The global pandemic has completely crushed entertainment businesses. Cinemas, theme parks, concert halls and many more have had to temporarily close, circumvent new COVID-19 regulations or struggle with low consumer attendance.
The last two years have been difficult for REP properties (REP -0.51%), a real estate investment trust (REIT) specializing in the ownership and rental of experiential real estate. Despite a return to demand for entertainment experiences in late 2021 and 2022, the company’s share price remains down 38% from pre-pandemic levels.
Its beaten stock price makes it particularly undervalued for future growth opportunities. Here’s a look at the company and why it’s a screaming buy right now.
Recovery is imminent
If there’s anything 2022 has shown us, it’s that demand is back for experiential activities. Top Gun: Maverick shattered box office sales, selling out movie theaters across the U.S. Eat and Play restaurants like At Dave and Buster’s are making a strong comeback and trips to resorts, campgrounds and theme parks are on the rise. It is only a matter of time before EPR Properties tenants fully recover operating at pre-pandemic levels.
EPR Properties’ portfolio is diversified across multiple sectors including restaurants, ski resorts, theme parks, gaming and casinos, cultural venues like museums, fitness centers and even private schools and early childhood centers. However, most of its portfolio is in theaters. Of its 355 properties, nearly half are movie theaters, with AMC Entertainment Holdingsits first tenant, representing approximately 14.9% of its rental income.
While there are still headwinds for its tenants, AMC in particular, there is optimism that the improvement will continue.
He is in a good financial situation and is recovering quickly
EPR Properties has done a good job of maintaining a sound financial position despite the challenges of the pandemic. Its debt to earnings before interest, tax, depreciation, and amortization (EBITDA) ratio is 5.1 times, which is around the REIT average of five times. It has $328 million in cash and cash equivalents and no debt maturities until 2024, meaning its tenants have a long period of time to recover.
Quarter after quarter, it is becoming very clear that EPR Properties is heading towards recovery. The company was profitable for the whole of 2021, which was a big turnaround considering it was operating with a net loss in 2020. And Q2 funds from operations (FFO), an important metric to show the profitability of a REIT, went from a net loss to jumping over 100% year over year. Fitch Ratings also gave the company and its unsecured debt an upgraded rating to a stable outlook.
Its price is good and pays dividends to boot
Most REITs trade between 15 and 20 times FFO, with some of the largest and most popular REITs trading above 20 times FFO. Currently, EPR Properties’ stock price is trading at around 11 times its FFO, making it one of the cheapest REITs in the market today.
Its dividend yield is just over 6.5% today and, as a bonus, the company pays dividends monthly. Moreover, its current payout ratio of 75% is very healthy, which means that a cut in dividends is unlikely to occur in the future, even if things do not improve dramatically.
The EPR is down less than 1% this year, which is quite impressive considering how volatile the market has been lately. Investors who are optimistic about the continued recovery of experiential businesses that EPR leases from should use today’s low price as a buying opportunity.
Liz Brumer-Smith has no position in the stocks mentioned. The Motley Fool recommends Dave & Busters Entertainment and EPR Properties. The Motley Fool has a disclosure policy.