Title: Is EPR Properties Delivering on Its Ultra-High-Yield Investment Plan? Worth Investing Now?
EPR Properties, currently sporting a less than ideal 1.4% dip, made headlines for a divisive move – slashing its dividend. In the initial stage, the company even suspended this income source entirely, aiming to protect its finances. This decision might set off alarm bells for some investors, but for those with a long-term perspective, it could be an intriguing opportunity, given the appealing 7.6% dividend yield.
What Got EPR Properties in Hot Water
The mandatory distancing and closures due to the coronavirus pandemic painted a bleak picture for EPR Properties, simply because their portfolio primarily comprised 'experiential' assets, like amusement parks, ski resorts, and movie theaters. While it's unfounded to blame the pandemic alone, there were other Real Estate Investment Trusts (REITs) that successfully navigated that phase without having to cut or suspend their dividends. So, let's dig deeper to find the real reasons behind EPR Properties' predicament.
The name EPR Properties itself is reasonably nondescript. It used to go by Entertainment Properties Trust, emphasizing its focus on interactive properties. Its investments span diverse sectors, encompassing fun spots such as amusement parks, ski resorts, and movie theaters. The notion was that these types of properties withstand the shift towards e-commerce quite well, making them attractive long-term investments.
However, the onset of the pandemic confronted this logic head-on. Governments urged people to keep their distance, closing businesses deemed non-essential. Entertainment venues were the first to feel the heat, with social distancing rendering them almost obsolete. Amusement parks were deserted, whereas the 'theater experience' took a hit due to superlative at-home options. Under these circumstances, it made sense for EPR Properties to suspend its dividend.
The Long-Term Conundrum EPR Properties is Trying to Solve
When EPR Properties decided to bring its dividend back into play, it was at a lower rate compared to pre-pandemic times. Despite a series of subsequent increases, the dividend still falls short of the former levels. That can be attributed to two factors – movie theaters and the meteoric rise of digital media consumption. Prior to the pandemic, movie theaters contributed approximately 45% to EPR Properties' total earnings. That is a hefty chunk and, in retrospect, exposed investors to a significant risk that nobody could have foreseen beforehand.
Though no one could have predicted the pandemic, it was evident in 2019 that online media consumption was fast becoming a game-changer. EPR Properties has learned its lesson, and reducing its reliance on theaters is on its to-do list. As of the third quarter, theaters account for 36% of their total revenue, a tad lower than earlier.
Investors may suggest that EPR Properties should act more swiftly, but pragmatically speaking, it's not an easy task to rip the band-aid off instantly. The company also owns several profitable theaters, so it makes sense to trim its portfolio while expanding other segments gradually.
How Safe is EPR Properties' Dividend?
Given the generous 7.6% dividend yield, scrutiny of EPR Properties is understandably intense, especially after its less-than-stellar dividend history and ongoing reliance on theaters. However, its third-quarter adjusted FFO payout ratio stands at a healthy 66%, indicating that there's ample room for adversity before another dividend cut is likely to materialize. It also signifies that investors prepared to ride the 'EPR Properties turnaround' wave can reap substantial dividend rewards while the REIT improves its long-term prospects.
Enrichment Data:
- Factors Leading to EPR Properties' Dividend Suspension and Reduction During the COVID-19 Pandemic:
- Experiential business model
- Tenant financial struggles
- Revenue and FFO decline
- Addressing Heavy Reliance on Theaters:
- Diversification efforts
- Improving tenant financial health
- Strategic investments
- FFO payout ratio
- Long-Term Outlook:
- Ongoing challenges
- Path toward improvement
- Restoration of dividend and growth
Despite the company's efforts to diversify and reduce its reliance on movie theaters, the uncertainty around their future remains. Therefore, it's wise for potential investors to consider diversifying their own portfolios, spreading their money across various sectors to reduce risk.
Moreover, savvy investors might see this as an opportunity to invest in adjacent sectors that benefit from EPR Properties' shift, such as virtual reality or online entertainment platforms that complement 'experiential' assets. Such investments could potentially yield high returns as the market evolves.
