EPR Properties Has Survived Cataclysm In Stride

The recent positive efficacy reports from large-scale COVID-19 vaccine trials conducted by several pharmaceutical companies, namely Pfizer (NYSE:PFE)/BioNTech (NASDAQ:BNTX), Moderna (NASDAQ:MRNA), and AstraZeneca (NASDAQ:AZN) has dampened the bearish sentiment against EPR Properties (EPR) and its wider industry peers. The company and other relevant real estate investment trusts have all rallied on the back of these reports after seeing both their rental revenue and stock price crater as the virus ravaged the world.

We now stand at the cusp of a newer world, where cinemas and other 'experimental' locations currently out of sight and out of mind for much of this year can stage a comeback without restriction. I first covered EPR back in March (EPR Properties, Wrecked By COVID-19, Is A Strong Buy) when the markets and stock portfolios were melting and the world as we knew it crumbled. The stock is up 62% since then, albeit shedding some gains after the announcement by AT&T (NYSE:T) that it will send all of its 2021 movies to HBO Max the same day they hit theatres. This direct move to streaming continues to be the major sticking point for the bearish narrative on the stock and does somewhat present a major risk for heavily indebted cinema operators like AMC Entertainment (NYSE:AMC).

A Light At The End Of The Tunnel

EPR is entering the new year with several upward catalysts behind it. Firstly, a mass vaccination campaign starting early January and prioritised for the most vulnerable sections of the population would crater the severity of the virus. This is especially true as these sections account for a majority of COVID-19 deaths. Against this, there would be no need for any more stay-at-home orders as the current ones expire.

Further, with more of their properties reopened rent collections should ramp up and allow EPR's management to provide visibility on the reinstatement of their monthly dividend. Such a move would attract past income investors who disposed of their shares after the dividend on the common shares was removed. EPR had a stellar dividend payout history prior to the pandemic. This should continue once the destruction and uncertainty brought by the virus ends.

Finally, with no more postponement of planned 2021 movie releases, people should flock back into movie theatres in the millions. Not only would this provide much-needed liquidity for embattled cinema operators it would also lift sentiment on the stock by proving that households will still embrace the cinema-going experience as a compliment to their streaming subscriptions.

Addressing The Pandemic In Stride

EPR last reported earnings for its 2020 third-quarter which saw a continuation of the broad month-on-month recovery the company has experienced since the initial March and April lockdowns.

September cash collections from their tenants rose to just under 50% from 40% in August and 35% in July with 93% of EPR's non-theatre properties and 63% of theatre properties open. However, with the new lockdowns instituted in November / December, we could see these figures worsen in the final quarter of 2020. The timeline for a total return to near 100% of properties open will depend on how quickly the FDA grants approval for emergency use vaccine applications by Pfizer/BioNTech and Moderna. The national rollout could begin by early January if both vaccines are approved before the end of this. This would mean by Summer 2021, both new COVID-19 cases and deaths should have fallen precipitously.

While somewhat aggressive, the end of Q2/Q3 could see a total normalisation and a tick back to near 100% reopening of their property portfolio. This assumes the rollout of vaccinations does not suffer from logistical or manufacturing setbacks.

Hence, with nearly $1 billion in cash on hand as at the end of the last reported quarter, 40% of their current market capitalisation, EPR can adequately de-risk its portfolio by acquiring high cap rate non-theatre assets. There will be heightened pressure on management to reduce the total percentage of rental revenue derived from theatres as opportunities to acquire other experiential assets at a potential discount to NAV are likely to be plentiful in the new year.

Facing Cataclysm And Surviving

I am a huge fan of post-apocalyptic movies. These often depict a ragtag band of survivors teaming up to defeat the difficulties they face in their new world from flesh-eating zombies, mutated animals, or nuclear fallout. While these end of the world movies differ in the type of challenges they pose, they are all fundamentally underlaid by the same theme. This theme, mirrored by EPR, is the critical importance of adapting to a new situation quickly and efficiently.

EPR quickly moved to adapt to this new pandemic as it was dealt a world that shut itself in and then threw the keys away. Hence, the dividend suspension was a prudent move and so was the generous concessions extended to their tenants. The former has helped to preserve liquidity while the later contributed to the survival of cash strapped tenants. The company now enters a new year in strength.

Disclosure: I am/we are long EPR, EPR.PE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.