EPRT's Strategic Refinancing: Balancing Debt Costs and Growth Potential

Essential Properties Realty Trust (EPRT) has executed a $400 million refinancing maneuver by issuing 5.400% Senior Notes due 2035, priced at 98.317% of par. This move, while seemingly straightforward, reveals a nuanced strategy to optimize capital structure, reduce near-term liquidity risk, and position the company for long-term growth. Let's dissect the implications for shareholders and the broader market.

The Refinancing Playbook: Fixed Rates vs. Variable Costs

EPRT's revolving credit facility, currently sized at $1.0 billion with $200 million drawn, carries a variable rate of Term SOFR + 77.5 basis points. As of August 17, 2025, SOFR stands at 4.36%, implying an effective rate of ~5.135% for the facility. The newly issued 5.400% Senior Notes, while 26.5 basis points higher, offer a fixed-rate hedge against potential SOFR hikes.

This trade-off is critical. By locking in a 5.40% rate for 10 years, EPRT avoids the volatility of short-term rates, which could spike as the Federal Reserve tightens further. The $200 million repayment of the credit facility also frees up $800 million in unused capacity, creating a liquidity buffer for opportunistic investments or debt management.

Capital Allocation: Fueling Growth or Overleveraging?

The net proceeds from the notes will also fund “future investment activity,” a vague but telling phrase. EPRT's portfolio—99.6% leased with a 3.4x rent coverage ratio and 14.3-year weighted average lease term—provides a stable foundation. However, the company's recent guidance increase for 2025 suggests confidence in its pipeline.

The $800 million in unused credit capacity, combined with the $400 million in new debt, creates a $1.2 billion war chest for acquisitions or dividend sustainability. This aligns with EPRT's history of disciplined capital deployment, but investors must monitor leverage ratios. As of June 2025, EPRT's debt-to-EBITDA stood at 6.5x, a healthy level for a net-lease REIT but one that could tighten if aggressive growth is pursued.

Shareholder Value: Stability Over Short-Term Gains

The refinancing prioritizes long-term stability over immediate cost savings. While the 5.40% rate is marginally higher than the current variable rate, the fixed cost structure reduces refinancing risk and aligns with the long-dated nature of EPRT's assets. This is particularly prudent given the REIT's focus on service-oriented and experience-based tenants, which are less sensitive to economic cycles than industrial or retail tenants.

Moreover, the accordion feature on the credit facility—allowing an additional $1.0 billion in capacity—provides flexibility to scale investments without dilution. For shareholders, this means EPRT can capitalize on undervalued assets during market dislocations, enhancing total returns.

Risks and Considerations

The strategy isn't without risks. If SOFR declines below 4.36%, EPRT's fixed-rate debt becomes more expensive. However, the 10-year maturity of the notes mitigates this risk, as rate cuts typically lag economic cycles. Additionally, the company's strong tenant diversification (606 concepts across 48 states) insulates it from sector-specific downturns.

Investors should also watch the pro forma leverage post-refinancing. While 6.5x debt-to-EBITDA is manageable, aggressive use of the $1.2 billion liquidity pool could push ratios beyond 7x, triggering higher borrowing costs or rating agency scrutiny.

Conclusion: A Calculated Move for Long-Term Resilience

EPRT's refinancing is a textbook example of strategic debt management. By converting variable-rate debt to fixed-rate obligations, the company reduces interest rate risk while preserving liquidity for growth. The decision to prioritize stability over marginal cost savings reflects a long-term mindset, which is essential for a REIT with 14.3-year lease terms.

For shareholders, this means a more predictable earnings stream and the potential for accretive investments. While the 5.40% coupon may seem modest, it's a small price to pay for a company that has consistently outperformed its peers in capital efficiency. In a market where short-termism often dominates, EPRT's approach is a reminder that patience and discipline can compound value over time.