EPR Properties (EPR +0.69%) was one of the harder-hit real estate investment trusts (REITs) by the pandemic. Its focus on owning experiential properties like movie theaters and other attractions has hurt it over the past two years. Many of its tenants have struggled to pay rent, which impacted the company's cash flow.
While rental collection rates have steadily recovered, a resurgence in the pandemic has weighed on the REIT's stock price over the past few months, sending it down more than 16% off its peak. However, the more shares fall, the more I buy. Here's why.
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We crave experiences
The pandemic has been challenging for most people. We desire to connect with others and share experiences. That has been evident this year, as spending on experiences recovered sharply as widely available vaccines and therapeutics made more people comfortable going out and enjoying experiences once again. In just one example, the latest Spider-Man movie recently notched the second-highest opening weekend in box office history.
That plays right into the hands of EPR Properties. It owns the largest experiential real estate portfolio, including theaters, eat and play, ski, attractions, experiential lodging, gaming, cultural, and fitness and wellness venues.
With people flocking to enjoy experiences again, EPR's tenants have the cash to pay rent. The company's rental collection rate was back up to 90% in the third quarter (from a low of 21% in the second quarter of 2020), and it expects to collect 95% to 97% in the fourth quarter. Meanwhile, tenants are steadily repaying rent that the company deferred during the pandemic.
Collections could be back closer to 100% in 2022. In many cases, the recent performance of nontheater venues has exceeded pre-pandemic levels. Meanwhile, there's a strong film slate set for 2022, which should drive continued box office success. That should enable these tenants to pay rent.
The financial flexibility to expand
Another reason why I'm increasingly optimistic about EPR's future is its financial position. The REIT has significantly improved its balance sheet over the past several quarters. It recently issued $400 million in low-cost debt, which, along with its cash position, enabled the company to repay a $400 million term loan facility and redeem $275 million on notes due in 2023. As a result, it has no debt maturities until 2024.
In addition, it has an undrawn $1 billion credit facility and $144 million of cash. All this means that rating agencies upgraded its credit rating to investment-grade, making it easier and cheaper to borrow money in the future.
That enhanced financial flexibility will enable EPR Properties to expand its portfolio of experiential properties. The company wants to reduce its exposure to movie theaters (currently 44% of its revenue) while growing its nontheater property portfolio.
The REIT spent $39.3 million during the third quarter on new investments, bringing its year-to-date total to $107.9 million. Recent investments have included an experiential build-to-suit development and the acquisition of joint ventures that owned an experiential lodging project.
Overall, EPR sees a more than $100 billion market opportunity in experiential real estate. Target property types include casino resorts, golf entertainment complexes, themed lodging, concert venues, zoos, water parks, and a whole range of other experiential properties. The company's vision is to build the premier experiential real estate portfolio.
Steadily expanding my position
EPR Properties will benefit from the continued recovery in shared experiences. That will support the company's attractive 6.8%-yielding monthly dividend. Adding to the company's upside is its strong financial profile, which allows it to expand.
Future growth will provide further support for its dividend and eventually enable the company to increase its payout. That's why I'm taking advantage of the current sell-off driven by renewed pandemic concerns to add to my position in what appears to be a long-term winner.
