EPR Properties (EPR) Earnings Call Transcript & Summary

Good morning, and welcome to the 9:45 a.m. session at Citi's Global Property CEO Conference. I'm Katy McConnell with Citi Research, and we're pleased to have with us EPR Properties. [Operator Instructions] And now, Greg, I'll turn it over to you to introduce your team and the company with some opening remarks.

Thank you, Katy. As Katy indicated, my name's Greg Silvers, I'm the President, CEO of EPR. Joining me to my left is Mark Peterson, our Executive Vice President and CFO; and Brian Moriarty, our Vice President of Corporate Communications. I think from an opening remark standpoint is, first of all, I want to thank Citi. It's just so nice to be back together. I mean, notwithstanding that many of you, our friends and investors, I'm tired of dealing with you in a Zoom. So yes, it's really, really nice to get back together. And when you're in the experiential business, as we are, having people come together is very important. And we see that momentum growing. What we're really excited about is kind of what is going on in our world right now as the reopening is coming about. Across all of our industries, we've seen an incredibly strong consumer demand as we bounce back. We think that we're uniquely positioned, if you think about this coming year, to really deliver a substantial shareholder value. We talked about that in our guidance with kind of sector-leading FFO kind of growth. So we feel like we're well positioned, continuing with this recovery to outperform this year. And I look forward to the questions that you may have.

Great. Thank you. So to open each session, we're asking each company, what are the top 3 reasons why investors should buy your stock today over any other property REIT?

Sure. I think I hit most of what I just said in my opening comments. I think from a value standpoint, we're at a great entry point for investors. If you look at, over the long term, where we're at from an equity multiple is probably one of the lowest kind of stabilized points. So for value, I think we're very attractive. As I said, we have sector-leading FFO growth for this year, but the reality is it's a multiyear growth. So I think there's a real opportunity for multiyear value creation. And as I said, I think we're supported by strong consumer demand for our properties. We're seeing approaching kind of, in a lot of our sectors, above 2019 performance. So we're very excited about all 3 of those things.

And given your stock still trades at a large discount to pre-pandemic multiples, how do you think about closing that gap and what steps do you think investors are looking to see?

I think it's -- I will tell you what I went over the board -- my board with, which is a 3-step: we needed to guide, we needed to execute and we need to tell. Meaning that we guide to the performance that we think we're going to have. We did that. So if you look at where we were at, 8% above consensus, 32% above of last year, so very, very strong guidance. But what needs to couple in with that is the execution. We need to drive the investments that we are working on right now to continue that growth. And then we need to get back in front of investors and tell that story. So the ability to have this conference and to be able to engage with investors is very important to us.

You mentioned how the reopening trade is benefiting all of your sectors that you're invested in. Can you just elaborate on that a little bit more and maybe go through each of those?

Sure. I think always the big sector that we're in is the theater business. If you look at what's going on from the fourth quarter forward, Spiderman as -was the third largest grossing movie of all time in the midst of Omicron. Batman this last weekend did $140 million, far above kind of expectations. So again, we don't have a consumer problem. The consumer is ready, willing and able to participate. If you look at our Topgolf properties, if you saw Callaway's year-end report, they were doing 90% of 2019 volumes with no group business. So group business used to be 30% of what they did. So their actual walk-up traffic is in excess of where they were in 2019. If you look at what happened in our ski business, Vail set all-time records with their annual pass sales. So across the board, in all of these, 6 Flags set records. So we're seeing very, very strong consumer demand that bodes well for us as we continue this recovery.

And what are your thoughts on industry exposure, where it goes from here? What do you view as the optimal mix, I guess I'd say, over the next several years, especially, if you assume that you could gain scale in any of these industries at a fair value today?

Sure. I mean, we've talked openly about the fact that we would like our portfolio to reflect the opportunity sets of experiential. What that means for us is we're, over time, going to need to reduce our theater exposure. If you think about where theater's set relative to experiential, that's generally in the 25% to 30% range. So we're high in that areas. We think there's opportunities to grow all of our other segments either through growth or through selling assets, get those exposures in line with kind of where the opportunity sets are.

And just going back to theaters a little bit, seeing box office sales have a really good rebound so far, but do you have a sense from the tenants as far as what actual traffic has been like relative to pre-pandemic levels and kind of how they're getting back on track in terms of operating margins?

Yes, again, actually, there's been some really exciting things in terms of margin. I think realistically, what we have right now is not a consumer problem, it's an amount-of-content problem, the number of movies that are getting released at this point. There's still some that -- we're not into the heavy season. But some really positive things that we've seen here recently is, if you follow reporting, on a pre-pandemic basis per cap F&B spending as reported by the major exhibitors averaged about $3.40. That's above and beyond ticket sales. AMC and Cinemark both reported fourth quarter that was $6.70. So that's substantial improvement. And for those of you who haven't bought popcorn at a theater, that's pretty high margin business that actually works. The other thing that we saw, and we saw it rolling out really a lot with Batman, is premium pricing -- flexible pricing. We saw -- whether it's what show you wanted to see, or in some degree, where you wanted to sit -- $1 to $2 premium pricing, that really we've not seen any pushback from the consumer. And that falls right to the bottom line. So there's an opportunity in several areas. The other thing that they've been doing to control cost is there's been a lot more automation. Now you can order your food and beverage on your phone. You can take advantage of that, which has driven down some labor costs. So on all fronts, I think they're making positive movements.

And just as we think about your experiential tenant base in general, what's your outlook for consumer spending this year? And to what extent do you think that could be impacted by inflation and the spike we're seeing in oil prices?

Yes, again, what we can do is look to the past and the good thing about most of our portfolio, it's very value oriented. Even going to the theaters, I know a lot of the participants here are based in large cities where this doesn't seem true, but the average ticket price is still below $9 in the US. So, it's a very affordable kind of option. What we've seen in the past, even when we saw large gas prices, is people rotating back to kind of these value and we actually outperformed in previous recessions. So we'll have to see as this goes forward, but history says we're going to be fine in that area.

We have an investor question online here regarding the rebound that you're seeing from the reopening trade. Are all theaters benefiting? Won't there need to be closures? And if so, how should we think about the value of those obsolete properties?

It's interesting. I'm sure there will be closures. A couple of points to bring out about our portfolio so that everybody understands. Really, between 70% and 75% of our theaters are in the top third grossing revenue production in the country and 99% are in the top half. So we feel pretty well positioned relative to if we have closures. I do think there's been a big discussion about repositioning theater assets and there's a lot of discussion about what do you do with the theater building, which I think dismisses the idea of where the real value is, which is most of our land parcels are 15 to 20 acres. And so again, that's open. We have sold theaters for industrial, for multifamily, for retail, for office. Generally speaking, the major component of that is land value. And if you think about, generally, about 1/3 of our value for any theater at inception was land value. And you escalate that with some level of inflation over a 20- to 22-year existence, we've done fine on -- I think people get caught in the idea of, how do I change this building? And I think people need to realize that's -- we sold a theater late last year for industrial conversion and people were asking us, so how did they convert the building? They used a bulldozer and they convert it. But on a cash flow basis, we sold it for a sub 6 relative to the cash flow that we were enjoying. So I think it's one of the reasons we publish the street addresses of our properties. Take the time and go out and look where our properties are located. They're well located, large parcels. We get calls on a weekly basis of, can we buy that theater and use it for some other use? The problem is they're leased right now. It's very difficult for us to get -- to sell it for an alternative use when it's leased. But there are a lot of uses when you have big land bank parcels.

And can you give us some clarity around pricing of the asset sales that you have completed to date, aside from that one industrial one you just mentioned?

Yes, we have 2 that are going to greatly impact this, but I would say we're probably in the -- around -- add them altogether, in the 8s which is -- but we have 2 that are in being rezoned now that are going to drive that number down. So I think overall, we're going to feel really good about where we end up. So I think, again, it's a mindset change for people think about that building, and don't think about that building, because in most of these situations, they're not physically using the building.

Right. And how many other theaters do you have in the market right now? And how do those compare in terms of quality and locations to the ones you've already been able to sell off?

We only have 2 left that we haven't sold. One is being rezoned for industrial. One is being rezoned for multifamily. Those will be -- if we're successful in that, which we're going through this process, they'll be substantially lower than that number I just gave you. So it's going to drive the overall number lower. So the reality is we don't have much to sell. We've had really good response. I mean, when we sold the one industrial, we had 13 bidders. When we sold multi -- we've not sold one that we didn't have multiple bidders for. So it's actually more attractive than people think.

Right. Would you consider, at this point, accelerating or putting additional theaters on the market, just given the demand has been stronger than you and investors may have expected?

It's what I was telling you -- it's hard. The rest of them are leased. I can't sell it for industrial conversion if it's leased to AMC or Cinemark. And most of those leases right now are fairly long-lived. I can't say 10 years from now, you can convert this. So it's a little more difficult for us now to sell. We've sold everything that we had. And you can imagine, as we've talked about, the theaters that we took back probably aren't our best ones. I mean, if you go out and start -- look, we own multiple acres in downtown Burbank. There are lots of our properties that are in and around major metropolitan areas that are large land parcels. And like I said, I encourage everyone, we publish every street address of every property we own. So.

And theoretically, if those leases were coming up in the near term, would you then accelerate asset sales or...

We probably would. Given the success that we've had, we probably would.

So I guess aside from theaters, how do you feel about the rest of your tenant base today? What's the watch list look like?

It's actually very small, other than kind of small shop tenant space at some of ours, which really, it's always been that. But if you look across the board from a large tenant basis, Vail is very strong. I mean, I look at the credit that we're getting for a Vail lease and Vail bonds are trading in the low 3s, and we've got that same credit backed by assets. 6 Flags, same way. I think if you start -- Callaway for Topgolf. If you start going down and looking at our top list and you compare them on the value we're getting for that cash flow demand versus a bond, I think there's a real disconnect between value.

We have another question online here. Could you give us an update on the latest with the Cineworld process?

Yes, I think for those of you who don't know, Cineworld pre pandemic had entered into agreement to acquire Cineplex, which is the largest operator in Canada. They backed away from that transaction and subsequently, Cineplex has sued and got a $900 million judgment against Cineworld. Again, our perspective, that judgment's truly unenforceable. I mean, if you think about -- there's a lot written on and there's third-party legal opinion so you guys can find those, that basically Cineworld's never writing a $900 million check. Cineworld's appealing that judgment because there was some issues about how the damages were calculated. But I think the general belief in the industry is those 2 are going to settle it because Cineplex doesn't have -- I mean, the judgment's unenforceable from a recovery standpoint. At least there's been speculation that Cineplex will take equity of Cineworld basically kind of in the value of a hope note as they recover. But we don't have a significant concern that Cineworld's writing a $900 million check or borrowing money to write it.

Maybe we could talk about inflation and just how this is impacting your tenant base.

Again, there's no doubt that inflation is impacting us all. It's being supported a little bit with wage growth as far as -- for a lot of kind of what I will call lower compensated employees. Those are actually pretty valuable to drive us. But remember, we're at a low cost. Most of ours are value oriented if you look at kind of what the average spend is. So we think it's pretty well positioned that way. From an inflation standpoint, on a cost standpoint, theaters are actually doing a little better. Most people don't realize that most -- theaters are the largest employers of kids under the age of 18. When you go look at a theater, again, if there's 80 people working at a theater, 6 of them are full-time. Most of those are part-time, and the wage growth has been the smallest in age 18 and under. So that's still working well and I think history tells us that low value drive-to destinations are still going to be in demand. That even in recessions and things of that nature, people like the escapism of what we offer. And whether it's parents shielding kids and still wanting to say they're doing stuff. So instead of going on a long trip, they go to Topgolf more often, they go to the movies. That's -- history says that's what's happened and we'll see if it plays out here.

We have another question online here. What is the rent coverage of the portfolio and of just your theaters?

Again, it's fair point. But we haven't quoted the rent coverage for the theater, that being primarily, most of them were shut down. I mean, fourth quarter really was when theaters came back and you saw the theater operators say they were all cash flow positive. We were getting paid so we could tell you that that's above 1.0. We'll -- as we get through this year, we'll have better insight than this. Our other nontheater portfolio is above 2.0. So like I said, the strength of that has been very strong and we think the recovery to the theaters is continuing to progress.

And did Omicron have an impact on rent collection levels or traffic in any meaningful way for any of your tenants?

It did have some impact in the theater business. We saw some because we saw some more restrictions that came -- or even some closures. For most of the non-theater business, it really didn't have a lot of impact. It had an impact in some ways that people necessarily wouldn't anticipate. As an example, Vail sold record season passes, but they had challenges with getting international workers into some of their resorts because of Omicron and kind of transferring people from Southern Hemisphere to Northern Hemisphere. And so they had some issues with customer service because they were overwhelmed, but it wasn't necessarily as much restrictions. We saw some of it in the theaters, but that was really the only space.

So you've outlined 8 property types as your target property types. How do you go about prioritizing what you're most focused on now?

Again, it's always been about -- our job is to drive accretive growth and we think that's what we do. So risk/reward. You look at various opportunities and how they're pricing relative to other. I would tell you we've laid out 8 categories, but we've said for -- we're not buying in theaters. And candidly, right now, gaming pricing doesn't work. I mean, again, every gaming operator thinks they're a 6 cap and that doesn't work for us. So we don't need to execute because it's a category, we need to drive accretive growth for us. And we think that it's very important to consistently deliver value for shareholders. And we also think we're in a very unique position in the sense, given our size. If you think about some of the kind of metrics that we all kind of use and historically being what normal kind of spreads at 10% net asset growth equals 5% FFO growth, we're in a unique position that that's $600 million for us. We can make a living in a flow business of $50 million to $100 million deals. For somebody that's $30 billion, $40 billion, $50 billion, $60 billion, they can't even look at our deals. It doesn't make -- they have to elephant hunt. We don't have to. We can execute and measurably grow. We are -- as an investor just told us, we are big enough to matter and small enough to be nimble. And that's a really good place to be in right now.

So, for gaming, you mentioned that a 6 cap doesn't work for you. What level would be more feasible? And if we just think about that relative to pre-pandemic times, how much do you think that's compressed?

I mean, I will be candid, again, without -- we won't call it, but we had announced pre pandemic that we had a gaming asset under control. We had a gaming asset under control in the mid 7s. That's clearly more attractive. I think what you've seen now is it's -- 2 things in that space. One, it's gotten very competitive from a cap rate. The second is there's just not that many more assets. I mean, it doesn't make sense for us to do it just because we said we were going to do it 2 years ago. Our job is to look at it and say, does it make sense now? Could that change in the future? Yes, we still think it fits within our portfolio, but it's got to make sense economically for us to do it.

And what's your outlook for the sector? Do you think we'll see further cap rate compression?

Again, it's -- in the experiential sector generally or gaming?

I guess your comments on both would be helpful.

Yes. In the experiential sector, I think hopefully given market conditions right now, further pressure downward. I mean, we're trying to hold where we're at, candidly, and some of these factors that we're going into will hopefully add to that. I think there's is a lot of money chasing deals. Again, what I said earlier, if you've got a deal that's $400 million to $500 million, you're shopping it hard and there's a lot of money chasing it. And different than what people think right now, large is carrying a premium just because there's so many large kind of REITs. And there's one up on Park Avenue that we don't mention, because they're not traded, but they -- all of these people have to consume. They have to drive deals. That's why we like staying in that $50 million to $100 million, piecing deals together that aren't as broadly marketed. And we think we can maintain kind of where we've said in the 7 to 8 range.

And then experiential in general, your outlook.

I think holding where we're at, I think large deals, like I said, in gaming that are well shopped. I don't know that it can go much lower than where it's at. I mean, arguably right now, even the guys who specialize in it can't make the economics work. So again, you've only got a couple of guys who can play in that field. So I don't think it's going to go much lower than what we've seen.

Okay. With 4Q results, you announced that you had about $350 million of investments under contract. Can you just provide an update on that pipeline?

We're just working through our due diligence on those. Again, nothing's fallen out. We think it's just moving kind of through on our progress. Again, we continue to grow our pipeline and it's multiples of that as far as kind of where we think -- looking at opportunities. When we announced $350 million, we've got a high degree of confidence that none of that falls out. So we're just kind of going through the legal and due diligence through those.

And if you had to put an estimate on timing for closing in general for this year for deals?

Again, it's going to be our goal to get as much as that done before we announce first quarter because that, again, you heard me talk about execute and tell. We'll see if all of that comes together and we could get that done, but it's making progress. So hopefully we'll get -- we feel good and have a high degree of confidence we're going to get it done. It's just, I think our call early May, third week of May is worse than in the first week. So we're pushing.

And does that pipeline reflect the smaller $50 million to $100 million individual deals?

Yes. I mean, like I said, that's -- we do 6 to 8, 10 of those. That's really very strong for us. I mean, if you think about Topgolfs, we said we like -- we stated earlier, we're mindful of our exposure there, but we always were willing to entertain West Coast and Mid-Atlantic strong urban markets. So we came out of this, we'd done San Jose, which is an incredibly high performer for them. We closed that. We announced Los Angeles and King of Prussia. Those are great sites. And those are development sites. So we're under construction on those. And when I say construction, we're financing the construction. But those are actually the things we talk about that are going to add real value in '23. So when I talk about this as a multi-year growth, there's a substantial amount of what we're starting this year that kicks in next year. So the growth that we're seeing now, there is -- this is a multiyear opportunity.

Can you talk about your relationship with Topgolf and how that could fit into your external future growth plans?

Again, like I said, it's just -- it's playing out as we see right now. What we did through the pandemic is paying out substantial benefits now with existing tenants. If you look at what our asset management team has done, we worked with our tenants, we understood the significance of what was going on. So we had -- through the pandemic, we had 3 bankruptcies, 2 of which assumed all of our properties, 1 of which we lost, 1 property that we subsequently sold. We didn't sue anyone. We've gotten paid back, I think, Mark, to date, $80 million of our deferred rent, some of it ahead of schedule. But it's also how we worked with our tenants is paying dividends now for opportunities as their business is returning to normalcy, as they're growing. A substantial amount of that pipeline will be with existing tenants. And we see that Topgolf. I mean, if you think about these are great opportunities that I just talked about that were never taken to the market. They were brought to us because of the relationship that we have with them. And we think that's a great way to grow our business.

Mark, maybe you could discuss what your goals are for the balance sheet over the next 12 months and any steps that you're taking to protect the balance sheet in the event of rising rates.

Sure. So we did a lot in this year, frankly. We redid our line of credit. We issued a new bond fortunately prior to the big increase in spreads and treasuries at a record low for the company and took out a maturity that was in 2023. So we find ourselves with $300 million in the bank, nothing drawn on a new $1 billion line of credit, no maturities until 2024, and even that maturity's modest. So we have the luxury of going into '22, this year, with a plan that isn't really contingent on raising a bunch of capital. And particularly in this turbulent market, both on the debt side and the equity side and the volatility you're seeing, with the cash we have on hand, with the cash flow that we have generated over and above the dividend, which is probably close to $150 million, and the fact that we're at low leverage as we fully annualize next year, we have the ability to execute next year without...

This year.

This year. I always say next year because I'm thinking '22, this year, without the need to raise additional capital. We do have some equity issuance in our plan, sort of, opportunistic to keep leverage low but, frankly, we don't really need to execute that. And we can look to the markets to see if that makes sense. So balance sheet's in great shape. Like I said, a lot of work was done on that in 2021 that really sets us up for, as Greg said, multiple years of growth going forward.

We have a follow-up to that from an investor. How do you think about the appropriate level to issue equity? Is NAV even a relevant metric as there's not a good mark to market for where theaters should trade?

Yes, it's a good point. I'll let Mark add to this. I think NAV's tough. We have all over the place on kind of where people are valuing theaters. I think it needs to be kind of accretive for us. I mean, that becomes kind of the benchmark of how we're doing things. Again, surprisingly, even at these levels, it would work. From where we're investing at, it would be accretive. It's not as -- the spreads aren't as wide. So part of this discussion that we've had all along is we knew what this was occurring, that we needed to execute what we told people, that we weren't going to just throw a good guidance number and our multiple goes up 3 turns. We need to execute. So we have the capital to let the market respond to our execution. So as we get closer to our kind of normalized kind of multiple, think about pre pandemic at 13.5, 14, so we got opportunities to get there. It becomes -- back into the 200 basis points of spread that we've enjoyed before.

Yes. We've had, last 3 quarters, significant outperformance. I think the market's finally catching onto the story here and that we're getting back into growth. Our tenants are healthy, we've got significant cash flow. So we're hopeful, frankly, that the market catches up and the multiple improves. And when we need to issue equity, which is kind of down the road, it'll be at a better place. But as Greg's said, it's not like we're paralyzed. We could issue equity today. Just the spreads aren't quite as big as we would like, or historically have been.

Are there any industries that you're in where you think cap rates have compressed significantly enough for you to sell and recycle that capital into higher yielding assets?

Again, it's probably one of the things that we will look at, but clearly in our education space, which we've stated as an intent, that it's not part of our strategic, it's clear that those areas, both in terms of demand, a lot of net lease people want to own that. And we've seen significant cap rate compression as demand has returned very strongly. We don't need cash right now. As Mark said, we have enough cash to execute our plan. So just to raise cash, probably not looking to do that, but it could be an alternative of raising additional cash that we think could be quite attractive.

Great. Well, we'll go quickly to our rapid fire questions. What is your #1 ESG priority for this year?

Again, for us, we did a couple of things. Every one of our employees across the board from myself all the way down, have an ESG objective within there. I think the opportunity for us is reporting the good news that we have. We are now starting to you tell the story and I think that's important for us.

What will the 10-year treasury yield be 1 year from today?

Again, I'll say 2.25. Who knows?

And will the net lease property sector have more or fewer public companies a year from now?

I always say fewer, but it's going to be probably more, but...

Thanks a lot.

Thank you. Thanks everyone.