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3 Reasons to Buy EPR Properties Stock Like There's No Tomorrow

12 hours ago

If you like dividend stocks and can handle a little risk in your portfolio, EPR Properties (NYSE: EPR) is a stock you'll want to dive into right now. If you wait until some later tomorrow, you may miss the opportunity at hand today. Although it's not for the faint of heart, the 7.7% dividend yield here is probably less risky than it seems. Here are three reasons to give EPR Properties a chance as it works to turn its business around.

The big story around EPR Properties goes back to the early days of the coronavirus pandemic, when non-essential businesses were shut down. This real estate investment trust (REIT) owns properties that bring people together socially in group settings (think amusement parks), so most of its tenants were closed during that period. To ensure it had enough liquidity to survive and, at the same time, help its tenants survive, EPR Properties suspended its dividend for a little over a year.

A person pointing to a wristwatch. — Image source: Getty Images.

That was the right decision to make for the business, even if it was likely a tough one for investors to swallow. It would be understandable if conservative dividend investors didn't want to touch this stock with a 10-foot pole. But the dividend came back in the second half of 2021 and has now been increased three times. While the monthly pay dividend is still below the pre-pandemic level, EPR Properties has proven that it is back to rewarding investors with a growing income stream. If you can handle a little risk in your portfolio, that fact alone makes it worth a closer look.

EPR Properties' adjusted funds from operations (FFO) payout ratio in the third quarter of 2024 was a solid 66%. That's a completely reasonable figure in the REIT sector. It suggests that there is a lot of room for adversity before the dividend would be at risk of a cut.

That said, EPR Properties is still working on its business turnaround. There is some potential for more bad news. Notably, Q3 2024 adjusted FFO came in at $1.29 per share, down from $1.47 in the prior year. Through the first nine months of 2024, adjusted FFO was $3.61, compared to $4.07 in the first same period of 2023. That said, Q3 adjusted FFO was up from $1.20 in the second quarter of 2024 and $1.12 in the first quarter. So the trend appears to be heading in a positive direction.

EPR Dividend Per Share (Quarterly) Chart — EPR Dividend Per Share (Quarterly) data by YCharts.

Combine that fact with the payout ratio, and it seems like EPR Properties' dividend may not be as risky as some investors might be fearing.

EPR Properties' portfolio is a "tale of two cities" story. Roughly 64% of the portfolio has improved relative to its pre-pandemic performance. Rent coverage on this portion of the portfolio has increased from 2.0x in 2019 to 2.6x today. That's very good news. But the remaining 36% of the portfolio, which is all movie theaters, has rent coverage of 1.5x compared to 1.7x before the pandemic. This is not good news.

That said, management is aware of the problem and is specifically looking to reduce the REIT's exposure to movie theaters. It owns some very high-performing theaters, however, so this isn't an effort that can be rushed. It requires some finesse, which is complicated by the fact that selling properties can take a little time to complete. On the other side, buying new assets is also a time-consuming process.

The key is that EPR Properties sees the problem and has a plan to do something about it. If you can handle a little uncertainty while it works through the repositioning process, which could take years to complete, the high yield on offer could be quite attractive.

EPR Properties is what might be described as a time arbitrage play. There is risk here over the short term, given the changes being made to the portfolio and the still-heavy reliance on the weak theater property niche. Risk-averse investors and those with short time horizons might want to sidestep this one.

But if you don't mind sitting through a turnaround, collecting a lofty yield along the way, you might find this a very attractive opportunity. That is buttressed by the fact that the dividend is back and growing again, the business' underlying performance is solid, and there's a realistic plan that management is working on to improve long-term results. If you wait too long, however, this opportunity might pass you by.

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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.

3 Reasons to Buy EPR Properties Stock Like There's No Tomorrow was originally published by The Motley Fool