EPR Properties (NYSE: EPR) has been one of the worst-performing stocks in the already beaten-down real estate sector during the COVID-19 pandemic. And it's not hard to see why.
For one thing, about 45% of EPR's rental income comes from movie theaters. Not only are movie theaters among the last types of commercial properties to get the green light to reopen (most are still closed), but there are serious questions about the viability of some of the major movie theater chains -- especially AMC Entertainment (NYSE: AMC), EPR's single largest tenant.
And it's not only the movie theaters that have been an issue. EPR's portfolio is full of properties leased to tenants that have been severely affected by the pandemic. Waterparks, ski resorts, indoor golf attractions, and family entertainment centers are some examples of EPR's major property types that have been largely shut down or severely limited over the past six months or so. In short, EPR invests in experiential real estate, and it's tough to imagine a type of commercial property that was more affected by the coronavirus outbreak.
Plenty of cash
The good news is that EPR has more than enough money to make it through the tough times. Shortly after the pandemic started, EPR borrowed $750 million on its revolving credit line raising its available cash to more than $1.2 billion at the end of March. With dividends suspended, EPR has enough money to sustain its operations for 43 months even if it doesn't collect a dime in rent. At a 15% rent collection rate, this runway increases to more than five years.
Solid progress in recent months
The recent news has been rather encouraging. At the depths of the pandemic, EPR was collecting just about 15% of its expected rent. Overall, EPR collected 21% of its rent in the second quarter, and this has already increased to a rate of 28% in July. And the company estimates that permanent rent reductions will only add up to 5% to 7% of its pre-COVID-19 income.
Furthermore, most of the missed rent will end up being deferred, meaning that EPR will collect it eventually. So, while it sounds alarming that 79% of EPR's second-quarter rent hasn't been paid, it's important to realize this isn't just lost income. EPR estimates that it will have $142 million in rent deferrals as a result of the pandemic and that it will collect the average deferral over a period of 32 months.
Excluding movie theaters, 88% of EPR's properties were open as of early August. And while movie theater openings are largely dependent on geographic location, some of the theaters started to reopen in late August. Plus, EPR modified its leases with AMC Entertainment in a way that not only helps AMC make it through the tough times but extends AMC's lease commitments to EPR by an average of more than six years.
In normal times, it's easy to see the value in EPR's business. The younger generations of Americans prefer paying for experiences over ownership, which is why businesses like TopGolf and indoor water parks have performed so well in recent years. And with the company barely scratching the surface of its addressable market opportunity (which it estimates at more than $100 billion in real estate), there could still be a very bright future for this unique real estate investment trust (REIT).
To be sure, EPR's business (and that of its tenants) has a long way to go before it gets back to its pre-COVID-19 normal, and even longer before it's likely to get back into "growth mode." However, with shares more than 60% lower than their pre-pandemic highs, EPR could end up making patient investors quite a bit of money if things go well over the next couple of years.