Executive Summary / Key Takeaways

• Essential Properties Realty Trust specializes in acquiring and managing single-tenant net leased properties for middle-market companies in service-oriented and experience-based industries, a strategy offering insulation from e-commerce and access to an underserved capital market.
• The company's relationship-driven sourcing model consistently generates a significant portion of investment opportunities (over 80% from existing relationships in recent quarters), providing a reliable pipeline for growth even amidst broader market volatility.
• Recent financial performance demonstrates robust growth, with Q1 2025 revenues increasing 25% year-over-year, driven by portfolio expansion and higher interest income, supporting a 7% AFFO per share increase in Q1 2025 compared to Q1 2024.
• A conservative balance sheet with low leverage (3.4x net debt/annualized adjusted EBITDAre pro forma at Q1 2025) and significant liquidity ($1.5 billion pro forma at Q1 2025) positions EPRT to fund its investment guidance without incremental equity issuance.
• While anticipating modest cap rate compression in 2025 due to normalizing capital markets, the company's guidance ($1.85-$1.89 AFFO per share, $900M-$1.1B investments) reflects confidence in continued accretive growth driven by its differentiated strategy and operational execution.

A Foundation Built on Niche Expertise and Relationships

Essential Properties Realty Trust operates as an internally managed real estate company with a distinct focus: acquiring, owning, and managing primarily single-tenant properties under long-term net leases. Its target market is middle-market companies operating in service-oriented or experience-based sectors, such as car washes, quick-service restaurants, early childhood education, and medical/dental services. This strategic emphasis positions EPRT in a segment often considered more resilient to e-commerce disruption compared to traditional retail. The company's properties are typically freestanding, small-box facilities where the tenant's activities are essential to their sales and profits.

The company's historical journey, commencing as a Maryland corporation in 2018 and electing REIT status shortly thereafter, has been marked by a consistent build-out of its investment platform and capital structure. Growth has been fueled by a combination of debt issuances, including term loans and senior unsecured notes, and regular equity offerings, often utilizing forward sale agreements to pre-fund its pipeline. This proactive approach to capital raising, coupled with a disciplined underwriting process, has allowed EPRT to expand its portfolio significantly, growing from 1,873 properties at the end of 2023 to 2,138 properties by March 31, 2025.

A cornerstone of EPRT's strategy is its relationship-driven sourcing model. Management emphasizes building deep connections with middle-market operators, positioning the company as a reliable and value-added capital partner. This approach has consistently resulted in a high percentage of investment opportunities originating from existing tenant relationships, contributing 86% of investments in Q1 2025 and around 80% in prior recent quarters. This recurring business provides a degree of predictability to the investment pipeline, even when broader capital markets are volatile.

Within the competitive landscape of net lease REITs, EPRT distinguishes itself through its focus on the middle market and specific service/experience sectors. Larger peers like Realty Income (O) and National Retail Properties (NNN) often target a broader mix, including larger, sometimes investment-grade, retail tenants. While these larger competitors benefit from significant scale and potentially lower costs of capital in certain markets, EPRT's expertise in underwriting and structuring deals with middle-market companies allows it to achieve attractive risk-adjusted returns in its niche. EPRT's average investment size per property is relatively small ($3.0 million as of Q1 2025), enabling portfolio growth without excessive concentration risk in individual assets. This contrasts with competitors who may pursue larger, more complex transactions. EPRT's emphasis on long lease terms (14.0 years weighted average remaining term) and contractual rent escalations (1.7% weighted average annual increase) provides a stable revenue base, a key differentiator compared to some competitors who may have shorter lease durations or less predictable rent growth mechanisms.

While specific technological differentiators in terms of proprietary software or hardware were not detailed, EPRT highlights its scalable platform and internal capabilities in origination, underwriting, financing, and property management as competitive strengths. The company's use of tools like Moodys Analytics RiskCalc for credit monitoring and its requirement for detailed tenant financial reporting (99.0% of ABR) are operational advantages that support its active asset management approach and help mitigate risk. These operational efficiencies and data-driven processes contribute to the company's ability to manage a growing portfolio effectively.

Performance Reflecting Strategic Execution

EPRT's financial performance in the first quarter of 2025 demonstrated strong growth, with total revenues increasing by 25.0% to $129.4 million compared to $103.5 million in the same period of 2024. This growth was primarily driven by a 23.6% increase in rental revenue, a direct result of the expansion of the real estate investment portfolio, which added 188 rental properties over the preceding year. Interest income on loans and direct financing lease receivables also saw significant growth, rising 58.8% to $7.5 million, reflecting an increase in the mortgage loans receivable portfolio.

Operational metrics underscore the health of the portfolio. Occupancy remained high at 99.7% as of March 31, 2025. The weighted average unit level rent coverage ratio stood at a healthy 3.5x, indicating strong profitability and cash flow generation by tenants at the property level. Same-store rent growth was 1.5% in Q1 2025, slightly up from the 1.4% seen in the prior three quarters. While the 'under one times coverage' bucket exists and can fluctuate due to idiosyncratic tenant situations or properties under development, management emphasizes coupling this with overall corporate credit assessment and notes that the watch list (intersection of credit risk and low coverage) remains at a manageable level (around 1.6% in Q1 2025). Leasing activity showed positive momentum in 2024, with a recapture rate of 101% on 72 signed leases.

The company's investment activity remained robust, with $301.4 million invested in 47 properties during Q1 2025 at a weighted average cash cap rate of 7.8%. This follows a strong Q4 2024 with $333 million invested at an 8.0% cash cap rate. Disposition activity in Q1 2025 totaled $24.3 million from 11 properties at a 6.9% cash cap rate, consistent with the strategy of selectively selling assets to manage concentrations or risk. Notably, Q4 2024 saw higher disposition volume ($60.4 million from 24 properties at a 7.0% cash cap rate), specifically targeting a reduction in car wash industry exposure to below the 15% soft ceiling.

EPRT maintains a conservative balance sheet, which is a key component of its strategy to navigate volatile capital markets. Pro forma net debt to annualized adjusted EBITDAre stood at 3.4x at the end of Q1 2025, well below the company's target of generally less than six times and its historical average in the mid-4x range. This low leverage, combined with significant liquidity ($1.5 billion pro forma at Q1 2025, bolstered by an upsized $2.3 billion credit facility), provides ample capacity to fund future investments. The company has been strategic in its capital raising, utilizing equity offerings and ATM programs, including forward sales. As of March 31, 2025, EPRT had $410 million in unsettled forward equity, which, along with retained free cash flow (over $120 million per annum run rate), represents a significant source of capital for near-term growth without needing additional equity issuance for its 2025 guidance. All long-term debt is fixed-rate or effectively hedged, limiting exposure to interest rate fluctuations.

Outlook and Risk Considerations

Looking ahead, EPRT has reaffirmed its 2025 AFFO per share guidance range of $1.85 to $1.89. This outlook is supported by an investment guidance range of $900 million to $1.1 billion, with the current pipeline indicating support for the upper half of this range. Management anticipates 2025 investment cap rates to be slightly lower than in 2024, projecting approximately 25 basis points of compression, reflecting the expected re-emergence of competition as capital markets normalize. However, recent market volatility has tempered this competition in the near term, keeping current pipeline pricing relatively firm.

The guidance assumes continued healthy portfolio performance, manageable credit events, and efficient operations, with cash G&A expected to be between $28 million and $31 million, contributing to ongoing operating leverage. A key assumption is the ability to fund the investment guidance without needing incremental equity issuance, relying on existing capital sources.

While the outlook is positive, several risks warrant consideration. Tenant defaults and bankruptcies remain a fundamental risk in the net lease sector. The recent Chapter 11 filing by Zip's Car Wash, while impacting a small portion of ABR (20 basis points across 3 properties), highlights this risk, although management notes proactive exposure reduction and the tenant's current payment status. Broader economic conditions, including inflation and potential shifts in consumer spending, could impact tenant performance, particularly in discretionary sectors, although EPRT's focus on service/experience-based businesses is intended to mitigate this. Volatility in financial markets and interest rates could affect the cost and availability of capital, although the company's conservative leverage and hedging strategy aim to limit this exposure. Competition for acquisitions could intensify as capital markets normalize, potentially putting further pressure on cap rates and terms. Natural disasters, such as hurricanes, pose a risk of property damage and business interruption, though tenant insurance requirements provide a layer of protection.

EPRT's competitive positioning, while strong in its niche, faces challenges from larger, more scaled competitors like Realty Income and National Retail Properties, who may have advantages in accessing certain capital markets or pursuing larger portfolio deals. EPRT's strategic response involves leveraging its relationship-based sourcing, underwriting expertise for middle-market credits, and focus on fungible, low-basis assets to maintain deal flow and attractive risk-adjusted returns. The company's active asset management, supported by tenant financial reporting, is crucial for identifying and addressing potential issues early.

Conclusion

Essential Properties Realty Trust has established a compelling investment thesis centered on its specialized focus within the net lease sector. By targeting middle-market companies in service-oriented and experience-based industries, EPRT accesses a market segment with inherent resilience and less direct competition from larger net lease players. The company's relationship-driven approach provides a consistent source of investment opportunities, underpinning its growth trajectory. Strong recent financial and operational performance, coupled with a conservative balance sheet and significant liquidity, demonstrates effective execution of its strategy.

While the prospect of normalizing capital markets and increased competition presents potential headwinds for investment pricing, EPRT's 2025 guidance reflects confidence in its ability to continue generating accretive growth through disciplined underwriting and strategic capital deployment, notably without requiring additional equity. Key risks, such as tenant credit issues and market volatility, are actively managed through portfolio diversification, proactive asset management, and a robust capital structure. For investors seeking exposure to the stable, income-generating characteristics of net lease real estate, EPRT's differentiated strategy, operational strengths, and prudent financial management present a clear and focused opportunity.