2023-08-21 22:43:35 ET
Summary
- EPR Properties reported strong financial results for Q2 2023. Also, Regal has emerged from bankruptcy, and the company is collecting its deferred rent.
- The company has a diverse experiential portfolio and low lease expirations in the following years, ensuring consistent financial results.
- Concerns about AMC's bankruptcy have eased as the company raised fresh capital and is expected to pay its rent.
- EPR's relatively low payout ratio and its strong coverage ratios mean that the company has the potential to pay higher dividends.
Investment Thesis
EPR Properties ( EPR ) reported an adjusted fund from operations ((AFFO)) of $100 million in 2Q 2023, compared with $93 million in the same period last year, and $99 million in the first quarter of 2023. In my previous article on EPR, I mentioned that the company collected all scheduled rent and deferral payments through April from Regal Entertainment Group. Regal, which is EPR’s biggest customer after AMC Entertainment ( AMC ) and Topgolf, is an American movie theater chain that filled protection under Chapter 11 of the U.S. Bankruptcy Code on 7 September 2022. About 13% of EPR’s total revenue comes from the rent it receives from Regal. In May 2023, I said that Regal expects to emerge from the bankruptcy case soon. Well, the owner of Regal Cinemas announced on 1 August that it had emerged from Chapter 11 of the U.S. Bankruptcy Code as the company paid billions of its debts, due to the success of Oppenheimer and Barbie.
“The company entered into a comprehensive restructuring agreement with Regal anchored by a new master lease for 41 of the 57 properties previously leased to Regal,” EPR announced . In the second quarter of 2023, EPR collected $7.3 million of deferred rent from cash basis customers. As of 30 June 2023, EPR had cash on hand of $100 million, no borrowings on its $1.0 billion unsecured revolving credit facility, and a consolidated debt profile that is all at fixed interest rates with no maturities until 2024. Besides, due to Santikos’ acquisition of VSS-Southern Theaters, EPR received full payment of its remaining deferred rent of $11.6 million, which will be recognized as rental revenue in 3Q 2023, and the company now has a more reliable tenant. VSS-Southern accounts for about 2.5% of EPR’s total revenues, and it is worth noting to mention that as a result of Santikos’ acquisition of Southern, there were no structural changes to existing lease terms.
“Having completed approximately $100 million of investments this year, we are selectively growing our experiential portfolio while being prudent in our capital allocation, as we have committed to approximately $224 million of additional experiential development and redevelopment projects over the next two years without the need to raise additional capital. We have continued to enhance our financial flexibility with a priority on maintaining our strong liquidity position and leverage profile,” the CEO commented.
Experiential investments account for 92% of EPR’s total investments of $6.7 billion. As of 30 June 2023, EPR’s experiential portfolio (excluding property under development and undeveloped land inventory) consisted of 171 theater properties, 57 eat & play properties, 24 attraction properties, 11 ski properties, seven experiential lodging properties, 16 fitness & wellness properties, one gaming property, and three cultural properties. Also, EPR’s own experiential portfolio consisted of more than 20 million square feet, which was 98% leased on 30 June 2023.
The truth is that overall, REITs are not in a good condition as high interest rates, tight capital markets, inflationary pressures, and economic uncertainties have limited their cash generation potential. In this market condition, a REIT that can maintain its dividend, and keep its payout ratio low, must not be ignored. EPR Properties is one of those REITs. A summary of the company’s ratios (see Figure 1 ) shows that in the past few quarters, despite the mentioned challenges, EPR managed to remain solvent, profitable, and stable. EPR’s AFFO payout ratio decreased from 67% in 2Q 2022 to 63% in 2Q 2023, as its AFFO increased. The company paid a monthly dividend of $0.275 for the past 18 months, and with its relatively low AFFO payout ratio, EPR can continue paying its monthly dividends without any trouble. At its current stock price of around $44, EPR has a 1-year forward dividend yield of 7.5%. “We continue to believe that EPR offers a very attractive value for investors with a well-covered dividend and an opportunity for multiple expansion,” the CEO said in the company’s 2Q 2023 earnings conference call. Thus, as EPR’s credit ratios and coverage ratios are strong, the company may increase its monthly dividend, which means higher dividend yields.
According to Figure 2, EPR is trying to decrease its dependence on theaters revenue and is expanding its footprint in other experiential activities. As the company is improving its portfolio diversity, its dividends get more reliable (because it will get less exposed to the challenges in Hollywood). Figure 3 shows EPR’s lease expiration data, and we can see that in 2023, 2024, 2025, and 2026 the lease term for only 10 properties of EPR (which account for 2% of its revenue) expires. Thus, you don’t need to be worried about the consistency of its financial results, at least for the next few years. Also, the recovery of the experience economy is continuing as leisure experience spending has increased significantly in the past few quarters.
Figure 1 – EPR’s summary of ratios
Figure 2 – EPR’s portfolio as of 30 June 2023
Figure 3 – EPR’s lease expirations
Is AMC going to be a problem?
The rent that AMC pays to EPR almost accounts for 14% of EPR’s revenue (see Figure 4). Actually, EPR’s revenue from theaters is the most important part of EPR’s revenue. About 40% of EPR’s annualized adjusted EBITDA is directly linked to its 171 properties (run by 19 operators). A year ago, due to the bankruptcy of Regal, there were lots of concerns about Regal’s ability to pay its rent. As mentioned earlier, Regal has emerged from bankruptcy recently and you don’t need to worry about Regal. However, AMC’s CEO said almost a month ago that AMC could run out of cash in 2024 and 2025 (due to Hollywood labor strikes which can postpone releasing of the new titles) and announce bankruptcy. According to AMC’s CEO, the company needed to raise fresh equity in the near term. AMC created APEs (AMC Preferred Equity units), which the company could issue and sell instead of common shares without authorization. APEs conversion means dilution for shareholders, but AMC must survive and escape bankruptcy. Finally, AMC overcame opposition from investors concerned about dilution as court approved transactions to sell nearly 400 million new shares. Now, AMC can raise fresh capital. Following the court's approval, AMC's stock price increased by more than 20% in the past week. However, AMC has been hit with a new class-action lawsuit over its stock conversion again. It could turn into a few months of turmoil for AMC. But for now, we can say that AMC is not going to file Chapter 11 of the U.S. Bankruptcy Code, and EPR can receive its rent.
Figure 4 – EPR’s top 10 customers by percentage of total revenue
Why I might be wrong?
You don’t need to be worried about AMC and Regal for now, as it seems that they can pay their rent to EPR. However, it is not wise to ignore the strikes in Hollywood. Due to Hollywood strikes , movie writers and stars are not allowed to go on with their projects, and it means movies that were previously expected to be released in the next few months, might face a significant delay. Subsequently, movies that were previously expected to be released in 2024, might experience a delay. For example, Warner Bros. Discovery might shift the release of Dune: Part Two (which is now expected to release on 3 November 2023) to 2024. Overall, the current strikes in Hollywood might limit the cash flow generation ability of theaters, implying that EPR Properties might experience some rent deferral in the next few quarters. Thus, it is wise to keep an eye on the news about the release date of movies. If the number of delayed movies increases in a significant way, EPR might face more serious risks.
Conclusion
EPR Properties released strong financial results for the second quarter of 2023, and its payout ratios, credit ratios, and coverage ratios show that its monthly dividends are reliable and there might be multiple divided raises in the following quarters. Also, the company’s strategy to reduce its dependency on theater revenue means that its strong financial results are going to get more reliable. Furthermore, a month ago, there were concerns about AMC’s bankruptcy, which could’ve meant significant rent deferral for EPR Properties. However, for now, AMC is not expected to file Chapter 11 of the U.S. Bankruptcy Code as it can raise fresh capital, and pay its rent. In a nutshell, EPR stock is a buy.
For further details see:
EPR Properties: Movie Theaters Can Pay Their Rents For Now