EPR Properties: Portfolio Restructuring, 8.2% Yield And Return To FFO Growth In 2025

EPR Properties (NYSE:EPR) is an entertainment-focused real estate investment trust with a unique portfolio and income opportunities in the experiential market.

The REIT has a broad footprint in various entertainment segments and produced high single digit FFO growth in 2023. The company is still seeking to reduce its exposure to movie theaters, which are experiencing attendance pressure due to the availability of streaming offers, but EPR Properties’ dividend was extraordinarily well-covered in the fourth quarter as well as in 2023.

Taking into account that the REIT continues to produce solid AFFO growth and that EPR Properties raised its dividend in February, I think that EPR Properties is a solid stock to buy for income.

My Rating History

Last September I sounded the alarm on EPR Properties’ exposure to cinema chains because I saw risks with the company’s exposure to AMC Entertainment Inc. (AMC) which is struggling and recently had to raise capital again.

The trust, against my expectations, did quite well since my last review, and produced robust growth in FFO. The stock went into a correction in 2024, however, likely because investors still see lease risks with AMC Entertainment (a situation that I will discuss in this article). Though the stock price is down 15% year to date, the operational performance was better than I anticipated.

EPR Properties was (and still is) overly reliant on movie theaters, which accounted for 37% of the company’s earnings. With that being said, the fact that the trust is reducing its exposure to cinemas and still growing its FFO spells less trouble for EPR Properties than I anticipated.

Consequently, I am modifying my stock classification for EPR Properties from Hold to Buy (for passive income).

Unique Portfolio Position And Focus On Emerging Strategic Shift

EPR Properties owned a $6.8 billion real estate portfolio as of December 31, 2023, that included a variety of real estate assets: Theaters, ski resorts, education facilities (which are particularly geared at early childhood education), fitness and wellness locations and other entertainment niches are part of the trust’s real estate base that produces a large amount of recurring FFO.

2023 was a solid year for EPR Properties from a growth perspective. The REIT earned $397.2 million in FFO (as adjusted), reflecting 12% YoY growth. This growth was driven primarily by growing leisure spending in a sizzling U.S. economy as well as strong results from the North American box office, which grew sales 20% compared to 2022. This growth has offset some of my concerns that I had with EPR Properties aggressive exposure to movie theaters.

The biggest income category in 4Q-23 was still represented by cinemas, though the percentage of earnings this segment produces declined from 40% last time I analyzed the trust compared to 37% now.

Moving forward, EPR Properties is probably going to divest of its movie theaters in order to shift its portfolio mix towards other preferred categories like attraction facilities, experiential lodging or ski resorts.

According to Statista, AMC Entertainment’s theaters are seeing a substantial rebound in attendance numbers after Covid-19. Attendance numbers are not back up to pre-Covid levels, but the trend is encouraging, and it supports management’s strategic plan to transition away from cinema investments.

Investors should anticipate to see select theater divestments, with them possibly getting sold to operators, and EPR Properties recycling those proceeds into other strategic growth areas in order to offset declines in FFO.

Though U.S. cinemas have seen a recovery in attendance numbers after Covid-19, they still remain way below levels seen right before the pandemic.

The threat posed by streaming services to cinemas is the main reason why EPR Properties is strategically divesting from this segment. I anticipate that EPR Properties will shrink its theater portfolio considerably in the next couple of years and invest in the company’s other core assets such as Eat & Play facilities, ski resorts, fitness, attractions and gaming (those sectors that management highlighted as growth areas for the trust moving forward).

With the U.S. economy being on an upswing and adding a good amount of jobs in March, consumers are still willing to spread their money around, which could make consumer spending-dependent experiential properties particularly attractive as income-generating investments. The situation might change if the U.S. economy goes into a recession and consumers cut back on discretionary spending.

FFO Pay-Out Ratio, Guidance And FFO Multiple

The most compelling feature of an investment in EPR Properties is that the experiential REIT has a very low dividend pay-out ratio based on FFO as adjusted and considerable excess dividend coverage. EPR Properties reports FFO as adjusted, which is regular FFO corrected for severance expenses, real estate transaction expenses and provisions for credit losses.

The trust earned $5.19 per share in FFO as adjusted, while it paid out $3.30 per share in dividends cumulatively in 2023. This in turn equates to a dividend pay-out ratio of 64%, a ratio low enough to leave substantial room for dividend growth.

The significant excess dividend coverage was the primary reason why EPR Properties raised its dividend by 3.6% in February: Starting in April, EPR Properties will pay passive income investors a $0.285 per share per month dividend, which equates to a leading dividend yield of 8.2%.

EPR Properties sees $4.76 to $4.96 in FFO in 2023 which equates to a YoY negative growth rate in this critical metric of 6%. The company anticipates a drop in FFO as its restructures its portfolio and sells non-core assets and, according to EPR Properties’ guidance for 2024, the trust guided for a disposition volume of $50-75 million.

Since the trust divests non-core assets, the decline in FFO was to be expected and makes sense. As EPR Properties recycles cash into new investments, however, I would anticipate the trust to achieve single digit positive FFO growth again next year.

Based on a stock price of $41.72, the trust’s FFO (as adjusted) are selling for an 8.6x multiple. This multiple compares against an FFO multiple closer to 10.0x at the start of the year and since EPR Properties should be able to return to growth in 2025, I think that the present correction in the stock price represents a buying opportunity.

With EPR Properties possibly returning to growth next year as the trust funnels proceeds from non-core asset sales back into new income-producing real estate investments, I think that the trust’s stock could re-rate to 10.0x FFO multiple. A 10x FFO multiple (as I pointed out last time) is realistic in a good economy and considering that there won’t be any major issues with AMC Entertainment’s lease payments. This would leave us with an intrinsic value of $51 (based on a 5% estimated FFO growth rate in 2025).

My FFO estimate implies that the trust is indeed set to return to positive growth in 2025. The estimated 5% growth in FFO, driven by recylicing of asset proceeds, implies an FFO target of $5.10 in 2025 which is the basis for my valuation. My FFO multiple that I used here, 10x, did not change since my last review of EPR Properties. However, my intrinsic value estimate might change moving forward based on the trust’s realized FFO potential.

With that being said, both the returning to FFO growth as well as a new dividend hike could be catalysts for a re-rating.

Cyclical Profit Risk

EPR Properties is focused on entertainment properties like cinemas, ski resorts and golf clubs which produce a solid amount of sales and profits during an economic upswing, but spending patterns supporting the trust’s financial metrics change during a recession.

Leisure spending is discretionary, and people tend to adjust their spending plans when they feel that economic times are getting tougher. As a consequence, EPR Properties has much more cyclical profit risks than other REITs, for instance, in the apartment sector. Still, taking into account the trust’s low FFO pay-out ratio, the dividend has a high margin of safety.

Furthermore, asset divestitures also mean that the trust is going to lose some of its FFO, at least in the short-term, until new investment opportunities can be realized. I think that EPR Properties has a lot of opportunities to redeploy cash as the trust is active in a variety of sectors. Nonetheless, there is a risk of FFO dips that might fuel investors’ anxiety about EPR Properties’ portfolio restructuring.

My Conclusion

EPR Properties is a pro-cyclical experiential REIT with a really unique collection of real estate assets in a variety of industries.

While the trust is still overweight movie theaters, management has said that it is going to reduce its strategic exposure to the sector and since my last coverage, EPR Properties earnings contribution from theaters has dropped from 40% to 37%, with a further contraction under way. As a consequence, EPR Properties anticipates a drop in FFO in 2024, compared to 2023, but the dividend as such is very well-covered.

Furthermore, EPR Properties raised its dividend by 3.6% and has a low pay-out ratio based on FFO which equates to a high degree of dividend safety.