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Faulty Risk Perceptions Buoy Specialty-Market REIT

EPR Properties enjoys strong investment returns, partly due to pricing advantages derived from perceptions that its assets are riskier than they really are.

Mark Peterson was working for a Kansas City-based regional public accounting firm, Donnelly Meiners Jordan Kline. It was 1995, and he had a new client, J.C. Nichols, a publicly traded real estate investment trust (REIT). Because of improprieties, the firm had fired many top executives, including its CEO and CFO, as well as its previous auditor.

One of Peterson’s jobs was to evaluate CFO candidates. He was putting in 12-hour days and loving the experience. So he decided to be the finance chief himself. He was 30 years old.

Three years later another REIT purchased J.C. Nichols, after which Peterson went into a different industry for a few years. But when the opportunity to join Entertainment Properties Trust came about in 2004, he was more than ready to get back to the industry he knew and liked best.

Mark Peterson, CFO, EPR Properties

Mark Peterson, CFO, EPR Properties

Peterson is now CFO of the company, which changed its name to EPR Properties about a year ago. It invests in specialty asset classes: megaplex movie theaters as well as entertainment centers anchored by theaters; public charter schools, early-childhood centers and private schools; and ski and water parks accessible from metro locations.

A common thread among those asset classes is that they’re perceived as riskier than they really are. Perceptions are that tenants of such properties are in risky industries and therefore may fail to pay their rent to EPR. But in reality that risk is low, Peterson says. The misperceptions enable EPR to price its rentals on the high side, as if the risk were real.

EPR executes sale-leaseback transactions with property operators and developers, the leases being of the triple-net variety. The rentals are priced to create a spread between them and the company’s capital-acquisition costs.

Peterson recently discussed with CFO what a REIT finance chief does, EPR’s specialty markets and how the company evaluates investment opportunities. An edited transcript of the conversation follows.

What is it like to be the CFO of a REIT?
There’s traditional accounting, SEC reporting and budgeting, of course. But to grow, REITs need to continually raise new capital to invest. By law, a REIT has to pay out at least 90 percent of its taxable income to shareholders in the form of dividends in order to avoid being taxed at the corporate level. Even then we’re taxed on that last 10 percent, so we return effectively 100 percent of our taxable income to shareholders.

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