Many high-yielding dividend stocks slumped as interest rates rose in 2022 and 2023. Those higher rates lifted the yields of CDs and T-bills above 5%, so many income investors shifted their cash from stocks toward those safer fixed-income investments.
However, the Federal Reserve finally cut its benchmark rate twice in 2024 as inflation cooled. Those reductions, along with expectations for future cuts, drove many investors back toward dividend stocks again as fixed-income yields declined.
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Real estate investment trusts (REITs) -- which buy properties, rent them out, and split the rental income with their investors -- are attracting more attention in this market because they're required to pay out at least 90% of their taxable income as dividends to maintain a favorable tax rate. As a result, they usually pay much higher yields than traditional dividend stocks.
One such high-yielding REIT is EPR Properties (EPR -0.57%), which rents its properties to amusement parks, movie theaters, ski resorts, and other experiential and educational businesses in the U.S. and Canada. It's paid continuous dividends since its public debut in 1997, it switched from quarterly to monthly payments in 2013, and it pays a hefty forward yield of 7.5%. Let's see if it's the right time to buy, sell, or hold this resilient REIT.
How stable is EPR's portfolio?
EPR is a triple net lease REIT, which means its tenants are responsible for covering all of a property's real estate taxes, insurance, and maintenance fees. It owns 352 properties and serves more than 200 tenants in 44 states and Canada. But in the first nine months of 2024, it generated 45% of its revenue from just four tenants -- Topgolf (14.3%), AMC Theaters (13.6%), Regal Cinemas (11.1%), and Cinemark (6.3%).
EPR's heavy dependence on the declining movie theater market is a sore spot. Only 852 million movie tickets were sold in the U.S. in 2023, representing a 46% drop from the peak of 1.85 billion tickets in 2002, and that decline could continue for the foreseeable future. Streaming video platforms, cheaper big screen TVs, and soaring ticket prices have all driven more people to watch movies at home.
But despite those challenges, EPR still maintained an occupancy rate of 99% at the end of the third quarter of 2024. It accomplished that by selling its vacant theaters, gaining more non-theater experiential tenants, and expanding its smaller portfolio of education properties.
In 2020, EPR's funds from operations as adjusted (FFOAA) per share plunged 74% as the pandemic crushed its tenants. But its FFOAA rose 116% in 2021, 52% in 2022, and 10% in 2023 as those headwinds waned and it restructured its portfolio. It expects that figure to rise 3% in 2024 and 3%-4% annually.
How does EPR stack up against similar REITs?
At $45 per share, EPR trades at just 9 times last year's FFOAA. That makes it a lot cheaper than comparable triple net lease REITs like Vici Properties and Realty Income, which both trade at 14 times their trailing adjusted FFO per share. Vici and Realty also pay lower forward yields of 5.4% and 5.5%, respectively.
But EPR also serves a messier mix of tenants than Vici, which focuses on the casino and resorts markets, and Realty Income, which mainly rents its properties to recession-resistant retailers. EPR also doesn't lock its tenants into multi-decade, inflation-linked contracts like Vici (which still has an occupancy rate of 100%). Instead, EPR's average lease lasts roughly 12 years with gradual rent increases every five years.
EPR has also underperformed Vici and Realty Income over the past six years. Even after including reinvested dividends, EPR generated a negative total return of 8% as Vici and Realty generated positive total returns of 106% and 24%, respectively.
Is it time to buy, sell, or hold EPR Properties?
Past performance is an unreliable indicator of future gains, but EPR's weaker returns likely reflect the concerns regarding its movie theater tenants as well as the exposure of its other experiential tenants to slower consumer spending and other economic headwinds.
EPR is still a fairly safe stock to buy and hold right now if you expect it to maintain its high occupancy rates as it prunes its portfolio. But I think Vici and Realty Income -- which I personally own -- are better long-term income plays even though they pay lower yields.
