EPR Properties (NYSE: EPR) is a net lease REIT that invests in a diverse group of industries including Entertainment (megaplex theaters), Recreation (metropolitan ski areas), and Education (public charter schools). EPR Properties was originally named Entertainment Properties Trust and, true to its name, the majority of their investments are in the Entertainment sector. Of their entire portfolio, 58 percent of their investments are in the Entertainment sector.
Management has recognized that sector and tenant concentration are issues to be addressed. Since 2007, EPR Properties began steadily investing in sectors outside of megaplex theater properties. The balance of the portfolio is evenly distributed between the Recreation and Education sectors. The company also maintains holdings in specialty properties including vineyards and wineries. These holdings make up a small percent of the overall portfolio.
One of EPR Properties’ largest tenants is American Multi-Cinema, AMC, which accounts for 25 percent of their megaplex theater rental properties. As the company portfolio grows with new properties and tenants, the concentration of AMC in the portfolio is expected to decrease. This is already evident as in 2007, AMC accounted for 51 percent of the megaplex theater properties held by EPR Properties.
The company holds more than 230 properties located in 39 states, Washington, DC, and Canada. With over 250 tenants, EPR Properties can boast a diversified and specialized portfolio. Management has been successful operating this diverse portfolio and investors have been rewarded. Since 2010, annual distributions have steadily grown in average 7 percent per year and they are expected to increase 6 percent for 2015. On the operational side, revenues and net operating income have grown by double digits in the first quarter of 2015.
EPR Properties’ management has maintained steady and prudent growth. Over the past 5 years, the company has been shrewd with expansion and has avoided any significant dilutions in a short period of time. EPR Properties’ debt-to-total capitalization ratio is expected to remain in the low thirties as it has historically been. The company’s senior debt is investment grade.
The one unexpected event was that co-founder and CEO David Brain left the company after 18 years, 16 of which as CEO. Mr. Brain’s severance package of US $19 million decreased Q1 2015 FFO per share by 44 percent when compared with Q1 2014.
From a valuation standpoint, EPR Properties’ price-to-FFO ratio (about 14.2) is slightly lower than its peers. The company has been paying dividends at a healthy 6.3 percent yield offering a good opportunity for both income and capital appreciation. These figures are as of 14 May 2015.
The positive points include:
- The company is increasingly diversifying the portfolio
- Management chooses to grow in a steady and prudent fashion
- EPR Properties has a high yield and is slightly undervalued relative to its peers
The drawbacks include:
- There is still a degree of tenant concentration
- The tenured CEO of 16 years has left the company
These points should be carefully weighted when investing in EPR Properties.
Written by Heli Brecailo
Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.
Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.