On Thursday, UBS initiated coverage on EPR Properties (NYSE:EPR) stock, a real estate investment trust, assigning a Neutral rating and setting a price target of $48.00.
The firm's stance on EPR Properties is grounded in the belief that the current market has adequately factored in the company's earnings growth potential.
EPR Properties, which has a significant portion of its earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAre) coming from the theater industry, is yet to show signs of revenue growth post-pandemic and the recent writers' strike.
Analysts at UBS have noted a pre-pandemic slowdown in theater revenue, estimating a decrease of about 50%, which they consider indicative of a long-term trend.
The company's earnings have also been impacted by property damage from Hurricanes Helene and Milton, leading to some unpredictability in the short term.
Additionally, EPR's investment opportunities seem constrained by its cost of capital, with an implied capitalization rate of 8.5% and acquisition capitalization rates in the mid-8% range.
Despite a limited annual free cash flow (FCF) of $35 million, UBS acknowledges EPR's increased investment activity in loans and build-to-suit development, with year-to-date investments totaling $215 million compared to approximately $270 million for the entire year of 2023.
UBS's models project a 3.9% growth in adjusted funds from operations (AFFO) for EPR Properties by 2025, matching the consensus estimate and placing the company in the middle of its peer group.
The firm also notes that EPR Properties trades at a 29% discount to Triple Net lease companies, which is slightly above its historical average discount of 30%.
A regression analysis of the current next twelve months (NTM) AFFO multiples against the 2024 and 2025 AFFO growth for Triple Net lease companies shows a correlation of 0.72, suggesting that EPR's stock is, on average, fairly valued.
The consensus outlook for EPR's 2024 and 2025 AFFO growth stands at -7.4% and 3.9%, respectively, which implies an AFFO multiple of about 9 times. This multiple aligns with the one applied by UBS in their evaluation. The firm concludes that the stock's growth prospects and internal growth limitations are already reflected in its current pricing.
In other recent news, EPR Properties reported mixed third-quarter results, characterized by a decline in Funds From Operations (FFO) per share and impairment charges due to hurricane damage.
Despite these challenges, the company announced a new $1 billion revolving credit facility and reported a total investment of approximately $6.9 billion across its portfolio.
The company's coverage ratio slightly declined due to lower theater box office revenues, but EPR Properties remains confident with a forecasted increase in box office earnings for the fourth quarter.
In terms of financials, EPR Properties reported a decrease in FFO as adjusted per share from $1.47 to $1.30, and acknowledged $12.1 million in impairment charges due to hurricane impacts.
However, the company maintains a strong liquidity position with $35.3 million in cash on hand and has narrowed its guidance for 2024 FFO as adjusted per share to $4.80-$4.92.
Despite the challenges, EPR Properties is optimistic about future prospects, expecting a normalized film schedule in 2025 and projecting a 3.2% growth in FFO per share from 2023 to 2024. The company also anticipates an increase in major film releases, with box office projections for 2025 showing optimism with expectations of mid-$900 million.
These developments are part of the company's recent strategic initiatives to strengthen its financial position and invest in experiential properties.
InvestingPro Insights
EPR Properties' financial metrics and InvestingPro Tips offer additional context to UBS's Neutral rating. The company's P/E ratio of 19.25 and adjusted P/E ratio of 17.48 for the last twelve months as of Q3 2024 suggest a relatively modest valuation, which aligns with UBS's assessment that the stock is fairly valued. This is further supported by an InvestingPro Tip indicating that EPR is trading at a low P/E ratio relative to near-term earnings growth.
The company's impressive gross profit margin of 91.39% for the last twelve months as of Q3 2024 demonstrates strong operational efficiency, which is highlighted as an InvestingPro Tip. This high margin could provide some resilience against the challenges in the theater industry noted by UBS.
EPR's dividend yield of 7.61% and its 3.64% dividend growth over the last twelve months underscore the company's commitment to shareholder returns. An InvestingPro Tip points out that EPR pays a significant dividend to shareholders and has maintained dividend payments for 28 consecutive years. This consistent dividend policy may be attractive to income-focused investors, despite the limited growth prospects outlined in the UBS analysis.
For investors seeking more comprehensive insights, InvestingPro offers 8 additional tips for EPR Properties, providing a broader perspective on the company's financial health and market position.
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