Having been a real estate investor for over three decades, I’ve witnessed many market cycles. The ups. The downs. The similarities. The differences.
Been there. Experienced that.
Lived to tell the tale.
For instance, when I finished college in the late ’80s, the economy was strong. But inflation was rising, so the Federal Reserve began raising rates at exactly the wrong time.
The 1990 oil crisis hit just when consumers were getting pessimistic from those policies, resulting in a modest recession from July 1990 to March 1991. So the Fed cut interest rates to a then-record low of 3% to promote growth.
And boy did it work! The rest of the decade was filled with steady job growth, rising productivity, and a surging stock market.
That lasted right up until the dot-com bubble burst in 2000, which led to another eight-month recession. People lost everything in that crash, but it wouldn’t be the last devastation the decade saw.
There was also the housing market debacle, which came to harsh and unavoidable light in 2008. As my regular readers know, that marked the end of my commercial real estate development business. I had to remake myself completely into the Wall Street analyst I am today, specializing in real estate investment trusts (“REITs”)…
Then, of course, came 2020 and its continuing aftermath, which has been particularly tricky to navigate for real estate.
Yet it’s all those experiences – seeing and surviving so many cycles – that makes me so confident that REITs are about to surge.
Today, I’ll show you why.
Have a Look at These Charts
First, have a look at the chart below. Like any sector, real estate has had its ups and downs. But, over the past 35 years, the sector has returned 12.4% per year on average.
What should stand out in the chart below is that the average return was made possible by a handful of standout years. Most recently, it was 2021 when financing rates fell and the generous yields from real estate investments looked very attractive compared with the near-zero returns from Treasurys. But what should also stand out is the drawdown in 2022 that saw those macro tailwinds turn into headwinds. Real estate has limped along ever since.
But here’s the good news…
The relative underperformance these past few years has brought real estate valuations, relative to the broader equity market, significantly below the historical median, down 7.7 times compared with the larger equities category.
So any reversion toward the historic median of negative 0.6 times could benefit shareholders.
By a lot.
Combine that with overall healthy fundamentals and strong balance sheets – not to mention interest rates that are finally falling– and we’ve got an environment where these companies and their shareholders are primed to thrive.
That’s why I’m so bullish on the sector in general… and Essential Properties Realty Trust in particular.
An ‘Essential’ Landlord Extraordinaire
Last Thursday, I covered two particular REITs: data-center owner Equinix (EQIX) and distribution-center landlord EastGroup Properties (EGP). They’re both industry experts with impressive holdings and significant growth prospects that are hard to ignore.
The past four days haven’t changed my mind: They’re still very worth considering for strong dividend payments and price appreciation alike.
But I also mentioned how:
… net-lease REITs continue to gain steam with accelerated acquisition volumes that set up a strong 2026 earnings season. I favor consolidators with scale advantage, including:
- Realty Income (O), which I recommended to my mom a few days ago
- Agree Realty (ADC)
- VICI Properties (VICI), which I included in my gaming REIT analysis here
- Essential Properties Realty Trust (EPRT)
Essential Properties is a net-lease REIT that owns 2,266 properties that amount to more than 25 million square feet distributed across 48 states. The only two it doesn’t have at least a few buildings in are Montana and Hawaii.
(More about that shortly.)
EPRT carefully selects every new property and continuously evaluates its holdings to ensure it’s full of the best assets possible. Better yet, its portfolio has a remaining weighted average lease term of 14.4 years and is 99.8% leased.
So it’s situated very well going forward.
I’ve already stated that there are several net-lease REITs that are particularly attractive. But one key differentiator for EPRT is its high unit-level coverage of 3.6 times.
Essentially, because it maintains conservative rental rates, its cash flow cushion provides a margin of safety that’s hard to beat. Plus, it focuses on select categories where it attempts to allocate capital to sectors with the best risk-adjusted returns.
All of this makes it a very attractive company to hold.
A Deeper Dive Into EPRT
Now, no company – REIT or otherwise – is perfect. So, I will say that I’m not a huge fan of EPRT’s 14.2% exposure to the car wash sector.
I believe there will be continued consolidation in that space, and it is harder to re-lease properties like that. They’re hardly a one-size-fits-all kind of structure, after all.
[Readers of Wide Moat Confidential may know that I recently recommended a publicly traded car wash company in our model portfolio. That company is the exception to my general bearishness on the sector. In fact, I expect it to benefit from the consolidation trend in the industry.]
Nonetheless, EPRT has a very diversified customer base, as evidenced by how its top 10 tenants provide just 16.9% of its revenue. There’s only one customer, Equipment Share, that amounts to more than 2% of its rent.
Here’s another thing to know: EPRT generates over 80% of its revenue from “red states” – those that are leaning into economic and societal policies that encourage growth. The result is that businesses and individuals alike are flocking to these places from once-hot spots like New York City.
[Incidentally, I just finished creating a new market tracker called the Red State REIT Index, which I have very big plans for. I can’t wait to tell you more as I put it into action.]
All factors considered, it shouldn’t be surprising that EPRT has maintained a conservative balance sheet with a weighted average interest rate of 4.3%. Its net debt to annualized adjusted earnings before interest, taxes, depreciation, and amortization for real estate adjusted is 3.8 times as of the latest quarter.
This REIT generates the widest investment spreads in the net-lease sector. And that has led to sector-leading growth of 8.5% in its adjusted funds from operations per share… compared with its peer average of around 3.5%.
As you can see below, EPRT has generated a 12% sector-leading historical compound annual growth rate (“CAGR”).
Shares are now trading at 16.4 times compared with their normal multiple of 18.4 times. And analysts are forecasting growth of 8% in 2026 and 7% in 2027, which is one of the best expectations in the net-lease space.
All put together, we have a 3.9% dividend yield plus 8% growth plus 10% price appreciation. This adds up to an annual total return forecast of over 20%.
There’s no guarantee shares will return that much over the next 12 months, mind you. But based on my experience and evaluation, I’m confident that now is the best time in my lifetime to buy REITs like EPRT.
Regards,
Brad Thomas
Editor, Wide Moat Daily