REP properties (NYSE: EPR) released a robust second-quarter earnings release in early August, but gave up all of its July and August gains, closing in on its June lows. The recent sale has been exacerbated by concerns over Regal’s parent Cineworld(OTCPK: CNNWF), because it would be in the process of filing for bankruptcy.
As a result, investors are rightly concerned about the impact on EPR’s rental base, as Regal represented 14.4% of its revenue base in Q2 and 8.4% in FY21. Therefore, we assume that the market has adjusted its expectations of a rental impact going forward, even though EPR has pointed out that it is not in negotiations with Regal currently on its obligations.
Therefore, we like the deep hindsight, as it helped improve the reward-risk profile with a less aggressive entry point. In our previous post (Hold rating), we pointed out that investors should be cautious, as we postulated that EPR might face strong selling pressure at its mid-resistance zone ($56). Consequently, EPR’s buying momentum was again decisively turned down in this zone in August, as it had been doing since June 2021.
With the EPR approaching its June lows and a critical support zone with significant pullback, we are ready to reassess the EPR.
Accordingly, we are revising our rating on Hold to Buy’s EPR, with a medium-term (PT) price target of $54 (implying 19% upside potential).
The market was spooked by Cineworld’s troubles
Cineworld announced in mid-August that it needed to take proactive steps to deal with its high debt load, given relatively poor ticket sales performance. As a result, EPR also felt the brunt of the sell-off, given its exposure to Regal.
As a result, it sent EPR down sharply from its recent highs in August, with the market reflecting the potential impact on its rental base. Selling pressure continued into the past week, racking up further losses on EPR, which collapsed almost 20% in a matter of weeks.
As a result, EPR’s NTM AFFO multiple per share fell significantly to 9.29x, 28% below its 5-year average of 12.94x. Additionally, its NTM dividend yield improved to 7.33%, significantly above its 5-year average of 5.67%. Street analysts also adjusted their projections, as they factored in potential rent reductions from Regal, as BofA (BAC) pointed out:
According to the Wall Street Journal, Cineworld, the parent company of Regal Theaters and 13.5% of the EPR portfolio, is about to file for bankruptcy. Half of EPR’s Regal leases are in two head leases. The rest of the leases are in cross default. Our updated model assumes a 15% discount to Regal’s rent in the event of bankruptcy. – Fly
While we believe a market downgrade is warranted given EPR’s significant exposure to Regal, we believe this decision has sufficiently mitigated EPR’s valuation risks. Additionally, investors should note that EPR’s Q2 release highlighted that the company continues to see a strong pace of recovery from its theater tenants, despite worsening macros exacerbated by inflation rates. high and a hawkish Fed.
In addition, management has emphasized that it expects its tenant base to remain resilient, which reinforces our belief in EPR’s strong AFFO visibility. Management emphasized:
Although overall there is growing uncertainty and concern about inflation and the possibility of a recession, historically our value-oriented destinations have proven more resilient in times of recession, as they offer a attractive value to families. To date, we have not seen any significant impact from inflation or gasoline prices, and we expect this to be the case in the event of an economic downturn. (Call on EPR FQ2’22 results)
Additionally, the company continued its investment cadence, seeing opportunities in the current environment, supported by a strong balance sheet. As a result, it posted capital expenditures of $214.9m in Q2. The company also expects further capital spending in H2’22, targeting $600 million (middle) for FY22. With capitalization rates around 8%, we assume that EPR is well positioned to continue to invest in growth and improve the resilience of its AFFO visibility in the future.
Is the EPR action a buy, a sell or a hold?
With the significant pullback in the EPR in August, we are confident that the buying momentum should return to support its stock.
As seen above, the EPR moved closer to its June lows as it digested all of its July and August gains over the past two weeks. Nonetheless, we understood that its near-term support zone ($41) should help provide robust buying potential for EPR, helping to stem downside volatility.
Therefore, we are revising our Hold to Buy EPR rating and urge patient investors to take advantage of the pullback to add more positions.