EPR Properties (EPR 0.05%) is a real estate investment trust (REIT) that focuses on properties that provide experiences. There are a lot of assets that fall into that category, but they differ meaningfully from things like apartments and office buildings. The only problem is that EPR still has a huge amount of exposure to one specific experience that consumers are still largely avoiding. Investors are worried about this fact, resulting in EPR's massive 8.2% dividend yield. Here's why.
Bringing people together
EPR Properties' portfolio includes things like amusement parks and ski resorts. These are not the typical things you'll find inside of a REIT's portfolio. In this way, EPR stands apart from the pack. However, there are advantages and disadvantages with this approach. For example, EPR was early to jump on a trend among consumers for experiences. But during the early days of the pandemic, most of what EPR Properties owned was non-essential and shut down. The REIT eliminated its dividend for a time because of the uncertainty its highly focused business model faced.
Image source: Getty Images.
That was a few years ago now, and business is getting back to normal. The dividend has been reinstated and has even been increased once. This is a company that's on the mend, although the $0.275-per-share monthly dividend is still below the pre-cut level of $0.3825. The most notable problem with boosting the dividend back to previous levels is EPR's exposure to the movie theater business.
This is no small issue. To provide some insight, in 2019, the company's movie theater tenants covered their rents 1.7 times over. In 2022, that number had fallen to 1.4 times. By comparison, the rest of the REIT's portfolio had 2.2 times coverage in 2019 and that had improved to 2.7 times in 2022.
Basically, movie theaters are the weak point in the portfolio, which is a major headwind since they account for roughly 40% of the rent roll. Investors are likely to be cautious until movie theaters are a smaller piece of the pie or the movie theater industry starts to recover in a more sustainable way.
No rest for the weary
There's no way to know what EPR will buy or sell, so it is hard to quantify the potential changes the portfolio will see over time. But we do know how well the movie theater business is doing. On one hand, it has recovered from the worst of the pandemic, when theaters were basically shut down because they were non-essential. But on the other, the box office has fallen from $11.4 billion in 2019 to just $7.7 billion in 2022. Normal is a long way off.
Which brings up the issues plaguing the industry's major players. For example, AMC just got shareholder approval to sell stock at deeply depressed prices. That will dilute current shareholders, suggesting that the company is desperate for cash. That's not a surprise given that despite a 25% year-over-year increase in revenue in 2022, AMC is still bleeding red ink. If AMC were to fall into bankruptcy, it would likely push its landlords for additional assistance on the rent front. It might even make a renewed effort to secure rent concessions without a bankruptcy filing, claiming that the savings could allow it to avoid that fate. AMC is a large tenant for EPR.
Bankruptcy may seem like a dire scenario to bring up, but AMC peer Cineworld is currently working through bankruptcy. It owns the Regal Cinema nameplate and is also a large EPR tenant. More recently, CineMedia, which sells the pre-show advertising moviegoers see when they actually go to a movie, filed for bankruptcy. Notably, it is a source of additional revenue for theater operators. And while CineMedia isn't a tenant of EPR, the company's need to seek out court protection says a great deal about the strength of the industry (or lack thereof) overall.
Muddling through
EPR is highly likely to survive any further headwinds posed by its exposure to the movie theater space. However, investors are not being unreasonable in their caution, and that is why the yield is still very high. Until the REIT reduces this exposure or the industry shows signs of a sustained recovery, EPR is likely to remain an ultra-high-yield stock that is most appropriate for more aggressive investors. Yes, the 8.2% dividend yield is enticing, but you need to make sure you understand all the risks before you jump aboard.
