The global pandemic absolutely crushed entertainment businesses. Movie theaters, theme parks, concert venues, and many others had to temporarily close their doors, work around new COVID-19 regulations, or combat dismal attendance from consumers.
The last two years were tough for EPR Properties (EPR -0.15%), a real estate investment trust (REIT) that specializes in owning and leasing experiential real estate. Despite a return in demand for entertainment experiences in late 2021 and 2022, the company's share price remains down 38% from its pre-pandemic levels.
Its beaten-up share price makes it notably undervalued for the growth opportunities ahead. Here's a closer look at the company and why it's a screaming buy right now.
Recovery is imminent
If there's anything 2022 has shown us, it's that demand is back for experiential activities. Top Gun: Maverick shattered box-office sales, selling out movie theaters across the U.S. Eat and play restaurants like Dave & Buster's are making a huge comeback, and travel to resorts, campgrounds, and theme parks is on the rise. It's only a matter of time before EPR Properties tenants fully recover operating at pre-pandemic levels.
EPR Properties' portfolio is diversified across several industries, including eat and play, ski resorts, theme parks, gaming and casinos, cultural spots like museums, fitness centers, and even private schools and early childhood centers. However, the bulk of its portfolio is in movie theaters. Of its 355 properties, nearly half are movie theaters, with AMC Entertainment Holdings, its largest tenant, accounting for around 14.9% of its rental revenues.
While there are definitely still headwinds for its tenants, AMC in particular, there is optimism that things will continue to improve.
It's in a good financial position and recovering quickly
EPR Properties has done a good job of maintaining a healthy financial position despite the challenges of the pandemic. Its debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) is at 5.1 times, which is right around the REIT average of five times. It has $328 million in cash and cash equivalents, and has zero debt maturities until 2024, meaning there's a long period of time for its tenants to recover.
Quarter over quarter, it is becoming abundantly clear that EPR Properties is headed toward recovery. The company was profitable for the full year of 2021, which was a great turnaround considering that it operated at a net loss in 2020. And second-quarter funds from operations (FFO), an important metric to show a REITs profitability, went from a net loss to a more than 100% jump year over year. Fitch Ratings also gave the company and its unsecured debt an upgraded rating to a stable outlook.
It's priced well and pays dividends to boot
Most REITs trade between 15 to 20 times FFO, with some of the largest and most popular REITs being upwards of 20 times FFO. Right now, EPR Properties' share price is trading around 11 times its FFO, making it one of the cheapest REITs on the market today.
Its dividend return is just over 6.5% today, and as an added bonus, the company pays dividends monthly. Plus its current payout ratio of 75% is super healthy, meaning it's unlikely a dividend cut will be in its future, even if things don't improve dramatically.
EPR is down less than 1% this year, which is pretty impressive given the volatility of the market lately. Investors who are bullish on the further recovery of the experiential businesses EPR leases to should use today's low price as a buying opportunity.