EPR Properties REIT: Convertible Preferred Stock for the Bulls (NYSE:EPR)

Ryan Bowen profile picture

These are not the cinemas that the EPR bulls are looking for.

Mixed/E+ via Getty Images

EPR properties (New York Stock Exchange: EPR) is a net lease REIT that invests in experiential properties primarily in movie theaters, but also in golf resorts, ski areas and others. Six different contributors on Seeking Alpha have written EPRs since August: 4 buys, 1 strong buy, and 1 hold.

Seeking Alpha: Recent EPR Articles

Seeking Alpha: Recent EPR Articles

However, those months have not been kind to the stock price. The share price stood at $54.32 in early August and is now trading around $38.00. That’s about a 30% decrease. And much steeper than the S&P 500’s decline over a similar period of time.

Seeking Alpha: EPR 6-Month Price Chart

Seeking Alpha: EPR 6-Month Price Chart

Seeking Alpha: EPR and SPY 6-Month Total Return Chart

Seeking Alpha: EPR and SPY 6-Month Total Return Chart

So what is underneath driving the price action? I like how SA contributor Leo Imasuen put it in his September article:

EPR Properties’ (NYSE:EPR) investment history since the start of the pandemic has been heavily marked by fear, uncertainty and doubt. Fear of what was then thought to be a permanent withdrawal from the cinema. Uncertainty over whether post-pandemic modes of entertainment will favor remote control forever. He doubts that the company will remain a going concern despite its large cash and cash equivalents position.

That fear, uncertainty and doubt continue when one of EPR’s three main tenants, Cineworld (OTCPK:CNWGQ), filed for bankruptcy in early September. One of its other three main tenants, AMC Entertainment (AMC), also appears poised for a shakeup. When we look at their revenue concentration, we can see how this can affect the EPR.

Q1'22 10-Q: Income breakdown

Q1’22 10-Q: Income breakdown

Cineworld is the parent company of Regal. So, if we consider AMC and Regal together, they represent 28.4% of revenues generated in 1Q’22. The story for the cinema does not seem to improve either. Consider some data from the recent Elephant Analytics article on AMC showing that the box office recovery has stalled at around ~30% below pre-pandemic levels.

Q1 2022

Q2 2022

Q3 2022

the last year

against 2019

-44%

-29%

-32%

-3. 4%

With Cineworld (hence Regal) in the midst of a restructuring process, we may see rent reductions for EPR properties. The reason for this is to maintain an operator for these theaters. On the other hand, the company has also shown that it is open to selling theaters for reuse. At a conference last year, CEO Greg Silvers had this to say:

We sold a theater at the end of last year to turn it into an industrial one, and people were asking us. So how did they convert the building? They used a bulldozer…

Where there is a will, there is a way. Especially with a bulldozer behind.

Also READ  The trades of inflation | looking for alpha

A Review of Recent Contributor Optimism

I reviewed the last seven Seeking Alpha articles on EPR to gather data for this table. Each of these articles was published by a different contributor.

Shares of EPR Properties currently sit at $38.83 and only the last two items are listed below this price. The authors’ average target price ($58.71) implies a 53% increase from current prices.

With context, we can recognize that this 53% upside potential is exposed to the risk of the Cineworld restructuring and the potential AMC restructuring. The Cineworld restructuring may result in less impact than expected and the AMC restructuring may not occur at all. We just don’t know the full impact here yet.

The total return could be higher than 53% considering the current annual dividend yield of 8.50%. EPR is a monthly payer that may appeal to income seekers and currently pays $0.275 per month. A note here is that during the pandemic the company temporarily suspended the dividend. Before that, the company paid $0.38 a month, a decrease of 28%.

Seeking Alpha: EPR Dividend History

Seeking Alpha: EPR Dividend History

Taking on the EPR Properties Bull Case

If we assume the bull case and take the average target price of $58.71, we could estimate a potential one-year return of 59.70% with the dividend included.

There are also a couple of different preferred stocks that could be a way to invest in EPR Properties. Two of these preferred shares are convertible, which not only gives them a safer place in the capital pile, but also exposes them to potential growth potential of the common stock. Here is a table with some reference data on the preferred ones.

Also READ  Microsoft Stock: Don't Waste Your Money (NASDAQ:MSFT)

Preferred stock

Actual Price

Nominal value

Dividend

Dividend yield

Date of the first call

Expiration date

NYSE:EPR.PC

$18.33

$25.00

$1.44

7.856%

01/12/2012

None

EPR.PE

$26.58

$25.00

$2.25

8.465%

04/20/2013

None

EPR.PG

$17.01

$25.00

$1.44

8.466%

11/30/2022

None

A couple of things to note. All of these are perpetual. favourites, which means that they have no requirements to call them. Each of these are quarterly dividend payers against the monthly payment of the common. As we can see in the table, both EPR.PC and EPR.PE have been due for almost a decade. And these are also the two convertible shares that I mentioned.

If we focus on the convertible preferreds we can find its conversion ratio in the company’s most recent 10-K. But don’t worry, I found it for you.

Preferred stock

Conversion rate

Pair

EPR conversion price

EPR.PC

0.4148

$25.00

$60.27

EPR.PE

0.4826

$25.00

$51.80

What this means is that if the average target price of $58.71 is hit, each of the preferred stocks looks interesting from a conversion perspective. If common shares trade at target price levels, then EPR.PC is likely to start trading closer to par given the conversion mechanics. Right now we can see that each of the preferred stocks seems to be trading according to yield and with rates going up, the price has been reduced until the yield becomes attractive.

With EPR.PE trading above average, I would say that the interesting stock here is EPR.PC. Let’s look at the bullish scenario from the perspective of these stocks. Assuming the EPR hits $58.71 in a year, we can make an estimate to gauge where EPR.PC might trade based on its conversion rate. Using the conversion rate of 0.4148, one EPR.PC share at $24.35 would convert to one EPR share at $58.71.

That gives us a target price for the preferred stocks to compare. This is what the yields would look like assuming a one-year time frame and $58.71 as the target price.

Also READ  DNP and UTG: A change makes sense (NYSE:DNP)

Actual Price

target price

Return

Dividend yield

trotal return

EPR

$38.83

$58.71

51.20%

8.50%

59.70%

EPR.PC

$18.33

$24.35

32.84%

7.86%

40.70%

The yield differential between the two isn’t much considering that preferred stocks carry much less risk. In particular, given the recent past of cutting the common dividend, we could see that happen again if the Cineworld restructuring causes more adverse effects than expected. Similarly, if an AMC restructuring occurs.

Preferred stocks are not at the same level of risk. EPR.PC is also a cumulative preference, which means that even if the company does not pay the dividend, it will still be due. Not only that, but the liquidation value of all the preferred securities is $371 million and is covered 6.95 times by the $2.579 million in equity.

Generally, with preferred stocks, the upside potential is limited to face value. But with these convertible types of preferred stock, they are exposed to potential capital growth, as we have seen. So it seems another way to play on EPR’s bullishness if you’re feeling a bit more risk averse is via EPR.PC.

The only major trade-off here is a somewhat lower implied total return (-19%) compared to common stock if the $58.71 price target is hit. That tradeoff is combined with a number of benefits that I think make this preferred security an even safer way to invest with a bullish EPR thesis.

What risk is worth 19%?

It seems to me that playing the EPR bullish story through the commons is a pretty risky way to approach things. With a major tenant currently undergoing restructuring and another possibly on the way, there are clear and present risks to the business, no matter how it is done. The question is to what degree.

From my point of view, reality is simply unknown in one way or another. What we do know, however, is that if things go in the wrong direction for EPR, the common dividend is something they are willing to sacrifice. The downside potential in the event of another dividend suspension and further weakness in the business is likely to be much greater in common stocks than in preferred stocks.

So bullish investors must ask themselves how much risk is 19% more bullish value? Some may choose a trade in the favorites as a result of your response.

Leave a Reply

Your email address will not be published. Required fields are marked *