EPR Properties: A Strong Buy With An 8% Yield, My Price Target And Strategy

seekingalpha06-26

EPR Properties focuses on experiential real estate, offering stellar returns of over 1,300% since 1997.Stock trading at half its pre-Covid value, potential buying opportunity with interest rate ...

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This company has provided stellar returns over the years, with total returns of more than 1,300% since 1997. This REIT once traded at much higher levels and returns were significantly higher at that time. However, like many REIT stocks, it has seen a big drop in valuation due to the aggressive level of interest rate hikes from the Federal Reserve in the past couple of years. I believe this has brought about a potentially significant buying opportunity, so let's take a closer look:   S&P Capital IQ The Chart I wanted to focus on a long-term chart, which is what is shown below. As you can see, this stock regularly traded for around $80 per share prior to the Covid stock market plunge. At that time, it dropped to around the $20 level, fueled largely by fear. The 50-day moving average is $40.77 and the 200-day moving average is $41.82. This REIT is now trading for nearly half of the value it traded at before Covid and the Federal Reserve's interest rate hiking cycle began. Covid is no longer the threat that it used to be, and the Fed's interest rate hiking cycle appears ready to reverse course and become an interest rate lowering cycle. That could be just what is needed to take the shares of this REIT back towards its former highs of about $80.   Finviz.com Earnings Estimates And The Balance Sheet Analysts expect EPR Properties to earn $4.85 per share in FFO, on revenues of $621.84 million. In 2025, FFO is expected to rise to $5.02 per share, with revenues coming in at just over $638 million. For 2026, this company is expected to generate $5.12 per share in FFO, on revenues of about $608 million. This puts the price to earnings ratio at just about 8 times earnings, which is low compared to its peers and extremely low when compared to the stock market in general since the price to earnings ratio for the S&P 500 Index (SPY) is currently well over 20 times earnings. This very low price to earnings ratio of just about 8, leaves plenty of room for multiple expansion, which is what I believe will occur when interest rates decline. As for the balance sheet, this company has about $3.04 billion in debt and around $59.48 million in cash. This company has an investment grade rating. Here are some additional financial data points on EPR Properties:   EPR Properties The Dividend EPR Properties pays a quarterly dividend of $0.285 per share, which totals $3.42 per share on an annual basis. This provides a yield of about 8.38%. The payout ratio is around 70%, which is reasonable and in line with many other REIT stocks. Valuation Compared To Peers Shows Upside Potential As detailed above, EPR Properties is currently valued at just about 8 times FFO. Other popular REIT stocks are trading at higher valuations which suggests there is room for upside through multiple expansion. To improve the valuation, I think EPR Properties could focus more on revenue growth and/or increasing the strength of the balance sheet through debt reduction. For some examples of what REIT stocks can trade for, Realty Income (O) is currently valued at nearly 13 times FFO estimates for 2024. VICI Properties (VICI) which also owns \"experiential '' real estate, much of which is in Las Vegas, is probably a closer comp for EPR Properties and it currently trades for about 11 times FFO estimates for 2024. Potential Upside Catalysts I believe multiple expansion is a potential upside catalyst for EPR Properties. I feel that the peer valuation examples above show a wide gap in the FFO multiples, which could narrow over time. The wide gap that exists now between EPR Properties is not warranted in my opinion and it leaves a lot of upside potential for this REIT. Another potential upside factor which I believe is very significant, is the probability that interest rates will decline significantly in the next couple of years. The Federal Reserve recently updated its \"Summary of Economic Projections\", and it is forecasting that the Fed Funds rate could drop from about 5% currently, to just around 3% in 2026. Since money market yields typically follow the Fed Funds rate, the yields on money market funds are likely to also drop to around 3%, and this could make investors scramble to find higher yielding investments, just as was the case before the Fed initiated rate hikes. This could lead to share price appreciation for EPR Properties and it could help push the stock back up towards the highs it held at around $80. A return to $80 might be the bull case, and I am not holding out for that, but I do see a strong case for the stock to return to $60 per share. This would be based on money market yields dropping to around 3%, in which case, I believe this stock could be attractively valued with a yield of roughly 6%. Based on the current dividend totaling $3.42 per share annually, and with the expectation of a couple of small dividend increases between now and 2026, this could take the dividend to around $3.60 per share annually which would provide a 6% yield if this stock is valued at $60. If my $60 price target is reached between now and 2026, this would provide potential gains of about 50%, plus the dividends, which suggests strong total return potential. Potential Downside Risks When you see how poorly this REIT and the REIT sector performed when Covid caused a stock market correction in 2020, it makes sense to realize the potential downside risks that could come if there is another pandemic, or a significantly negative economic event, or even just a stock market correction. For this reason, I would never have this stock or any REIT become a major holding in my portfolio. If the Federal Reserve is unable to tame inflation, or even worse, if inflation reignites and the Fed needs to raise rate, this could be a significant downside risk for this stock and for the REIT sector in general. Federal Reserve Governor Michelle Bowman recently said she \"would be open to raising (interest rates) if inflation doesn't pull back.\" However, I believe there are many signs that the economy is slowing and the biggest current risk factor is a recession, not inflation in my opinion. In Summary I believe this stock is significantly undervalued when compared to peers and also when compared to the historical highs of around $80 per share for this stock. I don't expect interest rates to reach the lows of the previous cycle, but I do believe rates will drop significantly in the next couple of years, just as the Federal Reserve is forecasting. This should push investors to get out of money market funds when the yields drop and back into the very attractive yields offered by REIT stocks such as EPR Properties. In terms of buying strategy, I will continue to buy on dips to build out a full position. However, I would never make any REIT stock or the REIT sector a huge part of my portfolio, because as we saw during the Covid stock market correction and other economic downturns, REIT stocks can plunge, wiping out years of dividend income. So, there will be no \"back up the truck\" for me, but with a current yield of over 8%, and the potential for capital gains, this stock warrants a position in my portfolio.  No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. 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