EPR Properties (NYSE: EPR) is a real estate investment trust, or REIT. However, instead of fitting into one of the traditional REIT categories like "retail" or "office," EPR is somewhat of a hybrid, focusing on three specific property types: entertainment, recreation, and education.
At the end of 2018, EPR's portfolio consisted of 394 properties located throughout the U.S. and Canada. Here's a closer look at the types of properties EPR invests in, and why long-term investors might want to consider EPR for their portfolios.
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Why entertainment and recreation properties?
The bulk -- 80% by rental income -- of EPR's portfolio is made up of entertainment and recreation properties. EPR's entertainment properties consist primarily of the 152 megaplex theaters the company owns, but there are also some family entertainment centers and entertainment retail centers in the portfolio. The recreation segment consists of golf entertainment complexes (Topgolf is a major tenant), ski resorts, and other such attractions.
The investment thesis with these types of properties is simple. Unlike most areas of retail, entertainment and recreation businesses are selling experiences. And the millennial generation places tremendous value on experiences when compared with previous generations. The 75-plus million millennials in the U.S. are gradually entering their peak earning years, so this should translate into growing demand for experience-based businesses.
As an example of how this is translating into growth in the industry, consider that box-office revenue has increased at a 3.4% annualized rate over the past 25 years, including a 7% rise in the past year alone. And, with consumer preferences gravitating toward more luxurious (and costly) features in theaters, I wouldn't be surprised to see this growth rate stay strong for years to come.
Recreation venues are seeing impressive growth as well. Major EPR tenant Topgolf saw attendance rise by 30% in 2018, and admissions at EPR's ski attractions rose by 13% last year as well.
Properties are leased on a long-term basis with rent increases (escalators) built right in. All EPR has to do is acquire a property, get a tenant in place, and enjoy year after year of predictable income.
Why education properties?
EPR's education portfolio consists of charter schools, private schools, and early-childhood education facilities, and provide a fantastic complement to EPR's entertainment and recreation properties.
Charter schools are another play on current trends. There are more than 1 million students on charter school wait lists -- nationwide enrollment has been growing at a double-digit rate for years. And education-based early-childhood centers have surged in popularity in recent years, and there's no sign that the growth will slow down anytime soon.
Dividends, returns, and valuation
EPR Properties not only pays a highly attractive 5.7% dividend yield, but it has a fantastic track record of raising the payout. Since 2010, the dividend has grown at a 6% annualized rate, but still represents just 74% of adjusted funds from operations (the REIT equivalent of "earnings"), a rather low payout ratio for a REIT.
While a high and sustainable dividend is nice, REITs like EPR are designed to be total return investments. In other words, they not only aim to produce a high level of income, but they also try to create value over time through appreciation of the underlying property portfolio.
Since its 1997 inception, EPR has done a great job of delivering returns for investors, with a total return of nearly 1,500% through the end of 2018 (14.1% annualized), handily beating the U.S. REIT average and the S&P 500. And, while past performance doesn't guarantee future results, that's a pretty impressive level of performance to sustain over more than two decades.
It's worth mentioning that REITs have been one of the best-performing parts of the stock market lately, thanks to cooling recession fears and the Federal Reserve's dovish interest rate outlook. In fact, EPR is up by 39% over the past year alone -- so the stock is obviously not as attractive as it used to be.
Having said that, EPR Properties is by no means an expensive stock. At the current share price, EPR trades for just 12.9 times 2018 adjusted FFO, which is still rather cheap considering the company's fantastic track record and growth potential.
Is EPR Properties a buy?
The bottom line is that even after the massive rally over the past year, EPR Properties remains a cheap stock with a high dividend and lots of room to grow. While no stock capable of double-digit returns is without risk, EPR makes a lot of sense from a risk-reward perspective for long-term investors.
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