EPR Properties (EPR) Earnings Call Transcript & Summary

Okay. Welcome to Citi's 2024 Global Property CEO Conference. I'm Smedes Rose of Citi Research. We're pleased to have with us EPR Properties and CEO Greg Silvers. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast, and at the AV desk. For those in the room or on the webcast, you can go to liveqa.com and enter code GPC24 to submit any questions if you don't want to raise your hand, or if you're in the room, you can just use one of the mics we have here. Greg, I'm going to turn it over to you to introduce who's with you from the company today, maybe provide a few opening overview remarks of EPR. And then maybe just give us a few reasons of why you think investors should be buying a stock today, and then we'll go into Q&A, and thank you for being here.

Well, thank you, Smedes, and thanks having us and those joining us. To my left is Greg Zimmerman, our Chief Investment Officer. To my right is Mark Peterson, our Chief Financial Officer. And sitting to his right is Brian Moriarty, our Chief Communications Officer. Again, when we talk about what EPR is, EPR really is the only truly diversified experiential REIT. We focus on experiential properties that -- meaning primarily you don't go there to buy a product. You're buying an experience, whether that's the movie, skiing, attractions, museums, all of those things. And what's really, I think, important to understand for us and what's compelling is value, value, value. If -- we're trading at post-COVID at a highly discounted multiple to our historical multiple, yet we are -- our businesses now -- our rent coverage is above what it was pre-COVID, both in terms of our non-theater and our theater business is back to its kind of pre-COVID level. So I think we have a compelling valuation. You look at this year, we've guided to somewhere 3% -- low 3%, maybe up to 4% growth with an 8% dividend. So we're starting off the year kind of with no multiple change into a double-digit TSR. And we think that's really compelling given the strength of our portfolio. But I'll turn it back to you, Smedes, for questions.

Okay. So just to kind of summarize the points that you wanted to emphasize on buying the stock is, a, you're the only kind of pure-play in your view as an experiential REIT, and then second would be just an attractive valuation with a low multiple and an attractive yield?

Yes.

Three would be the growth that he mentioned, too, kind of outsized growth relative to, I think, the average in our group.

So as I think most people know, I'm a little newer to the net lease space and to your company. So I'm going to kind of dive in here. And having gone through fourth quarter earnings season, for the most part, these are fairly somewhat straightforward stories, and people focus on a few kind of key metrics, and I think they compare and contrast across. Yours, not so much. It's much -- there a lot of moving parts. And I guess my kind of first question is, how do you guys think about -- when does EPR just become like a cleaner story and it's going to be a lot more simpler to kind of understand and there's a lot of accounting movements? Is that something that wraps up as we move through '24? Or do you think it's the next couple of years? Or just kind of your thoughts around that? Just kind of big picture and then we'll [indiscernible].

Sure. And then I'll let Mark add to this. I think it's really an interesting concept that it's a confusing story, which really involves around us collecting $150 million of deferred rents. Again, that's real cash. When we started off, people thought, oh, you go through COVID, you're not going to collect all of those deferred rents. We did. We collected $150 million. That meant our tenants were paying not only their current rent but all of this back rent. And candidly, analysts and people are like, oh, well, this is kind of confusing. You got all this kind of -- it was real money for us, and it spoke to the strength of our portfolio that we got all of this paid back. I think that we're fairly through that. I'll let Mark speak to...

Yes. As Greg said, part of that $150 million was deferral collections off balance sheet that went to income. So in '23, we had $36 million, $0.48 a share, of deferral collections that really relate to prior period. Like Greg said, we're not ashamed of that. That's a good thing that we collected all that money. But the good news is, going forward, we only -- we're done. We've collected all on-balance sheet accrued rent, and we only have 2 tenants where we're owed any rent, 1 of which is based on an EBITDA threshold that's pretty high, and we're not projecting that. The other has $600,000 remaining, which we project to be collected through July of this year. So this year only has a $0.01 per share of -- that we project of out-of-period deferral collection. So the story becomes much cleaner really this year, '24, because we don't have those deferrals. But again, those deferrals were the result of collecting back rent, and as Greg said, the tenants had the strength to be able to pay their current rent plus that back rent. So we think that's a good thing.

Okay. But then you've also got -- so you have the rent deferrals that are wrapping up, but I think there are a number of tenants that are going to be kind of on percentage rents going forward?

No, again, I think it -- again, it's a little bit of -- we cut a -- we did a deal with Regal where we got -- we actually increased the base rent on what the -- on the properties. And then we got an additional percentage rent. So I think it's not percentage rent only. And in fact, the story should be -- is on the theaters that are part of that lease. We increased the rent by approximately $4 million. And then we added an element of percentage rent. So not only did we get rent, it's actually additional. So I think those sorts of confusing things we're actually quite proud of.

And I'd just add on the percentage rent, we didn't want to set the rent based on the lowest box office over the past decade. So we wanted to take some upside. So I think the percentage rent will pay off in the end.

And to that point, our percentage rent collections in 2023 included 0 from theaters. So again, that percentage rent that will show -- the increase in the percentage rent for '24 is a direct result of what I just told you. Not only are we collecting base rent, but our projections would include an additional $3.8 million of percentage rent, which were Greg's efforts in negotiating that deal.

It's just one tenant.

Okay. And theater coverage, I think you said it's back at 1.7x, so that's in line with kind of pre-COVID levels despite box office revenues, I think, are well below 2019 levels. I mean -- but I guess after you've -- you've still got some Regal theaters that you're working through selling. After you sold those, are you happy with your remaining theater portfolio? Or do you see whittling that down over time?

No. We've said we want to lower our theater exposure. Again, that's definitely part of our long-term strategy is become more balanced in our diversified -- in our diversification. So the thought process is to continue. We've said we're not growing. In fact, we're going to reduce that exposure. But again, what Greg and his team have done through that is kind of produced the -- the highest producing theater portfolio in the industry. If you look at our numbers, we control 3% of the theaters, but we're probably 8.5% to 9% of the box office. So again, it's a reflection of the quality of the portfolio and how we were able to put that together. So there will be, as time moves on, interested parties in owning something of that high quality. So as the debt markets kind of start to heal, we'll look at reducing some of that exposure.

Okay. And on Regal, I think you've said like total proceeds of around $40 million for the sales [indiscernible].

Yes. That's for about [ 18 ] theaters that we're selling, yes.

And how many are left there?

8 of the Regals, we've sold 3. And of the 8, we have 2 under binding letters -- well, nonbinding letters of intent but signed and 1 under a purchase sale agreement.

Okay. And then can you just talk for just a moment about exposure to AMC? And are you happy with where that is now in terms of coverage and...

Again, if you go back to 2020 at the beginning of COVID, we actually restructured our AMC lease into one master lease, extended the term and, again, feel very good about our AMC lease in the way Greg and his team kind of restructured that. So we feel -- again, we're well positioned with AMC. If you look at Regal and how we did with that, I think Greg would say our AMC master lease is even stronger than our Regal, and our Regal master leases were challenged in bankruptcy. So we feel very good about how we're positioned with them about their overall performance even in the period that we're in right now. So it doesn't mean that over time, we wouldn't want to reduce that exposure, but we feel very good in how we're positioned.

So if AMC were to go through a bigger kind of event -- I don't know a lot about AMC, but when we talk to other clients, there's sort of this assumption that there's more to go there. I don't know if you agree with that. But do you feel like this lease would hold up and not be rejected if there was like a reorganization?

Again, we're very comfortable with that, that the last -- that this lease would hold up. Again, you probably wouldn't hear this from most landlords, but beginning in '20, we've been encouraging AMC to file. Again, because clean up your balance sheet, the business is recovering, the business looks nice, you have a bad balance sheet. So we have already done the restructuring with them. Like I said, we did it back in '20. We're very comfortable with how we're going to end up as a result of that. If you look at it now in the -- our 2 -- or 3 of our -- 3 largest theater tenants, AMC, Cinemark and Regal, Cinemark and Regal have some of the best balance sheets in the experiential area. I mean, fantastic. They've fixed and [indiscernible] their problem. AMC is the only one out there. We just relatively like them to go ahead and get it done because we're -- that's how comfortable we are with our lease structure and how important our assets are to them.

So where do you see theater just as a percent of overall earnings if -- sort of when all is said and done?

I think in a realistic to get to the level of diversification that we would like, probably 15% or below. If you look at in the experiential world, what theaters represent in that kind of paradigm, I think that's at least the place we would like to get to initially. And there are so many opportunities in some of the other experiential areas that we feel like increasing that level of diversity only creates value for us.

And just a reminder, so for 2024, what is theater percentage overall?

37%, probably -- it's been going down each year because we've been growing other areas and then selling some theaters. So it probably ends up at 36%, 35%. It's -- just given our guidance [indiscernible].

This year? Okay. And what was it kind of pre-COVID?

Like 40%.

40%.

Okay. So you're significantly sort of ramping down over time.

Yes, we're on our path.

Okay. And as you talked about diversifying, so what do you want to be more involved with? What's attractive to you?

Again, and I'll let Greg add to this. But if you look at like '22 and '23, we grew pretty much all of our non-theater elements or verticals other than gaming just because our limited capital in those transactions are generally larger. So we've not grown that area, but whether it's attractions, even play, fitness and wellness, even cultural, we've grown all of those areas, and we think we're underrepresented and across the board in those. But Greg, maybe you have...

Yes. And Smedes, we really like the fitness and wellness space. We've done 3 climbing gyms in the past couple of years. We've also just announced on the last call a deal with Mirbeau, which is an inn and spa concept in Upstate New York, so again, wellness. And we opened our Murrieta Hot Springs natural hot springs resort in Murrieta, California in February. So that goes along with our Pagosa Springs natural hot springs resort in Pagosa Springs, Colorado. So we feel really good about that. And then as Greg said, sort of our bread and butter is eat and play in attractions, and we see a lot of opportunities in that space going forward as well.

Okay. So within wellness, I mean there's kind of one end, which is maybe -- I guess, maybe a little more kind of the luxury side of spas and steam baths and massages and all that fun stuff. And then you have the actual kind of working out part, and you talked about climbing gyms. And I guess my question is, how do you sort of gauge what's going to be popular for a long period of time in terms of people exercising? Because there's always sort of a new do this, do that, et cetera. And just -- and I'm not making a call on climbing gyms. I have no idea. Maybe they'll sweep the country, but how do you kind of assess that and think about kind of the risk-reward in that?

Right. Generally speaking, it's -- Greg and his team do a great job of underwriting the idea of the longevity of the concept. So again, if you look at climbing gyms, there's a high affinity within that community, and there's a lot of stickiness to that customer. So if you look at our VITAL Climbing Gym in Brooklyn, it has different than your normal kind of retail sign-up in January and hope you never show up. It has 5,700 members. And it is all ages, and we think there's -- we do a lot of research on that and the real affinity. What we're really excited about, Smedes, if you've taken the fitness and wellness space is the 2 largest demographic groups in the country. That'd be in the baby boomers and the millennials. When you do your research on them, they value fitness and wellness very high on their list. So it is about -- it's -- what we are not is that pure kind of down the middle -- I don't want to name any names, but the fitness center you see on every strip center. That's not what we do. What we want is something that's a little more sticky with the customer that has longevity, that is proven. And again, what we've seen in these concepts are incredible resilience over years. But Greg, maybe?

Yes. So I would add, Mirbeau, for example, in Skaneateles, New York has been operating for 25 years. So obviously, we -- when we did the underwriting, we had a substantial history of how they perform. And then this is probably kind of trite, but the natural hot springs, nobody is making any more of them. So in Pagosa Springs, people have been coming there for many, many, many years. Same thing, Murrieta, at points, has not been a natural hot springs resort, but it actually -- the property that we redeveloped started as a natural hot springs resort about 100 years ago. So...

And to that point, again, and I don't want to -- I'll brag on our tenant. It just opened in February and Condé Nast named 1 of the 5 Best Hot Springs Resorts in the World.

For '24?

Yes. So again, the execution matters. And we think that -- as Greg said, we -- generally, most of these, we have a long history to be able to underwrite these, and we're very comfortable with their performance.

Okay. We have a couple of questions coming in from the audience. But I'd just -- on that, when you mentioned that Mirbeau has been open for 25 years, so why do they need you now? Like what's the end game for them from their perspective?

So first of all, I think we have a unique opportunity in the industry because we're able to find these deals. We have a lot of contacts throughout all the verticals that we're involved in. If you look at Mirbeau, they want to expand. And one of the things that we provide for our tenants is the ability to do growth capital. So if you look at Topgolf, we've done that. We've done it with Andretti Karting. In fact, on our call last week, we just announced our sixth and Andretti Karting deal, and this will be in Kansas City. So I think a lot of people in the industries that we are involved in understand that we're able to provide growth capital.

I think it's important again, Smedes, as a lot of people in the net lease space locate their deals by brokers showing up with really nice binders that are presented to them, that is the least percentage of our deals. Our deals are inbound calls, us working with people over the years. And so we've been very good about building what we call a flow business, meaning they're those deals that are somewhere between $50 million and $100 million that we think you put those deals together, they're not shopped. They're not someone who's hired a broker. There's a relationship that somebody knew somebody in our industry and told them to call us if they're looking to grow. And that's very important to us for our ability to identify and capture deals that are not kind of widely marketed.

One thing to add to that, Smedes, is Mark and Greg both mentioned that we were able to recover $150 million of deferred rent coming out of COVID. We didn't have to sue anybody, and we didn't sue anybody. So our tenants understand that we're in this together, and I think that pays dividends as well for future deal flow.

We had a question that kind of goes back to the theaters. So the question is what kind of cap rate might EPR's average theater command today?

Again, the -- I guess the most logical data point was we had one of these major tenants in COVID. So maybe better than this that we looked at disposing of prior to them filing bankruptcy. So let's -- it's easy to pick who that might have been. And that was right under [ 9% ]. So again, now that was right in the middle of COVID. The industry was somewhat down a little bit. Now that their balance sheet is cleaned up, it's a much stronger tenant. So -- but that was a high [ 8% ] number that we had on a several hundred million dollar deals. So I think that's indicative of where we think the assets could...

Not a lot of -- or frankly, probably any high-quality cash flowing theaters trading in today's market.

Okay. I wanted to ask you just a little bit about what -- when you've talked about doing a $200 million to $300 million of investing over the course of this year, so what are you -- I mean is most of that going to come from existing relationships? Are you sourcing new relationships? And I guess as part of that, I'm interested to hear your thoughts on do you come up against like a VICI just kind of broadly in the same business, and GLPI, I assume, is not on your radar.

Again, really, a lot of it is existing relationships, but we really don't see those guys. I mean we generally like their Bowlero deal with VICI. We got called about it. So we don't see them in our deals. If you're a $60 billion deal and you're doing a $77 million deal, it doesn't move the needle for you. I mean it does move the needle for us given our size. And we're just built differently. They're not built to do that kind of what I'm saying, that flow business, that $50 million to $100 million. They need the elephant hunt. And -- but I can tell you whether it's their Bowlero deal, their Homefield deal, again, we always get called about it because we're known in the space. But I don't think, Greg, do you see them?

No. I mean, and again, we see most casino deals. So I guess you could say we run into them there, but that's about it. And then I agree with Greg. It's a nice mix of new relationships and ongoing relationships. And again, not to keep talking about Mirbeau, but we just announced it. That's a perfect example. It's a new relationship, but it's built on growing into the future.

I'd also say on that $250 million of spending for this year, $140 million of it's carryover spending from existing deals. So we already have the $140 million expectation of deals that have already started. Then we announced that subsequent -- we did a deal with Andretti's. We'll probably spend in the neighborhood of $20 million, $25 million on that. So there's really not a lot of go find in the $250 million midpoint, and a lot of it -- all of it would be existing relationships effectively in the known amount.

So would you expect that number then to increase? I mean it sounds like -- so basically, what you've guided to is kind of known and...

I think that's a fair assessment. I think, again, cost of capital, our ability to dispose of some of the assets we've talked about could drive that number higher. Again, it's -- there's no doubt, and we've said this on our call, our opportunities exceed our capital. So again, we have -- we like this Andretti's deal. It was probably ready to go 9 months ago, and they wanted to work with us. And our capital constraint, where we are, we had to move it into this year. And so that's okay. It's just we -- as our cost of capital recovers, we want to get back to that cadence of $600 million to $800 million. We did $600 million in '22 and so that's a really good cadence for us. But we do need some cost of capital recovery.

We have the liquidity. We have $78 million of cash on hand at year-end, nothing drawn on a $1 billion line, but we're mindful of leverage and maintaining a strong balance sheet, kind of low 5s debt-to-EBITDA, and that's really the limiter until there's a cost of capital that works and you can raise debt and equity.

And what kind of free cash flow do you generate?

Well, last year was probably $170 million-ish. This year, over $100 million. Last year was really high because of the excess deferral collections. But this year still, because of our payout ratio only being about 70% AFFO payout ratio or lower, we'll generate over -- we think, over $100 million of free cash flow.

Okay. And then we had a question from the audience, which I think you just touched on, but what are the leverage targets near term, medium term and then kind of acquisition funding plans?

Yes. So leverage-wise, I've been CFO if, I think -- I've been at the company for 20 years, last 18 as CFO, and we've been at around the low 5s. There's some moderation of that at times, but really low 5s is where we've always operated. Our stated range is 5 to 5.6. Our plan is to start the year -- we started the year in the low 5s and finish in the low 5s.

Okay. So you're in the low 5s now?

Yes.

Could you talk a little bit about the -- I think you have 70 properties with the 8 operators in the education platform. It's 100% leased. I think you've talked about diversifying away from that a little bit. Can you maybe just talk about the plan there?

Yes. Again, I think it's an area, again, that could generate capital for us as we move forward. Again, as much as I'd like to convince people, I don't think I can tell kids that going to schools is experiential. They're not buying that. So strategically, it doesn't fit with our experiential focus. So we will exit that space over time. Again, as we look to raise capital, it's one pool of assets. Again, that's a pretty widely traded asset class within the net lease group. So we think there is a pretty broad market for that, and we'll probably begin to explore that to take advantage of some of these opportunities that we're talking about.

What sort of cap rates to those kinds of assets trade out?

I think, again, in the markets that we're in now, meaning what it was 2 years ago, it was different, I would still say kind of mid-7s -- low to mid-7s. So there's a spread there if we're investing in the mid-8s. We can flip that and put that capital to use.

Okay. And then I think on the call, you talked a little bit about some of the hotels and resorts type assets that you're invested in, want to do some expansion activity. So just in the way your relationship works, do you front the capital to them? Or do you take that -- do they fund it and then you take it down when they're done? Or kind of how do you think about allocating capital to those tenants?

Greg, do you want...

Yes. I mean typically, we provide ongoing draws. Think of us in those situations kind of like a construction lender. So the tenant is going to have to bring a portion of capital, and then we'll process payouts and pay close attention to the documentation.

So generally, Smedes, what's going to happen in those are the tenant's capital is going to go in first, and then we'll keep it in balance. So if it gets out of balance, they're going to have to bring more capital to the table.

And that's not just hotels, that's what we do on all [indiscernible].

Okay. And for these hotels, resorts, are they primarily leisure-driven assets? Or do they have a business component? Or are they...

Generally, it's going to be experiential focused. So whether that's Alyeska up in Alaska, which has not only a ski resort there, to our beach in St. Petersburg, so there's generally going to be -- it's -- the primary focus is going to be an experiential -- it's going to be in and around some asset that is driven on the entertainment experiential side.

Yes. And Mirbeau obviously has a lodging component but then a very large spa business. Murrieta and Pagosa have lodging, but again, the demand driver is the hot springs that are on property. And then we own a -- have a mortgage on a hotel in Downtown Nashville that's literally across the street from every major attraction in Nashville.

Okay. You've talked about disposition proceeds, I think, of $50 million to $75 million. I think like $45 million is already in hand with your sale of the 2 Titanic exhibits or museums. So I mean is there maybe upside to that if you can get further down the road with some of the education sales or [indiscernible]?

Definitely. I mean, again, first of all, let me touch on one of the things we -- again, as your words, Titanic Museum or exhibit. In this market, those sold at a 6 cap. So if people want to talk about the power of experiential properties, I think there's not a whole lot selling in this market in the 6 caps, but that transaction. So that generated roughly $45 million for us. So yes, I mean, clearly, given what Greg said is under contract, what we've guided to is what's known. There's definitely the opportunity for some of the other things to occur during the year, which could drive that number higher. But we just didn't engage in any sort of speculative of -- beyond kind of what we knew, but there is no doubt an opportunity there for us to get more proceeds out of that and then redeploy that into investments.

And was selling those driven by the relatively attractive cap rate? Or was there a decision sort of strategically [indiscernible]?

No. It was just cap rate. You can -- trust me. Anybody here wants something at a 6 cap. We're open for business, so just...

Yes, I think I mentioned on the call, Smedes, it's worth -- our operators were retiring. It was a husband and wife, and they were retiring. So they found a buyer who also had other investments in Pigeon Forge. That was a private equity firm, and they approached us, to Greg's point, about buying it out because they didn't want to be in a sale-leaseback platform. And obviously, we'll sell it at a 6 cap.

Okay. And then one of the other things you mentioned on the call was finalizing an agreement with, I think, 4 Xscape Theatres. And you got $2.5 million termination fees you entered into a percentage rent deal with a recapture right for another one. I guess -- I mean, are you satisfied that the restructuring of that deal is going to be enough? Or how are you going to think about that? That seems like one of the areas -- it's not a huge number, but there's like a few moving pieces there.

Yes, I think, obviously, it goes without saying, yes, we're comfortable because we cut the deal. What we've tried to do is improve our portfolio and portfolio coverage. So we also announced on the call that we sold 2 Alamo Drafthouses to franchise operators in small markets. They were in Corpus Christi and Laredo. Just long term didn't seem like a good place for us to be. With Xscape, the theater that we terminated is actually on adjacent to a dying mall in Cincinnati. So again, it didn't seem like there was a lot of growth potential there. And we feel comfortable that going forward, they'll be successful. We also, and I think you mentioned this, as part of the deal, they're going to invest $1 million in each of the 2 theaters that they're going to operate long term.

Okay. And then I mean you have a number of operating assets that are across several buckets. I mean longer term, is your plan to dispose of those? Or would you look to put them into more kind of traditional net lease structures?

I think especially on the theater side, it's look -- put them in long term, and we booked some assets that we feel like will work out to be highly productive assets. And it was -- as we referenced earlier, it was at a low point. So we engaged Cinemark, which has the highest credit in the industry, to operate those with a goal toward probably migrating those over time to leases. So again, I think that was just one of the areas that was a result still coming out of COVID that we were looking at.

Okay. And then I want to go into our final quick questions. But over time, if you get a more attractive cost of capital, I mean, is the gaming industry attractive to you? I know you have a small interest there, but...

Again, it's an exposure that we would like to have as part of our experiential. If everyone recalls, pre-COVID, we had a major gaming asset under contract that we both collectively backed away from that deal as COVID hit. So we think it makes sense as owning a little bit of that exposure if you're looking to build a truly diversified experiential platform so that no one is concentrated in one area. As Greg said, we're still called about every gaming deal. We've had multiple opportunities. But it's just for size right now doesn't work.

So let's just wrap up with a few kind of big overview questions. The first would be, as you think about the net lease space in 2025, what do you think sort of same-store organic growth can be across the industry?

I mean, generally speaking, it's been kind of somewhat in the 1% to 2% area. 1.5%, I think, is probably a good -- and a half, okay.

Do you think there'll be more, fewer or the same number of public companies in this space a year from now?

Well, the trend line would say fewer. The trend line would say fewer if you did kind of what's happened over the last several years.

So we'll go with fewer. And then for EPR, what's the best real estate decision today, to buy, sell, build, redevelop, or repurchase stock?

It's interesting, we're executing every one of those except for repurchasing stock. So we are buying, we are redeveloping, we are selling. So again, in our limited capital, we like the buy decision. We look at the repurchase stock decision every time because it is an investment. It's not leverage neutral. So you got to look at it in that way. But we're economic animals. We're going to do what is the best return that we have, and right now deploying our capital in the buy and redevelopment appears to be the best for us right now.

Okay. Well, listen, thanks. We're running out of time. Thank you for your time today, and I appreciate you being here.

Thank you.

Thanks, Smedes.