EPR Properties: It's Showtime

Summary

• Blue skies are starting to emerge for EPR Properties.
• Recent very strong box office openings suggest that theaters remain highly relevant.
• EPR maintains a strong balance sheet and has a sizeable total addressable market.

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EPR Properties (NYSE:EPR) has rightfully been a battleground stock since the past year. While its properties certainly are e-commerce resistant, they are certainly not pandemic-proof. However, as the Benjamin Graham saying goes, “adversity is bitter, but its uses may be sweet.”

This famous quote is particularly instructive, as the true test of the durability for any enterprise is how well it responds to adverse circumstances, and consequently how quickly it’s able to get back on its feet. In this article, I highlight why EPR passes this test, and what makes it a Buy at present, so let’s get started.

Why EPR Is A Buy

EPR Properties is a unique REIT in that it is 95% focused on experiential real estate, with over 20 years of experience in this segment. It targets family entertainment destinations (including movie theaters), casinos, experiential lodging (including ski resorts), live venues, and amusement/water parks.

At present, EPR has $6.4B in total investments spread across 357 locations and over 200 tenants in 44 U.S. states and Canada. Contrary to what some may believe, EPR actually has a strong track record of delivering shareholder returns. As seen below, EPR has kept pace with the S&P 500 (SPY) for much of the decade, before the pandemic sent the share price off a cliff.

(Source: Seeking Alpha)

One of the reasons for the strong returns is due to the triple-net structure of its leases, in which the tenant is responsible for paying property maintenance, taxes, and insurance. This greatly simplifies EPR's operating structure and is reflected by EPR's relatively high operating margin (with depreciation addback) of 79% in 2019 (pre-pandemic), comparing favorably to the ~65% range for shopping centers, industrial, and apartment REITs.

In addition, EPR properties benefits from a multi-decade long trend of increased leisure spending by households. As seen below, dips in leisure spending during recessionary periods have generally resulted in “pent-up demand” in following periods with a strong rebound.

(Source: investor presentation)

Of course, the EPR of today faces unique challenges, including the ever-present risks from streaming. However, if recent direct-to-theater releases are of any indication, movie theaters should be relevant for the foreseeable future. This is supported by the strong domestic showing for Shang-Chi and the Legend of the Ten Rings, which is set to cross the $200M mark domestically (and has crossed $300M worldwide).

In addition, Venom: Let There Be Carnage just posted a very strong opening weekend with a $90.1M debut, far outpacing the pre-pandemic $80.3M debut of the first Venom movie. The upcoming Bond movie, No Time to Die is also eyeing a strong $100M opening this weekend. At the same time, cracks are becoming rather evident for studios that opt for same-day streaming and theater releases. This is reflected by the disappointing results for Warner Bros’ (T) The Many Saints of New York, which opened to just $5M in ticket sales last weekend as it was available for streaming on HBO Max the same day.

Meanwhile, EPR is experiencing a strong rebound, as revenue grew by 18% YoY, to $125M during the second quarter. 99% of EPR’s movie theaters are now open, and 100% of non-theater locations are open, except for normal seasonal closings (i.e. ski resorts). I’m also encouraged by the improving cash collection, which increased sequentially from 72% in Q1 to 84% in Q2, and customers representing substantially all contractual cash revenue are either paying their rent or their deferral agreements.

Looking forward to Q3 and the remainder of the year, I expect to see continued improvements, as management is guiding for 95% rent collection by the end of the year. Plus, EPR has plenty of opportunities to consolidate the fragmented experiential real estate, as it represents a $100B+ addressable market opportunity. As seen below, management plans to strategically reduce its theater and education real estate while increasing exposure to other growing destination categories.

(Source: investor presentation)

EPR’s continued portfolio transition is supported by its Baa3 rated balance sheet, with $510M in cash on hand, and full availability on its $1.0 billion revolving credit facility. I’m also encouraged by EPR’s steady net debt balance, which has actually decreased by $19M since 2019 (pre-pandemic), to $2.80B at present.

While the net debt to TTM EBITDA ratio appears to be high at 10.0x, I would expect it to trend down as rent collection continues to improve. Should EPR get back to its 2019 EBITDA level, the leverage ratio would reduce to a healthy 5.4x. It’s worth noting that the recently reinstated monthly dividend of $0.25 was not covered by the $0.68 FFOAA (FFO as adjusted) per share during Q2. However, I would expect for coverage to improve as rent collections continue to improve.

Meanwhile, I continue to see value in EPR at the current price of $51.94. While the forward P/FFO appears to be somewhat high at 18.3, it should materially drop next year, as analysts forecast a 43% FFO/share increase next year, and a 9% rise in the year after. This brings EPR’s P/FFO down to 12.8 and 11.8 based on 2022 and 2023 forward estimates

Investor Takeaway

EPR Properties has seen its fair share of headwinds since the start of the pandemic. However, blue skies are starting to emerge for the company, as rent collections continue to improve, supported by the recent very strong box office openings. Looking forward, I see management continuing to evolve the portfolio, as supported by EPR’s strong balance sheet, triple-net business model, and the sizeable total addressable market for experiential real estate. EPR is a Buy.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in EPR over the next 72 hours. 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.

This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.