Editor’s note: This column is part of InvestorPlace.com’s Best Stocks for 2022 contest. Charles Sizemore’s pick for the contest is EPR Properties (NYSE:EPR) stock.
In 2022, the “reopening trade” should be alive and well. This is great news for my pick in the InvestorPlace Best Stocks for 2022 contest, EPR Properties (NYSE:EPR). Here’s what I mean by the reopening trade and what that means for EPR stock.
Just when you thought we were in the clear and that life was finally close to being normal again… we get a new Covid-19 variant! We’re still waiting for more details. Early signs show that omicron might be more transmissible than previous variants but not necessarily more deadly. The wildcard is how well existing vaccines stop it, and we should have some news on that in the coming days and weeks.
Now, with respect to my personal health and that of my family, this is something I would take seriously. But with respect to the market turmoil it unleashed following the Thanksgiving holiday, I believe this creates an opportunity.
We can’t completely rule out more lockdowns. They’re already happening again in Europe. But there’s not much political appetite for them here, and even during the worst spikes of the delta surge, the general direction tended to be towards loosening rather than tightening.
Movie Theaters Are Making a Comeback
EPR Properties is a real estate investment trust (REIT) with a niche portfolio focused on experiences and entertainment. (EPR is actually short for “entertainment properties.”)
Fully 95% of the portfolio is invested in entertainment and experiences with the remaining 5% invested in private schools and early childhood education. (EPR is reducing its exposure to schools to become a pure play on entertainment and experiences.)
Movie theaters are the REIT’s largest allocation, accounting for about 44% of revenues. That’s a high concentration, of course, and EPR is working on rebalancing its portfolio to make theaters a smaller piece of the total.
But for the moment, theater exposure isn’t looking too bad. After a long stretch of closures, Americans are returning to theaters in droves, and Hollywood has a solid backlog of content to show them.
This year brought Daniel Craig’s final appearance as James Bond in No Time to Die as well as four Marvel Cinematic Universe films, and next year will bring at least three new Marvel movies as well as installments to the Top Gun, Mission: Impossible, Avatar, Jurassic World, Batman and Aquaman franchises.
Yes, competition from Netflix (NASDAQ:NFLX) and other high-quality streamers is real, but it’s not exactly an apples-to-apples comparison. The majority of content streamed at home takes the form of series rather than movies. You can binge watch Netflix at home in sweatpants. But a movie is still an event, and going to a theater is an experience… particularly considering the gentrification of theaters over the past decade.
Most theaters, particularly in affluent areas, now boast luxury seating and many now offer alcohol and high-end dining in addition to the usual popcorn and Coke. Nearly 60% of EPR’s theater properties have reclining seats, and nearly 80% have enhanced food and beverage options or alcohol. EPR clearly focuses on the premium properties most likely to thrive in this new world.
Apart from movie theaters, EPR’s biggest allocation is 28% to “eat and play” properties, such as Top Golf driving ranges, with much of the rest of the portfolio allocated to ski and amusement park properties.
EPR Stock Is Recovering
Chart courtesy of GuruFocus.com
EPR Properties saw its stock price utterly eviscerated in 2020, particularly after it was forced to eliminate its dividend in a bid to conserve cash. Many of EPR’s tenants had to seek rent concessions, as their revenues effectively went to zero during the lockdowns. In the fallout, EPR’s shares lost around 70% of their value. They’ve rallied off those lows, but at the time of writing remain near levels first seen in 2004.
Meanwhile, EPR has reinstated its dividend, which now yields an attractive 6.6%. And as EPR’s tenants continue to ramp up their rent payments and even pay back deferred rent, EPR Properties will have the means to raise the dividend in the quarters ahead.
Why EPR Properties Is One of the Best Stocks
2020 and 2021 were years in which highly speculative assets tended to do well. This was the era of cryptocurrencies and SPACs (special-purpose acquisition companies), for crying out loud.
I suspect that 2022 will be a little less friendly to wild speculations. With the Federal Reserve looking to pare back stimulus and with many of the best trades of the past few years starting to look a little long in the tooth, 2022 will likely be a year in which slow and steady wins the race.
In the case of EPR Properties, we’re enjoying a market-crushing dividend while we wait for the market to appreciate the stock’s value. The shares would have to rise by about 60% just to touch their pre-Covid-19 levels. I don’t think we’re going to find returns in that ballpark in too many other places next year. In turn, it becomes one of the best stocks to buy for 2022.
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management, a registered investment adviser based in Dallas, Texas.
