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EPR: Dividend Suspension A Prudent Move, But Keep Avoiding The Stock

May 08, 2020 9:15 AM ETEPR Properties (EPR)AMC110 Comments


  • I had previously criticized EPR for buying back stock and paying an unusually large dividend despite facing a huge decline in revenues.
  • The company announced Wednesday that it is suspending both the share buyback and dividend for the foreseeable future.
  • This is the correct move by management, and relieves some of my concerns about its capital allocation strategy.
  • Unfortunately, the company is still in a bind. I expect shares to trade lower.
  • Looking for a helping hand in the market? Members of Ian's Insider Corner get exclusive ideas and guidance to navigate any climate. Get started today »

On Wednesday, entertainment and experiences-focused REIT EPR Properties (NYSE:EPR) announced earnings. The earnings themselves weren't that bad. That wasn't too surprising as the virus didn't really start to cause major problems until early March, well into the quarter.

However, the bigger story was that the company decided to make major changes to its capital allocation strategy. That comes as EPR's tenants face a prolonged disruption to operating their businesses.

As a result, EPR scrapped the share buyback that it had just announced back in March. That wasn't too surprising; last month I explained why a buyback was a puzzling move given the economic situation. EPR didn't just axe the buyback either, it also suspended the dividend indefinitely as well. That one stung - the company's bulls had conceded that a dividend cut might be coming, but few were expecting a complete dividend freeze so soon.

What changed? Reading the company's press release Wednesday, it appears that the banks may have forced the company's hand. EPR gave a detailed discussion of the company's debt situation and in particular its covenants:

Because certain financial covenants under [EPR's] bank credit facilities and its private placement notes are calculated based on the most recent quarterly net operating income, the Company expects that it will not be in technical compliance (non-payment related) with such covenants at the end of the second quarter of 2020. Accordingly, the Company is in discussions with its lenders and private placement note holders to obtain a temporary suspension or modification of these covenants, with some suspended financial covenants expected to extend through the first quarter of 2021.

As a reminder, when a company trips covenants, debtholders typically have a range of options at their disposal - some drastic - to handle the situation. An inability to comply with covenants can lead to unpleasant outcomes for shareholders.

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This article was written by

Ian Bezek profile picture

Ian Bezek is a former hedge fund analyst at Kerrisdale Capital. He has spent the decade living in Latin America, doing the boots-on-the ground research for investors interested in markets such as Mexico, Colombia, and Chile. He also specializes in high-quality compounders and growth stocks at reasonable prices in the US and other developed markets.

Ian leads the investing group Ian's Insider Corner. Features of the group include: the Weekend Digest which covers everything from new ideas to updates on current holdings and macro analysis, trade alerts, an active chat room, and direct access to Ian. Learn More.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (110)

Brad Thomas profile picture
@Ian Bezek Where are the bullish EPR articles?

Drive (Shack) For Show And Putt For Dough seekingalpha.com/...
Ian Bezek profile picture
Good point, it seems they've disappeared ever since the dividend suspension.
Brad Thomas profile picture
@Ian Bezek

Moody's downgraded EPR's senior unsecured and issuer ratings to “Baa3” from “baa2” with a negative outlook
@Brad Thomas, this rating not a serious criteria to buy, hold or sell EPR. EPR is buy or at least hold, imo. Next after all movie theaters open across US and world, EPR can resume distribution of the monthly dividends and that will create a good spike up.
Sadly, EPR As it is currently organized will not survive Covid-19. I suspect that they will be bought by Blackstone or Brookfield at a substantial discount to book value. Their tenants are the most exposed to covid. Water/Theme parks, ski resorts, TopGolfs and movie theaters will see a wave of bankruptcies. Just about every tenant will ask for an adjustment in their rental rate to survive as it will take long to return to business as usual.
Rombo profile picture
@Johnny Utah 777
What if it doesn't take so long?
You could be right, but you don't know for sure...
There are signs to the opposite.
Orchid Research profile picture
@Ian Bezek At what price would you consider EPR as a buying opportunity?
Ian Bezek profile picture
I guess if it took out the March lows I might take a look on the long side, but with so many good REITs on deep discount, why focus on this? I was long and wrong and sold for a loss CBL, WPG, SKT, and UNIT among others, in prior years. Would have lost way more if I had stuck around - bad things happen the longer you own shrinking businesses.

EPR's management has started making questionable if not bad decisions, the values of their main assets are in freefall, and cap rates will be permanently blown out on stuff like cinemas going forward. Plus you have potential tape bombs awaiting you if/when companies like Top Golf file. Surely you can find better upside elsewhere in REITdom.
Darren McCammon profile picture
The suspension of the common dividend retains cash which should help the company recover thereby making the cumulative preferred a better investment.
Fear Creates Opportunity: Triple Net Lease Preferred
Brad Thomas profile picture
EPR Properties: This Leading 'Experiential' REIT Has Become Quite The Experiment seekingalpha.com/...
Good piece and just proves what I have been saying all along about this name. Those pounding the table simply do not understand what is going on and how bad the set up is for EPR moving forward. This is definitely a name to avoid.
Amazon & AMC in buyout talks . If deal emerges great news for EPR.
rlp2451 profile picture
Don't see that as a positive for EPR. Sale would be far below what EPR has invested in the properties.
So why was the stock up 7% on Friday? Confused. It’s as if there was more buying than selling. Weird. No position.
@stevenweinberg33 The dividend suspension removed some uncertainty. There were clearly investors waiting to pounce if/when it was cut (and after any resulting selloff). That said, I was surprised and slightly annoyed that it went up so much on Friday because I trimmed my position on Thursday. Just another reminder that the only way to play this market is to think long-term and try to ignore the noise.
The suspension did not tank the stock which demonstrates confidence in EPR future
@Cyclenut And it also demonstrated that the stock had already tanked. :-) But I do agree that the future for EPR is better than many think.

Long EPR
EPR went from buyback/dividends to zilch overnight. I question executive leadership know how. Do they really have the ability to think years ahead when they couldn't predict tomorrow despite seeing things unfold...like a virus and their largest tennant having issues. I would avoid.
Looks like loan covenants do not allow them to continue to pay a dividend and buyback shares while they are unable to collect enough to cover them even though they have plenty of cash to do so. At the time they announced the share buyback it was possible that the US would be able to avoid the worst and the covenants wouldn't be an issue.
Carnival Cruise Bookings Surge Despite Coronavirus Pandemic.. Up over 200% vs LY, clearly this demonstrates that people are eager to return to normal social standards and will resume every activity they enjoyed prior to this overdone shutdown. Theaters, golf, ski, water parks will thrive once again once allowed to open by our elected officials who no matter what happens get paid and risk nothing.
rlp2451 profile picture
"Carnival Cruise Bookings Surge Despite Coronavirus Pandemic.. Up over 200%"

Meaningless statistic. What if they said it was up 100%? 50%? 500%?

Any number would appear to be better than zero. And given the discounts they've offered, I'm surprised it's that low.

PR gimmick.
200% over same period last year is not meaningless.. you can chose to believe and think whatever you want but you can't make up your own facts .
rlp2451 profile picture
Pentup demand over a two month period certainly should have been a lot more than 200% when there were no restrictions on making a reservation last year. What facts am I making up?
I do agree that "temporary" dividend suspension is very vague and they could have qualified it with hitting some income targets that would give temporary some clarity. Maybe once we receive 50 or 60% of contractual rent obligations we will reinstate the monthly common dividend. That is providing clear direct info that shareholders can take into account making decisions.
They only collected 15% of rent last month. They won't have any idea of when that will increase until the tenants are allowed to reopen. When do you believe 50% of theaters will reopen?
Mason A profile picture
EPR has more than doubled the market since your last article in which you told people not to buy it. That means you gave bad advice and potentially made people miss out on a lot of easy cash. Maybe it'll work out for you this time.
Ian Bezek profile picture
How does a move from $25 to $27 equal a double, walk me through the math there. Meanwhile they in fact cut (eliminated in fact) the dividend, as my previous article warned.
@Mason A "That means you gave bad advice and potentially made people miss out on a lot of easy cash."

Totally irrelevant. In a logical sense, bad results does not equal bad advice.

And talking about easy cash, nothing is as easy as what someone else has to do. Are you saying you can trade precisely the short term swings?

Finally, you (people) and you alone, are responsible for due diligence and your own results. If you make the mistake of following "bad advice," it is your own fault.
I can't speak for the person you are replying to, but I can state in my case it's true. I bought the majority of my shares in the mid 13's. I bought the bulk of the rest of my shares at $14. I bought a just a smidgen more right around $20. So it has been easy money in the sense it has been a quick uptrend , nothing but up, so far.

But more than that, it took guts to buy at that level. Some would say I am crazy or worse to buy EPR at that level. But facts are facts. My investment has paid off so far. It could turn lower, if the theatres can't get open. I understand that. But I think the theatres will get open in July. I have read those who think I'm crazy, but they can think what they want.

But I have done well, and I don't take it for granted that it will continue. However, I believe it will. So far the market agrees with me, otherwise EPR wouldn't be going up.
Daniel-san profile picture
Ian - You say they suspended the dividend 'indefinitely' but their statement clearly said "temporarily suspend its monthly cash dividend to common shareholders".

Where are you getting an *indefinite* suspension from?
Ian Bezek profile picture
Indefinite - adjective - lasting for an unknown or unstated length of time.
You told that "When properties eventually do reopen, they'll be operating at limited capacity, and thus, likely generate additional losses. If movie theaters were barely holding on in normal times, how are they going to make money now if they can only sell tickets for a third of their seats?"

Social distance for the cinemas is not maybe so bad than many think. Cinemark told that occupancy levels in peak periods are typically 20-30% on average, so they can operate very profitably while maintaining social distancing requirements.

I read Moody’s credit rating regarding Top Golf. It is quite clear that free cash flow is negative when Topgolf has expanded the number of locations in a very short period. Topgolf has too much debt and there is a big probability that Topgolf goes under Chapter 11. Anyway, Topgolf's business will continue also under chapter 11 the same way as AMC business if they also go under chapter 11 which seems now more unlikely than two months ago. Tenants will pay rents also after chapter 11. EPR's own credit rating is still BBB- and outlook stable.
rlp2451 profile picture
@Espoo I really doubt Cinemarks 30% number. They may be able to have a showing with 30% of their seats sold, but that doesn't account for the first two weeks where they are at 90-100% capacity. Most theaters have already lost 25% of their seating with upgrades, and people aren't going to flock back anytime soon to watch old movies they've already seen. Disney and others won't be releasing near the amount of blockbusters they had scheduled this year.

If theaters get 10% of what they had before COVID they'll be lucky.
Ian Bezek profile picture
RLP: That's correct. Beware of people presenting averages when the data has tons of peaks.

Similarly, retail is profitable despite low average traffic, in many cases, but if you don't get your decidedly above average sales for Black Friday, stores would go broke. Leave social distancing in place through the holidays, and a ton of shops will go bust despite the fact that stores aren't "usually" packed with customers.
Theatres opening up soon in some states. I think more and more people are realizing how stupidly the politicians have been in killing our economy due to pressure. Too many people have let the idiotic media get them hyped up and scared. A few months they will all be in the rear view mirror and hopefully things financially improve.
With 77,000 deaths to date & 2-3000 dying every day I certainly hope you are correct. However there is good reason to be scared. With 5% of the world's population and 30%+ of the cases the scientists indicate we are in trouble until a vaccine becomes available. For now I will believe them.
@dmcooper2003 "the scientists indicate we are in trouble until a vaccine becomes available."

Just keep in mind that the scientists/researchers/physicians who are telling a different story than "the party line" are being censored. Facebook and YouTube are taking down alternate views, and they will admit it as being some sort of "common good," and the mainstream media is going along. Do your own research if you don't believe it.
My answer to the dividend suspension was to sell 20% of my position, which reduced my portfolio weighting to about 1.2%. I plan to hold the rest of my shares and hope for a recovery in one to two years. With a little luck, some part of the dividend could be restored within a year. Even without the dividend, the stock has a lot of upside potential. And the company is now in a position to survive for several years with zero rent collected, so I think bankruptcy is unlikely.

Long EPR
Considering these unique circumstances will EPR going forward seek to diversify some of this core holding s in its portfolio so they somewhat get some ballast between current formats and a blend of essential tenets so they are not stuck at 15% income
I can see not buying this for income (at this time) but when you can buy beautiful property and a business at a 33% -50% off value you have to be mad not to pick some up.

People are chomping at the bit to get out and have fun.
The market seems pretty fine with EPR's issues. In a couple years if you look back EPR will look like a steal if you got in sub 20. I honestly don't really watch any new movies and am glad the current crisis has people ignoring all the idiots in hollywood lol.
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