With a focus on experiential real estate assets, EPR Properties (EPR -0.35%) was at the center of the storm during 2020 as the coronavirus spread across the globe. Things are better today, and the real estate investment trust's business appears to be picking up. But is the worst really over here?
A terrible position
Prior to the pandemic, EPR had found a strong niche and was benefiting from a customer shift away from buying "stuff" and toward buying "experiences." So while malls and many retail properties struggled, EPR was happily expanding its reach. In fact, the real estate investment trust had strung together a nearly 10-year streak of annual dividend increases before it was forced to regroup in 2020.
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The problem, of course, was that the coronavirus spreads easily in group settings. So when the government asked people to socially distance and shuttered non-essential businesses, EPR's tenants were hit particularly hard. It collected just 21% of its second-quarter 2020 rents. No wonder it suspended its dividend in April last year. But the world is reopening, and business is returning to some semblance of normal.
For example, EPR collected 85% of the rents it was owed in the second quarter of 2021. The REIT reinstated its dividend -- albeit at a lower level -- in July. And movie theater owner and large tenant AMC Entertainment just announced that Disney's Shang-Chi and the Legend of the Ten Rings helped it to set a new admissions revenue record. That means that, at least for one weekend, revenue was above pre-pandemic levels.
Looking at facts like these, it's pretty obvious that the worst appears to be over. However, that doesn't mean the headwinds are gone. And that's very important.
Not out of the woods just yet
The first thing to note here is that, while collecting 85% of rent is a huge improvement over 21%, it's still not 100%. So there has been an important recovery, but there's still notable work on the horizon. Meanwhile, the new dividend level seems to speak to the issue, given that it is roughly a third lower than the previous payment. Clearly, things are better, but they are not back to pre-pandemic levels.
This brings up two very real problems that EPR has to address. The first, and most difficult to handicap, is the ongoing pandemic. This health crisis is not over, and new variants of the coronavirus could easily lead to setbacks. People desperately want to get back to normal, but the delta variant's heightened ability to infect people has set the world on edge again, with material COVID-19 outbreaks showing up around the globe -- even in areas with high vaccination rates. Given EPR's focus on experiential properties that are, basically, purpose-built to bring groups of people together, this is an issue that can't be ignored.
EPR data by YCharts
The second problem is that movie theaters made up around half of EPR's rent roll prior to the pandemic. The REIT wants to reduce this concentration over time, but it remains a notable risk. That's partly because EPR worked with its customers during the pandemic, offering various concessions, including rent relief. In fact, overall rental revenue in the second quarter of 2021 was roughly 21% below what was brought in during the same quarter of 2019. That makes sense given the rental collection rate is just 85%, but that would suggest just a 15% drop in rents, not 21%. You can argue that this is splitting hairs, but if rents from the movie chains are permanently lower after COVID-19, then EPR's business is facing a lingering problem.
That's potentially going to be exacerbated by the growth of streaming media content, which increasingly includes first-run movies. It's great that Shang-Chi is performing well at the box office and has brought customers back to the silver screen, but not every movie is going to have that drawing power. The average movie might not be worth shelling out for a live screening, especially if you can watch it in the comfort of your own home for what is likely to be a lower price point. This makes the movie theater recovery just a bit more uncertain. And with so much exposure to that one sector, that is a very big deal for EPR.
Better, but not fixed
The best way to look at EPR is probably that the worst is, indeed, past, but the recovery is still a work in progress. Conservative dividend investors are probably better off watching from the sidelines, despite the recovery potential that exists in the REIT's business. There are better REIT options with similarly high dividend yields that have much lower risk profiles.
If you are a risk-taker, the stock is still well below its pre-pandemic highs, suggesting more room for gains. Just go in knowing that the ongoing recovery is still facing worrying headwinds, and may not materialize as quickly as you hope.
