Real estate investment trusts are of special interest to income investors, since they are required to return 90% of taxable income to stockholders in order to enjoy special tax status under the federal tax code. For REITs like EPR Properties (NYSE:EPR), this can mean sweet yields – and monthly dividend payments that increase year over year.
A profitable niche
EPR Properties has found success by investing in real estate linked to three particular segments: education, entertainment, and recreation. Entertainment complexes dominate the company's investment portfolio, making up 63% of total portfolio investment value. The dominant portion of this segment consists of 125 megaplex theatres, with retail and family entertainment centers comprising the remaining 15 investments.
Recreation makes up 16% of the company's portfolio, a mix of 14 ski resort parks, eight golf complexes, and four water parks.
Public charter schools comprise the lion's share of the educational segment: EPR has invested in 63 of these properties, which are 100% leased. In addition, the company owns two private schools, and two early childhood centers.
This combination of investments has proved to be quite lucrative for EPR Properties, which just recently turned in a spectacular third-quarter earnings report. As it has done over the previous year, the company once again nudged revenue higher, showing a 12% increase year over year.
Funds From Operations held steady at $1 per diluted common share, although the actual cash flow increased by more than 13% from the same time last year. FFO is considered an important indicator of a REIT's performance, and consists of net income, plus real estate depreciation and amortization. Gains or losses from property sales are then subtracted from this number, which can give investors insight into the REIT's performance on a per-share basis.
A money-making machine
EPR has enjoyed some analyst love lately, receiving a boost from Bank of America Merrill Lynch, which initiated coverage with a buy rating for the stock. FBR analysts also gave the stock a buy rating, and RBC Capital just chimed in, as well – bestowing an outperform rating on EPR, along with a share price target of $63, appreciably higher than its current $54.50.
Why are these analysts so enamored of EPR Properties? Simply put, the company is a money-making machine. A recent MarketWatch article profiling the top 10 equity REITs listed in the S&P 1500 included EPR Properties, with a yield approaching 6.75%. The company's 10-year rate of return – computed with the assumption that dividends were reinvested – was also very attractive, at 163%.
Notably, the company has seen its revenues rise steadily over the past year, and its dividends have been climbing, on an annual basis, since 2010.
A full pipeline
EPR Properties is continuing to expand operations. The company spent more than $10 million in its entertainment segment during the third quarter of this year, investing in the construction of five megaplex cinemas, as well as renovations to two existing theatres. It also spent $75 million on new construction projects related to education, including 17 public charter schools, 10 early childhood learning centers, and three private schools.
Recreation also received a big investment, as EPR spent more than $64 million on the construction of a dozen new TopGolf entertainment centers, as well as improvements to its Camelback Mountain Resort. Currently, the company is in negotiations to purchase another recreation resort, for about $135 million.
The company sold nearly 3.7 million common shares on Sept. 18, raising $160 million net proceeds for future acquisitions, as well as build-to-suit projects. Although the stock price dropped from $54.05 to $51.72 on the day of the offering, the share price was up to $56.10 by Oct. 31.
EPR Properties has updated its guidance for the rest of 2014, predicting spending of somewhere between $600 million and $750 million, up from a prior estimate of $550 million-$600 million. In addition, FFO has been adjusted to $1.03-$1.07 per diluted share for the fourth quarter of 2014.
EPR is a profitable company that has a history of increasing its dividend, and delivering that payout on a monthly basis. For investors looking to create a portfolio that creates monthly income, this REIT is worth a look.
Amanda Alix has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.