EPR Properties (EPR) Earnings Call Transcript & Summary

Okay. Good morning, everybody. My name is R.J. Milligan with Raymond James Equity Research. And today, we have EPR Properties. And so we'd like to try and make this as interactive as possible, so feel free to raise your hand and ask some questions. We're going to turn it over to Greg, who's going to provide some introductory comments, but they're going to be brief. And I have a list of questions here, but feel free to participate and raise your hand and we'll get through as many questions as we can. And so with that, I'll turn it over to Greg.

You started off telling you I'm going to be brief, so I guess that's an instruction. All early morning souls for coming out and joining us. I'm joined today on my right by Mark Peterson, our Chief Financial Officer; and on my left, by Greg Zimmerman, our Chief Investment Officer. Take a few moments. Again, we are EPR Properties, the diversified experiential REIT. I think the general themes are -- the recovery is alive and well at EPR. If you think about -- we've been through some struggling times as we were in COVID, but we were always strongly supported by the consumer, and we're seeing that recovery alive and well. If you look at kind of our performance the last couple of years, we had the highest FFO growth rate last year and the best TSR of the net lease group. This year, we have the highest FFO growth performance and the best TSR of the group. So I think significantly, we are outperforming, but we're still what we think is a great value relative to that performance. If you look about our long-term valuation, we're still trading at a discount to our equity mobile for our long-term averages. So we still see a significant amount of value creation. As far as this year, if you guys have followed with our recent announcements, we just prior to this convention announced a new acquisition, which puts our acquisition total at about $280 million year-to-date. Again, when you think about it in terms of our stated guidance of $500 million to $700 million. We're about halfway through it -- about halfway through the year. Greg can elaborate a little bit more on this as we get to questions, but the pipeline is well. We're supported, like I said, very well by the consumer, and we're seeing really positive signs in our portfolio. With that, why don't I leave it there and go to some questions.

Excellent. Well, I'll start off first with a couple of questions. And I think maybe it would be helpful for those that aren't as familiar with the story, to talk about the experience of the experiential portfolio through COVID and sort of where the tenant base stands today?

Sure. I think it's always important to ground us in the fact that we never had a consumer problem. The consumer was always highly supportive of our properties. We had an environment where we were shut down for a lot of our properties. We were unable to operate. So if you look at overall, we have about 10 segments of experiential ranging from theaters or anchor to Eat & Play to ski to cultural to attractions. If you take our portfolio and split it between our non-theater and theater, our non-theater sections are already performing at or above 2019 levels. So we've come back and seen really, really strong support. If you look at our theater segment, we are not back up to 2019 levels. But if you use a metric of what we like to look at if you look at the past 3 quarters, where theaters really have started to open back again, the percentage of 2019 relative to the number of films available are outperforming 2019. So in first quarter, we had 54% of first quarter Box Office, and we had 47% of the number of films. So when there's product flowing, the consumer is highly supportive of the theater business. And we continue to see that as we get back into greater and greater production, a further recovery of that segment. So overall, as I said, we're back. The consumer is well supporting our activities, and we feel like experiential spending is only going to continue to grow.

And that's pretty consistent with what we've been pitching in terms of -- this is one of the few reopening plays that's left out there in the market. What -- how do you think about the performance of Top Gun: Maverick over the past two weeks and do you think that means for the future of movies?

Again, it's been fantastic. What we've seen is it's open -- it's not only Top Gun, but if you look behind that, the film before that was Downton Abbey. And what we've seen really is the expansion of the demographic group. As we've moved into more and more films that look beyond the 14- to 24-year-old primary demographic group. We've seen that group start to come back in numbers. So again, that's maybe because the original film was 30-plus years ago, it resonated with a lot of people at an older demographic group, but we've seen that become strongly supported by 45 and above. I do think, as I said, there is a perception out there that when I talk about a lack of content, it's not about the $100 million films plus. Those all got pushed during COVID. So a lot of those titles just got delayed. What we're missing when I talk about a number of films are those $25 million to $50 million production cost films that we need to continue to see a further recovery. We believe what the studios are saying, those are coming. But during COVID, for 2 years, those films didn't get made. But there is a continued support by the studios. They're realizing that what we used to talk about 2 years ago was streaming and is that going to replace? Streaming is a competitor to cable television. It's not necessarily a competitor to the movies and the studios understand from a revenue generation standpoint, they need that. So we've moved from kind of low 4s last year to kind of mid-7s, maybe 8 this year, and that path of recovery continues.

And so there's always been a lot of focus over the past 1.5 years on the movie theater exposure. But looking outside of that, are there any sectors or segments within the experiential categories that are doing a lot better than you would have thought they would be?

Again, across the board, I would tell you in the non-theater segment, it's -- like I said, we're either at or above 2019. Anything in our Experiential Lodging is much as what we're seeing in that general sector. We've seen outstanding ADRs and high occupancies. You look at it in our Eat & play area like a TopGolf, they're running above 2019 levels with no corporate business. Remember, corporate business used to be 30% of their revenue generation. Now they're running that with just walk up traffic. So again, there's no doubt that the consumer wants to get out, they want to engage. We talk about our business being built upon the foundation that family, friends and colleagues want to come together and the consumer is demonstrating that in abundance across our portfolio.

This is probably a good time to pause and ask if there's any questions from the audience as we covered sort of the existing portfolio.

Strategy [indiscernible].

And I'm going to repeat the question for the webcast. Have you thought about sort of your positioning with movie theaters given the recent success? How do you think about your exposure there?

Again, we maintain -- we said coming into the pandemic pre -- before that, that we would like to take our concentration in theaters down to more reflect what we think is the total addressable market of Experiential. We still maintain that. We think that we are really the only REIT that offers a diversified Experiential exposure. And we would like that to reflect that total addressable market. So overtime, you will see us kind of reduce our theater exposure to, as I said, kind of reflect that addressable market.

So if you're reducing the exposure to theaters. What areas of experiential are you looking to see the most growth in? Like if you look at your portfolio 5 years from now, which of the other segments would you see playing a more significant part?

And sure, I'll just repeat the question. As you are deemphasizing movie theaters, what segments or categories are you going to emphasize or grow? And what does the portfolio look like 5 years from now?

I think we're going to grow in all of our other experiential categories. Right now, we're seeing growth, and I'll let Greg comment on -- in our Eat & play, our Attractions, our Experiential Lodging. Across the board, our pipeline, right now, if you look at what we've announced already to date, we've announced a purchase RV park, so Experiential Lodging, Attractions with a water park hotel, two TopGolfs that we've done. So we're growing that what we think is that entire remaining part of the portfolio. And candidly, we had said earlier, we were looking at gaming. We're getting a lot more inbound calls on that right now. So probably all of those. But Greg, maybe...

Yes, I should also add, we've done a fitness and wellness acquisition this year as well, and we see a lot of opportunities for growth, particularly in the wellness sector.

[indiscernible] What are the most attractive opportunities what we required so far? And what are you seeing from the cap rate typically, we'll see sort of pressing are you expecting [indiscernible].

And so the question is for the remainder of the acquisition volume expected to do -- that you're expected to do in '22. Are there any sectors that look better on a risk-adjusted basis relative to pricing? And then where do you expect cap rates to go and the impact of rising interest rates and how that's going to affect pricing?

I think, right now, other than theaters, we're looking at transactions in all of our segments. So we're actively pursuing. We said at the beginning of the year for our investment pipeline that the cap rate range would be between 7% and 8%. I would tell you it's probably trending to the higher half of that now. We talked about in our acquisition that we just announced, a $142 million acquisition in Canada that trended to the higher end of our range, and that's after tax effect. So we feel like there is the beginnings of cap rate expansion. The positive thing in our space is it's being supported by organic growth by our tenants. They're realizing that if they want to grow their businesses that are, like I said, being supported by the consumer that this is the cost of capital right now, again, and waiting around for it, is not going to make it better. And if they've got the opportunity to grow right now, they're saying this is what I need to go for. But Greg, I don't know if you have any more...

Yes. The other thing I would add is a number of our projects are build-to-suit development projects, and you would expect a little higher cap rate on those because of the risk-adjusted return, but they're with existing tenants, so we feel very comfortable about their ability to execute.

And that really goes to the point of when we talked about we've got sector-leading growth this year and should move into next year. A lot of our projects we talked about deploying capital in the second half of this year or the build-to-suit projects that will come online next year. So a lot of our capital deployment this year is actually going to be impacting next year. So the activities that we're doing will be highly supportive of additional growth as we move into next year.

Additional questions?

[indiscernible] your cost of capital. How do you think about your public market and your acquisition strategy [indiscernible].

So the question was on funding. And given the stock discount, how do you think about funding future acquisitions? And where do you think the balance sheet stands today?

Well, I think it's a great question. We understood and appreciated that as we came out of this recovery, we needed to position ourselves to allow ourselves time to recover, to reengage with investors and show the value of the portfolio. So Mark, who's our CFO, did a really good job of positioning us. So we came into this year with about $300 million of cash. We're going to generate before we start collecting deferrals, probably $150 million of additional cash. We have probably 67%, 68% payout ratio. So we're generating a lot of cash. So we can fund our $600 million of investment this year without going back to the capital markets. We have an undrawn $1 billion revolver, so $450 million of cash generation at [ 150 ]. So we think, hopefully, by the time we progress that our cost of capital will get better. If it doesn't, we also have -- we've stated that we have an intent. We have an education portfolio that represents about 5% to 7% of our portfolio that we set is not kind of a long-term hold. It's probably assets that are trading very attractively in the 6s. So if we don't like our cost of capital, again, there's another recycling opportunity for us with that. If our cost of capital returns that we think gives us attractive spreads, then we can raise capital. But as I said, the way we're positioned, we're generating a lot of cash. We have the ability to fund ourselves. And as we move into next year, again, when you think about generating $150 million of cash, continued deferral collections, all of our tenants are paying and they're paying off their deferrals. We're going to be able to fund a significant portion of that with our own cash generation.

[indiscernible]

And so the question is, are there any examples of conversions of theaters from your traditional movie theater format to a different type of asset? How do you repurpose a movie theater?

We've seen a significant amount, and I'll let Greg -- but we've sold for industrial, we've sold for multifamily. We've sold for retail. We've sold for office. So the reality is, I think, that most people forget is we have generally with a theater parcel, 15 to 20 acres of well-located property. Whether or not they use the building or not, it's the ability to take that well-located property and do something with it, as generated. We've now probably done 8 to 10. We don't do them. We're generally selling them to others. If there is -- if it's zoned industrial, it doesn't -- I mean we sold a property in Chicago earlier this year. We had 14 bidders. And I think it sold right around a 6 cap. So overall, it's probably -- if you look across the board, when you look at whether it's conversion to retail, it's probably high single digit. So again -- but there is a lot of different uses when you have well-located real estate.

Yes. And I would say we've had multiple expressions of interest on all those. Now I can't say that we've had 14 on all of them, but we've had more than one on every one of them.

If you were to match your pipeline, just to your retained cash plus leverage. Would that imply just a slower growth than you think would be appropriate on that level? Why not link it to your cash and your retained cash?

And so the question is, why are you growing faster than, say, just your routine cash flow and additional leverage would be able to provide?

I think right now, Rick, the opportunities and the spreads are attractive enough that it makes sense for us to do that. I mean we're not going to grow for growth's sake. We appreciate the fact that every investment dollar that we put out needs to be accretive growth. And if we're still able to get 100 basis points or greater on the initial spreads, we think that makes sense. So again, it's a combination for us of using our existing cash flow and incrementally accretive investment on those investment dollars. Like I said, we've talked about the education. If we could sell that for [ 6.5 ] and reinvest that at [ 7.75 ], we think that makes sense for -- to drive accretive growth. But again, we're always mindful of the leverage. We are at the low end of our range right now. So we've created this capacity. We've always kind of operated the company that way. We don't see us levering up to create growth or create accretion. But that -- within that mindset of prudent growth that there's a way we can execute both.

I have an additional question. So -- and this is more of a broader question, but in terms of exposure and how you view the portfolio is positioned with the backdrop of very high gas prices, high inflation, how do you think that's going to impact the consumers of your Experiential Properties?

Again, what we can do, R.J., is look back over time. And I'm not trying to say that all recessions are the same. But our most, if not all of our properties, are on the value side of Experiential. If you look at the theater industry, historically, you can match it up for probably the last 30 to 35 years that theaters outperformed during the recession. It's still the cheapest form of escapism. The average U.S. ticket is still slightly below $9, which is hard for people in New York to believe. But for the rest of Middle America, it's still a pretty good value equation. If you look at our Experiential Lodging where there are RV properties or others, they're still on the lower end of value. Our ski properties are still kind of 1 to 3 hour drive. So maybe the family doesn't fly to Park City, but they still go and experience our properties. So if you go back -- the fortunate thing for us is we were born in 1997. So we've had a few recessions. And generally speaking, our theater properties or our Experiential Properties have outperformed during these periods.

[indiscernible]

And so the question is any changes with Callaway and TopGolf?

For us? No. I mean, Callaway is still highly supportive of our involvement. We still see every TopGolf deal. We don't do every TopGolf deal. If you see what we talked about the last time is, we said for our TopGolf exposure, we were going to limit ourselves to what we thought were truly high-value locations, West Coast, kind of Mid-Atlantic and Northeast. So you see what we have announced so far. We -- during the -- at the -- right at the close of the pandemic, we opened San Jose, California, which is probably their #2 location in the country. About 6 weeks ago, we opened Ontario where L.A. It opened as the #1 opening ever in the chain. And we are going to break ground tomorrow on King of Prussia. So we think the idea of controlling 15 to 20 acres in San Jose, L.A., King of Prussia is a better equation for us than doing some of the middle-market deals that they're still doing. It doesn't mean those aren't working. But as we talked about with theaters, we're mindful of our exposure. And if we're going to increase our exposure, we want it to be these really impactful locations.

Can you talk about your assets having outperformed the previous recessions. This time around, are you going to have a bit higher backlog, right, as you have folks that prefer experiences. Does that give you more visibility longevity recovery does that potentially extended durability of that [indiscernible].

And so the question is, is that Obviously, this is going to be a different type of slowdown. And given some of the pent-up demand that we had through COVID, does that sort of change the outlook? Or is there a more extended runway for consumers to go out and spend in this environment than maybe in previous recessions?

Yes, I think we think so. But we're -- candidly, we're discounting that in our underwriting. I'll give you an example, and Greg can speak to that. If you look in the theater business for -- we had a rising increased spend in the F&B component of going to the theater. And so for leading up to the pandemic, the average F&B spend was about $3.50 to $3.70. If you look at the last 2 quarters for theater spend, you would see that most of the major chains are reporting at F&B spend of about $6.70. That seems -- even though we've seen more introduction of alcohol into theaters, which is supportive of a higher F&B spend, we're not -- we wouldn't underwrite to that level. It appears that there is a level of whether we call it revenge spending or excess spending. So we're still using our conservatism and we think that there is more liquidity than in previous recessions with some of the balance sheets of the consumer. We're just not underwriting to that level, candidly. But Greg?

Yes. The only thing I would add is that we think there's going to be some for people to have more time to spend on these things because people are working from home one or two days a week. The other thing I would mention is that when things reopen, particularly in the South, the bounce back was almost immediate. So people have consistently wanted to do these things.

So right before COVID, EPR had a regional gaming asset under LOI. And then obviously, COVID hit and you guys did not complete that acquisition. I'm just curious what the appetite is today for gaming assets? And how do you think about that relative to pricing for gaming assets?

Yes. I think -- yes, we had a transaction. We prudently stepped away from that to kind of manage our balance sheet as Rick pointed out in his question. We've always been very mindful of keeping an eye on our balance sheet and keeping our leverage intact. We like gaming. We think gaming fits within our portfolio. The pricing probably moved away over the last 12 months. I would say that's changing now. Greg can comment on this. We still see -- we get calls about every deal and I think the pricing is, especially on regional assets, which we were focused on, is starting to come a little bit back into focus. But...

Sure. I think there's been a process, and we're getting a little more clarity on following cap rates.

We do not have any gaming in that investment guidance that we have, but we've seen more activity recently as far as people soliciting our interest.

And we have time for just maybe two more questions.

I think the dividend currently about 70% pre-COVID levels. How should I think about that going forward? I mean how we think the [indiscernible].

So the question is on the dividend. Obviously, below pre-COVID levels. And so sort of what's the expectation of the Board in terms of getting that ramp back up to COVID levels?

I think you're -- again, we're making a really good progress, and you saw us. We increased it around 10% this year. And still, as I said, it's a very low and well-covered dividend at about 67%, 68% right now. I think you -- the Board is kind of focused on keeping in that low 70s payout. So probably high 60s, low 70s. We like that cash kind of generation and that retaining cash to fund acquisitions and give us flexibility. So I'd say we're on that path, and we're making good progress on it.

Okay. We have time for just one more question. Sure.

[indiscernible].

Sure. And the question is, can you just provide an update on Regal, Cineworld, and it is one of your larger tenants? And expectations for some clarity there over the next two months?

I don't know. The backdrop, I think, of the question is about the Cineworld, Cineplex litigation, which is ongoing. For those who don't know Cineworld, which is primarily Regal for us in North America, had entered into a transaction pre-COVID to acquire Cineplex, which was the largest operator in Canada. They subsequently stepped away from that in late last year. Cineplex got a judgment against Cineworld for about CAD 1.2 billion. They are -- Cineworld is appealing that judgment. I think everyone in the industry feels like they're going to work something out between those two parties because Cineplex's judgment is, in all practicality, unenforceable against Cineworld. It will not result in them getting a payment. That thought process is, at least among the industry, like I say, that they're going to work something out. What we can say from our standpoint is all of our tenants are current. They're paying all their obligations. So we feel like we have an above average Regal portfolio. So they're going to be highly protective of those assets as they move through this. And all indications from our standpoint is they continue to be supportive of that as they are currently paying and paying all of their obligations. Greg, I don't know...

Excellent. Well, thank you guys very much, and thanks, everybody, for attending this morning, and we'll conclude with that.

Thank you.

Thanks.