The market reaction after EPR Properties (NYSE:EPR) released earnings results for its fiscal 2021 fourth quarter was incredible as the company’s recovery continues strongly more than two years since the pandemic forced a material deterioration of its financials. EPR, once a high profile casualty of the pandemic, saw its cash collections improve meaningfully as all its topline results outperformed consensus estimates.
This meant a stock price that was being weighed down by Omicron variant fears roared back in spectacular fashion. Building upon the recovery from its December lows to move just above $55 per share, a 26% move. In retrospect, the omicron selloff presented a strong opportunity for the bulls to accumulate shares in what I described as an unnecessary discounting of a company that has built its revenue on the much-needed experience economy that genuinely stood to benefit from the post-pandemic world . Hence, the unique REIT with a history of outperformance was always going to be a great investment if its management was to prudently handle the risks to its underlying financials.
A Dividend Raise As Fiscal 2022 Guidance Dazzles Bulls And Bears Alike
EPR’s fiscal 2021 fourth-quarter earnings saw its collection rate, funds from operations, and its monthly dividend payout all realize strong improvements.
Highlighting how improved the operating environment for its experiential tenants has been, EPR’s collection rate was at the high end of its expectations at 97% of contractual cash revenue. Total revenue during the quarter at $154.91 million was a 65.8% year-over-year increase and a beat of $14.52 million on consensus estimates. This was also 90.1% of its pre-Covid revenue in the comparable quarter in 2019.
The company’s cash collections continue to improve as rent deferred for delinquent customers continues to be paid back. The fundamentals of its theater tenants drove most of these gains as the period saw the domestic theater industry realized improved fortunes on the back large blockbuster releases, including Spider-Man: No Way Home. This would move to become the third-highest grossing movie ever at the domestic box office. EPR’s adjusted FFO per common share at $1.11, was a $0.15 beat on consensus estimates. And mirroring the story from previous quarters, the company provided guidance that the market assessed to be extremely strong with FFOAA per diluted common share expected to be between $4.30 and $4.50, an increase of 42% at the midpoint versus 2021 performance.
The monthly dividend payout was also raised by 10% to $0.275, meaning the yield at the current price stands at 6.09%. Whilst this is lower than the headline rate of inflation, it is a healthy competitive yield against other REITs and likely stands to increase further as the company’s collection rates stabilise at the current level. EPR’s management also flagged an intention to return to investment spending and is allocating between $500 million and $700 million in fiscal 2022 for this. This should help drive further increases in the FFO and future dividend growth.
As EPR deploys its cash and equivalents to return to investment spending, the company’s balance sheet is to be monitored. It ended the quarter with a strong liquidity position with cash on hand at $288.8 million and no borrowings on its $1.0 billion unsecured revolving credit facility. The company was able to issue $400M of 3.60% Senior Notes due 2031, a record low coupon. Critically, the move to greater investment spending should help diversify rental income streams and address pertinent concerns from bears that EPR is still far too exposed to the inherent turbulence of the US domestic movie-going industry.
This continues to pose the greatest risk to EPR’s financials as a potential future slowdown of this industry would catalyse a return to rent arrears and a deterioration of EPR’s financials. This risk is especially heightened as the financial health of its largest tenant AMC Entertainment (AMC) has been questioned in recent years. Whilst AMC has experienced an improvement in its revenue, its balance sheet continues to be stretched.
EPR Properties Is A Great Company With A Sustainable Future
Investors who took the risk with EPR when the company collapsed at the onset of the pandemic have been rewarded. EPR was and continues to be a prudently run real estate company that now has a dividend payout that is likely set to build on its 10% increase. The future of the domestic box office is also likely to remain bright as Hollywood reverses earlier stances to pull back from the industry and as streaming companies face headwinds.
EPR Properties remains a buy on its return to investment spending and its FFO guidance for 2022. The company’s new dividend payout is likely the start of future increases, meaning the good times for current investors are likely to continue.