Entertainment Properties Trust - Happy End Or Disaster Movie Ahead?

| About: EPR Properties (EPR)

Entertainment Properties Trust (NYSE:EPR) is a specialty REIT that invests in properties that are mainly used for entertainment and education.

EPR operates more than 160 assets in 34 states. The lease contracts are triple net and approximately 92% of EPR's portfolio consists of mega-plex theatres (58% at 99% utilization), entertainment recreation centers (18% at 94% utilization), chartered schools (11% at 100% utilization) and metropolitan ski areas (5% at 100% utilization). The rest is divided between vineyards, wineries and water parks.

Theatres: The major part of EPR's assets has an average of 12 years remaining before the contracts expire. EPR upgraded most of its theatres to digital and 3D equipment in order to provide a better product and now it sees a promising future for the theatres:

  1. Higher prices are charged for 3D movies
  2. Better content and experience attract more viewers - this is the main reason for management's estimate that VOD and home cinemas should not pose a risk to the theatres
  3. The high-quality equipment supports possible alternative content such as sports events or concerts for higher utilization of the theatres
  4. Premium services include adult beverages, expanded food menus etc.

Entertainment recreation centers: EPR thinks of its commercial centers as the shopping malls of the future. They try to enhance the consumer's experience by creating a concentration of businesses like restaurants, movies, bowling, ice-skating etc. The idea is to attract the consumer's entire family to spend as much time (and money) as possible once they enter the place. EPR provides these businesses with complementing financing solutions to help them operate according to the EPR way.

Public charter schools: EPR owns 34 public charter schools that are operated by five different operators. Nationwide there is a huge waiting list for such schools and that supports its ability to keep this part of the portfolio running at 100% utilization. EPR keeps investing in this segment - in 2011 more than 20% of its Capex was on the public charter schools.

Some numbers of the company vs. other interesting picks in the REIT world:

Entertainment Properties Trust Realty Income Corporation (NYSE:O) Government Properties Income Trust (NYSE:GOV) Senior Housing Properties Trust (NYSE:SNH)
Market Cap $2.07 Billion $4.85 Billion $1.13 Billion $3.67 Billion
Dividend Yield 6.3% 4.8% 7.1% 6.8%
FFO per Share (last quarter) $0.8 $0.5 $0.51 $0.43
Price / FFO 13.9 18.3 11.5 13
Years of Dividend Growth 3 18 3 12
Debt / EBITDA 4.4 3.7 3.1 4.4

Dividend yield: 6.3%, 70 cents per share. The dividend has consistently increased between 1998 and 2008 by a total of 75% before a tough 2009 forced EPR to cut its dividend. Since then the dividend increased but has not yet reached its 2008 level of 84 cents per share.

My first thought about it was that it is quite obvious that once recession hits - consumers will stop hanging out and going to see movies and the company will face serious headwinds. However, the company's annual report for 2009 tells a different story. Apparently, the setback that caused the dividend cut and the FFO's drop was "just" projects under development that had to be abandoned. It turns out that all the other segments (cinemas, commercial centers, schools and ski areas did quite well despite the recession, without any payment delays from the company's customers.

EPR's FFO fell dramatically following the 2008-9 crisis. The following table shows how bad it was and how optimistic the company is right now about their future:

Year FFO
2007 $4.22
2008 $4.61
2009 $0.13
2010 $3.02
2011 Guidance $2.38 - $2.42
2012 Guidance $3.44 - $3.64

EPR's FFO per share for the 3rd quarter of 2011 was $0.8, implying $3.2 annually. Using EPR's guidance FFO for 2012 of $3.44 to $3.64 implies average P/FFO of 12.6. That's not a steal level multiple but definitely not expensive and lower than most of the other REITs out there.

EPR's portfolio consists of $2.9 billion and provides and EBITDA of $279 million. The Capex guidance for 2012 is $250-$300 million vs. $150 million in 2011. These numbers support management's confidence in the industry and in the ability to provide value to investors.

Insider transactions: Over the last two years insiders were only selling the stock. All sales took place at price levels close to EPR's current price.


EPR is an interesting yet somewhat risky choice.

The management is experienced and despite the tough 2009 - shows a good track record of providing value to shareholders.

As explained above - EPR's management expects a bright future and invests in new assets accordingly. The company yields an attractive dividend and apparently, even the dividend cut and bad results during the last crisis had nothing to do with regular operations, only with several assets under development.

Under these assumptions and taking future expected growth into account, the company's stock valuation is not expensive.

However, if you feel - like I do, that the worst of the recession is still ahead of us, you might fear that next time the crowds will actually start saving cash and steer clear of cinemas, ski areas and even the company's recreational centers. In this case EPR might face serious problems again and the dividend could be compromised. After all - the industry is one that best fits good economic times.

I choose to stay on the sidelines until the economy's future clears out a bit. Only then will I initiate a long position in the company's stock.

Disclosure: I am long GOV.

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