While location is the most important success factor when investing in real estate, having the right tenants is essential for commercial real estate. It can be the difference between a property generating stable rental income and one that becomes a headache because struggling tenants aren't meeting their rental obligations. That's why real estate investors need to consider a property's tenants closely.
For Essential Properties Realty Trust (NYSE: ERPT), a real estate investment trust (REIT) focused on freestanding retail properties, tenants are as essential as the property. It focuses on certain tenant and property types, which helps reduce risk.
Here's a closer look at the company's strategy.
Essential Properties Realty Trust profile
Essential Properties is a retail REIT focused on owning single-tenant properties net leased to service-oriented and experience-based businesses. These properties tend to be resistant to disruption from e-commerce because customers need to visit them to receive services or experiences, making them essential to the tenant's operations.
As of mid-2021, Essential Properties had 1,325 properties in 44 states with 11.6 million square feet of space leased to 281 tenants across 17 industries. It breaks its tenants down into the following categories:
- Service: 83% of its annual base rent (ABR).
- Quick-service restaurants: 13.8%
- Car washes: 13.8%
- Early childhood education: 13.6%
- Medical/dental: 12.5%
- Auto service: 8.2%
- Convenience stores: 7.5%
- Casual dining: 5.4%
- Equipment rental and sales: 2.1%
- Family dining: 2.8%
- Pet care services: 1.7%
- Other services: 1.4%
- Experience: 11%
- Health and fitness: 4.7%
- Entertainment: 4.3%
- Movie theaters: 2%
- Retail: 3.4%
- Grocery: 2.4%
- Home furnishings: 1%
- Industrial: 1.8%
- Building materials: 1.8%
Essential Properties' top 10 tenants and percentage of ABR are:
- Captain D's Seafood Kitchen: 74 properties, 2.5%
- Equipment Share: 17 properties, 2.4%
- Cadence Education: 23 properties, 2.3%
- Mister: 13 properties, 2.1%
- Couche-Tard Circle K: 34 properties, 1.8%
- Share Time Entertainment: 5 properties, 1.8%
- Harps Hometown Fresh: 19 properties, 1.7%
- AMC: 5 properties, 1.7%
- Mavis Tires & Brakes: 19 properties, 1.6%
- The Malvern School: 13 properties, 1.6%
Overall, Essential Properties' 10 largest tenants contribute 19.5% of its ABR, giving it a reasonably diversified tenant base.
In addition to focusing on service-oriented and experience-based industries, Essential Properties focuses on smaller-scale net leased properties that it primarily acquires in sale-leaseback transactions with middle-market tenants. The company's focus on smaller properties increases diversification, provides greater alternative uses if it needs to find another tenant in the future, and gives it a deeper pool of potential buyers if it sells.
Meanwhile, by concentrating on middle-market businesses instead of larger, national brands, Essential Properties can secure longer lease terms and more attractive returns, since these companies have less access to capital to grow their operations.
Essential Properties Realty Trust news
Essential Properties' focus on service-oriented and experience-based businesses paid off during the pandemic. While some of its tenants didn't make their rental payments on time in 2020, the REIT had recovered 87% of that rent by the middle of 2021. Further, its monthly rental collection rate was back at the pre-pandemic level of around 100%.
Meanwhile, the company continued to actively expand its portfolio, primarily by completing sales-leaseback transactions with tenants. During the first half of the year, it spent $421 million to buy 168 properties in 56 separate deals, 86% of which were sale-leasebacks. Essential Properties also sold 25 properties for $44.8 million, recording a $7.5 million gain. Those sales helped finance some of its purchases.
Another noteworthy accomplishment in 2021 was achieving an investment-grade credit rating from Moody's and S&P Global. That allowed it to complete its first public bond issuance, raising $400 million of 10-year notes at a low rate of 2.95%. That credit rating gave the company access to low-cost financing to continue acquiring essential freestanding properties.
Essential Properties Realty Trust stock price
Essential Properties' strategic focus has paid off for investors: