EPR Properties (EPR) Earnings Call Transcript & Summary

Pleased to have with us EPR and CEO, Greg Silvers. This session is for investing clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available up here and on the webcast on the Disclosures tab. For those in the room or the webcast, you can sign on to liveqa.com and enter code citi2020 to submit any questions. Greg, I'll turn it over to you to introduce the company and your team and provide the audience 3 reasons why investors should buy EPR stock today, and then we'll get into Q&A.

Thank you, Nick. As Nick said, I'm Greg Silvers. I'm the President and CEO. Joining me up here today is Greg Zimmerman, who's our Chief Investment Officer; and Mark Peterson, who is our Chief Financial Officer. A little bit of background on EPR. We are a diversified REIT that is focused on the experiential platform, again, supported by the concept that more and more dollars are being directed on the purchase of experiences as opposed to goods. Our investment thesis is simply that we want to provide the premier experiential REIT that it gives you exposure to a variety of experiential categories as opposed to asking an investor to choose one of those. With regard to kind of 3 reasons to invest with EPR, I think it's fairly straightforward in the sense of what the underlying investment thesis is, is that we have a strong opportunity set, and it's growing. The data supports the fact that more and more people whether that be millennials or baby boomers are spending greater and greater amounts on experiences. And we have the team that's been together over 20 years kind of mining that opportunity. I think the second reason is we're well positioned from the term of a balance sheet. Right now, we sit with over $500 million in cash and an undrawn line. So we have a great ability to -- and flexibility to execute on our plan. And the third reason is, regrettably, we're a very attractive valuation right now. I think on a relative basis, relative to our ability to deliver consistent and reliable cash flows, that we are well positioned to deliver both value in terms of dividend growth, but also in terms of multiple expansion.

Great. So we're starting every session off with the same question. ESG has an increasing importance for all company stakeholders. What is the one thing that EPR is doing to improve its overall ESG score over the next 12 months?

I think for us, the primary thing, if you saw our new website and some of the things we're rolling out, is increased disclosure. I think we've long maintained really good policies and directives on environmental, social and governance, but I don't think we did a good enough job on disclosure. And so we have really ramped up the amount of disclosure, but also the emphasis that we're placing on in the company. We have 3 separate committees representing each of those categories, of which we have people inside the organization focused on not only how do we disclose what we're doing, but how do we improve that.

Great. I recognize it's been 1 week since earnings, but the question we get most frequently is what is the gaming asset that you're looking at currently? So first of all, is there any update to that?

It's a great question. And as much as we would love to make this the forum with which we announce it, we're not prepared. So there's been no updates. I think we can say, again, consistent with what we've said before, the asset is of a quality and of a consistency that it is representative of us owning kind of market-dominant assets. And I think it will be represented when we get to the point of dealing with that announcement.

How does that $1 billion represent in terms of -- is it 100% at $1 billion? Or is it some joint venture? And how are you also pursuing financing for that $1 billion at the same time that you're pursuing the closure of it?

Again, I think what we've said, it's 100% of investment. I think we didn't say that -- whether it would be a joint venture or not. But I think we continually say it's 100% our investment.

Right. But does that represent 100% of the equity in the asset?

I think it's safe to assume that.

Okay. So it's 100% owned EPR asset with an operator.

You will see the traditional lease set up. I think the...

Okay. New lease, you're not buying. This is direct from an operator or -- so you're putting a new lease in place?

Yes.

Okay.

How we're financing, as I just said, with our cash in our line, we can close the deal now. And then we'll see how we want to deal with that debt. Do we want to term that debt out, pursue bond financing, things of that nature? So I think we're perfectly -- Mark, I don't know if you want to comment on that.

Yes. We're just fortunate sitting at 4.7x debt to EBITDA, $500 million in the bank and undrawn line. So we can close the whole deal, as Greg said, liquidity-wise and leverage-wise still be sub-6 after closing that entire transaction.

And how would you characterize -- and I think on the call, you talked a lot about -- this didn't come up 3 weeks ago, right? This has been something that you've been working on from an industry perspective for a while. You obviously brought someone on your Board with gaming experience. Was this a marketed transaction? Or do you feel that you had exclusivity? And how long has that exclusivity been for?

I think it's reasonable to assume that people in the industry know the asset. I don't know if they actually went out and marketed the deal. I think it's likewise safe to assume that we've been in touch with all of the gaming operators. And we have had relationships and building these. And I think there is a win-win for us that is different than some of the other operators. All of these guys are trying to expand their experiential offering. They're looking to create a greater stay and duration. And I think they look at us as being able to bring more things to the table than simply capital. So it's a relationship that we've probably been working on, Greg, probably 4 or 5 months.

Or more.

Or more.

As you think about the maturity of the asset -- I think about when you went back into Toronto and you bought, it was effectively a development, didn't have a lot of operating history. How should we think about this asset? Does it have a 10 to 15-year sort of operating nature? Or is it recently developed where it may look -- the coverage, you're underwriting on more recent operating performance.

I think without doubt, it has a sufficient level of history. It's not a recent development.

It's not a recent development. Okay. And then from a core gaming market perspective, you think about Las Vegas, you think about Atlantic City, you think about regional markets, which bucket would this be in?

Again, we haven't really said on that sense.

I know, but we're getting closer and closer. So this is like -- the Venn diagrams are like, we're almost. We're almost there.

I appreciate that. But I think we will...

Does it start with a P or an E?

Yes. I think we'll be there shortly, where we'll be able to talk about this further.

And so the timing is still expected to close in second quarter. Where are we in terms of the acquisition process?

Again, we are going through documents and finalizing things. And I think -- I don't want to speak. Greg, do you think that time frame is still consistent?

Yes [ it's consistent ].

You're under contract, do you have a hard deposit?

Again, we're not going to give any details about the specifics, but we feel that what we've said and the time line that we've said is still consistent.

You mentioned the skills or the expertise that you can bring to this casino or just more broadly to the sector. What are those conversations looking like? What kind of experiential add -- or experiential opportunities your casino is looking to add?

I mean I think it's anything that kind of extends the stay and creates a more and more better quality experience for the guests. So whether that's looking at things like TopGolf, Andrettis, things of that nature. I think that everybody is looking to kind of go beyond the gaming experience and create a longer stay and more loyalty. And so there's a lot of different concepts. Again, whether it's even in the live performance and live venues and our interaction with people in that field. So I think it's consistently kind of seeing the perspective of a -- changing the perception of this is a multi-hour to a multi-day stay. And I think everyone is interested in that.

And is your experience with Kartrite unique to that property? Or could it be at that large of a scale?

I think it's probably not as -- I think that is more unique to that property in the sense that I don't know that, that use is necessarily -- is accommodative to the gaming use from that sense. I think it's still a very strong product. I just don't know how hand in glove those uses are.

How do you think -- obviously, you have net leases with your operator, so your income is protected, but this coronavirus has the potential, especially for experience-based interactive things to put a halt on a lot of things, right? You can see schools being closed, theaters being closed, music venues, hockey games, baseball, all this stuff could be empty. And so...

Yes. Almost everything will be almost empty if it goes that bad.

Correct. And so how do you -- what protections do you -- I mean, your operators and your leases have? And at what point do you have to share in that potential liability? And how -- you don't have CapEx, you don't have the operating cost, right? So it just comes down to coverage.

Right.

And so at some point, how long can your tenants withstand a basically 0 revenue and having the expense base to continue to pay your leases?

I think it's a fair question, Mike. I also think it's important to go under the hood and see kind of what the business models are different than some retailers and everything. Remember, in the theater business, which is our largest, the biggest component of that is movie rent. And you only pay for that based on performance. So again, that issue could -- will go away. The other thing that most people probably take for granted is the largest employer of part-time people in the country are movie theaters. So their cost structure goes dramatically down. So if you look at just from a box office standpoint and the variability of the box office, without varying the other aspects of that, like your employment and being able to do that, we could withstand a 30% to 35% reduction in box office to get to 1-0. So the substantial nature of that hit is large. So -- and I think they can actually -- they are, in fact, probably more better positioned than a lot of people because of the variable nature of their cost structure. So if you look at our other areas, the ski season is winding down. The amusements part of our section really kicks off Memorial Day and goes further. So I think what we'll have to see is how long and prolonged is this issue. Do we -- is it a regional, is it a national, kind of how we look at it. I think when we look at the underlying segments of our business, if you go back and you look at SARS in Toronto, which is a base case that we kind of looked at, was about a month long. We saw a 50% reduction in a month on a box office performance, but the box office recovered most of it by the end of the year because what occurs is the titles will just slip to a later part of the year. And so the ability to recover that revenue still is there. If we come out of a period where everyone's trapped in their home, and it actually comes flooding back because everybody wants to get out and go do something. So like I said, from a number standpoint, keeping just film rent as your variable, it's about a 30% to 35% reduction. Clearly, the number is larger than that, that we can withstand just because of the nature of the employment base, but we don't know how many of those employees could be cut totally or if they would give them some sort of income during that. What we know is and we can quantify is film rent.

And then the film purchasing, there is some flexibility by the exhibitors to flex that. You talked about delays. I just don't know how much upfront cost they have.

They're really -- you pay for a film in arrears. You pay for it 90 days after it -- it's the perfect model for having -- dealing with from a situation where you have a high variable cost.

Right. If you think about -- Prologis yesterday talked about how -- yes, there could be some disruption in the near term, but what they feel from an inventory and an e-commerce perspective, that this type of episode will actually accelerate e-commerce on the back end, and I -- so let's say this gets worse. And the worse -- in a bad case scenario, theaters close for a period of time. Does that have the potential, right, if people start streaming more in home and not going to the theater? And they say, maybe it's not that bad. And could -- this thesis has been out there for a while, right? And do the studios say, okay, we're going to -- we will release these because no one can go to the theaters, but we'll release them on Netflix, we'll sell to Universal, we'll sell to Disney, whoever it is and have it streamed. And is this the thing that could actually upend the whole model that's been at tension for so long?

Again, first, I'm not saying it couldn't, but let's talk about the underlying thesis. Forever, people continue to view Netflix and streaming as a competitor to theaters. Netflix is a competitor to networks and the cable television. It's not -- they actually -- if any, everybody here has Netflix, do you actually watch movies? No, you watch shows, you watch episodic television. Netflix is a competitor to ABC, CBS, NBC. That is what they do. The fundamental question I think you've got to ask yourself, Michael, is, are people going to want to stay in their home or after this event passes, are they going to want to get out. And I think there is -- if you look at a Disney, as an example, and you are selling Disney+ at $6 per month. If you don't release Avengers to the theaters before you release it there, you gave up over $1 billion because if you can't increase your price for your additional content on there, it was just lost and that is Disney's perspective on it. I get 2 bites of the apple. I get to sell it in theaters and make $1 billion on it. And I get to include it in the content, very much similar to how networks used to take a movie that was out in exhibition and then show it on network television 6 to 8 months longer. So I think that the issue is we are not -- people compare us to competing with them. And it's truly -- they're competing against a different model. And they're doing a very good job on episodic television and competing against that model. They just haven't produced a first-run movie that would actually -- made substantial money in theaters. I mean everybody talks The Irishman. The Irishman was floated for every major distribution company and they passed. What they are -- what Netflix did last year was basically take over the film slate of the former Weinstein Company's. Those are very well-made arty movies that don't gross from a standpoint of deliver a lot of dollars. So I think they have a model that's working for them. They understand that they are driven toward this, like I said, this episodic television and they are creating a model that is a pay-per-view versus a free with advertising.

Are you seeing any pressure movement on lowering the exclusivity window? You might get Disney, but from any of the other studios?

No. I mean, in fact, Disney came out again and -- I think the question will be, at some point in time, does Netflix fold the other way and say, listen, we're giving up money if we don't take the movies that were paid for and release them out. It probably would not impact their viewership at all for them to release. They started negotiating with major exhibition chains this last year. So it won't surprise me in the coming years. Just to drive cash flow that you will see them adopt a respect in a window and then showing it on their service.

You talked about the flexibility of the expense model on the theater exhibitor side. You collect some level of percentage rent, about $15 million is expected this year. First of all, what percentage of that is related to theaters? And how do you think about the risk of that specific line item outside of the contractual rent that you'll have?

It's like $1.5 million.

$1.5 million from small. And so a lot of it is -- yes, so it's small relative to that.

What's the remaining number?

I mean there'll be -- there's some actually in our private schools. There's some in TopGolf. There's some -- I can't tell you that...

Attractions, it's kind of across the board in a number of categories, but the theaters isn't the biggest part of it.

Yes. But they'll all be impacted by percentage rents of things, especially on the attractions side, right? So I guess, the $15 million...

It's -- I mean, depending on how long or how prolonged this -- I mean, you can make an argument that even in schools, where you're paying percentage rent, that if this thing -- if we're all just going to all live in our homes and not go out at all, it can impact anything.

Right. But the breakpoints, I guess, is how far are you in breakpoints because 1 month of lost revenues could just push you down below the breakpoint and don't even get it.

Absolutely. I mean that's what I'm saying. It's going to be -- I mean, if you look at it in terms of ski, which pays -- we have ski clients. That issue is not going to come back until next November. So how long is this period going to be? I just -- I don't know. And how vast is it? We don't know.

Where are you in terms of reamenitizing your theaters? What percentage have been reamenitized? And then what's the coverage ratio differential between a reamenitized theater versus an older-gen theater?

Again, it's hard for us to do that anymore because we're so far along in that. I mean if you think about expanded food and beverage and alcohol and those things, we're about 99%. And if you think about just the reclining -- full reclining seats, I think the industry is about 35%. We're about 60%. But some of that is, if you have some very, very high-performing theaters, they just don't want to give up the number of seats to do it. So we are substantially kind of through that. And I think our coverages now reflect that.

Greg, the gaming -- so you've talked about going to the gaming. The gaming REITs are talking about going more experiential, right, which is your world. I guess, where are you bumping into them? Which parts of your investment set today and the ones that you want to go into are you seeing that increased competition?

Honestly, I can say -- and I don't mean that they're not. We're not seeing them yet. We're seeing them talk about it. The question that I think they have to -- they're going to have to deal with, and I'm not saying they won't get there is most of our other experiential business is a flow business. Meaning you have to have a staff that is out there interacting with operators, an underwriting group. To date, I think they're made -- I think they're somewhere between 2 and 7 people on these teams to do a -- to do that level of interaction. I mean, our -- last year, we did $800 million, I think it was 40 transactions. So we're just -- I don't know -- I'm not saying they can't. But right now, we don't see them in the coverage just because it takes a lot of people and bandwidth to do that. They may be there, but our interaction with our tenants, we're just not seeing that.

You're not finding increased pricing, lower yields for the type of assets that you're either funding for development or acquisitions?

I think there's no doubt that as you -- again, as you move up the credit spectrum, the idea of doing 8s and 9s are not -- as you look in the live performance and you're talking the Live Nations, the AEGs, the things who view themselves as a better credit profile, had we done to where probably 3 years ago, our average would have been the low 8s, and we're probably kind of mid- to upper 7s now. So there has been that, but I think it's a reflection of somewhat of the market moving as far as our cost of capital as well as, to some degree, a better profile of credit.

How do -- you think about where you started off as a spin IPO from AMC back in the late '90s...

Which -- we weren't a spin from IPM.

Spin IPO, I said. It was a...

A transaction we did.

Correct. Because you raised capital, right? And it was a separation. But single-tenant type, at least initially. You think about the gaming side, which is very large capital, single operator, it starts to introduce tenant or industry much higher concentration. So how do you maintain a certain level of diversity within your portfolio overall?

I think it's a great question. And I think that's part of our investment thesis, Michael. When we say we've got 9 categories that we've identified and we are actively pursuing opportunities in all of those, so what it may end up doing is if you have a gaming transaction and you get -- you think a little overexposed, you may tone that down for a while and say, we're focusing on the other. But I think, overall, what we're trying to do is to create -- I mean, when I would juxtapose myself against the gaming guys who are good companies, it's not only are you taking single industry, you're taking single tenant to a large degree, 80%, 90%. What we want to present is the most diversified experiential platform available. Now the reality is, we have to acknowledge to everyone, all of our investors, that if you're in the experiential business, that your ability to diversify is somewhat limited. There may be 200 people who operate small, large amusement parks. There are 5 that matter. And if you want to be in the best properties, you're going to be concentrated in those 5, but that's that juxtaposition of maintaining as much diversity as you can with a focus on quality. The reality is someone will always want to operate those parts that are part of the 5 because they're effective monopolies. But it does not allow you, as opposed to our other triple net competitors who are just retail, all of the diversity and all of the little boxes that are in that venue. But it is offering the most diversity possible within the experiential platform with a view toward market dominant properties.

You've talked about a $100 million plus investable universe across those 9 different segments and the need to be really in front of these potential opportunities to really create the value. How do you think about R&D and underwriting, not existing concepts, but newer concepts because you're obviously early to TopGolf, that was a great call. But how do you find the next TopGolf?

Again, it's -- we're always trying to stay in front. Like I said, we're spending a disproportionate amount of time on e-gaming right now, candidly, and because you can see the trends of -- for those of you who are under the age of 30, there's a whole social platform called Twitch. If you've never seen it, it's people who watch people game and it literally generates huge amounts of revenue. But there is demand for this. And so whether that's -- we're meeting with the e-gaming leagues and the people who are running those, people who are looking at venues, I think part of our job is -- like 2 weeks ago, we were out at the, what they call the Experience Evolution Conference, which is all of these new kind of concepts, they get presented. And we've got to discern how many of those we want to stay close to. They may not be ready for a venue, but we know that they've got something, that there is a trend. So whether it's e-gaming, virtual reality, a lot of these things -- I mean, virtual reality has totally changed over the last 5 years. There was an Australian company that's got a great concept that's coming out. And it is kind of staying with these and identifying those groups who actually want to know -- I mean, for us, we were presenting at the conference and the introduction we got at the conference was from the provider, "You know you've arrived when EPR does one of your projects." That starts an inbound of calls from people that we love. Yes, yes, no, and so we get to discern through those and say, okay, what of these kind of make sense. Part of that is Greg is smart enough to have several or multiple young people on his group that -- again, I may not understand the idea. I sat around with a group that said, "How could people watch people play video games?" I don't understand this at all. And one of the young people said, "You play people to -- you pay to watch people play sports. Is there really any difference in that?" My -- conceptually, they're right. I just never thought I would be -- so it's trying to stay in front of this, surrounding ourselves with talented young people who have exposure to some of these new concepts and seeing how they develop.

Specifically, gaming, you've talked about this in the past. What's the challenge to actually deploying capital into that space?

The challenge is there's not a -- I mean, right now, the market is -- everybody is focused on their platform. So you will all see things about -- they sold out a Fortnite tournament at Arthur Ashe Stadium for 30,000 people, which sounds really great, except what do we do with the other 364 nights if you want a venue? So who is going to become platform-agnostic and say, I'm going to do this on Wednesday and this on Saturday. So there's a new concept that's coming out. Comcast is building a venue in Philadelphia where -- it's actually going to be a 5,000-seat kind of live performance venue, but they built it with all the infrastructure to do e-gaming. So they can do concerts, they can do e-gaming. So it really probably is going to be one of these hybrids to create a durable venue that creates cash flow for the entire year. And so we're working with people to figure out those challenges.

You obviously sold out of the charter schools. Part of the benefit was to have a kind of more consistent earnings, given the volatility that, that portfolio introduced into your numbers. You have gone into more -- much smaller scale, but traditional lodging versus on the net lease side, I think, with a plan to transition. What level of exposure are you comfortable there? Or you wouldn't disrupt kind of the stability that net lease REITs typically provide?

I think in the sense of -- I don't think we're looking at we have 1 -- or a couple traditional lodging structures. We're not trying to do traditional lodging at all. We're trying to do experiential lodging in a fixed income fashion, so net lease type thing. So for most of ours, it's a migratory issue. So the exposure to a traditional kind of hotel structure should be very minimal. Our goal is it's either transitory or -- but our goal is always to get into a fixed income instrument.

And how about the level of loans? You've had successes in the past, but how do you feel that level of income and asset?

Again, overall, I think it's coming down and will continue to come down. We use loans mainly as a structuring. It's not -- if you read our loans, they have annual escalators. They read like leases. Often what we found, especially in older properties with a lower basis, you could actually derisk the project by doing a loan structure as opposed to a lease structure because no tax is going to be on transit, so your actual overall coverage is higher. And then you can address the residual ownership with buyout options that we have or we can deliver the loan balance and take the property. So we can handle the ability to create the structure and give us the income like the lease, but do some very, we think, thoughtful tax planning that no one benefits from them having to pay a higher rent or the government getting the money.

Right. So theaters and anything experience-based is a worldwide phenomenon, right? So I don't know how much you want to bite off. But do you have global ambitions at all? Recognize you went in Canada. You pulled out of some of the investments, but where -- is that...

In the Canada, we still -- we're still $700 million in Canada. The challenge is most people don't consider Canadian international.

No, I know that.

Yes. No, I know.

We speak the same language. We look the same, too. But I guess, where -- I guess, how much -- as you are thinking about all these other industry verticals, are you also thinking about expanding, I don't know if it's U.K., Europe, further into Canada? I mean there's a lot of opportunities, whether it's ski hills, water parks. I mean everything that is here is there in Europe and in Asia. And so...

I think right now, we're not. I mean we've been approached by almost all of our tenants to at least consider that. And it appears that our investors think if we cross a salty body of water that, that's not a good thing. So we understand that where our focus is, is primarily in North America. I mean -- but theater companies, TopGolf, everyone's approached us about that, we've just decided that right now, our opportunity set is large enough within North America that, that's going to be our focus.

So rapid fire. Will the net lease property sector have more or fewer public companies a year from now?

It seems to always have more.

Correct. What will same-store NOI growth be for the net lease sector? Not EPR in 2021 for reference. I guess it's 1.75%.

What I have to do is the same.

What will the 10-year treasury be a year from now? I think it's about...

Again, I will say 1.5%, and it will be wrong.

What year will the U.S. enter a recession?

I think we used to think 2021 or 2022. But again, we'll see how this potential pandemic affects us.

So earlier or later, I guess, now you're saying?

I think it could be earlier with the result of -- I think people don't appreciate the level of disruption that China can have on all of our throughput. Great. Thank you very much.

Great. Thank you very much.

Thank you.