EPR Properties: Secular Pattern Is Declining (NYSE:EPR)

Introduction

EPR Properties (NYSE:EPR) is an actual property funding belief (REIT) that makes a speciality of the possession of properties associated to the leisure trade. The portfolio of the corporate features a various vary of properties resembling film theaters, theme parks, and household leisure facilities.

The way forward for EPR Properties is essentially depending on the way forward for AMC Leisure (AMC) (APE). Whereas AMC Leisure’s debt ranges are skyrocketing and its free money stream is detrimental, I consider AMC is in large hassle. Many polls present that individuals favor to observe new motion pictures at house relatively than going to the theater. It is like evaluating the web to books in 1999.

EPR Properties’ Future

EPR primarily rents to film theaters, with AMC Leisure as its largest tenant. The movie show trade does effectively when the economic system is doing effectively however can wrestle throughout a recession. Regal’s mum or dad firm, Cineworld, has lately filed for Chapter 11 bankruptcy in October of 2022.

Because the Corona disaster, AMC Leisure has additionally been in troubled water. AMC Leisure is a movie show chain that noticed important income declines on account of the Corona disaster measures.

With the assistance of meme traders, AMC Leisure was capable of keep away from chapter in early 2021. A gamma squeeze occurred when quick sellers have been compelled to purchase AMC inventory as a result of its worth had soared after the money infusion. AMC noticed a chance to keep away from chapter by elevating funds via the issuance of inventory. The enterprise had financially improved. Now, there are recent rumors of impending chapter.

Let’s delve into AMC a bit of deeper. From the corporate’s steadiness sheet, we are able to see that AMC has $685M in money and short-term investments. It has a complete debt of $5.3 billion (a web debt of $4.6 billion). For various years now, AMC’s debt degree has steadily risen whereas its free money stream has been detrimental. Debt have to be refinanced subsequently previous to maturity, which is unfavorable within the present excessive rate of interest atmosphere. Contemplating that the corporate generated $620M in EBITDA for 2019, the ratio of its present web debt to that determine remains to be very excessive at 8.8. Thus, its future rests on the willingness of its collectors to refinance its debt. If rates of interest rise sharply, curiosity protection will fall. AMC might be in hassle if it could not meet its debt obligations.

One other movie show, the mum or dad firm of Regal Cinemas, Cineworld, has filed for chapter 11 chapter in October 2022. Cineworld financials did not look good because it has net-debt of $5B. In a superb 12 months like 2019, EBITDA was $843M. Web-debt to 2019 EBITDA ratio was very excessive at 6. AMC’s ratio is larger at 8.8. So sure, traders are rightly involved about the way forward for AMC Leisure.

Buyers bought the inventory, inflicting the value to fall. The inventory has carried out poorly in recent times, with a complete return of solely 53% over the previous 10 years. However over the long run, the inventory outperformed the S&P500.

There’s a important threat that EPR will lose its largest tenant, AMC Leisure, if the corporate goes bankrupt. Information from the 2019 fiscal year’s annual report:

For the 12 months ended December 31, 2019, roughly $123.8 million or 17.6% and $75.8 million or 10.8% of the Firm’s complete income (together with income from discontinued operations) have been derived from rental funds by AMC and Regal, respectively.

EPR Properties is steadily getting out of the publicity to movie show companies. Third quarter results present that cinemas accounted for 41% of complete gross sales in that quarter. In 2019, this determine was 45%. I feel that is nonetheless a excessive allocation for a high-risk sector.

Trying forward, I anticipate that film theaters will grow to be much less widespread as streaming turns into extra widespread. Individuals can hire a film and watch it with their household or buddies at house. In accordance with Grand View Research, the films and leisure market will develop at a 7.2% CAGR from 2022 to 2030. The next are progress drivers from the report:

New advertising and distribution platforms, resembling IPTV, digital newspapers, DTH, and digital cable, in addition to on-line music and film gross sales, are anticipated to speed up trade progress.

Grand View Analysis writes that new cinema companies present subscribers with entry to the latest worldwide movies earlier than they’re launched in theaters. Amazon (AMZN) Prime, Netflix (NFLX), and Disney+ (DIS) all supply aggressive film streaming companies. I don’t consider that film theaters will develop at a 7.2% CAGR within the coming years; relatively, I consider that the sector will decline as a result of aggressive threads.

In accordance with a 2014 survey, 57% of Individuals would relatively keep at house and watch a film than go to the theater. In accordance with a 2020 survey, solely 12% of individuals would see a film in a theater first if there was a 90-day wait to see it. As well as, a current poll from 2021 discovered that 56% most popular to stream at house, whereas solely 44% most popular to see the identical movie in a theater.

It is just like the web versus books in 1999.

EPR’s Stability Sheet Is Robust

In accordance with EPR’s steadiness sheet, web debt is $2.6 billion, whereas trailing twelve-month EBITDA is $469 million. The corporate has sufficient money readily available to satisfy its short-term obligations. In accordance with its annual report for 2021:

As of year-end we had $288.8 million of money readily available, no borrowings on our $1 billion unsecured revolving credit score facility, and no scheduled debt maturities till 2024. Lastly, we have been happy to announce a ten% enhance in our month-to-month dividend to widespread shareholders for 2022, bringing the annual money dividend per widespread share to $3.30.

In accordance with its 2021 annual report, the vast majority of its debt will mature after 2026. I consider their debt is well serviceable by their earnings.

Fitch assigned EPR Properties a BBB- score (outlook steady) on March 22, 2022. Fitch talked about the next:

The improve displays the corporate’s dedication to conservative leverage metrics, the restoration in shopper demand for experiential actual property, and Fitch’s expectations that the corporate will diversify tenant and trade focus via exterior exercise. Fitch expects the corporate to maintain metrics acceptable for the score, together with REIT leverage (web debt excluding most popular/recurring working EBITDA) within the low-to-mid 5x vary.

Dividends And Share Repurchases

Whereas EPR Properties’ future stays unsure, the corporate lately introduced a major enhance in its dividend per share. The dividend charge is at present $3.25 per share, with an 8.2% dividend yield. From 2012 to 2019, the annual dividend charge elevated by 4.2% on common.

The money stream assertion demonstrates that the corporate can successfully handle its shareholder return via its funds from operations. Whereas shareholder return was 3.4 occasions FFO in 2020, it’s now at a greater ratio of 0.8.

Valuation Is Favorable When FFO Is Anticipated To Keep

Lastly, a phrase concerning the firm’s inventory valuation. The worth to funds from operations has traditionally averaged 16.4. This ratio is at present 9.6, indicating that the corporate’s inventory is considerably undervalued.

Analysts proceed to forecast sturdy progress in income and funds from operations, leading to a positive ahead worth to funds from operations of 8.2 for 2024. That is nonetheless too optimistic for my part, particularly if AMC goes bankrupt.

As I beforehand acknowledged, I don’t consider EPR will likely be ready to extend funds from operations for a few years to come back as AMC seems to be in hassle. In 2019, AMC accounted for 18% of complete EPR Properties income, with theater income accounting for 41% of complete income.

Closing Comment

Film theaters account for 41% of EPR Properties’ complete income within the third quarter of 2022. Whereas I consider that film theaters will ultimately be phased out as a result of streaming companies, some analysts consider that they may stay operational.

Nonetheless, from a inventory valuation standpoint, the inventory seems engaging because the dividend yield is at present excessive at 8.2%. Nevertheless, if film theaters are utterly phased out, EPR will obtain roughly 40% much less income (and FFO as a easy assumption). Given the dangers related to the leisure trade, I consider the dividend yield of 8.2% remains to be on the excessive aspect. In that case, the dividend yield is roughly 40% decrease (4.92%).

I consider the inventory’s valuation stays unappealing, provided that traders may quickly put money into risk-free belongings yielding greater than 5%. In a standard situation, I doubt EPR may considerably enhance dividends per share when film theaters are declining in recognition over time. I do not see the share worth rising by 50% (for instance), leading to a 5.4% dividend yield. On this high-interest-rate atmosphere, that is merely not logical.

Conclusion

Nearly all of EPR’s tenants are within the movie show trade, with AMC Leisure being the most important. Cineworld, Regal’s mum or dad firm, lately filed for Chapter 11 chapter safety in October 2022. Because the Corona disaster, AMC Leisure has additionally been in troubled water. There are new rumors of a attainable chapter. AMC Leisure is more likely to go bankrupt, and EPR might lose its largest tenant. In accordance with surveys from 2014, 2020, and 2021, many individuals favor to observe new motion pictures at house relatively than going to the theater. Streaming companies like Amazon Prime, Netflix, and Disney+ might pose critical threats to the movie show trade. It is like evaluating the web to books in 1999.