Shares of real estate investment trust (REIT) EPR Properties (NYSE:EPR) rose as much as 14% by 1pm before cooling off. By the end of the day the stock was trading with a roughly 10% gain. There was no material company specific news from the REIT, which owns entertainment oriented properties like movie theaters (45% of 2019 rents), food/play attractions (23%), and ski resorts (8%), among others. However, there was a change in the outlook with regard to COVID-19 that could have a material impact on EPR's ability to collect rent.
In an effort to limit the spread of the coronavirus, much of the United States has been, effectively, shut down. The social distancing guidelines laid out often included a requirement that nonessential businesses be closed until further notice. Most of the properties EPR owns fall into the nonessential category. Moreover, many, like movie theaters, involve people congregating in groups, which could increase the likelihood of catching COVID-19.
Forced closure was a material hardship on EPR's tenants, with the company only receiving around 15% of its base rents for April. The REIT stepped in to help as best it could, noting that it clearly wanted to create a mutually beneficial solution to the problem. It agreed to offer month-to-month rent deferments to "substantially all" of the lessees that didn't pay. Based on the properties it owns, pushing a lessee into bankruptcy would likely leave a difficult to fill vacancy in its portfolio. So, EPR kind of has no choice but to work with its tenants and pray for the best.
Over the past week or so, EPR and its tenants have started to get some good news. Nothing has changed dramatically about the situation, mind you, but several states have begun to lift restrictions on nonessential businesses. A number of others have started to discuss plans for reopening. That has Wall Street feeling like there's a light at the end of the COVID-19 tunnel. The more positive outlook, in turn, led investors to bid up the price of EPR and other entertainment-oriented companies (like amusement parks).
Long-term investors shouldn't get too excited by Wall Street's mood swings. EPR's financial results will remain under pressure until its properties start reopening in significant numbers. It believes it has enough liquidity to survive until that point, which is good. But for now, very little has actually changed. In fact, even after the company's lessees restart their operations, the REIT will still have headwinds to deal with. For example, it may take months, or even a year or more, before moviegoers are comfortable going to a theater again like they once did. And state and federal governments' efforts to slow the virus are highly likely to lead to a recession, which will crimp spending across the economy. So reopening is good news, but the path back to "normal" operations is likely to be a long one.