Michiel van der Groen | Apr 25, 2023 05:10PM ET
EPR Properties (NYSE:EPR) looks both attractive and risky. In this article I will show you why I think the company is more attractive than it is risky by comparing it to the REIT market and some of its peers.
For the readers not familiar with the company, EPR Properties is a net-lease Real Estate Investment Trust (REIT) with a niche business in the experiential property market. The company owns 21.5M square feet of leasable area in this sector (and a small portion in the educational sector). Management is currently working on reducing its stake in the theatre business and divert capital to other experiential sectors (e.g., Top Golf, Ski resorts, attraction parks, etc.). Management informed about a healthy pipeline which is currently limited by the rising capitalization rate, but enough investment opportunities remain.
Now that we are all on the same page, we can continue to the analysis. Some peers in the real estate sector for EPR are companies like: Realty Income (NYSE:O), Spirit Realty Capital (NYSE:SRC) and Gaming and Leisure (NASDAQ:GLPI) Properties Inc (GLP). For this analysis I will compare the company to these three peers in terms of performance. For financial health assessment I will use some commonly used definitions in the REIT world.h5 EPR's Performance against its Peers/h5
The table below gives a summary of the performance ratios for all companies.
This profitability is not incidental, since EPR has been seeing solid returns on investment capital against cap rate over the last five years. This is important since an investment will increase value when it is returning at a rate above the cap rate, where it will destroy value when it is returning at a rate below the cap rate.
REITs have a reputation to be highly leveraged and are therefore considered more risky than common stocks. There are four ratios I like to analyse the health of a REIT:
Using these standards, I have analysed the ratios for the last five years.
It can be stated that overall, financial health has been improving, although it remains close to the high-risk areas. Still, I think, overall, the financial stability is increasing even through 2020. This brings us to the next topic: risk.
h5 High Dividend but How Risky is it?/h5For the risk performance I check the Sharpe Ratio and Calmar Ratio for a period of 1000 days. Here, I added the main indices (S&P500, Dow Jones and Nasdaq) and the vanguard REIT ETF (VNQ) as a reference.
The data below shows the current Sharpe Ratio of the analysed data. Note that the higher the Sharpe Ratio the better.
Here, we can first see that REITs have underperformed against the broader market indices. But, we can also see that EPR has performed relatively well compared to the REIT ETF (VNQ) and its peers.
When we check the influence of maximum drawdowns over the period on EPR's risk adjusted performance using the Calmar Ratio, we see it has been a little more vulnerable to drawdowns in stock price.
Overall, EPR Properties is strongly positioned against its peers and the REIT market. Its stable profitability and success in its niche experiential real estate market makes it an attractive business to invest in. Management seems capable to allocate capital to consistently realize return rates above the cap rate, while improving and ensuring financial stability. The 8%+ dividend yield hints to higher risk, where in reality, the stock has good risk adjusted performance. The current stock price implies that it trades a little below its 1000 day mean.
Overall: good performance, strong financials, capable management and a good balance between dividend returns and risk.
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