EPR Properties (EPR 1.69%), a comparatively small actual property funding belief, or REIT, was outperforming the inventory market throughout most of 2022. Nonetheless, within the latter half of the yr, the guardian firm of one in all its largest tenants, Regal Leisure, filed for chapter safety, and the inventory plunged by about 40% from the highs.
Nonetheless, Wall Avenue hasn’t given up on EPR even when buyers are nervous. In truth, a few of the most revered corporations see numerous upside potential for this beaten-down, high-yield REIT. Raymond James lately named EPR a high decide amongst internet lease REITs, and JPMorgan Chase lately put a $52 value goal on the inventory, implying greater than 50% upside from the present value.
To make sure, there are some short-term headwinds buyers ought to pay attention to earlier than contemplating EPR. So, here is a fast overview of what the corporate does, its long-term potential, and key danger components.
What does EPR Properties do?
EPR Properties is a REIT that focuses on companies that promote experiences versus bodily merchandise. Consider companies like golf points of interest and ski resorts (Topgolf and Vail Resorts are each EPR tenants), water parks, and eat-and-play companies. EPR buys the actual property occupied by these kind of companies after which leases it to their occupants.
EPR’s high property kind, and the explanation for its current inventory underperformance, is film theaters, which made up 46% of the corporate’s lease earlier than the COVID-19 pandemic. Its largest tenant is AMC Leisure, with Regal additionally amongst its high three. As of the most recent obtainable data, EPR owns 173 film theaters out of 282 whole experiential properties, and the corporate additionally has a portfolio of schooling properties that it has been lowering lately.
As a REIT, EPR distributes nearly all of its revenue to buyers, and due to its depressed share value, it has a really good-looking 8.8% dividend yield. It pays in month-to-month installments, and the annual payout represents simply 72% of its earnings, which is a fairly low payout ratio for a REIT.
A high-potential market alternative and many monetary flexibility
After pausing development for a pair years as a result of COVID-19 pandemic, EPR has lately began pursuing development alternatives once more. Via the primary three quarters of 2022, EPR spent $321 million on property acquisitions, with one other $250 million in dedicated spending on improvement over the following two years. In all, EPR sees a $100 billion market measurement of properties it may pursue.
The corporate has the monetary flexibility to make the most of alternatives it sees. It has a $1 billion untouched credit score line and greater than $160 million in money. And if that wasn’t sufficient, EPR is producing sufficient money stream to maintain paying its dividend and fund the $250 million in dedicated spend with out elevating any extra capital by fairness or debt.
The movie show portfolio may weigh on the inventory for some time
To be completely clear, I am not terribly frightened about EPR’s movie show publicity (which the corporate is actively attempting to diversify away from). For starters, EPR’s theaters are typically higher-end properties, resembling newer megaplex cinemas positioned in high-traffic areas. So, even by a chapter restructuring, these are the forms of theaters operators wish to maintain open — the truth is, in its third-quarter earnings launch, EPR confirmed that Regal had paid lease on all 57 of its EPR-owned theaters in October and November. Plus, the current field workplace success of films like Avatar: The Method of Water are encouraging for the long-term viability of film theaters.
Having stated that, the theater portfolio may actually act as a short-term headwind to the inventory, particularly whereas the Regal chapter proceedings are ongoing. So, whereas I hope the analysts are right and we see a rally within the inventory within the close to time period, I personal EPR as a result of I feel it is going to be a fantastic long-term, market-beating funding. Not solely does EPR have numerous upside potential because the theater enterprise normalizes, however it has tons of room for value-adding development, in addition to a excessive, well-covered dividend.
JPMorgan Chase is an promoting associate of The Ascent, a Motley Idiot firm. Matthew Frankel, CFP® has positions in EPR Properties. The Motley Idiot has positions in and recommends JPMorgan Chase and Vail Resorts. The Motley Idiot recommends EPR Properties. The Motley Idiot has a disclosure coverage.
