Realty Income (O) has long been a powerhouse in the real estate investment trust (VNQ) arena, but things are not quite as rosy as they once were for this widely renowned company. While it has a celebrated track record of almost 30 years of consistent dividend growth and impressive average annual returns, recent market dynamics have caused some cracks to surface in its facade.

It’s true that past success can be inspiring, but it’s not always a reliable indicator of future performance. Realty Income’s historic growth was bolstered by a smaller size, minimal competition, and access to cost-effective capital, enabling the acquisition of properties at advantageous rates. However, the landscape has shifted dramatically in recent times, with the company now grappling with challenges presented by its massive market cap, increased competition, rising interest rates, and diminished spreads.

Essential Properties Realty Trust (EPRT) emerges as a compelling alternative to Realty Income, with a significantly brighter future. Since its public offering, EPRT has outpaced Realty Income and shows no sign of slowing down. There are several key factors that make EPRT a more enticing investment prospect.

Reason #1: Far Better Growth Prospects

EPRT has delivered approximately three times the returns of Realty Income since its public debut in 2018, establishing itself as a growth powerhouse in the REIT sector. EPRT’s ability to expand its FFO per share at a rate triple that of Realty Income is a testament to its remarkable growth trajectory.

EPRT’s smaller market cap allows each new investment to exert a more significant impact, serving as a distinct advantage over Realty Income’s enormity, which necessitates an exponentially larger volume of acquisitions to effect meaningful growth.

Furthermore, EPRT’s strategic focus on net lease properties occupied by smaller middle-market companies has proven to be a winning strategy, providing access to properties at higher cap rates, increased rent escalations, and more robust lease terms, underpinning its superior growth potential compared to Realty Income.

Contrary to common assumptions, smaller tenants do not necessarily pose a higher risk. In EPRT’s case, they balance this by structuring stronger leases, accessing property-level financials, securing corporate guarantees, and implementing master lease protections. This approach, combined with acquiring properties at discounted values, mitigates downside risk – a stark contrast to common market practices where investors often pay a premium for tenant credit quality that may deteriorate over time.

In a telling sign of the times, Realty Income’s principal tenant, Walgreens, recently faced a credit downgrade, precipitating a decline in the value of its properties.