Things are starting to look up for the multiplex industry. AMC Entertainment Holdings (NYSE:AMC) and its peers just pulled off a record Labor Day weekend in box office receipts earlier this month, and now the major movie studios are starting to pull back from making theatrical releases available on streaming services at the time of their big-screen debuts.
AMC is this year's hottest stock, nearly a 22-bagger year-to-date. Is there a coattail play that hasn't appreciated as much? Smaller multiplex operators may seem like a logical place to start, but a lot of AMC's rivals are in financial shambles right now. Its largest competitor actually closed down its screens for months late last year after the industry started cranking back up, and that's squandered momentum that the chain will never regain.
A strong bandwagon play could be Imax, especially since it's already an AMC partner providing super-sized theatrical screening experiences and mutually sharing in the platform's success. However, what if I told you that there's a high-yielding AMC partner that you probably haven't considered as a more conservative way to ride AMC's good fortune? Have you met EPR Properties (NYSE:EPR)?
Our feature presentation
EPR Properties is a real estate investment trust -- or REIT -- that owns income-generating properties, passing along the lion's share of the profits to its shareholders. REITs typically focus on residential real estate or commercial buildings like offices or medical centers. EPR's specialty is experiential properties. It leases out family entertainment centers (FECs), ski resorts, water parks, and -- yes -- movie theaters. A beefy 177 of the 357 properties it watches over are movie theaters; they're EPR's largest segment, which contributes 46% of its contractual cash revenue.
EPR deals with 17 different operators in the multiplex space, but AMC is its biggest customer. Back in 2019 -- the last normal year for the film house industry -- AMC accounted for 17.6% of the rents that EPR collected.
Last year was rough for AMC, and it was also a pain for EPR. Many of its top accounts, like AMC and Topgolf, had to shut down during the pandemic; and even now, business for many experiential attractions is still well below pre-pandemic levels. EPR had to sacrifice rents, and in May of last year it suspended its dividend.
It's fair to say that EPR was never in danger of going under. Many of its tenants were buckling during the shelter-in-place phase of the COVID-19 crisis, but EPR had roughly four years of liquidity on its balance sheet given its then-current rate of cash burn.
The prospects are a lot better now for both AMC and EPR Properties. EPR returned to profitability in the first quarter of this year, and the monthly distributions resumed this summer. EPR is currently yielding a little more than 6%, and it's just getting started.
CEO Greg Silvers pointed out in the company's latest earnings call that the payout is intentionally conservative. If its projections hold up, it would give EPR the wiggle room for a "meaningful increase" next year.
Sizing up the room
Now for a splash of reality. Movie theaters have high ceilings, but the same can't be said about EPR Properties. It's not going to be a 22-bagger. If AMC, Topgolf, or Poconos-based Camelback ski resort grow exponentially as businesses, the upside for EPR Properties is that it gets paid. If AMC excels with its on-demand streaming side business, that cuts EPR Properties out entirely.
However, the downside here is also limited. EPR has a lot of different tenants, so it's not at the mercy of a single account. EPR is also depressed. It's trading well below where it was at the start of last year. Its dividend is well below what it was before the monthly distributions went away.
When AMC shored up its balance sheet, it had to increase its share count fivefold to arrive at the financial optionality it has now. EPR benefits from the AMC windfall -- its largest account was on the brink of bankruptcy and now it's not -- and EPR didn't have to dilute its shareholders to make that happen.
If AMC succeeds, EPR should have the means to keep growing its empire as well as its payouts. If you believe in AMC, it likely means you think we'll return to movie theaters, casinos, FECs, and perhaps even the Wild Waves Theme and Water Park in EPR's portfolio. With a chunky yield above 6% and a clear runway for even bigger payouts, EPR Properties is a smart way to cash in on the turnaround at AMC with a more conservative risk-reward profile.