EPR - Stop Trading Your Health For Wealth Buy Income Instead

Summary

• We all too often give up the most valuable thing - our health - for a few more transient dollars.
• You can achieve more with less when you create proper goals for retirement.
• We look at Tekla Healthcare Investors and EPR Properties as we talk about buying what others all too often neglect.

Co-produced with Treading Softly

There is an adage:

You trade your health for wealth, and you give your wealth for health."

Seems like a conundrum, right?

The reality of it is, so many will work endless hours, pouring out their heart and soul, depleting their health, and neglecting relationships to get rich.

One famous rapper - 50 Cent - is famously quoted as saying:

Get rich, or die tryin'"

It's the same concept. As young people, we have plenty of health and life ahead of us - or so we assume - and frequently are willing to trade it for our jobs in an attempt to get rich.

Yet, often when we achieve that wealth, we have to start spending it just as rapidly to cover life's health expenses. We rack up an array of various illnesses and issues - partly tied to our lifestyle of attempting to get rich.

The average age of a millionaire is 57 . For most, that means multiple decades of sacrificing their health on the altar of trying to get rich. That's quite a sacrifice. Giving up relationships, time with your hobbies and possibly even giving up your dreams. All to achieve this nebulous idea of being rich.

This is where I have long disagreed. I don't see being rich as a valid life goal. Just like I think having a 5-year goal of "being alive" isn't a real goal either. Both are a state of being.

I see getting wealthy as a means to an end. What will you do with your wealth? Can you achieve it without being rich or being less rich? Perhaps you don't need to be endlessly rich at all! While having billions is no doubt very nice, what most of us truly want is financial security. Knowing we can maintain a comfortable lifestyle indefinitely.

What do I do? I buy income-producing assets. In essence, I buy income. I buy the income I need to pay for my goals and pay my bills. My goal is to have the income I need now and at least 25% extra that I can reinvest to grow my income further. This way, I have a tangible goal outside of a "being" goal and the market is simply a tool to use to help me achieve it. I know how much I need, and I can measure how close I am to that.

Today, I want to give you two picks to help you do that. They focus on healthcare and entertainment. Two things we all too often give up on our path to "riches." Instead, own them and benefit from all those who neglect both.

Let's dive in.

Pick #1: HQH - Yield 9.2%

Closed-end funds have a tendency to amplify market moves. This can be disconcerting for some investors, but for income investors it creates opportunity. Let's look at Tekla Healthcare Investors ( HQH ). HQH invests in the healthcare sector. Biotech and pharmaceuticals are the largest, but HQH has exposure to every corner of healthcare.

Like any other sector, healthcare has been through its ups and downs, but over the long haul, HQH has materially outperformed the S&P 500.

It is easy to see why. Over the past 40 years, the healthcare industry has seen remarkable change. Advances in medicine have created numerous medications and procedures for previously untreatable ailments.

As the population ages, the demand for everything healthcare is rising. Both for life-prolonging treatments like heart surgeries and elective quality-of-life treatments like knee replacements. The Baby Boomer generation is huge, wealthy, and needs more medical care by the day.

The healthcare sector will continue to have ebbs, and it will always have to contend with an above-average amount of government regulation, but the long-term outlook is clearly a secular uptrend.

HQH is a proven option for investors to gain exposure to the sector. Right now, HQH is trading at a discount to NAV of over 10%. One reason closed-end funds ("CEFs") tend to be more volatile is that the market price can become disconnected from NAV. It can fall faster and often finds itself rushing to catch up on upswings. The current 11% discount is the largest discount we have seen since very early 2021.

For income investors, HQH has a variable dividend policy. It distributes 2% of NAV each quarter. This means that our income will vary every quarter. This policy ensures that the fund is never over-distributing or under-distributing. It is always paying out a reasonable amount in relation to its NAV.

This type of policy creates a very durable CEF that can withstand the tests of time. However, investors should be prepared for some inconsistencies. For the past year, this policy has caused a declining dividend. When stock prices bottom and the NAV rebounds, it will cause a rising dividend.

The long-term drivers of the medical sector are structural, and they will persist for decades. This is a sector we want to maintain exposure to at all times, and HQH is a great durable option to gain that exposure with a track record spanning back over 30+ years.

Pick #2: EPR - Yield 9%

EPR Properties ( EPR ) has seen its price fall dramatically from recent highs. In August, it was actually up for the year, and since then, it has fallen to be down 25% year-to-date, like much of the market. While macro forces are certainly at work on all stocks, for EPR, the bankruptcy filing of Cineworld Group ( CNNWQ ) likely plays a major role. Cineworld owns Regal Cinemas in the U.S., one of EPR's largest tenants.

When we look at Cineworld's Q2 earnings, it is obvious where the problem lies. $1.5 billion in revenue, $364 million in EBITDA, and small operating profits, but all of it is wiped away by the staggering $409 million in finance costs.

Regal is Cineworld's largest source of revenue, and Canadian-based Cineplex has reportedly been exploring a merger with Regal. Cineworld had previously agreed to acquire Cineplex but walked away from the deal in the early days of COVID. That move resulted in a lawsuit and a $1 billion award granted to Cineplex in a case that is now being appealed.

Such a merger could be a positive for EPR, as it would result in Cineplex taking over substantially all of Regal's leases. The leases with EPR are one of the assets that Cineplex is seeking to buy; a movie theater company with no theaters isn't very valuable.

On its side, Cineworld is seeking a quick resolution to the bankruptcy. Here is the current-proposed schedule:

For EPR, this is fantastic news. The uncertainty over what might happen is most likely much worse than whatever the news will be. So far, Cineworld has "rejected" 20 leases. However, they were all locations that were already out of operation and based on our survey, none of them were owned by EPR. This isn't a surprise, because EPR has long focused on higher-end locations that generate above-average revenue. Cineworld is looking to get out of leases at below-average locations.

Cineworld has likely started negotiations with EPR. What is unknown is how willing EPR is to negotiate with Cineworld. Back in March , CEO Greg Silvers predicted that some locations would close.

I'm sure there will be closures, a couple of points to bring out about our portfolio, so that everybody understands. Really, between 70% and 75% of our theaters are in the top third grossing revenue production in the country and 99% are in the top half. So, we feel pretty well-positioned relative to if we have closures. I do think there has been a big discussion about repositioning theater assets and there is a lot of discussion about what do you do with the theater building, which I think dismisses the idea of where the real value is, which is most of our land parcels are 15 to 20 acres.

So how do you repurpose a theater building?

We've done fine and I think people get caught in the idea of how do I change this building? And I think people need to realize that we sold a theater late last year for industrial conversion, and people were asking us. So, how did they convert the building, they use the bulldozer, and they convert it. But on a cash flow basis, we sold for a sub-six relative to the cash flow that we were enjoying.

Granted, the world has changed since March 2022, with higher interest rates. Yet there is little doubt that EPR could sell some Regal locations for much larger gains than their current rents are worth. EPR isn't afraid to get these locations back empty and either lease to one of their other tenants or sell it to someone with a bulldozer.

EPR isn't desperate. It has ample liquidity on hand to reposition any property, with over $168 million in cash and no balance on its $1 billion revolver. EPR's dividend is well covered by cash flow, providing ample cushion for any reduction in FFO (funds from operations). With an AFFO payout ratio below 70%, EPR's dividend is not at risk. These realities give EPR the upper hand in any negotiation. Maybe it makes sense for EPR to forgive some deferred rent. Maybe at some locations, it makes sense for EPR to reduce rent. Maybe it doesn't. EPR is going into these negotiations with the luxury of flexibility and the cash to back up any decision that management makes. At a negotiating table, that is powerful, and it is a luxury that Cineworld doesn't have.

Given the schedule, we can expect that by Q3 earnings, management will have very good visibility. Whether they will have the freedom to disclose it or the negotiations will be covered by non-disclosure agreements is unknown. At the very least, guidance that management issues should be accurate. In 3-4 months, there will be a lot of certainty about how this all shakes out. We expect that the market will look very favorably upon any certainty.

EPR is trading at a very attractive price today, with a dividend in which we can have a lot of confidence. We can get paid while we wait for the bankruptcy process to play itself out and be holding when the market rushes back in. If you are a more conservative investor, consider EPR's convertible preferred shares.

Conclusion

With HQH and EPR we can get unusually large income from two sources that many all too often neglect on their march for riches. I have long tried to teach others that worshiping the "almighty dollar" is a terrible religion. Instead, the dollar should be used as a tool to achieve a goal. Take your dollars off their pedestal and put them to work. I've learned through my years of banking and investing one simple truth: nothing makes money as well as money does.

When you reach retirement, will you have achieved your goals and maintained your health and relationships? I hope your goal is larger and greater than "being" something, like being rich, or being wealthy, or being famous. Move from the "being" to the "doing" or achieving-type goals. Leverage your dollars and income to be a tool for achieving it.

Retirement can be a relaxing time, and I hope it is! I also hope you use your time in retirement to dedicate more time to achieve the goals you have for your life. Whether it be to travel the world, help the less fortunate, or grow closer to your family. Money can make those easier but can't do it for yourself alone.

You'll need your health for that, so stop giving it away for a few more shekels. Buy income, and let it pay your way.

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