Rising interest rates have led investors to shift away from risky high-yield stocks and put cash into safer alternatives, like CDs, which now come with yields of around 5%. That's one of the reasons why real estate investment trust (REIT) EPR Properties' (EPR 0.24%) dividend yield is 7.9% today. But it isn't the only reason.
If you are looking at this stock, it is important to know these three things before you buy it.
1. EPR Properties has a unique focus
As a REIT, EPR owns physical properties that it rents out to tenants. It uses a net-lease approach, so those tenants are responsible for most property-level operating costs. At this point in the story, EPR sounds like a lot of other REITs you could buy.
Where things start to differ is in the types of properties it buys, which are all geared toward providing consumers with experiences. That means it owns properties like movie theaters, ski resorts, and amusement parks, among many other things. It's hardly the only company that owns such assets -- casino-focused REITs would likely be considered experiential as well. However, EPR Properties has a broader focus on assets that bring people together in groups.
Of course, this proved to be a terrible business approach during the early days of the coronavirus pandemic, when people were asked to socially distance themselves. Things were so uncertain that the board decided to suspend the dividend for a time. But from a longer-term perspective, it does appear that experiences are increasingly important to consumers, particularly younger ones. So EPR's experiential focus is probably a solid approach. But it does come with risks that shouldn't be ignored.
2. EPR's dividend is back and on solid ground
While the coronavirus is now a permanent part of the world landscape, it now appears that people have figured out how to live with the risk. So the REIT's business has improved materially, and it has started paying dividends again. But the dividend isn't back to previous levels.
Prior to the suspension, the dividend was $0.3825 per share per month. When the dividend was brought back in 2021 it started at $0.25 per share per quarter. It was raised to $0.275 at the end of 2022. That's not exactly great news, but there's a silver lining. The company's adjusted funds from operations (FFO) payout ratio in the first half of 2023 was a robust 63%. That should provide plenty of leeway for the REIT to deal with any further adversity that may come its way, as well as allow for future dividend hikes.
3. Movie theaters are still a notable problem
That extra leeway is a good thing because the company still relies heavily on movie theaters, which represented around 40% of its rent roll in the first half of the year. The problem here is that rent coverage for its movie theater properties has fallen from 1.7 times before the pandemic to just 1.3 times. Rent coverage for the rest of its portfolio increased from 2 times to 2.7 times over the same span.
EPR recently worked out a deal with bankrupt movie chain Regal that will lead to lower rents and the need to sell or transition assets that Regal no longer wants to lease. This is not the only movie chain that is dealing with difficulties, so there's a risk that more renegotiations will have to take place. That increases uncertainty and is the other big reason for the stocks' high yield today. Notably, the REIT wrote down the value of some of its movie theater assets after the Regal deal, which suggests that the theater portfolio may not be as attractive as it once was.
To be fair, the company is making good progress in dealing with the movie theater headwinds, and it has a long-term goal of reducing its movie theater exposure. But for now, there remains substantial uncertainty about this very large portion of the REIT's business. Investors need to go in here understanding this fact.
EPR comes with risk, but it may be worth it
Given the still-heavy theater exposure, EPR Properties probably isn't a great option for conservative income investors. However, the REIT's rather unique focus, solid payout ratio, and efforts to reduce its movie theater risk might interest more aggressive investors looking to create a large income stream. The smartest investors, however, know that the big 7.9% yield comes with some risks that need to be closely monitored.