“Hollywood’s Landlord” Yields 7% And Looks Like A Buy…
This past Memorial day marked a triumphant box office debut for Paramount’s Top Gun: Maverick, the long-awaited sequel to the iconic 80s classic.
No spoilers, in case any of you haven’t seen it just yet. But millions did, as the film played to packed houses across more than 4,700 theatres nationwide. It raked in approximately $156 million during the extended weekend — the strongest Memorial Day showing in history, edging out the third installment of Pirates of the Caribbean.
It has recently passed the $1 billion mark at the global box office. Yet, Maverick doesn’t rank as the biggest opening weekend blockbuster of 2022, trailing superhero flics Batman and Doctor Strange.
Even before Maverick, cumulative box office totals through the first four months of 2022 were already running about five times higher than last year’s pace, $1.9 billion versus $432 million.
It looks like Hollywood is back in business.
Needless to say, nobody likes to see visitors returning to cinemas more than movie exhibitors like AMC (NYSE: AMC). Except for maybe AMC’s landlord…
EPR Properties (NYSE: EPR) counts AMC as its biggest renter. In fact, this real estate investment trust (REIT) owns 175 cinemas leased to 18 different operators.
It was a bleak time when theatres (and just about everyone else) went dark during the pandemic. Rent collections dwindled to just a fraction of their normal levels and the company had to temporarily suspend its dividend to preserve cash. Thankfully, those days are now in the rear-view mirror.
EPR’s tenants account for 8% of all North American box office receipts, or nearly a dime of every dollar spent.
For all the consternation about video streaming, the threat is overblown. 85% of all streaming minutes are devoted to television series like Stranger Things, versus just 15% for movies. And even many of those who do stream the occasional Netflix movie don’t consider it a substitute for the big screen experience.
The industry sold 1.2 billion tickets last year, easily outdrawing competing forms of family entertainment like pro sporting events. With an ambitious release slate including the latest installments in popular franchises such as Thor, Minions, Toy Story, and Jurassic World, I expect attendance figures to continue strengthening.
With patrons now filing back into those theatres, the company received 100% of the cash rent due last quarter (actually a bit more, 106%, including deferred rent).
But there’s a lot more to this landlord than just popcorn and auditoriums. In fact, they account for less than half of the overall rental income.
More Than Just Movies…
The vast $6.5 billion portfolio includes nearly 100 other leisure-oriented properties, including waterparks, bowling alleys, winter ski resorts, indoor sky diving facilities, and “eat-and-play” complexes such as Top Golf. With business returning to normal, the company generated $87 million in adjusted funds from operations (AFFO) last quarter, double the $39 million from a year ago.
On a per-share basis, that works out to $1.16, enough to comfortably meet the $0.77 in dividends – for a distribution coverage of 154%. Better still, management has just confidently raised its full-year outlook and is now expecting cash flows of at least $4.39 per share.
The market has taken notice of these operating improvements, driving the stock to a new 52-week high a few weeks ago. So have ratings agencies like Fitch, which just upgraded EPR’s credit to the investment-grade tier. That means the stock’s generous 7.2% yield (payable monthly) is on solid financial footing.
There’s no denying that Covid-19 brought about a lot of changes. Yet, as we figure out what exactly the “new normal” means, we’re quickly learning that some things haven’t really changed all that much.
Going to the movies is one of them. That said, I like to see EPR broadening its revenue stream. The company has recently branched out into destination resorts, such as Margaritaville Nashville. And it’s eying other unusual properties from zoos to aquariums to concert halls. Management intends to sink at least $500 million into the acquisition and development pipeline this year.
It hasn’t always been a smooth ride. But this focus on “experiences” over traditional retail gives EPR a major leg up on other REITs, in my view. And considering this management team has chalked up an impressive 1,570% return for EPR shares since 1997 – outrunning the Russell 1000’s 785% by a two-to-one margin – I trust that capital will be deployed effectively. And while those kinds of returns aren’t guaranteed going forward, I think long-term investors will continue to be rewarded.
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