EPR Properties(NYSE: EPR) is a unique real estate investment trust (REIT). There are reasons to like its highly focused approach and reasons to dislike it.
Unfortunately, the coronavirus pandemic and a subsequent dividend cut highlighted one of the biggest reasons to be worried about EPR Properties. Here's why some investors will want to avoid the REIT, and others will probably find it attractive.
Sell EPR Properties
EPR is singularly focused on so-called experiential assets. Owning properties that entertain and bring people together in group settings was a terrible business during the coronavirus pandemic.
Indeed, many of the REIT's tenants were effectively shut down because they weren't considered essential businesses. That made sense: EPR owns movie theaters, amusement parks, and ski resorts, among other attractions.
Image source: Getty Images.
In reality, EPR Properties didn't just cut its dividend in 2020; it eliminated it after reporting a huge $156 million net loss for that year. The company restored the dividend in the second half of 2021.
It would have taken a cast-iron stomach to sit through that period if you were trying to live off the dividends your portfolio generated. In fact, you might not have been able to do it if the complete loss of that income stream meant you didn't have enough dividends coming in to pay your bills.
This, however, isn't a comment on EPR's chosen focus on experiential properties as much as it is on the fact that the REIT is not highly diversified. Any REIT that only invests in a such a narrow way could end up facing the same dividend fate.
For example, many office REITs have cut their dividends, too, given the downturn in the office sector amid the rise of working from home. If the inherent risk of a highly focused portfolio is going to keep you up at night, you shouldn't own EPR Properties. That's buttressed by the fact that a little more than a third of its rents come from movie theaters, which means there's an even deeper concentration in the portfolio than you might at first realize.
Buy EPR Properties
If you are willing to accept that owning EPR Properties can be a bit of a roller coaster ride, there are reasons to like the stock.
For example, the pandemic dividend suspension was really a cautionary move so the REIT was sure it would have enough liquidity to help its tenants through a clearly unusual and difficult period.
Once management was comfortable that the worst was past, it brought back the dividend, though at a lower level. As time has passed, it has started to increase the dividend again.
And while movie theater operators are still struggling, the rest of the REIT's tenants are actually in a stronger position today than they were before the pandemic. To put a number on that, rent coverage outside of theaters was a multiple of 1.9 in 2019 and is currently up to 2.1, which shows by how much rent payments cover EPR's property ownership costs. The company's adjusted funds from operations (FFO) payout ratio in the third quarter of 2024, meanwhile, was a reasonable 66%.
Moreover, management isn't ignorant of the concentration risk posed by its movie theater exposure. The plan is to reduce that risk over time by selling assets, leasing space to more resilient tenants, and reworking leases with current tenants so they are in better financial positions. Acquisitions, meanwhile, are more likely to be in other types of experiential properties.
If you are willing to take on extra risk for extra reward, this could be a good investment for your portfolio. That big reward here, meanwhile, is the lofty 7.7% dividend yield. That's many times higher than the 1.2% from the S&P 500 index(SNPINDEX: ^GSPC) and a bit more than twice the 3.7% average for the REIT sector.
What if you have been holding on to EPR Properties through this difficult period? As the chart above highlights, you are still sitting on a sizable capital loss.
And since the dividend is still below where it was before the suspension, the cash this investment is generating is lower, too. It would be understandable if you chose to throw in the towel.
But if you have held on this long, you might want to stick it out a little longer. After all, the underlying business appears to be on the mend. Experiential properties are also a pretty interesting category that many expect to be resilient in the face of the shift toward digital activities (be it online shopping or social networks). Selling now that things are starting to improve seems like dropping out of a marathon at mile 13.
EPR Properties will be an acquired taste
EPR Properties is a turnaround play right now, appealing only to a small group of more aggressive investors. It is also focused on a unique niche -- experiential properties -- that history has shown can increase risk.
New investors will want to consider this investment's risk-reward profile very carefully before buying. That said, if you own it, the underlying business appears to be getting stronger and it may be worth sticking around -- if you can handle the inherent risk, that is.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends EPR Properties. The Motley Fool has a disclosure policy.
