EPR Properties (EPR) Earnings Call Transcript & Summary

So good afternoon. This is the EPR presentation, and I'm Mike Carroll, senior analyst at RBC Capital Markets. And with me, I have Greg Silvers, CEO; Mark Peterson, CFO; Greg Zimmerman, CIO; and Brian Moriarty, IR. I'm going to flip it over to Greg for some opening remarks, and then we'll go immediately into some Q&A. Greg?

Thank you, Michael, and thank you all for joining us today. And for those of you who are new to the story, EPR, we are a triple-net REIT that focuses on experiential assets. And as you can imagine, this has been quite a challenging year for those of us who focus on experiential assets. Our portfolio really has been -- as we've migrated through this year, really 2 different segregations: one, our experiential focus that is not theatrical, which has done remarkably well and continues to ramp up, and we've seen continued strength in that; and our theater portfolio, which has faced the challenges both of governmental restrictions and a lack of content. What I'm happy to say today is with some of the recent announcements, we can see the end of this. We've made great strides in positioning ourselves to withstand this. We've spoken with many of you about our outstanding liquidity and how we are well positioned to withstand this pandemic. We will get to the other side. The activities that we support will come back, and we've got a lot of evidence of that. And we feel like we have continued to make progress through the year and look forward to getting to the other side and returning to normalcy. If you look at our third quarter presentation, you see that our liquidity has continued to improve. Our cash collections have continued to improve. We're at a -- basically a breakeven point. So we have roughly $1 billion worth of cash. And we think that this will, as I said earlier, come to an end, and we will turn the corner with theaters. Why don't I open it up to questions, Mike. I know you have some, and we'll start there.

Great. Thanks. So I do have a list of questions. And if people in the audience wants to ask questions, I think there's a function that you can put into this screen, and then I will present it to Greg and the team. So I have a list of questions here that we can start with. And Greg, I think, obviously, the biggest part of your story right now is the theater business and how is that going to evolve. How does EPR believe the movie industry will evolve over the next several months? And what aspects will be different in the post-COVID world versus the pre-COVID environment?

Yes. And I think over the next few months, it's still going to be challenging. I think what we're going to see is a continued lack of content as we go. I would tell you that we're probably focused more on the spring when we think that we will have some level of vaccine deployment. It's the next major release window that we see. And so -- but what I think is more important is what are the long-term impacts, Michael. I think what we've seen now, we've gone into this pandemic, and we had a lot of discussion about is this the year that premium video-on-demand is going to take over, and we're going to see a fundamental change or shift in the exhibition industry. I think right now, we could put that to bet. I think through various models, we've seen that premium video-on-demand just really doesn't work. It doesn't drive the revenues. And the studios learned this, and they know this now. So I think the model is going to -- or what we believe the model is going to is an exhibition window, and clearly, that window may change. It may be more dynamic. It's probably contingent upon the cash productivity of a title. But think about generally, I think this is going to be something in the neighborhood of around 60 days. And then that title will move to a streaming platform, not on a video-on-demand, but part of the library. Because what the consumer has spoken loudly is that they're willing to go to the theater and pay for a title and have that experience, and they are willing to buy streaming as a subscription service, where they buy the all-you-can-eat buffet. They want to buy the entire library and have their ability to watch whatever they want, but they don't want to pay for it by title. So the way to maximize -- studios have figured this out that the way to maximize revenues is to have a theatrical exhibition window, followed by a title that moves to their streaming platform. And I think, hopefully, as we move through this, we'll stabilize into that world.

And then how will studios be more flexible with these types of agreements? And what do exhibitors have to do? I think you were highlighting that the premium window will be reduced to about 60 days, but obviously, AMC and some of the other exhibitors have agreed down to a 3-weekend-type window. So if they continue to reduce these windows, what will that do to the box office? And then also, what will these exhibitors ask in return if they're reducing that exclusive window agreement?

Yes. I think the key to that exclusivity -- that window reduction with Universal was it was tied to a revenue, that things can move off of and move outside of a 17-day window, 3-weekend window if the grosses were less than $50 million. And I think this is where people are going to be more creative and say if a title is actually grossing, what it's really doing is taking up shelf space. And so how do we move titles in and out so that if they are making money for both parties, that it will stay in that venue? And if it's not making money, we'll move it to our library on the streaming. Now I think people will be creative. And what you've seen is, okay, people are sharing in revenues in that framework. But I think more than anything, Michael, is will it create an opportunity for other content providers to begin bringing their content to theatrical exhibition for the same reasons I told you that studios know that to maximize revenues, you need theatrical exhibition and streaming. So will we see Netflix, who we know we're negotiating with operators to show first-run exhibition in a limited theatrical window, will they begin to start bringing some of their product to the exhibition screen. And maybe it's in a 30-, 45-day window, some based upon revenue and how it does. So we'll actually be getting -- we have the opportunity to be getting more content and more titles playing in the theaters.

And how do the studios think about these theatrical releases? And I think that over the past decade or so, the successful movies have been fewer and fewer and taking more share of the overall box office. So those big tent-pole movies still are generating a lot of revenue, but the smaller ones probably aren't. Are they as willing to patch into the actual [indiscernible]? Do you think that the content is going to be similar over the next several years as it has been in this past decade?

I think it's going to be similar for this reason. They have to be producing content for either their theatrical release or their streaming. And if we can find a window where things have a natural flow from theatrical release to their streaming platform, they've got to fill these content demands. And again, what they understand now is that to maximize revenue, you want to take 2 bites at that apple. And there is people who want to see it in the theater, and there's people who want to consume it on their streaming device. And so I think what we will be able to do is figure out a way to monetize what was formerly streaming content, because right now, the consumer hasn't said, "I'm not willing to buy the streaming service if I don't get first-run movies." They're willing to buy that streaming content even if it's 60, 45 days delayed. So this really is a revenue enhancement for content providers.

So I guess as this is kind of evolving, I think -- I mean, at least our view would be is that there's going to be fewer theaters out there, but still important through the overall distribution model. So with that in mind, I guess what type of theaters are better positioned to thrive? What type of theaters do consumers want? What are those key characteristics that these exhibitors have to have?

I mean we've always felt that the high-amenity theaters were better positioned just because the consumer has spoken with their feet. And so whether that's amenitized with luxury seating and the recliners, and as we've talked about, our portfolio is probably further ahead than any group out there, as far as that, or it's other amenities, whether that's IMAX and proprietary large-screen format systems. So I think it will be a match of things, but there's also going to be the question of, are these amenities necessary if you don't -- if you already have a market-dominant position. And so what we see a lot is -- especially in a city like New York City is there's much demand for the seat, there's no reason to take seats out and put in these recliners. So it is kind of a market-by-market kind of place, but I think clearly amenitized, as far as comfort with better technology as far as IMAX and proprietary large-screen format. We don't -- we're not necessarily a believer of dine-in theaters and how those are going to people -- we haven't seen -- it's a very difficult model to make work, and we haven't seen it widely accepted. So I think it's creature comforts of the theater and technology. But Greg Zimmerman, who's joining me here, who's close to this also, may have his thoughts that I'd ask him to share.

I agree. I think absolutely, the consumers have shown with their wallet that premium large-formats screens and seats are what they value. And again, the strong DMAs will continue to be strong DMAs.

I guess in what percentage of your portfolio, Greg, would you consider meets these characteristics that are either high amenities or are in those markets where they have a leading market position, I guess? So what number -- or what percentage of theaters do you think are well positioned to manage through this current environment?

Like I said, I think a significant -- we'll give you a reference point. I think the industry is probably -- as far as amenitized with the recliners, they're about low 30% amenitized. We're probably getting close, and Greg can confirm this, getting mid-50s, high -- or getting close to 60% on amenitization. I think we're similarly well positioned for large-format screens, whether that be IMAX or proprietary. So I think we are significantly better than both portfolios in that degree. So Greg, I mean maybe you can add to that or illuminate it some more.

No, I agree. And I think the other part, Michael, is that just under -- we probably own just under 3% to 4% of the screens in the United States and generate between 8% and 9% of the box office, so that shows you we have strong, well-positioned theaters.

So that remaining 40% that hasn't been, I guess, amenitized yet, I guess what percent of those are in these top markets or leading positions? And I mean is there a percentage of those that you want to add amenities to, so those are just better positioned? I guess how should we think about that other 40% of that portfolio?

Well, I think part of it is -- like I said, I hate to be kind of granular, but it's an asset by asset. So if you take -- like we have the #2 theater in the country in Burbank, happens to be an AMC theater, and it has 4,000 seats. And historically, they're sold out all the time. You're not going to amenitize to recliners because you have the capacity to sell out every seat. Now what they've done is they've added expanded food and beverage. They've added alcohol. They've added all the technology. So it -- I wouldn't necessarily correlate does it have recliners with it's a successful theater because it's -- each one of those are market by market. And if you look at the grouping of the top 10 theaters in the country, and Greg, you can help me, I don't know if any of those are high amenity. They're high volume, but they may not be a reclined seat just because of the density of the populations in which they operate.

That's right. You probably do have a premium large-format screen. I would also say, Michael, that probably a handful that we've targeted going forward, part of it, as Greg mentioned, is we have a pretty thorough analysis that we do about whether we're going to get lift in market share out of doing an amenitization now. It was a lot easier to get that lift over the past 4 to 5 years. But as competition has caught up, and we've probably handled most of the theaters, we feel like we need to, generally speaking. Again, a handful that we could probably improve.

Okay, great. We do -- I got a few questions from the audience, so let's kind of work through some of those. So I guess the first question is what's your thoughts on Callaway buying Topgolf? And what's your view on that transaction and the outlook of that tenant going forward?

I think we viewed that favorably in the sense that clearly they improved themselves significantly from a credit metric standpoint. I mean, Topgolf was in growth mode, so their leverage metrics, what's been publicly displayed, were higher, and they've significantly reduced that. I think Callaway has said they intend to use Topgolf as a growth vehicle. They've talked to us. They like to partner. They've said they're going to continue to partner with outside people to grow that concept and that we have a very favorable relationship with them. So again, when we look at that, we have a tenant that's doing quite well, even now in a pandemic, that's got a growth platform and that likes us as a partner in that. So we see that as all favorable.

Okay. And then I guess the next question from the audience, and maybe this is a little bit difficult to answer given that we're in such an uncertain time. But what's the company's plans, I guess, going forward, diversifying away from maybe the theater business? Is there other avenues that you want to venture into as maybe theaters become a less important part of the portfolio, if that's fair to say?

No. I think it's very fair. And I think we can point back to early last year when we talked about we -- that theaters were probably at the high watermark pre-pandemic of where we want to be because we intend to be the most diversified experiential REIT available for investors. And to do that, we need to lower our exposure to theaters. So prior to the pandemic, we had announced we had a transaction to go into gaming, which would have lowered that exposure. And we will continue to look for ways to lower our overall exposure to theaters because we want to become more balanced within the 10-or-so categories of experiential that we've identified. So not only is it -- was in a stated objective pre-pandemic, it will continue to be an objective as we exit this pandemic.

Okay. And then kind of going back to the theater space. Again, obviously, the next tent-pole movie being released is maybe the spring time -- I guess it's always the moving target, it seems like, for the past year or so. I guess what options do you have if some of your larger exhibitor tenants do file for bankruptcy? What's your expectation in that bankruptcy court? And how do you position yourselves to have other options or if those tenants decide to reject those leases?