The recent market downturn has been especially harsh on stocks in the restaurant, hotel, and casino industries, as well as most other types of hospitality businesses. It's not hard to understand why -- most hospitality businesses in the United States are closed right now (or are at least severely limited in their operations) with no clear end in sight.
However, there could be some excellent opportunities for long-term investors with the patience to ride out the ups and downs as the COVID-19 pandemic continues. Here's why EPR Properties (NYSE:EPR) and Wynn Resorts (NASDAQ:WYNN) should still be well positioned for success in the years ahead.
Yes, people will still want to go out after the pandemic
It's not too difficult to see why EPR Properties has been beaten down lately. The company is a real estate investment trust, or REIT focused on experiential real estate, and virtually all of its properties are closed right now. Plus, it derives 45% of its rental income from movie theaters, including top tenant AMC Entertainment (NYSE: AMC), which has been the subject of recent bankruptcy rumors.
However, there are some good reasons to consider EPR as a long-term investment. For one thing, fears of tenant bankruptcies may be a bit overblown. AMC recently announced plans to raise $500 million through a debt offering that should allow it to withstand a shutdown until Thanksgiving if necessary, and will probably receive funds from the CARES Act as well. EPR's other tenants are likely to get a similar combination of government help and other capital.
In addition, most of EPR's tenants are businesses that could potentially get back to business in the earlier stages of a phased reopening. Businesses like eat-and-play entertainment venues (TopGolf is a major tenant), ski resorts, and waterparks can accommodate social distancing with minimal changes, and theaters could certainly open with limited seating capacity.
EPR's management seems extremely confident in its ability to get through the tough times as well. The company has $1.25 billion in cash (EPR's market cap is just $2 billion), has cancelled its planned acquisition spending for 2020, and is confident that demand for experiential entertainment will come roaring back after the pandemic. In fact, EPR is so confident in its business that it recently authorized a $150 million share buyback program "in response to the extraordinary dislocation in the company's stock price" and hasn't suspended its dividend.
A best-in-breed casino stock
The Las Vegas Strip remains closed down, and pretty much all casinos throughout the U.S. are shuttered as well. And it might seem there's no end in sight -- after all, casinos aren't exactly the most socially distanced businesses in the world. Players typically sit right next to each other at gaming tables and slot machines, the nightclubs and bars in casinos can be very crowded, and many casinos rely on large gatherings like conferences to bring in business.
However, people aren't going to stop gambling at casinos -- things will get back to normal eventually. And Wynn Resorts is well positioned to weather the storm and capitalize on the reopening.
For one thing, the company has done an excellent job of ensuring that it will be ready to reopen as soon as it can. It is the only one of the major casino companies that decided to pay all full- and part-time employees during the shutdown, ensuring a smooth continuity of operations when it comes time to open the doors (no need to train new workers or persuade people to return). And CEO Matt Maddox recently outlined plans for a partial reopening in mid-May, complete with strict social distancing procedures.
Plus, Wynn already has a ton of experience in reopening after a pandemic. In fact, more than two-thirds of the company's revenue comes from its Macau casinos, and that market has been reopened for some time now after China's coronavirus outbreak started to taper off.
Expect a roller-coaster ride
I mentioned it before, but this is important to emphasize -- I'm not calling a bottom in any of these three stocks, nor do I think the path upward will be anything resembling a straight line. I'd expect a roller coaster until things start to get back to normal, and if we get negative news regarding reopening timetables, it's entirely possible that we'll see a significant drop in these stocks.
The point is that all three of these companies have excellent management, strong liquidity, and highly desirable assets, and should be just fine over the long run. If you're a patient investor with a high risk tolerance, these three hospitality stocks could end up producing fantastic returns in the post-COVID years.