EPR Properties (EPR -0.32%) is having a bounce-back year. The real estate investment trust (REIT) has collected most of the rent it deferred during the pandemic. It also signed a comprehensive restructured lease with a key tenant. That has given the company much more clarity on its future rental income.
Despite all this progress, shares have fallen nearly 15% from their recent peak, pushing its dividend yield up to 8.4%. That higher-yielding payout makes the REIT focused on movie theaters and other experiential real estate a top buy for those seeking an attractive income stream.
A strong quarter
EPR Properties recorded $1.47 per share of adjusted funds from operations (FFO) during the third quarter. That was up 20.5% from the year-ago period. The REIT generated more than enough income to cover its monthly dividend, which totaled $0.825 per share in the quarter. That allowed the REIT to retain cash to fund new investments and maintain a strong balance sheet.
One of the factors boosting the REIT's income was that it has continued to collect rent it deferred during the pandemic, with interest. The company collected $19.3 million of deferred rent during the quarter. Most of that was from theater tenants. Southern Theaters repaid its remaining $11.6 million in deferred rent after Santikos Theaters acquired the company during the quarter. EPR also collected some deferred rent from Regal as part of its comprehensive restructuring agreement.
The REIT has now collected over $150 million in rent and interest it deferred because of the pandemic. It has less than $1 million of deferred rent remaining to collect.
The Regal deal became effective in August and covers 41 theaters. The company started collecting rent on that new lease that month. The REIT also took back 16 properties Regal had leased as part of the deal. Five reopened in August and are now operated by third parties and generating income.
EPR sold one of the remaining vacant former Regal theater properties during the quarter and plans to sell the other 10. It also sold another empty theater and two early childhood education center properties in the period. The company generated $26.6 million in cash proceeds from those sales, recording a $2.6 million gain. That brought its 2023 property sales to $35 million.
The company also funded $36.8 million of investments in the quarter. That brought its 2023 total to $135.5 million. Even with that investment spending, EPR ended the quarter with a very strong balance sheet. It had $173 million of cash and no borrowings under its $1 billion credit facility. It also has no debt maturing this year and only $136.6 million coming due in 2024.
An improved outlook
EPR Properties' strong showing has allowed it to increase its full-year guidance. The company anticipates that its FFO will be in the range of $5.10 to $5.18 per share, an increase from its prior range of $5.05 to $5.15 per share. That has the company on track to generate even more post-dividend free cash flow since its dividend payments will total $3.30 per share this year (giving it a 64% dividend payout ratio at the midpoint of its updated guidance range).
The company also narrowed its investment range from $200 million to $300 million to $225 million to $275 million. Given its investment spending level through the third quarter, this new range implies the REIT will spend around $100 million by the end of this year. The company also noted that it has committed to investing about $235 million in experiential development and redevelopment projects over the next two years.
EPR Properties will finance these investments with post-dividend cash flow, balance sheet capacity, and capital-recycling initiatives. The company raised its asset sales guidance to a range of $45 million to $60 million, up from its prior forecast of completing $31 million to $41 million of dispositions. As noted, it plans to sell 10 more vacant theater properties formally leased to Regal.
A brighter future
The pandemic was a challenging period for EPR Properties and its tenants. However, the REIT has now put that in the rearview mirror by collecting nearly all the deferred rent and restructuring its lease with a key tenant. That's giving it increasing visibility into its future rental income, which is more than enough to cover its high-yielding dividend. It's using that excess cash to maintain a strong balance sheet and invest in new experiential properties.
Those investments should grow its cash flow in the future, further improving the long-term sustainability of its dividend. These features make it look like a top buy for those seeking an attractive monthly income stream.
