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EPR Properties

Pittsburg State University Alex Allen | Jordan Phelps | Rece Dawson | Trevor Johnson

Valuation Date: 1/30/2018 Current Price: $58.07 Ticker: EPR (NYSE)

Recommendation: HOLD Target Price: $67.33 Upside: 15.95% (23.35%)

Dividend Yield: 7.40% Industry: REIT Sector: Real Estate

EPR Share Price Movement

$80 $70 $60 $50 $40 $30 $20

Market Data

Closing Price

$58.07

52- Week High/Low

77.70/58.07

Average Volume

468,185

Diluted Shares Out.

73,665

Market Cap

4.28B

Dividend Yield

7.4%

Beta

.58

2018E FFO/Share

4.78

Institutional Holdings 92.27%

Insider Holdings

1.15%

Valuation Method

FFO Multiple NAV DDM Price Target Upside Dividend Yield Total Return

1/30/2018

Weight Price

40% 64.84

40% 65.49

20% 75.97

-

67.33

-

15.95%

-

7.4%

-

23.35%

COMPANY HIGHLIGHTS: We initiate coverage on EPR Properties (EPR) with a HOLD recommendation based on a one-year target price of $67.33, representing a 15.95% upside from its closing price of $58.07 on January 30, 2018. Our recommendation is primarily driven by:

? Knowledge Driven Management ? EPR has been able to build relationships with property managers by having industry expertise. EPR has been strategic in providing smart capital at a more attractive rate than its competition.

? Growth Drivers ? EPR's ability to continually acquire and maintain high producing properties at advantageous cap rates while also providing the option of financing for the tenant has helped grow relationships with tenants. EPR has a track record of high occupancy rates and has a proven history of finding successful investments in highly enduring properties. We project EPR's growth will be driven by the Recreation and Education segments.

? Potential Risks ? The potential for EPR's high producing theater properties losing foot traffic due to amenity theaters becoming less profitable than expected and losing market share to streaming services is a concern. Especially since EPR's portfolio has some concentration in the Entertainment segment. Also, if the targeted payout ratio exceeds the projected 80% rate causing either an increase in debt or equity above expectations and/or a decrease in the dividend growth rate would be a concern to EPR's investors. Lastly, EPR's performance could be negatively affected by macroeconomic factors.

BUSINESS DESCRIPTION: EPR Properties (EPR) - was founded in 1997 and is a triple net lease real estate investment trust, which allows the burden of expenses related to the operations and maintenance, to be reliant on the tenant. It offers numerous acquisition and financing options with a build to suit development allowing for greater flexibility in the selection, financing, and construction processes of their properties. Targeting its own specialized segments, EPR is a REIT with a diversified portfolio of Recreation, Education, and Entertainment. It is currently headquartered in Kansas City, MO and operates 392 locations with 250+ tenants in 43 states as well as in D.C. and Canada. Over the course of 20 years, EPR has invested $6.6+ billion in total investments with a long-term outlook within its specialized segments that is focused on intimate partner relationships driving new investment opportunities that are often exclusive to them (Appendix F).

Key Financials &

2015

Ratios

Total Revenue FFO Net Profit Margin Interest Coverage LT Debt to Assets Return on Equity Return on Assets Dividend Per Share

$421,017 $235,198 40.55% 3.68 47.00% 8.23% 4.05% $3.63

2016

2017E

$493,242 $304,635 40.79% 3.90 51.09% 8.19% 4.14% $3.84

$593,731 $351,877 42.58% 3.43 45.68% 8.24% 3.91% $4.08

2018E

$647,792 $402,833 42.94% 3.55 45.97% 8.27% 4.04% $4.22

2019E

$685,809 $423,491 42.14% 3.31 46.22% 8.08% 3.79% $4.44

2020E

$743,682 $460,084 42.32% 3.15 46.41% 8.11% 3.76% $4.82

2021E

$807,307 $507,074 43.32% 3.02 46.55% 8.15% 3.84% $5.32

2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E

Table 1: Investment Rating

Investment Grade Rating

AMC

REGAL

Cinemark

Ba1

Ba1

Ba1

* Non-Investment Grade

Source: Fitch

Figure 1: Lease Expirations

Source: Company Data

Figure 2: US Theme Park Growth

Source: IAAPA

Figure 3: Ski & Snowboard

2,900.0 2,800.0 2,700.0 2,600.0 2,500.0 2,400.0 2,300.0 2,200.0 2,100.0

Resorts in US

Source: IBISWorld

INVESTMENT SUMMARY: Strong Relationship-Based Growth Pipeline EPR has been able to sustain strategic relationships for long periods of time due to their depth of industry knowledge, build-to-suit development approach, capabilities to provide financing, and track record of delivering a constant pipeline of successful and enduring property investments. Some relationships have developed into new segment opportunities such as Topgolf. Attracting over 10 million guests in 2016, the golf entertainment complex's fun, flexible, all-inclusive approach to the sport is connecting with consumers and driving the brand's continued strategic growth across the United States. Topgolf's partnerships between its brand and the Golf channel, the PGA TOUR, LPGA, and Golf Digest speak to this innovative company's secure footing in the industry. EPR is highly tenant focused. This is demonstrated by allowing tenants certain capabilities such as executing a buyout option, or providing access to capital at a lower cost than other lenders like banks.

Strategy The company's main strategy is to create greater value for its shareholders by its strategic acquisitions, having a strong relationship based growth pipeline, and continued growth in Funds from Operations (FFO) and its dividend per share.

? Triple Net Lease Structure ? With the triple net lease structure, EPR's property tenants take on all the operating expenses that the property might require. These expenses include property taxes, insurance, and maintenance and repairs. This lease structure provides predictability in the income stream coming from these properties because they will not be affected by variable expenses. These lease structures minimize risk by being long-term focus, including rent escalators, and requiring tenants to take upon all operating expenses as mentioned before.

? Long-term Lease Focus ? Over the next 10 years only about 2.1% of revenue in leases is set to expire. These leases also have automatic rent escalators which can increase anywhere from 1%-2% or 7% to 10% every five years. These factors help to insure a secure and growing long term revenue stream from EPR's tenants.

? Segments with Greater Depth ? EPR executes its strategy by investing in a limited number of segments while still offering portfolio diversity. This allows for management to pinpoint their focus and develop a rich depth of knowledge within each chosen segment. EPR's advantage exists in this expertise which is supported by research and data to identify trends. Where others may overlook an opportunity, management's ability to understand segment drivers and differentiate between real and perceived risk allows EPR to isolate these investment opportunities. For example, EPR is the only triple net REIT seen operating in the Education sector. Management has recognized a strong and growing demand for real estate financing in the sector. Since 2002, public charter schools and the number of students enrolled in them have seen a CAGR of 7% and 12%, respectively. Within Entertainment, EPR distinguishes itself by providing build-to-suit properties allowing operators to adjust to consumer demands, transform their content, and advance technology. Properties owned in the recreation segment demonstrate a consistent track record of attendance and revenue in the attractions industry. EPR owns strategically located properties of two of the top waterparks in the US, as well as enduring golf entertainment centers under the name Topgolf. They also provide more flexible financing options for ski parks and resorts. These properties offer ski area operators with the advantage of making the ski experience more accessible with the convenience of proximity, as well as four-season resorts to combat any cyclical risks faced by weather. EPR succeeds by focusing on select market segments that are often overlooked by peers due to their lack of knowledge depth in that industry.

Figure 4: REIT Peer Performance

INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING:

REIT Overview The REIT industry is different than other sectors for many reasons. REITs are required to distribute 90% of their taxable income to shareholders in the forms of dividends, be managed by a board of trustees, and invest 75% of total assets in real estate and/or cash, and much more. REITs can have different lease structure types, EPR's being triple net. A triple net lease structure gives a REIT company an advantage because they do not have to pay any operating costs of the property. Performance within REITs in general have been underestimated because the corporate tax provides more of an incentive for investors who are looking for more growth initially in a company.

Figure 5: Investment % by Segment Historical Investments

Other: 3%

Ent: 43%

Rec: 32%

Edu: 22%

Source: Company Data

Figure 6: Box Office Revenue

Box Office (Gross Revenue)

$12,000.00 $10,000.00 $8,000.00 $6,000.00 $4,000.00 $2,000.00

$-

Source: Box Office Mojo

1997 2000 2003 2006 2009 2012 2015 2018

Figure 7: Entertainment/Recreation as a Contribution to GDP

Source: Bureau of Economic Analysis

REIT 2018 Outlook REITs in 2017 saw a slight decline for the year because a rise in interest rates and new corporate tax laws were two things that were not in their favor. It may be challenging for a business that takes on a considerable amount of debt to grow in a rising rate environment. With the S&P 500 along with other indicators still showing momentum, and an estimated three rate hikes by the Federal Reserve in the coming year, this complicates investing in the REIT Industry. REITs avoid corporate taxes by paying 90% of their earnings in dividends. The tax cut essentially becomes more beneficial to other companies who received the benefit of a lower tax rate.

Competitive Edge EPR Properties is a triple net lease REIT. This is a competitive advantage because EPR is not responsible for maintenance costs, insurance, or property taxes. The triple net structure provides for a steady and reliable income stream from its tenants. EPR also has grown its top and bottom line consistently over the past 5 years, while it has consistently increased dividends, on average by 7%. EPR has been strategic with its investments and has created a deep moat within entertainment properties. For example, they own many entertainment locations, and CEO Greg Silvers and other top executives are invited to key entertainment events. In addition, key executives have years of experience in the industry. This helps them keep up with industry trends and helps them find locations for these properties. In recent years, they have started to widen the moat with additions to recreation (ex: Topgolf) and education. These properties are strategically positioned throughout the U.S. and Canada (Appendix H). EPR's properties are built to accommodate the needs of both tenants and their customers. In the entertainment segment, this is demonstrated by new amenity additions in theaters, including reclining seats, food services, and alcoholic beverages, which create a more experiential environment. In the recreation segment, ski resorts can compensate for climate fluctuations with artificial snow making capabilities. These ski resorts are also located in metropolitan areas, giving more guests access to this experience. Golf complexes have climate control capabilities allowing for year-round access. Within their education segment, EPR offers its partners a buyout option which allows them access to state and local funds if advantageous. EPR's advantage is having strong relationships with its operators in each of its three segments, combined with a build-to-suit development program. EPR is also able to provide financing at a more attractive rate than these companies could obtain themselves. These factors contribute to the attractiveness of EPR when possible tenants are looking for properties and/or lending.

Entertainment & Recreation Industry Outlook Concerns around theaters losing share to streaming services have impacted theater companies for the last 18 months. AMC, Regal, and Cinemark account for roughly a third of EPR's portfolio. AMC, the largest tenant, accounts for about 20% of EPR's rental revenue. Streaming concerns are legitimate for the industry but it is not a direct concern for EPR. The majority of EPR's tenants are in the entertainment sector, which has potentially contributed to the decline of EPR's stock price; however, at the company presentation, CEO Greg Silvers mentioned that EPR owns 10% of AMC properties but 18% of AMC profits. This means that EPR owns some of the most profitable AMC theaters, which will be last to go out of business in a worst-case scenario. EPR Properties

Figure 8: Annual Growth of Public Charter Schools

Figure 9: Annual Growth of Charter School Students

Source: Company Data

Figure 10: U.S. Disposable Income per Capita

4%

Annualized forecasted growth rate (U.S. Disposable Income Per Capita)

3%

2%

1% 2016 2018 2020 2022 2024

Source: Company Data, Team Estimates

has greatly benefited by leveraging its knowledge and focusing on the growing entertainment, recreation, and education sectors. As of the second quarter of 2017, the entertainment (mostly theater) and recreation segments accounted for approximately 76% of EPR's revenues. Consumers increasingly value experiences over ownership, and trends continue to validate this change, further contributing to the success of EPR's portfolio investment strategy. To the left, Figure 6, shows how the entertainment and recreation segments are outgrowing total U.S. GDP. Theaters may struggle significantly in the long run, which may affect EPR, but there should be minimal effect in the near future. A graph of theater key financials is provided in (Appendix M).

Education Opportunity EPR's education segment is a great opportunity that many are underestimating. One thing that many economists agree on is the fact that an educated workforce is one of the main keys to economic growth. EPR stands to benefit from this demand for education. EPR mentioned in the Q3 call that their charter schools saw a 10% increase in students. On top of that, EPR's revenue per square foot in the Education segment has grown over 15% the past two years. In a survey by EdChoice, asking parents' preferences, the majority of parents preferred private schools. The question was asked, where would you prefer to send your kids to school? About half, 46%, preferred private schools. Another question was, do you support charter schools? Over half, 69%, of Americans said they support charter schools. Another thing the survey found was that parents increasingly do not prefer public schools. Fewer than half, 42%, preferred public schools in 2012, but as of 2016 only 29% preferred public schools. With all of that said, the majority of children still attend public school. This information might show a change in schooling in the future. The need for high quality education centers is increasing, and EPR is in a good position to meet that demand. These factors could explain why EPR is continually increasing their investment spending in Education. In 2015 and 2016, education investment spending accounted for roughly 42% of EPR's total investment spending (Appendix Q).

Corporate Tax Cuts The corporate tax cut will benefit any of EPR's tenants that are labeled as Corporations. Corporations within the United States are expected to grow at an annualized growth rate of 1.8% for the next five years (IBIS World Corporate Profit). Looking forward, the tax cut is expected to increase net income for tenants in 2018 by moving from a 35% to a 21% corporate tax rate, this factor alone drives profitability within EPR's tenants and creates opportunities for future increased rent revenue. More importantly, EPR could expect to see more less risk and more stability within their tenants.

Disposable Income Per Capita The unemployment rate is reaching record lows, there has been a boost in job gains, and a gradual increase in housing and stock values; therefore, annualized growth for disposable income is expected to increase at an annualized rate of 2.8% for the next five years. The expected tax burden on individuals within the United States for the next five years is projected to be minimal. With more money left after taxes and savings, individuals would be more likely to pursue better educational opportunities as well as recreational and entertainment outings. Under these circumstances these economic factors will have a positive effect on EPR's tenant performance and future revenue growth.

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