EPR Properties (EPR) Earnings Call Transcript & Summary

Good afternoon, and welcome to Citi's 2021 Virtual Global Property CEO Conference. I'm Katy McConnell with Citi Research. And we're pleased to have with us today, EPR. This session is for Citi investment clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast. For those of you joining us here today, if you'd like to ask management any questions, please type them into the question box, and we'll do our best to ask them during the session. So to kick things off, I'll turn it over to you, Greg, to start with some opening remarks on the company.

Thank you, Katy, and thank you all for joining us today. Again, we are EPR Properties. And as the only kind of diversified net lease REIT that focus solely on experiential assets, I think we were at the tip of the spear of the pandemic. However, as we can talk to you today, we've managed the company in a way that we think greatly positions us as we begin to come out of this. I can talk just a second on what we've seen as we begin to make progress. For those of you who have followed our fourth quarter results, you see that momentum change start to begin. We moved from mid-40% cash collections to mid-60% cash collections. We've seen substantial progress across the board with the vaccine deployment. And clearly, the momentum has changed and the tone and tenor of how we are -- how this recovery is progressing has changed. Whether we look at around the world with Box Office results from China, Japan and Australia, where we set all-time records over the last month, to our non-theater portfolio, which continues to perform at a very, very high rate. And as I said, we've tried to position the company so that we were always had a mindset on how we were going to look on the other side of this. And why don't I have Mark and Greg add a few comments, and then we'll kind of open it up for questions if that works for you, Katy.

Sounds good.

Yes. We're certainly optimistic. As Greg said, we had -- we're kind of in the mid-40s from a collections percentage in Q4, which was a positive cash flow scenario for us. As we moved to January and February, that went up to the mid-60s on an apples-to-apples basis. And we expect that trajectory to continue as we go through the year. And then we're seeing the additional collections on the theater and non-theater side, but particularly on the theater side. So we're pleased with that. That gave us the confidence, as you saw, subsequent to year-end to pay down our line of credit to $90 million on a $1 billion facility. We paid it down by $500 million and still have $500 million of cash available. So we feel very good about our liquidity and balance sheet. And with respect to that, we've managed our -- through this pandemic with thinking about how we're going to look on the other side of this. And the good news is that here, as we go to the back half of the year, if things come out according to plan, we'll be in the mid-5s on a debt-to-EBITDA basis, back to our investment-grade metrics. And we'll have the ability to deploy that $500 million to accelerate our growth without having to raise any capital and still being within those investment-grade type of metrics. And as we roll into 2022, we'd really hit our full run rate. So we're excited about that. I think at the bottom line is the demand drivers that were here pre pandemic for experiential, that existed before, have only been heightened by everyone sitting in their house for a year. So we're seeing that both on the theater and non-theater side as properties have opened, as Greg will talk about, certainly, the demand has been there. So we're really optimistic and feel we've turned the corner. But I'll turn it over to Greg.

So not -- to pick up on what Mark was discussing regarding our non-theater portfolio. 95% is open. It bounced back very quickly. And in fact, a lot of our tenants are seeing revenue that exceeds 2019 levels. One of the happy accidents of the pandemic has been -- these guys have been able to focus on rationalizing their cost structure. So a lot of them are actually more profitable. And we feel like this demand, along with the theater demand, really bears out our thesis on investing in drive to value-oriented destinations. We're seeing strong demand in -- across the verticals we invest in, attractions, eat and play, experiential lodging, et cetera.

With that, Katy, why don't we see -- move to you to see what kind of questions that you or your investors would like to explore.

Great. So to start off each session, we're asking every company. If an investor is buying one real estate stock coming out of the pandemic, what are 3 reasons that it should be yours?

Sure. Great question. I think a couple of easy answers are, we really are the pure recovery play. I mean as we look out here, we were a $70 plus stock going into the pandemic and sitting right now we still think there's a lot of value to still regain. And as Mark talked about, Greg talked about, with $500 million of cash -- no, that's really the second thing. We're really is kind of a growth engine. We're -- other than some of the other -- our competitors who are going to have to raise debt and equity, we're sitting with a large cash balance and ready to deploy that, and Greg and his team are building up great opportunities. And the last thing I would say is we truly are -- if you look at the trends that were occurring going into this pandemic, as a true diversified experiential REIT, we offer somebody that pure kind of exposure. The trends that were occurring there, we don't think will abate. In fact, we think they're going to come back even stronger, as Mark kind of alluded to, after us being in our homes for a while. So we continue as a society to increase our spending on experiences. And as we've all been trained to get our stuff through Amazon on a daily basis, I think it will open up even more experiential opportunities. So those are the 3 reasons that I would point to.

And as you look at the stock recovery so far this year, how do you think marries up with your outlook for the recovery of the business? And has recent progress on vaccine rollout kind of changed your views over the last month or so?

I would say, if anything, it's probably accelerating our thoughts. I mean if we think about -- as Greg talked about, we've seen a really, really nice recovery in our non-theater business. And what we've seen more than anything is, the only thing that's holding back even further recovery is governmental restrictions right now. If you look at kind of our -- a lot of our properties are operating at capacity that are these imposed restrictions. So we feel like there's more demand than we have capacity right now. So if we open that up, we'll continue to see that expansion. On the theater side, we really think that kind of the watershed moment is going to be the Disney title Black Widow scheduled for early May. They -- this week, they reaffirmed that they're still looking at that as the launch date, which we see with vaccine deployment and restrictions being eased with New York opening this last week. We think L.A. is going to follow here shortly. That we'll see kind of some of the trends that we've seen around the world with outsized kind of response to -- from consumer demand. So we think we're well positioned. We're excited about the rapid deployment of the vaccine. We think it all adds to that. And the progress that's been made is pretty phenomenal.

And like you said, with New York opening up and hopefully, L.A. following suit soon here, how are you thinking about the time line of studios rolling out new releases and getting back to a more normalized pace for that?

Yes. What I mentioned before, I think that early May release of Black Widow will kind of start to start that process. And we've seen some of that kind of early indications of -- we had a phenomenon that we haven't seen in a year earlier this week where a title actually moved up. So A Quiet Place II actually moved up into the Memorial Day weekend from a previous later day. So we could see those kind of trends. And clearly, the calendar stacked for the balance of '21. We've seen some really good momentum. If you think about the last 2 weekends, 2 weekends ago, we had a $20 million weekend, which we haven't seen in a while. This last weekend, we had a $25 million weekend. And both of those were led with what we would traditionally call kids product, the demographic targeted at 10 and under. And that group hasn't been vaccinated. So if we're starting to see real good momentum in that group, when we move to the superhero kind of 14 to 24-year old, that group thinks they're invincible anyway. So we're really excited about. We'll kick off, and we'll see product flowing on for the rest of the balance of the year.

And you mentioned the pent-up demand in your opening remark. So outside of theaters, which of your industry exposures do you think are positioned to benefit the most from that, that have so far seen a slower return in foot traffic?

Again, I would say it's interesting, depending upon -- I mean, clearly, we're reaching capacities in our ski right now. If you look at what's going on right now, limitations in various jurisdictions have reached those. Even though we're approaching -- if you saw Bell's release, they're hitting within 15% of their previous numbers. But clearly, that's holding back. Topgolf in our areas, some of our eat and play, still California, New Jersey, are highly limited. But it's the juxtaposition of what we see in Texas. Where on an average weekend, it's a 3 to 4 hour wait to get into a Topgolf with no limitations. So again, when we're operating at 25% to 35% capacity limits in California and New York, we think there's a lot of opportunity for growing those.

And as you look back on the pandemic, what would you say are big picture the key lessons learned?

I mean, I think for us -- and we talked about this even going into the pandemic. We'd like to bring our portfolio to be a little more balanced. We -- our concentration in theaters is probably too high relative to the opportunity set that we see otherwise. And so as we move forward, it's a continuation of what we talked about going in. We've talked about -- we probably won't be investing further in theaters, but in the other areas of experiential to kind of balance our portfolio out and give us a full exposure and offer investors a full exposure to the entire environmental platform -- or I'm sorry, experiential platform.

And in your more recent conversations with your theater tenants, as you get to that place where we are fully reopened, what permanent change do you expect to see in theater industry and their rent paying capabilities? And how do you plan to manage that risk going forward?

We probably aggressively kind of dealt with some of that, we think. We reached out and cut a deal with AMC going into this pandemic early on. I think there's some positives with what you see about automation and how people are able to now not only order their tickets but order their food order. So there's going to be some positives that go on. What we think really is going to be kind of a major structural change is kind of the windows. When we look at that right now, we think that what used to be the 90-day window is probably going to shorten probably to a 40 -- what Paramount just recently announced to a 45-day window. Theater operators collect about 97% of their revenues during that 45 days. And I think this has been a big experiment as we've gone through this. I think the interesting thing that's come out of this is the consumer has kind of spoken. There really isn't a demand for premium video-on-demand. You can't -- it doesn't work, whether you look at the various avenues that have tried. So what we're moving to is really a system where we're going to have theatrical exhibition and then titles will move to streaming platforms. Because what the consumer wants is to pay $12, $13 a month and have the entire library. They don't want to pay per title. And so to maximize revenues, what I think the studios, and I think what the exhibitors are going to realize, is that the way to do that is to shorten that window to like that 45-day period. And there may be some changes with film rent and how that works to solve those economics. But we believe that they can and will harmoniously exist as we move to this new kind of platform.

Great. And then could you just update us on your views on how theater assets could ultimately be repurposed? And any sort of interest level you're getting from developers that are looking at theater assets today?

Sure, Katy. It's a great question in the sense that when we came into this as part of our deal with AMC, we felt like there was an opportunity for us to prove a couple of points. One, that if people did restructure that we had really quality assets that we were more than willing to operate for ourselves. And that by doing that, we would not be put in a position where we had to take -- terms were dictated to us. And so Greg and his team set up a platform where, by using third party managers, we could actually manage our theater assets. And clearly, that message has been heard by the theater companies and by the people who have invested in theater companies. And while we don't think we're going to have to pursue that, the message was sent that we were ready, willing and able to do it, had the capability to do it and had, in fact, executed on it on 2 assets. The other area that we felt very strongly about was there was a narrative that theater properties are very specialized properties. There's not much reuse for them. And we felt that this was a really good example to just prove that. So we -- when we originally negotiated with AMC, we requested that we'd be able to take 14 theaters back. AMC didn't want to lose that many theaters. So we negotiated that down to 7. We've got 3 others that we've gotten from other operators. And we now have a body of work of about 10 theaters that we have -- that we're going to sell. And those sells for reuse have included retail, office, industrial, multifamily across the board. And we announced -- we've announced a couple of them. The latest one we announced in fourth quarter, we sold a theater property for industrial conversion at of 6% cap. So I think most people forgotten that most theater parcels are 15 to 20 acres, that these are well-located real estate and that they've been operating as a theater generally for 15 to 20 years. That the land component makes up about 30% to 40% of the original purchase price. So our innate value in that has accumulated quite a bit. So our goal, Katy, is as these deals -- the original 7 that we've taken, we migrated 1 to another operator, 6 we've either sold, under contract or under letter of intent. As these deals begin to get close to closing, what we're going to do is put all 10 of those deals together, so that we can show people across multiple geographies, across multiple uses that there is a substantial demand for this product -- a reuse for this product. Like I said, 1 of them just sold retail. It's going to be converted to a big box home improvement store. So again, I think people think of these boxes, but it is just that. It's a big box. That slope floor, you think, doesn't really exist. It's lightweight concrete poured over a steel erector system. So there is a lot more value, we think, and we'll be able to demonstrate that once we have all the data points together. And I think it will be really enlightening for people who previously thought into that narrative.

Yes. I think that will be really helpful to see because I think there's a lot of mixed views out there on how economically feasible some of these reuse opportunities could be and can they actually be profitable. So...

It's interesting. As a data point, though, the one we sold for industrial, we had 12 to 14 offers, and we sold to a large public REIT, industrial REIT. So again, I think it's far more manageable than people may have thought.

And to what extent do you have interest in converting any of them to different retail use or are you...

Again, I would say for us, that's not our expertise. We've made our living being focused on experiential. And I don't think it's really value-add for us as investors, for us to learn how to become industrial or multifamily developers with their money. Clearly -- and Greg may be able to add more color on this. Every one of these have had multiple offers from very substantial kind of proven players in their respective fields. And so I think it's -- it makes sense for us just to be a seller as opposed to -- I mean, most of these guys in the industrial, they've forgotten more than we'll ever know about that product type. So I think it makes sense, given the valuations that we're getting that we can redeploy that capital. I mean, if you think about the IRRs that we've achieved for this property, we're operating as a theater for 20 years. And then we sell it at a single-digit cap rate. Those are pretty tremendous IRRs. And to think that all of a sudden, you go do it again in industrial, probably not the best use of our time or our capital.

And what would the pricing have been if you had looked to sell these same assets before the pandemic started?

I mean, I think, generally, we were looking at the theater market, and everything is caveated a little bit from the coast. We saw theaters in the coast area trading in the 6s. But I think you early saw kind of mid-7s to mid-8s, depending upon the market. So again, I think if we say 7.5% to 8% is probably a reasonable number. But Greg, maybe you have thoughts?

No, I think that's right. Yes.

So we have a lot of questions coming in here online. So I'll go to a couple of those now.

Sure.

First one is, Regal is a big question mark. How do you feel about them right now as a tenant? And then do you expect to renegotiate AMC rents lower? And how does Cinemark feel about their current rent versus peers?

We'll take out those in order. Regal has demonstrated, they have good access to capital. Our decision to negotiate with AMC was really kind of predicated on the fact that we had owned most of those assets for nearly 20 years. And if people recall, we did those original deals at 10.5% cap, escalating 2% a year for 20 years. So we felt there was a need to get their occupancy costs back in line, not only just for AMC, but if we ever had to sell those, where it made sense. And for that, we got substantial value. We think we got 10 years of term. We got the inclusion of everything in a master lease. We got to extract some assets. So we felt pretty good about that. Regal and Cinemark are in a different place. I mean our average lease term with AMC, when we did the deal, was about 5 years. Both Cinemark and Regal are 10 years plus. I think if you look at Regal and Cineworld, they were generating $1 billion of EBITDA pre pandemic. So I just think -- we think they're in a -- both them and Cinemark are in a much different position as far as where they're at. If you look at going in, Cinemark was levered at about 2.5x, Regal was levered at about 4.2x, and AMC was about 6.5x. So there was a much different credit profile in those. So we think those groups are fine. With regard to your question on AMC, I think we feel like we've done our deal with AMC and won't need to renegotiate that. We've been pretty clear about that. We think they're -- they have access to capital right now. They're trading even today substantially higher than they have 2 or 3 months ago. So don't really see the need for that. And as I said, I think Cinemark is in a very good position, and we don't see any opportunity or need to do anything with them.

Okay. Great. And so if you continue to see the demand you spoke to about the 7 theaters that you're marketing. 5 years from now, how big do you think your feeder exposure could be, if you have the option?

Again, like I said, I think we'd like to get it, Katy, down to kind of where the opportunity set is. So if theaters make up -- of our $100 billion opportunity set, if they make up 25% of that, then we'd like our portfolio to reflect that. So we'll have to see how long that takes. Or do we grow out of that? Or do we sell some assets? But again, I think what we're demonstrating is whether they're operating as a theater or whether they're used for something else, there's real value in these assets.

So maybe we could talk about reinvestment opportunities. You mentioned the large cash balance. At what point do you think you'll be in a position to really pivot back towards more offensive external growth?

Yes. And we've been pretty clear about kind of what the milestones are for us. I mean, clearly, we need to exit the covenant waiver period. We've got a covenant waiver through the balance of the year, but we can -- as soon as we can demonstrate compliance with our covenants, we can exit at our choice. So we talked about on our call that we thought in the second half of the year that we'd be able to do that. The Board has made it a priority to kind of reinstate the dividend. So that would shortly. And then I think following up to move to offense on that. I mean, we talked about at this conference last year, we were spending a lot of time talking about we had a large gaming asset under contract. By mutual consent, we both stepped away from it. So there's a logical place that I think we'll go back and look. We've been really pleased kind of with how our underwriting of that asset has proven out. And we think there's still value. We still think that that's a component of building the diversity within our portfolio. I know Greg and his team are working diligently to build up that investment pipeline across all of our kind of areas of experiential focus. And I think we're going to see really good strong opportunity set as we exit.

And if you were to look at that same gaming portfolio you were considering before, how do you think pricing has changed a year later now? And has the space gotten a lot more crowded?

You know what, I don't know that -- I think -- I mean, really, the only major transaction that's occurred in this space is the -- which is Venetian. And that's a different asset. I mean, again, you've seen -- that's a large-scale $4 billion Vegas asset. We were never going to make a $4 billion investment. So I think, clearly, there's more acceptance of the space. But I don't see a lot more competitors at this point in time. And I think from what we've seen -- haven't seen a lot of cap rate compression, candidly, just because there haven't been transactions really other than kind of this major one-off Vegas transaction.

And so what are some of the other areas that you would look to as you start to pursue more acquisitions?

Sure. I think across the board, we like what's happened in attractions. I mean we've said, when able to open, we've set 1 day records and records best August, September of last year. We still like the live performance space. Even though it's still limited in what it can do, but we like the dynamics of -- that's the way artists make their money now, and it had about a 7% CAGR that as far as growth for about 6 years running. So we like that space. We like -- as I said, we're still interested in the gaming space. And so I would say across all of ours, whether that's experiential lodging, whether it's attractions, whether it's eat and play, we feel really good about these opportunities. And we feel like the tailwinds that were leading us in this direction as we entered into the pandemic are going to continue as we move forward.

And then on the other end of things, as you think about dispositions, are there other areas you'd like to pare down, including childhood education? What are your updated thoughts there?

Yes. I mean, clearly, we'll take a look at that. We stated when we made the shift to all experiential that those were kind of legacy assets, and we would take a look at opportunities. That will be another opportunity, recycling capital. We've seen a really nice rebound in that. That's an area where a lot of -- we have a lot of competitors who probably would love to own this portfolio. It's about timing and getting the right value but it's clearly an opportunity for us.

So we have another question here on the web. How will you achieve the 25% theater exposure? What percentage will it be if theater sales as opposed to acquisitions of other experiential assets bringing down the CAGR?

Again, that's the secret of the sauce. We'll have to see. If you're selling things, it takes willing buyers and willing sellers. So -- and I don't have that -- that's something we'll work out with our Board. But -- and I'm giving you the long-term kind of plan. You said 5 years. So there's a lot of things that can happen in there. As theaters kind of recover, there may be more demand, and people may want to own those because for what we just talked about, Katy, I mean even if these are selling at kind of 8s and above, there's going to be a demand for yield as people are chasing yield down. So assets that can perform at that level, there will be a market for, and we'll see as we rotate into other things.

So maybe you could give us a little bit more detail on how you and the Board are thinking about dividend reinstatement as far as timing and where could the payout ratio end up by the end of the year?

Yes. I think we would think about it, Katy, in the second half and really look at it in 2 levels, and I mean this sense. This year, I think we'll probably looking at the minimum as just say kind of precautionary coming out of this. But it also gives us a nice trajectory as we go into 2022 to bump that up. And I would think the long-term plan is probably a 70% to 75% kind of payout ratio. But I would think of it in terms of this year and next year. This year, probably more geared toward the minimum payout and next year moving up to that 70% to 75% payout. So that we can not only reward people this year, but give them a nice increase for next year.

And you mentioned how you're in a good liquidity position with the cash balance. But as you think about future capital raising, how are you evaluating your alternatives today?

I mean, again, long term, we've always taken the approach, as Mark mentioned, that we want kind of investment-grade metrics, which means we're going to lean heavily onto the equity side, and we will have positioned that way. We always look -- Mark and his team do a great job. Everything is open to us, whether that's all tenor of bonds, preferreds, equity, converts. And we evaluate those as what creates the best value for our shareholders as we're looking to deploy those. But the good thing is everything is available to us. We think that we're positioned well. But as I said earlier, we think we have more room to run. And with $500 million of capital sitting on the sidelines, we think it's important for us to -- for our shareholders to let's take advantage of that and demonstrate kind of this recovery, get back up to some better equity pricing before we go back out into the markets.

And has the pandemic changed your view at all on a target leverage level? And when would you expect to get back to a more stabilized multiple?

I think what Mark said is true. I mean, operating at kind of mid-5s is what we thought was a good target level. I don't think that's kind of changed. I don't think having lower -- I mean the reason that we've done so well through this is we maintained strong liquidity all the way throughout the deal and having lower leverage. I don't know that, that would have benefited us in any way, but we were -- I think Mark and his stewardship of this was very good. He was -- as he talked about, we were always mindful of how we're going to come out of this. And therefore, we always positioned ourselves to be -- have that investment-grade tenant profile. And we think we've managed that well to get to the other side and do that.

All right. So maybe you could talk a little bit about where you stand on ESG integration and recognizing some of the limitations in the net related structure being a landlord. But what are your top 3 priorities as you think about next year and improving your score?

Sure. And it's important to us and the Board, and we've made some changes. People will notice that we have increased disclosure this year. I mean one of the things that we found is that beyond anything, we need to tell our story. And I think there's a real opportunity. And we need to work closer with our tenants. We think we're unique in the scenario that we have a lot of tenants who are very, very focused on ESG, especially the environmental side, when you're in this key industry, when you're in the water park, water reclamation, things of that nature. But we haven't been telling that story as well as we can. And so we feel like further refining our disclosure. The other thing is the Board and senior management have taken on -- assigning direct responsibility. So we're at the -- both at the Board level and the senior management and have a point of contact for each of these initiatives, so that we're very focused on that. And then there's clearly a message coming down from our Board and from the senior management that we want to increase our diversity. And that's at both the Board level and on the management and workforce of EPR. So those are the 3 priorities that we've really been focused on.

And to the point on telling your story, can you talk about what your opportunities you're most excited about kind of coming out of the pandemic that might be overlooked by the market right now just because of the hyper focus on theaters?

Yes. I mean I think it's -- again, I think from that standpoint, I think the idea of how quickly these experiential properties are going to rebound, I think that's one area. I think it always surprises us when we're talking to a lot of our investors are located in the tri-county area in and around Manhattan. And when you talk to them about how the rest of the country is operating, it seems like someone's in a bubble. And I don't know which group, but someone's in a bubble because there is tremendous demand in what we're seeing. I mean you go to Kansas City, which we still have restrictions but the wait -- average wait for a Topgolf is 2 hours on the weekend. And so -- and there is people who are booking weeks in advance. So people want to get out. I mean, the idea that we formed -- we talked about when we decided on this experiential was that people want to connect and share those experiences. And that hasn't changed. And in fact, it's only been reinforced by the Zoom and everything else where we don't get to have these experiences with people. So we see a real opportunity for that rebound and a real opportunity to kind of prove kind of some of the thesis that we've had.

Great. Okay. Well, I think we'll jump into our rapid-fire questions now part of meeting. So the first one is, what do you think your corporate travel budget will be in 2022 as a rough percentage of what you spent in 2019?

I think we figured it will probably be similar. Again, we think by that time, we'll be back out and kind of back onto the same plane that we were before, plane -- I mean equalize not, said early, plane. Bad metaphor.

Okay. And what will same-store NOI growth be for your property sector overall in '22? A little bit hard for you to answer.

It is because for us, because we have several tenants on cash collections, it's going to be substantial in '21 and '22. But if you think about the property sector group as a whole, I think around that 1.5% to 2% is probably -- ours is going to be much, much higher as we move through '21 and 22.

Okay. And what will the 10-year treasury yield be 1 year from today?

Katy, I'm horrible at this, and I would hate for somebody to go back over the 15 or 20-plus years that I've been here. But my guess is the safest thing to say is something similar to where it's at today.

Sounds good. All right. Well, that's it. Thank you, everyone.

Thank you for every question.

Thanks, Katy.

Thanks.

Have a good rest of the conference.

Thank you.