Pondering Over Investing in EPR Properties Stock Currently for Long-term Profit Potential?
Individuals aiming for a substantial return and long-term income generation might find EPR Properties (EPR shedding -3.81%) intriguing. This real estate investment trust (REIT) boasts a substantial 7.5% dividend yield, and its third-quarter adjusted funds from operations (FFO) payout ratio stood at a robust 66%.
Could purchasing EPR Properties today pave the way for a lifetime of income?
What is EPR Properties' role?
EPR Properties operates as a property-focused REIT, specializing in a unique segment – experiential assets. Its extensive portfolio includes amusement parks, fitness centers, ski resorts, and cinemas (more on cinemas below). At a time when customers are gravitating towards digital platforms, which has negatively impacted some retail properties, offering spaces where individuals can engage in experiences is an enticing niche for landlords.
While some other REITs are exploring a similar strategy, primarily in the gaming sector, EPR Properties boasts a more varied portfolio. On the other hand, major retail property owners are venturing beyond basic retail (including the incorporation of experiential tenants) to lure customers to malls and shopping centers. Given the emerging trends with customer-facing properties, EPR Properties appears to have an alluring market niche.
As of Q3 2024, the REIT maintained a robust financial position. It recently revised a credit agreement, lowering interest costs, prolonging its maturity horizon, and lifting restrictive debt covenants. In the quarter, the adjusted FFO payout ratio was a noteworthy 66%. Plus, portfolio-level rental coverage increased from 1.9 times in 2019 to 2.1 times in the current quarter.
The company has also been rearranging its portfolio, which warrants caution from investors.
EPR Properties' recovery from a substantial setback
EPR Properties' emphasis on experiential assets was detrimental during the initial phase of the coronavirus pandemic when people were urged to practice social distancing and stay at home if possible. This resulted in the REIT halting its dividend in 2020. The dividend resuscitated and continues to grow, but it remains below its pre-pandemic levels. The primary issue lies in EPR Properties deriving around 36% of its rental income from cinemas.
The pandemic was especially harsh on cinemas, pushing EPR Properties to partner with theater operators to reduce rents and adjust leases. The REIT possesses a roster of cinemas it plans to sell and has already divested from many others as it seeks to lessen its dependency on this property type. Given the scale of the cinema industry, this will likely be a long-term diversification endeavor. Consequently, investors must remain vigilant when tracking EPR Properties' cinema business.
That being said, cinemas will not disappear. Compared to other experiential assets, the film industry stands as one of the largest market opportunities available for investors. Plus, EPR Properties' cinemas have been relatively successful, with the REIT controlling just 3% of North American theater locations and generating 8% of the box office. As a result, EPR Properties is more pruning its portfolio than attempting to abandon the cinema sector.
Beyond cinema repositioning, EPR Properties is also investing in several development projects. Involving project execution risk, this is another aspect of the company's operations that investors need to monitor closely, as it plays a crucial role in the diversification strategy. However, given the strong dividend coverage and enhancing balance sheet, there's no reason to be pessimistic.
Is EPR Properties the right choice for you?
Overall, EPR Properties appears to be an appealing high-yield stock, but it carries risks that should potentially discourage more risk-averse investors from investing. However, for those willing to tolerate a modicum of uncertainty and monitor their portfolios meticulously, EPR Properties seems to be recovering post its difficult exogenous impact (the pandemic). Given the high yield, the risk/reward ratio might prove appealing enough to make it a good investment option for risk-tolerant investors.
- Considering EPR Properties' diversified portfolio in experiential assets and its resilience despite the pandemic's impact on cinemas, investing in it could potentially provide a steady income stream for those willing to accept a moderate level of risk.
- With its high dividend yield and robust financial position, EPR Properties' engaging in development projects and repositioning its cinema portfolio could present an attractive risk/reward opportunity for investors seeking high yields, provided they are willing to closely monitor its ongoing ventures.
