EPR Properties (EPR) Earnings Call Transcript & Summary

All right. Good afternoon, everybody, and thank you for coming. My name is R.J. Milligan. I'm with the Raymond James Equity Research team, and we're proud to present EPR Properties. And so with that, I'm going to turn it over. But I'd also like to encourage you after a brief presentation to make it as interactive as possible and raise your hand and let's have an engaging discussion. With that, I'll turn it over to Greg.

Thank you, R.J. Joining me up here today to my left are Mark Peterson, our CFO; and Greg Zimmerman, our Chief Investment Officer. I think for a couple of opening comments, I think for those of you who may or may not know, EPR is the truly only diversified experiential REIT. We focus on experiential properties, not traditional retail or some of the major office groups. I think for us, right now, it's an exciting time as most of our properties have recovered from COVID or on recovery. As many who follow us would know, we have a large exposure to the cinema industry, and there was a considerable concern about that coming out of COVID. However, I think now we've seen that the industry is not only going to survive, but flourish. We've got -- we're moving from about $7.4 billion of box office last year to targeting, approaching $9 billion this year and even greater next year. We've got all the studios who are now committing to theatrical exhibition. So -- and we have in our non-theater exposure, we had coverage ratios of low 2s that have moved upwards to [ 2.7 ] as we're exiting COVID. So again, a really great position we find ourselves in that's strongly supported by the consumer with really accelerating growth prospects. I think overall, the value proposition for EPR, given what I just told you is the backdrop of COVID, we're trading at what we think is a significant discount to our valuation. That's notwithstanding being the best performing triple net REIT of the year. We still think we have a long way to go as far as value creation, but we feel like we're well positioned to do that. And we think that we have some catalysts coming forward that will help further that value creation. With that, why don't I -- I don't know if either one of you guys want to add anything. But with that, why don't we open it up, these are best generally dealt with questions. So why don't we open it up there?

Sure. And I'll start out with just a few questions, and then we'll open it up. But if we focus on the non-theater portfolio, experiential. Obviously, during COVID, everything was pretty much shut down. As you mentioned, an improvement in the coverage levels versus 2019, so more people are doing experiential. One of the questions that we get from investors is, given these uncertain macro times, what is the -- is there a concern that the consumer may pull back on experiential if we do go into a recession? And what sort of history show you about the performance of the non-theater portfolio?

Sure. I think the key to understanding most of our portfolio is understanding that's a drive to destination, not a fly to destination, which we think, and we're also generally on what we think is a value part of the equation. And so historically, most of these different than what may have been intuitive to people, is they outperform during a recessionary times. And I'll give you a quick data point because people have asked us about this, they said, Topgolf. When that gets the economy is going to do. Well, Topgolf issued a report earlier this week -- or earlier this year. And we had some people said, "I read a headline that their forecast is down." And I said, yes, it's down. It's gone from 9% growth to 7% growth for corporate spending. But 7% growth in the face of what we're saying feels pretty good. And we're seeing a lot of real resilience if you look in -- like I said, if you go back and you mark, and I know you said non-theaters, but I'll give you a data point, you adopt theaters to recessions, they generally always outperform in a recession. It's the lowest cost form of out-of-home entertainment. The ski business. Again, people may not fly to their destination, but they're still going to their local drive-to destinations. And we've had great history with that. The good thing about our business is, this is our 25th year, so we've had a few economic cycles, and we've seen really solid performance all through those.

So I did want to talk about the theater portfolio.

He saved that 1 question [indiscernible].

Well, we'll mix in a little bit of both, but I did want to talk about the theater portfolio. And as an analyst covering the stock and talking to investors over the past 2 years or 3 years now, COVID comes, everybody says movie theaters are dead. Nobody is ever going to go back to the theaters. And we've seen that clearly in the box office numbers that hasn't happened. One of the other pushbacks that we got from investors was the move for studios to go direct to streaming. And can you talk about that dynamic and sort of how that has played out?

Sure. I think if you're -- again, I'll give you a little longer history. The death of the movie business has been going on for, at best, 80 years. TV was going to kill it, then cable television was going to kill It, then VHS tapes was going to kill it, then DVDs were going to kill it, then streaming was going to kill it. I think the reality is we just had the perfect storm if it was going to die because every studio generally has a supporting streaming platform. They had the ability to try this model out. And what they found was it doesn't work. People don't want to experience or they're not going to pay a premium to see that experience in their home. What they -- it's an out-of-home cup of entertainment option. And so what we've now -- and don't take our word. Let's go talk to the studio heads. David Zaslav, who is one of the prominent studio head said, it was totally flawed. And it was -- who ran HBO, he said, we did day-and-date release on streaming. He said it's the worst move we ever made. It was economic disaster. Not my words, his words. And so what we're seeing now is just the opposite of that. This year, we now have Amazon and Apple committing to putting movies in theaters before they go to streaming. So if you want to make money, and now subscriber growth isn't the driver. It's actually making profit. Then the model is pretty straightforward. You release your movie into the theaters for a defined period of time, minimum 45 days, and then you release it to your streaming platform, which is, again, to use a movie analogy, we're just going back to the future. That's the way it was before, and we're going back to it. And if you look at data examples, Amazon made the movie air, which is the film like Michael Jordan kind of story. They decided we're going to release that to theaters first. It made $82 million in theaters. Then last week, they released it to their streaming and are saying, this is the way we should do it. We love to hear that from the studios. And we think the model is proving out that again and again, this is the way the consumer wants to view that.

Questions from the audience?

Sure. First an observation and then a question.

Absolutely.

Blockbuster. Streaming killed Blockbuster and so movie theaters. Blockbuster was going to kill movie theaters, but it didn't. Movie theaters are staying. My wife and my kids can't get enough Marvel movies.

Well, how do you make -- can you get that on tape? What you've said, just -- yes.

I'll repeat it for you. Question. You had a deal to buy the casino that didn't come to fruition. What are your thoughts about going into the casino or purchasing casino properties going forward?

Okay. Just for the record, what we -- the question was we had a deal to buy a casino property. We pulled out of that deal going into COVID. What are our thoughts on casino properties going forward? We think gaming makes sense in a diversified portfolio. We don't want to become a gaming REIT, but we think it has a place in a truly diversified model. We did have a transaction. We can talk about that transaction. Now that transaction was Maryland Live and Baltimore, that GLPI purchase. We like what we think of as dynamic regional assets that have more than just gaming, that had live performance. It has a lot of things going on for it. And we think in the future, we'll still -- we're still going to look at those deals. We continue to see them. Given our cost of capital, it probably doesn't work in the size that those are, but I think long term, having an element of that is appropriately in our portfolio. Greg, I don't know if...

No. I think that's absolutely right. And we continue to see almost every deal that transacts, and we're paying attention.

Additional questions.

Be more specific, you mentioned some, I think, some dollars of a [indiscernible] studio releases this year. Can you [indiscernible] what was pre-COVID [indiscernible] but also talk about seats, butts in the seat and theaters.

Sure. I think, again, what we tried to explain this to people. And hopefully, it will make sense to you. The highest correlation any year for how box office is going to do is the number of wide release films. I know that sounds -- but I'll give you an example. Last year, in 2022, we had 74 wide release films. Now you'll hear a number, there's 400 films, but trust me, [indiscernible] wide release films. In 2019, there were 132 wide release films. So that's 68%. Box office was 67% of 2019. So that number correlates -- you can go, take it back year-over-year and the number of wide release films highly correlates to box office. So in that year -- and this year, you'll have roughly 80% to 85% of the total box office will be made up of those number of wide release films. The remaining 300 will make up $1.5 billion or $2 billion. So this year, we're going to have 100 wide release films. So we're going from 74 to 100. So that's why I say when we go to 74 to [indiscernible], it's really about the number of wide release films. In 2024, we think we'll be at 120. So we're getting back toward building that content back into the pipeline to get to that 125 to 130, which are really kind of the determinant of where box office goes. It's not as much as trying to predict each film how well it will go. Just take that total number, and you'll get back really close to where kind of box office is going to be.

[indiscernible] I got the impression that prices are 25% to 50% higher [indiscernible].

It's a great thing. Do you know it's cheaper to go on an inflation-adjusted basis to the movie today than it was in 1973. I mean, again, it is, it actually kind of lags that the other point that people often don't miss, there's 2 things I wanted to touch base on: one is just how big is it. Going to the movies is bigger than all professional sports attendance combined. That's football, basketball, baseball, hockey, add them all together, they still don't come close to the number of people who go to the movies. The other aspect about your equation about just the revenue kind of generation within a theater. And why for us -- 2019 was $11.3 billion box office, but we don't necessarily need $11.3 billion because the revenue mix at a theater has changed. When we entered 2019 -- or if you look at 2019 actuals, the amount of food and beverage spend was approximately $5.40 per patron. The food and beverage spend in 2022 was approximately $7.60 per person. So again, that's a much better margin business, that food and beverage. And the reality of that is and is we have the ability now to sell alcohol in theaters, and that's been a game changer relatively to the food and beverage, and that's 75%, 80% margin business. So the actual EBITDAR can get back to 2019 levels without achieving 2019 box office levels.

Additional questions.

Okay. Let's talk about the alcohol at movie theaters...

Everybody wants to talk about get that drink.

Is that the same kind of liquor license that a bar or restaurant would have? And if the movie theater operator has financial troubles, does that license stay with your property or this stay with the operator?

It's generally jurisdictions dependent, and a lot of jurisdictions, we have to be a participant in that as the property owner. So it can be transferred to us. But it is very, very jurisdictional dependent. But we have -- if you look at generally -- when you think about theater amenitization and we'll talk about that, and I'll have Greg comment on that, at 3 different levels. One is what we call recliner amenitization. So if you've gone to a recent one, they have the full recliners, they're wonderful seating. Expanded food and beverage, which generally includes liquor license. And then what we call PLFs or premium large format screens, IMAX, things of that nature. If you look at those, generally speaking, where our theaters are about twice the industry average of all of those things, meaning that if reclined seats are in the low 30s, we're 58%. If alcohol is 30%, 45%, we're 75%. So again, our portfolio is at the premium end. And to your point, we treat the license or often try to treat the license that we would get a security interest or give beyond the things so that we could control it.

But Greg, I don't know...

Yes, the only thing I would add is we're in the experiential real estate business. And one of the things that people want theater is a good experience. So we're proud of the fact that our theaters are amenitized with premium large format screens, recliners, enhanced food and beverage because that's what the customer wants in today's world.

So I have a question for Mark. And Obviously, and for those of you that don't know, EPR pays a pretty outsized dividend relative to its peers. But can you just talk about the coverage of that dividend, the free cash flow, still the portfolio generates after paying that dividend and then thoughts on the uses of that free cash flow?

Sure. So prior to COVID, we had a dividend payout ratio in the low 80s, which is probably pretty typical of REITs. But coming out of COVID and reestablish our dividend, we reestablished it at a level that's actually high 60s today, mid- to high 60s. So what that means is we're retaining more cash flow. We're generating a lot of cash flow. This year, we'll generate well in excess of $100 million of free cash flow. So we're coming into the year with 0 on our line of credit, $100 million in the bank, and generating over $100 million of cash flow. So we can take that free cash and invest it accretively obviously, because it's generated by our portfolio and grow probably 3%, 3.5% just on that small level of investment. Normally, we would do more than that. That translates to $200 million to $300 million of investments a year. Normally, we'd probably do $500 million to $600 million. But we are -- because of the cost of capital is not there and most of our growth comes from retained cash flow, we thought it was appropriate coming out of COVID to set that level lower. So it's very well covered and allows us to still grow in a capital-constrained environment.

Additional questions? Don't be shy. All right. Well -- on the external growth side, you guys have said that it's not really a lack of opportunities. It's more of a cost of capital issue. But maybe you can talk more about where those opportunities are if we do see an improvement in the cost of capital?

Sure. Greg, do you want to...

Yes, I think we're seeing, R.J., we're seeing opportunities in all of our verticals. Last year, we actually transacted in each of our verticals other than, as we mentioned, gaming. We're not going to grow our theater exposure and we're not going to grow our education exposure. So we did cultural attractions Eat & Play, Experiential Lodging, Fitness & Wellness. And in some of those categories, multiple opportunities. We continue to see those. Already this year, we acquired the VITAL Climbing Gym in Williamsburg, Brooklyn. So that's our second entree into the climbing gym space. And then also interesting transaction at the end of last year, we acquired -- we financed the acquisition of Gravity Haus, which is 6 kind of boutique hotels and mountain towns, which also have enhanced food and beverage, fitness aspect and then co-working space. So we're really excited about that opportunity as well.

I think the other thing I would add to that is, if you saw our investment spending, last year, we closed $600 million worth of deals, stated value. We funded about $400 million of that. So when we gave guidance this year of $200 million to $300 million of spend this year, we already have accomplished with what we've done at the VITAL. We're at about 191. Fair statement?

Yes.

So again, as we sit here in the first half of the year, we're at the lower end of our range already. So we feel good. Again, that means, like I said, we've got a lot of pipeline of opportunities. There are a variety of avenues. I think what we're telling people is we're focused on 2 -- I won't say verticals, but 2 major categories that are: one, supporting existing clients, meaning that again, if we have a relationship with somebody, they're growing organically, growing their business. It's important for us if we think it's a good value equation that we support those. Evidence of that is for those who are in and around the Philadelphia area that the new Topgolf King of Prussia will open in the next 2 weeks. That will be ours. And so hopefully, you guys who are in that area will get a chance to have that experience. Also supporting existing times, but doing new deals that give us future growth. Greg mentioned Gravity Haus. It's very similar to what we do in a lot. When we do a new deal with somebody. We also entered to a relationship agreement that we get access to your product either for a number of years or for a set amount of capital. That's not a commitment by us, but that's -- you have to show it to us, and if we want to do that, we get to do it. So we're mindful of supporting tenants, but also creating pipeline that gives us future growth.

So, you mentioned that EPR is the best-performing net lease stock year-to-date, but granted starting from a pretty low valuation.

You have to say that.

We've written a lot about the potential near-term catalyst of coming to a resolution with Regal, which is one of your largest tenants that's in bankruptcy and expect it to emerge in early July. Can you talk about -- obviously, you can't talk about the negotiations, but maybe the time line and the thought process as you think about that process?

Sure. What we've told everyone is that Cineworld stated time line is to file their order of kind of confirmation order June 27, 28, and their stated time line is for the judge to either -- would approve that and issue is order in around July 7. Again, our thought process is that we would -- if we're successful in negotiating some terms, we would then have a call, in which we would lay out kind of the impact of that, what it means for us, why we did it and all the kind of idiosyncrasy of any sort of agreement. But again, I go back to your earlier point on value. If you look at kind of where we're at right now, historically, not being as diversified as some of our other triple-net peers, if you go back and look at our history, we've generally traded at about 2 turns kind of below the median of the triple nets. We can argue if that's justified. And me and my family will have a big argument about if you think it's justified. But anyway, if you think about it now, we're trading at about 9 multiple. And the median peer is about 13.5, 13, 3 quarters. So we think there's a really good opportunity for at least 2 to 2.5 turns of value creation for EPR as we move into some of these catalysts, and we remove certain of the reasons for people to have hesitation to invest in EPR.

Yes. We would argue that it's the lack of clarity versus really any economic impacts that I think, has some investors on, the sidelines, and we certainly see that as a near-term catalyst. So we have time for just a few more questions. So please.

I'll throw another one you like. You talked about occasionally a year back, that's no longer viable as a theater, because repurposed to best use, sometimes residential, sometimes retail, sometimes warehouse. First, how many properties do you have that are currently in that for sale or repurposing status? Second, typically, what's the amount of time takes you to work a deal? And third, when they [indiscernible] to sell it, are you making money, losing money, breaking even?

Yes. I think, again. I think, we have 2 properties...

We have 2. Yes.

Two properties left. We probably have done 12.

We've done 9 since COVID. So that will give you, call it, 2, 2.5 years, we've sold 9.

The biggest issue on timing is really about are you zoned correctly. I mean -- and so if there is adequate value creation for getting that rezoning, then we'll perceive that. So as an example, if you say, I've got a parcel, it's worth $10 million, but it's worth $25 million if it's owned for warehouse. And we think it will take 12 months -- well, that's probably worth it to try that, if you go. So that's generally almost everything timing-related relates to zoning and getting the right zoning. I think overall, I think we would have, given the length, a really positive ROI on all of those investments. Remember, most of these, we've -- it's been a theater for 20 years. And then it, what you've depreciated down and the land value is appreciating. Even if it goes, they're going knock it down and turn it into residential. It's pretty -- generally, a pretty good equation for us.

Just a quick question on the moment you made about trading -- multiple 2x higher, 2x higher. Is that on current [indiscernible]? Or is that on what could potentially be the [indiscernible] is reduced by [indiscernible]?

Again, that's just really the multiple. So again, you could apply whatever kind of FFO. I'm just saying when you look at the multiple that we have relative to other multiples, so again, I think we -- it's upon us to demonstrate to you guys what the FFO will be once we have so sort of resolution of this or the AFFO, whichever one you want to, but the underlying quality of that, it really kind of speaks to the multiple.

It's generally a forward multiple based on analyst consensus for next year, really. That's probably the best way to put it forward 12 months. And that should take into account their estimate of whatever Regal impact would be.

Right. For example, our estimate does include a rent reduction for Regal. So that multiple as I lower earnings base than, say, the 2022 run rate?

Yes. I remember a few years ago, you had an emphasis with charter schools. I wonder what's going on in that sector? What do you guys doing there? What's the business like?

Its -- actually the business is doing quite well, but we sold all of them. We sold all of those and did a...

I think 12% unlevered return.

12% unlevered return. Again, the business for EPR was quite good, and I think it's done quite well, but we no longer have any interest in that.

We do have some. We still have early childhood...

Early childhood, but not in charter schools.

And so with that, we have time for 1 more question.

Again, this is my perspective. It's not that they were unsuccessful as an investment. They were unsuccessful in a triple-net public income vehicle. Again, I think a lot of people -- we got a lot of questions. There are headlines in charter schools. There's a lot of much more concerned. It's a very, very local business. There's always something in the paper about them. People didn't understand them. The model was often like you would have a charter school that would operate 5, 7 years, and then they would want to buy themselves out of a lease, and they would pay us a 20%, 25% premium, which is a good economic model, but it was a difficult model for net lease investors to get their hands on.

Great. And with that, thanks, everybody, for attending, and thank you to EPR.