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 length, 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 Arlington, 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.
