EPR Properties (NYSE: EPR) was forced to do one of the most undesirable things a real estate investment trust (REIT) could do in 2020: It eliminated its dividend. But it's important to look at why that cut happened now that the world is starting to get a better handle on the novel coronavirus that basically caused it. And that leads to a look at the future, which is starting to look a lot better. The question, however, is whether or not the future looks good enough for investors to buy this REIT that still has no dividend today.
In the flesh
The big story behind EPR Properties is that the assets it owns are protected from the increasing use of the internet. Before 2020 that was seen as a huge benefit, since the things people do at EPR's properties can't be easily replicated online. The list of assets here includes things like amusement parks, ski resorts, casinos, and movie theaters. All are experiential based, which is what the "E" in the company's name stands for.
However, a key feature of experiential properties is that they bring people together into groups. When the coronavirus pandemic hit, it was clear that it spread most easily in group settings. The government quickly shut down the types of businesses EPR Properties houses. It was a devastating blow and resulted in the REIT's dividend elimination. However, it is important to note that this was not the fault of poor management. EPR was simply a casualty of a global effort to slow the spread of the novel illness.
That doesn't make the sting any less painful, of course, but it suggests EPR's portfolio has a chance to recover as the world learns to live with the coronavirus. Indeed, vaccines have led to economic reopenings that have materially boosted the REIT's operations. To put a number on that, in April of 2020 it collected just 15% of the rent it was owed. By April of 2021 that number had improved to 77%. Clearly things are on the upswing, though 77% is still well short of 100%, which is the real issue that needs to be considered.
Is this enough?
EPR moved quickly to increase its liquidity position as the pandemic impacted its business. At the end of the first quarter, it had more than $500 million of cash on its balance sheet and an undrawn $1 billion credit facility at its disposal, should it be needed. This cushion, along with the dividend cut, should provide EPR with ample financial room to navigate to the other side of the pandemic.
The problem is that nearly half of its portfolio is tied to movie theaters. At the end of April, only 71% of the company's theaters were open for business compared to 96% of the company's non-theater properties. Theaters are still a material drag and, at this point, it is hard to tell how long it will take for moviegoers to return even after all of the movie venues reopen. In fact, the pandemic has actually shifted the dynamic of the movie space, with movie companies increasingly pushing their fare directly to customers online.
It's also important to understand just how deep a hole theaters are trying to dig out of. AMC Entertainment, one of EPR's largest customers, saw an 84% revenue decline in the first quarter with a similarly large drop in attendance at its U.S. operations. It continues to bleed red ink at an alarming rate. In its quarterly update, the company noted that it was working with its landlords on the rent it owes. That's not a good backdrop for EPR's business, especially since movie makers are looking to shift away from the theater format.
While EPR's stock is still around 33% below where it started out in 2020, before the pandemic hit, there remains a material amount of uncertainty here. It is not at all clear that the REIT's business will be the same even after the pandemic has passed, given the exposure it has to the shifting fortunes of movie theaters. And there's still material risk that some of the movie chains it serves will need assistance from landlords like EPR for an extended period of time. That means muddling through in the near term could remain difficult for the REIT and take longer than hoped.
EPR Properties' business is definitely improving, there's no question about that. This nascent recovery might interest more aggressive investors looking for a turnaround play. However, there are still very real headwinds investors need to consider given the uncertain changes taking shape in the movie theater space that is so important to EPR's business. In the end, most investors will probably want to wait on the sidelines here for a little longer. And conservative types might want until the dividend is reinstated before they consider reevaluating the REIT.