Thanksgiving Was a Smashing Success for the Box Office – But I'm Still Not Buying EPR

Movie ticket sales over Thanksgiving weekend blew everyone's expectations… But there is still a company I'm avoiding. [Wide Moat Daily]( Thanksgiving Was a Smashing Success for the Box Office – But I'm Still Not Buying EPR By Brad Thomas, Editor, Wide Moat Daily I mentioned movie theaters in Monday's article, but I think it deserves a deeper dive today. After all, it's a big deal that beleaguered movie theaters recorded massive Thanksgiving weekend sales. It's no exaggeration that ticket sales blew everyone's expectations out of the water. Moana 2 opened with $221 million worth of ticket sales here in the U.S. and $386 million total worldwide. That's enormous. Take it from The Hollywood Reporter, which declared the sequel as having achieved "demigod status" since it took the following titles: - "Biggest 5-day debut of all time, period," easily beating out The Super Mario Bros. Movie's April 2023 debut of $204 million. - "Biggest 5-day Thanksgiving earner of all time by a mile," with runner-up Frozen II (2019) making just $125 million. - "Biggest 5-day Thanksgiving nationwide opening by a mile and then some," obliterating Frozen 2013 debut of $93.6 million. - "Biggest Walt Disney Animation 3-day debut of all time," with Frozen II once again giving up its crown. The list goes on from there, in case you wanted to know. Biggest Black Friday gross of all time. Biggest Thanksgiving Day gross of all time. Biggest opening day for a Walt Disney animation title. Check. Check. Check. And that was despite the continued success of Wicked, the Wizard of Oz prequel that went from book to Broadway to movie theater. Released over a week ago, Wicked has made $359 million around the world. All told, TMZ calls Thanksgiving weekend "an incredible win for movie theaters across the globe." And a "desperately needed" one at that. I can't argue with that description considering how poorly the decade has gone so far for traditional Hollywood. But two big wins – even one that's off-the-charts – doesn't automatically mean the industry and its associates are in the clear. Personally, I expect more pain ahead for almost everyone involved. And that includes investors of real estate investment trusts ("REITs") that hold too many movie theater properties. The Movie Theater Hits Keep Coming, and Not the Good Kind How have the 2020s been overall abysmal for traditional Hollywood? Let me count the ways: - The 2020 shutdowns meant almost every single movie theater in the world closed for months or more. - Social distance concerns kept most people away in 2021, leaving the industry floundering further. And while there were some success stories that came out as time wore on, movie theaters were still $2 billion shy of their 2019 level last year – despite inflationary forces. - Studios have been producing a whole lot of flops, with even superstar Disney releasing repeated disappointments. The past few years have seen a near-endless stream of mistakes from the House of Mouse, from Lightyear to Indiana Jones and the Dial of Destiny to The Marvels. - There were the dual strikes in 2023 from both actors and writers. While both groups had a list of concerns, safety against artificial intelligence taking over their jobs was a big demand. - High streaming costs continue to plague the digital-entertainment industry, with Netflix continuing to take the lion's share of the profits. Every single bit of that has impacted movie theater landlords. And while I'm sure they're cheering this past weekend's successes, I'm not ready to give them the all-clear yet. Not by far. As evidenced by the holiday weekend, the movie theater concept isn't dead despite everything Covid could and did throw at it. I guess there's just something about the cinematic experience and seeing stories play out on the big screen. It doesn't hurt that these businesses offer instant gratification. Consumers can see anticipated movies right away instead of having to wait months for them to hit some streaming platform. But, again, that benefit completely depends on there being something worth talking about. And also as already noted, Hollywood has been far from consistent in its offerings for years. Showing in Several Theaters Near You Even if Thanksgiving 2024 was the start of a revived Hollywood golden age, movie theaters have another problem that can't be ignored. Summed up in a single word, it starts with "over" and ends with "supply." There are just too many movie theaters out there. That's been an issue in the U.S. in particular for decades now, which is why these buildings were being demolished well before Covid hit. In 2005, there were about 7,000 movie theaters. In 2019, there were only about 5,500. But even then, that meant many towns featured two, three, or even more. So they were eating each other's profits up even in the best of times. Which we're no longer in. As much as movie theaters have been shutting down the past few years, I expect more to follow. That's why, even with Thanksgiving weekend's record-breaking numbers, I'm still saying no to movie theater-heavy REITs like Entertainment Properties Trust (EPR). In EPR's defense, the reason it owns so many movie theater properties is because it's an AMC Entertainment (AMC) spinoff. AMC separated its real estate assets back in 1997 in order to free up some cash and fund its growth story. Not in EPR's defense, it still had 45% exposure to theaters as of March 2020. That's a 23-year timeline where it could have invested more heavily in diversifying its portfolio. And since it didn't, the REIT had to slash its $4.50 per share dividend down to $1.50 once mass closure mandates hit. Management couldn't have seen Covid coming. That blindsided everyone. But they should have recognized the previously slow but steady consolidation of the industry – and acted accordingly. They didn't. Today's EPR Versus the Same Realty Income Standard We've Seen for 50 Years Yes, EPR now owns ski resorts, lodging, restaurants, gaming, and education-focused properties. However, as of last quarter, it still had 159 theaters that generated about 36% of its revenue based on earnings before interest, taxes, depreciation, and amortization for real estate (EBITDAre). That's just too much for my liking. Even if Hollywood actually has transformed itself into a consistent hit-producing wonder… one that can take on intensely successful and expanding competitors like Netflix and the general appeal of streaming services… I can't endorse it. The risks remain far higher than the possible rewards. I much prefer Realty Income (O). While it can and will get a cut from Moana 2, Wicked, and other smash box office hits, it's just a comparative sliver. I'm talking about less than 1.1% exposure to movie theaters. As such, it only suffers so much from box office slowdowns and subsequent closures. It's that kind of smart diversity that's allowed Realty Income to raise its dividend every year for 30 years in a row. And that's just as a publicly-traded company. If you count its time in the private markets, it's been paying a steady dividend for half a century. That's the kind of smashing success story I'm willing to put my money down on any day. Regards, Brad Thomas Editor, Wide Moat Daily --------------------------------------------------------------- MAILBAG Were you a part of the record-breaking ticket sales over Thanksgiving weekend? Do you agree with Brad that movie-theater-heavy REITs are not worth the investment risk? Write us at feedback@widemoatresearch.com. [Wide Moat Research]( Wide Moat Research 1125 N Charles St, Baltimore, MD 21201 [www.widemoatresearch.com]( You have received this e-mail as part of your subscription to Wide Moat Daily. If you no longer want to receive e-mails from Wide Moat Daily, [click here](. You're receiving this e-mail at {EMAIL}. For questions about your account or to speak with customer service, call [(888) 415-6046](tel:18884156046) Monday-Friday, 9 a.m.-5 p.m. Eastern time. Or you can e-mail us at feedback@widemoatresearch.com. Please note: The law prohibits us from giving personalized financial advice. 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