Uncovering Hidden Gems: The Undervalued Investment Opportunity in EPR Properties Preferred Shares
Introduction: In the search for lucrative investment opportunities, astute investors often uncover hidden gems that go unnoticed by the masses. One such opportunity arises with EPR Properties PFD C CV 5.75% (NYSE:EPR.PC), an exchange-traded preferred stock issued by a real estate investment trust (REIT). This article aims to shed light on the undervalued nature of EPR.PC and explore the potential it holds for investors.
EPR-C Preferred Stock: Key Characteristics and Value Proposition: EPR-C, a fixed-rate cumulative convertible preferred stock, was issued by EPR Properties (NYSE:EPR) on December 20, 2006. Investors have the option to convert these shares into 0.4213 common shares of EPR Properties per $25.00 liquidation preference, equivalent to a conversion price of $59.34 USD per common share.
Comparison to EPR-E: EPR-C has two exchange-traded siblings, EPR-E (EPR.PE) and EPR-G (EPR.PG). While EPR-E is also a convertible preferred stock, EPR-G lacks a conversion clause. At present, EPR-E is trading at $27.43 USD with a current yield (CY) of 8.20% and a conversion rate of 0.4826. A direct comparison between the two convertible preferences seems to favor EPR-E. However, the embedded conversion clause in EPR-C adds substantial value to this investment vehicle.
Understanding the Value Proposition: Convertible preferred stocks, including EPR-C and EPR-E, possess the potential to benefit from both fixed-income characteristics and their conversion clauses. The performance of these investments is influenced by the price movements of the underlying common stock. EPR-C is closely tied to the upside changes in the price of EPR, whereas EPR-E requires a much higher common stock price to exhibit a similar correlation. Consequently, EPR-C offers more upside potential while providing the protection of a preferred stock’s higher position in the company’s capital structure.
Embedded Call Options and Adjusted Current Yields: Both EPR-C and EPR-E include embedded call options that contribute to their valuation. To enhance yields, investors can sell call options in the common stock EPR with strike prices close to the corresponding conversion prices. The resultant options values, multiplied by the conversion values, are divided by 10 and added to the nominal yields to calculate the adjusted current yields. EPR-C outperforms EPR-E in terms of the adjusted current yield, further highlighting its value.
Analyzing EPR-G: EPR-G is a fixed-rate cumulative redeemable preferred stock issued by EPR Properties on November 20, 2017. Unlike its convertible siblings, EPR-G lacks a conversion clause. Despite trading at $19.58 USD with a CY of 7.35%, its yield seems overvalued when compared to the company’s bond issues, which offer higher yields due to their position in the capital structure and lower credit ratings.
Investment Opportunities: Sophisticated investors have several options to consider when investing in EPR products:
Long Position in EPR-C: Investing in EPR-C provides a close correlation to the common stock’s performance, with added protection as a preferred stock.
Pair Trade: Combining a long position in EPR-C or EPR-E with a short position in EPR-G allows investors to capitalize on the difference between convertible and non-convertible preferred stocks. Selling call options in the common stock EPR equalizes the convertible preferred stock to its non-convertible counterpart, minimizing credit risk.
Bonds of the Company: Investing in EPR’s bonds offers a decent opportunity with yields ranging from 7.2% to 7.7%, as they hold a higher position in the capital structure compared to the preferred stocks.
Conclusion: EPR Properties’ convertible preferred stocks, EPR-C and EPR-E, present compelling investment opportunities due to their mispriced conversion clauses. By carefully assessing their relative value, investors can seize these opportunities for potential gains. Trade With Beta, a platform where such ideas are discussed in detail, provides a space for active investors to engage with sophisticated traders and investors.
Note: The calculations for deep out-of-the-money put options of EPR, mentioned in the article, are not included but can be considered to eliminate credit risk.
