Movies are returning to a theater near you and by next year major blockbusters will be on the big screen. The sequel to Top Gun, Wonder Woman 2, the next James Bond movie, and other blockbusters are in the hopper ready to be released in 2021 after being delayed due to COVID. The question many pundits are asking is whether audiences will return. Initial evidence looks promising for the silver screen industry.
Recent Releases Are Showing Promising Results
Here are some updates from recent news articles:
From the Financial Times last week: “The first big US film release since the pandemic drew more than $4m in box-office sales, in a tentative sign that Americans are ready to come back to the movies after a five-month shutdown. Unhinged, a thriller starring Russell Crowe, managed to earn $4.06m across 1,823 cinemas in North America according to ComScore. Jeff Bock, box office analyst for Exhibitor Relations, called the results “a surprisingly robust start”. The results were particularly encouraging considering two-thirds of cinemas remained closed with New York and California still on lockdown.”
From CNN just yesterday: “The New Mutants,” the latest comic book movie from Marvel and 20th Century Studios, brought in an estimated $7 million in the United States during its opening this weekend.
And about Tenet, a movie release internationally last week that is coming to U.S. theaters this Labor Day Weekend: Christopher Nolan’s Tenet has surged to a $53M opening at the worldwide box office which includes 40 overseas markets and Canada. The numbers are a triumph on the highly-anticipated Warner Bros title which bows in the U.S., China and other markets this coming week and will see further international box office rollout through September. The Tenet figures are better than pre-weekend projections, which were already difficult to call given this is the first major Hollywood movie to release in the pandemic era — amid an unstable landscape that features varying capacity restrictions and recent coronavirus spikes in some areas.
The Demand for Movies is there but Government Restrictions will be a Strong Headwind
People are ready to get out and see a move on the big screen. The CEO of the parent company of Regal Cinemas recently commented that the company has had “sold-out” showings upon reopening its movie theaters from coronavirus-induced closures. From his interview on CNBC, he said “we were very pleasantly surprised with the numbers. People really missed the cinemas and wanted to go back into the big screen…. We had many shows that were sold out.” Demand should surge again headed into 2021 when we get a vaccine and the big blockbuster movies are released. 2021 could be a strong year for the movie industry if it were to be determined based on basic supply-demand economics.
Unfortunately, government is going to artificially cap movie attendance for at least the remainder of 2020 with forced capacity restrictions in the name of social distancing. State regulations limiting capacity and other aspects will make it more challenging for movie theaters to return to pre-COVID profitability anytime soon. As an example, California has put in place rules that finally allow theaters to open i again in a limited capacity. However, these same theaters in states like California can expect to have capacity restrictions of 25-85% for at least the remainder of 2020. Limiting ticket sales artificially reduces demand and it will make it hard for theaters to return to profitability in the near term.
That is why I am not buying stocks like AMC or IMAX but instead buying REITs that have theaters like AMC, Regal and IMAX as tenants. Companies like AMC have piled on debt to get access to cash to avoid bankruptcy. If movie re-openings are further delayed, and that is a real possibility in many of the bigger states like California and New York, then bankruptcy by AMC and other movie theater companies is put back on the table. Stockholders are typically crushed when a company files bankruptcy. That is too risky for my blood.
Movie Theaters will Start Paying Rent Long Before They Start Making a Profit
The more conservative way to play the return of the movies is investing in REITS that have meaningful exposure to movie theater tenants like AMC, IMAX and Regal. Many of the REITs with movie theaters as tenants have extracted significant concessions from movie theaters in exchange for deferring rent payments. While movie theater tenants have are not paying rent today you can see how rent will start being paid soon after movie theaters open up again.
Why am I playing it this way?
- Many of these REIT stock prices are still down 30% or more from their pre-COVID highs. That means there is significant upside once things start getting back to normal.
- REIT cash flow and rent collections are already improving even without the help of the movie theaters. The triple-net REITs that I am investing in have a diversified tenant base and many of these tenants are in sectors that are already open and starting to pay rent.
- The worst case scenario, bankruptcy of movie theater companies and a complete loss of my investment if I was a movie theater investor are off the table for me by investing in these triple-net REITs. At the same time I will see upside with my REIT investments if and when the movie industry returns to a more normal environment.
Hare are some triple-net REITs that will benefit from the movies coming back into our lives. As a reminder, a triple-net REIT owns properties that it leases to commercial tenants on a triple-net basis, meaning the tenant pays for all the expenses of the property including taxes, insurance, and maintenance. Historically, these have been very secure investments with stable cash flows and steady growth. I purchased each of the below triple-net REIT stocks during the second quarter and they are already showing meaningful signs of recovery. You should do your own diligence to see if they are potential good investments for you.
Realty Income (O)
The “Monthly Dividend Company” has made over 600 monthly dividend payments without ever reducing the monthly dividend amount. It did not cut its dividend during the Great Financial Crisis and it is unlikely to cut its dividend this time around. However, it has tenants in sectors heavily impacted by the COVID fallout and rent collection was as low as 83% in April. However, the stock price is 27% below its 52 week high and rent collections are improving and topped 90% in July. Collections will continue to go up as businesses, such as movie theaters, are allowed to open up again. The company has a strong balance sheet (A- credit rating) to weather the COVID storm.
% below 52 week high: 27%
Rent Collections – April: 83%
Rent Collections – July: 91%
% of Portfolio Rent tied to Movie Theaters: 6.3%
National Retail Properties (NNN)
This is one of the oldest triple-net lease REITs with a portfolio of properties worth billions of dollars. It is not as big as Realty Income but it is still one of the larger publicly traded triple-net REITs. The company does not focus on investment grade tenants like Realty Income but that translates into more profitable leasing terms and buying properties at lower prices/higher cap rates. NNN’s stock is trading at a greater discount than some of the other triple-net lease REITs, the stock has a higher dividend yield than most, and the company just increased its dividend to show financial strength. The company has a solid balance sheet with a BBB+ credit rating. There is a lot of potential upside here over the next several years as the economy recovers.
% below 52 week high: 40%
Rent Collections – April: 52%
Rent Collections – July: 84%
% of Portfolio Rent tied to Movie Theaters: 4.7%
STORE Capital (STOR)
Warren Buffett owns this stock and he increased his holdings last quarter. Buffett’s recent purchase is a worthwhile mention because he has been dumping a lot of other stocks (namely airlines and banks) that might have trouble returning to profitability post-Covid. Buffett tries to buy undervalued stocks and he sees value in the company is still trading at 34% below its 52 week high. The CEO of STOR seems is highly regarded within this space and seems to be navigating this tough environment well.
% below 52 week high: 34%
Rent Collections – Month: 68%
Rent Collections – July: 85%
% of Portfolio Rent tied to Movie Theaters: 4.0%
Spirit Realty Capital Inc. (SRC)
This company is a smaller version of Realty Income with more of a mixed track record when it comes to its historical performance but it also has a newer management team that is moving things in the right direction. You get paid a higher dividend yield (around 7%) to compensate you for a smaller company with a mixed past. The company still has a multi-billion dollar market cap and like the other companies it is showing significant progress on rent collections.
% below 52 week high: 35%
Rent Collections – April: 70%
Rent Collections – July: 85%
% of Portfolio Rent tied to Movie Theaters: 5.7%
EPR Properties (EPR)
The last company on my list is EPR Properties. The stock is not for the faint of heart as almost every tenant of EPR has been impacted by COVID. This company has significant exposure to movie theater tenants with Regal, Cinemark, and AMC all being top 10 tenants. However, EPR has significant liquidity and recently stated in its last earnings call that it has over 6 years of cash on hand assuming no improvement in collections (which was at 15% in April). EPR has done the right thing like suspend its dividend to stockholders to reduce cash burn. Many of its tenants are starting to reopen and if get above 50% in the third quarter the stock will start to rise. At some point in 2021, assuming most things get back to normal, the company will reinstate its dividend and you will see further upside movement to the stock price. Under a worst-case scenario regarding COVID (meaning vaccine failures and prolonged social distancing restrictions and limitations on business and activities) this stock could get killed but the stock is currently 60% below its 52 week high so there is real room to run if we get a vaccine and more restrictions on its tenants are lifted.
% below 52 week high: 61%
Rent Collections – April: 15%
Rent Collections – July: 28%
% of Portfolio Rent tied to Movie Theaters: Approximately 30%