Robust Investment Pipeline And Liquidity Will Support Future Stability

Key Takeaways

• Strong liquidity and low leverage position the company well for growth, with a robust investment pipeline enhancing future earnings through increased rental income.
  
• Tenant diversification and long lease terms from middle market sale-leaseback focus offer stable revenue growth and reduced risk exposure.
  
• Economic pressures and tenant credit risks, alongside capital market normalization, could challenge future rental collections, returns, and earnings stability.

Catalysts

A real estate company, acquires, owns, and manages single-tenant properties in the United States.

• Essential Properties Realty Trust has strong liquidity and low leverage, with $1.5 billion in liquidity and a pro forma leverage of 3.4x, positioning the company well for future growth opportunities and potential increases in revenue.
  
• The company has a robust investment pipeline, having already invested $443 million year-to-date, with expectations for achieving the higher end of the $900 million to $1.1 billion guidance range, which could positively impact future earnings through higher rental income.
  
• Essential Properties’ focus on middle market sale-leaseback transactions in targeted industries provides a stable platform for revenue growth, as these deals often come with long initial lease terms averaging 17.5 years and annual rent escalations of 2.2%.
  
• Same-store rent growth was 1.5% for the quarter, indicating healthy tenant performance and potential for continued income growth, which could positively affect overall net margins.
  
• The company’s tenant diversification strategy, with the largest tenant accounting for only 3.9% of annual base rent and top 10 tenants at 17.3% of ABR, mitigates risk and supports stable earnings growth by reducing exposure to any single tenant or industry.

Essential Properties Realty Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Essential Properties Realty Trust's revenue will grow by 16.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 44.5% today to 42.2% in 3 years time.
• Analysts expect earnings to reach $314.2 million (and earnings per share of $1.39) by about April 2028, up from $211.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $362.2 million in earnings, and the most bearish expecting $245 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.3x on those 2028 earnings, up from 29.8x today. This future PE is greater than the current PE for the US REITs industry at 24.4x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.53%, as per the Simply Wall St company report.

Essential Properties Realty Trust Future Earnings Per Share Growth

Risks

• The ongoing Zips Car Wash bankruptcy, impacting 3 properties and 20 basis points of ABR, could pose a risk to the company's future rental collections and revenue.
  
• The expectation of modest cap rate compression as capital markets normalize could result in lower returns on future investments, negatively affecting net margins.
  
• The dilution from unsettled forward equity provides a modest headwind to AFFO per share, potentially affecting future earnings per share.
  
• Although current credit trends are healthy, the watchlist at 1.6% suggests potential risks to tenant creditworthiness that could impact occupancy rates and rental revenues.
  
• Despite positive tenant credit metrics, economic pressures such as potential interest rate hikes or a recession could challenge tenant profitability, impacting overall earnings and AFFO.

Valuation

• The analysts have a consensus price target of $35.803 for Essential Properties Realty Trust based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $40.0, and the most bearish reporting a price target of just $32.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $744.0 million, earnings will come to $314.2 million, and it would be trading on a PE ratio of 33.3x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of $31.93, the analyst price target of $35.8 is 10.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.