We are sharing an attractive high-income-generating options trade on a compelling oversold big-dividend REIT. Our thesis is basically that big-dividend REITs in general are oversold as a result of near-term market noise. With the phase 1 US-China trade deal in place and the economy strong, investors are shedding “safety assets” like REITs, and buying “risky assets” like growth stocks. It’s still a fantastic environment for REITs with interest rates low (and the economy strong), and good REITs are being thrown out with the bathwater. We believe this is an attractive trade to place today, and potentially over the next few days as long as the share price doesn’t move too dramatically before then.
The Trade:
Sell Put Options on EPR Properties (EPR) with a strike price of $65.00 (4.4% out of the money), and an expiration date of January 17, 2020, and for a premium of $0.55 (this comes out to 10.2% of extra income on an annualized basis, ($0.55/$65.00 x 12 months). This trade not only generates attractive income for us now, but it gives us the possibility of owning shares of attractive EPR Properties at an even lower price if the shares fall even further than they already recently have, and they get put to us (and we’d be happy to own EPR, especially if it falls to a purchase price of $65 per share).
Note: If you want lower upfront income and a lower chance of owning the shares, consider selling the January $60.00 puts instead.
Your Opportunity:
We believe this is an attractive trade to place today and potentially over the next few days as long as the price of EPR doesn't move dramatically before then, and as long as you’re able to generate annualized premium (income for selling, divided by strike price, annualized) of approximately 8% to 10%, or greater.
Our Thesis:
Our thesis is basically that EPR is an attractive long-term, big-dividend (6.6% yield) REIT with price-appreciation potential, and the shares have sold off inappropriately. We recently completed a full write-up on EPR, and you can access it here. W concluded that article by writing:
“EPR Properties is a REIT with a dominant position in niche market segments such as entertainment and recreation properties. EPR’s 6.4% dividend yield and monthly dividend payments are very attractive for investors seeking income. The stock has seen a sharp fall of over 12% in the last one month (as REITs in general have sold off) and has now entered oversold territory from a technical perspective. Overall, the business is healthy, the dividend is healthy, and if you are a long-term income-focused investor, the shares currently provide an attractive entry point.”
And as you can see in the chart above, the shares are in oversold territory, trading below 50-day and 200-day moving averages, a metric that we view as an attractive investment opportunity in this particular case (because EPR’s business and fundamentals are attractive).
Important Trade Considerations:
Two important considerations when selling put options are dividends and earnings announcements because they can both impact the price and thereby impact your trade. In this particular case, both are largely a non-issue. First, EPR isn’t expected to go ex-dividend until the end of January—after this options contract has already expired. And with regards to earnings, EPR isn’t expected to announce earnings again until the end of January (again after this options contract expires). Had either of these events happened prior to this option trade’s expiration, we’d have to take a closer look at the potential impacts on the trade.
Conclusion:
EPR is an attractive long-term REIT thanks to its compelling niche strategy, its healthy dividend (6.6% yield), and its ongoing growth opportunities. However, it is facing indiscriminate near-term selling pressure as the market overreacts to good economic news and buys up growth stocks at the expense of safer big-dividend REITs, such as EPR. The premium income available on this trade is higher than normal because the near-term volatility (and perceived uncertainty) is also higher than normal (as the market reacts to short-term macroeconomic news). Recall also that overall market interest rates still sit at historically low levels, thereby creating a fantastic environment for REITs (i.e. low rates and a strong economy). The big risk of this trade is that the shares fall even further than they already have and get put to us between now and the option expiration date, and we are forced to buy; and we’d be happy to pick up shares of EPR at an even lower price. We get to keep the attractive upfront premium income generated by this trade, no matter what.