EPR Properties (NYSE: EPR) is a real estate investment trust (REIT) focused on experiential assets. Before COVID-19 that was viewed as a huge tailwind, but now that people are staying home to avoid getting sick, it has become a huge headwind. Just how big? AMC Entertainment’s (NYSE: AMC) recent troubles help provide some important scope.
Focused on a niche
EPR Properties is a unique REIT because it specifically owns what it calls experiential assets. Roughly 90% of its rents are tied to things like movie theaters, amusement parks, sports clubs, and ski resorts, among other things. The rest of its business comes from educational facilities, which are a different kind of in-person experience (not quite as fun for the kids). No other public REIT has a profile like this.
The reason for this focus was to tap into a big-picture trend among consumers that seemed to increasingly highlight experiences over owning physical objects. In fact, one of the key draws here for investors was that EPR pretty much avoids the retail apocalypse story, since it doesn’t own retail stores. But that was before COVID-19 led the government to shut down nonessential businesses and place restrictions on attendance at places where people congregate in groups. This has been devastating to EPR Properties’ business. In August, the REIT only managed to collect 35% of the rent it was owed.
With that backdrop, it’s no wonder EPR stopped paying its monthly dividend in June. That said, the economy has begun the reopening process so it’s not unreasonable to think things could start to turn around. Only a recent announcement from AMC Entertainment suggests the pain is set to linger for EPR.
The big screen goes dark
AMC Entertainment was EPR’s largest tenant in 2019, representing 17.6% of rents. EPR has been working with the movie theater operator and has already restructured its lease, including reducing rents by roughly 20%. However, moviegoers haven’t been returning to AMC’s theaters even as they reopen for business. A key piece of that is because movie production companies keep pushing off big releases or, worse, shifting them to streaming platforms. In other words, there’s little out there to draw customers into the movie house.
This was one of the big highlights from AMC Entertainment’s SEC filing that warned it could run out of cash before the end of the year or in early 2021. It noted that despite having 83% of its theaters open, revenues are down 85% year over year. More troubling, the company highlighted a few ways it could get the cash it needs to keep going, including selling stock or bonds, finding an investor to inject some cash into the business, and getting further concessions from landlords. That last one would make life even more difficult for EPR but would be better than a bankruptcy, which some industry watchers are now worried is on the table for AMC. (The company is adamant that such an outcome is not in the cards right now.)
It’s highly likely that other theater operators are facing similar headwinds. For example, Regal Cinemas has decided to shut down all of its U.S. theaters because there aren’t enough patrons to make it worth staying open. Updates like these are particularly bad news for EPR, since roughly 45% of its rents come from movie theaters. That’s a huge number from a single property type and suggests that EPR’s recovery from COVID-19 will be a long and difficult trek unless there’s a vast (and quick) improvement in the movie theater space.
Only for aggressive investors
In the face of COVID-19, investors need to step back and consider more than the value of a REIT’s property portfolio. Today it’s just as important to assess whether the REIT you’re considering can muddle through until the world gets a better handle on the coronavirus. With EPR collecting just 35% of its rents and its largest tenant highlighting the financial troubles within the industry to which it has the most exposure, it’s probably best for conservative investors to take a wait-and-see approach with this particular REIT. Sure, there’s likely to be massive turnaround potential if things start to get better, but right now the evidence suggests that the REIT’s business prospects are, in fact, still getting worse.