During the height of the coronavirus pandemic, EPR Properties made a tough but vital choice—it halted its dividend. This was a strategic move to ensure it maintained sufficient liquidity to not only weather the storm itself but also support its tenants.
Today, the dividend has made a comeback and is on the rise, yet Wall Street remains wary. The stock is still trading well below its levels prior to the pandemic. This naturally prompts the question: could this be a buying opportunity for investors? The stock has flirted with the $55 mark several times, only to pull back. Is it poised for a breakthrough?
So, what exactly does EPR Properties specialize in? The company is known for owning what’s called experiential real estate. These are properties designed for group activities and include places like amusement parks, ski resorts, and movie theaters. While these properties are somewhat shielded from the digital shift, a global health crisis posed a significant challenge. Since COVID-19 is particularly contagious in group settings, management had little choice but to pause dividends due to the prevailing uncertainty.
Fortunately, EPR Properties managed to come through this challenging period relatively unscathed and even provided assistance to its tenants. The dividend, which was reintroduced after about a year’s break, has been incrementally increased since then. While it hasn’t returned to its prior level, the real estate investment trust (REIT) is clearly working to restore investor confidence.
EPR Properties’ long-term strategy centers on diversification. This strategy highlights why some investors are still cautious, evident from the lackluster stock performance and the substantial 6.7% dividend yield. For context, the S&P 500 yields around 1.2%, and the average REIT offers a yield of about 3.8%.
A significant concern is that roughly 37% of EPR’s portfolio consists of movie theaters. Financially, these theaters are not in great shape compared to their pre-pandemic status. This is underscored by the fact that rental coverage for theaters is currently lower than it was in 2019. Fortunately, other assets within the portfolio have shown improved rental coverage, indicating underlying resilience.
However, with movie theaters making up just over a third of its holdings, this segment poses a major challenge. Management is well aware of this and aims to decrease this exposure over time. But given the size of this segment, addressing this issue could take several years, which could explain why EPR is still under Wall Street’s scrutinizing gaze.
When looking at the price chart, EPR Properties has struggled to sustain momentum past the $55 price tag. Wall Street’s hesitance is palpable, but there’s a silver lining. The adjusted funds from operations (FFO) payout ratio for the fourth quarter was a conservative 70%. This gives management ample room to navigate its portfolio transition without the immediate need for a dividend cut. Plus, with a 3.5% bump in its monthly dividend reported in Q4 2024, the REIT clearly has confidence in its future prospects.
For risk-averse dividend seekers, EPR may not be the ideal fit. However, for those willing to embrace a bit of risk in exchange for a higher yield, it could be an enticing option. The management team is methodically working towards a brighter future, all while maintaining financial prudence to support its dividend long-term. The generous yield could well reward those ready to keep a close watch on the REIT as it gradually reduces its dependence on the movie theater sector.
