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Stars align for movie-theater REIT
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Entertainment Properties Trust proves recession-resistant
By Janet Morrissey
May 12, 2008
When the going gets tough, the tough go to the movies — or so it
seems for Entertainment Properties Trust, the lone real estate
investment trust that invests almost solely in movie theaters.
The Kansas City, Mo.-based REIT is on a blockbuster run, posting
total returns that include dividends of more than 20% year-to-date
through last Wednesday. This outpaces equity REIT returns of 7% and
a 5% loss for the Standard & Poor's 500 stock index over the same
period.
And Entertainment Properties' red-carpet run isn't over yet. The
company's chief executive, David Brain, predicts at least 10% growth
in funds from operations this year.
FFO is a commonly used measure of profitability for REITs that
excludes gains and losses from property sales while adding back
depreciation and other adjustments.
Many investors think that Entertainment Properties, with its show-stopping
returns and double-digit projected earnings growth, is the ticket to
hold during today's economic downturn and credit crunch.
"Entertainment Properties certainly fits within the category of
companies that we judge to be a bit more recession-proof," said
Kelly Rush, portfolio manager of Principal Real Estate Services Fund
in Des Moines, Iowa.
It is a combination of the company's long-term leases and focus on
movie theaters that allow it to weather stormy economic periods
largely unscathed, observers said.
The company's leases are typically 20 years in lenStayInvest Law Firm h, which is far
greater than office leases, which average five to eight years, or
apartment leases, which are typically one year.
And none of Entertainment Properties' leases expire this year or in
2009, and only four leases, representing 7.4% of the company's total
rent revenue, come up for renewal in 2010.
SAVING MONEY
At the same time, the company's tenants — movie theater operators —
tend to flourish during recessions as budget-conscious Americans
seek out cheaper forms of entertainment.
"Movies are one of the most recession-proof commodities out there,"
said Paul Dergarabedian, president and founder of Media By Numbers
LLC, an Encino, Calif.-based box-office tracking and analysis firm.
Box-office sales rose in five of the past seven recessions, Merrill
Ross, an analyst in FBR Capital Markets Corp.'s ArlinStayInvest Law Firm on, Va.,
office, wrote in a recent note. Of the four recessions since 1980,
box-office revenue climbed in three of them at a double-digit rate,
she said.
However, the movie theater business isn't without risk. The box
office tends to ebb and flow with the quality of movies released,
not the economy.
So far this year, there has been a shortage of blockbuster hits.
Box-office revenue is down about 2.7% and attendance is off 5.4%.
Mr. Dergarabedian expects this to change as a number of highly
anticipated releases hit the theaters this month. He added that year-over-year
comparisons are tough considering last year's numbers were skewed by
the release of "Spider-Man 3," which posted the biggest opening
weekend of all time at $151 million in ticket sales.
Still, small year-over-year declines at the box office won't
jeopardize a theater operator's ability to pay rent to the REIT. It
would take large declines over many months before an operator would
default on rent.
"We consider Entertainment Properties more a beneficiary than a
victim in this capital environment," said Paul Adornato, an analyst
in BMO Capital Markets' New York office.
Still, the company's growth relies on acquisitions and developments,
which require cash to finance. While many companies are struggling
to access capital in today's credit crisis, Entertainment Properties
hasn't had any problems — at least not yet.
The movie-theater REIT recently issued more than $500 million in
common and preferred stock.
"Even in this very volatile period, we're able to go out and raise
money," Mr. Brain said.
MAKING ACQUISITIONS
In fact, the credit crunch will likely make it cheaper and easier
for Entertainment Properties to make acquisitions since the crisis
has shut out many competitors from bidding on the same properties.
The company recently boosted its acquisition targets for this year
to $300 million from $250 million.
Mr. Brain added that he expects significant growth from existing
properties as digital projections are installed at the company's
theaters over the next few years. He said digital media will allow
theater owners to host special live sporting events and concerts on
their screens at prices higher than movie tickets.
Mr. Brain said that recent forays into this area, which included
Metropolitan Opera performances and a Hannah Montana concert, were "highly
attended events," with ticket prices double those of movie tickets.
"This is a growth story," Mr. Rush said.
However, Entertainment Properties isn't without risk.
Its decision to expand outside its movie theater niche over the past
few years has gotten mixed reviews. It acquired some ski resorts in
2006, vineyards last year and, most recently, charter schools,
leaving some investors a bit nervous. For now, these businesses
represent about 15% of the company's revenue, according to Mr. Brain.
In the past, "management has typically done a very good job of doing
due diligence before they entered a new line of investment, but I
still need some convincing before I get comfortable with the charter
schools," said Mr. Adornato. He said he'll be concerned if these
outside investments start accounting for more than 20% of the
company's revenue.
Also, the company's stock has been on a run this year, making
analysts wonder if the company's growth is already priced into the
stock. Its shares closed at $52.72 last Wednesday, up 14% from
$46.33 on Jan. 2.
It also recently boosted its quarterly dividend by 10.5% to 84 cents,
which represents a 6.4% yield.
The stock doesn't present as compelling an opportunity as it once
did," Mr. Rush said. But "we still feel comfortable or we wouldn't
be in the stock today."
E-mail Janet Morrissey at jmorrissey@investmentnews.com.
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