Real estate investment trusts (REITs) have long been a sector where investors seeking income-producing investments park a lot of money.
The biggest concern when it comes to deciding which REITs to buy is that an REIT needs to generate enough income to pay debt service on what is often a sizable amount of debt, and have enough cash flow left over to both pay and increase its dividend.
There are certain subsectors within the REIT universe that have become a little dicey to invest in. For instance, real estate investment trusts involving malls can be very dicey, as retail struggles continue.
However, I think I found a real estate investment trust that has a very unique business model and competitive advantage, generates great cash flow, and pays an 8% dividend. I think it may be the very best of the REITs to buy.
Entertainment, Recreation and Education Properties
EPR Properties (NYSE:EPR) deals in three kinds of properties: entertainment, recreation, and education. The portfolio is well diversified, with 43% invested in entertainment, 33% in recreation and the rest in education.
The portfolio is nearing $7 billion in value, and the REIT has returned 1200% to shareholders since its inception and just delivered terrific earnings.
What kind of entertainment properties are we talking about? Megaplex theaters, family-entertainment centers, and entertainment retail centers. What I like about these divisions is that movie theaters generate fairly consistent cash flow. Although gross audience numbers have been declining, ticket prices have been increasing.
Home theaters and streaming and mobile entertainment have certainly gobbled up a lot of time that people might have one spent in movie theaters, but not enough to materially impact the cash flow that EPR needs.
EPR has 11 family-entertainment properties with 100% occupancy rate. These are things like bowling alleys and other gathering spots that skew toward millenials. This demographic is placing more emphasis on experiences, and so I expect robust cash flow from this division for quite some time.
Entertainment retail centers, which comprise seven properties with 96% occupancy, are geared toward entertainment venue — anchored centers that offer live entertainment, dining, fitness facilities, shopping, and so on.
The recreation division includes golf entertainment complexes. A quick look at the earnings at Callaway Golf Co (NYSE:ELY) demonstrates that golf is becoming increasingly popular. This is a sunrise industry still.
EPR also has 25 ski areas that are 100% occupied, and skiing is a timeless sport. EPR also has 20 attractions-driven properties. These are things like water parks and amusement parks, where attendance continues to increase in the low to mid-single digits.
Finally, EPR has developed a very smart approach with respect to education properties. It owns 65 public charter schools that are 96% occupied and 14 private schools which are 100% leased. Increasing frustration with public schools has driven demand for private and charter schools, and EPR is playing right into this demand.
Things are improving significantly at EPR, as the company redeemed all of its outstanding 7.75% senior notes due in 2020 and replaced those with $400 million in senior unsecured notes due 2028, at a 4.95% interest rate. That’s an incredible improvement.
Bottom Line on EPR
It isn’t easy finding a hidden gem in the REIT sector. EPR Properties takes the crown as the best REIT to buy, and I’ll take that 8% yield and significant cash flow any day.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.