by Will Ashworth | April 18, 2013 2:14 pm
Been to the movies lately?
If you were at an AMC movie theater, chances are it was owned by EPR Properties (NYSE:EPR), a Kansas City-based REIT that specializes in entertainment and recreation complexes. Formerly known as Entertainment Property Trust, EPR is moving beyond its entertainment roots to conquer other areas.
Few investors have probably heard of this company, but it’s very good at what it does. As far as REITs go, this is one of my favorites, and would make a solid investment for your portfolio.
The primary reason investors buy REITs is for the income-producing real estate. REITs must pay out 90% of taxable income in the form of dividends, which means higher yields than most dividend-paying stocks.
In 2012, EPR paid out $162.8 million in dividends from $168.8 million in funds from operations. During the past five years, it has increased the total payment from dividends by 10.7% annually while increasing funds from operations 8.2% annually. In comparison, Realty Income (NYSE:O), one of its peers, has increased dividend payments since 2007 by 8.4% each year, while growing funds from operations by just 6.6%.
Consistent growth in funds from operations is an important thing to look for in REIT investments. Essentially, FFOs are net income plus real estate-related depreciation and amortization less any gains from the sale of property. EPR has been able to grow its FFO at a peer-beating rate in large part because of its solid tenant base. Approximately 73% of its net operating income comes from entertainment-related businesses including movie theaters, retail centers, bowling complexes, etc.
Cynics have been writing off the movie theater business for decades. Yet U.S. box-office revenue has experienced a compound annual growth rate of approximately 4% during the past 25 years; in 2012 it grew 6%, delivering a record year in ticket sales.
I’ll take 4% long-term growth every day of the week.
Given the stability of its 16 exhibition partners (its 113 megaplexes are 100% occupied), EPR isn’t afraid to experiment with its investment portfolio. In 2008, it acquired two vineyards and four wineries for $115 million. The head of Ascentia Wine Estates, who was the former COO of Beam’s (NYSE:BEAM) wine division, bought five well-known wine brands from Constellation Brands (NYSE:STZ) with financing from CalPERS, California’s retirement system for public employees.
The assets would be the cornerstone of the brands, and while it seemed like a good idea at the time, EPR decided in 2011 that it could do better elsewhere and put the assets up for sale. As of the end of 2012, it had sold $65 million in winery assets with $55 million still up for sale. In the end, it made a modest profit from its unconventional investment.
Add charter schools, ski hills and water parks to the mix, and you get a very eclectic group of assets.
EPR has some real growth potential with Alamo Drafthouse, the Austin-based cinema chain that brings movies and dining together under one roof so that adults can enjoy something other than popcorn when going to the theater. They’re about to open a 10-theater complex in Austin that will be owned by EPR. Later this spring, Alamo Drafthouse will open a location up north in Kalamazoo, Mich., and it too will be owned by EPR. I don’t know if Alamo has any plans of going public, but if it did I’d definitely be interested in its stock — the concept rocks.
But having a neat business isn’t enough for an investment thesis, so why should you buy EPR?
For starters, its dividend yield (5.9%) is higher than its triple-net-lease peers. It also doesn’t hurt that EPR has been very consistent in growing its FFO and dividends annually. Conservatively financed, its stock has delivered an annual total return of 10.7% during the past 15 years. Sure, it hasn’t kept up with its retail REIT brethren in that time, but it has done much better than the S&P 500.
With partnerships like Alamo Drafthouse, its future looks at least as bright as any other retail REIT. EPR’s announcement of a monthly distribution starting in May should be enough to keep it moving higher in 2013.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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