EPR Properties (NYSE: EPR) has been hard-hit by the COVID-19 pandemic. Virtually every property in the real estate investment trust's (REIT's) portfolio depends on people being willing and able to go out and do things. With large holdings in movie theaters, entertainment centers, golf attractions, waterparks, and more, it shouldn't be a big surprise that EPR's portfolio was almost entirely shut down by the pandemic. And in recent months, only about 15% of EPR's tenants paid their rent.
However, long-term investors shouldn't be too worried. While 2020 isn't likely to be a profitable year for EPR, there are several reasons why EPR Properties will survive the pandemic -- and thrive afterward.
3 Reasons EPR Properties will be fine
1. They have tons of liquidity
First off, EPR Properties has the cash to make it through the pandemic even if shutdowns and lost rent last for years. The company borrowed $750 million on its revolving credit line as a precaution, deferred planned investments, and suspended its dividend and share repurchase program.
EPR released a liquidity analysis in April, which showed that at the present 15% rent collection rate, the company has enough cash on hand to keep its operations going for 65 months (that's more than five years). And that was before the share repurchase program was suspended. The company's breakeven point where it stops burning through cash occurs with less than 50% of rent collected.
Now, nobody thinks that EPR will only collect 15% of its rent for the next five years, and that's the point. There's no financial reason to believe that EPR won't be able to survive the COVID-19 pandemic.
2. Early reopening data is promising
EPR expects essentially all of its properties to reopen this year. But it's not enough for its tenants to be allowed to reopen -- the tenants need to have customers spending money to be able to afford to pay rent.
At the recent Nareit REIT Week virtual conference, EPR's management expressed that early opening data from tenants is strong, which indicates that paying rent for the second half of 2020 might be less of an issue than previously thought. For one specific example, EPR reported that its TopGolf tenants that had reopened by early June were actually reporting a year-over-year increase in walk-in customer traffic.
3. The movie business isn't going anywhere
Quite frankly, the movie theater business can make or break EPR. The company relies on movie theaters for 46% of its rental income -- by far the largest component of their portfolio.
As the pandemic worsened, there was widespread fear that movie theaters might not open until 2021 at the earliest. And there were also worries that even when they did, there wouldn't be enough movies to show or enough consumers willing to go to the theaters.
Simply put, the reality is that movie theaters are coming back, and much quicker than many had expected. Just recently, AMC (NYSE: AMC) said that "almost all" of its U.S. theaters will reopen in July, and Regal (NYSE: RGC) said that it would begin reopening its theaters on July 10.
Sure, there will be protocols in place to limit attendance and accommodate social distancing for the time being, but it's important to note that during good times, high-performing movie theaters only sell 20% to 30% of their total available seats.
Expect a roller coaster ride in the meantime
EPR has certainly rebounded nicely from its March lows as clarity about the company's tenant base and liquidity has come to light. Having said that, it's very important to realize that the pandemic isn't over and that while the news has been good lately, that might not be the case in the months ahead.
The point is that while I am very confident EPR will be just fine from a long-term perspective, I'd expect quite a roller coaster ride in the stock price as the pandemic continues to evolve.
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