EPR Properties: 5.9% Yield, Monthly Dividend Income

EPR Properties Organizational Integration

Source: EPR Properties Investor Presentation, slide 8

This benefits the REIT in two ways. First, the decentralized structure helps to reduce operating expenses, giving EPR a cost-based competitive advantage over its peers. Secondly, it allows each operating silo to develop substantial expertise. If your team is focused on solely finding deals in the education real estate segment (as an example), you have a much greater probability of identifying deals than if you are searching for all real estate.

As an owner of entertainment and recreation properties, EPR might not be as recession-resilient as, say, a healthcare REIT. The tenants of EPR may experience financial difficulties if customers cut spending when disposable income becomes tight. With that said, EPR stands to benefit from its strong balance sheet. 62% of EPR’s assets are financed with common equity, with the majority of the remainder (31%) financed with unsecured debt.

EPR Properties also has most of its debt financed in fixed-rate instruments, which will benefit this REIT in the current rising interest rate economic environment. More details about the balance sheet of EPR Properties can be seen below.

EPR Properties Capital Structure and Financial Highlights

Source: EPR Properties Investor Presentation, slide 42

For EPR, there are two main concerns that may need to be addressed during a recession. The first is that a company will be unable to meet its interest obligations, or unable to refinance debt as it matures. EPR is insulated from this risk because of its well-laddered debt maturity profile. The REIT has just $140 million of debt maturing in 2017, and the remainder is well dispersed beyond that.

EPR Properties Well Laddered Debt Maturity Profile

Source: EPR Properties Investor Presentation, slide 43

The second main risk is tenant-related. As mentioned, EPR might experience trouble if its tenant do. There is also the additional risk that EPR will not be able to find new occupants for its properties as its leases expire. EPR has mitigated this risk by creating a well-laddered lease maturity profile. Fortunately for investors, a great deal (40%+) of EPR’s leases are very long-lived and expire beyond 2027. In the more near-term, EPR’s lease expirations over the next 10 years average only ~3% of total revenues each year.

EPR Properties Portfolio Lease Expirations

Source: EPR Properties Investor Presentation, slide 16

Although EPR is likely not as recession-resistant as a healthcare REIT like Omega Healthcare Investors (OHI), EPR has mitigated its business-specific risks accordingly.

Valuation & Expected Total Returns

Expected total returns for EPR shareholders will be composed of valuation changes, dividend yield, and growth in the trust’s per-share funds from operations. The valuation of REITs cannot be assessed using the traditional price-to-earnings ratio because their earnings-per-share are depressed by the substantial depreciation and amortization charges associated with owning real estate.

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