q4 AFFO guidance fairly wide, $0.03. Is that just potential treasury share dilution and equity issuance timing? Or are there other factors being taken into consideration there?

[Peter Mavoides, executive]

I think that's going to be the biggest driver with $600 million of unsettled forwards. And I'm not really sure about the timing of when that's going out. You can assume there's some decent volatility in that.

[Operator]

The next question comes from JJohn Massocca with B Riley.

[John Massocca, analyst]

[indiscernible] the competitive environment, are you seeing anything kind of tangible at this point? I mean you mentioned it's not impacting the pipeline, but are there competitors either bidding for deals or talking to tenants that maybe weren't in the space for the last couple of years or that [indiscernible] maybe space before that and have now entered just given -- I know volatility -- volatility in the 10-year, but maybe expectations of where rates are going to go?

[Peter Mavoides, executive]

Yes. Yes. It's just -- it's an overall feeling and sense when you're doing -- negotiating 37 transactions in the quarter, there's a lot of different competitive dynamics in each of those transactions. And we're dealing with 37 different counterparties who are out there sourcing capital through a variety of different sources. It's not any 1 data point, but just the overall sense of the market. And I think you can see that and feel it when spreads come in and the treasuries are in the mid-3s, people are feeling a lot more bullish and bidding more aggressively. And when spreads gap out and treasury rates get out, they back up. And so there's certainly natural ebbs and flows in competition in the capital markets, and we live it on a day-to-day basis.

[John Massocca, analyst]

Okay. And then maybe on the tenant partner side, I mean, what's kind of, broadly speaking, the general driver of them seeking your financing today? I mean is it more kind of refinancing existing liabilities? Or is it kind of growth still?

[Peter Mavoides, executive]

It's -- the vast majority is going to be growth, either supporting them in individual M&A activity or them developing new sites and providing development capital. Very little of it is refinancing past liabilities. There's some, but not a ton.

[John Massocca, analyst]

And then given some of the broad pressures we're seeing in the restaurant industry, especially among smaller operators, how is kind of performance and coverage looking in the restaurant portion of the portfolio, both kind of on the QSR side and the casual dining side?

[Peter Mavoides, executive]

I would start by saying most of the pressure in the restaurant industry is we're seeing in large operators. If you think of Red lobster, [indiscernible] Fridays, these large systems that are able to get unsecured corporate debt, which really becomes the catalyst that trips a lot of these companies. The smaller regional operators that we see are less likely to have that debt lever and really are capitalized mostly with the equity capital and real estate financing. That said, we are seeing some pressures in the restaurant space. But I would say that you're seeing top line sales pressures, so the top line sales are off, but they are seeing some expansion in margins as the as the inflationary pressures of labor and cost of goods fall off such that I would expect overall, our restaurant exposure to be roughly flat to maybe down 10 or 20 basis points on coverage.

[Operator]

The next question comes from Jim Kammert with Evercore ISI.

[James Kammert, analyst]

Perhaps just building on the last topic, if possible. It looks like your overall at the port level coverage, unit level coverage is just down modestly, let's call from the [ 3.94, 3.6 ] and were there other implied basically that the unit level cash flows are growing a little slower than your average 1.7% escalator across the portfolio? Or is it that's too generic and it's more specific to certain industries. Just curious which sectors are doing a little better, and which might be feeling a little more pressure?

[Peter Mavoides, executive]

Yes. I think it's going to be specific to specific industries, particularly like building supply, which it can go from [ 20 to 10 ] and really have an impact on equipment rental sales, equipment rentals and sales like equipment share, they can go from [ a 12 to a 10 ] or some along those lines. Generally, in car washes, they're flat to down 10 basis points. Early childhood is up 10-basis-point coverage. Medical/dental, flat; QSRs are down 10 basis points. I'm just ticking down our industry list here. So mostly, you're going to see it flat to up, flat to either down 10% or up 10%, but some of those different industries like building materials and equipment supply are going to have more volatility.

[James Kammert, analyst]

And then just quickly go. Obviously, 7-Eleven has been reported to be out there marketing a large portfolio. Do you feel you've added to your -- consistently to your convenient segment? Do you think there's more just a 7-Eleven regarding maybe their health of those particular stores and not much of a read-through to the C-store industry overall? Just curious color thoughts you might have there.

[Peter Mavoides, executive]

Yes. I think the 7-Eleven, I think that's more just capital allocation for that company than anything going on systemically in the C-store space. Yes [indiscernible] is a community store operator that populated our top 10 that's growing and seeking capital to facilitate their growth. PopSmart is C-store operator that has been in our top 10, they're growing. And so I don't -- there's nothing going on in the space that gives me concern, and we continue to deploy capital there. I think the 7-Eleven opportunity is more specific to that tenant.

[Operator]

The next question comes from Spenser Allaway with Green Street.

[Spenser Allaway, analyst]

You know that the lion's share of your deals completed in the quarter was from recurring business. Can you just talk about some of the newer relationships in the quarter? What industries were these in? And based on our current portfolios, do you suspect that they're also going to become a source of recurring business?

[Peter Mavoides, executive]

Yes. That's our business model is sourcing new relationships and continuing to grow with those relationships. And as I've said in the past, relationships over time tend to outgrow us and find alternative sources of capital as they grow larger and have more diverse funding options. We generally source in all our industries. We conduct sourcing activity. We attend industry conference events and and seek to build relationships and deploy capital in those industries. And so those sourcing efforts are really what brings the incremental investment opportunities.

Over time, we expect that to kind of be an 80-20 sort of mix. And so it's good to see 20% new relationships coming into the portfolio because there's certainly a cohort of tenants that are going to move on and transact somewhere else.

[Spenser Allaway, analyst]

Okay. Great. That makes sense. And then just as your asset base continues to grow and your underwriting more and more deals each quarter, as you mentioned, it's quite an arduous endeavor. How comfortable are you with your current headcount? Or does the acquisition and underwriting team need to keep growing? And when do you think that new headcount would be added?

[Peter Mavoides, executive]

Yes, that's a constant process, Spencer. We're always hiring, training, bringing new people online to build the organization to both underwrite and process, close and manage a larger portfolio. So it's very much a dynamic organization and infrastructure that we're constantly investing in. And I think you see that in our G&A guide.

[Operator]

[Operator Instructions] There are no further questions at this time. I would like to turn the floor back over to Pete Mavoides for closing comments. Please proceed.

[Peter Mavoides, executive]

Great. Thank you all very much for your time today. We look forward to meeting with you all out at Vegas for NAREIT next month. And thank you very much. Have a good day.

[Operator]

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.