Essential Properties Realty Trust, Inc. (NYSE:EPRT) Q4 2024 Earnings Conference Call February 13, 2025 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 - Chief Financial Officer
AJ Peil - Head of Asset Management

Conference Call Participants

Haendel St. Juste - Mizuho
Caitlin Burrows - Goldman Sachs
Rich Hightower - Barclays
Maddie Fargis - Citi
Eric Borden - BMO Capital Markets
Michael Goldsmith - UBS
Farrell Granath - Bank of America
Daniel Guglielmo - Capital One Securities
Jay Kornreich - Wedbush Securities
Greg McGinniss - Scotiabank
Spenser Allaway - Green Street Advisors
John Massocca - B. Riley Securities

Operator

Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust fourth quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow a formal presentation.

If anyone should require operator assistance during the conference, 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 Essential Properties website at www.essentialproperties.com, an archive of which will be available for ninety 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.

Rob Salisbury

Thank you, operator. Good morning, everyone. And thank you for joining us today for Essential Properties fourth 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 third quarter earnings call, we discussed how our relationship-driven investment strategy has positioned us well to execute our business plan in a dynamic market environment.

Maintaining relationships with and providing value to operators continues to drive investment activity in the fourth quarter, with seventy-nine percent of our investments generated from existing relationships, underscoring the value of recurring business with our tenant base. Our portfolio also continued to perform well, with tenant credit trends and same-store rent performance healthy and in line with our expectations. With quarter-end pro forma leverage of 3.8% times, and liquidity of $1.4% billion, our balance sheet positions us well to continue to grow our portfolio by continuing to support our tenant relationships and investing in our core industries at attractive spreads, generating sustainably attractive earnings growth for our shareholders.

The continued strong portfolio trends and the current attractive investment environment remain supportive of our 2025 business plan. As a result, we have updated our 2025 AFFO per share guidance range to $1.85% to $1.89%, representing a penny increase at the low end. As we noted on our third quarter earnings call, competition has begun to materialize as capital markets have normalized, resulting in modest cap rate compression.

We continue to expect our investment cap rates in 2025 to be slightly lower than 2024, reflecting this trend. However, our large and growing investment pipeline is supportive of our articulated investment guidance of $900 million to $1.1% billion. We ended the quarter with properties that were leased to 413 tenants operating in sixteen industries.

Our weighted average lease term stood at fourteen years at quarter-end, in line with a year ago, which is 5.8% of our annual base rent. From a tenant health perspective, our weighted average unit-level rent coverage ratio was 3.5% times this quarter, indicating the profitability and cash flow generation by our tenants at the unit level. At a high level, our portfolio credit trends remain benign with same-store rent growth in the fourth quarter of 1.4%, occupancy of 99.7%, which is seven vacant properties, and collections of 100%.

Tenant credit events were de minimis during the quarter, and our leasing activity picked up materially in 2024, with seventy-two leases signed for a recapture rate of 101%, up from twenty-two leases at a recapture rate of 79% in 2023. The execution of our property management team serves to further mitigate risk by resolving credit events and at favorable rental rates, which ultimately is supported by disciplined asset pricing when we buy properties. Looking into the first quarter, we continue to expect a constructive tenant credit and portfolio.

As noted in recent press reports, one of our car wash tenants, Zip's Car Wash, recently filed for Chapter 11 bankruptcy protections. At year-end, this tenant represented approximately twenty basis points of ABR across three locations in our portfolio, which is a large decline from our peak exposure in 2017 of sixteen sites at over 5% of ABR. This material reduction in exposure to an underperforming operator highlights our proactive approach to asset management, driven by our proprietary financial reporting, a key underpinning of our differentiated business model.

Given the ongoing nature of the bankruptcy, it is premature for us to discuss our expectations around our leases on these three properties. I would note that this credit event is consistent with the assumptions supporting our guidance range. On the investment side, during the fourth quarter, we invested $333 million through thirty-seven separate transactions at a weighted average cash yield of 8%, in line with our trailing four-quarter average.

Our investment activity in the quarter was broad-based across most of our top industries with no notable departures from our investment strategy. These investments had a weighted average initial lease term of seventeen point seven years and a weighted average annual rent escalation of 2%, generating an average GAAP yield of 9.2%. Our investments this quarter had a weighted average unit-level rent coverage of 3.4% times, and the average investment for a property was $3.3% million.

All of the investments this quarter were sale-leaseback transactions where we are providing capital to an expanding operator. Looking ahead, our investment pipeline remains solid, reflecting M&A and new unit expansion across a variety of targeted industries. As noted earlier, the current investment climate is characterized by attractive cap rates that have modestly compressed.

Our pipeline reflects this trend with pricing in the mid to high 7% range and strong contractual escalations, which is supportive of our long-term growth trajectory. From a tenant concentration perspective, our largest tenant represents 4.2% of ABR at quarter-end, and our top ten tenants now account for just 17.6% 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 offer an expansive opportunity set.

Dispositions picked up in the fourth quarter as we opportunistically monetized a number of investments at accretive pricing. We sold twenty-four properties this quarter for $60.4% million in net proceeds. This represented an average of approximately $2.5% million per property, highlighting the importance of owning fungible liquid properties, which allows us to proactively manage portfolio risks.

Dispositions this quarter were executed at a 7.0% weighted average cash yield, with approximately 70% of disposition volume in the car wash sector, allowing us to pare this industry exposure to 14.2% of ABR, down from above our soft ceiling of 15% last quarter. Over the near term, we expect our disposition activity to be slower than the fourth quarter, at a level relatively 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 fourth quarter.

Mark Patten

Thanks, Pete, and good morning, everyone. As Pete detailed, we had a good fourth quarter highlighted by a strong level of investments and an 8% initial cash cap rate. Among the headlines from the quarter was our AFFO per share of $0.45%, an increase of 7% versus Q4 of 2023. On a nominal basis, our AFFO totaled $81.8% million for the quarter, which is up $14.8% million over the same period in 2023, an increase of 22%.

This AFFO performance was in line with our expectations as reflected in our guidance range provided last quarter. Total G&A in Q4 2024 was $8.5% million versus $7.3% 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. Importantly, our recurring cash G&A as a percentage of total revenue was 4.8% for the quarter, which compares favorably to the 5.2% in the same period a year ago. Our total G&A and recurring cash G&A were modestly favorable to our expectations for the quarter.

Our recurring cash G&A as a percentage of total revenue was 5.4% for the full year, and 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 $0.295% in the fourth quarter, which represents an AFFO payout ratio of 66%. Our retained free cash flow after dividends continues to build, reaching $30.6% million in the fourth quarter, equating to over $120 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, representing upwards of approximately 10% of our annual capital needs. Turning to our balance sheet, with the net investment activity in Q4 2024, income-producing gross assets reached $6 billion at quarter-end. The increasing scale of our income-producing portfolio continues to build, improving our credit profile.

On the capital markets front, we remained active on our ATM program in the quarter, completing the sale of approximately $79 million of stock on a forward basis at an average price of $32.01% per share. We settled $325 million of forward equity, with a portion of the proceeds utilized to repay our revolving credit facility balance. Our balance of unsettled forward equity totaled $381 million at quarter-end, which we plan on utilizing to continue funding our investment program while maintaining flexibility by keeping capacity available on our revolver. Similar to last quarter, our share price remained well above the weighted average price of our unsettled forward equity of $29.03% 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 fourth quarter, our diluted share count of 182.3% million included an adjustment for 3.2% million shares from our unsettled forward equity related to this treasury stock calculation. This represented a headwind of approximately $0.01% to AFFO per share in the quarter and $0.02% for the full year.

Our pro forma net debt to annualized adjusted EBITDAre, as adjusted for our unsettled forward equity, was 3.8% times at quarter-end. We remain committed to maintaining a well-capitalized balance sheet with low leverage and significant liquidity to continue to fuel our external growth. We further bolstered our liquidity at quarter-end with the previously announced closing of our amended $2.3% billion senior unsecured credit facility.

The facility amendment yielded a number of strategic accomplishments for the company, including an upsized revolver commitment of $1 billion, improvements to the rate structure and our financial covenants, and an extended maturity date to February 2030. We'd like to thank our entire bank group for their full participation and continued support in another successful financing, supporting the growth of our business. Lastly, as we noted in the earnings press release, we've updated our 2025 AFFO per share guidance range to $1.85% to $1.89%, implying over 7% growth at the midpoint.

Importantly, this guidance range requires minimal equity issuance, 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. In summary, we are very pleased with our fourth quarter and full-year results and remain optimistic about the prospects for the business. Operator, please open the call for questions.

Operator

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, the confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you.

Our first question is from Haendel St. Juste with Mizuho. Please proceed with your question.

Haendel St. Juste

Hey. Good morning out there. Thanks for the question.

My first question, please, on tenant credit. I was hoping you could talk a bit more about the Zips bankruptcy here and the car wash segment more broadly. Rents in the car wash segment have run up quite a bit and cap rates compressed the last couple of years.

So I'm curious if fifteen percent is still a level of exposure you're comfortable maintaining. Could we see that drift down more over time. And specifically, Zips, I'm hoping you could add some color on how you envision that playing out.

Seems like the risk to your ABR this year falls lower than the twenty basis point exposure you have. Thanks.

Pete Mavoides

Yeah. Sure. There's a lot embedded in that, and that one's a good place to start.

I would, you know, it's too early on Zips. Obviously, we're in negotiation with them in bankruptcy. Certainly, we feel like we're in a really good position having pared our exposure down to three properties and twenty basis points ABR.

And, you know, if you look at our historical recoveries, we're at seventy to eighty cents on the dollar, but, you know, it's an ongoing discussion. More broadly, you know, we work with strong conviction in the car wash space. We've been investing in that space for quite some time, and it's really the first bankruptcy we've seen.

It's not one that we didn't see coming, obviously, as we've done our exposure. And we have, you know, strong coverage across the portfolio. One of the benefits of our platform is having deep industry expertise with, you know, almost two hundred car washes across fifty-four operators and ongoing financial reporting where we can see the operators that are adding value, growing sales, improving EBITDA, or not, and take corrective action as we manage the portfolio.

So car wash will continue to be one of our leading industries. It's been a great industry. We get great risk-adjusted returns, and, you know, we're pretty comfortable with our position as we think about bankruptcy.

Haendel St. Juste

Appreciate that. And if I could add a follow-up to that question about Zips. Curious if you're able to share if they paid January and February.

Pete Mavoides

We're not able to share that. But we did make comments on the call where we're a hundred percent collected. So that should give you a hint.

Haendel St. Juste

Okay. Fair enough. And then the second question is, I guess, on the commentary regarding the increased competition you're seeing.

I was hoping you could expand on that a bit. Where are you seeing the competition, specific industries. Do you think it's sustainable, and what do you think it means for your ability to transact for portfolios or sale-leasebacks and cap rates, which I think you mentioned expect to see compression in the near term.

Pete Mavoides

Yep. Max, why don't you tackle that question.

Max Jenkins

Sure. Thanks, Pete. You know, over the last couple of quarters, we've seen some increased competition both from our peers, and there's been a couple of new entrants into the marketplace.

But, you know, the only effect of that would just be a slightly modest compression in cap rates. But otherwise, the transaction environment remains favorable to us. You know, we focus on servicing relationships and providing growth capital to middle-market operators across the country.

And there's an ample opportunity set for us to continue to invest in and realize those attractive risk-adjusted returns. So we're happy with where the pipeline sits, and, you know, it'll support the strong earnings chart that's implied in our guidance.

Pete Mavoides

Thanks, Max.

Haendel St. Juste

Yeah. I would say, as we've said, you know, kind of the eight caps and the nine-two gap yields we saw last year were kind of, you know, as we said all throughout the year, kind of felt like the high water mark, and, you know, we see sevens as we think about this year.

Haendel St. Juste

Thank you. Appreciate the call.

Operator

You got it. Thank you. Our next question is from Caitlin Burrows with Goldman Sachs.

Caitlin Burrows

Hi. Good morning, everyone. I guess maybe just kind of expanding on that.

Wondering if you could give any more discussion on just, like, how interest rate volatility has impacted your business recently, maybe on the positive side or more negative side. I mean, if you look at the interest rate moves of Q4 alone, it was, like, pretty significant. So wondering to what extent you felt that and, I guess, anything that happened subsequent to the quarter end.

Pete Mavoides

Yeah. Listen, Caitlin, you know, we have what is a sixty to ninety-day transaction cycle. So, you know, if we're closing a deal today, we probably priced it anywhere from sixty to a hundred and twenty days ago.

And we're making twenty-year investments. And so, you know, the week-over-week and even month-over-month volatility, you know, doesn't come into our pricing. And then, you know, you think about how we've positioned the balance sheet, you know, we're raising capital well in advance of deploying it such that that capital is priced in.

And so, you know, we try to insulate ourselves from those volatile moves and are much more slowly and, you know, again, to Max's commentary in the fourth quarter when people are looking at a three-seven ten-year, they were getting more aggressive bidding, and then, you know, you turn the calendar and you have a four-seven. They're blown out of deals, and we deliberately try to be more consistent and more predictable to that with our counterparties, which is why we think we get premium returns for how we deploy our capital. So overall, I think, you know, we expect downward pressure on cap rates as we've consistently said.

We saw more of that in the fourth quarter, and it's abating a little bit here in the first quarter. But, you know, we'll see where the market goes.

Caitlin Burrows

Got it. And then maybe just on the dispositions in the fourth quarter, wondering if you could talk a little bit more about what made you decide to move forward with that deal in particular or maybe it was a couple of deals. And as we think about it or how you think about it from, like, portfolio management versus, like, source of capital going forward.

Pete Mavoides

Yeah. You know, from a source of capital, you know, it's not necessarily accretive to where we're pricing new capital. You know, certainly at a seven cap, you know, it's more portfolio management, risk management.

You know, the fourth quarter was really lightening up on our car wash exposure, bringing that down from our soft ceiling of fifteen percent, which, you know, you see we did, I think, sixty-five or seventy percent of our dispositions in the fourth quarter were in the car wash space. So it was mostly, you know, portfolio management industry exposure. As we said on the call, we expect the disposition activity to moderate and be more consistent with our eight-quarter average as we think about this year.

Caitlin Burrows

Thanks.

Operator

Our next question is from Rich Hightower with Barclays. Please proceed with your question.

Rich Hightower

Good morning, everybody. Maybe just to stick to the capital side of the equation, Mark. I think you mentioned, you know, minimal equity issuance needed overall this year to hit your investment targets.

But, you know, maybe just talk about, you know, what might be needed. And I know that, you know, you also you guys also just said the dispositions obviously will decrease relative to what we saw in the fourth quarter. But just help us piece together, you know, any sort of remaining equity capital needs to hit the full-year guidance.

And then, obviously, you know, we start thinking about 2026 at some point and maybe just, you know, to hear your thoughts on that as well. Thanks.

Mark Patten

You got it. Well, I'll probably leave 2026 out until we actually provide guidance on 2026. So let 2026 I had to try, Mark.

No problem at all. Appreciate it, Rich. Yeah.

So listen, I think there are some of the building blocks as you think about it, and I mentioned one other thing in my remarks about our growing free cash flow. If you think about that, that's a pretty significant component of our investment ambition for in addition, Pete even mentioned even if we use our eight-quarter average on this dispositions, that probably delivers, you know, a decent amount of capital for that. We've got $380 million of unsettled for. We've got a billion-dollar revolver.

So from our standpoint, the underlying assumption is that our equity issuance and guidance is really sort of you could deploy that, you could achieve that with normal kind of ATM activity. So I'll say it a different way and, you know, what I mentioned in my remarks is, you know, we like to be front-footed in point of capital raising or equitizing our growth ambitions. So as I think about it, it makes us very puts us in a position of being very opportunistic.

So if we actually wanted to do something in terms of a bigger offering execution or otherwise, we could do that, and it would just be it would be all the more positive to our expectations. But what I would say, as you look at our liquidity, we're sitting at 3.8% times leverage. If you run out, say, the liquidity we have to get the 4.6% times, which is somewhere right around sort of our probably, our historical you're pretty much approaching a billion-dollar at least three and a half quarters of investment.

Rich Hightower

Okay. Got it. Sorry.

I think, Mark, you were breaking up there on my end, but I think I caught most of that. And I guess just to so that was sources just to check-in on uses for a second. What's the best way we should be thinking of acquisition volume, you know, kind of throughout the year at this point.

Rob Salisbury

Hey, Rich. I think from a cadence standpoint, historically, the fourth quarter has been a little bit larger for us in years past, but a ratable over the right now. Obviously, where our pipeline sits today, we don't have visibility beyond sixty to ninety days there, but just speaking to our historical.

Rich Hightower

Got it. Thanks, guys.

Operator

Our next question is from Smedes Rose with Citi. Please proceed with your question.

Maddie Fargis

Hey, good morning. This is Maddie Fargis on for Smedes. Do you have any feedback you're getting around consumer behavior from tenants that you're able to share given the current inflationary environment.

Pete Mavoides

Yeah. Listen, our feedback's gonna be delayed. Right.

We're receiving unit-level financials at our sites on a, you know, on a one-quarter lag. And so, you know, we're typically seeing, you know, inflation and cost and cost pressures come through on a ninety to a hundred and eighty-day lag, and, you know, if anything, you know, what we're seeing is those factors abating in the current numbers, but, you know, it's I would I would say, you know, the data and input you hear on the news is much more current.

Maddie Fargis

Great. Thank you. And then your ABR exposure to tenants under one times coverage ticked up slightly sequentially.

Is there anything there to be concerned about.

Pete Mavoides

No. That bucket ebbs and flows and particularly is influenced by, you know, sites that we're developing with our partners and putting capital to work before those sites are actually producing positive ABR. So and certainly, the uptick is de minimis in our view and nothing to be concerned about.

And I would say, you know, if there were credit issues, they would be into guidance, and they are built into guidance, and I think bumping the bottom end of the range of guidance this quarter should give you a sense of where we're thinking at this point.

Maddie Fargis

Great. Thank you. That's it for me.

Operator

Thank you. Our next question is from Eric Borden with BMO Capital Markets. Please proceed with your question.

Eric Borden

Good morning. Just noticed that Circle K popped into the top ten tenant list. You know, I just want to talk wondering if you could talk about the, you know, potential opportunity to acquire more there and then more broadly speaking, the appetite to add more c-stores to the portfolio.

AJ Peil

Sure. So Circle K has been in the top ten in previous quarters. It was really sequencing of just the rental escalation that put it back in.

We're very happy with that tenant. Couchard's a great credit. I think c-stores across the board is an area that we've continued to grow over the years ratably.

We're really happy with the community source space.

Eric Borden

Okay. And then we just noticed that occupancy, you know, slightly moderated twenty bips quarter over quarter. I was wondering if you could have a comment there.

And then if you could talk about your, you know, current watch list outside of Zips. You know, what are your guys' have built into guidance for bad debt.

Pete Mavoides

Alright. Well, that one's jumping around the room. You know, on occupancy, I wouldn't read too much into going from, you know, three vacant properties to seven.

That's certainly, you know, natural ebbs and flows in the portfolio. We did the, you know, went through our releasing stats on the call, which I think are positive. So, you know, those seven properties will be brought back online and run through our releasing stats and, you know, certainly any specific assumptions around those sites would be built into guidance.

In terms of bad debt, Rob, why don't you tackle that.

Rob Salisbury

Yeah. So our guidance range includes a wide range of assumptions, including for credit. We haven't quantified the specific in the past, but maybe just as a frame of reference, we have said that historically our portfolio has experienced about thirty basis points.

So when we construct our guidance range, we go through a combination of top-down and a bottom-up process where we identify individual tenants as well as bake in a general reserve. And so typically, that results in an assumption that well in excess of that thirty basis points number.

Eric Borden

If that's helpful.

Rob Salisbury

Oh, I'm sorry. I think you're breaking up a little bit. I don't know if I heard the last bit of your question.

Happy to take it offline, though. Thanks.

Operator

Great. We appreciate that. Thanks.

Sorry for breaking up. Our next question is from Michael Goldsmith with UBS.

Michael Goldsmith

Good morning. Thanks a lot for taking my question. First question on the car wash industry again.

You know, given what you have visibility into, is the pressure on this group broad-based, or is it more focused on a narrow range of operators right within the Zips filing where they noted that they've seen roughly nine hundred new car wash sites open every year for the past five years. So just trying to understand if this is industry-wide or is this just kind of specific operator.

Pete Mavoides

It can seem to just kind of specific operators. Thanks. Yeah.

We certainly think it's a specific operator trend. Obviously, there is new competition in the car wash space, and we're monitoring that and trying to deploy our capital with guys who do it right and guys who do it well. Across our overall portfolio, sales are flat and EBITDA is roughly flat with margins in excess of fifty percent.

And so and coverage, you know, in the mid-twos. So we certainly feel good with our exposure, and we monitor it on a quarterly basis and take corrective action where we see sites that aren't working, but I don't think there's, you know, something systemic to the entire car wash space that gives us concern.

Michael Goldsmith

I appreciate that. And as a follow-up, you know, keep up the good work with the acquisition guidance, but you know, you did guide to a billion at the midpoint this year down from one point two last year. Is that a reflection of, you know, lack of visibility into the transaction market or some other factors that would potentially lead to a more challenging year this year because it did sound like you were relatively optimistic at the start of the call.

Thanks.

Pete Mavoides

Yeah. I think it's really conservatism and the recognition that, you know, 2024 was a great year for buying assets at super high cap rates. And we were aggressively looking to take advantage of the dislocation in the capital markets that was allowing us to deploy capital at historically wide spreads and historically wide rates, and we expect in 2025 a normalization of the capital markets and the resumption of will drive, you know, cap rates down and thus making us a little less acquisitive.

But it's early in the year. Right. And the ten-year remains volatile as we just discussed earlier in the call.

And, you know, we'll see where things shake out. But, you know, obviously, there's not a huge difference between, you know, where we ended up last year and the midpoint of our guidance. So, you know, we'll continue to transact, continue to service our relationships, and see what the year brings.

Michael Goldsmith

Thank you very much. Good luck in 2025.

Pete Mavoides

Great. Thank you.

Operator

Our next question is from John Kilichowski with Wells Fargo. Please proceed with your question.

Cheryl

Hi. This is Cheryl on behalf of John. I was just wondering what were the drivers for the plus one cent based on the low end of AFFO guide, and how have you seen acquisitions trend year to date.

What does the pipeline look like. And have you seen any cap rate compression recently.

Pete Mavoides

Yeah. As we said in our prepared remarks, the pipeline's full, albeit with modest cap rate compression. So, you know, as I said, we do expect to transact in the mid to high sevens, which is down from an eight.

You know, the range of guidance is driven by a bunch of assumptions, both around investments, around credit experience, and around the cost of capital. Obviously, I think the cost of capital is not gonna be a huge driver given where we're positioned currently. And the price of that capital, but, you know, it's really cap rates and credit experience and performance of the portfolio.

Cheryl

Thank you. And then just one.

Michael Goldsmith

I received that the credit coverage picked up in the one point five to one point nine nine times category. What kind of assets drove the pickup in that bucket.

Pete Mavoides

It's gonna be broad-based across the portfolio. I don't think there's anything specific to industries or tenants that's gonna, you know, kind of drive the increase in that bucket.

Cheryl

Gotcha. Thank you.

Operator

Our next question is from Farrell Granite with Bank of America. Please proceed with your question.

Farrell Granite

Hi. Good morning. Thank you for taking my question.

I wanted to ask about your dispositions that you spoke about. That there may be a slowing, but there was a key focus on the reduction in car washes. Is there any other industry that would be a focus going into 2025, or would it be just the rebalancing of the portfolio.

Pete Mavoides

Yeah. So, you know, we have the soft ceiling for any given industry of fifteen percent. And so when we crest that, we look to pare that exposure and create the ability to continue to invest within those industries really, to be able to service our relationships.

You know, beyond that, I think most of the disposition activity is gonna be property level and tenant risk-based, where we see risks either at a tenant level or an individual asset level. And really moving those risks out of the portfolio and nothing really systemic to hang your hat on there.

Farrell Granite

Okay. Thank you. And, also, sorry to bring go back to the bad debt and credit assumptions.

I just wanted to understand, compared to your initial guide on the twenty basis points of exposure for Zips, was that initially included into the bad credit assumption, or is there an additional assumption that is maybe baked in now into new guide of that additional twenty basis points.

Pete Mavoides

Yeah. So you gotta think about what happens in a credit event. You have a tenant file for bankruptcy, and then a lease stops paying, and then you take your assets and you reposition those assets. And you have a recovery on those assets.

So, really, when you're building in the credit assumption, you're gonna have the downtime of the assets and then the recovery of experience of those assets assuming a specific downtime, whether it's thirty, sixty, you know, hundred and eighty days depending upon the asset and the market. Our credit assumption in guidance goes through all our tenants and all our assets and makes specific assumptions around what we think is gonna happen. Based upon our experience and our visibility into the unit-level performance of those sites.

And then, on top of that, has a, you know, unknown assumption to account for things that we don't know. That we can't see. And so without speaking specifically to Zips, I would say our credit loss assumptions for the year have not changed materially in the ninety days since we initially provided guidance.

Farrell Granite

Okay. Thank you so much.

Operator

Our next question is from Daniel Guglima with Capital One Securities. Please proceed with your question.

Daniel Guglima

Hi, everyone. Thank you for taking my questions. I appreciate the US math on page nine of the supplement, and there weren't many major changes in diversification by state quarter to quarter.

But I know you all have a large forward pipeline of deals, so thinking about that map one year from now, are there certain states or regions where you'd expect material changes.

Pete Mavoides

We often say geography is an output of where our tenant relationships bring us, such that I would expect our geographical diversification to grow ratably, and I would not anticipate a materially different page nine, you know, twelve months from now.

Daniel Guglima

Okay. Great. And then as a follow-up to that, we looked through kind of the US wage data.

And it looks like some of the southern cities have had some, like, reacceleration in wage growth. Atlanta, Miami, Dallas, Houston. And you mentioned it's kind of where your partners take you.

Have you been getting more inbounds from partners and tenants trying to kind of expand in those parts of the country.

Pete Mavoides

Yeah. I mean, our relationships are bringing us into those markets, and given that we're heavy in those markets currently, you know, I would say our inbound demand for capital has been proportionately, you know, similar to our geographic diversity.

Daniel Guglima

Great. Thank you.

Operator

Our next question is from Jay Kornridge with Wedbush Securities. Please proceed with your question.

Jay Kornridge

Hey. Thanks. Good morning.

Just going back to industry allocations, you know, beyond lowering car wash exposure below fifteen percent, it looks like you increased exposure to casual dining eighty basis points to seven and a half percent. And, you know, that's an industry that's faced some headwinds lately. So just curious if you can provide any thoughts around your conviction to increasing exposure there and if there's any other, you know, smaller industry exposures you have that you would like to see increase going forward.

Pete Mavoides

Yeah. I would say, you know, in general, I have said expect our pie to grow ratably. And much like the geographic discussion I just had, our industry diversification is driven by our relationships and where we have, you know, deep relationships.

And they're the ones that bring us the opportunities. Certainly, some industries are, you know, there's more opportunities than others given where they are in consolidation, like car washes, early childhood, and automotive service. And other industries like the restaurants are more consolidated.

In general, you know, we have a strong conviction around the casual dining, which is why it's seven and a half percent of our ABR. And that conviction is really more driven by the fungibility of the real estate and our recoveries experience around that real estate, and our credit loss experience around, you know, casual dining credit events that gives us that confidence. And so we continue to invest there.

I've been investing in restaurants for twenty-plus years in the, you know, specific casual dining space, and it remains a core investment industry for us.

Jay Kornridge

I appreciate that. And then just one more. In terms of, you know, where your transaction is coming from, they typically come the bulk of them typically comes from existing tenants.

And so I guess I'm just curious how sticky or, I guess, loyal do you feel like your existing tenants are to valuing your platform and your relationship and continuing to transact going forward. Versus as new, you know, capital providers come into the market, really just chasing, you know, the best cost to capital they can.

Max Jenkins

Thanks, Jay. This is Max. I'll take that.

You know, I think it can probably look to the repeat business and existing relationship percentages that we post quarter over quarter, and it always kind of adds around that eighty percent give or take. So that just kind of tells you that the repeat business continues to drive the majority of our pipeline. But then we're always actively out there sourcing new relationships, and I think the strongest driver for new relationships would be referrals.

At the end of the day, all these operators and tenants talk to each other. They're exchanging ideas, and when you continually transact with our tenants over and over, you build that relationship, and that relationship continues to expand, and that's, you know, always gonna be the driving force of our pipeline.

Pete Mavoides

And to the pricing question, I would say, you know, these operators, they value execution certainty. And they're not unsophisticated, and they certainly are gonna do a price check on any capital that they source, but they do place a high priority on reliability and predictability and being the incumbent, having docs negotiated, having underwritten the credit in advance, certainly gives us an advantage over new capital coming into that system.

Jay Kornridge

I appreciate that. That's it for me.

Operator

Thank you. Our next question is from Greg McGinnis with Scotiabank. Please proceed with your question.

Greg McGinnis

Greg, is your line on mute.

Greg McGinnis

Sure is. Good morning. Sorry about that.

Cash releasing spreads were positive for the first time in a while. Was there anything unique about the expirations or anything handled differently from the portfolio management standpoint that helped you cross that threshold. And do you expect a similar outcome, or is a similar outcome achievable in 2025.

AJ Peil

Yeah. I don't think there was anything unique to the quarter on the recovery rates. Some of the lease renewals had some larger bumps than usual, which led to some of that positive. And if you look at just kind of the breakdown of the number of leases renewed, this particular trailing twelve-month period, we had forty-two leases renew with larger than usual bumps, which led to the total leasing stats being positive. So I think this particular quarter was more just episodic of the fact that we had forty-two leases renew in the trailing twelve-month period.

But, you know, it's really kind of two different buckets. One's just contractual renewals, and the other is repositioning assets, whether it's through a vacancy or without a vacancy. But I think the stats should be pretty consistent as we move forward.

Greg McGinnis

Okay. Thanks. And, you know, I can understand that the.

Pete Mavoides

I'm sorry. Go ahead.

Greg McGinnis

Greg, I would just add, you know, listen. As I look at those rates, the recovery rate, I would anticipate those percentages to be relatively consistent. The ultimate weighted average is really just gonna depend on, you know, how we're renewing an asset.

Is it an as-of-right in the lease. Are we renewing an asset without vacancy. Or are we having to take it back and repurpose it with the downtime.

So it's really just a factor of, you know, we had a bunch of renewals, not a bunch of vacant asset re-leases.

Greg McGinnis

Okay. That makes sense. And then follow-up is on the tenant credit.

And I recognized that rent coverage remains healthy and will move quarter to quarter, but we did see what appears to be kind of a doubling of the triple C plus tenant credit to around four percent from last quarter. Was that due to acquisitions, or is that tenants dropping down into that bucket. Any color is appreciated.

AJ Peil

Yeah. It was tenants dropping down within the portfolio. And the thing to remember oftentimes in that particular cohort is it's implied credit rating.

It's something we pay attention to. But what we really look for is if it's migrating down to the triple C plus bucket or even B minus bucket, what's the unit-level coverage look like. And, you know, more than half of that particular bucket is still greater than two times coverage, which gives us a lot of confidence.

And that's really what we're paying attention to is the marriage of those two categories, which is the implied cover trading as well as the unit-level economics.

Pete Mavoides

Yeah, Greg. And you can assume we're not deploying a lot of fresh capital into triple C credits.

Greg McGinnis

Fair enough. Thank you.

Operator

Our next question is from Spencer Glimcher with Greenstreet Advisors. Please proceed with your question.

Spencer Glimcher

Thank you. Just one for me on the acquisitions pipeline. So you guys commented that the pipeline remains robust, reflecting continued M&A activity as well as new unit expansion.

Are you able to share which industries you're seeing the most activity from in terms of that new unit growth thus far into the year.

Max Jenkins

Spencer, I think it's pretty ratable to historical trends, and there's really nothing that draws a conclusion. You know, both new unit M&A, a lot of add-on follow-on transactions with existing tenants, but the pipeline looks pretty consistent as it has been in the historical periods.

Spencer Glimcher

Okay. And then, actually, maybe one just on the disposition for 2025. I know you commented that some of this would obviously be driven by opportunistic asset sales.

Has there been any assets in this particular bucket that have already been earmarked for sale that you guys think might be a compelling divestment either because of, you know, cap rate compression in the industry, good real estate, or are these just kind of ad hoc from inbounds or as they come up throughout the year.

Pete Mavoides

Yeah. We're mostly gonna sell because we see an asset that, you know, we don't like the risk profile. You know, generally, if our phone rings and someone, you know, trying to buy an asset, they're not gonna be the most competitive. You know, running an auction and, you know, finding the most competitive capital is generally how we do it.

So we tend not to respond to, you know, unsolicited inbounds on our properties. And it's more just deliberate risk management activities that we take, you know, and that's what's driving the volume.

Spencer Glimcher

Thank you.

Operator

Our next question is from John Massocca with B. Riley Securities. Please proceed with your question.

John Massocca

Good morning. The 2025 investment volume done year to date, maybe even on the pipeline that's, I mean, TSA or LOI. I mean, are you seeing that cap rate compression in those investments or potential investments, or is it more just a theoretical view on stuff that's more than ninety days out given just kind of all the macro factors.

Pete Mavoides

No, John. We're living it. You know, and particularly if you think, you know, we negotiated those deals back in November and December where there was a much more constructive tenure.

And so our current pipeline, I think, is, you know, in that mid to high sevens cap rate that we discussed.

John Massocca

Okay. That's helpful. And then, were there any Zips in the Q4 2024 disposition activity.

Pete Mavoides

Was there any what, John. Just car washes. I mean, these kids are the big bucket of car washes in Q4, and I just was curious if.

No. We unloaded. And that's the key here is when something becomes, you know, apparent something's gonna break, it becomes illiquid, and the price to transact becomes pretty steep.

And as a sophisticated institutional investor, we're not gonna sell individual assets that are, you know, imminently gonna break. We'd most likely fix them and then sell them. So there was no Zips car wash in the fourth quarter.

John Massocca

Okay. And then is the car wash sales in the fourth quarter more generally. I mean, how much of that was driven by, you know, individual risk at those assets or with those tenants, and how much was just kind of getting below that fifteen number and some breathing room to maybe be aggressive on the investment side again for the remainder of this year.

Pete Mavoides

It's both. Right. We want the breathing room, so we're gonna look at our portfolio and choose the assets that we don't wanna own for the next twenty years.

John Massocca

Okay. That's fair. That's it for me.

Pete Mavoides

Thank you very much. Gotcha. Take care.

Operator

Thank you. Our next question is from Caitlin Burrows with Goldman Sachs. Please proceed with your question.

Caitlin Burrows

Hi again. I don't think it's come up, so I figured I'd ask. Just as you guys think about the leverage and funding going forward, I think you made a point earlier on given where your leverage is today, you obviously have a lot of capacity.

But from here, like, near term, how are you guys deciding between using equity versus debt.

Mark Patten

Thanks, Caitlin. I guess what I'd say is as we think about it, just generally, the split between debt and equity had historically been about sixty percent with our growing free cash flow that's really turned into more sixty percent equity, thirty percent debt, ten percent free cash flow. So as we look at it, we would continue to utilize that.

We'd also orient ourselves to where our leverage stands. So that obviously is a data point for us as we think about when to deploy, when to access equity, when to utilize debt issuance. I think, from the debt standpoint, as I mentioned, we don't have any near-term demands on liquidity for us to do either.

In our case, we can be opportunistic on the equity front, but we can also be opportunistic on the debt front. And, hopefully, the tenure will accommodate in some fashion. But for us, we're thinking that, you know, that piece we have for 2025, you know, really starts with our revolver and then term it out with, hopefully, an unsecured bond deal.

Caitlin Burrows

Thanks. That's all.

Operator

Thank you. There are no further questions at this time. I would like to hand the floor back over to Pete Mavoides for any closing remarks.

Pete Mavoides

Great. Well, thank you all for participating in today's call. Obviously, we'll be on the road at various conferences in non-deal roadshows in the next couple of months, and so we look forward to meeting with you all in person.

Have a great day. Thanks.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.