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One look at experiential real estate investment trust (REIT) EPR Properties' (NYSE: EPR) portfolio should give you a pretty good idea of how the company's business has performed during the COVID-19 pandemic. Of the properties in EPR's portfolio, 95% are experiential in nature. Here's a more specific breakdown of the key property types:
- 47% (based on contractual rent) are movie theaters.
- 26% are "eat & play" businesses (mostly TopGolf locations).
- 8% are ski resorts.
- 7% are attractions (amusement parks, waterparks).
- 4% are "experiential lodging" -- think indoor waterparks and themed resorts.
Not surprisingly, EPR's business was particularly hard-hit as the pandemic started. Most of its properties were forced to close, and EPR's rent collection rate dipped to just 21% of contractual rental income in the second quarter.
EPR Properties' business now
Since then, things have improved significantly. 94% of EPR's non-theater properties were open as of the company's first quarter earnings report, and rent collection had rebounded to 46% in the fourth quarter (66% in January). Theaters remain the weak spot -- many are still closed, and those that are open haven't had many new film releases to attract customers.
And it's also important to note that EPR's business is profitable. To be sure, adjusted funds from operations (AFFO) declined by 65% year over year (YOY) in 2020, but it's important for investors to realize that even with virtually no movie theater revenue, the company isn't losing money. There's no doubt that EPR will survive for the next three years.
Will movie theaters ever recover?
Here's the million-dollar question that will determine whether EPR will thrive or simply survive in the post-pandemic world. There's no way to know for sure what the movie business will look like a year or two from now, which is the main reason why the stock is still about 30% below its pre-pandemic value.
Even the experts are conflicted. On one hand, Warner Brothers is planning to release all of its 2021 blockbusters on the HBO Max streaming service on the same day they hit theaters, which understandably has made investors worry that people will simply watch movies at home.
On the other hand, AMC Entertainment (NYSE: AMC) CEO Adam Aron recently said that vaccination efforts should result in movie audiences becoming much larger starting in the second half of 2021 and that streaming isn't necessarily a threat to in-person movies. Aron emphasized that this isn't the first disruption theaters have faced -- after all, many experts thought movie theaters would die out when in-home television became widely available decades ago. Movie star Tom Hanks agrees, saying that theaters will still be the preferred way for studios to release their most-anticipated films.
Even if movie theaters don't recover, it's important to keep in mind that EPR has tremendous financial flexibility. The company has more than $500 million in cash and a nearly untapped $1 billion credit line, which gives it the ability to strategically reposition its properties as needed. In other words, if a movie theater property were to close, EPR could potentially turn it into an indoor waterpark, golf attraction, casino, or any number of other types of entertainment properties. Hopefully, it won't come to that, but it's important to know that if EPR's movie theater properties were to suddenly become vacant, it wouldn't necessarily be a death sentence for the company.
The Millionacres bottom line
To be perfectly clear, EPR Properties is in no danger of going bankrupt anytime in the foreseeable future, even if things stay just the way they are now.
Having said that, the biggest variable going forward is what happens with the movie theater business over the next few years. If studios decide to keep theaters as their primary way to release their product, and consumers flock to theaters in large numbers, the next three years could be great for EPR and its shareholders. If not, EPR will still be fine in the long run, but the recovery could take much longer.
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