My investment plan for 2024 is the same as 2023; focus on stable dividend-paying tickers. Hence, I intend to continue to add to what’s currently a portfolio concentrated on REITs. Monthly dividend distributions are great as they become salary-like income so having some of these monthly tickers within an income portfolio is ideal. Realty Income (NYSE:O) and EPR Properties (NYSE:EPR) represent strong monthly income players, albeit with materially different risk profiles.
Realty Income | EPR Properties | |
Market Cap | $41.58 billion | $3.57 billion |
Diluted Weighted Average Shares Outstanding | 709.5 million | 75.8 million |
Price/FFO (Forward) | 13.76x | 9.30x |
Dividend Yield | 5.4% | 6.88% |
O is one of the largest publicly traded REITs with a dividend history that stretches back to the 90s. The ticker forms one of the three REIT dividend aristocrats, a title awarded to companies that have raised their dividends annually for 25 consecutive years. Its portfolio consists mainly of retail and industrial assets in the US and Western Europe with the REIT last declaring a monthly cash distribution of $0.2565 per share, a 0.2% increase from its prior distribution for a 5.4% annualized dividend yield.
EPR focuses on the more niche experiential properties with a US and Canada-only portfolio that is heavy on theatres, amusement parks and waterparks, themed lodging, and ski resorts. The portfolio was valued at $6.7 billion across 359 locations and was 99% leased at the end of its fiscal 2023 third quarter. The REIT last declared a monthly cash dividend of $0.275 per share, unchanged from its prior distribution for a 6.88% annualized dividend yield. EPR was forced to cut its dividend during the pandemic when stay-at-home orders kept its locations shut for months. The distribution has yet to recover to its pre-pandemic level of $0.38 per share.
Theatres represented 39% of EPR’s annualized adjusted EBITDAre with AMC Entertainment (AMC) forming one of its largest tenants. This should be stated upfront because AMC faces quite intense solvency risk. I flagged this when I last covered the largest theatre operator in the US. Critically, EPR’s relative dependency on AMC for 13.3% of its third-quarter total revenue represents a type of concentration risk that places the ticker beyond the comfort level of more risk-averse investors. The REIT’s top three tenants accounted for 42.7% of total revenue for the last nine months as of the end of the third quarter. The US box office is also somewhat volatile, highly dependent on big-ticket releases of a handful of movie production studios, and faced some structural but overstated headwinds from streaming.
Both tickers form two incredibly divergent plays on monthly income. O has an investment grade credit rating of “A-” and forms a safe sleep well at night ticker with top-tier creditworthiness and near-zero risk to its dividend payouts. EPR on the other hand has a “BBB-” credit rating and a dividend yield that’s roughly 148 basis points ahead of O to reflect its higher credit risk. The investment pitch for EPR is a recovery of its monthly distributions to the pre-pandemic level, for O its rigid stability and dependability against the specter of a recession and broader economic volatility. O is a slow-moving container ship while EPR is a more nimble sailboat.
EPR at just under 9% of O’s market cap has the greater upside potential but also comes with an enhanced risk profile. O saw 22% of its annualized contractual rent at the end of its third quarter driven by grocery and convenience stores with its largest tenant Walgreens (WBA) accounting for 3.9% of third quarter annualized contractual rent and its top 20 clients driving a combined 27.1% of annualized contractual rent during the third quarter.
Revenue, FFO, And Dividend Growth
O reported third-quarter revenue of $1.04 billion, up 24.2% over its year-ago comp and a beat by $84.22 million on consensus estimates. The REIT realized same-store rental revenue growth of 2.2% with its portfolio occupancy exiting the third quarter at 98.8%, around a 20 basis points sequential dip from 99%. Its FFO at $1.04 per share was up by 7.2% from $0.97 in its year-ago quarter and by around 2 cents sequentially. EPR reported year-over-year FFO growth of 26.7% from $1.16 to $1.47 per share. Revenue of $189.4 million marked growth of 17.3% over its year-ago comp and a beat by $25.7 million on consensus estimates. EPR is growing quicker, albeit from a more deteriorated year-ago base. The emergence from bankruptcy of the parent company of what’s currently its largest tenant Regal drove a significant amount of this growth as EPR moved to realize rent from a new master lease.
EPR’s total debt of $2.8 billion at the end of its third quarter has only $136.6 million, around 4.9% of the total, coming due next year. Total debt was 78.4% of its market cap but the REIT should face no issues addressing this balance with cash and equivalents of $173 million at the end of the third quarter. 2025 will see around $300 million come due but possible interest rate cuts through 2024 should set the baseline for the REIT to refinance this. The Fed’s December dot plot is for at least three cuts of 75 basis points next year but the market as per the CME’s FedWatch Tool is pricing in 2x this amount of cuts with current market expectations being for rates to exit 2024 at least 150 basis points lower than where they currently are. EPR’s debt is all unsecured and currently fixed at 4.3%. The REIT also has three outstanding preferreds; Series C (NYSE:EPR.PR.C), Series E (NYSE:EPR.PR.E), and Series G (NYSE:EPR.PR.G).
O held a total debt balance of $20.4 billion at the end of the third quarter, around 49.06% of its market cap, and has a staggered debt maturity profile with around 9% of its total debt coming due next year. The REIT has $4.48 billion in liquidity available spread across a $3.39 billion revolver, unsettled ATM forwards of $749 million, and cash and equivalents of $344 million.
Whilst both REITs stand to benefit from possible Fed rate cuts next year, EPR’s concentration risk makes it hard to recommend over O. However, EPR’s third-quarter FFO means its payout ratio sits at just 56%, a level that infers a possible dividend raise next year. O is paying out 74% of its FFO. EPR’s dividend hopes could be more constrained next year if AMC does experience more material financial distress with the theatre operator faced with a substantial debt balance and a movie slate that saw disruption on the back of the strike by the American actors’ union that concluded in November. Both tickers could see some continued positive volatility as interest rates fall but O is the better buy here whilst EPR forms a hold.
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