Q1 2023 Essential Properties Realty Trust Inc Earnings Call

Participants

Mark E. Patten; Executive VP, CFO, Treasurer & Secretary; Essential Properties Realty Trust, Inc.

Peter M. Mavoides; President, CEO & Director; Essential Properties Realty Trust, Inc.

Eric Jon Wolfe; Former Research Analyst; Citigroup Inc., Research Division

Greg Michael McGinniss; Analyst; Scotiabank Global Banking and Markets, Research Division

Haendel Emmanuel St. Juste; MD of Americas Research & Senior Equity Research Analyst; Mizuho Securities USA LLC, Research Division

Jim Kemmer

John James Massocca; VP of Equity Research; Ladenburg Thalmann & Co. Inc., Research Division

Joshua Dennerlein; VP; BofA Securities, Research Division

Ki Bin Kim; MD; Truist Securities, Inc., Research Division

Richard Jon Milligan; Director & Research Analyst; Raymond James & Associates, Inc., Research Division

Spenser Allaway

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to Essential Properties Realty Trust First Quarter 2023 Earnings Conference Call. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions,(Operator Instructions) as a reminder, this conference call is being recorded, and a replay of the call will be available 2 hours after the completion of the call for the next 2 weeks. The dial-in details for the replay can be found in yesterday's press release. Additionally, there will be an audio webcast available on Essential Properties Real to Trust's website at www.essentialproperties.com. An archive of which will be available for 90 days. On the call this morning are Peter Mavoides, President and Chief Executive Officer; and Mark Patten, Executive Vice President and Chief Financial Officer. It is now my pleasure to turn the conference over to Mark Patten. Please go ahead, sir.

Mark E. Patten

Thank you, operator. Good morning, everyone, and thank you for joining us today for the first quarter 2023 Earnings Conference Call of Essential Properties Realty Trust. During this call, we will make certain statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to those forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in yesterday's earnings press release. With that, I'll turn the call over to Pete.

Peter M. Mavoides

Thanks, Mark, and thank you to everyone who is joining us today for your interest in EPRT. As our first quarter earnings release indicates, we had a very solid first quarter, highlighted by the strength and stability of our portfolio and our strong investment activity. Our properties continue to perform at a high level with unit level rent coverage staying strong at 3.9x. Our same-store rent growth remaining at 1.6% for the second straight quarter and just 4 vacant properties. The overall health of our portfolio is a testament to our disciplined underwriting process, the quality of our operators and the resiliency of our service-oriented and experience-based businesses. With regard to our investment activity, the benefits of our differentiated strategy and the development of long-standing tenant relationships were evident in the first quarter as we acquired 57 properties and 24 separate transactions that were 100% sale-leaseback transactions with 94% of those deals generated from existing relationships.

We were able to increase our initial cap rate to 7.6% from 7% cash cap rate in our first quarter 2022 investments and achieve an average annual annual rent escalation of 2% on 19 years of weighted average lease term, which results in an average yield over the primary lease term of 9% versus a 7.8% average yield for our first quarter 2022 investments. Our balance sheet remains conservatively positioned, and our liquidity remains strong with quarter-end leverage of 4.4x and pro forma leverage of 4.1x when taking into account our unsettled forward equity and liquidity of $775 million. As we've said and have demonstrated consistently, we are committed to maintaining a conservative balance sheet. Based on our first quarter results and our second quarter investment pipeline, we have refined our 2023 AFFO per share guidance to a range of $1.60 to $1.64, which implies 6% growth from midpoint to midpoint.

Turning to the portfolio. We ended the quarter with 1,688 properties in our portfolio that were 99.8% leased to 348 tenants operating in 16 industries. Our weighted average lease term stood at 13.9 years, with only 5.7% of ABR expiring through 2027. From a tenant health perspective, our weighted average unit level rent coverage ratio at quarter end was 3.9x and the percentage of our ABR that had a 1.0 rent coverage level continued to decline, reaching just 2.9% at quarter end. Regarding our first quarter investments, we invested $207 million in 24 separate transactions at a weighted average cash yield of 7.6%, which was an increase of 10 basis points versus last quarter. Our investments include properties in 11 of our 16 focused industries, with approximately 79% of those investments being made in the car wash, family dining, industrial and fitness industries. The weighted average lease term of our investments this quarter was 19 years.

As I mentioned, the weighted average annual rent escalation reached 2%. The weighted average unit level rent coverage was very healthy at 3.3x, and the average investment per property was $3.4 million. As I noted in my earlier remarks, 100% of our investments this quarter were originated through direct sale-leaseback transactions, meaning that they were completed on our lease form with ongoing financial reporting requirements. And additionally, 86% of our investments were in a master lease structure. Looking ahead into the second quarter, our pipeline remains strong. From an industry perspective, car washes remained our largest industry at 14.6% of ABR, followed by early childhood education at 12.4%, quick service restaurants at 11.4% and medical dental at 10.8%. Of note, unit level rent coverage for our early childhood education portfolio continues to increase above pre-pandemic levels as our operators have experienced strong pricing power due to a favorable supply-demand imbalance.

From a diversity perspective, our largest tenant represents just 3% of ABR at quarter end, and our top 10 tenants account for only 17.1% of ABR, both strong indicators of the growing diversity in our portfolio and tenant base. Diversity is an important risk mitigation tool and differentiator for us and is a direct benefit of our focus on noncredit rated tenants and middle market operators, which offers an expansive opportunity set and, in our view, superior risk-adjusted returns. In terms of dispositions, we sold 17 properties this quarter for $37.2 million in net proceeds at a weighted average cash yield of 6.1%. The weighted average unit level rent coverage ratio for the properties that were sold was 2.3x. Owning fungible and liquid properties and capitalizing on that liquidity is an important aspect of our investment discipline.

And as we have consistently held, it allows us to proactively manage our industry, tenant and unit level risks within the portfolio. We expect our level of dispositions to revert more closely to our 8-quarter average for the remainder of 2023 as we selectively take advantage of favorable market pricing and accretively recycle capital away from identifiable risks in support of our tenant relationships. With that, I'd like to turn the call over to Mark, who will take you through the financials.

Mark E. Patten

Thanks, Pete. Pete indicated, we had a solid start to 2023 as evidenced by our reported results for the first quarter. Our portfolio continues to demonstrate the high quality of our tenancy and consistent internal rent growth. As I'll cover in a moment, our consistently conservative balance sheet and strong liquidity position support our aspirations for growth in 2023. We Among the headlines last night was our AFFO per share, which on a fully diluted per share basis was $0.40. That's an increase of 5% versus Q1 of 2022. On a nominal basis, our AFFO totaled $58.3 million for the quarter. That's up $9.3 million over the same period in 2022, an increase of 19% and up over 4% compared to the preceding fourth quarter of 2022. We also reported core FFO per share on a fully diluted per share basis of $0.42, also an increase of 5% versus Q1 2022, and which you'll note excludes nearly $900,000 of other income that we recognize based on 2 insurance recoveries we received. Total G&A was approximately $8.6 million in Q1 2023 versus $8.1 million for the same period in 2022.

Our first quarter cash G&A moved higher sequentially by approximately $1.6 million, of which nearly $900,000 relates to the change between our reduction of the Q4 2022 bonus accrual to reflect full year results versus the accrual in Q1 2023 for the 2023 estimate. In addition, you'll recall that the first quarter consistently has a higher level of payroll tax costs associated with the payout of bonuses. That was an additional $300,000 of the sequential change. Importantly, our cash basis G&A as a percentage of total revenue decreased to 7% in Q1 2023 and versus 7.3% in Q1 2022. And as I've noted before, we continue to expect this percentage to rationalize quarterly in 2023.

Turning to our balance sheet, I'll highlight the following. With our $207 million of investments in the first quarter of 2023, our income-producing gross assets reached $4.2 billion at quarter end. From a capital markets perspective, we had a very strong quarter from an equity perspective. In February, we completed an overnight offering that was upsized based on strong demand, which when physically settled, will generate expected net proceeds of nearly $210 million. The February overnight offering was executed all on a forward basis. In March of 2023, we physically settled approximately $105 million of the net proceeds and have nearly $105 million remaining to settle sometime during 2023. We also generated approximately $21 million of net proceeds in the early part of the first quarter from our ATM program.

Our net debt to annualized adjusted EBITDAre was 4.4x at quarter end when factoring in the proceeds that we'll generate by physically settling the remaining $105 million of the February offering, our leverage at quarter end would equal 4.1x. Our total liquidity at the end of Q1 2023 totaled $775 million. Our conservative leverage, strong balance sheet and significant liquidity position continues to be supportive of our current investment pipeline and sufficient to fund our future growth plans in 2023. We Lastly, I'll reiterate that our current investment pipeline, our outlook for the core portfolio and our continued strong performance this quarter provided us with the basis to refine our 2023 AFFO per share guidance range to $1.60 to $1.64 per share, which, as Pete noted, implies a 6% year-over-year growth at the midpoint. With that, I'll turn the call back over to Pete.

Peter M. Mavoides

Thanks, Mark. As reflected in our results that we released last night, our portfolio continues to perform exceptionally well, and our relationships are increasingly valuing our consistency and reliability in a very challenging capital market environment. We are encouraged by what we see in our opportunity set, and we will remain disciplined as we continue to execute. Operator, please open the call for questions.

Question and Answer Session

Operator

(Operator Instructions)Our first question comes from Haendel St. Juste with Mizuho.

Haendel Emmanuel St. Juste

Very double question on the investment activity in the first quarter. I guess I'm curious on the decision to add more car washes to the portfolio. It stands as the top category here, nearly 15% of ABR. So are you inclined to add more? Are you full? And then maybe some color on the range of cap rates evolved...

Peter M. Mavoides

Sure. Well, as we've said in the past, Car wash is one of our top industries. And as a Tier 1 industry, we're kind of comfortable in the 12% to 15% range. So you can see where our current exposure is. We are a little more selective on the incremental car wash deals that we're doing, representing the fact that we are almost full. That said, there's no hard and fast guidelines, and we continue to want to do good business with good operators, and we have nice opportunity set of car washes. I would say, about a year ago, a lot of the car wash operators were pricing away from us, and we were choosing to do business elsewhere. But given the overall environment and diminished competition, we're seeing more and more car wash opportunities.

And so we'll be selective, and we'll continue to invest in carwash and maybe lighten up some on the back end. In terms of a range of cap rates really depending upon the size of the operator, the price point of the assets and the market the assets are in, it can be anywhere from a low of a 7 cap to a high of 7.75% and maybe up into 8 if we're looking at doing some development deals. But we like the industry. It has great cash flow dynamics and good rent coverage, but we'll be selective as we continue to grow there.

Haendel Emmanuel St. Juste

That's very helpful. And similarly, maybe you could talk a little bit about the decision to add fitness to the portfolio. There's a bit of a major surprise given the core experience. I'm curious why fitness, why now and how you're underwriting there?

Peter M. Mavoides

Yes. In the fitness space, we've always kind of like the kind of newer mid-tier operators and with new construction and new facilities, and we have a couple of relationships in that space that have proven themselves to be real good operators and developers and had a very positive experience. And so we've had the opportunity to continue to invest with them, and we've done that. Fitness was a small part of the 1Q investments. Going back to COVID, our experience and our negative experience is limited to the bigger boxes that were purpose-built facilities and not as new. And so we've been selectively going into some of the newer mid-tier fitness centers with proven operators and getting good risk-adjusted returns.

Haendel Emmanuel St. Juste

That's great. And last one, I guess, maybe just on the improved terms overall that you're seeing some of the best of all best pumps, I think you've seen in your relatively brief history. But I guess, is that a function of your emerging as a buyer of choice. And I know you mentioned that you're seeing more sale leasebacks. So I guess I'm curious if this is maybe the new paradigm reflective of just less competition out there and your ability to be more selective.

Peter M. Mavoides

Yes. Listen, we feel really good about the terms we're getting. 2% escalations for 19 years is pretty powerful. And it's really -- it's the fact that there is some dislocation in the capital markets and the competition. We would expect that to ebb and flow. And I wouldn't stop short of saying that's a new paradigm. And I would imagine as competition normalizes, we'll see more pressure, both in terms of the escalations we achieve and in the lease terms that we're able to get. But for the time being, it feels pretty good to kind of realize those terms on a long-term basis.

Operator

Our next question comes from RJ Milligan with Raymond James.

Richard Jon Milligan

Just curious, given some of the headwinds or the major headwinds that we're seeing in the banking world, I'm just curious, and it's a 2-part question. What are you seeing from a tenant perspective in terms of their access to capital or refinancing risk and any potential risk that you're seeing emerge from what's going on in the banking world? And then two, what you're seeing from an opportunity standpoint, given the fact that interest rates have moved up and there's less liquidity out there.

Peter M. Mavoides

Yes. Just tackling the second part of that, RJ, and that kind of goes to Haendel's last question is our operators have fewer capital alternatives and are increasingly turning to us to 2 deals. In the quarter, we did 94% of our business was our existing relationships and 100% sale leasebacks. And I think that's indicative of what's going on out there. In terms of our tenant's ability to obtain financing in the bank market, that's diminished. As we're doing deals, we're seeing less use of debt capital and more just traditional sale-leaseback coupled with equity. And so overall, the incremental deals that our tenants are adding on to their businesses, are better capitalized and with equity and sale leasebacks. It does create some refinancing risk, and that's something we're watching very closely.
To the extent that the tenant has a refinancing issue, that's going to manifest itself in the implied credit rating. And so our credit distribution be something important to monitor. But overall, we're continuing to see rent coverages at high levels and de minimis credit issues. And so it's a good environment to invest, and we're going to watch our tenants very closely.

Richard Jon Milligan

Okay. That's helpful. And then a question for Mark. Obviously, you don't need additional equity to fund the growth this year, which is part of your comments. But given the stock price performance, one of the few net lease REITs in the green this year, how do you think about lining up another forward to just take advantage of the current attractive cost of capital?

Mark E. Patten

I mean, I think the way I'd look at it from the standpoint of the rest of the year is more likely than not we'd really be looking to the and do that opportunistically. Now obviously, we can do ATM on a forward basis. That might be to anything right now with the second half of our current forward still out there. But doing another forward offering, I just don't see that as something that would be as likely.

Operator

Our next question comes from Greg McGinniss with Scotia Bank.

Greg Michael McGinniss

So a question, you've kind of addressed a couple of times here, but looking at it from a different angle. So given these challenges in the financing market, and I realize that the vast majority of deals, at least this quarter and generally are from prior relationships, but are you starting to see any new players or verticals looking for sale leaseback capital? And is that enough to offset any slowdown in deal flow that we might be seeing on the private equity side?

Peter M. Mavoides

Yes. Listen, when you look at this quarter, 94% last quarter, 95% and 94% before that, we're leaning into our existing relationships because they're increasingly valuing us. And -- these are guys we know and trust, and they're providing us with ample opportunities as opposed to really having to venture out and do different industries or different structures. And I would say, while there is overall a decreased level of transaction volume, we're winning a higher percentage of the deals that come in and particularly deals with people that know us and trust us and place a high -- high premium on reliability. So as I think about the rest of the year, it's more likely that we're leaning more disproportionately into our existing relationships than really trying to venture out and find new things to do.

Greg Michael McGinniss

Okay. And then on the acquisition cap rates, which were up 10 basis points from last quarter, which was already a nice bump from the trailing 3-year average. Does it feel like cap rates have settled down at this point and maybe this is kind of the expected level going forward? Or is there still room for upside?

Peter M. Mavoides

Yes. It feels like we've topped out. And I would say, in any given quarter, the average cap rate is going to be heavily impacted by the mix of transactions, where we're paying lower cap rates for things like QSRs and higher cap rates for things like early childhood, the blend of industries is going to influence the overall cap rate, but it does feel like we've capped out. And if anything, I would probably have an expectation more in the mid-7% range.

Greg Michael McGinniss

And can you just remind us what your kind of targeted spread is?

Peter M. Mavoides

Yes. We don't have an articulated targeted spread, and we've really priced deals based upon the individual risk returns of that deal, looking at the credit, the industry, the coverage and the markets and the relative return on that given the overall opportunity set. So that's really not a number we think a lot about.

Operator

Our next question comes from Eric Wolfe with CD.

Eric Jon Wolfe

It's actually Nick Joseph with Eric. Just wondering, as you talk to your tenants or underwrite current deals, are you seeing any indications of a slowing economy or changes to consumer behavior kind of on the ground?

Peter M. Mavoides

We really haven't. I mean, we've seen reflected in the kind of first quarter reporting and the year-end numbers that we've been analyzing. We have seen inflation pressures kind of creep into the numbers and seen some pressure on margins and some resistance to push the push-through of these increased costs. But we have not seen -- I have not seen any indication of changing consumer behavior in the industries that we're in.

Eric Jon Wolfe

In terms of the inflation pressures, are there any specific either tenants or industries that you've seen that felt a bit more?

Peter M. Mavoides

Yes. I think the QSRs are having some challenges that we've heard and seen pushing it through and that price sensitivity tends to be more regionalized. And we're seeing the early childhood education guys facing the increasing labor costs and the inability to push that through on a real-time basis. They are bumping their prices up, but it's not -- they can't kind of mark-to-market as labor increases.

Operator

Our next question comes from Ki Bin Kim with Trust...

Ki Bin Kim

I just want to go back to the car wash topic. Could you give us a little tutorial on what makes this business attractive to you guys and maybe some potential downside? And historically speaking, how sustainable are these businesses? And lastly, the rent per square foot is about $60 a square foot. And I'm just curious, how much of this rent is basically paying back CapEx for the build-out costs?

Peter M. Mavoides

Yes, there's a lot to add one, Kevin. But first off, I've personally never experienced a loss in the car wash space. And so I've had a very positive experience. And in general, there's been a very powerful -- there have been 2 dynamics in the space that has really helped improve our exposure, our tenants and the coverage. One is consolidation where operators that we've invested with have grown from, call it, 10 to 20 unit operators to 100 to 200 unit operators over time, creating a larger, more stable credit as well as kind of the bigger operators, creating systems where they can implement membership pricing and create a more durable and steady revenue base. And so those combined trends of a growing credit and a more stabilized revenue base with improved margins has really made the investments that we made stronger, and we've seen increasing coverage over time.

We were just looking at one of the early carwash operators that we invested with that has grown and the sites we've invested with with them really went from what was a 2x coverage at the time we purchased them to what is a 4x coverage today and over the course of 5, 6, 7 years, which is pretty nice to see. In terms of the rent per square foot, carwash property is somewhat unique in that you're going to have a large land parcel on a well-traveled corridor. That's kind of their business model is to place themselves where a lot of cars are, as you would imagine, and have big lots for the queuing and circulation. And then you prorate the cost of that land over what is a smaller building footprint in largely what is a tunnel. So you have a land component. And generally, we're not investing in -- you talk about capital improvements. We try to limit our investments to pure real estate value, what it cost to buy the land and build and improve the real estate and avoid financing specialized equipment to the extent that we do feel ourselves putting in placing value to the equipment, and we would have a lean on that. So that in a downside scenario, we're able to capture that equipment and retenant that site pretty readily. So overall, we like the space. There's great cash flow dynamics that are -- that have been strong and improving, and we continue to see good opportunities.

Ki Bin Kim

And just curious, what is the approximate coverage ratio for call washes?

Peter M. Mavoides

I would say -- and I'm giving you a rough number here, 2.25. As I said, we have some of the early ones up around over 4, and we have some of the newer ones at 2, maybe mid-2s or something like that. It's not -- we don't -- we look at individual exposures and don't spend a lot of time thinking about the overall industry exposure.

Operator

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

Spenser Allaway

Similar question to Nick earlier about beyond tenants or industries that are facing inflation pressures. Are there any segments in the portfolio that are on your watch list or a growing concern? I know the portfolio rent coverage is high and certainly at a healthy level. But again, I'm just trying to get a sense of your watch list that you have one.

Peter M. Mavoides

Yes. So our watch list, as we define as the intersection of credit risk with unit level coverage risk. So that would be a single B minus credit, coupled with coverage of under 1.5x. And so as we sit today, that is roughly 90 basis points of ABR and really consisting of 4 operators, but about 60% of that exposure is with our AMC theaters as we have 2 of those theaters under 1.5. The rest is spread out across the strong guys. But overall, that's a very good spot and at a historically low level.

Spenser Allaway

Okay. And can you just remind us of the parameters utilized to identify disposition candidates?

Peter M. Mavoides

Yes. I mean it's -- there's no hard fast parameters. Basically, if my asset manager sees long-term risk that can be current coverage levels or declining coverage levels or a high basis that would indicate a less -- a lower probability of renewal. We often will lighten up on credits that we see not performing as we would have expected. And so there's no hard and fast rules and -- but anywhere, anytime we see risk that may manifest itself in the portfolio down the road, we're trying to lighten up on that exposure. Because when you see imminent risk, right, if it's going to default in the near term or coverage is sub-1%, that becomes illiquid and you really don't have the ability to move that risk out of the portfolio. So it's really being proactive in trying to get in front of potential problems.

Operator

(Operator Instructions) Our next question comes from Joshua Dennerlein with Bank of America.

Joshua Dennerlein

Yes. Just kind of curious if there's any -- have you seen any changes in the market for sale-leaseback financing after FCB? Like anything on the deal flow front or underwriting from peers or just even competition?

Peter M. Mavoides

No. I mean, listen, that's been kind of recent. And with a 60- to 90-day transaction cycle, it's going to take a bit. I think, overall, the -- I think that SVB is just a symptom of a bigger problem in the capital markets of lack of liquidity and challenging debt environments, and that was persisting before and continues to persist.

Operator

Our next question comes from Jim Kemmer with Evercore.

Jim Kemmer

Question on most of your tenant financial reporting at the entity level, is that on a quarterly or predominantly annual basis?

Peter M. Mavoides

Mostly, it's going to be quarterly.

Jim Kemmer

Okay. Good to know. And have you seen any behaviors where there a little tardy in filing incipient indicators of financial troubles, et cetera? Or are they pretty prompt in providing the financials?

Peter M. Mavoides

They're pretty prompt. I mean, the real problem is if they're tardy in paying rent, that's where we're going to really sense the sense of problem. But generally, people -- it's an obligation in the underlying lease agreement and failure to provide live up to that obligation is at least default. And so we have the hammer, but generally, tenants are compliant, and these are long-term arrangements. And so there's not an issue with getting it.

Jim Kemmer

That's terrific to ask obviously helping -- if we go an economic slowdown, you want to keep as timely a pulse as you can on their financial circumstances, which I know you continue to do. Thinking back historically, you've done a great job on the sale-leaseback structure to grow your business. Yields have been creeping up in terms of the initial cap rates for Essential. Is there any bifurcation? Or would you be able to provide a bifurcation between, say, where essential in terms of yield or essential is the predominant landlord for one of your tenants versus maybe an equipment share where they have dozens of landlords. Just trying to get a sense of how important that is when you're a big part of the wallet share, if you will, for the given tenant.

Peter M. Mavoides

Yes. Listen, I think what you see in a situation like that is we do deal with them early on. And then as they grow in size and become more attractive to a wider range of capital providers, we tend to get priced out. And the people come in and we'll do deals at what can be 50 to 100 basis points inside of us. We're generally not going to lose a deal with a relationship over 25 basis points. It will be closer to 50 to 100 where they say, you know what, you guys have been good to us. You helped us in the past, you've been reliable and straightforward and trustworthy, but your capital is too expensive. I got to do a deal with someone else. And that's fine with us, right, in that we have growing credit and the diversity of capital sources. And overall, it helps our exposure. And so it evolves over time. It's not a static analysis. Sometimes, that attractive 50 to 100 basis points tighter bid falls out and they end up coming back or that buyer exits the market, and they end up coming back. But it's usually pretty dynamic, and it's particularly dynamic in the current environment.

Jim Kemmer

Yes. That's helpful context. And then a quick final follow-up. It sounds like most of your capital recycling from the earlier question has really driven more tenant-specific issue as opposed to essentially looking to fade some of your 16 industries. Is that a fair statement?

Peter M. Mavoides

Yes, it is. But like my commentary around car washes earlier, to the extent that we are -- have an exposure, whether industry tenant or individual asset that we want to lighten up, we'll use capital cycling to do that. And we have plenty of carwash opportunities to invest in fresh deals, and so we're likely to sell some off on the back end. So it's a variety of factors.

Operator

Our next question comes from John Massoca with Ladenburg Thalman.

John James Massocca

So I know you don't give investment volume guidance, but maybe in the near term, how should we think about kind of the acquisition volume cadence in 2Q versus later in the year, just given the around $8 million you closed quarter-to-date. I know it's kind of a lot less than you had to close quarter-to-date 1Q with the kind of the 4Q earnings call, but the back year to really impact volume ended at closing in 2Q to '22. So just kind of maybe any kind of thoughts you have as to where deal flow maybe might fall over the course of the year.

Peter M. Mavoides

Yes. And as you know, one of the reasons we don't provide acquisition guidance is because we rarely have visibility to our pipeline out beyond 90 days. So as we think about the 2Q pipeline, we recognize it's off to a slow start. But as we sit today, the pipeline is full, and I would expect 2Q to kind of be at or around our 8-quarter average as an indicator. And as I think about the back half of the year, there's nothing that would suggest that our quarter average is in a decent proxy, but we'll just have to see how the year plays out.

John James Massocca

Okay. That's fair. And then I know we're kind of splitting hairs here, but I noticed the equipment share exposure fell a little bit. Was that driven by dispositions or something else? And if it was by disposition, is that just an attempt to kind of diversify the portfolio further? Or just maybe kind of open the thought process there?

Peter M. Mavoides

Yes. So we did sell an equipment share during the quarter. And that much like my commentary around car wash to the extent that we can sell assets off in the low 6 to free up capacity to invest with guys in the mid-7s, that makes sense to us. And so we like equipment share. They're a great tenant. They've been a good relationship. They continue to grow and continue to bring us opportunities. And so lightening up through some asset disposition and capital recycling made sense to us.

John James Massocca

I guess can you remind us on an individual tenant basis, is there kind of a relative maximum exposure you want in the portfolio?

Peter M. Mavoides

Yes. We say we have a soft ceiling of 5%. We certainly feel good with our top 10 sitting at 17%, just around 17%, which is -- continues to trend down, and I feel good looking at not really having any material exposure over 3%. So I mean, those are all soft guidelines, but diversity is a key part of our portfolio construction.

Operator

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Pete Mavoides for any closing remarks.

Peter M. Mavoides

Great. Well, thank you all for your questions and time today. We have a busy conference season coming up. So I'm sure we'll see many of you in the coming weeks, and we look forward to that. So everyone, have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.