Investing.com -- Essential Properties Realty Trust Inc. (NYSE: EPRT ) has seen its outlook revised to positive from stable due to robust growth and strong credit metrics, according to S&P Global Ratings. The company’s ’BBB-’ issuer credit and issue-level ratings on its senior unsecured notes have been confirmed.

The positive outlook reflects the expectation of continued expansion of the company’s asset base, with investments funded in a way that doesn’t significantly alter its debt levels. This is also supported by the company’s solid and stable operating performance, underpinned by long-term triple-net leases. The company’s S&P Global Ratings-adjusted debt to EBITDA is expected to remain in the low- to mid-5x area for the next 12 to 24 months.

In recent years, Essential Properties Realty Trust has significantly expanded its scale. The company’s investment volume in 2024 was $1.2 billion, up from $1 billion in 2023 and $937 million in 2022. This resulted in the expansion of its asset base to $6.3 billion at the end of 2024, up from $3.5 billion at the end of 2021. The company also increased its tenant relationships to 413 from 311 over the past three years.

Essential Properties Realty Trust is expected to maintain a conservative balance sheet as it grows its portfolio. The company’s S&P Global Ratings-adjusted debt to EBITDA was 5.5x as of Dec. 31, 2024, relatively consistent with the 5.3x and 5.6x seen in the two previous years. The company is expected to continue funding its investment activity in a way that doesn’t significantly alter its debt levels, using a combination of free cash flow, proceeds from dispositions, equity, and debt.

The company’s operating performance is expected to remain solid due to its diversified tenant base and triple-net lease structure. Essential Properties Realty Trust’s same-store rent growth was 1.4% in the fourth quarter and occupancy ended the year at 99.7%. These metrics are relatively standard in the net lease space. The majority of the company’s leases have contractually fixed annual escalators, with a weighted average annual escalation rate of 1.7%.

The company is well diversified from a tenant perspective, with only one tenant accounting for more than 2% of annualized cash base rent and its top 10 tenants accounting for 17.6%. This provides protection against tenant distress. The company’s 3.5x tenant unit-level rent coverage, with only 3.1% of cash ABR coming from tenants with coverage below 1x, are indicators of the portfolio’s relatively solid tenant health.

The positive outlook reflects the expectation for continued expansion of the company’s asset base with investments funded in a way that doesn’t significantly alter its debt levels. It also reflects the expectation for solid and stable operating performance, supported by long-term triple-net leases. The company’s S&P Global Ratings-adjusted debt to EBITDA is expected to remain in the low- to mid-5x area for the next 12 to 24 months.

The outlook could be revised to stable if the company adopts a more aggressive financial policy, financing investment activity with a larger proportion of debt, leading to an increase in S&P Global Ratings-adjusted debt to EBITDA to the high-5x area for a sustained period. Other factors that could lead to a revision include a weighted-average debt maturity sustained below three years or a deterioration in operating performance.

The rating on EPRT could be raised if the company continues to increase its scale in a debt-neutral manner, maintaining its S&P Global Rating-adjusted debt to EBITDA in the mid-5x area or below. Other factors that could lead to a rating increase include extending its weighted-average debt maturity comfortably above three years through the issuance of longer-term debt, and maintaining high-occupancy levels and minimal tenant issues.

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