When economies around the world started to shut down in an effort to contain the coronavirus pandemic, EPR Properties (NYSE: EPR) was in the center of the storm. In something of an understatement, the real estate investment trust (REIT) struggled to collect rent on its portfolio of experience-based assets. It hasn't gotten much easier since then, leaving investors with some important issues to ponder here.
1. Another tough quarter
When EPR Properties reported fourth-quarter 2020 earnings, investors expected tough numbers and got them. Revenues fell 45% year over year in the quarter, with adjusted funds from operations (FFO), which is a metric similar to earnings for an industrial company, dropping just over 80%. The real estate investment trust (REIT) only collected 46% of the rent it was due in the quarter.
That number was higher in January and February, at roughly 66% and 64%, respectively, but the REIT is clearly still having a hard time getting paid. FFO is going to remain under severe pressure even as other REITs that initially struggled to collect rent (notably retail-focused REITs) have started to see rental rates recover to the high 80% and low 90% ranges.
2. "Pre-COVID contractual rent"
Sometimes wording is important, with the key nuance in EPR Properties' quarterly report being the use of the word "pre-COVID" to describe its rent collections. In other words, the 46% in the fourth quarter, 66% in January, and 64% in February were all compared to levels before the pandemic. The REIT has been working with tenants on rent concessions to help them survive, which is the right thing to do. However, the use of "pre-COVID" likely suggests that investors need to be prepared for an ongoing lower level of rents in the future.
3. Two different businesses
The real issue here, however, is that one piece of EPR Properties' portfolio continues to struggle while the other has started to recover. Indeed, just 60% of the REIT's movie theater properties were open in the fourth quarter while 94% of its non-theater properties had reopened. This is a very big deal given that nearly 50% of its rental revenue has historically been derived from movie theaters. To put it mildly, some of its largest tenants continue to struggle.
AMC Entertainment (NYSE: AMC), for example, has warned of bankruptcy. Although that risk appears to be smaller now than it was at the end of 2020, the movie operator is only just starting to reopen locations in key markets like New York City, at reduced capacities. This half of EPR Properties' business is, at best, in the early stages of recovery. Moreover, with the increased use of video streaming during the pandemic, it is possible that the movie industry just won't be the same ever again -- something that executives from major movie studios have been hinting at in a notable way.
4. The clock is ticking
Having eliminated its dividend in 2020, the next big obligation EPR Properties has to think about is debt repayments. It should be fine in 2021 and 2022, with minimal debt-repayment obligations. However, in 2023 it has a $275 million loan and a $400 million loan coming due. That seems like a long way off right now, but when you consider the situation it's facing with the roughly half of its business dedicated to movie theaters, it makes sense for investors to pay very close attention to the calendar as well as the balance sheet here. So far the REIT has been able to work with lenders and capital markets to raise needed cash and push out maturities, but if that changes in any way, then 2023 becomes a much bigger concern -- especially if the movie theaters it owns are still struggling to return to "pre-COVID" operating levels at that point.
Doing what it can
The big takeaway here isn't that investors should run screaming from EPR Properties. Management is dealing as best it can with a tough situation, but the shares are really only appropriate for more aggressive investors willing to take an active approach with their portfolios. There is worthwhile recovery potential in the business, but there are also material risks here and they are not going away anytime soon. As such, conservative investors would probably be better off watching this turnaround from the sideline. And those that venture in will need to pay close attention to the REIT's performance, the performance of the large movie chains, and the positioning of EPR Properties' balance sheet.