EPR Properties (EPR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the EPR investor call. [Operator Instructions] I would now like to hand the call over to Brian Moriarty, Vice President, Corporate Communications. Please, go ahead.

Great. Thank you. Thanks for joining us today for our call and webcast. Participants on today's call are Greg Silvers, Chairman and CEO; Greg Zimmerman, Executive Vice President and CIO; and Mark Peterson, Executive Vice President and CFO. I'll start the call by informing you that this call may include forward-looking statements as defined by the Private Securities Litigation Act of 1995, identified by such words as will be, intend, continue, believe, may, expect, hope, anticipate or other comparable terms. The company's actual financial condition and the results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of those factors that could cause results to differ materially from these forward-looking statements are contained in the company's SEC filings, including the company's reports on Form 10-K and 10-Q. If you wish to follow along, today's presentation is available on the webcast page of the Investor Center on the company's website at www.eprkc.com. Now I'll turn the call over to Greg Silvers for opening comments.

Thank you, Brian, and thank you for joining us today. We are pleased to have this call after months of hard work, both within the company and with our partners. Theatrical exhibition is gaining momentum after being severely impacted by the pandemic, it is now undergoing a strong recovery. With this in mind, our approach to this restructuring plan had to be multidimensional, considering not just where we are today, but also where we'll be in the years to come. Today, we'll discuss the goals of our negotiation, the specific terms of the resolution, the anticipated economic impact of the transaction and finally, a reconciliation of the anticipated Regal run rate for years 2023 and 2024. Just to level set for everyone's understanding of the facts that the commencement of the bankruptcy, the company owned 57 Regal theaters, which were documented in 30 leases. Included in that lease count were 2 Master Leases, one with 11 properties and the other with 18 properties. Our total Regal revenues were approximately $86.3 million, including annual fixed rent, CAM and ground rent, but excluding deferral payments. This number represented approximately 13% of our total revenue. Over the months of this bankruptcy, we've spoken with many of you about our approach. We were willing to negotiate on either a lease-by-lease basis, which is the right of a debtor in bankruptcy or on an entire portfolio basis, which we have utilized with other operators. In the end, Regal agreed with the portfolio approach. This approach relied heavily on our deep internal knowledge of the industry. We believe that this plan illustrates that depth of knowledge. Finally, while our equity multiple has been severely dislocated, we appreciate that investors dislike uncertainty, and we believe that this plan lays out a clear, creative and rational path for recovery and growth. At the commencement of the bankruptcy, we established some clear goals that would anchor our negotiations, limit revenue reduction, participate in exhibition recovery, meaning we understood that the industry was at a low point in its recovery, and we were unwilling to establish rents at the trough without a clear path for participation in all of the recovery, maintain a quality portfolio and create a Master Lease structure, which we have utilized this approach with another operator and believe that a masterly structure only strengthened our portfolio for the future. With these goals in mind, I'm going to turn it over to Greg Zimmerman to go over the details of our resolution.

Thanks, Greg. I'll walk you through the details of the comprehensive restructuring agreement, starting with Slide 5. The new Master Lease will comprise 41 properties with staggered tranches and a weighted average lease term of 13 years, an increase of 4 years over the pre-bankruptcy weighted average. The 41 Master Lease theaters had the highest productivity in our pre-bankruptcy Regal portfolio. The best illustration of this higher quality is pre-bankruptcy annual fixed rent for these 41 properties was $61.5 million versus $65 million in the Master Lease. Significantly, in 2019, with $11.4 billion in North American Box Office Gross, our pre-bankruptcy Regal portfolio covered at approximately 1.7x. As you will see later in the presentation on Slide 8, at $9.4 billion in Box Office Gross Regal's coverage will be approximately 1.6x. By eliminating lower performing assets, Regal will be able to focus on growing market share. As Greg noted, we made clear from the very beginning that we would not send rent at a box office trough. We set percentage rent to take advantage of 100% of the upside from box office recovery. We anticipated the continued box office recovery from 2021 and 2022, which is borne out by year-to-date 2023 North American Box Office Gross of $4.3 billion. The breakpoint is $220 million. In 2022, with box office gross totaling $7.4 billion Regal revenues for these 41 theaters exceeded $221 million. Percentage rent will be based on a lease year, so we'll start with the effective date of the lease. The median industry analyst estimate for 2023 is $9 billion and for 2024 is $9.8 billion. Based on these estimates, we expect the first lease year box office gross to be around $9.4 billion, which will provide around $8.7 million in percentage rent. Finally, and importantly, there is no cap on percentage rent. Moving to Slide 6. We have several credit enhancements beyond the Master Lease, including a corporate level guarantee, a note for $51.8 million in deferred rent, which will be held in advance and forgiven at the end of the term of the third tranche unless there is an uncured event of default, at which time the entire amount will become immediately due and payable. The remaining balance of the deferred rent related to the Surrender Properties will be an unsecured claim in the bankruptcy proceeding. We're always focused on improving our portfolio. To that end, we will reimburse Regal for 50% of revenue-enhancing improvements they may choose to make in the first 5 years of the Master Lease capped at $32.5 million and not to exceed $10 million per year. Regal is not obligated to make these improvements, and we have approval rights over the units, the types of improvements and that they will be revenue enhancing. We plan to operate 5 of the 16 Surrendered Properties. We're pleased that Cinemark will manage 4 high-performing units, all in top 20 MSAs, 3 of which are reclined and 2 of which have premium large-format screens. Phoenix will manage 1 in a smaller market. We have 34 leases and a long-standing deep relationship with Cinemark. We value their partnership and greatly respect their ability as a high-quality operator and their laser focus on the profitability of their theaters. Phoenix has successfully operated 2 of our theaters since the end of COVID, and we're pleased to expand that partnership. We plan to sell 11 of the theaters as part of our ongoing strategy to reduce our theater footprint. We know how to sell theaters. Since the end of 2021, we've sold 9 theaters for multiple uses, including industrial, residential, retail and theater reuse. We have retained brokers and have been soft marketing the 11 theaters, including at this year's ICSC RECon in Las Vegas, all pending final resolution of the bankruptcy. 9 of the 11 we're selling are less profitable locations in smaller MSAs. One is a traditionally seated theater in a highly competitive zone in the outlying suburbs of a top 20 MSA and 1 is a traditionally seated theater in a major metropolitan area, which was built against and requires a substantial improvement just to maintain market share. As Greg will explain in more detail, we plan to reinvest the proceeds from these sales to acquire nontheater experiential assets. Finally, the new Master Lease, including the rent structure and credit enhancements is effective as of the effective date of Regal's emergence from bankruptcy, which they have said will be in July. Now that the bankruptcy court has approved their plan of reorganization, Regal has a period to execute the necessary documentation and transactions needed to effectuate the plan. As such, the effective date is entirely within their control. Until the effective date, they will continue to pay pre-bankruptcy rent on and operate 57 theaters. Now I'll turn it back to Greg for a discussion of our views on box office recovery and what it means to our overall economics from this comprehensive restructuring.

Thank you, Greg. As you can see from our structure, our approach was grounded in a belief that exhibitors did not have a consumer issue, but rather a content issue. Specifically the amount of wide release films that were made available to exhibitors. Ultimately, box office projections are driven by the number of wide release films and the number of wide release films is increasing and is predicted to continue to do so. On Slide 7, we have provided you with a graph demonstrated this recovery. In 2021 and 2022, North American Box Office had tremendous growth as wide release films finally made their way back to theaters. Based upon the median of multiple analysts, the 2023 box office is projected to reach $9 billion and 2024 is projected to reach $9.8 billion. On Slide 8, we are illustrating what we anticipate will be the recovery of pre-bankruptcy Regal rent under various box office projections. We have also added the projected income from the theaters we'll be operating and the projected income from the reinvestment of the 11 theaters that we anticipate selling. We highlighted $9.4 billion of box office as percentage rent will be calculated on a lease year basis rather than a calendar year. To arrive at $9.4 billion, we simply took the midpoint between 2023 and 2024 estimates. A couple of key points to understanding our likelihood of hitting these numbers. These projections are based upon Regal maintaining current market share that they have demonstrated over the trailing 12-month period. There is not an increase in that. These projections are based upon existing pricing without assuming any increases. And the operating theaters do not assume any improvement in performance or cost structures beyond knowable items such as film cost and cost of goods sold. So as you can see at the $9.4 billion level of box office, we should achieve approximately 96% of our pre-bankruptcy rent, and this is before we account for the reinvestment of proceeds from the 11 theaters that we anticipate selling. For purposes of this chart, we have assumed that we can sell those properties at recently appraised values totaling approximately $40 million and reinvest those proceeds at an 8% return. Under this scenario, we can achieve approximately 100% or greater. However, the actual sales and redeployment are timing dependent. As the number of wide-release titles continues to grow, we believe that this approach will allow us to achieve near-term recovery with significant long-term upside. Finally, I know we are often asked about specific rent coverage by tenant. And while we're reticent to talk about a specific tenant, we believe that it was appropriate to provide that information as Regal emerges from bankruptcy. As Greg said, at the $9.4 billion box office level, we anticipate that Regal's coverage will be approximately 1.6x. Now I'll turn it over to Mark to discuss the Regal year-over-year analysis.

Thank you, Greg. Turning to Pages 9 and 10 of the presentation, you will find financial projections and related footnotes for the Regal portfolio for both fiscal years 2023 and 2024. First note that we have split out the components of revenue in more detail than our typical reporting to enhance the comparability of results between the 2 years. 2023, we assumed a new Master Lease year for purposes of the projections beginning on 7/1/23, and thus, we have included the previous monthly rental amount and out-of-period deferral payments through June of 2023, with the remaining stub rent of approximately $3.5 million being paid in the third quarter. Both the minimum rent and CAM amount as well as the deferral income could end up being higher in 2023 based on the final effective date of the lease. Given that percentage rents are calculated on a lease year, we do not expect to receive any percentage rents from Regal for calendar year 2023. We have assumed that the 5 Surrendered Properties that we intend to operate reflected in other income and other expense will break even over the remainder of 2023 as we transition them to the new operators and that we will incur an estimated total of $5 million in pre-opening costs that are included as transaction costs in the 2023 projection. We also anticipate moving Regal to accrual accounting from cash basis on the effective date of the Master Lease given their greatly improved credit profile coming out of bankruptcy and thus, we will begin recording straight-line rent. We have also added approximately $1.7 million to property operating expense for the second half of 2023 related to the estimated carrying costs of the surrendered theaters that we anticipate selling over time and we expect to record an impairment charge in the second quarter of approximately $50 million related to these properties, although that amount has not been finalized and is subject to change. For 2024, the minimum rent and CAM line item includes $65 million of base rent plus an estimated $3.5 million for triple-net charges including ground rent. Percentage rent for the first lease year ending in 2024 is estimated at $8.7 million, which correlates to an expected box office of approximately $9.4 million (sic) [ $9.4 billion ], as Greg discussed. Footnote 2 on Page 10 provides a sensitivity analysis of estimated percentage rent for various lease year box office outcomes. Similarly, we have estimated the profit from the 5 operating theaters for calendar year 2024 based on an expected box office of $9.8 billion. And Footnote 3 provides a sensitivity based on various calendar year box office outcomes. The bottom of Page 9 also provides various EBITDA measures for both fiscal years. Note that adjusted EBITDAre which adds back the impairment charge and transaction costs and is equal to the impact on our primary reported measure FFO as adjusted is expected to be lower in '24 versus 2023 for Regal due to the out-of-period deferral and stub rent payments received in 2023 that don't repeat. However, it should also be noted that our annualized adjusted EBITDAre which removes the impact of the audit period deferral and stub rent payments is expected to be higher in 2024 versus 2023 due to percentage rents and the impact from the operating theaters. In our upcoming earnings call, we will be providing 2023 earnings guidance for the company that will incorporate the expected results for Regal. In summary, we are very pleased that we achieved all our goals in the resolution of Regal's bankruptcy, limited the near-term revenue impact while positioning ourselves to return to 100% or more of the previous revenue level as we participate in the exhibition recovery through meaningful percentage rents and theater operating profits. We have improved the quality of our portfolio with significantly enhanced tenant credit and a multi-tranche master lease structure, while reducing our overall theater footprint and generating capital from theater sales to invest in other experiential assets. Now with that, we will open it up for questions.

[Operator Instructions] Our first question comes from the line of Anthony Paolone of JPMorgan.

So we're coming up with some of these questions here, you covered a lot of ground. But I guess the first one is I'm trying to understand like what -- can you just give us a recap of what happened in 2Q and then just again help us roll into 3Q with respect to kind of, I guess, there won't be any more deferred rent, you'll pick up the straight line rent and just kind of what the dollars sequentially changed -- with that dollar changes sequentially?

Sure. The deferred rent that we collected for Regal in Q2, we collected all 3 months, $1.5 million roughly a month. So that's $4.5 million was the deferrals we collected through -- for the quarter -- second quarter. As far as revenue, we collected the full amount of revenue in CAM, and that number annually had grown due to rent up to about $88 million a year, so take half of that -- or take a quarter of that and that's what we collected in the second quarter. So full rent and full deferrals in the second quarter and then beginning July, we've got the new rent structure.

Okay. And is it fair to assume this will be effect like July 1, I guess?

Well, as I mentioned in my comments, we had to pick a date for this and the effective date isn't fully known right now. As the effective date moves out, let's say, instead of July 1, it becomes, say, July 31. All that means we'll get another month of full rent and another deferral payment and our Master Lease will kick in August 1 instead of July 1. For this purpose, we assumed July 1 because we don't really have -- know the effective date, it's not in our control. But -- so that's how we modeled it. But like I said, if we just make the numbers higher for '23, should that date move out to a further date other than July 1.

Okay. And then in terms of the operating assets that you have those 5, like on Page -- on Slide 9, it looks like for '23, you're showing no profit. But is that -- and then it kind of bounces back up? Is that -- like, I guess, why is that?

I think, Tony, I think, again, we're probably -- we're being conservative. We're changing operators. We're giving them time to get how they want to position the asset, but we felt it was reasonable just to set for -- again, the other side, as Mark said, we don't know when the effective date is. So again, it kind of made sense to just kind of set the balance of this year at breakeven.

But I mean, is it your view that those theaters make money right now?

Yes. Yes, they do.

Okay. And then just last one for now. The 11 assets that you intend to sell, just can you maybe describe like what those -- do you think there'll be theaters? Or are they just land plays and just timing of getting that cash and repatriating it and reinvesting?

Tony, it's Greg. Yes. So I would say roughly half of them we would anticipate might be theaters. Although as we've said many times, we're fairly agnostic about it. We market them widely and we'll sell it to the person who presents us with the most compelling offer. Some of them will probably be repurposed or perhaps torn down and repositioned. As far as timing, I think the analog coming out of COVID is probably a good one, it took us about just under 2 years to sell 9. So we're anticipating that we'll be on the same cadence here.

Our next question comes from the line of R.J Milligan of Raymond James.

Yes. So thanks for the table here on Slide 8. I think the sensitivity is very helpful. So I appreciate that. The estimated Master Lease rent coverage is 1.6x at that $9.4 billion box office number. What is the current coverage level on today's box office?

Again, I think we would say it's probably about a 1.4x on that, where we're at a little low 8s right now.

For all 57?

No. For the 41, yes.

Okay. The $30 million of CapEx. I think you guys mentioned that was over a 5-year time period. Can you expect -- what's the expected cadence of the deployment of that capital?

Yes, R.J., it's actually $32.5 million is our portion of it, and it's a reimbursement should they elect to do it. Essentially, think about it. They have to get things started within 5 years and it's limited to a cap of $10 million a year.

Got it. That's helpful. So based on the updated projections, does that then not really change the pro forma leverage level? I think you guys [indiscernible] 5x?

Yes, if you kind of pro forma even without the percentage rents or the operating profit kicking in, we're still within our range of 5x to 5.6x, so still well within that range. And then nothing else next year, that improves as EBITDA improves, obviously, we'll get the percentage rent and the operating profit. But no, we're in good shape.

Okay. And you guys mentioned the expectation of about $40 million in proceeds from the sale of those 11 assets, but the expected time line, I think you said it was probably over the next 2 years, and the expectation is that you can reinvest that at an 8% cap rate. I'm just curious, given the expected -- or the current leverage levels and now sort of the clarity here that we've gotten on Regal, what is the outlook for your ability to execute on additional external growth?

Again, I think as we've said before, I think we have good opportunities. It's really about capital. We hope that, again, with this removing of this cloud that was over here -- over our price with this. We're hoping to see improvement in that and hopefully, to kind of drive more growth. So I think we're very positive about this. I mean, R.J., we talked with a lot of people and a lot of people were modeling expectations of 20% to 25% rent reductions. And we're hopeful that people will be pleased that really straightforward, we're kind of at 96% recovery. And as you look at -- like a $9.8 billion run rate box office, we're closer to a 100% recovery without even any of the proceeds from those sold assets. So that becomes additional capital. So again, I think all signs are pointing in a very positive direction.

R.J., I would also add, obviously, we've known that the structure of the deal would be coming for several months and my investment guys are out traveling the country just as busily as they always have been, and we've got a very robust pipeline.

And my last question before I jump back in the queue is, obviously, to get back to that 96% level, it's based on box office projections. I'm just curious if you have any updated thoughts, Greg, on the writers' strike and sort of what that means for potential 2024 or even as we look into 2025 in terms of wide releases in the box office and the potential impact there?

Yes. As we've said, we're about 60 days into this, and most of the industry -- the theater and exhibition industry pundits say, probably if we can get something resolved in the next kind of 40 to 50 days, it will have little or no impact on the theater space. If you go beyond that, it will have probably 5% or more in the second half. So that $9.4 billion that we talked about there is kind of a half year convention. We feel pretty good with that number.

Our next question comes from the line of Nick Joseph of Citi.

It's Eric, on for Nick. For the Regal coverage, you're estimating at 1.6x, are you using the sort of total payment of $82.7 million for that. So that includes some of the operating theaters and that includes the percentage rent? Just trying to...

It's just a minimum fixed rent. That's what [indiscernible] footnote. I think that's pretty much the convention of all net lease companies.

I mean the other -- the operating theaters aren't leased.

They're not leased. So they wouldn't be in the...

So it's the $65 million, right. Clear.

And then I guess, how is the operating theater and what's the agreement there? What percentage of profit are you receiving?

Again, it's what percentage -- they have a management fee that they would be collecting. But again, so there's more EBITDA there. That's generally going to be at a set percentage and for competitive reasons, we're probably not going to disclose that. But I can tell you there's substantial amount upside. To the extent that again, even when we did this management agreement, we, Cinemark, had as a requirement to get a right of first offer on these, but we were unwilling to lease them with these box office levels and want to see better recovery.

Okay. Got it. And then last question is for the percentage of rent component, did you say that it changes based on lease year? I know there's nothing -- it sounds like nothing in 2023, but does it change like 2024 to 2025. And is there any sort of thresholds that -- what sort of percentage that you receive changes based on the amount of the box office or the amount of gross sales above a certain amount?

No. I mean it has defined thresholds, but it doesn't change on a box office dependent. I think we were just trying to say it's a lease year. So the lease year, in our example, we gained -- we used July 1 to July 1. So we had to interpolate kind of the midpoint year of 2 box office years, and that's why we chose $9.4 billion.

But importantly, as box office rises and that translates to Regal revenues, our percentage rent will rise as well, and there's no cap on that.

Yes. And Eric, just to be clear, because we did mention in the deck threshold amounts increasing, that's a standard breakpoint change when base rent goes up.

Our next question comes from the line -- sorry, Rob Stevenson of Janney Montgomery Scott.

Mark, what was Regal paying you guys annually in rent pre-COVID and the rent coverage then versus what their rent coverage is now? I think you said it was going to be 1.4x now?

No, no -- was 1.7x and the rent -- no, what they're paying us, not third party. It was about $80 million what was the...

$82 million.

$82 million and 1.7x at a $11.4 billion box office. And what we're saying is that at $9.4 billion and $65 million, these are going to be at a 1.6x.

Okay. That's helpful. And then Greg or Greg, what is the impact to the Master Lease if you guys want to sell 5 or 10 or anything less than all the theaters 3 or 5 years down the road, does it pierce it and then make it invalid? Does it hold up? What is your understanding of that if you guys do it without substituting and instead just sell assets out of it?

Again, it's always one of those challenges that if you provide a road map, I will tell you it would have to be negotiated because we did not put a road map to remove 4 or 5 in there just because that's not the strongest argument that you can have -- so I would say it does have some challenges with that. It doesn't mean that you can't work through those with the operator. But we did not put a mechanism in there because as we've seen in previous bankruptcies, if you put that mechanism in, the courts can use that to break your Master Lease.

Okay. And then last one for me. What is the $3.5 million of third-party charges on Slide 5?

It's CAM that we actually charge or they pay us ground rent, truly third-party charges that are paid to us and we're paying off to other people.

Okay. And then I guess one last one associated with that. In terms of the revenue-enhancing improvements, the $32.5 million potentially, is there a return on that? Or is that just an investment that you're basically making into those theaters?

Rob, it's an investment we're making into the theaters. There is not a -- they are not required to pay additional rent, but we made very clear to them that it has to be revenue enhancing. So we will absolutely do an investment analysis before we would go forward with that. Now occasionally, also, you need to make an investment in your theater to maintain market share and do improvements as well.

And we participate [ remember ] in percentage rent, so as the revenue goes up as a result of those improvements, we participate in that revenue. But it's not rent, it's a percentage rent, not base rent.

Our next question comes from the line of Mitchell Germain of JMP.

Congrats again on the deals on. So I'm curious, you're making this announcement tonight, and it seems like some of the others might still be in negotiation. Why now? And why not see if you can kind of -- as maybe some of the other deals are struck with other landlords see what they're getting and how it can potentially change what your perception of value could be?

I think for us, when we entered into and you saw today, there was a reference to an Omnibus agreement that, that was a material agreement for us, and we needed to disclose it. Again, I think the other side of that is, to the extent that you did not have a deal today, it's our understanding that you had to agree to extend the rejection period for your leases. So you're really not necessarily -- if you think your -- we felt like we had negotiated a good deal. We felt like we had got the terms upon which we set, and we wanted to lock this down as opposed to say, if we went on like anybody who's not been assumed as of yet is still subject to rejection. And therefore, they still are -- even though they filed their plan, they reserve the right to do that. And therefore, you're really -- you didn't advance yourself to being done at all.

Okay. Understood. That's good to know. And then the calculation of percentage rent, is that -- I mean, kind of just through your chart into Excel as you were talking, and it seems like -- is it like, what, like 14%, 15% of the difference? Is that how we should be thinking about it?

Against the first break point, it is, yes, 15%.

Okay. So your numbers are just kind of round numbers on the percentage rent side?

Yes. Again, I think in fairness that we have a break point for the first $50 million and then a break point after $50 million and I mean a different rate after $50 million. And we feel like we have great confidence that those numbers are achievable as we said, based upon kind of not increasing -- I mean, literally, Mitch, with inflation, we'll get bumps in that and with box office and candidly, with their focus now back on these properties, I think we feel like we've positioned ourselves to not only achieve 100% recovery, but in excess of 100% recovery.

And again, Mitch, it's uncapped.

Yes, understood. So the $220 million initial kind of break point, we'll call it, right, that is the threshold, right? That is kind of -- that goes up 10% in 5 years. Is that the way to think about it?

That's correct.

Okay. Great. You spent a little time talking about the theaters that have moved to the operators. You spent a little time talking about the location and quality of theaters that you're selling, right? But I'd love to gain some perspective on what you're keeping and why you think those are the best 41 out there?

Again, and I'll let Greg jump in on this. Clearly, these were highly productive theaters. As many of you have heard us say all through this, these were -- what we felt were key to Regal's emergence from bankruptcy. As Greg said, talking about the performance, we actually raised the rent on these 41 -- and so again, I don't think most bankrupt tenants think you're going in and raising the rent and we did because of their performance and candidly because of the team that we have here being able to put forth that. So I think we feel really good about those -- I think, again, if -- what's interesting is everybody -- we talked about our strategy, portfolio approach. If you look at those, a vast majority of those were the individual leases. I mean, again, so it goes to kind of the -- what I would say is the strength of the underwriting team. I think these are all top theaters and top markets that are kind of at the core of necessity for Regal. Greg?

Yes. And again, as we've said repeatedly, Regal had a debt issue more so than a quality of theater issue. We did absolutely have smaller market theaters. And as I mentioned, the vast majority of what we're going to sell are smaller market theaters, which just by definition, are not as profitable and probably not worth as much effort going forward. So we're -- we thought we had a really good Regal portfolio before. And now we think it's an even better Regal portfolio.

As Greg mentioned, we raised the rent on those -- that portfolio and even at $9.4 billion of a 1.6x cover kind of tells you the quality right there.

Right. My last question is it seems like that $220 million threshold for those 41 theaters, right, was based on the, I guess, last year's number, right, last year's box office number?

That's correct.

Yes. Okay. So it equates to about $5.5 million per theater though, I know that not every theater is built differently. I'm curious like pre-COVID, do you know where those figures were?

I don't have it readily available, but I can tell you, like I said, these are in the clearly top 20% of Regal's entire portfolio.

Including a couple that are probably in the top 15% of our entire portfolio.

Our next question comes from the line of Michael Carroll of RBC.

Sorry if I missed this, Greg, can you talk a little bit about the operating theaters that you're maintaining, I guess, why keep them in this operating structure does the 2 new operators managing those contracts? Do they want to eventually lease them? Or do you just see upside in those properties and you just want to maintain flexibility?

I think we could definitely lease them, and Greg can jump in here. But we're seeing again the -- where we set the rent is based upon kind of where sustained performance is at. And as I said earlier, Michael, Cinemark required a right of first option to acquire and lease these properties if we entered into this agreement, we just were unwilling to set a lease here at these points now. And as this recovery continues, we think we'll have an opportunity to move those in a lease structure. We think -- you see the performance of kind of where they're at now, and that's on a $9.4 billion. And that's kind of candidly with Regal's operating metrics. So we think there's going to be improvement and we think there's a right time to set those. It just wasn't now.

Okay. Is there capital investment plans that you think it's worthwhile putting into those assets to kind of accelerate that recovery?

Again, it's not -- as Greg talked about, 3 of the leases -- 3 of the 4 properties with Cinemark have recliners already, 2 of them have premium large format. I mean these are not -- the 11 that he talked about in smaller markets, these are good theaters. Yes, top 20 MSAs. So this was our team determining that either for a lot of reasons, we didn't think Regal was the right operator, either because of their presence in the market or their ability to kind of operate in certain areas. So we aggressively went after these properties. We think that these properties are strong performers. We didn't pick properties that we think need a tremendous amount of capital improvements that these have already been or most of these to a large degree, have been amenitized.

Yes. I think the best way to think about it is we thought we could make more money than whatever incremental rent we would get from Regal in operating these 5, and they're not 5 that we thought we should sell. And to Greg's point, we're not interested in setting a lease right now given market conditions. So for us, it's kind of the best of both worlds because Cinemark gets to operate it, they're a quality operator and hopefully, at some point, they'll want to lease them.

Okay. Great. And then just last question on the $32.5 million, I guess, potential money that you could give back to Regal for the reimbursement. I mean how would that be treated on an accounting basis? Would that be a deduction from AFFO? Or is that just a different accounting given it's really not recurring CapEx?

We view it as investment CapEx because it does increase the revenue, which increases the percentage rents. We think we're investing in the theaters, and we think it will be treated that way.

Our next question comes from the line of Ki Bin Kim of Truist.

Just a couple of follow-ups here. On the $32.5 million of revenue-generating CapEx that you'll reimburse Regal for, for 50%. Does the $32.5 million reflect your share? Or is your share half of that?

No, that's our share, Ki Bin, $65 million total, $32.5 million is our share.

And remember, Ki Bin, it's reimbursement, so they have to put it all in first. We're not putting -- I mean they have to make a decision. We have to agree that it's revenue enhancing. And then they have to go spend it and produce evidence of that spend. And then as we've said, it's no more than $10 million in any 1 year and $32.5 million over a 5-year period.

Okay. And no rent, like you said earlier?

Well, I mean, again, I really challenged that in the sense that, as we talked about, if you're getting 15% percentage rent and its revenue enhancing, then you're actually getting double what you're getting on a fixed rent basis at 8% or nearly double.

And how much off the book deferred rent did Regal pay in 2Q?

$4.5 million roughly.

Okay. $4.5 million. And the percentage rent that you'll collect after the anniversary period of the effective date, does that come in a lump sum? Or is it -- does it come over time?

As we get evidence that they're exceeding the limit, we can accrue it because we're on an accrual basis. So it's when -- during the lease year, they exceed our threshold, we can start accruing that amount -- start accruing amounts.

And then -- but you get paid like pretty in short term? Or is there a long period of time they can hold on to it.

In the lease year, you get paid. So we'll still get the cash in the same year [ expectations ].

And I guess, I'm curious about the dialogue you've had with your bondholders. I'm not sure -- are they -- I'm not sure if they're all finding out the same time as we are, but what kind of impact or reaction do you think you'll -- this will have on your cost of capital?

Well, frankly, we haven't been able to talk to them about the deal just like we couldn't talk about you since it's confidential and nonpublic information. I think at the end of the day, the fact that we're showing this level of recovery is going to be very favorable to our -- to both our equity and debt costs, especially just eliminating the overhang, I think, is going to be helpful.

I see. But no guesstimate of what kind of cost of capital improvement it will have on the bond side.

No. Again, it's just -- the announcement is just today. So again, we'll -- I mean, I think we have briefed the rating agencies on this transaction. And I think we felt they were -- they thought very favorably about it. So we'll see from there.

Our next question comes from the line of Todd Thomas of KeyBanc Capital Markets.

Just a couple of follow-ups, I guess. First, so in terms of the percentage rent, it sounds like nothing is expected to be collected in 2023. If you do hit the $9.4 billion box office, what would the distribution of percentage rent be in '24? Is that -- should we assume that primarily hits in the second quarter? Or could some of that hit earlier with that box office projection?

Yes. It's well contingent on the lease year. So if the lease was July, it could be -- it depends on the lease year, the effectiveness of this deal and when the lease year starts. And then it's just the trajectory is going to depend on box office and when we start exceeding those thresholds, which you're going to get most of it towards the end of the lease period because at that point, you start exceeding the threshold you're getting your full amount.

Yes. I mean you could -- Todd, you could toward the end of first quarter, see some of it accrue, but it will predominantly be -- my guess is in the second quarter...

Second quarter or third, if it's July...

[indiscernible] upon on our example.

Right. Got it. So primarily second quarter and third quarter of '24. How does food and beverage concessions factor into the percentage rent?

It's every dollar of revenue generated in the box.

Okay. And then are there any sort of additional hurdles, any key hurdles to Regal exiting bankruptcy from your employment as expected in early July. What are sort of the final steps or requirements really necessary for them to emerge at this point?

Again, we're very careful because that's not our purview necessarily, but we understand based upon what they've accomplished to date that it's really kind of finalization of some documentation with lenders and things that are completed and have been agreed to but now need to be documented. So -- but I think that's our understanding that there's no major hurdle.

Yes. And Todd, just in case it wasn't clear, the judge approved their plan of reorganization today.

Okay. And then a question on the dividend, which is currently at $3.30 per share, that compares to, I think, $4.50 per share in 2019. I know there's been other activity, other changes to cash flow since '19, but any implications on this Regal restructuring agreement as it pertains to the dividend or taxable income that we should be considering as we think about 2024? Again, assuming the box office projections, the sort of the baseline, I guess, $9.4 billion that you're looking at?

I think given where we're at and not knowing exactly when the effective date of this will be that our dividend -- our Board probably take it up in their normal course, which is at kind of the beginning of this -- in '24. We have a lot better visibility to that. I'll let Mark think if we have any cash.

No. I mean our dividend remains well covered even for '23. And then as Greg said, we'll project our results for '24, have better visibility to things like percentage rents and operating profit. And we'll look at everything, our investment CapEx, and we'll assess does it make sense to do something on a dividend.

We have a follow-up question from Anthony Paolone of JPMorgan.

Just hopefully two small ones here for me. Number one, just on the percentage rents outside of this. I think the last time maybe you talked about it for EPR, it was going to be running around $10 million for the year. And I know you've done some things with the education assets and things. So any way you can just refresh us on like where we should think the starting point is as we start to think about what we want to assume to put on top for Regal in the out years?

Well, we'll give guidance for '24 in February, kind of as we -- in our normal course. But that percentage rents that we had this year, you can think of this probably being additive to that as far as next year, but we'll update that percentage rent range, if you look at our entire portfolio really in February is when we give '24 guidance.

We'll probably discuss that here at the end of July -- or in our next earnings call for this year. But there will be no addition, but you'll have update...

Yes, we will update the guidance range for this year, but this won't impact that.

Right. Okay. I just don't know if you could give us a sense as to like whether that's changed for other reasons like in the last few months or something. But -- and then second question, just to make sure I understand, because it looks like on your slide, you're including this for half of the year for '23. So in simple terms, though, this is going to add $1 million a quarter of straight-line rent, effectively that will hit your FFO. Is that fair?

In '24, right? In '23, it's half a year. It really is going to start on that effective date. So it's July 31, it may be a little lower than this, but you've got higher minimum rent, so it depends on the effective date, but it's about -- yes, you're right, it's about $1 million a quarter. That's right, $1.1 million.

Our next question comes from the line of Mitchell Germain of JMP.

Just two follow-ups. The $4.5 million of deferred rent collected, was -- does that relate to the September nonpayment? Or is that part of the $82.4 million?

Frankly, neither of those. We didn't get any stub rent in second quarter. We'll get the remaining stub rent we expect in the third quarter, and we expect that to be $3.5 million. So the stub rent is not a part of that. And then the $82 million that we mentioned was minimum rent, excluding deferrals. Deferrals run about $1.5 million a quarter, and we got $4.5 million of those in the second quarter, $4.5 million.

$1.5 million a month, not quarter.

Yes, yes, $1.5 million a month, totaling $4.5 million for the quarter.

Understood. Okay. And then the switch to -- are you going to be fully GAAP accounting upon the switch for all revenues? And when will that become effective? Do you think is it going to be for the calendar year?

No. So as soon as the Master Lease becomes effective, and we're just talking about Regal here, Regal will become accrual upon that date. So if it were July 31, we'll begin accrual accounting at the beginning of the lease term, which would probably begin 8/1 and we start accruing -- start booking straight line. It's been more on an accrual basis at that time.

Who's going to -- who remains on cash at that point?

Frankly, we still have AMC on cash basis, and we have a couple of others. They're performing well. paying us in total, in some cases, not AMC's case, there's still a pretty large amount of deferred rent owed, not on our books, but we want to see that become lower and see their continued performance before we put them on accrual, but they're paying 100% each month.

Our next question comes from the line of Nick Joseph of Citi.

Just quickly on the rent coverage again on the 1.6x. So if I basically just take that $65 million of fixed rent multiplied by 1.6x, you're basically saying they're going to generate around $104 million of EBITDAre, is that right?

Yes.

Okay. And so to calculate. Okay, great. And then to calculate the sort of profitability, if you will, attached profitability for them, then you would just minus off $8.7 million in percentage rent the sort of $3.5 million of expense reimbursement, the $65 million, of course, of rent payment and then just some allocation around interest expense? Or I'm just trying to kind of get a sense for...

Again, they probably wouldn't do interest...

EBITDAre by definitions before interest, so not interest.

But you had all the elements of the...

Yes. I guess I'm just trying to think through like will they have some cushion from a sort of cash expense to absorb something just after all sort of the payments that are owed to you.

Yes, almost by definition to emerge from this bankruptcy, they have to have that. I mean just they have to prove their solvent. But yes, I mean, even like I said, if you think about -- and Greg, you get up -- if you think about average margins in the 30s, if they're -- even on the percentage rent, they're making -- if we're making 15%, they're making 20% on it. So it's generating quite a bit of free cash flow.

Got it. That's helpful. And then last question is to calculate the sort of GAAP impact. I don't think it's included in this, but you were just basically look at like a 13-year average lease and then just assume the sort of 2%, 10% kind of rent bumps along the way. That's the way you would just look at it [indiscernible] impact?

Yes. The 3 tranches are 11, 13 and 15 kind of evenly split. Accounting makes you take -- use the 11, frankly, for the straight-line calculation, the lowest number. So at the end of 11, it would go down in theory to 0. And then as that got released, as they extend it will get started again. So use the lowest number of the 3 tranches to calculate that straight line.

I would now like to turn the conference back to Greg Silvers for closing remarks. Sir?

Again, thank you all today. Hopefully, we fulfilled what we told you that we would when we said we would lay out not only what our results were, but why and what the impact of that was. As many -- as we've talked about today, we're very pleased with this result. We think this allows us to not only position us very well in the current environment, but actually create a really nice factor of growth, especially in an inflationary environment. But as always, if you did not get all your questions answered, we will be around. We look forward to talking to you if you have those, just reach out, and we'll be glad to answer more questions. But thank you for your time and attention today, and we look forward to talking to you soon. Thank you.

Thanks.

This concludes today's conference call. Thank you for participating. You may now disconnect.