Essential Properties: A Strong Buy That Paid Off Big Time by Brad Thomas
Summary
- I’m feeling a bit euphoric with regard to the success of Essential Properties Realty Trust.
- It’s not every day that you invest in or recommend an underdog name that turns into an overnight rock star.
- EPRT shares have returned 99% year-to-date.
- This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Get started today »
Whenever we decide to upgrade a company to a Strong Buy we base that recommendation on sound fundamental analysis. Although the share price may scream "deep value," we dig deeper to understand the catalysts that support the potential for enhanced capital appreciation.
It’s true that one of the secrets to my stock-picking ability is the fact that I have taken the time and effort to report on a variety of REITs, as I pointed out when I wrote on EPRT back in December 2018,
“…we are constantly scanning the REIT universe to select the up-and-coming "sleep well at night" REITs, are appropriately named, the SWAN-A-BEEs. Much like junior varsity (or JV) sports, these SWAN-A-BEE picks are on the path to becoming prime-time varsity players, and just lack a little bit of time to mature into full blown SWANs.”
Thus, we initiated a strong buy on EPRT in December 2018 “based on the favorable risk management practices and discounted valuation.” I added that the “6.0% dividend yield screams "strong buy" and this warrants our Strong Buy (25% total return target) recommendation.”
Now, let me bring this back down to Earth: The purpose for my article is not to run a victory lap, instead I wanted to take another look at the REIT (post Q3 earnings) to determine our course of action going forward.
But I must say, I’m feeling a bit euphoric with regard to the success of EPRT, and as Senior analyst at iREIT on Alpha, I hope readers also are feeling like they're also own cloud nine. It’s not every day that you invest in or recommend an underdog name that turns into an overnight rock star.
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The Basics
EPRT is a Net Lease REIT that's differentiated by its highly-skilled senior management team with more than 50 years of experience. We recognized that when the company went public in June 2018 (raised gross proceeds of $494 million) that there was very little execution risk.
As a small cap REIT, there were few analysts and investors interested in a new net lease name, but we recognized the potential early (and this rest is history). The investor base stabilized after market volatility in Q4-18: As market volatility increased in October and November of 2018, EPRT’s investor base experienced significant turnover, which pressured shares heading into 2019.
Then EPRT obtained RMZ inclusion in late February and was added to the MSCI US REIT index, which created demand for the shares as various large REIT fund managers are benchmarked to the index.
Then in March 2019 the company raised $246 million from the first follow-on offering of common stock. This was an obvious catalyst that served to gain exposure and many new investors begin to take notice.
Then in July the company completed a secondary offering of $519 million which took out Elridge Industries (lead investor) and unlocked float by broadening the investor base.
Perhaps this biggest catalyst for EPRT is the fact that the company now has a market capitalization in excess of $2 billion and is now on the radar. Fortunately, our instincts were right:
“EPRT's new vintage portfolio is an important differentiator that Mr. Market is missing.”
EPRT also was added to the FTSE EPRA NAREIT Global Developed index in September and S&P Smallcap 600 index in October. These inclusions have increased demand for EPRT shares from various active and passive money managers.
Keep in mind, EPRT’s investment strategy was constructed in the current retail environment using the lessons learned from decades of management’s experience in and managing net lease properties throughout various economic cycles. This means that the portfolio isn’t encumbered with legacy retailers or challenged/at-risk retail concepts, which could negatively impact some of the more established peers.
One key differentiator for EPRT is that the company is only focused on 15 industries, and it has an extensive rolodex of tenants that it can contact should the company want to replace a tenant or re-let a property.
...Originally Posted On Seeking Alpha
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