Essential Properties’ senior unsecured ratings upgraded to Baa2 by Moody’s Ratings

Investing.com -- Moody’s Ratings has upgraded Essential Properties, L.P.’s issuer rating and backed senior unsecured rating to Baa2 from Baa3. The backed senior unsecured shelf rating was also revised to (P)Baa2 from (P)Baa3. The outlook for Essential Properties, a real estate investment trust (REIT), has been revised to stable from positive.

The ratings upgrade comes in response to the significant growth in Essential Properties’ asset base and cash flows over the past several years. This growth has been coupled with a reduction in leverage below 5x. Moody’s also noted the REIT’s consistent operating performance, supported by its long-term triple net retail leases, as well as its good liquidity and financial flexibility, which will facilitate its continued growth.

The stable outlook is based on Moody’s expectation that Essential Properties will continue to generate stable cash flows from its operating portfolio, while executing its strategic growth on a leverage-neutral basis.

The Baa2 ratings reflect Essential Properties’ prudent financial policy and the stability of its revenues from a diversified property portfolio comprised of long-term triple net retail leases. The REIT has managed to lower its leverage below 5x, even as it has been growing rapidly since its 2018 initial public offering. Essential Properties also benefits from its focus on tenants who operate service-oriented and experiential businesses that are resistant to competitive e-commerce threats challenging traditional retailers.

However, there are some credit challenges. Essential Properties focuses on private, middle-market tenants that tend to have riskier credit profiles, especially in an uncertain macroeconomic environment. The company’s exposure to weaker tenants heightens the risk of credit losses due to potential tenant bankruptcies or financial distress. Additionally, the company has some industry concentrations to car washes, medical and dental, and early childhood education. These risks are mitigated by lengthy lease terms relative to peers, minimal upcoming lease expirations, and strong rent coverage.

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As of March 31, 2025, Essential Properties maintains good liquidity, with a large unencumbered asset portfolio, full availability under its $1.0 billion unsecured revolving credit facility, $47 million of cash available, and $410 million of unsettled forward equity. This provides the REIT with capital to fund its near-term investment activities, although it will be continuously reliant on external debt and equity to fund its strategic growth plan. Essential Properties has no maturities until 2027 when $430 million in unsecured term loan debt comes due.

A ratings upgrade would reflect stable operating trends through industry cycles, with strong unit level coverage trends across the portfolio. Maintenance of net debt to EBITDA below 5.0x, and fixed charge coverage above 4.5x, each on a sustained basis, and portfolio growth to over $10 billion with enhanced tenant and industry diversification would also support an upgrade.

A ratings downgrade would result from declining operating trends as measured by same-store rent growth or credit losses. Net debt to EBITDA above 6.0x and fixed charge coverage below 3.5x, each on a sustained basis, could also result in a downgrade.

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