A 6% Yielding Monthly Paying Dividend Growth Stock With 11% Long-Term Return Potential

Posted On September 6, 2018 12:12 pm

High-yield dividend stocks are a great way to help fund a comfortable retirement. And monthly paying dividend stocks can make it even easier to match up your expenses with your passive income. Unfortunately while there are lots of monthly paying dividend stocks, few offer a good combination of generous and safe yield that can be relied upon during your golden years. That’s especially true since most monthly payers offer little to no dividend growth meaning you purchasing power falls victim to inflation. EPR Properties (EPR) is an exception, thanks to its attractive and low risk business model, skilled management team, and proven ability to deliver both high monthly yield and strong dividend growth over time. And from today’s valuation this REIT is likely to also deliver market beating, 11% annualized total returns over the next decade.

EPR Properties: A 6% Yielding Monthly Paying Specialty REIT

EPR was founded in 1997 and started off owning 12 movie theaters. Over the past two decades the REIT has grown its property portfolio to 396 facilities, leased to over 250 tenants in 43 states and Washington DC. Along the way it’s managed to enrich investors with total returns that not just crushed the broader market but most REITs as well.

Source: EPR Investor Presentation

There are two key factors to EPR’s phenomenal track record of investor wealth creation. The first is the business model, which is 86% focused on triple net leases. This means that EPR will buy a property from an existing operator and then lease it back to them under very long-term contracts (average remaining duration 12.5 years).  In fact, over the next 10 years leases representing 22% of its rent are expiring. Not just does this mean EPR enjoys very stable cash flow over time, but the tenant pays maintenance, taxes, and insurance costs. As a result in the first half of 2018 48% of the REIT’s revenue converted to adjusted funds from operation or AFFO. This is the REIT equivalent of free cash flow and what funds the dividend.

The second reason for EPR’s success is the skilled management team, led by CEO Greg Silvers, a 19 year veteran of the REIT who came on board just one year after its founding. Before becoming CEO Silvers served as the REIT’s general counsel (lawyer), Chief Development Officer (in charge of building new properties), and Chief Operating Officer (running day to day operations). EPR’s management focuses mostly on experiential specialty properties including: premium movie theaters, golf courses, ski resorts, charter schools, day care centers, and early childhood education centers.

Source: EPR Investor Presentation

Management’s strong dedication to quality tenants means that its average tenant rental coverage ratio is excellent:

  • Entertainment properties: average rental coverage 1.67
  • Recreation: 2.05
  • Education: 1.47
  • Property Portfolio Average: 1.77

The tenant rental coverage ratio is a tenant’s operating cash flow over annual rent. In general 1.3 or higher is considered a healthy tenant who is at little risk of defaulting on rental payments. EPR’s rental coverage of 1.77 shows that its tenants, even the movie theaters, are thriving, and continue to be reliable sources of steadily growing cash flow.

Source: EPR Investor Presentation

That’s why the REIT’s occupancy is sky high at 99.1%. That includes 100% in its movie theaters which are all located in large affluent urban areas with very high customer traffic. In fact, EPR owns about 3% of the movie theaters in the US, but they take in 7% of total annual box office. This shows management’s strong dedication to balancing strong growth with top quality properties leased to strong tenants. But EPR is still a fast growing REIT. In the first half of 2018 EPR managed to grow its revenue and AFFO/share by 29%, and 26%, respectively. That’s one of the fastest growth rates the entire sector. The REIT grows through acquiring new properties or building them itself. Today EPR has 17 properties under development representing $457 million in investment.

Going forward management plans to continue to diversify its investments, while always focusing on its education and experiential niche. Experiential assets are things favored by America’s 75.4 million Millennials (largest generation in US history). That means in the future EPR plans to potentially invest/build:

  • Super premium movie theaters (including international)
  • Zoos
  • Aquariums
  • Museums
  • Live theaters
  • Sports arenas
  • Convert venues
  • Racetracks
  • International ski resorts
  • Water Parks
  • Amusement Parks
  • Gyms/Fitness Centers
  • National Park/Hunting lodging facilities

And of course the REIT’s education segment is also benefiting from the secular rise in charter schools and student enrollment, which has been growing at 7% and 12% per year, respectively, since 2002.

EPR’s experienced management team has been able to continually execute on its niche focus to drive very strong growth. For instance over the past five years the REIT’s revenue and AFFO/share has grown at 14% and 7% respectively. Most importantly for income investors is the fact that the dividend has grown at 7% annually since 2010, which is one of the fastest growth rates in REITdom. To help fund its future growth, the REIT has about $1 billion in remaining borrowing power under its revolving credit facility. For context management’s investment plans call for about $550 million in new investments this year, most of which will be funded by $475 million in asset sales. Like all well run REIT’s, EPR periodically sells properties at a profit to reinvest the proceeds at higher cash yields and thus help drive AFFO/share and dividend growth.

The bottom line is that EPR is a highly profitable and well run triple net lease REIT. One whose niche focus on thriving industries and sectors sets it up for strong long-term growth in both its dividend and its share price. That’s why I consider it one of the best monthly dividend stocks you can own, and is part of my own high-yield income growth retirement portfolio. That’s because this REIT isn’t just a great source of safe and high monthly income, but is also likely to deliver exceptional long-term total returns as well.

About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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1 Comment

  1. Chris Oscar Sr. September 7, 2018 at 2:18 pm

    Should I be concerned about EPR’s dividend payout ratio and dividend coverage ratio? Please explain. Thank you.

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