Essential Properties Realty Trust: Navigating Rising Rates with a Resilient Portfolio

In an environment where rising interest rates and economic uncertainty are reshaping investment strategies, real estate investment trusts (REITs) face a dual challenge: maintaining cash flow stability while positioning for growth. Essential Properties Realty Trust (NYSE: EPRT) has emerged as a standout example of how a disciplined capital structure, diversified tenant base, and long-term lease strategy can fortify resilience and unlock opportunities. Here's why investors should take notice.

A Fortress Balance Sheet Anchors Resilience

EPRT's financial health is its most compelling asset. As of Q1 2025, its pro forma net debt to EBITDA ratio stood at 3.4x, well below the 4.6x upper limit of its target range. This conservative leverage, paired with $1.5 billion in liquidity, provides a cushion against rising borrowing costs. The company's amended $2.3 billion senior unsecured credit facility further underscores its access to capital, even as rates climb.

Moreover, EPRT's use of $410 million in unsettled forward equity positions it to grow without diluting shareholders. This strategy allows the company to fund acquisitions or debt reduction while maintaining a disciplined equity issuance policy—a rarity in an era where many REITs face pressure to raise capital at unfavorable terms.

Portfolio Diversification: Strength in Numbers

EPRT's portfolio of 2,138 freestanding properties leased to 423 tenants across 16 industries is a testament to its risk management philosophy. Key sectors include restaurants, car washes, medical services, and convenience stores—businesses with inherent demand resilience. Notably, no single tenant accounts for more than 3.9% of annual base rent (ABR), and the top 10 tenants collectively represent just 17.3% of ABR. This diversification reduces exposure to sector-specific shocks.

The weighted average lease term of 14 years and 2.2% annual rent escalations further insulate EPRT from short-term rate volatility. Tenants are also financially robust, with a 3.5x rent coverage ratio, meaning they generate sufficient income to cover rental obligations even in a downturn.

Occupancy remains a highlight, sitting at 99.7%, with 100% rent collection in Q1—a sign of tenant health and management effectiveness. The watch list (tenants under financial stress) is minimal at 1.6% of ABR, down 50 basis points from the prior quarter.

Growth Engine: A Pipeline Fueling Returns

EPRT's growth strategy is built on a steady flow of mid-sized sale-leaseback transactions, which accounted for 90% of its Q1 investments. These deals—averaging $5.5 million each—leverage existing tenant relationships and avoid the risks of chasing larger, competitive assets. The weighted average cash yield of 7.8% on Q1 investments outpaces the 6.9% cap rate on dispositions, signaling disciplined pricing.

The company's $900–$1.1 billion 2025 investment guidance is achievable thanks to a robust pipeline, with cap rates stabilizing in the high 7% range. Management has reaffirmed its $1.85–$1.89 AFFO per share guidance, supported by a 66% payout ratio after the recent dividend hike to $1.20 annualized. This payout remains sustainable, even as rates rise, given the portfolio's cash flow stability.

Rising Rates? EPRT is Built to Thrive

While rising rates pressure REITs reliant on short-term debt or high leverage, EPRT's structure minimizes these risks. Its long-term leases and conservative balance sheet create a “moat” against interest rate hikes. Additionally, the company's focus on service-oriented businesses—which exhibit inelastic demand—ensures steady cash flows even as consumer spending shifts.

A case in point: EPRT's investment in Dave & Buster's, a sale-leaseback with a >2x coverage ratio and 15–20 year terms, exemplifies how it targets assets with durable fundamentals. Even sectors like car washes and medical services, which benefit from recurring demand, provide stability.

Investment Thesis: A Steady Hand in Volatile Markets

For income-oriented investors, EPRT's 7.2% dividend yield (as of June 2025) offers attractive compensation for risk. Its $0.02 dividend hike in Q2 signals confidence in its ability to grow distributions while maintaining balance sheet health. Meanwhile, long-term investors gain exposure to a portfolio engineered for longevity: properties with 17.5-year average lease terms and 9.4% gap yields (net of credit risk) provide a buffer against inflation and rate pressures.

Cautions and Considerations

No investment is without risk. EPRT's reliance on smaller transactions could slow growth if competition intensifies, though its focus on relationship-driven deals mitigates this. Additionally, a prolonged economic slowdown might strain tenant credit quality, though the current watch list remains minimal.

Conclusion: A Rare Blend of Safety and Growth

In a rising rate environment, EPRT stands out as a REIT that prioritizes capital preservation while pursuing sustainable growth. Its fortress balance sheet, diversified tenant base, and focus on cash-generative assets position it to navigate macro challenges while rewarding shareholders with dividends and AFFO growth. For investors seeking stability without sacrificing returns, EPRT is a compelling choice.

As of June 2025, EPRT's stock price remains within striking distance of its 52-week high, offering a favorable entry point for those willing to capitalize on its disciplined strategy.