EPR Properties (EPR) offers an attractive investment opportunity especially after the recent fall in share price. The 6.4% dividend yield and monthly dividend payments are very attractive for investors seeking steady income. The stock has a history of outperformance having delivered ~19x returns since IPO in 1997. For these reasons, we’ve ranked it #10 on our list of Top 10 Big-Dividend REITs. This article reviews the health of EPR’s business, its valuation, risks, dividend safety, and concludes with our opinion about why EPR is worth considering if you are a long-term income-focused investor.
Overview:
EPR Properties is a triple-net lease specialty REIT which intends to focus on experiential real estate which includes property types such as Theatres, Eat & Play, Ski, Attractions, Experiential Lodging, Gaming, Fitness & Wellness, Cultural and Live Venues. The triple net lease structure means the tenant, rather than the landlord, is responsible for paying expenses such as property taxes, insurance, and maintenance. This reduces the operating expenses of EPR, thereby allowing it to keep more of its rental income, which can then be returned to shareholders through dividend payments. At the end of November 2019, EPR's portfolio consisted of 367 properties with over 200 tenants located in 43 states in the US and Ontario, Canada. Of which, megaplex theatres account for the largest share of EPR’s portfolio at ~45% of its total adjusted revenue.
(source: Company Data)
EPR in oversold zone; Presents attractive entry opportunity
Over the past six months, EPR sharew have fallen ~12%, of which ~9% fall has come in the last one month. This despite management sounding optimistic about its prospects in Q4 and even raising its full year fiscal 2019 guidance. For a little perspective, the stock has entered oversold territory on technical parameters such as Relative Strength Index (RSI) (we don’t often write about technicals, but it’s worth keeping an eye on). Technically, a stock is considered to be oversold if the RSI reading falls below 30. In the case of EPR, the RSI reading has hit 23.1 as of December 2, 2019. In our view, the recent sell-off presents an attractive opportunity for investors to lock-in not only a +6% dividend yield but also gain from price appreciation in future.
Experiential real estate – A $100 billion opportunity
Experiential real estate represents an estimated $100 billion market opportunity. And to tap into this, EPR has been deliberately trying to shift its portfolio mix towards more experiential real estate. In this vein, in November 2019 EPR sold 47 charter school properties as part of its strategic review to further strengthen its focus on experiential real estate. Chief Investment Officer, Greg Zimmermann, during the Q3 earnings call, noted:
“We continue to shift our focus from non-experiential areas of business toward experiential properties, and asset class that we have been successfully investing in for over 20 years and one that will be the primary growth forever going forward.”
The Experiential portfolio now accounts for nearly 89% of total adjusted revenue, while the Education portfolio accounts for the remaining 11%. EPR has over 20 years of experience and knowledge in this type of real estate. This positions EPR to take advantage of rising consumer demand for experiences. Leisure spending has been rising and now accounts for almost 9% of total consumption. Also, overall leisure experience spending has been rising continuously over the last decade and stood at ~$900 billion in 2018.
(source: Company Data)
Strong operating performance history
We don’t like to put too much emphasis on past performance, but it is worth considering, to some extent, as a gauge of the abilities of management and the business. And in EPR’s case, it has been positive. For example, EPR’s total revenue has compounded at a CAGR of 16% since 2014 while FFO-per-share has risen by 10% annually during the same period. This compared to FFO (on a dollar basis) has grown at ~20% CAGR which is nearly double the rate on a per share basis. This is primarily due to ever-increasing share count as REITs are reliant on raising capital to fund their growth which typically causes dilution and lowers per share growth.
We expect EPR to continue to post strong growth given its leadership in its niche segments, as well as ample balance sheet flexibility. EPR posted strong results in Q319 with revenue up ~18% anchored by strong consumer demand for experiential assets. This dynamic is likely to continue in Q4 as well. Management raised its guidance for 2019 FFOs adjusted per share to a range of $5.42 to $5.46 (earlier $5.32 to $5.48) and tightened its guidance toward the upper end for investment spending to a range of $775 million to $825 million from a range of $700 million to $850 million. EPR also increased its expected disposition proceeds for 2019 to a range of $875 million to $900 million from a range of $400 million to $475 million.
The consistent operating performance over the past several years has also translated into share price appreciation of nearly 19x since its IPO in 1997 (see next section).
History of Outperformance
EPR Properties has a history of delivering superior returns to its shareholders. EPR has meaningfully outperformed all well-known indices over the long-term (including the financial crisis of 2007-2009). Since becoming a publicly-traded entity in 1997, EPR has delivered total returns of nearly 1,895% to its shareholders – more than 3x the total returns of MSCI U.S. REIT Index and nearly 5x the total returns of Russell 1000 index. Again, we don’t like to put too much emphasis on past performance, but in this case it gives some credence to EPR’s management and business going forward.
(source: Company Data)
Demand Remains Strong for Experiential Assets
EPR’s core business, which include entertainment and recreational properties (accounting for 89% of sales), continue to see strong demand. During the third quarter of 2019, EPR’s entertainment portfolio saw occupancy of 99% and rent coverage of 1.76x. The box-office collections were up by ~3% year-over-year in Q319 and the momentum is anticipated to extend in Q4 as well. The recreation properties had occupancy rate of 100% and rent coverage of 2.28x. The recreation segment has delivered solid results in Q319 with visits and revenue through the August trailing 12 months period, up 4% and 7% respectively versus the trailing three-year average. EPR’s Chief Investment Officer, Greg Zimmermann noted:
“The consumer continues to evident strong demand for experiences. We have a deep pipeline of opportunities to expand our already broad-based portfolio of the experiential assets.”
We note that EPR’s balance sheet is well positioned to fund its growing pipeline of opportunities moving into 2020. Nearly all of its $3 billion debt (~99%) is unsecured, meaning its properties do not carry mortgages and there are no debt maturities till 2023. It’s debt-to-equity ratio is roughly 0.5, a very reasonable number for a REIT. It also has an undrawn $1 billion revolving credit facility, giving it plenty of liquidity to take advantage of opportunities and fund growth.
Valuation:
From a valuation standpoint, here is some perspective. Specifically, on a Price to Adjusted Funds from Operations basis (“AFFO”) basis, EPR is inexpensive relative to its peer group average. As seen below, EPR trades at P/AFFO multiple of 13x, which is ~15% discount to its peer group average multiple of ~15.2x. In our view, the discount should narrow given EPR’s strong operating performance.
(source: Thomson Reuters)
Analysts covering the stock, on average, believe the shares are undervalued by ~13.7%. And when you include the dividend, the total return potential is increasingly attractive.
source: Factset
Dividend Safety:
Annual growth in EPR’s distribution from 2010 to now has been very steady. Specifically, EPR’s dividend has grown at an average rate of 6% since 2010 and stands at an estimated $4.50 for 2019. At today’s price near $70, that gives EPR a current yield in excess of 6%. The company did guide for $5.40 in FFO-per-share at the midpoint for 2019, so its payout ratio is 83% for this year. EPR has no debt maturing until 2023 which provides it with ample cash flow to continue to invest for future growth. This supports EPR’s ability to not only pay its dividend but to also continue to raise it over time. This makes us conclude that EPR’s dividend is secure, and we are likely to see meaningful raises over time. This makes the stock attractive for those seeking current income and dividend growth.
(source: Company Data)
Risks:
Interest rate risk: Even though we expect interest rates to remain relatively tame, dramatically rising rates could create challenges. As REITs are often seen as an alternative to bonds, higher interest rates could mean decreased demand for REITs, thereby causing a decline in the share price. Also, higher interest rates put downward pressure on earnings as interest costs rise.
Lower consumer spending: EPR is focused on experiential property types which are highly reliant on buoyant consumer sentiment and spending. With US economy doing well over the past several years, increasing consumer demand for EPR’s tenant offerings have translated into growth. However, this could change very quickly. A major economic downturn like the financial crisis of 2007-08 could dampen the consumer spending and remain a key risk in our view.
Conclusion:
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. We’ve ranked EPR #10 on our list of Top 10 Big-Dividend REITs.