Jeff Middleswart of Behind the Numbers is one my favorite stock analysts. I’ve always been very impressed with the depth of his research and his understanding of complex accounting. At any rate, I was interested to see Jeff's initial coverage of EPR Properties (EPR) with a rating of “Buy.”

An excerpt from his recent report:

We initiate coverage of EPR with a BUY rating and earnings quality coverage with a 4- (Acceptable) rating.  

EPR is definitely a unique REIT in that it operates primarily in the entertainment areas where demand by consumers has been increasing.  It has no exposure to retail shopping or office space.  Instead, it focuses on movie theaters, Top Golf, water parks, ski resorts, and other eat-and-play destinations.  

The overriding risk is the total amount of debt on these assets.  Not only is EPR leveraged 4.7x adjusted EBITDA, but many of its customers operating the assets are leveraged 3-6x adjusted EBITDA also.  EPR is also paying a dividend in excess of earnings and FFO at this point…

Missing some rent payments from tenants for a month or two is unlikely to derail EPR in the long-term in our view.  It has two years of revenue in cash on its balance sheet now.  In fact, after being shut-in their homes, many consumers may flock to an entertainment venue like a water park, Top Golf, or movie when this is disruption is over.  EPR’s own cash obligations look manageable given its own liquidity.  

It has the ability to pay the dividend now.  Reducing the dividend may help EPR further retire debt (it drew down $750 million on its revolver recently). With its customers having their own financing obligations to pay without revenue coming in, they may ask for relief from EPR.  Also, EPR is slowing its growth plans substantially in 2020.  We doubt its cash flow will support the dividend in 2020.  This is still a REIT and has to pay out the bulk of earnings as a dividend and is very unlikely to cut it to zero.  A 20% cut would still leave this stock yielding 12%.  

Behind the Numbers 3/27/2020 report.

I noted recently that EPR had recently authorized a stock buyback. If management were concerned about liquidity or solvency, that’s not something they would be doing.

Clearly, seeing major short-term reductions in rent is going to hurt EPR. That’s unavoidable. But are its properties suddenly 75% less valuable than they were a month ago?

I think it’s very possible the company may opt to reduce its dividend in the months ahead, at least temporarily. But it’s important to remember it’s long-term business model is solid and that this virus scare will eventually pass. Two years from now, anyone buying EPR and suffering through the volatility will likely be glad they did.