Analyzing EPR Properties: A Potential Investment Opportunity

EPR Properties (NYSE: EPR) faced tough times during the peak of the coronavirus pandemic, choosing to suspend its dividend. This decision was critical for maintaining liquidity and supporting its tenants through challenging circumstances.

Although the dividend has resumed and is on the rise, Wall Street remains cautious about the stock. It continues to trade significantly below its pre-pandemic levels. Investors are wondering if now is the right time to consider purchasing EPR Properties’ stock, especially as it encounters resistance at the $55 price level.

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Understanding EPR Properties’ Business Model

EPR Properties specializes in experiential real estate, focusing on properties that encourage group gatherings. Its portfolio includes amusement parks, ski resorts, and movie theaters. While these properties are somewhat insulated from shifts toward online experiences, the global health crisis posed significant challenges. COVID-19 spread effectively in crowded environments, leading management to suspend dividends due to the pandemic’s uncertainty.

Image source: Getty Images.

Fortunately, EPR Properties managed to withstand the pandemic while supporting its tenants. After a year without dividends, the company reinstated its dividend and has increased it several times since. Although the current dividend remains lower than pre-suspension levels, the real estate investment trust (REIT) demonstrates efforts to regain investor trust.

EPR Properties’ Long-Term Strategy

Having navigated the immediate challenges of the pandemic, EPR Properties has established a long-term strategy centered on diversification. However, investors continue to express concern, as evidenced by the stock’s weak performance and its high 6.7% dividend yield. This yield stands in stark contrast to the S&P 500, which offers around 1.2%, and the average REIT yield of 3.8%.

A notable worry is that approximately 37% of EPR’s portfolio comprises movie theaters, which are in a weaker financial state than before the pandemic. Evidence of this can be seen in rental coverage, which is now lower compared to 2019 levels. In contrast, the remaining properties in the portfolio show stronger rental coverage than prior to the pandemic, indicating some underlying strength.

The significant reliance on movie theater properties is a major concern for management, which recognizes the need to reduce this exposure over time. However, given the size of this segment, addressing the issue could take several years, keeping EPR Properties under scrutiny from Wall Street.

EPR data by YCharts.

Evaluating the Buying Potential of EPR Properties

As illustrated in the accompanying chart, EPR Properties has approached the $55 mark multiple times but has struggled to maintain this level. Wall Street’s concerns are evident, yet the adjusted funds from operations (FFO) payout ratio for the fourth quarter stood at a manageable 70%. This figure allows the management team room to navigate its portfolio overhaul before considering any dividend reductions.

In fact, the REIT raised its monthly dividend by 3.5% following the Q4 2024 earnings report, signaling confidence in future performance. While it may not be the ideal choice for risk-averse dividend investors, those willing to accept some uncertainty for a higher yield may find EPR Properties appealing. Management is progressively striving for improvement while maintaining a conservative financial outlook necessary to sustain the dividend long-term. The attractive yield could serve as compensation for those prepared to monitor the company’s gradual transition away from the movie theater sector.

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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.