Should You Buy EPR Properties While It's Below $55?

EPR Properties (NYSE: EPR) made a hard, but necessary, decision during the coronavirus pandemic's height. It suspended its dividend to ensure that it had the liquidity to survive and help its tenants survive.

Although the dividend is back, and growing again, Wall Street is still worried about the stock, which remains well below its pre-pandemic highs. Is this an opportunity for investors to buy the stock, which has bumped up against the $55 price level a few times only to retreat again?

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What does EPR Properties do?

EPR Properties owns experiential real estate. That basically means its properties are meant to bring people together in group settings. The portfolio includes assets like amusement parks, ski resorts, and movie theaters. Although the nature of these properties protects them from the effect of the shift toward online life, it is easy to see how a global health crisis was a major problem. Indeed, COVID spread most easily in group settings, and management had little choice but to suspend the dividend given the uncertainty during the pandemic.

Image source: Getty Images.

The good news is that EPR Properties managed to muddle through the period in one piece while also helping its tenants along the way. After about a year's hiatus, the company restored the dividend, and has increased it several times since. To be fair, the dividend is still below where it was before the suspension, but the real estate investment trust (REIT) is clearly attempting to regain trust with investors.

What is EPR Properties' big plan?

During the pandemic's height, EPR Properties was simply attempting to get through to the other side. Having done that, management has laid out a longer-term plan. The big-picture idea is diversification. That brings up the key reason investors are still so concerned about the REIT. This concern is highlighted by the weak stock price and the lofty 6.7% dividend yield. To put that yield into context, the S&P 500 index (SNPINDEX: ^GSPC) is only yielding around 1.2%, while the average REIT's yield is just 3.8%.

The big concern is that about 37% of the portfolio is made up of movie theaters. As a group, EPR Properties' theaters are in worse financial shape today than they were before the pandemic. This is highlighted by the fact that rental coverage is lower today than it was in 2019. The rest of the portfolio actually has higher rental coverage than it did before the pandemic, so there is underlying strength here.

At a touch more than a third of the portfolio, however, the movie theater properties are a huge overhang, and management knows it. That's why it has a stated goal of reducing this exposure over time. But, given the size of the property type in the portfolio, it could take several years to fix this issue. Thus, EPR Properties remains in the Wall Street doghouse. It isn't unreasonable to be concerned.

EPR data by YCharts.

EPR Properties may still be worth buying

As the chart above highlights, EPR Properties has bumped up against the $55 price point a couple of times only to fall back again. Wall Street is clearly showing it has concerns. But the adjusted funds from operations (FFO) payout ratio in the fourth quarter was a very reasonable 70%. That gives management a great deal of leeway to deal with its portfolio overhaul before a dividend cut would be needed. In fact, it increased its monthly dividend by 3.5% when it reported Q4 2024 earnings. That is a statement that the REIT is confident in the future.

While EPR Properties probably isn't a great fit for risk-averse dividend investors, those willing to take on some uncertainty for a higher yield might find it an attractive choice. Basically, management is slowly working toward a better future (and making progress) while operating in a conservative financial manner that should support the dividend over the long term. The high yield looks like ample compensation for the risks, assuming you're willing to keep close tabs on the REIT as it continues to shift its portfolio away from the movie-theater business.

Should you invest $1,000 in EPR Properties right now?

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends EPR Properties. The Motley Fool has a disclosure policy.