EPR Properties (EPR -0.32%) stock sold off last year when news broke that the parent company of one of its largest tenants (theater operator Regal Cinemas) filed for bankruptcy. The news caused uncertainty on how those proceedings might impact the real estate investment trust's (REIT) rental income and ability to maintain its dividend, which currently yields 7.2%.
The specialty REIT recently agreed to a new deal with that tenant, lifting the curtain of uncertainty that had shrouded its future. Here's what the agreement means for the company and its high-yielding monthly dividend.
Restructuring the relationship
When Regal's parent filed for bankruptcy last year, it had leased 57 theaters from EPR Properties. It paid a total of $86.3 million per year to the REIT in rent and other charges, representing 13% of EPR's revenue. EPR wanted to preserve as much revenue as possible through its negotiations with Regal.
It was largely successful in that endeavor. The company recently announced a new comprehensive restructuring agreement that provides a floor of rental income with upside potential from the ongoing recovery of the theater industry.
The companies signed a new master lease covering 41 properties. EPR will receive $65 million in annual fixed rent, plus about $3.5 million in third-party charges. The triple net lease (NNN) will make Regal responsible for covering the properties' maintenance expenses, building insurance, and real estate taxes. In addition, EPR will receive an annual percentage rent each year based on gross sales exceeding $220 million (which they achieved in 2022).
Meanwhile, EPR will take back 16 properties. It will continue to own five of them, which two separate theater chains will operate on its behalf. Instead of receiving rent, it will earn operating income, giving it earnings upside potential to the continued recovery of the theater industry. EPR plans to sell the remaining 11 properties.
The REIT estimates it will recover 96% of the total prebankruptcy rent of the entire 57-property portfolio next year. That assumes the theater industry's recovery trajectory aligns with the current industry forecast that total box office receipts will rise to $9.8 billion next year, up from $9 billion in 2023. It will continue to participate in the future recovery of the box office from the annual percentage rent on the properties leased to Regal and from the operating income on the other five theaters. Those features give it lots of upside potential if the box office has a blockbuster year.
Enhancing the dividend's foundation and upside potential
The new deal with Regal will provide more clarity on EPR's future cash flows and ability to pay dividends. The REIT generated $1.26 per share of funds from operations (FFO) during the first quarter, partially driven by Regal making all its rental payments and then continued to collect a portion of rents deferred from the pandemic. That was more than enough money to cover dividend payments, which totaled $0.825 per share in the quarter.
Those levels mean EPR has a lot of cushion to absorb the reduction in fixed rent while maintaining the dividend. Further, with the new lease structure potentially preserving 96% of the prebankruptcy rent next year, it likely won't see much impact on its total cash flows, keeping the dividend on a solid foundation.
Meanwhile, the company can further offset the impact and potentially capture some upside from the eventual sale of the 11 properties it will take back in the deal but not operate. EPR plans to recycle that capital into new nontheater experiential property investments. While it likely won't receive a lot of money by selling these properties, their sale will give it more cash to invest in its strategy of acquiring and developing other experiential properties to reduce its overall exposure to the theater industry.
EPR Properties currently plans to invest $200 million to $300 million to acquire and develop additional experiential properties this year. It's funding these investments with post-dividend free cash flow and its available liquidity ($96.4 billion of cash and an untapped $1 billion credit facility at the end of the first quarter).
The company invested $66.5 million during the first quarter, including buying a fitness and wellness property. It has also committed to investing $245 million in experiential development and redevelopment opportunities over the next two years. These investments will grow its cash flow while reducing its exposure to the theater industry, and those growing cash flows will further enhance the dividend's long-term sustainability, while potentially enabling the REIT to increase it in the future.
A more sustainable dividend with upside potential
EPR Properties has agreed to a new deal with Regal that should enable it to recover a substantial portion of the rent it currently collects from that company next year. Meanwhile, the deal provides upside to the continued theater recovery and from recycling capital into new experiential real estate investments. These features should put the REIT's dividend on a firmer foundation, while potentially providing investors lots of upside potential to the continued recovery of the theater industry. That makes it an attractive stock for those seeking the opportunity of earning blockbuster total returns.
