Experiential real estate player REP properties (EPR -2.36%) reported mixed third-quarter results on Wednesday, October 30. Third-quarter revenue of $180.5 million beat expectations by $144 million but fell 4.7% year over year. Net income was the real disappointment in the third quarter, falling to $40.6 million from $50.2 million a year earlier. This led to EPS of $0.53, lower than expectations of $0.70. Adjusted funds from operations (FFOAA) of $1.30 per share fell 11.6% year over year.

Overall, the quarter illustrated the challenges and successes of EPR Properties’ strategic changes.

Source: EPR Properties. Note: Analyst consensus estimates for the quarter provided by FactSet. FFOAA = Funds from operations as adjusted. YOY = Year after year.

About REP properties

Properties EPR is a real estate investment trust (REIT) specializing in experiential real estate, characterized by properties promoting entertainment and leisure such as ski resorts and movie theaters. Historically, a significant portion of its portfolio was tied to theatrical properties. In recent years, the company has pivoted, emphasizing a diversification strategy that aligns with shifting consumer preferences toward experiential investments like water parks, golf courses, amusement parks , etc.

The company is working to reduce its reliance on theater investments due to the challenges in this sector. In the current quarter, experiential investments represent 93% of their total funds, with education investments accounting for the remaining 7%. Key success factors include asset diversification, strategic investments in leisure spaces and maintaining high rental rates, with the experiential and educational portfolios boasting rental rates of 99% and 100% respectively.

Quarter Highlights

During the third quarter of 2024, REP Properties has focused on reducing its reliance on the theater segment, to better avoid the volatility in consumer behavior caused by events like the COVID-19 pandemic. Its investments in cinema continue to be an important source of revenue, but consumer trends and competition from streaming services remain challenges. Major clients like AMC Theaters and Regal contributed 13.7% and 10.8% of total revenue, respectively.

The company invested $82 million in experiential development initiatives and continued to advance its financial structure by securing a $1 billion revolving credit facility. Despite a strong focus on growing the experiential segment, recent natural disasters in Florida resulted in $12.1 million in impairment charges impacting its experiential lodging plans. This unique event magnified an already difficult theatrical segment.

REP Properties adjusted its dividendwith payments increasing slightly to $0.855 per common share, up from $0.825. However, constraints on new investments due to cost considerations such as inflation and interest rates were highlighted.

Looking to the future

For the remainder of 2024, REP Properties has refined its forecast, reducing FFOAA expectations to between $4.80 and $4.92 per share (while maintaining the median estimate). It lowered its net income per share forecast to $2.40 to $2.52 (from $2.58 to $2.78). Management remains focused on real estate diversification to counterbalance the residual risk linked to the theater. Investors should monitor the ongoing impacts of economic conditions on rental income and capital expenditures.

Going forward, EPR aims to strengthen its position in the experiential economy, supported by stable rental rates and adjusted capital allocation strategies. Critical areas to watch include liquidity management and investment expansion in non-theatre segments, amid pressure from changing interest rates.