Essential Properties Realty Trust, Inc. (NYSE:EPRT) is an internally managed real estate investment trust (REIT) that acquires, owns, and manages primarily single-tenant properties that are net leased on a long-term basis to middle-market companies operating service-oriented or experience-based businesses. The company was organized in 2018 and elected to be taxed as a REIT beginning in 2018.

Business Overview

Essential Properties' primary business objective is to maximize stockholder value by generating attractive risk-adjusted returns through owning, managing, and growing a diversified portfolio of commercially desirable properties. As of June 30, 2024, the company had a portfolio of 2,009 properties (inclusive of 147 properties which secure its investments in mortgage loans receivable) that was diversified by tenant, industry, concept, and geography, had annualized base rent of $412.2 million, and was 99.8% occupied.

The company's portfolio is built based on core investment attributes such as diversification, long lease terms, significant use of sale-leaseback investments and master leases, contractual base rent escalation, and a focus on smaller, low-basis single-tenant properties. As of June 30, 2024, 93.3% of the company's annualized base rent was attributable to tenants operating service-oriented or experience-based businesses, which the company believes are generally more insulated from e-commerce pressure than many others.

Financials

For the six months ended June 30, 2024, Essential Properties reported total revenues of $212.8 million, up 25.0% from the same period in 2023. This increase was driven primarily by the growth in the company's real estate investment portfolio, which grew from 1,593 rental properties, representing $4.1 billion in net investments in real estate, as of June 30, 2023 to 1,857 rental properties, representing $5.0 billion in net investments in real estate, as of June 30, 2024.

Net income for the six months ended June 30, 2024 was $98.8 million, compared to $96.1 million in the same period of 2023. The company's adjusted funds from operations (AFFO), a key metric for REITs, was $148.2 million for the six months ended June 30, 2024, up 23.3% from $120.1 million in the prior year period.

Essential Properties' operating cash flow for the six months ended June 30, 2024 was $147.9 million, compared to $119.1 million in the same period of 2023. However, the company's free cash flow for the six months ended June 30, 2024 was negative $413.0 million, compared to negative $269.7 million in the prior year period, as the company continued to invest heavily in its portfolio.

Geographic Diversification

Essential Properties' 2,009 properties are located in 49 states, with no single state accounting for more than 12.9% of the company's annualized base rent as of June 30, 2024. The top five states by annualized base rent were Texas (12.9%), Georgia (7.6%), Florida (6.5%), Ohio (5.4%), and Wisconsin (4.8%).

Tenant and Industry Diversification

As of June 30, 2024, Essential Properties' portfolio was leased to 395 tenants operating 568 different concepts across 16 distinct industries. The company's top ten tenants accounted for only 18.6% of annualized base rent, with the largest tenant representing 4.7% of annualized base rent. The company's tenants operate in a variety of service-oriented and experience-based industries, including car washes, early childhood education, medical/dental services, quick service restaurants, automotive services, and convenience stores.

Liquidity

As of June 30, 2024, Essential Properties had $23.6 million in cash and cash equivalents, $0.9 million in restricted cash, and $1.1 billion in total liquidity, including availability under its revolving credit facility. The company's pro forma net debt to annualized adjusted EBITDA ratio was 3.8x at the end of the second quarter.

During the second quarter of 2024, the company invested $334 million in 35 separate transactions at a weighted average cash yield of 8.0%. The company also issued $137 million of common stock through its at-the-market (ATM) program, all on a forward basis. As of June 30, 2024, the company had $319 million in unsettled forward equity.

Subsequent to the quarter end, Essential Properties closed on a $450 million term loan with a delayed draw feature, of which $320 million was drawn at closing. A portion of these proceeds were used to fully repay the outstanding balance on the company's revolving credit facility.

Outlook

For the full year 2024, Essential Properties has reiterated its AFFO per share guidance range of $1.72 to $1.75, which implies an over 5% growth rate at the midpoint. The company noted that its balance sheet position and conservative leverage profile have created a near-term headwind to earnings per share, but that its strong liquidity and competitive cost of capital should allow it to continue driving robust AFFO growth in 2025 and beyond.

Looking ahead, the company expects that the recently rejuvenated expectation of Federal Reserve easing could result in modest cap rate compression later in 2024. However, Essential Properties' current investment pipeline suggests cap rates similar to the second quarter of 2024.

Risks and Challenges

Essential Properties' business model and growth strategy expose the company to certain risks, including:

1. Tenant credit risk: The company's performance is dependent on the financial health and operating performance of its tenants.

2. Concentration risk: While the company's portfolio is diversified, a significant downturn in any of its core industries or geographic markets could adversely impact its results.

3. Acquisition and disposition risk: The company's ability to identify, acquire, and dispose of properties on favorable terms is critical to its growth and portfolio management.

4. Financing risk: The company's ability to access capital markets and maintain a well-capitalized balance sheet is essential to funding its investment activities.

5. Regulatory and tax risks: As a REIT, the company must comply with various regulations and maintain its tax-advantaged status.

Conclusion

Essential Properties Realty Trust, Inc. is a well-diversified net lease REIT that has demonstrated consistent growth and strong financial performance. The company's focus on service-oriented and experience-based businesses, disciplined underwriting, and active portfolio management have positioned it well to navigate the current market environment. With a healthy balance sheet, ample liquidity, and a robust investment pipeline, Essential Properties appears poised to continue delivering attractive risk-adjusted returns to its shareholders.