EPRT: Landlord of the Losers

“The stock market is filled with individuals who know the price of everything, but the value of nothing.”

Phillip Fisher

“Don’t wait to buy real estate. Buy real estate and wait.”

Will Rogers

Essential Properties Realty Trust (EPRT)

“Essential Properties acquires, owns and manages primarily single-tenant properties leased to middle-market companies operating service-oriented and experience-based businesses.” -Their website

About 90% of EPRT’s properties are triple net-leases, meaning the renters pay the maintenance and taxes for the properties. This is an ideal situation for today’s hard short term environment. The combination of high yield, an excellent balance sheet, and a reasonable valuation provide an excellent setup.

The Problem

The problem is that all the “experience based businesses” were mostly shut down, due to Covid. Here’s some data that you can ignore and I’ll sum it up after:

Here’s the facts:

• EPRT has many tenants in rough industries, no argument there
• EPRT only collected 66% of April rent and 65% of May rent
• 33% of remaining May rent has been deferred over the next 12 months
• Reported Q1 FFO of $.28 per diluted share (more than dividend payment…food for thought)
• Currently paying a $.23 quarterly dividend, equivalent to a 6% current yield
• Invested $167.5 million in 63 properties during Q1 (current market cap is $1.26 billion) at a 7.1% weighted average cap rate

Past Results

Here’s some more data/figures for you:

The Balance Sheet

They’ve got a large amount of cash on hand and a large $500 million plus revolving credit line. This large amount of available liquidity will allow EPRT to keep investing in new properties when a large number of renters need capital.

In addition, annual dividend payments are $85 million dollars. This means that the dividend is well covered between operating FFO and cash on hand.

Current Valuation – Based on Q1 Results

• Less than 14 times forward FFO, significantly less than current market valuations
• 1.0 Price/Book

Summary

• Less than current market valuation, due to its severely affected clientele
• Down approximately 50% from its highs a few months ago
• Current 6% well covered yield
• Large amount of cash and liquidity with heavy investments in the first quarter
• Current attractive market valuations with large amounts of deferred rent

Due to the triple net lease structure, Essential Properties has a low capital intensity and will survive this difficult current environment. This in combination with the large amount of cash on hand and heavy investments in the first quarter will result in better than expected results in the future.

Recognizing a situation a company can succeed in the future isn’t everything though. The REIT has a low valuation at approximately 1 times book value and less than 14 times FFO. This in turn leads to a well-covered 6% yield.

As 2020 progresses, I believe Wall Street will eventually take notice of EPRT continued growth and the share price will increase with that attention. Plus, with a 6% yield all you’d need is for a small share price increase for total returns to beat the market.

Do your own research and don’t sue me. I own EPRT, and I don’t think this should be your only source of research. Definitely subscribe though or check out other Fundasy posts