EPR Properties (EPR -0.32%) has an interesting focus on experiential real estate. That includes things as varied as ski resorts and amusement parks. For more aggressive investors, the stock's huge 7.9% dividend yield will probably be very enticing. But that high yield is also an indication of the risk that comes with EPR's unique focus. Here's why conservative investors will probably want to stay away for now.
EPR's dividend is well covered
Before getting into the big negative for EPR, it is worth giving the real estate investment trust (REIT) some credit. Indeed, it has earned it. The fact is that owning properties specifically designed to bring people together in a group setting was a terrible focus in 2020 as the coronavirus started to spread around the world. Economies were basically shut down, and people were asked to practice social distancing.
Image source: Getty Images.
EPR reacted quickly, briefly eliminating its dividend as a precaution. It worked with tenants to help them muddle through a very uncertain environment. The dividend has been reinstated, though at a lower level, and it has even been increased once.
At this point, however, the board is taking a conservative approach to the dividend. The adjusted funds from operations (FFO) payout ratio was a modest 63% in the second quarter. That leaves plenty of room for adversity before the dividend would be at risk again. Unfortunately, there's a good reason for EPR to take a conservative approach.
EPR has too much exposure to one troubled sector
So far, dividend investors are looking at a rebounding business with a high yield and well-covered dividend. There's a lot to like there. But the high yield is there for a reason in this case. It is a warning to more conservative investors that there are risks in the business model.
The most important risk for investors to understand is that 40% of the company's portfolio is focused on movie theaters. No other property type in the portfolio comes close to that. If something should come up in the movie theater arena, EPR would have a big problem on its hands.
Of course, something has come up in the movie space. The most noteworthy event was the pandemic. But there are other factors that have created a lingering headwind for the movie industry. A big one is that people are changing the way they consume media. A movie theater just isn't the way many people prefer to see movies. And, increasingly, movie companies are trying to push movies out to consumers through streaming platforms as quickly as possible. That, essentially, allows consumers to watch movies whenever and wherever they want -- no need to go to a movie theater.
One important number bears this out. The rent coverage in EPR's movie theater portfolio was 1.7 times prior to the pandemic, and it is 1.3 times today. The rest of the REIT's portfolio improved from 2.0 times to 2.7 times. Clearly, the movie theater portfolio remains a major trouble spot, and its size just adds to the risk.
EPR is changing slowly
EPR isn't ignorant of the risks it faces in the movie theater niche. It is working with tenants, finding new tenants to replace weak ones, and selling movie theaters when appropriate. And, to be fair, the movie theater business is starting to improve. Still, the end goal here is to reduce the concentration risk from movie theaters. But until EPR is further along in the process, conservative investors should probably continue to watch from the sidelines.
