EPR Properties (EPR -0.32%) is becoming one of the more popular real estate investment trusts (REITs). That's likely due to its high-yielding monthly dividend, making it an attractive option for those seeking passive income.
Given the REIT's growing popularity, we asked a couple of our contributors to provide the bull and bear case to give investors a fuller picture of the EPR's upside potential and risk profile. Here's a closer look at the case for and against buying shares of this high-yielding REIT.
Lots to like about this high-yielding REIT
Matt DiLallo (bull case): The bull thesis for EPR Properties is simple. Spending on experiences continues to grow as more consumers prioritize spending their hard-earned money on enjoying an experience over purchasing products. That's driving more visitors to experiential properties like movie theaters, gaming locations, attractions, eat & play venues, and experiential lodging.
The continued growth in experiences is leading operators to expand. One way they can fund their growth is by partnering with EPR Properties to complete sale-leaseback transactions, unlocking the value of their real estate and giving the capital to expand. EPR Properties expects to make $500 million to $700 million of new investment this year, which will help grow its income-producing experiential real estate portfolio. Overall, the REIT sees a more than $100 billion investment opportunity in experiential real estate.
Future acquisitions should enable EPR Properties to grow its attractive dividend. The REIT pays a monthly dividend that currently yields over 6%. That's nearly double the REIT sector's average and even further about the1.6% yield of an S&P 500 index fund.
That payout is on a solid foundation. EPR Properties expects its dividend payout ratio to be around 70% of its funds from operations this year. That's a conservative level for a REIT, providing a cushion for the dividend while enabling EPR to retain cash to fund acquisitions. Meanwhile, the company has an investment-grade balance sheet with over $300 million of cash and an untapped $1 billion credit facility at the end of the first quarter, giving it lots of financial flexibility to make deals.
Put everything together, and EPR looks like a great REIT to own for the long term. It offers investors strong growth prospects and a lucrative passive income stream. That should enable it to produce attractive total returns in the coming years.
These speed bumps could slow EPR's growth
Mike Price (bear case): EPR is a tough stock to make a bear case for, but I think it could have a few speed bumps coming if the economy enters a recession. Let's look at its concentration risk and balance sheet.
Ten tenants make up just less than 70% of the REIT's total, and the top four account for just less than half of revenue. Those four are AMC Entertainment Holdings, TopGolf, Regal Entertainment Group, and Cinemark Holdings. That's three movie theater chains and a souped-up driving range. You can argue that movie theaters and souped-up driving ranges would be among the first things to be cut out of personal budgets in the event of a recession.
There are plenty of successful companies that have revenue concentrations and EPR is currently investing in diversification. Just keep in mind that an investment in EPR is an investment in its tenants staying financially viable.
EPR has work to do on its balance sheet. At the end of Q1, it had about $300 million in cash and $2.8 billion in debt. Interest expense of $33 million was close to a quarter of rental revenue. The good news is that all of that debt has fixed rates below 5%.
The bad news is that all of the debt is coming due in the next 10 years. About $1 billion of it is due by 2026. Normally, the REIT would just refinance the debt as it comes due and move on. But that's not a great strategy when interest rates will probably have doubled by the time EPR can refinance and interest expense is already almost 25% of revenue.
The next step is jacking up lease prices. Out of its 323 properties, only 14 have leases coming due by 2026. Its leases have planned increases each year, but management acknowledged that the contractual escalations may not even keep up with inflation in last year's annual report. That means the REIT will have to grow revenue to meet the new debt obligations by buying more properties to produce more cash flow. That means taking on even more debt at higher interest rates.
The REIT could potentially issue stock to pay down debt, but that reduces the dividend yield. It could unload some existing properties, but that reduces cash flow. Whatever it does will have pros and cons and may affect your investment.
The high-yielding REIT is a bit higher risk
EPR Properties offers investors upside to the growth in experiences from a real estate perspective. It should be able to continue providing them with a steadily rising stream of passive income. However, the high-yielding REIT isn't without risk. Investors shouldn't wager too much of their portfolio on this high-yielding REIT's upside and income potential.
