Sometimes even the best ideas can get fouled up by circumstances outside of one's control. That's probably the best way to describe the story at EPR Properties (EPR -0.10%), a unique real estate investment trust (REIT) with a massive 9% or so dividend yield.
Here's why only aggressive investors will want to step in here.
Experiences matter
Before the REIT changed its name to EPR in 2012, the "E" stood for entertainment. It highlighted the company's focus on owning assets that provide experiences. The main idea was that it could provide capital to companies that offered consumers a way to enjoy life rather than simply cluttering their homes with more "stuff."
That capital would allow the lessees to invest in their businesses and grow, creating a virtuous circle for all involved. There had been a clear trend toward experiential events backing up the concept. Today, the REIT owns everything from movie theaters to amusement parks -- and schools, though some might argue about how enjoyable school is as an experience.
Image source: Getty Images.
And then the coronavirus pandemic of 2020 caused the bottom to fall out. Almost every type of property EPR owned was nonessential and either shut down or was at risk of being shut down. The social distancing being used to slow the spread of the illness, meanwhile, kept people from gathering in groups, which is pretty much what experiential properties are all about.
The REIT eliminated its monthly dividend payments for roughly a year. That was a clear sign of the headwinds it faced and was the proper decision for the company, even if it was a tough pill to swallow for investors.
The dividend was reinstated in August 2021 at roughly two-thirds of the previous level. It has been increased once, by 10% in 2022, since being reinstated.
Given that dividend increase, it seems pretty clear that the worst of the crisis is over for EPR. And yet it doesn't mean that the problems facing the REIT have completely passed.
That high yield
A roughly 9% dividend yield is likely to be a very attractive number for income-oriented investors. Moreover, the adjusted funds from operations (FFO) payout ratio, using fourth-quarter 2022 figures, was a very comfortable 65%. That, in fact, makes the dividend look very secure, since such a low payout ratio should provide a material amount of room for adversity.
Conservative investors should still tread with caution. One of the big problems here is that EPR started life with a very large portfolio of movie theaters. It has been diversifying away from this property type, but movie theaters still make up roughly 40% of the REIT's business. That's a huge amount of exposure, and it can't be overlooked, even though things are starting to improve.
For example, the company highlights that its tenants are, overall, more capable of covering their rent today than prior to the pandemic. But coverage in the movie theater space is well below 2019 levels. Even at that point, meanwhile, there was a shift taking place among consumers, with roughly stagnant box office revenues suggesting that movies were being replaced by other options, such as streaming video. The 2020 pandemic just made things worse, given that going to the movies was basically not even an option.
To be sure, box office revenues have rebounded from the disastrous levels seen in 2020. But they are still far below pre-pandemic levels. According to Box Office Mojo, 2019 revenues totaled nearly $11.4 billion but were just under $7.4 billion in 2022.
The movie industry remains under significant pressure, highlighted further by the bankruptcies the industry has seen. Moreover, the industry is dominated by a few large operators, which further increases the concentration risk.
Risk versus reward
While EPR is not a bad REIT, it is still trying to navigate a very difficult market that accounts for a huge portion of its portfolio. More aggressive investors might appreciate the high yield and turnaround potential of EPR's movie business.
But for investors seeking a safe and secure dividend, this REIT just doesn't look like a good risk/reward trade-off. Yes, the 9% yield is attractive and seemingly secure, but if you are living off of your dividends, the still-troubled movie theater exposure is just too big to take on.
