2023-12-20 07:35:00 ET
Summary
- Experiential properties continue to see strong consumer support and demand.
- COVID-19 lockdowns renewed a desire for getting out and doing, among all age groups.
- I love a good time, and I like it even more when someone else is paying for it!
Co-authored by Treading Softly.
One truth that I learned as I became a parent is that you can never decide what's going to be quality time. All that you can do is invest in quantity time with your family, and know that some of it is going to be quality. Quality time appears on its own, naturally amongst the quantity of time that you provide. Many life experiences can be governed the same way. You have to expose yourself to different experiences in life for some of those experiences to be the quality that is worth telling stories to your grandchildren.
When it comes to the market, you're going to have a plethora of different experiences, especially if you've been an investor for any length of time. You will experience good times in the market where it seems to only be climbing and every decision you make seems to prove that you're a genius, and you're going to experience bear markets where everything seems to be falling apart and no matter what you do, you're worried that you're going to lose it all. In between those periods, you're going to experience lulls when there's nothing crazy going on, and you're just diligently working away at building the perfect portfolio to meet your needs.
Today, I want to look at an opportunity that provides life experiences to others and can also provide you with life experiences while providing you with strong income along the way.
Let's dive in!
Get Some Experiences
EPR Properties ( EPR ), yielding 6.8%, is a real estate investment trust, or REIT, that is focused on owning what management terms "experiential" real estate. This makes it the most entertaining REIT to do "due diligence" by visiting its properties. Sure, you can go check out Walgreens location #122, owned by Realty Income ( O ), and see that it is another pharmacy on another busy corner, or you could go check out Valcartier Village Vacances in Quebec, Canada. Source .
I haven't been there yet, but I have enjoyed myself thoroughly at a number of EPR-owned locations. Whether enjoying skiing at one of EPR 's Vail locations, relaxing at The Springs in Pagosa Springs, Colorado, spending a day at Six Flags, catching the latest blockbuster at AMC, riding the sky tram in Gatlinburg, Tennessee, or laughing with your friends about how terrible your golf swing is at a Top Golf, you will have a lot of fun at EPR's properties. How do I know? These are all things that I have done at EPR properties. For the retirees traveling the continent in their RVs, I'll say you could have a worse idea than trying to visit every location EPR owns!
I do have to say that, as much fun as EPR properties are to visit, it is even more entertaining when you can pay for the whole trip with EPR dividends!
COVID had a unique impact on EPR and the experiential economy. While leisure spending is theoretically expendable and, in theory, something that people would consider cutting during a recession, in practice, it isn't. People love to "treat" themselves, and while saving for a vacation might be more difficult, the evidence suggests that spending on leisure is rather durable, even during recessions. COVID is the exception which caused a substantial crash in leisure spending:
While EPR's real estate covers a wide variety of entertainment options, the one thing they all have in common is that they involve places where groups of people mingle in public.
EPR is still recovering from this impact but is getting back on track. Tenants have been paying back rent that EPR deferred during COVID, and rent coverage is above 2019 levels for EPR tenants, although theaters are still trailing.
EPR recently faced a major tenant bankruptcy with Regal Cinemas. With the company emerging from bankruptcy, Regal has resumed paying rent. Despite the distraction of the Regal bankruptcy, EPR managed to grow the bottom line year-over-year:
EPR is in a prime position to expand with debt/EBITDA at only 4.4x, a $1 billion revolver that is completely open, and $173 million in cash on hand. EPR has only one maturity for 2024, and they have enough cash on hand to pay it off completely if they want to.
EPR has room to leverage up safely, as the buying opportunities allow for it. The best part is that EPR's adjusted funds from operations, or AFFO, payout ratio is only 56%. Source .
This provides us with a lot of confidence that EPR will be raising the dividend early next year to get the payout ratio back to 65-70%. In 2023, management chose to be conservative, given the uncertainty of what would happen during the Regal bankruptcy.
If EPR leverages back up to its normal range of 5-5.5x, we could see above-average dividend growth for the next few years.
During COVID, EPR saw a staggering reduction in cash flow. As virtually all of its tenants were forcefully shut down by the government, EPR was able to work out rent deferral agreements. It is difficult for any company to see a massive decrease in cash flows. However, EPR managed to navigate COVID without issuing new equity – in fact, EPR actually bought back shares, reducing its share count. EPR didn't take out more debt. It emerged from COVID with a balance sheet that is stronger today than it was before COVID. EPR management managed to avoid the actions that would cause permanent and irreversible damage to shareholders.
Over the next few years, we can expect EPR to redeploy its capital, leverage back up, and see earnings return to pre-COVID levels and go even higher. That will be a positive catalyst for dividend growth to pre-COVID levels and beyond.
Conclusion
With EPR, we can invest in experiential properties that visitors look forward to visiting. Good experiences drive repeat business, which keeps the rent checks flowing into EPR and keeps the dividend dollars following into your account. EPR's management team proved skilled and capable in handling the COVID shutdowns and slowdowns, having EPR emerge stronger and leaner than before. Now, investors are primed for an outstanding opportunity to enjoy high levels of income and capital gains as EPR resumes its growth.
When it comes to your retirement, I frequently discuss how I want your retirement questions to be focused on how to spend your time with loved ones, friends, and your hobbies. EPR provides plenty of options on places to visit and have enjoyable experiences; it's even better when it pays for them too! Retirement should be a time to experience new things, or retread the old nostalgic ground. It's not a time that should be marked by want or struggle, financially speaking. Unlock new levels of income and see how it can revolutionize your outlook.
That's the beauty of my Income Method. That's the beauty of income investing.
For further details see:
Passive Income: Earn 6.8% From Life's Experiences, EPR Properties