Entertainment Property: Long-Term Outlook Remains Favorable

I purchased Entertainment Property Trust (EPR) over 10 years ago (not too long after their founding in 1997) and have done quite well with the stock even though it is down over 65% from its peak in 2007.

When I bought, the stock was low providing a 12% yield. Today, the stock is higher (despite selling at depressed levels) while shares have more than doubled from reinvested dividends. The compounded average annual growth rate on my original investment has been 12%.

EPR is a REIT which invests in real estate niches. They purchased 80 megaplex theater complexes (16+ screens per theater complex) in the US and Ontario, Canada. In recent years they have expanded and diversified, buying retail entertainment centers, a metropolitan ski area and wineries with vineyards. Their track record has been excellent, higher dividends year after year. Last year, the dividend was a record $3.36 up from $2.25 in 2007. However the recession created problems, causing the dividend to be reduced to a $2.60 rate for 2009.

The current depressed state of the economy has hit REITs hard, including this one. Growth is key in their corporate culture, which hurts when the economy stops growing and switches to shrinking. They have to adjust. EPR maintained the leverage position (debt as a percent of book value) at a relatively modest level, 49% in 2008.

They are investing in three major projects which have to be cut back in these difficult times. The first is a retail, office and billboard advertising project in downtown Toronto, Canada. The second is a world class water park in Kansas City. Third, the Concord project, would have up to 8 million square feet of retail, leisure/recreation and residential development anchored by a horse race track and casino facility that will be advantaged by signed legislation enabling the lowest gambling tax in the state.

Because of the difficult economy, these investments will have a tougher and slower course of progress than initially planned but EPR expects they will turn out positively. The one exception is the first project, which may have to be abandoned if the Canadian partner pulls out.

Like all REITs, they face tough challenges but the CEO, David Brain, just said (on May 8) on CNBC that their fundamentals are strong. They collect rents and pay bills with interest being a very important expense. EPR is making changes to control expenses and assure adequate long term financing to get them through the coming months. They are working on extending a $325 million credit line. The movie and wine businesses have been good. Base rents should hold, but they also collect percentage rents above the base amount which is subject to risk. The soft economy is painful.

But I agree with management that the long term outlook remains favorable. This time can be used to learn about EPR, investments can be made when the future is better defined (especially for the three new projects). For existing stockholders, an 11% yield (from the reduced dividend) will make the waiting period easier to take. Their website has more information.

Disclosure: I own EPR shares

Comments

[reitinvestor:]

Water parks and racetracks have little in common with movie theatres. Management has strayed from their core competency. Their theatres are 100% occupied. Management here is suspect, imho.

May 12 07:46 AM

[2houndz:]

I have retrofitted enough commercial real estate in my life to know that entertainment properties are inherently risky due to the nature of the property alone. If a TJ Maxx type store goes belly up, in a normal situation, it is relatively cheap to retrofit for another tenant. Grocery stores are more complex, and movie theaters can be a nightmare. The individual screening rooms often have load-bearing walls that cannot be taken down, stadium seating involves sloped floors and often pits that have to be filled in, the space is large and unmanageable. I can only imagine the logistics of converting a water park into something more traditional.

Seems to me that this added risk needs to be considered when looking at such an operator. Something else to think about. Unless you have done this type of work, it might not come to mind when weighing the pros and cons.

May 13 10:53 AM

[James Cullen:]

Avi - I'd question those non-movie investments more critically. I own one of EPR's convertibles, and that's because I don't have faith in the idea that all is well with the non-movie properties. One takeaway from the last few years is that CNBC appearances where "everything is fine" shouldn't be taken at face value.

May 13 08:37 PM

[JerryR:]

I believe a safe way to play EPR is to buy their preferred which is symbol EPR-pE on Finance.Yahoo. At a price of 12-13 it is selling at a deep discount and paying a 17.5% yield. As long as EPR keeps paying a dividend on their common stock, this preferred dividend is safe. Also, you have a good opportunity to double your investment as this preferred climbs back to the 25 level when the economy recovers.

May 22 11:57 PM