EPR Properties (NYSE: EPR) and AGNC Investment (NASDAQ: AGNC) are both dividend cutters. That might be enough to turn many investors off, but… they have attractive dividend yields. EPR’s yield is around 7.1%, while AGNC’s yield is a huge 17.2%! But before you jump on the higher yield, you’ll want to read the rest of this article.
While both EPR and AGNC are real estate investment trusts (REITs), they are very different businesses. EPR owns physical properties, while AGNC invests in mortgages that have been pooled into bond-like investments often called collateralized mortgage obligations (CMOs), or something similar. Owning mortgages is not even remotely like owning properties.
CMOs are affected by interest rates, the housing market, and repayment trends, among other things. The securities trade all day long and, thus, can react quickly to changing market conditions. Leverage, meanwhile, plays an important role for mortgage REITs, with the portfolio of CMOs often acting as collateral. Although the goal is simply to earn the difference between financing costs and the interest paid on the CMOs, this is very much an active investment business, not a passive one.
AGNC is best suited to institutional-level investors that want exposure to mortgages. It’s also important to look at the REIT through a total return lens and not just focus on the dividend. That’s highlighted by the fact that the dividend has been cut regularly over the past decade. As the chart above shows, the stock price has followed the dividend lower. That’s about the worst possible outcome for an investor trying to live off the income they generate from their portfolio.
But if you switch the view to total return, which assumes the reinvestment of dividends, you can see (in the chart above) that the return is positive over the past decade. Most income investors just don’t think this way, and that shockingly high yield will end up hurting your portfolio more than helping it if the cuts continue.
EPR Properties, by comparison, owns physical properties. That’s a more passive business, as it looks to hold assets for a long period of time and generate income by leasing the properties to tenants. The problem here is that EPR focuses on experiential assets that basically serve to bring people together in groups. Think movie theaters, amusement parks, and ski resorts, among other things.
When the coronavirus pandemic hit, much of this REIT’s portfolio was shuttered, leading the board to suspend the dividend. Given the uncertainty at the time, that made a great deal of sense. While the dividend is back, it is set at a lower level, which hints at the risk here. EPR Properties is still dealing with some lingering headwinds. The biggest issue is the roughly 40% of the REIT’s rents that come from movie theaters.
While the rest of EPR’s portfolio is stronger today than it was prior to the pandemic, movie theaters are weaker. To put some numbers on that, rent coverage for non-theater tenants has improved from 2 times in 2019 to 2.6 times today. Rent coverage for movie theaters has gotten worse, falling from 1.7 times in 2019 to just 1.4 times today. So there’s still work to be done.
The key for investors is that EPR is actually doing that work, and things are likely to improve, perhaps slowly, from here. It has been negotiating with theater tenants to restructure leases, retenanting properties when appropriate, and selling theaters that no longer fit in the portfolio. This is exactly what management should be doing — it will just take time to muddle through the process. But, for more aggressive investors, that’s probably more desirable than owning a high-risk mortgage REIT, such as AGNC.
For the average dividend investor, considering EPR and AGNC is really a question of which of these high-yield REITs is likely to keep paying you over the long term. Right now the clear answer is EPR, which has reinstated its dividend and is working on mending its portfolio. AGNC’s business is far more complicated and, historically, far more volatile from an income perspective. Most will be better off with EPR here.
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