Introduction
I'm a huge fan of real estate investment trusts as you can probably tell by my articles. I love the idea of owning real estate through the stock market. Owning physical properties has never been that appealing to me because of the time and costs associated with owning them.
Furthermore, investing in REITs gives you the ability to own real estate in various states and other parts of the world with ease. EPR Properties (NYSE:EPR) not only gives you that ability, but it is one of the highest-quality REITs that also pays on a monthly basis, making them even more attractive.
I'm a huge fan of monthly paying REITs as I currently own two: Agree Realty (ADC) and Realty Income (O) in my portfolio. In this article I discuss the REIT's latest quarterly earnings, portfolio restructuring, and other reasons why income-focused investors should consider buying EPR Properties.
Previous Thesis
Although EPR's share price has appreciated roughly 6% since my last article titled: EPR Properties Q4: A Cheap REIT With A Monthly Well-Covered Dividend To Build Your Snowball, I think the stock at its current price of $43 still offers value. In the past month REIT prices have appreciated, most likely due to the fact that investors assume interest rates will be cut sometime in the next 4-6 months.
Still, EPR Properties offers a decent entry price currently. And I'll touch on reasons why later in this article. During their Q4 earnings, EPR saw their FFO, AFFO & revenue all decline. Despite this, all three were up for the full-year. The company's dividend still remained well-covered however with an AFFO payout ratio of 71%. They also had a price target from Wall Street at the time of $47, which gave investors some nice double-digit upside, making them an attractive play.
Share Price Movement
Many REIT share prices have shown some strong price appreciation over the past month or so with Agree Realty up over 8%, and Realty Income & EPR Properties both up roughly 7%. And I think many will see stronger price movement in the coming months. One reason I think EPR's share price has moved slower than that of Agree Realty is the REIT's association with movie theaters.
And although I don't think these are going anywhere anytime soon, the recent pandemic changed this with consumers preferring to stream movies at home. I myself still like to go enjoy blockbuster movies in theaters. I recently went to watch The Kingdom Of The Planet Of The Apes last weekend and it was a great experience.
Benefitting From Box-Office Numbers
I'm sure some consumers feel the same way and although box office numbers have slowed down compared to 2023, I think this will pick up in the coming months. And this will benefit EPR Properties going forward. Management also touched on this during earnings stating they expect numbers to pick up in 2025.
During the quarter, North American Box Office numbers were $1.6 billion, down 6.6% year-over-year. The month of April was down due to lack of titles, but management stated they expect this to pick up in May and beyond. One reason is the release of popular movies: Inside Out 2, and Deadpool & Wolverine. The first Inside Out is one of the highest-grossing movies of all time with nearly $900 million worldwide. And although I don't expect the second installment to gross as much as a result of higher interest rates, I do expect them to post strong numbers at the box office.
Moreover, Deadpool & Wolverine recently made history as the most watched movie trailer ever. Additionally, this is a movie I've been waiting for and would rather enjoy the experience in a theater vs streaming it at home. And although EPR will likely benefit from these in the coming months, the REIT has been decreasing its exposure to movie theaters, something I think will also benefit them over the longer term. Furthermore, according to the latest CPI report, inflation eased a bit to 3.4% from the prior month. And if this continues as a result of the FED's tightening policy, it will likely impact consumer sentiment positively, just in time for the summer blockbusters.
Latest Earnings
EPR Properties reported their Q1 earnings at the beginning of the month on May 2nd. Similar to Q4, FFO, AFFO, and revenue all declined. Despite this, the REIT reiterated its full-year AFFO guidance of $4.76 - $4.96. This is down from the $5.22 the company brought in in 2023, but as mentioned previously, 2023 was a very good year for North American Box Office, up 21% from the prior year.
FFO was $1.13 during the quarter while AFFO was $1.12. Both declined on a sequential basis from $1.18 and $1.16 while revenue of $167.2 million declined from $171.79 million over the same period. Year-over-year FFO & AFFO were down double-digits at roughly 10% and 14% respectively. Revenue was down much less at roughly 2.5%.
Q1’23 Q1’24 FFO $1.26 $1.12 AFFO $1.30 $1.13 Revenue $171.4 million $167.2 million
Although this doesn't look good for EPR, out of period deferral collections attributed to the decline from the prior year, resulting in an $0.08 decrease per share. Some of this can also be attributed to softer performance at its St. Petersburg, Florida hotel and resort locations as well as higher expenses for their RV parks.
In regard to revenue, the drop was attributed to the Regal restructuring that took place last year. I touched on this in prior EPR articles. This strengthens the company's portfolio as they have been focusing on not only dispositioning theaters but beefing up their experiential portfolio as well.
Repositioning For Growth
During the quarter, EPR continued disposing of theaters and lower quality properties within its portfolio. This is part of the REIT's plan to reduce exposure to theaters and its education portfolio while growing the other segments, which I think sets them up for long-term growth.
The REIT had 8 remaining theaters to sell and sold two museums in Tennessee & Missouri at 6% cap rates and gross combined proceeds of $45 million. So, they have been effectively recycling capital, which gives them ample liquidity to reinvest back into the portfolio. They also sold 4 of the 5 KinderCare locations they regained possession of in 2023.
Additionally, they closed on a few acquisitions: The Enchanted Forest Water Safari in New York and a $14.7 million acquisition of land in Illinois for two build-to-suit karting locations. These had cap rates of 8% which creates long-term value for EPR. Furthermore, they committed $220 million to experiential development & redevelopment projects.
Management spent a total of $85.7 million during Q1 on investments and they maintained their $200 - $300 million spending guidance for 2024. Regarding their portfolio, EPR showed solid growth with Eat & Play EBITDARM up 6% year-over-year and a 6% increase in revenue regarding the Education portfolio. Total portfolio coverage remained similar to Q4 at 2.2x.
Balance Sheet Comparison
EPR's balance sheet also puts them in a strong position to continue making investments to grow its portfolio. It also holds up well against other monthly-paying REITs like Agree Realty & Realty Income. At quarter's end EPR had a net debt-to-EBITDA ratio of 5.5x.
On an adjusted basis, this was 5.2x and had roughly $137 million in debt maturing in August of this year. In 2025, this is more than double at $300 million, but the company has plenty of liquidity available to satisfy this.
This is in comparison to ADC's net debt-to-EBITDA of 4.7x and O's 5.5x. Furthermore, EPR's fixed-charge coverage ratio was also healthy at 3.1x. This is in comparison to Agree Realty's 4.9x and Realty Income's 4.5x. EPR also had ample liquidity available at $59.5 million in cash and $1 billion on the revolver. They are also investment-grade rated by all three major agencies, similar to peers ADC & O as well.
EPR Properties Net debt-to-EBITDA 5.5x Agree Realty Net debt-to-EBITDA 4.8x Realty Income Net debt-to-EBITDA 5.5x
Valuation
At a forward P/AFFO of less than 9x using their midpoint of guidance, EPR still presents a compelling buying opportunity despite their exposure to theaters. As previously mentioned, the REIT has been reducing its exposure to theaters and growing its other segments, positioning themselves for long-term growth.
This is much lower than their monthly paying peer Agree Realty's 14.6x and 14.8x sector median at the time of writing. Again, I think the market is pricing in the company's headwinds with its exposure to movie theaters and concerns regarding AMC Theaters (AMC), but as mentioned earlier in the article, EPR has been making strides with its portfolio restructuring.
Therefore, I think the REIT warrants a higher P/AFFO similar to its peers. And although this may take some time as they deal with restructuring, acquisitions, and higher for longer interest rates, eventually I think EPR will warrant a higher valuation, similar to its peers.
As a result of their strong fundamentals, I think EPR warrants at least a P/AFFO of 10x, lower than the current sector average. This gives the REIT a price of roughly $50, more than 16% upside from the current price. This is slightly lower than Wall Street's high price target of $51.
Risks To Thesis & Bottom Line
As a result of EPR's portfolio, the REIT is subject to changing consumer behaviors. And with higher for longer interest rates placing downward pressure on consumers' wallets, this could cause a further drop in the REIT's financials in the coming quarters.
Furthermore, EPR has seen FFO & revenue decline over the past few quarters, likely a result of the tightening financial policy from the FED. Additionally, the REIT is subject to further downturns in the event of a recession, which some say the economy is still due for as a result of higher interest rates and a tick up in unemployment.
This, along with its exposure to theaters would continue to place downward pressure on EPR's financials, negatively impacting their share price in the process. But as previously mentioned, the current P/AFFO ratio presents a compelling opportunity, especially for long-term investors. Inflation also seems to be moderating with CPI dropping slightly to 3.4%, down from 3.6% in the month prior. As a result of this, their portfolio restructuring, and upside potential, I am upgrading EPR to a strong buy.
The Dividend Collectuh
The Dividend Collectuh is not a registered investment professional nor financial advisor and these articles should not be taken as financial advice. This is for educational purposes only and I encourage everyone to do their own due diligence. Navy veteran who enjoys dividend investing in quality blue-chip stocks, BDC's, and REITs. He is a buy-and-hold investor who prefers quality over quantity and plans to supplement his retirement income and live off dividends in the next 5-7 years. He aspires to reach and help the hard working, lower and middle class workers build investment portfolios of high quality, dividend-paying companies. He also hope to give investors a new perspective to help them reach financial independence.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.
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