This REIT will CRUSH Realty Income (O Stock)

Introduction

This tutorial will guide you through a comparative analysis of Realty Income (O Stock) and a potentially better investment opportunity, Essential Properties Realty Trust (EPRT). The insights are based on a recent video by Jussi Askola, CFA, where he discusses why EPRT might outperform Realty Income going forward. By understanding the key differences between these two REITs, you can make more informed investment decisions.

Step 1: Understand Realty Income's Performance and Challenges

• Realty Income has a strong track record, with nearly 30 years of consecutive dividend growth and an average annual total return of about 15%.
• However, its growth has slowed due to:
  • Increased market size (over $50 billion market cap), diminishing the impact of new acquisitions.
  • Heightened competition for properties which has compressed cap rates, reducing spreads on its cost of capital.
• Realty Income has diversified into new property sectors (casinos, data centers) but may face valuation challenges because investors prefer specialization.

Step 2: Explore EPRT's Growth Potential

• Essential Properties Realty Trust has outperformed Realty Income since its IPO in 2018, generating approximately three times higher total returns.
• Key factors contributing to EPRT's growth include:
  • Smaller market cap (less than one-tenth of Realty Income), allowing for more impactful acquisitions.
  • A focus on properties occupied by smaller, middle-market tenants, resulting in less competition and higher cap rates (e.g., 8% versus 6% for large tenants).
  • Better lease structures, including corporate guarantees and master lease protections.

Step 3: Analyze Financial Health

• Debt Levels:
  • EPRT has a debt-to-EBITDA ratio of about 3.7, while Realty Income’s is around 5.0, indicating a stronger balance sheet for EPRT.
• Debt Maturities:
  • EPRT has no debt maturing until 2027, providing stability against rising interest rates, unlike Realty Income, which has significant debt maturing soon.

Step 4: Evaluate Market Valuation

• Despite EPRT's stronger growth potential and better financial health, its valuation is similar to Realty Income's.
• This presents a unique opportunity, as EPRT's business model allows for faster growth without a premium price tag.

Conclusion

The analysis suggests that while Realty Income has been a strong performer historically, its future growth may be limited compared to Essential Properties Realty Trust. EPRT’s ability to grow faster, maintain a stronger balance sheet, and remain competitively priced presents a compelling investment case. For those looking to invest in REITs, considering EPRT alongside Realty Income could lead to better total returns. Before making any investment decisions, ensure to conduct thorough due diligence and consult with a financial advisor to align with your individual financial situation.