Essential Properties (NYSE:EPRT) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Essential Properties Realty Trust reported strong financial performance with GAAP net income of $60.7 million and AFFO of $111.9 million for Q3 2026.
The company invested $342 million into 100 properties, with a focus on sale-leaseback transactions, achieving a strong initial cash yield of 7.7% and a GAAP yield of 9.4%.
Portfolio performance remained solid, with an occupancy rate of 99.6% and a weighted average lease term of over 14 years, driving an increase in 2026 AFFO per share guidance to $2.02-$2.05.
The company plans a cautious investment pace in the near term, aiming to preserve balance sheet capacity amid volatile capital markets, with full-year investment guidance of $1.3 billion to $1.5 billion.
Management highlighted the strategic advantage of providing capital to middle market operators, leveraging pricing power due to reduced competition in the market.
The company maintains a strong financial position, with pro forma leverage of 3.8 times and liquidity of $1.3 billion, leaving it well-positioned to execute its business plan.
Essential Properties announced management promotions, reflecting the evolution of its leadership team as it marks its 10-year anniversary.
The company is exploring various debt capital options to refinance its revolving credit facility and extend its liquidity profile, with no debt maturities until 2028.
Dispositions are expected to increase, with plans to sell $200 million of assets in 2027 as an accretive source of capital.
The forward pipeline indicates cap rates around 8%, with GAAP yields in the high nines, reflecting proactive management of investment pricing.
Full Transcript
OPERATOR
Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust’s third quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. To register to ask a question at any time, please press star-1 on your telephone keypad. This conference call 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 90 days.
Pete Mavoides, Chief Executive Officer; Rob Salisbury, CFO and Chief Strategy Officer; Max Jenkins, President and Chief Operating Officer; Craig Vachris, Chief Investment Officer; and Cheryl Call, Director of Financial Planning and Data Analytics. It is now my pleasure to turn the call over to Cheryl Call.
Cheryl Call (Director of Financial Planning and Data Analytics)
Thank you, operator. Good morning, everyone, and thank you for joining us today for Essential Properties’ third quarter 2026 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.
In our earnings release last night for the quarter, we reported GAAP net income of $60.7 million and AFFO of $111.9 million. With that, I’ll turn the call over to Pete.
Peter M. Mavoides (President & CEO)
Thank you, Cheryl, and thank you to everyone joining us today for your interest in Essential Properties. In the third quarter, we continued to execute on our goal of driving compelling earnings growth for shareholders through owning a diverse portfolio with an increasing revenue stream and accretively deploying capital to grow and diversify that portfolio. On the external growth front, we invested $342 million into 100 properties at an average initial cash yield of 7.7% and a GAAP yield of 9.4%. Ninety-one percent of our investments in this quarter were sale-leaseback transactions, which continues to be a compelling source of growth capital for middle market operators across our targeted industries in an elevated cost of capital environment. Our ability to deliver reliable, permanent capital to operators gives us compelling pricing and structuring leverage, and that is showing up in our pipeline.
Our investments team continues to find attractive opportunities across our targeted industries. That said, we are being deliberately selective, prioritizing transactions where pricing reflects a meaningful spread to our cost of capital, supporting long-term earnings growth for our shareholders. As Max will discuss later, we are achieving pricing power in real time, with new investments being struck at higher cap rates than the third quarter investments, which were largely contracted over the summer.
Importantly, our methodical approach to deployment protects our capital runway and preserves our corporate liquidity in a period of capital markets choppiness. Our capital position remains strong, with pro forma leverage of 3.8 times and liquidity of $1.3 billion, providing ample financial capacity to execute our business plan. As Rob will discuss later. Turning to the portfolio, we ended the quarter with investments in 2,580 properties that were leased to tenants operating over 700 concepts. Our weighted average lease term is over 14 years, our weighted average lease escalations are 1.9%, and just 2% of our annual base rent is expiring through 2028. Our portfolio continued to deliver solid and consistent performance this quarter, with same-store rent growth of 1.4%, healthy rent coverage of 3.5 times, and occupancy of 99.6%, and a reduction in our tenant credit watch list.
With investment activity and portfolio performance tracking ahead of our budget and expectations, we are increasing our 2026 AFFO per share guidance to a new range of $2.02 to $2.05 and our investment volume guidance to a range of $1.3 billion to $1.5 billion. Our revised AFFO per share guidance implies a growth rate of almost 8% at the midpoint. We are establishing our initial 2027 guidance with an AFFO per share range of $2.10 to $2.18, investment volume of $1 billion to $1.5 billion, and cash G&A expense of $32 million to $37 million.
Our operating plan calls for a slower pace of deployment over the next two to three quarters as our investment teams remain disciplined on pricing, allowing us to retain balance sheet capacity. Historically, asset pricing adjustments tend to lag the rapid movement of pricing in the capital markets. Based on our current weighted average cost of capital, dispositions have become an accretive source of capital and are likely to trend higher in the near term to alleviate capital markets funding requirements.
Lastly, I’d like to congratulate Max and Rob on their recent promotions, which recognize the meaningful contributions they have made to the company and position them with greater responsibilities going forward. I’d also like to welcome Craig Vachris to the company as our new Chief Investment Officer. These management changes reflect the continued evolution of the management team as we pass our 10-year anniversary. With that, I’ll turn the call over to Craig, who will provide an update on our portfolio and asset management activities.
Craig Vachris (Chief Investment Officer)
Thanks, Pete. Overall, our portfolio fundamentals remained healthy during the quarter and continued to perform in line with our expectations. Same-store rent growth was 1.4%, consistent with recent quarters. Occupancy remained strong at 99.6% with only 11 vacant properties. Portfolio rent coverage remained at a very healthy level, 3.5 times. The percentage of ABR with rent below 1 times was consistent quarter over quarter, and our watch list improved, reflecting continued stability in tenant credit.
On the disposition front, we sold 11 properties for $17.9 million at a weighted average cap rate of 6.1%. The dispositions were primarily driven by opportunistic sales led by restaurant and car wash properties. Notably, these dispositions were transacted at cap rates that were accretive to our weighted average cost of capital, highlighting the value of owning granular, fungible properties with a deep buyer pool. Additionally, healthy buyer demand enables us to have the flexibility to scale our disposition activity should we choose to lean further into capital recycling.
Our portfolio continues to benefit from broad diversification, as our top 10 tenants represent just 15.2% of ABR at quarter end, while our top 20 tenants account for only 25.1%, reflecting our continued focus on partnering with a broad base of middle market operators and limiting concentration risk. We also reduced our car wash exposure by 60 basis points during the quarter to 12% of ABR, and our portfolio construction remains healthy. Lastly, you may have noticed that we relabeled certain industry categories in our supplemental to better reflect the businesses in our portfolio. This was simply a name change; for example, Medical/Dental is now Health and Wellness, and Health and Fitness is now Fitness. With that, I’ll turn the call over to Max Jenkins, our President and Chief Operating Officer, who will provide an update on our investment activities and the current market dynamics.
Max Jenkins (President & Chief Operating Officer)
Thanks, Craig. On the investment side, during the third quarter we invested $342 million at a weighted average initial cash yield of 7.7%. Our investments in the quarter had a weighted average initial lease term of 17.9 years and a weighted average annual rent escalation of 2.3%, generating a strong average GAAP yield of 9.4%. Our capital deployment during the third quarter was broad-based across most of our top industries, as we completed 31 transactions totaling 100 properties. With alternative financing sources becoming more difficult to access for many companies, operators continue to monetize their own real estate through sale-leasebacks, which encompassed 91% of our investment volume in the quarter. Our average investment size was $3 million per property during the quarter, reflecting our focus on granular, highly fungible assets that provide attractive risk-adjusted returns.
As Pete mentioned, pricing is front and center for us as our cost of capital has moved higher. We have been proactive in managing our pipeline and pushing for higher returns reflective of the current environment without taking on any incremental risk. Diminished competition from private players in a more restrictive middle market lending landscape are factors contributing to our pricing power. Consequently, our forward pipeline has cap rates around 8% with GAAP yields in the high nines.
With over $1 billion of investments closed year to date, we have again increased our full-year investment guidance to a new range of $1.3 billion to $1.5 billion. With that, I’d like to turn the call over to Rob Salisbury, our CFO and Chief Strategy Officer, who will take us through the financials for the third quarter.
Rob S. (EVP, CFO and Corporate Secretary)
Thanks, Max. Overall, we delivered another strong quarter of operating and financial performance. Our AFFO per share was $0.51, representing an increase of 6% versus the year-ago period, while nominal AFFO increased 16% year over year to $112 million. This AFFO performance was ahead of our expectations, driven by strong investment volume and a modest benefit from the lack of treasury stock method dilution on our unsettled forward equity balance. Total G&A in the quarter was $14.1 million. Our cash G&A was $7.3 million, which is trending favorably toward the lower half of our guidance range of $30 million to $34 million for the year and represents just 4.3% of total revenue, down from 4.6% in the same period a year ago. We declared a cash dividend of $0.32 in the third quarter, which represents an AFFO payout ratio of 63%. This low payout ratio enabled us to retain free cash flow totaling $42 million in the quarter, representing a substantial source of internally generated capital.
Turning to the balance sheet, at quarter end our income-producing gross assets totaled $8.1 billion. The growth and diversification of our portfolio continues to further strengthen our credit profile. During the quarter, we partially exercised the accordion feature on our revolving credit facility, increasing capacity by $300 million to $1.3 billion. We would like to thank our entire bank group for their overwhelming support in this successful transaction.
We utilized this extra liquidity to support the prepayment of our sole 2027 maturity, a $430 million term loan, leaving us with no debt maturities until 2028. As a reminder, we retained our favorable interest rate swaps which had previously hedged that maturity. Our revolving credit facility will utilize this hedge until it expires next month. Looking ahead, we are evaluating a range of debt capital options to term out our revolver balance and extend our robust liquidity profile. With $483 million of unsettled forward equity at an average price of $30.50 per share and $809 million of revolver capacity, we have more than enough liquidity to continue funding our growth plan, allowing us to be opportunistic when it comes to sourcing external capital. Additionally, from a leverage standpoint, our pro forma net debt to annualized adjusted EBITDA REIT remains low at 3.8 times at quarter end, underscoring our commitment to maintaining a low leverage profile.
As Pete mentioned, we increased our 2026 AFFO per share guidance to a range of $2.02 to $2.05, reflecting a growth rate of approximately 8% at the midpoint. We also established an initial AFFO per share guidance range for 2027 of $2.10 to $2.18, reflecting our expectation of another year of best-in-class earnings growth. The guidance range includes investment volume of $1 billion to $1.5 billion, which is expected to be back-end loaded as we seek to preserve balance sheet capacity in the near term.
Importantly, our annual free cash flow after dividends is approaching $200 million, and our guidance assumes approximately $200 million of dispositions next year. Combined with our expanded revolver capacity and unsettled forward equity balance, these sources provide sufficient funding to support our investment guidance for 2027 without the need to source external capital. With that, I’ll turn the call back over to Pete.
Peter M. Mavoides (President & CEO)
Thanks, Rob. In summary, we are pleased with our third quarter results. Volatile capital markets present both challenges and opportunities for disciplined investors. We have positioned this company to manage both the challenges and capitalize on the opportunities. With a strong balance sheet, long-standing relationships built on reliable execution and a great team, we are excited about the business plan that supports our 2027 guidance. Operator, please open the call for questions.
OPERATOR
Thank you. If you’d like to ask a question, press star one on your keypad. To leave the queue at any time, press star two. Once again, that is star one to ask a question. We’ll take our first question from Michael Goldsmith with UBS. Your line is open.
Michael Goldsmith (Analyst)
Good morning. Thanks a lot for taking my questions. First on the 2027 guidance. I think you started to touch on it, but can you provide us the building bl for, you know, how you’re going to achieve that and then also what are you assuming on the debt refinancing and, you know, how you’re going to approach that? I know you put it on the revolver, but just can you, can you talk about, you know, your different options there and how you plan to proceed?
Peter M. Mavoides (President & CEO)
Avi, why don’t you handle that?
Avi
Hey Michael. Good morning. So we outlined some of the high-level drivers in our press release, most notably the investment volume range. As it relates to the financing, yes, we currently have $430 million on the revolver that was attributed to the prepayment of that term loan that was set to mature in February. So we had 8-K’d that about a month ago. But we went ahead and expanded our revolver capacity. That helps support taking that down a little bit early. And just as a reminder, we kept that swap in place. So you can see some expanded disclosure in our supplemental to show you where that’s currently swapped. That swap will mature at the end of November, at which time it’ll become a floating-rate obligation just like the rest of our revolving credit facility. And so as we look at some potential options to term that out, you know, clearly we don’t want to leave that floating; [we] seek to have as low variable-rate debt exposure as we can.
So as we sit here today, we’re evaluating all of the debt alternatives I think we mentioned in the earnings call script. And when we look at the menu right now, unsecured bonds on a 10-year basis would probably price in the high 6s. A convert would probably price south of 5% on a coupon basis, I should say. And then bank debt would probably be somewhere in between the 5.6% to 5.7% range. We’re looking at all those. And, you know, as a general comment, we’re always looking to extend the duration on our liability stack. We recently did a 10-year bond offering back in June. So strategically we’re continuing to focus on that, understanding of course that we do have a hole in our ladder at both the five- and seven-year maturity. So we would consider shortening up just a little bit, you know, to support the refinancing of that obligation. And I should say that we’ve included a range of scenarios for that baked into our guidance range.
So the range does not assume that we leave it floating for the entirety of 2027; we assume that we do term that out. I think that just given where the swap is today, we’ll probably have more to talk about in a month or two as we continue to assess those options. But, you know, clearly interest rates are evolving dynamically and we’ll see where that shakes out.
Peter M. Mavoides (President & CEO)
Yeah, Mike, the, you know, the other building blocks for, you know, 2027 — you know, obviously, you know, we have the investment guidance out there, a billion to a billion five, which is a conservative range relative to our historical performance. And then all of that guidance [is] kind of predicated on continued solid portfolio performance and, you know, our compelling growth within the portfolio.
Michael Goldsmith (Analyst)
Thanks for that. And just as a follow-up, you know, speaking about the solid portfolio performance, can you just talk a little bit about tenant health and the watch list? I think your sub 1 times rent coverage bucket was flat with last quarter. So just trying to get a sense of, you know, you know, is there any change in the watch list, how you think about your tenant base and how they’re and have been able to navigate the macro.
Peter M. Mavoides (President & CEO)
Thanks. Why don’t you handle that?
Craig Vachris (Chief Investment Officer)
Thanks, Pete. Yeah, no, it’s been very consistent. We don’t really [see] any trends or, you know, movement one way or another. Obviously it’s — yeah, it’s like I said, it’s going to be pretty consistent. I think we’re happy with the way our tenants are performing. Coverage remains strong and, Michael, on that — you know, specifically the watch list — it’s actually down 50 basis points quarter over quarter and sits at 1.1%. And, you know, as [noted], the portfolio continues to operate within the guidance range and, you know, no trends, nothing material to report, and we’re happy with how our tenants [are] performing.
Michael Goldsmith (Analyst)
Thank you very much. Good luck in the fourth quarter.
OPERATOR
Thank you. We’ll take our next question from Hendel St. Juste with Mizuho. Your line is open.
Hendel St. Juste (Analyst)
Hey there, guys. Good morning. I wanted to follow up on this — love it. I want to follow up on the 2027 line of questioning from Michael before. Can you talk a bit more about your capital deployment strategy and balance sheet management a bit more? Sounds like, Pete, you mentioned investments may be back-end loaded. Should we expect to see leverage tick up a little bit here over the course of ’27 and maybe some color on the key swing factors for the upper and lower end of the range for next year.
Is it basically volume, spreads, and debt refis, or anything else we should consider? Thanks.
Peter M. Mavoides (President & CEO)
Listen, I think we’re going through a period of time here, as we said in the call, where there’s been a rapid movement in our weighted average cost of capital, and we’re going through a process of repricing assets and repricing our pipeline. And so as we go through that period of time, we expect volumes to decrease as sellers’ expectations are adjusted. Overall, we would expect there to be a lower level of transaction opportunities. But, you know, I think on a bigger picture we would expect a more than commensurate lower level of competition that, you know, continues to afford us ample opportunities to invest.
But it’s a very dynamic time and we’re going to, you know, react to the market as it evolves, you know, and as we’re, you know, focusing on achieving attractive spreads and pricing transactions appropriately for the risk in the current market. And, you know, we’re uncertain, you know, what that looks like as we think about, you know, certainly 2Q and 3Q and out into 4Q. So there’s a wide range of scenarios supporting our guidance. And, you know, I guess it really just depends on, you know, one, our cost of capital and two, the pricing of assets and our ability to maintain spread.
Pretty optimistic — you know, the pipeline’s strong and we’ve gone through and repriced a large portion of the opportunities in the pipeline, and those transactions have held together and are consummating at attractive rates. But it’s early days and we’ll see what happens.
Rob S. (EVP, CFO and Corporate Secretary)
Just I’d add on the capital side, Hendel, we’re not assuming a dramatic re-leveraging of the balance sheet. We’re going to continue to run at a low leverage point, and we’re assuming really nothing on the ATM in the very near term, just in recognition of where our share price is today. So no common equity in the near term.
Hendel St. Juste (Analyst)
Got it, got it. Super helpful. Gracias. And maybe one follow up, if I could, on the dispositions. Certainly seems like there’s an opportunity out there, as you alluded to, to sell some assets at good pricing and perhaps accretively recycle into investments. So maybe color on the market, the demand, your ability to sustain low fixed cap rates or maybe the range of expectations for cap rates as well as you look at the marketplace, and any color on verticals you may lighten up as well.
Peter M. Mavoides (President & CEO)
Yeah, I think we’ll take a deep look at the portfolio and I think we have good liquidity across most of our industry verticals and we’ll probably try to sell a representative sampling of those assets. Certainly, you know, we wouldn’t want to cherry-pick the portfolio solely to achieve, you know, pricing. We [would] probably sell a representative sample and overall try to improve our hold positions. You know, historically we’ve been about $25 million a quarter.
I think it’s, we could conceivably, you know, ramp that up very easily to $50 million a quarter and I would expect us to be able to achieve in the, you know, mid- to high-7s cap. Excuse me, mid- to high-6% cap rate range on those transactions.
OPERATOR
We’ll take our next question from Yana Galan with Bank of America. Your line is open.
Yana Galan (Analyst)
Thank you. Good morning and congrats on a strong quarter. Just going back to the investment guide for 2027. Curious, is that gross or net? I think Rob, you mentioned 200 million of potential dispositions next year.
Rob S. (EVP, CFO and Corporate Secretary)
Yeah, we tend to, we guide to a gross investment number.
Yana Galan (Analyst)
Thank you. And then on the activity in the quarter we noticed early childhood education ticked up. Just curious if there’s any tenant categories that look more attractive today. Anything that you’re looking to lean into.
Max Jenkins (President & Chief Operating Officer)
Thanks for the question. This is Max. Our investment strategy hasn’t changed in the last decade and we’re going to price deals within each industry based on the appropriate risk-adjusted returns and maintaining an attractive spread in this environment. Notably about early childhood education. It was five different portfolio transactions within the quarter with different tenants. And so, you know, no large portfolio, just our normal right of way relationship-based investing.
Yana Galan (Analyst)
Thank you.
OPERATOR
We’ll take our next question from Caitlin Bowers with Goldman Sachs. Your line is open.
Caitlin Bowers (Analyst)
Good morning everyone. Pete, you mentioned earlier. Now we’ve talked about it a bunch about how you’re continuing to find attractive opportunities but are being deliberately selective and getting a meaningful spread. So I was just wondering if you can talk a little bit more about how that’s been possible. Is it that you look at more deals so then you can be more selective? Is it that your customers need you so you have that upper hand or. Yeah. How can you continue to achieve that outcome?
Peter M. Mavoides (President & CEO)
Yeah, I think part of this is the looking at a lot of deals, having a lot of throughput. We have a very granular portfolio where we’re investing in five to $10 million chunks. And so that granularity gives us good optionality. I think the bigger picture is that we’re negotiating and providing capital to operators who are motivated by accessing capital and growing their business. And so, you know, an extra 25, 50, 75 basis points on cap rate doesn’t change the complexion of their overall business plan, they’re more focused on expanding units, growing sales and improving margins. And having that access to capital is important to them. So we’ve always focused on a value-added investment strategy by providing capital to middle market operators that are not that price sensitive.
And, you know, through those relationships we’ve been able to kind of price our deals. On the flip side of that, those operators are getting transactions and opportunities that are attractive to them in the current market environment too, such that the overall transaction can handle a higher cost of capital supporting it.
Caitlin Bowers (Analyst)
Got it. And then just as you think of industries going forward, I think last quarter we talked a lot about how you guys have your kind of split of different industries. You didn’t expect to really change that. I guess a lot has happened in the past quarter. So as you think of the investment volume in the next 12 months or through 27 and maintaining attractive spreads, would you consider some shift like industry focus where you could get that larger spread or you still expect it to be like ratable?
Peter M. Mavoides (President & CEO)
Yeah, I would expect it to be more ratable and we certainly built the business plan that way. You know, I would not want to look at a business plan that focuses us solely on, out the risk spectrum on the wider industries or the more risky transactions. We generally follow our relationships with 80, 90% repeat business. And I would expect the composition of our 2027 investment pipeline to be very ratable to the overall portfolio.
OPERATOR
We’ll take our next question from Smedes Rose with Citigroup. Your line is open.
Smedes Rose (Analyst)
Hi, thanks. I just wanted to ask a little bit. Just in your experience in the space, are there any segments where you might expect to see seller expectations adjusting, maybe more quickly, more rapidly, I guess as expectations do reset over the next several months or quarters? Or is it generally kind of similar across all categories?
Peter M. Mavoides (President & CEO)
The flip side of that to me is I would expect seller expectations in the auction market of existing net lease product to adjust less rapidly. I think where we focus providing capital, middle market operators and sale-leasebacks, that’s very dynamic and those operators are less price sensitive. But if you’re sitting on a portfolio of net lease assets that are cash flowing, your sole motivation is going to be price. Unless you have debt financing or some maturity or some artificial catalyst that forces you to effectuate a sale, you know you’re going to hold on for the best price and so that market tends to be the slowest to adjust.
But, you know, with our granular middle market operators, you know, that adjustment has happened really in a matter of a month, month and a half.
Smedes Rose (Analyst)
Okay. And then I was just wondering, we heard from, you know, other reports either deals being cancelled in the fourth quarter or sort of an aggressive efforts to reprice deals that were underway. Is that, you know, something that you are, I guess, currently doing now and could you maybe just sort of update us on where the kind of total sort of line of sight is on your, on your pipeline relative to your September update?
Peter M. Mavoides (President & CEO)
I guess, yeah. Max, why don’t you tackle that?
Max Jenkins (President & Chief Operating Officer)
Hey, Smedes, you know, we took a pretty granular and tactical approach and so we took all 60 to 90 deals in the pipeline. And when we were relationship investing, you want to be proactive and reach out to those partners and those operators. And so it’s a mixed bag. Some deals are M&A related and so the financing just didn’t come together and they naturally fell out in a volatile environment. But generally we’re pretty happy with how quickly we’ve kind of been able to move cap rates to make investments accretive.
And I think that’s just a testament to the pipeline engine that we built over the last decade and a lot of repeat business. And so we’re focused on, you know, maintaining those relationships. But as Pete said, when you’re providing a service and you’re one of the only capital providers in the middle market right now in this volatile period, we’re encouraged by where the pipeline sits and where we’ve been able to move cap rates.
Peter M. Mavoides (President & CEO)
Yeah, I would add, Smedes. You know, the complexion of our pipeline is, you know, 30 or 30 $10 million deals in any given quarter that are being priced, you know, every week. And so we have a very real-time ability to price transactions and react to our movements in cost of capital. And we certainly have done that on a go-forward basis. That said, we generally operate with a 90 to 95% expected probability to close within our pipeline. But given the capital markets choppiness, I would say that’s, you know, probably closer to 70% or 65% in the current market.
So there’s more volatility, but that’s offset by the number of opportunities and the diminished competition.
Smedes Rose (Analyst)
Great, thank you.
OPERATOR
Thank you, Steve. And we’ll take our next question from Eric Borden with BMO. Your line is open.
Eric Borden (Analyst)
Hey, good morning. Thanks for taking the question. I know you don’t provide specific credit loss guidance, but with tenant performance stable and the watch list improving, how should we think about the credit loss assumption embedded in 2027 relative to what you’ve actually experienced this year. I know, I think you had talked about previously that the credit loss assumption within guidance was trending a little bit higher. So if you just provide a little bit more color on 27, that would be great.
And then just to follow up on the impairment this quarter, can you just talk about what, what drove that? Was it primarily, primarily related to dispositions or was there other factors?
Rob S. (EVP, CFO and Corporate Secretary)
Thanks, Eric. It’s Rob. Thanks for the questions. Yes, so credit losses generally are trending slightly better than we had guided to for this year. And as we think about 2027, similarly, we tend to guide well in excess of where our realized losses have historically been. Just as a reminder, that realized loss has been just under 30 basis points per year since the inception of this portfolio. And so while we don’t give a specific number out, the assumption that’s baked into that guidance range is well in excess of that roughly 30 basis point range.
So that’s where credit losses are today. And yeah, as you noted, all the indicators that we monitor are very healthy right now. So. So hopefully that’ll prove to be conservative again next year. But our starting point is conservative posture, as we do on a lot of lines in our guidance range. And then on your second question, as it relates to the impairments, I think as we’ve discussed in the past, a lot of these situations are much more idiosyncratic in nature.
As it relates to this one specifically, we have a robust quarterly impairment testing process. It’s well established, it’s been in place for a very long time. And as part of that rigorous process, we’re constantly testing on a quarterly basis. This quarter specifically was driven primarily by one site that’s on a former Art Van location. It’s in the home furnishing retailer segment, as we’ve talked about in quarters past, the tenant that went bankrupt in the fourth quarter of last year, that used to be in those sites, we owned two sites at that time and a specific property from 3Q had been vacant.
We’ve been assessing sale and leasing alternatives for the site. We received more leasing information this quarter, which triggered the impairment testing process. But in general, we have not been bullish on the home furnishing industry. That’s an industry that we’ve not invested in for many years. And we’re down to one location now, which represents effectively a rounding error in terms of the exposure to the portfolio broadly. So it’s not a huge surprise in terms of where the exposure is there.
And all that’s outlined in footnote 12 of our 10-Q if you want to dig into more of the details behind those assumptions.
Eric Borden (Analyst)
Thanks, Rob. Great, thank you. And then just one on the disposition timing. Sorry if I missed this earlier, but just how should we be thinking about the dispositions as it relates to acquisitions? Would you be looking to match fund those or would there be some sort of delay between the two?
Peter M. Mavoides (President & CEO)
Yeah, you know, we’re not tying dispositions to acquisitions. Our disposition activity is very granular. Single $3 million average assets and our investments are, you know, tend to be, you know, $10 million. And so, you know, both are very granular. So. And really, you know, it’s not tied one for one. As I said, we’re maybe taking $25 million a quarter to $50 million a quarter, and they’ll both, you know, kind of be very much on a flow basis.
Eric Borden (Analyst)
Great, thank you very much.
OPERATOR
Thank you. We’ll move next to Rich Hightower with Barclays. Your line is open.
Rich Hightower (Analyst at Barclays)
Hey, good morning, guys. Just, just one for me. Rob, I think you mentioned in your prepared comments that the acquisition volume target for 27 is back end loaded. You know, presumably kind of related to some of the capital markets choppiness we’ve been discussing. But when I think about sources of funding and kind of adding up all of all available sources as they exist today, can you express that as sort of a runway to complete 2027, you know, expected activity and you know, is 27 fully covered?
Is it kind of covered through the first half? Does the back end loading affect that calculation? Just help us think through that.
Rob S. (EVP, CFO and Corporate Secretary)
Yeah. Hey, Rich, good question. Yes, we’re fully covered in terms of funding for next year. And that’s maybe from a liquidity standpoint, we’d also add. From a leveraged capacity standpoint, we’re also covered that would end the year assuming no common equity, that we’d be in the low to mid fours in terms of net debt to annualized adjusted EBITDA REIT on a pro forma basis, which is in line with our historical average. That being said, we have run at a lower leverage point over the last several years. Clearly, should our share price get to a more attractive level, that’d be something that we would think about to build more dry powder.
But obviously where we are today, the math doesn’t make a whole lot of sense to issue common, which is why we noted earlier we’re not assuming any ATM equity in the near term. And then as it relates to the sources on that, I think we mentioned earlier about the dispositions as one lever. We’re trading at a 7.3 cap right now. And as Pete noted, we’re able to dispose in the 7 cap or even better than 7 cap territory. That’s something that’s new. We haven’t really talked about sourcing that capital because it’s been dilutive relative to our weighted average cost of capital over the last several years. But obviously, to the extent that we’re able to source more opportunities, that is a potential lever that we could pull.
And so that’s the quick picture on where it sits today in terms of the cadence. Part of that is really just making sure that we extend the runway not just over the next quarter or two, but really as we’re moving through the year. And as you think about the high end of the guidance range, that’s assuming that we have a much higher investment volume activity level. And so obviously that would be a world where our cost of capital has improved as well.
So that’s kind of the scenario that we’re outlining at the high end.
OPERATOR
We’ll take our next question from Linda Tsai with Truist. Your line is open.
Linda Tsai (Analyst at Truist)
Thanks for taking my question. What is driving the lower credit loss in your portfolio? Do you attribute it to how you’re operating the portfolio or are you seeing lower tenant distress for the tenants in which you’re investing in?
Peter M. Mavoides (President & CEO)
I would say it’s certainly more the latter. You know, we buy these assets and make an investment decision and, you know, we have 15 years weighted average lease term. And, you know, there’s little we can do to effectuate change after our initial investment. And so the vast majority of our low level of credit losses can be attributed to the investment decisions we make at the outset.
Linda Tsai (Analyst at Truist)
And then in terms of achieving more favorable disposition cap rates and seeing expansion in acquisition cap rates, could we expect investment spreads to improve in 27 versus 26 since your funding for next year is in place?
Peter M. Mavoides (President & CEO)
Yeah, you know, we have historically invested, you know, anywhere tight as 100 basis points, to wide as 300 basis points. I would say, you know, that is an output, not an input. And as we move cap rates, you know, obviously our spread will improve relative to the capital that we’ve raised and hopefully relative to the capital that we continue to raise. But as Rob just said, you know, we don’t. Our business plan in 2027 isn’t predicated on raising new capital.
And then generally cap rate movements lag the movements in cost of capital, and that’s why we’re in a compressed cap rate spread environment today. And it really just depends on what happens to interest rates and what happens to our cost of capital and our ability to move the pipeline. So it’s early as we sit here in 4Q26 to make a prediction on our net spread in 27. But, you know, I would say it would be about the same.
OPERATOR
And once again, if you would like to ask a question, please press star and one on your keypad. Now we’ll take our next question from Jim Kamert with Evercore. Your line is open.
Jim Kamert (Analyst)
Good morning. Thank you. I think it was mentioned earlier that kind of 8% is the new floor for going-in transaction cap rates. Obviously that’s the cash cap rate. And I’m wondering, can you still extract portfolio average now 1.9% escalators on that type of cap rate or is there a bit of a trade-off going on? Thank you.
Max Jenkins (President & Chief Operating Officer)
Hey, Jim, this is Max. I would say you’ve seen over the last year or two that we’ve been able to push the escalations and they’ve kind of increased and we’re sitting at 1.9%. And I would say the forward pipeline is pretty consistent with that. And internal growth has been a focus for us as we’re striking new deals. And like we said in the prepared remarks, you know, forward pipeline has an 8 in front of it and the GAAP yields will be approaching the, you know, mid to high nines at this point.
So we were happy with the pricing and making sure we’re investing at accretive spreads.
Peter M. Mavoides (President & CEO)
Yeah, Jay, I wouldn’t want it to be lost. You know, last quarter we were at 2.3% on our new deals and a GAAP yield, you know, well into the nines. So, you know, the overall economic package we negotiate with tenants is fluid. You know, I think the highest sensitivity is on initial cap rate. But, you know, we continue to do the best we can on that front.
Jim Kamert (Analyst)
Thank you.
OPERATOR
And we’ll move next to Greg McGinnis with Scotiabank. Your line is open, Greg. You may need to check the mute function on your device.
Greg McGinnis (Analyst)
Sure do. Thank you for that. I just wanted to go back and touch on your commentary regarding the change in the percentage of deals closing and how it related to this year. Is that entirely the seller backing away after not getting financing or whatever other reason they may have? Or is that your team adjusting underwriting and stepping away from deals that no longer make sense?
Peter M. Mavoides (President & CEO)
Yeah, it’s not our team adjusting underwriting. It could be our team adjusting pricing. You know, we haven’t changed the way we look at credit or the way we underwrite credit. But I would say it’s equally balanced between deals not closing because of the choppy capital markets backdrop, or deals not closing because of the pricing that we’re offering.
Greg McGinnis (Analyst)
Okay. And then looking forward, is there a targeted investment spread where you feel more comfortable transacting, trying to get some sense how much cap rates need to adjust before you guys kind of hit the accelerator again? And then how are you thinking about cost capital as it relates to what you’ve kind of previously raised versus what you could do today when you’re evaluating these investment spreads?
Peter M. Mavoides (President & CEO)
Yeah, I’ll let Rob tackle the cost of capital end of it. You know, we don’t necessarily have a targeted spread. You know, it’s not that mathematical. We try to negotiate the best deals we can with our counterparties and we try to source the cheapest capital that we can from the market. And as I said earlier, you know, it’s been about 100 on the low end, 300 on the wide end. And, you know, we’re just working hard to make it as wide as possible, both on initial cap rate and a GAAP cap rate basis.
So, you know, it’s not that formulaic because the markets aren’t that efficient. But Rob, from a weighted average cost of capital, how we looking at it?
Rob S. (EVP, CFO and Corporate Secretary)
Yeah, so on the capital that we’ve raised, where we have an unsettled forward equity balance that struck at $30.50 and 10-year debt issuance that we did in June, in the low fives, we’re looking at a spread that’s over 200 basis points in 3Q/4Q. Obviously that’s not where our spot cost of capital is now. So that’s probably what you’ll see pull through the model in the back half of 2026. But for the incremental deal and the incremental dollar that goes out the door, our cost of capital today is in the mid to high sixes.
Depends a little bit on which debt instrument you want to choose for that calculation. But that would get you to a range of 100 to 150 basis points of spread, which, as Pete noted, I think on an earlier question, is within the range of 100 to 300 basis points that we’ve enjoyed historically, but obviously toward that lower end. So we would hope to continue to achieve good pricing power to widen that spread out over time without maybe giving any guidance on where that might ultimately shake out.
Greg McGinnis (Analyst)
Great. Thank you.
Peter M. Mavoides (President & CEO)
Thanks, Greg.
OPERATOR
And we’ll take our next question from Jamie Feldman with Wells Fargo. Your line is open.
Jamie Feldman (Analyst at Wells Fargo)
Great. Thanks for taking the question. I was hoping you can dig deeper into the bonus depreciation demand market. You know, we keep hearing from brokers that’s a pretty, there’s a pretty healthy appetite, you know, concerns about maybe rules eventually changing if there’s a change in administration in a couple years. Can you just provide more color on how deep it is, how sticky it is? Sounds like you and some of your peers are saying the same thing in terms of that should be a pretty good source of funds going forward.
Just wanted to kind of get your latest thoughts on that and especially given the move in rates.
Peter M. Mavoides (President & CEO)
Yeah, you know, we’ve got a lot of demand for products from that market. Historically, we haven’t delved into it too deeply, but it is certainly there and it is certainly there at attractive costs, given the massive tax incentives that kind of benefit that capital. Given the fact that the tax benefits are pretty dramatic, it tends to be pretty sticky. There tends to be pretty big penalties for selling those assets once you’ve fully depreciated them.
So it’s a market we can look at. It tends, as you’d imagine, given any sort of tax-motivated capital, to be more robust in the fourth quarter than the first and in the second quarter. And, you know, I would say our guidance and our disposition plan hasn’t really leaned into that too much, but it’s certainly out there as attractive source of capital should we want to tap it deeper.
Jamie Feldman (Analyst at Wells Fargo)
Okay, thanks for that. And then I guess just focusing a little bit more on some of the tenant moves. So we saw Flagstaff Car Wash fall out of the top 10. TA Express is in. Was that primarily a function of pruning car wash or are you leaning more into truck stops and C-stores? And then also it looks like you bought another Dave & Buster’s. What’s your appetite to increase exposure to that tenant given their credit outlook from S&P.
Max Jenkins (President & Chief Operating Officer)
Hey, thanks. This is Max. You know, first I’d point out that, you know, our top 10 concentration of 15.2% is among the most diversified across the space. And when you’re talking about tenants that are less than 200 basis points of exposure, we do a ton of repeat business relationship investing. Every quarter we have, you know, movement. So we never want to look too much into, you know, each quarter-over-quarter slight changes. But, you know, TA Express, we’ve been working with the largest franchisee in the space that operates over 100 truck stops and convenience stores, you know, two asset classes that we’ve invested in since inception.
And this was just a follow-on transaction. We’ve done multiple deals over the past couple years and so they’re a great operator, great partner. You mentioned Dave & Buster’s. It was a single transaction that was added to the master lease. It was extremely accretive, both from a master lease coverage standpoint. It was a lower basis that improved our collateral position and the cap rate was accretive to the Q3 overall cap rate. So it was a good deal for us, but it’s unlikely we’d probably add more exposure to that name on a go-forward.
That’s it.
Peter M. Mavoides (President & CEO)
I would say, you know, that’s. We don’t follow S&P as a guide for our investment activity or our underwriting. And so the S&P certainly didn’t drive our decision there. It’s more just managing exposures and assets. And we remain, you know, we remain confident in our master lease there and our coverage and think that that company will be a great tenant long term.
Jamie Feldman (Analyst at Wells Fargo)
Okay, thanks for that. I mean, are you changing your perspective at all on the consumer heading into next year or areas where you would have less appetite?
Peter M. Mavoides (President & CEO)
You know, listen, we know our industries well. We have deep data and experience to support our investment in these industries. Ultimately, we’re real estate investors in these industries and we specifically know the real estate assets in these industries. And as we study our portfolio performance, our tenant performance, there’s no trends that alarm us. Generally the consumer is doing okay. You know, the worst, we have modest same-store sales down 2 to 3 percent with margin expansion, which results in a flat unit-level coverage.
And that kind of commentary runs across a lot of our sectors. So do not expect any material shift in our capital allocation strategy. Thank you.
OPERATOR
We’ll take our next question from Spencer Glimcher with Green Street. Your line is open.
Spencer Glimcher (Analyst)
Thank you. On the releasing front, I realize you guys have very little coming due in the near term just given the long lease term of the portfolio, but just curious how you think about the high rent coverage on the leases coming due in the next few years. Do you see this as an opportunity to step up the rent at all or is it a priority to keep these coverage levels close to the portfolio average?
Peter M. Mavoides (President & CEO)
Generally inheriting our leases, or renewal options that the tenants have, typically it’s either two 10-year renewal options or four or five-year renewal options, and that option is at the tenant’s discretion. So we do not have the ability to mark these assets to market. And generally we assume, you know, if there’s higher than 2 times coverage that there’s a 98% probability that a tenant’s going to exercise those options.
Spencer Glimcher (Analyst)
Yep, that makes sense. That’s it for me, guys. Thank you.
Peter M. Mavoides (President & CEO)
Thank you, Spencer.
OPERATOR
And we’ll take our next question from John Massocca with B. Riley Securities. Your line is open.
John Massocca (Analyst)
Good morning everyone. You kind of mentioned the step up in cap rate in the pipeline versus what you closed in 3Q. How fast should we expect that to flow through closed transactions?
Max Jenkins (President & Chief Operating Officer)
Hey John, it’s Max. You know, we put out the pipeline early in Q3 before conference season and that showed a 7.6. And you know, in the prepared remarks we said cap rates are around an eight. And as we’ve always said, you know, our pipeline is about a 90-day forward look. So you can kind of infer from there and, as Pete said, it’s a volatile market and, you know, it seems the rate environment and cost of capital is changing pretty rapidly, and we’re taking a long-duration, long-term, whole 20-year investment horizon.
So, you know, we’ll continue to invest in and price deals as they come in, but that’s about as best as I can give you right now.
John Massocca (Analyst)
Okay, and then on the disposition front, I mean how fast should we expect those to potentially accelerate? You mentioned 200 million being kind of in the guidance for 27, but, you know, is that something that could accelerate as soon as 4Q? I know you’ve already done 22 million. Just kind of trying to think about how fast you kind of push on that lever for proceeds.
Peter M. Mavoides (President & CEO)
Just to be clear, we didn’t guide the 200. As an indicative level. You know, we’re constantly marketing assets generally. You know, there’s a 30-day pre-market period, a 30-day market period and then it could be a 60-day close. So there is some typical lag in ramping those up. But we are in the market. We have listed assets for sale. And so, you know, going from a 25 to a 50 or 75, you know, it could happen over a couple quarters, but it’s not going to be a material change immediately.
John Massocca (Analyst)
Okay. And then, you know, in terms of maybe trying to kind of think about the lower kind of close percentage on deals in the pipeline and the call for kind of investment volumes to be back-end loaded next year, I mean how much of that, if any, reflects kind of demand destruction for kind of the net lease offering? Like, are you seeing some of your counterparties maybe at current prices or yields just not being able to kind of pencil in some of the growth opportunities that maybe traditionally had kind of catalyzed them to seek out your financing?
Peter M. Mavoides (President & CEO)
Yeah, I think I said in an earlier comment, John, we would expect overall transaction volumes to be down, but we also expect diminished competition to be down on a greater level such that overall there should be plenty of opportunities for us to invest.
John Massocca (Analyst)
I guess why would deal volume be so back-end loaded next year?
Peter M. Mavoides (President & CEO)
You know, and part of that is not driven by the opportunity set. You know, we’ve always maintained that our opportunity set is ample and we have plenty of deals to do. And, you know, I think as we said in the prepared remarks, part of that is preserving our capital run rate and, you know, waiting for asset pricing to catch up with the movement in capital pricing. And, you know, we are sitting at a pretty wide level of capital pricing that we would expect to normalize over time as well.
So it’s more the capital front driving that than the opportunity set driving that.
John Massocca (Analyst)
That’s it for me. Thank you very much.
Peter M. Mavoides (President & CEO)
Thanks, John.
OPERATOR
Thank you. At this time, there are no further questions in queue. I will now turn the meeting back to Pete Mavoides for any additional or closing remarks.
Peter M. Mavoides (President & CEO)
Great. Well, thank you all for your time today. You know, as we try to indicate, it’s certainly an interesting time for the capital markets, the net lease industry and our company. But we’re excited about the opportunity. We’re excited about our abilities to execute in this backdrop and continue to drive earnings growth for shareholders. And we look forward to seeing everyone in the coming months at the conferences. Thank you all and have a great day.
OPERATOR
Thank you. This brings us to the end of today’s meeting. We appreciate your time and participation. You may now disconnect.
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