Essential Properties Realty: A 'Mini Realty Income' Packing A Punch

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Essential Properties Realty leverages a proven net lease model, focusing on service-oriented, e-commerce-resistant properties for steady growth.With 99.9% occupancy, a diverse tenant base, and a ...

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In general, occupancy rates have shown positive developments, as both industrial and apartment occupancy rates are stabilizing.   NAREIT More importantly, the outlook remains strong, as Cushman & Wakefield noted in its 3Q24 retail real estate report : Balanced market. A resilient consumer environment, limited construction, and a  healthy tenant base supports a balanced outlook. Store expansions have become more cautious, but there is ample demand across traditional retail, consumer services and cross-border entrants to underpin an active leasing environment in 2025. Rent growth has moderated, and prospective tenants are likely to see somewhat more opportunities","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4160":"多样化房地产投资信托v","EPRT":"Essential Properties Realty Trust Inc."},"translate_title":"Essential Properties Realty：强劲的“迷你房地产收入”","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"EPRT":0.9},"content_text":"Essential Properties Realty leverages a proven net lease model, focusing on service-oriented, e-commerce-resistant properties for steady growth.With 99.9% occupancy, a diverse tenant base, and a strong balance sheet, EPRT is well-positioned for long-term stability and consistent dividends.EPRT’s small size enables agile growth via sale-leasebacks and strategic investments, offering potential for higher returns than its larger peers.   Hammarby Studios  Introduction Generally speaking, real estate investments are considered safe. That's mainly because buildings are always needed and because it's an industry protected against disruption. After all, it does not matter what innovations the world's biggest tech companies come up with. We still need homes to live in, stores to buy groceries, warehouses to support modern logistics, schools for education, car washes, pharmacies, restaurants, and so much more. However, the industry does not come without risks, especially when dealing with stock-listed REITs. These are companies run by people, which comes with operational risks, financing risks, and so much more. Pexels (Free For Use Photo) One of the biggest factors is macroeconomic development. While demand for real estate is much more inelastic than the demand for, i.e., capital goods, factors like interest rates have a big factor in the industry. Because almost every real estate deal is financed, borrowing costs are a big driver of profitability. Moreover, in good times, investors build new assets to deal with rising demand. This can pressure occupancy rates and rent growth, as the real estate sector has very low barriers to entry. As we can see below, we are currently in a somewhat unfavorable environment for real estate. Occupancy rates in the office, industrial, and apartment spaces have risen since 2022, pressured by elevated rates, sticky inflation, and new supply growth. Meanwhile, the office space has its own special headwinds, mainly coming from decades of oversupply and the post-pandemic work-from-home trend.   Wells Fargo With that said, one sector is not like the others. As we can see above, the retail space is doing extremely well, showing no signs of upside in its average vacancy rate! This has continued in the third quarter, as data from NAREIT shows below. In general, occupancy rates have shown positive developments, as both industrial and apartment occupancy rates are stabilizing.   NAREIT More importantly, the outlook remains strong, as Cushman & Wakefield noted in its 3Q24 retail real estate report (emphasis added): Balanced market. A resilient consumer environment, limited construction, and a (mostly) healthy tenant base supports a balanced outlook. Store expansions have become more cautious, but there is ample demand across traditional retail, consumer services and cross-border entrants to underpin an active leasing environment in 2025. Rent growth has moderated, and prospective tenants are likely to see somewhat more opportunities ahead. That said, the “flight to quality” will persist, ensuring that the top end of the market will remain competitive. - Cushman & Wakefield This brings me to one of my favorite net lease retail REITs. As much as I like a giant like Realty Income (O) for income, safety, and consistency, I also like some of the smaller players, including Essential Properties Realty Trust (NYSE:EPRT), a company I like to call a \"mini-Realty Income.\" The last time I covered the company was on October 13, titled \"A REIT So Good, It's Practically Required.\" Since then, the company has reported its third-quarter earnings and gotten support from favorable macroeconomic developments like the retail real estate tailwinds we discussed in the first part of this article. Year-to-date, the REIT has returned 35%, beating the already impressive 25% return of the S&P 500 by an impressive margin. Data by YCharts In the second part of this article, I'll update my thesis and explain why EPRT remains one of my favorite REITs with the potential to become a much larger player in the future. So, let's get to it! A Venn Diagram Of Three Competitive Strengths With a market cap of almost $6 billion, EPRT uses a similar game plan as its much larger $50 billion market cap peer, Realty Income, as it focuses on service-oriented and experience-based industries that are resistant to e-commerce disruption and rely on personal interaction with customers to warrant a physical footprint. This strategy also comes with a focus on small-scale fungible net lease properties to improve diversification, gain a deeper pool of potential buyers, and provide alternative uses. This is something Realty Income cannot do, as its size almost requires the company to engage in massive takeovers and real estate projects. EPRT's size is perfect for a more aggressive growth strategy that does not require major M&A projects. Additionally, as the overview below shows, the Venn diagram has a third component, which is the focus on sale-leaseback (\"SLB\") deals. Essential Properties Realty Trust An SLB deal is based on companies seeking non-lending financing opportunities. Essentially, companies in need of funding sell their real estate to a company like EPRT. Instead of taking on an expensive loan, these companies lose ownership of their building and are obligated to pay monthly rent. While this makes them dependent on a landlord, it frees up cash. Especially in an environment of elevated rates, this is an attractive way for many companies to raise funds for whatever they have in mind. Essential Properties Realty Trust Going into this year, roughly 99% of new investments were SLB deals, which makes sense in the current macroeconomic environment. A Strong Tenant Profile & Healthy Balance Sheet At the end of the third quarter, the company had an occupancy rate of 99.9%, better than almost any public retail-focused REIT. Even better, it has 2,053 assets, which makes the occupancy rate even more impressive.  These assets are leased by 407 tenants in 16 different industries with a weighted average lease term of 14.1 years. Less than 4.0% of its contracts expire before 2028. While I doubt the company would be in trouble if that number were higher due to strong macroeconomic tailwinds, it adds a lot of safety to the investment thesis. Essential Properties Realty Trust As we can see below, not a single tenant accounts for more than 4.3% of its annual base rent. In fact, the biggest ten tenants do not account for more than 18.0% of the total rent. Essential Properties Realty Trust It also helps that its net lease model shifts taxes, maintenance costs, and insurance obligations to tenants. While this also tends to come with a lower base rate, it adds inflation protection, as many of these costs tend to weigh on landlords who are sometimes unable to hike rents beyond the average rate of inflation. With regard to safety, the company also has a healthy balance sheet. As of September 30, it has a net leverage ratio of just 3.5x, a weighted average maturity of 4.3 years, a weighted average interest rate of 4.2%, and 100% unencumbered assets. Essential Properties Realty Trust This paves the road for future growth, as it does need to prioritize financial health. Plenty Of Growth Opportunities Because of its \"small\" size, the company can grow fast without having to engage in large deals. The third quarter proved this, as the company invested $308 million across 37 transactions. These deals had a weighted average cash yield of 8.1% and a weighted initial lease term of 17.2 years. They also have annual rent escalators of 2.1%, roughly in line with the Fed's long-term inflation target. Essential Properties Realty Trust With regard to the aforementioned expansion strategy, almost 80% of its third-quarter investments came from existing tenant relationships. This is a good sign, as the company has built good relationships that open up long-term SLB opportunities. The company sold nine properties for $17 million in net proceeds with an average cash yield of 6.8%. That's a good deal, as new investments had substantially higher yields. This is also a great way to keep the occupancy rate elevated, especially in a market with strong nationwide demand. Essential Properties Realty Trust Looking ahead, EPRT's investment pipeline remains strong, supported by M&A activity and tenant expansion plans in its core industries. Moreover, EPRT's management expects to invest between $900 million and $1.1 billion in 2025, with cap rates expected to compress a bit as competition normalizes in the capital markets. Dividend & Valuation With regard to its growth, EPRT reaffirmed its 2024 AFFO (Adjusted Funds From Operations) per share guidance range of $1.72 to $1.75 and introduced its 2025 range of $1.84 to $1.89. This represents more than 7% growth, using the midpoint of this guidance range. Analysts are even more upbeat. Using the FactSet data in the chart below, the market is expecting 9% per-share AFFO growth next year, potentially followed by 8% growth in 2026. While I'm painting with a broad brush, the company has longer-term growth rates roughly 2x as high as the growth expectations of its peer, Realty Income. FAST Graphs This bodes well for its valuation and its dividend. For example, trading at a blended P/AFFO ratio of 19.4x, the company trades roughly 0.9 points above its long-term average. Based on expected per-share AFFO growth, its dividend, and its \"normal\" valuation, the company has a total return outlook of roughly 10% going forward. The dividend yield is 3.5%, protected by a 2025E payout ratio of just 63%. Its longer-term compounding annual growth rate since 2020 is roughly 6.0%, which is a great number, even though dividend growth has slowed down a bit. Data by YCharts While its yield may not be something to get overly excited about, we need to be aware that the low payout ratio means that funds have been put to good use. EPRT has simply better growth rates than many of its peers, which is reflected in its stellar stock price performance. So, although I believe that higher-yielding REITs are better picks for investors dependent on generating the most income possible from their investments, I believe EPRT is a great choice in the industry, with a high probability of long-term outperformance. Takeaway Essential Properties continues to impress me with its strategic focus and fantastic execution. Its small size allows it to target high-growth opportunities while maintaining an impressive 99.9% occupancy rate and a well-diversified tenant base. Meanwhile, the company's emphasis on sale-leaseback deals is perfectly suited for the current macroeconomic environment, while its strong balance sheet provides room for future growth. Although its 3.5% yield might not excite all income-focused investors, EPRT's strong AFFO growth and disciplined capital allocation make it a compelling long-term investment. Hence, for those seeking a REIT with both stability and strong upside potential, EPRT continues to stand out as a top pick. Pros & Cons Pros:   Resilient Growth Strategy: EPRT's focus on service-oriented, e-commerce-resistant industries and sale-leaseback deals provides a powerful mix for long-term growth.  Impressive Occupancy Rates: A 99.9% occupancy rate across 2,053 assets says a lot about its operational strength.  Strong Financials: With low leverage, a manageable interest rate, and a solid tenant base, EPRT is financially healthy with a strong foundation for long-term growth.  Attractive Growth Potential: High AFFO growth rates and disciplined reinvestment make it a strong long-term compounding play.   Cons:   Modest Yield: At 3.5%, the dividend yield may not satisfy income-focused investors.  Valuation Premium: The stock trades slightly above its historical average, which could limit near-term upside if interest rates were to surge again.  Economic Growth: Although it has a solid business model, severe economic stress could hurt its occupant rate and ability to grow.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2486037585"}