As more data comes in, we’ll get a better idea of what the financial situation looks like for REITs, specifically how much rent they are able to collect from tenants.
EPR ran the numbers, analyzing their cash “burn rate” with and without their dividend.
Per the press release,
Since the prior update, tenants and borrowers have paid approximately 15% of April 2020 contractual base rent and mortgage payments. The Company has agreed to defer the rent and mortgage payments on a month-to-month basis for substantially all of the customers that have not paid rent for the month of April 2020. While deferments for this period delay rent or mortgage payments, these deferments generally do not release tenants from the obligation to pay the deferred amounts in the future.
Several larger tenants of the Company have recently announced additional sources of liquidity including the Company’s largest tenant, American Multi-Cinema, Inc. or “AMC,” representing approximately 18% of the Company’s total revenue for the year ended December 31, 2019. On April 17, 2020, AMC’s parent announced the pricing of a private offering of $500.0 million of first lien notes and has indicated that these additional proceeds would provide it with sufficient liquidity to withstand a global suspension of operations until a partial reopening ahead of Thanksgiving. Despite this increase in short term liquidity, the Company believes it is prudent to begin recognizing revenue for AMC on a cash basis. Accordingly, the Company will record a non-cash write-off of straight-line rent receivable of approximately $12.5 million for the quarter ended March 31, 2020 related to AMC as well as two small tenants where a similar assessment has been made that cash accounting is appropriate.
Charles here. 15% rent collection is awful. That’s even worse than I expected. Still, there are signs of encouragement. The largest tenants are still solvent and still obliged to pay rent. Though importantly, EPR has run the numbers to see what its own liquidity situation looks like if they don’t pay rent, potentially for multiple years.
Months of Available Cash Assuming Rent Collection Levels
| 0% | 15% | 25% | 50% | 100% | ||
| Estimated remaining months of cash, excluding common share dividend; Monthly Cash Burn Rate: $23M | 43 | 65 | 99 | no limit | no limit | |
| Estimated remaining months of cash, including common share dividend; Monthly Cash Burn Rate: $51M | 19 | 23 | 26 | 40 | no limit |
Note that these figures include cash outlays for a $150 million share repurchase.
By EPR’s math, rent collection could go to ZERO, and they could maintain all operations and the dividend at current levels for 19 months. Scrapping the dividend, they can maintain operations for 43 months.
If even 15% of their tenants continue to pay rent, they can maintain all operations and the dividend for 23 months. And scrapping the dividend gets them to 65 months.
I would take these figures with a healthy grain of salt, of course. If rents remain at 15% of normal for more than a couple months, EPR should suspend or reduce its dividend for at least a few quarters.
If you believe that Americans will get back to skiiing, water parks, and movie viewing in the next two years, then EPR’s stock is a bargain.
Of course, if you believe that we stay in quarantine forever or that society devolves into anarchy or zombie apocalypse… well… none of this really matters, and the only investments you should be making are in canned goods and shotgun shells.
Disclosures: Long EPR
This article first appeared on Sizemore Insights as Update on EPR Properties