What a year. EPR Properties (NYSE:EPR) stock, my pick for InvestorPlace’s Best Stocks for 2022, is down 19%. And yet I still find myself in fourth place.
It’s just been that kind of year.
I’m good with that. EPR could still enjoy a nice run in the fourth quarter and take the crown. Stranger things have happened. But regardless of where the stock places in this year’s contest, I still consider EPR one of the very best ways to play a return to normal.
Return to Normal With EPR Stock
EPR Properties is a specialty real estate investment trust (REIT) with a focus on experiential properties. Its portfolio consists of movie theaters, Top Golf driving ranges and other “eat and play” properties, ski resorts, amusement parks, concert venues — just about everything that was restricted or outright shut down during the pandemic.
And that’s precisely what makes EPR so interesting. Even with the economy looking rocky and investors strapped for cash due to inflation, Americans are starved for experiences after being denied them for the better part of two years. A deep recession might slow down this trend, but it’s not going to reverse it.
Furthermore, this isn’t EPR’s first rodeo. The REIT has been in business since the late 1990s and has seen its share of recessions and other upheavals in the quarter century that has followed.
Consumer spending tends to slow during recessions, but the cutbacks tend to be concentrated in big-ticket items like cars, appliances or furniture. Frivolous little expenses like a night at the movies or an afternoon at the batting cages provide a form of escape, and we see this in the data. Spending on experiences — the services that EPR’s tenants are selling — tends to hold up well during recessions.
As explained in EPR’s Q2 investor presentation, consumer spending on experiences never materially declined during the 2000-2001 downturn. And as nasty as the 2008 Great Recession was, the drop-off in spending on experiences was hardly catastrophic. Spending dropped to the levels of approximately two years before and then quickly recovered.
The only significant decline in experience spending happened during the pandemic, and this was due in large part to forced closures.
What Comes Next?
EPR is a real estate investment trust, and the dividend has always been a big part of its appeal. Let’s talk about that.
At current prices, EPR yields a massive 9%. And while a yield like that might normally be cause for concern, remember that we are in a bear market and prices often reach ridiculous extremes in such conditions. EPR was confident enough in its ability to maintain its dividend that it raised it this past March.
Bearishness toward EPR tends to center around its exposure to movie theaters, which make up about 40% of the portfolio. Personally, I’d prefer to see that allocation drop, and EPR has been actively diversifying out of movie theaters for years. But it remains high, and movie theaters continue to suffer from a post-Covid dearth of new movies.
I would counter the bears by pointing out that EPR tends to own higher-end movie theaters. As the company noted in its second-quarter investor presentation, EPR owns about 3% of all of the movie theaters in America, yet it generates about 8% of all box office revenues. And that says nothing of food and drink sales, which tend to be higher in top-tier theaters. Plus, 96% of EPR’s theaters are in the top half of the U.S. by box office sales.
So, even if the movie business is going through a transition, EPR would seem to be on the right side of it.
EPR’s shares could double from current prices and still be below their old pre-2020 highs. The shares are dirt cheap and priced to massively outperform the broader market. Win or lose the Best Stocks for 2022 contest, EPR is one you’ll want to hold onto for years.
On the date of publication, Charles Sizemore held a LONG position in EPR stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
