EPR Properties (NYSE: EPR) is a real estate investment trust, or REIT, that focuses on experiential real estate. Movie theaters are the biggest component of its portfolio, and properties like waterparks, golf attractions, and ski resorts are also large pieces of the puzzle.
At first glance, this may seem like an awful type of real estate to own in 2020 while the COVID-19 pandemic is ongoing. However, the long-term trends are favorable for experiential real estate, and the company might be in better shape than you think. While the stock isn't likely to rebound in a straight line, patient investors with a relatively high risk tolerance might want to take a closer look at this beaten-down real estate stock.
EPR Properties: The bad news
First, the bad news. EPR's portfolio was almost entirely shut down as the coronavirus outbreak spread across the United States. Much of it remains closed even now, particularly the movie theatres that make up 46% of EPR's rental income.
Because of the shutdowns, many of EPR's tenants have been unable or unwilling to pay rent. In April, for example, EPR only collected about 15% of its contractual base rent. That's a terrible rent collection rate, even when compared with other highly affected REITs such as shopping mall operators.
Reasons for long-term investors to pay attention
With all of that in mind, the question isn't whether EPR's business is doing poorly right now. We know it is. Rather, the most important questions from a long-term investor's standpoint are "Can EPR get through the tough times?" and "Will the business do well once the pandemic is over?"
I believe the answer to both of these questions is a resounding "yes." Here are the important points for long-term investors to know about EPR's business:
- EPR has tons of liquidity to make it through the bad times. The company released a cash burn analysis that shows that it has enough money to cover its cash needs for 65 months at the 15% rent collection rate it reported in April. Obviously, nobody thinks the pandemic will last for more than five years or that EPR's rent collection rate will stay anywhere near this low. The point is that EPR has more than enough money to survive the pandemic -- even if a major tenant goes bankrupt.
- While EPR's rent collection rate of about 15% is very low, it's important to point out that the other 85% isn't necessarily lost money. EPR has agreed to defer most of the unpaid rent, meaning that it will get the money eventually. While it will almost certainly end up writing off some of its rent, the point is that at the end of the day, the rent collection rate will be far greater than 15%.
- Many of EPR's properties have already reopened, and early results are promising. As one example, EPR's TopGolf tenants reported a year-over-year increase in traffic shortly after reopening. In a nutshell, there is a lot of pent-up demand to get out and do things.
- EPR's biggest tenant question mark (and the most important one) is its movie theater tenants, especially AMC Entertainment (NYSE: AMC), the single largest component of EPR's rental income. AMC previously said that after a recent debt issuance, it would be able to survive if it was shuttered through Thanksgiving. The company recently said that it plans to open its theaters by the end of July. We think this is a bit ambitious, especially in certain parts of the U.S., but theaters should be open long before their operators run out of money.
- EPR's properties are experiential but generally don't require consumers to travel by airplane. Most experts predict that it will take some time before consumers are comfortable with leisure air travel, and the regional nature of EPR's properties could help it get back to normal levels of business quickly.
- EPR estimates that its addressable market is over $100 billion in size, and as the largest pure-play experiential REIT, the company could capture a significant portion of this. With less than $7 billion in its portfolio, EPR could grow to several times its current size once its revenue normalizes and it returns to growth mode.
Finally, there's a clear trend towards spending on experiences, especially among the younger generations, and the pandemic is unlikely to change this. Simply put, Americans want to get out and experience things more and more as time goes on.
The Millionacres bottom line
EPR Properties should be able to make it through the pandemic, but it will be quite some time before business truly returns to normal. And to be perfectly clear, I expect quite a roller coaster ride in EPR's stock price for the remainder of the year, if not longer, as the COVID-19 situation continues to evolve. However, at about 60% less than its pre-pandemic high, there could be tremendous long-term value for patient, risk-tolerant investors, so EPR could certainly be worth a look.