EPR Properties (EPR 0.10%) is a unique real estate investment trust (REIT). This has not served investors well in 2020 -- but cracks were starting to show up even before the coronavirus appeared on the scene. That said, COVID-19 was something of a "rip the bandaid off" type of event for EPR Properties and its investors, and value investors might be wondering if now is the time to buy this beaten-down landlord. Here are some things to think about before you do that.
1. A definite laggard
EPR's stock price is off by more than 50% so far in 2020. Compare that to the average real estate investment trust, as measured by Vanguard Real Estate ETF, which is down around 15%. Clearly, EPR has been hit extra hard by the impact of COVID-19 (more on this in a second). It would hardly be surprising to see this name pop up on a "bottom fishers" list of investment ideas.
When looking at down-and-out stocks, however, you need to step back and think about what you are really looking at. If Wall Street thinks EPR is worth half of what it was just seven months ago, what's going on? Is there something here I'm missing? Put simply, a depressed price alone isn't enough information to make a good investment decision.
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2. In the line of fire
The big problem is that EPR's focus is on experiential assets. That includes things like movie theaters, amusement parks, ski facilities, casinos, and water parks, among others. The economic shutdowns used to slow the spread of COVID-19 took direct aim at many of these industries. This is no small issue, with the REIT only collecting 15% of its April rents. That's a disastrous number, and shows that the REIT's highly focused business model exposes investors to a material amount of risk.
To be fair, the coronavirus is hardly a normal event. But that doesn't alter EPR's focused approach, which was already showing some signs of stress.
3. Movies aren't what they used to be
The best example of this is the company's heavy reliance on movie theaters. This property type makes up nearly half of the company's rent roll. Movie theater attendance hit an over-two-decade low in 2017, rose a bit in 2018, and fell back toward that low again in 2019. And that was all before COVID-19, so this is hardly a business that's hitting on all cylinders. Rising ticket prices were helping to offset the hit from falling attendance, but there's eventually going to be an upper limit to that approach. Near-term, just convincing customers to come back will be hard enough.
The weak attendance trends were a key reason behind management's efforts to diversify the business into areas outside of movie theaters. Diversification is clearly a good call, but EPR is still highly focused on experiential assets. Yes, experiences can't be replaced by the internet, but that doesn't mean that the properties EPR owns are going to thrive over the long term. Cinemas are one example, but also consider that it owns amusement parks run by Six Flags. This is a highly leveraged amusement park operator that has gone bankrupt before. Yes, EPR is more diversified and, thus, better positioned than it was a decade ago, but there are still portfolio risks to consider here.
4. Dividend ... gone
REITs are designed to pass income on to investors, with a requirement that they pay out 90% of their taxable earnings as dividends. In exchange, REITs avoid corporate-level taxation (investors must report the dividends as regular income, unless the REIT is owned in a tax-advantaged retirement account). So it is a pretty big deal when an REIT stops paying a dividend -- which is exactly what EPR announced it was doing when it reported first-quarter earnings. Having collected just 15% of its April rent, it pretty much had no choice in the matter.
However, it again points out the risks investors face from the REIT's highly focused "experiential" portfolio. You can chalk the dividend elimination up to a global pandemic, which is absolutely true, but don't underestimate the dividend impact that a deep and/or prolonged recession would have likely had as consumers cut back on unnecessary spending. Even in normal times, the business model here isn't likely to hold up to the normal cycles of the business world.
What's an investor to do?
The clearest takeaway here is that EPR is not a good investment for conservative investors. It faced a major test of its business model and, frankly, the model proved it was not robust in the face of adversity. Worse, the REIT's business will likely struggle until there's sustained success on the COVID-19 front. With coronavirus cases spiking again, there's no clear sign when that will come to pass.
At some point, life will go back to some level of normal and EPR's rent roll will begin to recover. There's probably a material amount of recovery potential here, but only if you are into turnaround stocks. And even then, until there's more progress on containing COVID-19, it's hard to suggest EPR's future is secure. It's probably best to wait here until the REIT makes some definite signs of progress and then reevaluate the story.
