EPR Properties: An Entertainment-Focused REIT With A 7% Yield (NYSE:EPR)

EPR Properties (NYSE:EPR) supplies a well-supported 7% dividend yield to income investors that look for something different in their portfolios. EPR Properties is an entertainment-focused REIT and owns a large portfolio of experiential properties such as theaters, tourist and attraction destinations etc. The REIT was hurt by the COVID-19 pandemic that shut down all but the most essential facilities, but EPR Properties has benefited from a strong post-pandemic FFO recovery since. The REIT’s dividend is well-supported by cash flow and shares still have revaluation potential in FY 2024!

Previous rating

I recommended EPR Properties as a sort of countercyclical investment in 2021 when I suggested that the REIT had potential to reinstate its dividend and that it could see a profound FFO recovery related to a reopening of its facilities to the public after COVID-19: EPR Properties Has 30% Upside And A Big Catalyst. Since then, shares of EPR Properties have revalued lower by 8%, but the REIT’s FFO picture has steadily normalized and the dividend was reinstated, as predicted. I believe EPR Properties is a buy for income at this point, but also has revaluation potential.

A unique, entertainment-focused REIT benefiting from a strong FFO recovery

EPR Properties clearly is not your average REIT. Most normal REITs tend to invest in portfolios of residential or commercial properties, but some are unique, like EPR Properties: the REIT chiefly invests in entertainment facilities that offer visitors unique experiences. EPR Properties’ portfolio includes theatres, tourist attraction facilities as well as fitness, wellness and snow-sport destinations. The REIT did decide, however, to reduce its exposure to the theater segment as the trend towards streaming movies and TV shows has hurt attendance numbers of theater chains like AMC Entertainment (AMC). In total, the REIT owned 288 properties in its experiential portfolio and an additional 71 properties in its education portfolio.

During the pandemic, the REIT suffered a decline in its visitor numbers as government authorities restricted travel to contain the spread of COVID-19 and only the most essential facilities were allowed to remain open. In the last three years, however, a major FFO recovery has transpired that fully restored EPR Properties’ revenue and funds from operations profile to pre-pandemic levels. The REIT also resumed paying a monthly dividend in the amount of $0.275 per-share monthly.

Strong balance sheet provides additional support, well-laddered debt maturity structure

EPR Properties has a balance sheet that is rated investment-grade and the REIT has attracted investment-grade credit ratings with stable outlooks from each major rating agency: Fitch, S&P and Moody’s. More than 50% of the REIT’s capitalization also consists of common and preferred equity and the company has a moderate amount of net debt, relative to its total equity, on its balance sheet. With a full FFO recovery taking place and a stable balance sheet to boot, I believe EPR Properties is a promising yield play in FY 2024.

EPR Properties had no debt maturities in 2023 and only has a limited amount in 2024. Overall, the REIT has a well-laddered maturity schedule, with the majority of its debt due in FY 2026 or thereafter.

EPR Properties has potential for a dividend raise in 2024

EPR Properties benefited, as previously outlined, from a profound (adjusted) FFO recovery following the end of the pandemic. With COVID-19 restrictions being eased, visitors returned to the REIT’s numerous attraction properties in 2022 and this year as well.

The result of this recovery has been that the REIT now offers income investors very solid dividend coverage: EPR Properties achieved $1.47 per-share in adjusted diluted FFO in Q3’23, showing a year-over-year increase of 27%. Since the REIT continued to pay only $0.275 per-share monthly as a dividend in the third-quarter, EPR Properties disclosed a dividend coverage ratio of 178% for Q3’23 (162% in FY 2023, YTD). The dividend coverage situation allows the REIT, theoretically, to increase its dividend in FY 2024.

EPR Properties’ fair value

EPR Properties has guided for $5.14 per-share in adjusted funds from operations, at the mid-point, for the current fiscal year. Since the REIT earned $4.89 per-share in FY 2022, EPR Properties is on track to grow its adjusted funds from operations 5% year over year. Assuming that EPR Properties can also grow its adjusted FFO 5% next year (to $5.40 per-share), the REIT is currently valued at a forward P/FFO ratio of 9.1X.

EPR Properties was valued much higher before the pandemic and I don’t see why this valuation could not be restored, especially with the REIT being on track to achieving a similar level of FFO in FY 2024 than it did before the pandemic (EPR Properties’ FY 2019 AFFO was $5.44 per-share). Assuming $5.40 per-share in adjusted FFO for FY 2024 and applying a very reasonably 12.0X P/FFO ratio gives shares of EPR potentially a fair value closer to $65. A 12.0X P/FFO ratio is not outrageous for a REIT that supplies a well-covered 7% dividend yield, in my opinion. With a $65 fair value, shares of EPR Properties could have 32% upside revaluation potential.

Risks with EPR Properties

An investment in EPR Properties is contingent on the assumption that the U.S. economy is not dipping into a recession and consumer spending is not set for a contraction. As long as consumers are willing to spend money freely on travel and leisure experiences, EPR Properties is set to continue its FFO growth. However, a major decline in consumer spending or a new pandemic would likely negatively affect the REIT’s funds from operations trajectory.

Closing thoughts

I recommended EPR Properties more than two years ago and believe the REIT is supplying a well-supported 7% dividend yield to its investors after the dividend was reinstated in FY 2021. A major FFO recovery has taken place since, and I continue to see moderate FFO upside as long as the U.S. avoids a recession and consumer spending is growing. EPR Properties also has an opportunity, given its decent dividend coverage metrics, to raise its monthly dividend in FY 2024!