Essential Properties Realty Trust, Inc. (NYSE:EPRT) Q3 2024 Earnings Conference Call October 24, 2024 10:00 AM ET

Company Participants

Robert Salisbury - Senior Vice President and Head of Capital Markets
Pete Mavoides - President and Chief Executive Officer
Mark Patten - Executive Vice President and Chief Financial Officer
AJ Peil - Executive Vice President and Head of Asset Management

Conference Call Participants

Haendel St. Juste - Mizuho Securities
Caitlin Burrows - Goldman Sachs Group, Inc.
Eric Borden - BMO Capital Markets
Smedes Rose - Citigroup Inc.
John Kilichowski - Wells Fargo Securities, LLC.
Ki Bin Kim - Truist Securities
Joshua Dennerlein - Bank of America Merrill Lynch
Michael Goldsmith - UBS
Greg McGinniss - Scotiabank
John Massocca - B. Riley Securities
James Kammert - Evercore ISI
Spenser Allaway - Green Street Advisors, LLC

Operator

Good morning, ladies and gentlemen, and welcome to the Essential Properties Realty Trust Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

[Operator Instructions] As a reminder this conference is being recorded, and a replay of the call will be available three hours after the completion of the call for the next two weeks. The dial-in details for the replay can be found in yesterday's press release. Additionally, there will be an audio webcast available on the 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 AJ Peil, Head of Asset Management.

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

Robert Salisbury

Thank you, operator. Good morning, everyone, and thank you for joining us today for Essential Properties' third 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.

Pete Mavoides

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 the 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 at 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 through the continued normalization of capital market conditions. Specifically, we expect to invest between $900 million and $1.1 billion in 2025 at 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 terms 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 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, two 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 five 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 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 had a weighted average unit level rent coverage of 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.

Moving 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 four 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 eight-quarter average in Q3. We sold nine 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 eight-quarter average, driven by opportunistic asset sales and ongoing portfolio management activity.

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

Mark Patten

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. 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 a $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 a $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.

Pete Mavoides

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.

Question-and-Answer Session

Operator

Thank you. We will now conduct a question-and-answer session. [Operator Instructions] Our first question comes from Haendel St. Juste with Mizuho Securities. Please proceed.

Haendel St. Juste

Hey. Good morning, guys. Thanks for taking my questions and also for the early read into 2025. My first question is on the guidance, which includes acquisitions – an 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 a 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 multi-year growth rate? Thanks.

Pete Mavoides

Great. Thanks, Haendel. Listen, I think providing the acquisition guidance really just is a natural evolution in the maturation of the company. We've grown our tenant base expansively from a 100 tenants to 400 tenants. Our acquisition team has now been in their seats and seasoned over five 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. 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 short – I would stop short of trying to give growth rates beyond next year.

Haendel St. Juste

Well, I had to try. Appreciate the color there. One more maybe I was hoping you could talk about your bad debt or tenant 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 around the watch list and categories you're monitoring today? Thanks.

Pete Mavoides

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 a 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 in 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 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 certainly have the appropriate level of conservatism built into our guidance.

Haendel St. Juste

Great. Thank you.

Pete Mavoides

Thanks, Haendel.

Operator

The next question comes from Caitlin Burrows with Goldman Sachs. Please proceed.

Caitlin Burrows

Hi. Good morning, everyone. 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

I think so when to use the existing forward shares, I think, we may have mentioned in the remarks that our expectations in the fourth quarter will begin to settle a fair amount of that [activity] 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 gives – we've got a fair amount of dry powder, that dried powder is probably a good three and a half quarters worth of liquidity to execute and still stay – low end of our leverage range [indiscernible]. And I think good news embedded in that as well is that we – assumptions around equity needs in 2025 and they're pretty low amount of equity needed, in fact, very little. That's something we think we could address on…

Caitlin Burrows

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

Yes. I can hear you.

Caitlin Burrows

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 buyers and is it generally other third parties?

Pete Mavoides

Yes. It's always other third parties. On occasion it maybe tenants coming back to us, but mostly it's third parties. Really, there's three reasons we're going to sell an asset. One is to manage industry concentrations. As you can see our car wash exposure has been high. And so we've been proactively trying to lighten up on that industry exposure really to create some more capacity, 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 that continue to support that tenant relationship.

And then lastly, just selling assets that don't work for whatever reason. We see risk of tenant continuing to be able to pay the rent or 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 [1031] motivated buyers. And we've demonstrated that since coming public and we'll continue to do that.

Caitlin Burrows

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

Pete Mavoides

Great. Well, I tend to be more clearer than Mark, anyway.

Operator

The next question comes from Eric Borden with BMO Capital. Please proceed.

Eric Borden

Hey. Good morning, guys. Thanks for taking the question. 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 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?

Pete Mavoides

Yes. There's a lot of time left in the quarter. And the fourth quarter tends to have some volatility. It could be a lot of deal volume or few and or a little. And so I think our general guide to the eight quarter average is probably a good indicator and 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 our investor deck and give a good snapshot then. But it shouldn't 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

All right. Thank you. And then looking to the 2025 acquisition guidance that you provided, if we square that with your trailing 12 or trailing eight 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 we're one month after closing the three quarter books?

Pete Mavoides

Yes. I think, consistent over the last kind of three or four quarters, we've indicated it's been a unique buying environment with 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 and 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 de-risk 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.

Eric Borden

All right. Thank you for the time. I'll leave it there.

Pete Mavoides

Thank you.

Operator

The next question comes from Smedes Rose with Citi. Please proceed.

Smedes Rose

Hi. Thank you. I 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 tenure at this point. And maybe how you think that will play out for cap rates maybe over sort of the first half of 2025?

Pete Mavoides

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 the 10-year and long-term financing as they match funds these long dated assets. The 10 year's been volatile. I guess, three weeks ago was in the mid-3s, now it's in the low-4s and that's pretty volatile.

I think a high tenure supports us and limits competition. But to the extent that you see tenure in the mid-3s, I think the leveraged private buyers going to be more aggressive and being 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 tenure and what that does for our private competitors.

Smedes Rose

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

Pete Mavoides

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 them 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 him some time to get those sites to the spot where they're out of that sub one 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.

Smedes Rose

Great. Thank you, guys.

Pete Mavoides

Thank you, Smedes.

Operator

The next question comes from John Kilichowski with Wells Fargo. Please proceed.

John Kilichowski

Hi. Thank you. 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 eight quarters?

Pete Mavoides

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 like in that – in entertainment bucket. So I wouldn't read too much into that number. That's really just an industry mix. I would 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.

John Kilichowski

Got it. And then maybe just jump into your top 10 tenants. There seems to be a fair bit of shake up 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?

Pete Mavoides

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, or operators that we've been investing with in a series of transactions over multiple years or 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 current fitness operator is a great operator. We've been doing deals with him 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.

John Kilichowski

Got it. Thank you.

Pete Mavoides

Thank you.

Operator

[Operator Instructions] Our next question comes from Bin Kim with Truist Securities. Please proceed.

Ki Bin Kim

Thank you. Good morning. 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 are competitors to your business in terms of like a market share?

Pete Mavoides

Yes. Generally in my experience in the ABS market is, structured bonds that are rated are going to trade anywhere from 25 basis points to 50 basis points wide of similarly rated corporate unsecured. So if you assume, the BBB index at 15 ABSs through a similar level should be 25 basis points to 50 basis points wide to 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 within an elevated tenure and wide spreads are less competitive. As that market becomes more robust and tightens they become more competitive. And it's really, it ebbs and 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 $8 million to $10 million chunks that we transact.

Ki Bin Kim

Thanks. And on the cash G&A guidance for 2025, the slight increase. Is that driven by just more hiring on staffing or kind of inflationary pressures? Just curious what's driving that?

Mark Patten

Yes. Thanks, Ki Bin. I think 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 as a percentage of our total revenue obviously continue to season favorably. We think about investing in really non-executive 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 hires and some of those normal kind of puts and takes.

Ki Bin Kim

Okay. Thank you, guys.

Pete Mavoides

Thanks, Ki Bin.

Operator

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

Joshua Dennerlein

Yes. Hey, guys. 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, could you just kind of give us more color on how that's showing up in the guide for this year. Then 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 fades out?

Robert Salisbury

Hey. So yes, as Mark noted in the prepared remarks, the treasury stock method forwards was about a penny. 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. 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 – 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

Okay. Sorry, Rob, it was a little hard to hear you breaking up. I'll follow-up offline. So appreciate that. And then Pete, you mentioned lightning up on car washes. Is that just a pure diversification play or something kind of specific to maybe your existing car wash portfolio or maybe just the industry in general?

Pete Mavoides

Yes. It's just portfolio management, portfolio construction. We generally have a soft ceiling of 15% for any individual industry concentration and car wash is 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.

Joshua Dennerlein

Okay. Appreciate that. Thanks, Pete.

Pete Mavoides

Thanks, Josh.

Operator

The next question comes from Michael Goldsmith with UBS. Please proceed.

Michael Goldsmith

Good morning. Thanks a lot for taking my questions. First question's just on the acquisition guidance, you've done $300 million a quarter over the last four, you're kind of pointing to 250-ish. For the fourth quarter and the guidance applies, 250-ish a quarter going forward. Now, typically the fourth quarter is when you've acquired the most. And you're expecting kind of a lower run rate going forward. So 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 the theme of the call is just being thinking a prudent conservative approach just given the lack of visibility and a lot of moving pieces in the market today?

Pete Mavoides

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 as 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 volume. So it's safe to assume when we do start providing them it's going to have appropriate level of conservatism baked in.

Michael Goldsmith

Got it. And then one thing we noticed 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 the reflection of like the greater competition? Just try to get an understanding of the market overall.

Pete Mavoides

No, nothing. I mean, it's not material. At 89%, we're 90%, we're still kind of vast majority of sale-leasebacks. We just happened 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 is changing materially.

Michael Goldsmith

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

Pete Mavoides

Thank you very much.

Mark Patten

Thanks.

Operator

The next question comes from Greg McGinniss with Scotiabank. Please proceed.

Greg McGinniss

Hey. Good morning. I guess given that tenure 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?

Pete Mavoides

Yes. Listen, it's seems like the tenure is high, it backed up. Three 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 assuming that the tenure is going to move around and may move against us. I 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

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

Pete Mavoides

I do. Yes.

Greg McGinniss

Okay. Just last one 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?

Pete Mavoides

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

Greg McGinniss

Okay. Thank you.

Operator

The next question comes from John Massocca with B. Riley. Please proceed.

John Massocca

Good morning.

Pete Mavoides

Good morning, John.

John Massocca

On 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 weren't even maybe the space before that, that have now entered just given. I know volatility, there's some volatility in the tenure, but maybe where expectations of where rates are going to go?

Pete Mavoides

Yes. It's an overall feeling and sense. When you're doing – negotiating 37 transactions in a 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. And it's not any one 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 gap 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

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?

Pete Mavoides

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

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

Pete Mavoides

I would start by saying most of the pressure in the restaurant industry is we're seeing in large operators. You think of Red Lobster [indiscernible]. 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 debt, with 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 topline sales pressures. So the topline sales are off. But they are seeing some expansion in margins as the past 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 basis points or 20 basis points on coverage.

John Massocca

Okay. I appreciate the color. That's it for me. Thank you.

Pete Mavoides

Thanks, John.

Operator

The next question comes from Jim Kammert with Evercore ISI. Please proceed.

James Kammert

Thank you. Good morning. Perhaps just building on the last topic if possible, it looks like your overall at the portfolio level coverage, unit level coverage has drifted down modestly. Let's call from the 3.9, 4x, [3.6 here at 930]. And were there other – does that implied basically that the unit level cash flows are growing a little slower than your average 1.7% escalator across the portfolio? Or is that's too generic and it's more specific to certain industries? I'm just curious which sectors are doing a little better and which might be feeling a little more pressure?

Pete Mavoides

Yes. I think it's going to be specific industries, particularly like building supply, which can go from a 20 to a 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 something 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 is flat. QSRs are down 10 basis points. I'm just ticking down our industry list here. And 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 supplier are going to have more volatility.

James Kammert

That's interesting. Thank you. And then just real quickly let you go. Obviously 7/11s been reported to be out there marketing a large portfolio. Do you feel you've added to your, consistently to your convenience store sector segment. Do you think there's more just a 7/11 issue regarding maybe their health of those particular stores and not much of a read through the c-store industry overall? Just curious what color or thoughts you might have there? Thank you.

Pete Mavoides

Yes. I think the 7/11, I think that's more just capital allocation for that company than anything going on systemically in the c-store space. Yes, way is a community store operator that populated our top 10 that's growing and seeking capital to facilitate their growth. Pop smart is a c-store operator that has been in our top 10 and they're growing. And so there's nothing going on in the space that gives me concern and we continue to deploy capital there. I think the 7/11 opportunity is more specific to that tenant.

James Kammert

Great. Thank you.

Pete Mavoides

Thank you.

Operator

The next question comes from Spenser Allaway with Green Street. Please proceed.

Spenser Allaway

Thank you. 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?

Pete Mavoides

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 activities. We attend industry conference events 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 got to move on and transact somewhere else.

Spenser Allaway

Okay, great. That makes sense. And then just as your asset base continues to grow in 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?

Pete Mavoides

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.

Spenser Allaway

Thank you.

Pete Mavoides

Awesome. Thank you very much.

Operator

Thank you. [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.

Pete Mavoides

Great. Thank you all very much for your time today. We look forward to meeting with you all out in Vegas for NAREIT next month, and thanks very much. Have a great day.

Operator

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