Real estate investment trust EPR Properties (NYSE:EPR) pays a 5.7% dividend yield, which not only looks safe, but could grow rapidly in the years ahead. In addition to the high dividend, EPR's unique mix of properties could produce market-beating returns in your portfolio.
What does EPR Properties invest in, and why?
EPR Properties' original specialization was entertainment, but it has since diversified into recreation and education properties as well. At the end of 2017's first quarter, EPR had 368 properties in its portfolio located in 43 U.S. states, D.C., and Canada.
The entertainment properties (49% of the portfolio) primarily consist of megaplex movie theaters, and the recreation portion (23%) of the portfolio contains properties such as ski parks, golf facilities, and waterparks. EPR invests in its properties in three main ways: redevelopment, build-to-suit, and acquisitions.
A central idea behind investing in these property types is to capitalize on the aging millennial group. There are about 75.4 million millennials in the U.S., making it the largest segment of the population. This group prefers spending their money on experiences, as opposed to simply buying things, and as they get older (millennials are currently 18-34 years old), this group will have more and more disposable income. In fact, millennials represent half of current moviegoers, and have shown willingness to spend money on things like luxury seating and in-theatre dining.
An additional 25% of EPR's portfolio is education properties, specifically public charter schools, private schools, and early childhood education facilities. There are over 1 million students currently on charter school waiting lists, and the number of charter school students is growing at a 12% annualized rate. The need for private schools and early childhood education is on the rise as well, making this an attractive property type that adds diversification to EPR's portfolio.
EPR has grown quite rapidly, and to date has invested about $6.2 billion in its properties, with a particular emphasis on growing the recreation and education portions of the portfolio in recent years.
Over EPR's roughly 20-year history, the company has delivered a 1,493% total return (14.8% annualized), significantly beating REIT peers as well as the overall stock market. So, it's fair to say that the company's strategy of "investing in experiences" has paid off so far. And the company's management seems to think there could be more years of strong growth ahead.
EPR's growth potential
"All three of our property types have significant tailwinds," CEO Greg Silvers said recently at the REITWeek 2017 conference in New York. For EPR's entertainment and recreation properties, Silvers pointed toward the trend that's emerging in the millennial generation, where they value experiences over ownership.
This means EPR's "retail" properties are in great shape to capitalize as millennials age. What's more, these types of properties are naturally immune to the e-commerce competition that is plaguing many other brick-and-mortar retailers.
Silvers also discussed EPR's education properties and what an amazing and stable growth opportunity they present over the coming years. "Most people don't understand the durability of the charter school world," said Silvers. He mentioned that there are about 3 million students in U.S. charter schools today, and that this figure is projected to double over the next seven years. Charter schools are valued at roughly $14,000 per seat to EPR, so this translates to $42 billion in market growth. Silvers acknowledges that EPR won't capture all of this growth itself, but should certainly benefit from the school choice trend.
Is the dividend safe?
When investors hear about a dividend yield over 5%, many ask: Is such a high dividend sustainable? And you should be skeptical, because in many cases, such a dividend is too good to be true.
However, EPR's dividend looks to be safe. For starters, REITs pay out most of their income as part of their tax structure, so it's only natural that their dividends are above-average. 2017's estimated payout of $4.08 per share represents less than 80% of the company's projected funds from operations (FFO) of $5.05-$5.20 (using the midpoint), a healthy payout ratio for a REIT.
EPR has a solid balance sheet, with just 32% of its capitalization coming from debt, the vast majority of which is at fixed interest rates. In other words, if rates spike, it won't have a dramatic effect on EPR's debt servicing requirements.
Not only does EPR's dividend look safe, but it also has an excellent history of growth. And since the company is projecting FFO per share of about $1.00 more than it's paying out in 2017, there's no reason to believe the dividend growth won't continue.
The Foolish bottom line
EPR properties invests in a real estate portfolio that is not only diversified in nature, but is also resistant to e-commerce and is well-positioned to take advantage of the millennial age group over the coming years.
To be clear, no stock capable of double-digit returns and a 5.7% dividend yield is without risk, and EPR is certainly no exception. For example, a recession could cause difficulties in the entertainment and recreation industries, which rely on discretionary spending. The education properties should help offset this somewhat, as they are less recession-prone, but this is still a risk factor to be aware of. And in regards to the education properties, it's entirely possible that charter school demand won't be as strong as experts are projecting.
Even with the risks in mind, however, EPR looks well-positioned to grow in the years ahead, and could be an excellent generator of income and growth for decades to come.