Essential Properties Realty Trust: A Solid Option In Retail REITs Despite +9% Gains

Core Viewpoint - Essential Properties Realty Trust (EPRT) is positioned as a compelling investment alternative in the retail REIT sector, focusing on mid-market properties and smaller tenants, which allows for higher growth potential despite associated risks [1][19]. Group 1: Company Overview - EPRT specializes in retail properties, particularly in the experience and services sectors, differentiating itself from larger peers like Realty Income Corp. and NNN REIT by targeting smaller, non-investment grade tenants [1]. - The REIT has a total of 2,009 properties and 395 tenants, with an impressive occupancy rate of 99.9% since its IPO, indicating strong demand and effective management [4]. - EPRT's portfolio is diversified across 16 industries and 49 states, with a significant focus on services, which constitute 80.3% of its annual base rent (ABR) [5][6]. Group 2: Financial Performance - In Q2, EPRT reported a funds from operations (FFO) per share of $1.84, maintaining consistent growth in both FFO and dividends per share since its IPO in 2018 [2][3]. - The REIT has demonstrated a controlled payout ratio, with a dividend per share of $1.14 and a dividend payout ratio of 0.95, reflecting a healthy balance between growth and returns [3][16]. - EPRT's average cash cap rate for acquisitions in Q2 2024 was 8%, significantly higher than larger REITs, indicating its ability to secure more profitable investment opportunities [11]. Group 3: Investment Strategy - EPRT employs a strategy focused on sale-leaseback transactions, which typically involve long-term contracts and enhance tenant quality, contributing to predictable cash flows [11]. - The REIT's focus on tenants with lower credit ratings allows it to capture a risk premium, with 38.4% of its portfolio under long-term contracts expiring after 2039 [7][10]. - EPRT has invested over $195 million per quarter since Q1 2022, indicating a proactive approach to growth and expansion in a less competitive market [10][19]. Group 4: Valuation and Growth Prospects - EPRT is currently trading at a price-to-FFO ratio of 17.3x, higher than its peers, reflecting its growth potential and lower leverage [14][15]. - The projected annualized FFO per share growth for 2024 is 5.5%, which is favorable compared to Realty Income's 4.4% and NNN's 2.6% [15]. - EPRT's dividend yield stands at 3.56%, the lowest among major retail REITs, but its payout is considered the healthiest based on net income, suggesting room for future increases [16][18].