Comparing Realty Income and EPR Properties: Which High-Yield Triple Net Lease REIT is the Better Buy?

Mid Caps 6 replies 0 votes 2174 views Tags:  EPR Propertiesmonthly dividendsreal estate investment trustsRealty IncomeREITstriple net lease

If you're interested in high-yield triple net lease real estate investment trusts (REITs), two options worth considering are Realty Income (NYSE:O) and EPR Properties (NYSE:EPR). Both companies operate under a similar business model, paying monthly dividends. Let's compare them side by side and provide insights on which might be the better buy at present.

Realty Income, often considered the gold standard in the triple net lease REIT industry, boasts an extensive portfolio of 12,492 properties across 84 industries, serving 1,259 tenants. Its properties are underwritten in a way that prioritizes recession-resistant and e-commerce-resistant tenants, comprising approximately 91% of its rent base (ABR). Furthermore, around 41% of its ABR comes from investment-grade tenants, adding an additional layer of safety. Realty Income's broad diversification and conservative underwriting have resulted in exceptional long-term results and a defensive profile in the REIT sector.

On the other hand, EPR Properties focuses primarily on entertainment-themed properties, such as theaters, water parks, amusement parks, ski resorts, lodging, fitness centers, and gaming properties. Although EPR's revenue generation heavily relies on a few tenants, such as AMC Entertainment Holdings and Topgolf, it has still demonstrated impressive long-term total return performance. However, the concentration of revenue from a limited number of tenants, particularly those in the theater and experiential property sectors, presents some risks in terms of long-term viability.

When it comes to the balance sheet, Realty Income enjoys an advantage over EPR. Realty Income holds an A- credit rating, providing a lower cost of capital compared to EPR's BB+ credit rating. Additionally, Realty Income's stock trades at a premium to its net asset value (NAV), further strengthening its ability to access equity markets for financing growth investments. In contrast, EPR's stock trades at a discount to NAV, requiring more caution when raising equity to avoid diluting existing shareholders. Nonetheless, both companies demonstrate solid debt and liquidity metrics, with well-laddered debt maturities and strong fixed charge coverage ratios.

Considering dividends, Realty Income has an impressive track record of annual dividend growth for over 25 years, earning it a spot on the prestigious list of Dividend Aristocrats. With stable monthly dividend payments, Realty Income's conservative approach, combined with organic per-share growth and a cost of capital advantage, positions it for continued dividend growth of 3-5% per year. EPR Properties also expects to deliver 3-5% per share growth annually, with a 2023 payout ratio of 65.8% that allows for reinvested retained earnings and lease escalators. However, analysts remain cautious about EPR's ability to achieve this growth due to its riskier property portfolio and higher tenant concentration.

When it comes to valuation, EPR Properties holds an advantage over Realty Income. EPR's stock appears significantly cheaper based on several major valuation metrics, including price-to-net asset value (P/NAV), enterprise value-to-EBITDA (EV/EBITDA), price-to-funds from operations (P/FFO), and price-to-adjusted funds from operations (P/AFFO). With a higher dividend yield, EPR presents a wider range of potential return outcomes, provided it can avoid major tenant lease defaults or renegotiations. On the other hand, Realty Income offers a lower-risk profile with expected annualized total returns of 8-10%.

In summary, both Realty Income and EPR Properties offer attractive monthly dividends to investors. Realty Income provides a more conservative and stable investment option, delivering consistent dividend growth and a low-risk profile. EPR Properties, on the other hand, carries more risk but offers a higher current yield and the potential for greater total returns. Depending on your risk appetite and investment goals, you can choose between the two accordingly.

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