New Trade for December 14th, 2021

Investor confidence took a hit this morning after the release of more hot inflation data.  The producer price index reading for November showed a year-over-year increase of 9.6%, the steepest increase ever to be recorded and significantly over the 9.2% increase economists were expecting.    

Our trade for today is for our long-term-minded readers looking to benefit from real estate’s potential for capital appreciation without the commitment that typically comes with real estate investing.  It’s one of the lowest net-debt-to-EBITDA ratios in its sector, with a strong balance sheet to boot.

Essential Properties Realty Trust (EPRT) invests in single-tenant, net-lease retail properties across the US. At present, the REIT owns nearly 1,100 properties leased to 214 tenants spread across 16 different industries. At present, its properties are 99.6% leased and have remaining lease terms averaging a high of 14.6 years.  Over 60% of the portfolio consists of e-commerce resistant businesses such as quick-service restaurants, child learning facilities, car washes, medical offices, and convenience stores.

As the adage goes, the proof is in the pudding.  EPRT’s track record speaks for itself.  Thanks to the essential nature of its portfolio, this small but resilient REIT managed to keep its adjusted FFO flat throughout 2020, during the height of the pandemic.  Even more impressive, the trust managed to generate 6% FFO per share growth and invested nearly $360 million in 126 new properties that were 100% leased by the end of the first quarter of 2021.  

Fast forward to now, and the trust is in stellar financial shape with liquidity of about $490 million and a modest 4x ratio of net debt-to-EBITDA.  For Q3, EPRT surpassed consensus revenue expectations of $55.2 million, reporting  $59.6 million.  The company said, “Our third-quarter results were driven by our fully stabilized and performing portfolio, our long-standing relationships with high-quality and growing middle-market operators, and an attractive capital markets environment.  These positive trends, which developed earlier in the year, resulted in another quarter of robust investment activity that was conservatively capitalized. With this momentum carrying into the fourth quarter, we are establishing our 2022 AFFO per share guidance of $1.46 to $1.50, which we believe provides investors with a compelling growth opportunity.”

Essential Properties began paying dividends in 2019, a year after it came public, and hiked those payouts twice that year for a total increase of nearly 10% but has kept dividends level in 2020 and 2021. Payout is at the low end of the REIT range at 3.66%.

Of 13 analysts offering recommendations for EPRT, 11 call it a Buy while 2 call it a Hold.  There are no Sell ratings for the stock.  A median 12-month price target represents an increase of 20% from the last price.  

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