EPR Properties (EPR +0.49%) differentiates its approach within the real estate investment trust (REIT) sector by focusing on experiential properties. That turned out to be a problem during the early days of the coronavirus pandemic, when people basically started to hide in their homes.
The world is getting back to normal as pandemic pressures ease, but what does that mean for EPR and its hefty 7.8% dividend yield?
How bad was it for EPR?
By design, EPR Properties owns assets that bring people together in large groups. When the government shuts down such businesses, asks people to work from home, and generally recommends social distancing, owning amusement parks, movie theaters, and other similar assets is a big problem. There was so much uncertainty in 2020 that EPR's board chose to completely eliminate the dividend after the May payment.
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At the time, the REIT was paying $0.3825 per share per month. The move was the right one given that EPR was forced to work with its tenants on rent concessions and abatements because of the still-unfolding health scare. There was just no way to quantify how bad things would get. But as time went on, the world has learned to live with the coronavirus. The dividend was restarted in July of 2021 and was increased in April of 2022.
Obviously, things are getting better for EPR. But there's an important fact here that you need to understand about the dividend: When it came back it was set at $0.25 per share per month, and the increase brought the monthly payment to $0.275. So it is still 28% below where it was prior to the pandemic-led cut.
EPR is starting over again
Prior to the cut, EPR had a history of regular dividend increases dating back to 2011. So in some ways, the pandemic forced a reset. But management isn't rushing back into the dividend growth story -- it is taking a prudent approach. To put some numbers on that, the $0.275 monthly dividend translates into a quarterly dividend of $0.825 per share. The REIT's adjusted funds from operations (FFO) summed to $1.31 in the second quarter. That puts the adjusted FFO payout ratio at roughly 63%.
That's a fairly conservative payout ratio for a REIT and gives the company plenty of room to deal with further headwinds if it has to. And, unfortunately, it has had to continue working with some of its largest tenants. Most recently it reworked its relationship with Regal, a movie chain owned by Cineworld Group that was forced into bankruptcy. The deal required a lowering of rent and EPR taking back a handful of properties. The value of those properties was instantly written down, which suggests that its movie theater portfolio may not be worth as much as it used to be.
NYSE: EPR
Key Data Points
That's a big issue, because movie theaters currently account for around 40% of EPR's rent roll. Rent coverage in the sector, meanwhile, remains well below where it was prior to the pandemic. On the bright side, rent coverage for the rest of the portfolio is well above where it was prior to the pandemic. All in, rent coverage for the full portfolio is just slightly better now than it was in 2019. That's why taking a prudent approach with the dividend is such a good idea, as it recognizes both the successes and ongoing risks within the REIT's portfolio.
A slowly improving dividend future seems likely
EPR's goal has long been to reduce its exposure to movie theaters, given the material scale of this property type in the portfolio. That won't happen overnight, but the company is now working off of a strong core of other properties as it deals with the still-troubled movie operators. Dividend growth is likely to be modest until it has materially reduced this exposure. But that's not a bad thing -- the high dividend yield is ample compensation for the risk of ongoing headwinds in the theater space. Meanwhile, the low adjusted FFO payout ratio should provide management plenty of room to maneuver even if movie theaters remain a trouble spot for longer.
EPR probably isn't a good choice for conservative dividend investors, given the heavy exposure to one at-risk property type. But for more aggressive investors willing to ride out the transition that is taking place in the portfolio, it might be an interesting option. Just go in knowing that the move away from theaters will likely take time to enact, which suggests a slow growth profile for the dividend in the years ahead.
