EPR Properties (EPR -0.57%) did one of the worst things that a dividend stock can do, it cut its dividend. In fact, at one point, it completely suspended the dividend in an effort to preserve cash. It's understandable if investors are a bit leery of EPR Properties now that its dividend is back (and growing again). But for investors with a long-term focus, Wall Street's concerns could be an opportunity, noting that the dividend yield is a very generous 7.6%.
What went wrong at EPR Properties
The simple reason for the dividend suspension and cut at EPR Properties is the coronavirus pandemic. But there were plenty of other real estate investment trusts (REITs) that made it through that period without cutting (or suspending) their dividends. So this answer isn't sufficient, it requires a deeper dive.
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EPR Properties' name is a bit nondescript. It used to be called Entertainment Properties Trust, highlighting specifically its focus on experiential assets. The list of property types in which it invests includes things like amusement parks, ski resorts, and movie theaters, among others. The general thesis is that these types of properties are relatively immune to the shift toward online shopping, making them desirable long-term assets to own.
That isn't bad logic, but it is logic that got upended during the early days of the pandemic. Indeed, people were asked to socially distance back then and many businesses that weren't deemed necessities were closed. Nobody needs to go to an amusement park and those who want some entertainment can always watch Netflix (NFLX -1.80%) at home. Given the uncertainty at the time and the expectation that its tenants would be under financial strain, EPR Properties chose to suspend its dividend.
The longer-term problem for EPR Properties that it is trying to solve
That said, when EPR Properties brought the dividend back it was at a level that was below the pre-pandemic rate. Even after several increases the dividend remains below the pre-pandemic rate. That's a function of two things hinted at above, movie theaters and the growth in digital media consumption. Prior to the pandemic, movie theaters made up around 45% of EPR Properties' business. That's a huge number and, in hindsight, opened investors up to material risk. Still, while nobody could have predicted the pandemic timing, it was already clear in 2019 that online media consumption was a big and growing trend.
EPR Properties has learned the lesson and reducing its exposure to stand alone theaters is a key focus. At the end of the third quarter theaters made up 36% of the business. Investors might rightly suggest that EPR Properties needs to do more, which is true, and that's the goal. However, given the size of the exposure it can't just rip the bandaid off, so to speak. And, notably, it owns some very profitable theaters, so it probably makes more sense to prune its portfolio while growing other segments of the business. That's inherently going to be a slow and steady process.
But the company's portfolio shows it is making progress. Some highlights include fitness and wellness jumping from 0.9% of the business to 8% and attractions rising from 6% to 12%. All in, management has a plan, has outlined it for investors, and is executing on it. That's what shareholders should want to see.
How safe is EPR Properties' dividend?
Given the lofty 7.6% dividend yield, it is pretty clear that Wall Street is in a show-me mood when it comes to EPR Properties. That's not unreasonable given the dividend history and still heavy focus on theaters. However, the company's third quarter adjusted funds from operations (FFO) payout ratio was a solid 66%. That leaves a lot of room for adversity before a dividend cut would likely be in the cards again. And it suggests that more aggressive investors willing to ride along for EPR Properties' turnaround can collect big dividend checks while the REIT improves its long-term outlook, just like it said it would.
