Essential Properties: A Good Bet For Income And Growth

JuSun

Smaller REITs person immoderate advantages complete larger REITs. This includes having nan worth of hindsight into charismatic spot sectors arsenic good arsenic being capable to root deals that move nan needle owed to their smaller size.

This brings me to nan accelerated up and coming nett lease REIT, Essential Properties Realty Trust (NYSE:EPRT), which whitethorn beryllium a bully portfolio diversifier for those seeking some income and growth.

EPRT has done alternatively good for investors since my past bullish return connected nan banal past month, rising by 7.4%, and acold surpassing nan 2.7% return of nan S&P 500 (SPY) during nan aforesaid time.

While EPRT is nary longer nan table-pounding bargain that it was backmost successful October of past year, I item why it's still a coagulated prime for those pinch a semipermanent horizon, truthful let's get started.

Why EPRT?

EPRT is simply a self-managed REIT that owns and manages single-tenant nett leased properties pinch semipermanent leases. At present, it has a portfolio of 1,653 freestanding nett lease properties and is good diversified by geography, pinch a beingness successful 48 states.

What sets EPRT isolated from its nett lease peers specified arsenic Realty Income (O) and National Retail Properties (NNN) is its sale-leaseback attraction connected nan mediate market, a assemblage that's highly fragmented pinch smaller location tenants. This usually comes pinch higher headdress rates owed to little title from organization players.

EPRT's erstwhile closest nationalist adjacent was STORE Capital (STOR) earlier it went backstage successful an all-cash transaction. Similar to STOR, EPRT besides gets unit-level financial reporting from nan immense mostly (98.5%) of its tenants, enabling them to reside tenant profitability issues earlier they go bigger problems (i.e. defaulting connected rent).

In addition, EPRT is besides akin to STOR successful that it has agelong weighted mean lease word of 14 years, sitting supra nan ~10 twelvemonth mean for astir nett lease REITs. EPRT's portfolio is diversified crossed 350 tenants crossed 16 industries successful nan work sector, making them e-commerce resistant.

In fact, work and experiential existent property makes up 93% of EPRT's yearly guidelines rent. As shown below, EPRT's portfolio is comprised of basal and mundane sectors for illustration medical/dental, early puerility education, car washes, convenience stores, and speedy work restaurants.

Investor Presentation

Meanwhile, EPRT's portfolio appears to beryllium wide patient pinch a 99.8% portfolio leased rate, and tenants person a beardown 4.2x unit-level rent coverage. Moreover, EPRT benefits from beardown existing relationships, arsenic 85% of its deals are originated done repetition business from nan tenant base.

During Q4 alone, EPRT closed $328 cardinal worthy of deals astatine an charismatic 7.5% weighted mean headdress rate. This compares favorably to EPRT's costs of equity, which comes to 6.4%, based connected nan guardant P/FFO of 15.7. Moreover, EPRT's favorably debased weighted mean costs of indebtedness of 3.3% brings down nan weighted mean costs of superior (when averaged pinch equity).

EPRT besides carries a beardown equilibrium expanse pinch a nett indebtedness to EBITDA ratio of 4.5x, sitting good beneath nan 6.0x level mostly considered to beryllium safe by ratings agencies for REITs. It besides has plentifulness of liquidity, which stands astatine $700 million, comprised of rate connected manus and readiness connected its revolving in installments facility.

Importantly, nan EPRT raised nan dividend doubly past year, and it's well-covered by a 71% payout ratio. This is based connected $1.56 FFO per stock generated during 2022, which grew by an awesome 13% past year.

Admittedly, EPRT is nary longer arsenic inexpensive arsenic it was during nan autumn of past year. However, I still find it to beryllium reasonably charismatic astatine $25.89 pinch a guardant P/FFO of 15.7. This assumes a semipermanent FFO/share maturation complaint of astir 5%, which guidance guided for successful 2023, and this equates to full yearly returns of astir 10% including nan dividend.

EPRT could besides reasonably execute a higher maturation complaint considering its smaller size and beardown equilibrium sheet, which could perchance push full returns successful nan low-teens successful immoderate years. Analysts person a statement Buy standing pinch an mean value target of $26.15.

Investor Takeaway

EPRT is an charismatic full return play for investors looking for income from a well-run nett lease REIT. The institution has a well-diversified portfolio pinch a sale-leaseback attraction connected work and experiential existent property successful nan mediate market, making it e-commerce resistant.

Moreover, EPRT carries a beardown equilibrium expanse and plentifulness of liquidity while generating charismatic finance spreads compared to its costs of capital. Lastly, while EPRT is nary longer cheap, nan banal is reasonably priced astatine coming for perchance beardown semipermanent income and returns.

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