Real estate is an essential aspect of commerce because companies need physical locations to provide services to their customers. They also need capital to open new locations to serve more consumers.
Real estate investors can play an essential role supporting commerce. They can provide capital for companies to open new locations by acquiring and owning the physical properties and leasing the space to operating tenants. That relationship enables the landlord to generate passive income on its investment.
An easy way to participate in that passive income is to invest in a real estate investment trust (REIT) that owns income-generating real estate. One option for investors seeking a super safe income stream is Essential Properties Realty Trust(NYSE: EPRT).
Essential Properties Realty Trust owns a diversified commercial real estate portfolio including the following tenant industries:
Service: Service-related properties -- like car washes, medical and dental locations, early childhood education sites, restaurants, and convenience stores -- comprise 79% of the REIT's annual base rent.
Experience: Experience-related properties -- like fitness centers, movie theaters, and entertainment locations -- provide 13.5% of its rent.
Retail: Retail properties -- like grocery stores and home-furnishing stores -- supply 3.3% of its rent.
Industrial: Building materials and other industrial-related tenants provide 3.5% of the REIT's rent.
The REIT owns over 2,100 properties leased to 413 tenants in 16 industries across 49 states. Its top tenant, Equipment Share, supplies 4.2% of its annual base rent, while the 10 largest provide 17.6% of its rent.
The REIT signs long-term net leases with tenants (14-year weighted average remaining lease term). Those leases deliver stable rental income because the tenants cover all of a property's operating expenses including routine maintenance, real estate taxes, and building insurance. Most of its leases (nearly 97%) escalate rents at a low fixed rate (1.7% weighted average annual escalation rate). As a result, the REIT collects steadily rising rental income.
A very safe and secure income stream
Essential Properties Realty Trust's diversified portfolio of stable income-generating properties gives it a rock-solid foundation of cash flow to pay dividends. The REIT only pays out about two-thirds of its stable cash flow in dividends, which is a very conservative level for a REIT. For perspective, leading net lease REIT Realty Income(NYSE: O) paid out 74.6% of its cash flow in dividends last year.
That higher payout ratio is one reason Realty Income has a higher dividend yield (5.5%, compared to 3.6% for Essential Properties). Essential's low dividend payout ratio enables it to retain $120 million in excess free cash flow each year to invest in additional income-producing properties.
The REIT also has a very conservative financial profile, with an investment-grade rated balance sheet (BBB/BBB- bond ratings) backed by a low 3.8 times leverage ratio. That's super low for a REIT. For comparison, Realty Income, which has one of the highest credit ratings in the REIT sector at A3/A-, has a 5.4x leverage ratio, which gives it a lot of financial flexibility to invest in additional income-generating properties.
Essential Properties primarily buys additional properties via sale-leaseback transactions with existing and new partners. Those deals provide its partners with capital to invest in opening new locations while enabling the REIT to invest in additional income-generating real estate.
The REIT's expanding portfolio, along with growing rental income from existing properties, enables it to increase its dividend. It has hiked its dividend every year since coming public in 2018, giving investors roughly 2% raises about every six months.
That compares pretty favorably to Realty Income, which has been one of the most consistent dividend growth stocks in the REIT sector. It's raised its payout every single year for three decades -- including for the past 110 quarters in a row -- growing it at a 4.3% annual rate.
An essential income stock
Essential Properties Realty Trust pays a very secure dividend backed by a diversified portfolio of essential real estate, a low dividend payout ratio, and a conservative balance sheet. Its financial metrics are as good, if not better, than leading net lease REIT Realty Income. Because of that, it's an excellent option for those seeking a very bankable passive-income stream.
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