EPR Properties: A Buyout Candidate As Recovery Continues And America's Vaccination Effort Surges

Summary

• EPR Properties continues to see rent cash collections rise.
• The US vaccination effort is surging ahead as a third single-shot vaccine is approved.
• EPR's shares are still trading at a material discount to its pre-covid peak.

EPR Properties (NYSE:EPR) recently reported earnings for its fiscal 2020 fourth quarter. The company maintained the now established monthly trend of higher cash collections set against rising non-theatre and theatre locations opened. EPR now finds the price of its common share gyrating to the perceived pace of the reopening of America and to the fate of its largest theatre tenant AMC Entertainment (AMC).

The critical foundation of EPR's bull case remains that its malaise over the last year has been somewhat of a temporary product of government stay at home orders and capacity constraints on leisure activities. The reversal of this as well as rising consumer confidence due to the increasingly successful rollout of the Pfizer (PFE)-BioNTech (BNTX), Moderna (MRNA) and now Johnson & Johnson (JNJ) vaccines should help contribute to a recovery of its fundamentals in the months and quarters ahead.

To what extent this pulls up the price of EPR's common shares will be dependent on the pace of the recovery and whether the return to normality mirrors the bulls or the bears. The latter has posited that post-pandemic theatre-going will be a relic of a bygone past, while the former has staked a claim of theatres as an important social part of America's social fabric. Hence, while there might be some retrenchment in fringe geographical markets, theatres will keep on going and likely thrive as pent-up demand locked up for the better part of a year gets released.

Data by YCharts

EPR's common shares currently trade at $44.47 per share, which is 44% below its pre-covid peak. Assuming the bullish narrative is realized EPR's recovery should see this gap closed.

The US Vaccination Effort Continues At Pace

The US daily vaccination rate has surged ahead in recent weeks with 2.04 million vaccine doses now being administered daily. This prompted the Biden administration to bring forward by two months to May the timeline to take delivery of enough vaccine doses for all US adults. This move has been boosted by the FDA emergency use approval of the single-shot Johnson & Johnson vaccine.

Our World In Data, University of Oxford (Source)

This pace of vaccinations is set to surge even higher as more mass vaccination sites come online, including the SoFi stadium in Los Angeles. The US is now on track to vaccinate at least 135 million people by the end of March. This should increase to 200 million by the end of April and 250 million by the end of May. With the adult population vaccinated at these levels, the US should see a strong lurch to its post-pandemic normality as forced closures and restrictions on opening capacity are removed. However, vaccine take-up rates might present a barrier to this rollout timeline as there is no law mandating individuals take the vaccine.

EPR's demise has been entirely manufactured by the pandemic and the destruction wrought on its financials a temporary stay until the political will to peel it away on the back of mass vaccinations ramped up. I'd expect the 2 million a day rate to be maintained when set against a decline in covid cases and deaths.

Current holders of EPR's common shares have another salient catalyst to look forward to with the reopening of theatres in Los Angeles and California at large. Regal Cinemas, EPR's second-largest theatre tenant, has indicated that it would only start the reopening of its closed theatres once LA opens up as this would provide confidence that studios would hold their release dates for new movies. The vaccination effort in California has rapidly expanded and the state has indicated it would start rescinding restrictions.

Data by YCharts

EPR earnings for its fiscal 2020 fourth quarter saw the company realize total revenue of $93.4 million versus analyst consensus of $85.1 million. While this was still down 45% from the year-ago quarter, the company only had 60% of its theatre and 94% of its non-theatre locations open. The financials remain murky but should recover on the back of the continued success of the vaccination effort. February 2021 cash collections came in at 64% while January was at 66% of pre-COVID contractual cash revenue. This is expected to rise to at least 70% in March.

Consolidation And Experiential Properties In The Post-Covid Age

The continued trading of high-quality net lease REITs at a discount to their net asset value and future recovery fundamentals has opened up the spectre of acquisitions from private equity funds and other institutional investors. This was seen with Brookfield Asset Management (NYSE:BAM) and Brookfield Property Partners (NASDAQ:BPY). Fundamentally, the greater visibility enabled by the strength of the vaccination effort on the economic recovery materially increases the potential of buyout offers for high-quality net lease REITs still trading at somewhat significant discounts to their pre-covid highs.

EPR Properties continues to have a strong upside profile as statewide stay at home orders are peeled away on the back of a surge in the US vaccination effort. This combined with a rise in sentiment on the resiliency of the theatre industry and a rotation of capital away from more speculative sectors to value should serve as a catalyst with future rising rent collections and positive earnings to drive EPR's story forward.

Analyst’s Disclosure: I am/we are long EPR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.