EPR Properties (EPR) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Rob Stevenson. I run the real estate equity research team at Janney Montgomery-Scott. This is the 3:30 session with experiential triple-net REIT EPR Properties, ticker EPR. We have several members of management with us today. So why don't I turn it over to management, we can talk about the company and take your questions at the end of this session. With that, it's my pleasure to turn it over to Greg Silvers, EPR's Chairman, President and CEO, introduce both the company as well as his management team. Greg?

Thank you, Rob. Joining me up here today to my left is Mark Peterson, our CFO; and Greg Zimmerman, our Chief Investment Officer. As Rob indicated, we are a net lease REIT. We focus on experiential properties. So our tenants look like movie theaters and Vail and the ski, Six Flags, TopGolf, many household names that you guys have heard, I think the very positive thing that we're talking about. Again, if you look at how we're doing in this environment right now, well, theaters, our rent coverage level is back to the level that it was in 2019. And our non-theater portfolio is 30% ahead of where it was in 2019. So the consumer is clearly speaking. They value experiential product, that's where they're spending their dollars. They're supported with the 2 largest demographic group being the baby boomers and the millennials, and we're seeing the benefit of that. Again, much like many people, we're kind of challenged in this environment with our cost of capital, but we're pleased to talk about the outstanding results that we're delivering. So why don't we open it up and kind of go from there?

Sure. So I guess one place to start here is that you and I both mentioned experiential and you ticked out some of your major tenants. Can you talk about how those tenants perform if the economy gets a little tougher, obviously, continued to have some inflation, food and gas prices, student loans, things like that. How does the consumer impact the tenants there? And how do they sort of -- that translate through good times and bad times economically?

It's a great question. And I think it's always important that we talk about what the data tells us because your gut says, this is discretionary. So it actually should not perform as well. But the data would say otherwise. In the theater business, it outperforms recession. You can go market against every recession and it actually outperforms. Why is that? It's because people have got enough drama in their lives and they're looking for escapism. Going to the movies is the most popular out-of-home entertainment going, notwithstanding what everyone thinks, more people go to the movies than NFL games, Major League Baseball, NBA and hockey combined. They still are the most attended activity. Most of our other aspects of our -- whether that's ski or attractions or TopGolf performed quite well because what most people do even in recession, whether it's the staycation or the aspects of -- like I said, still embracing the idea of, "I don't want my family to feel the total impacts of this." We see water parks and amusement parks tick up during recessions because they're, like I said, staycations, maybe you don't go away, but you go visit the parks. So the good thing about our portfolio, this is my 27th year, so we've had a couple of recessions. And we've weathered all those quite well.

When you take a look at the market for deals today, you guys just bought a water park recently. How do you look at the acquisition environment in a higher for longer interest rate environment given the cost of capital is precious today?

Again, it's about being selective. And I'll let Greg jump in on this in a second, but our opportunities right now exceed our available capital, candidly. And so we're being highly selective in what we're buying. We understand that we're buying durable assets for 20-year leases. So it's looking at not only what the accretion is immediately, but what the viability is of that long term. And we're -- we have a wonderful underwriting team. I mean again, to look back on it pre-COVID, other than some assorted retail, we never gotten the property back. So whether that's ski, whether that's water parks, whether that's TopGolf, we've got a good track record of being able to underwrite that.

Yes. And Rob, in terms of deal flow, I mean I think what we're seeing is we tend to play in the space of $50 million to $100 million deals. We also like to invest with folks who are going to give us opportunities for further investment. So we'd like to do relationship agreements with people that hopefully achieve one, we'll have the right to at least look at the next couple of deals. And then on top of it, we also want to service existing clients. So we also announced a couple of Andretti Karting deals. We were Andretti's largest landlord. So we want to be able to facilitate their growth as well.

I think that's one of the areas that I think people are normally focused on with you guys is the movie theater business given your ownership there. I think it's almost 40% of EBITDAre but you have some of the most productive theaters in the U.S. I think that last call, you talked about 3% of the screens and 8% of the box office, if I'm not mistaken.

Correct.

One of the interesting things from the earnings -- the recent earnings call was you said that movie theater coverages back to 2019 levels. Can you talk about like what fundamentally that business is today versus the pre-COVID because I think everyone still has the notion, remembering that these were shut down in some municipalities during COVID that the movie release schedule got pushed back not only because of COVID delays, but then you had the strikes, et cetera. Can you talk about where the movie theater business is and how that sort of impacts both your revenue from a straight lease standpoint, but also from a percentage lease?

Sure. And I think it's important to realize, those businesses were shut down in a regulatory framework, not because of consumer demand. Everybody wants to think about, the reality is that streaming was going to kill movie theaters. We're all going to sit at home and watch our movies. The reality is not true. We -- what your streaming platform is really replacing what used to be your cable TV. We watch episodic television on streaming. The studios have all confirmed they don't make any money on movies unless they go to the theaters. So not only have you had all the theater, all the studios embrace the theatrical model, again, you've had 2 new entries. Apple and Amazon have both committed to $1 billion annual of movie theatrical releases. So it actually creates an environment where you get 2 bites at the apple. You get the income from the theatrical exhibition and then you get too loaded onto your platform. So there's a lot of value. But what has changed in the environment is the mix of revenues at a theater. Pre-COVID, the average food and beverage spend in the theater was about $4.50 per patron. I think your traditional popcorn cokes, candy. The average per cap spin now is nearly $7.75. That's 80% margin business. So it's material. Now what's driven that? I don't know what this says about society, but we introduced a really good concept of letting you have alcohol in a theater, not in Manhattan or in the city, but in almost every other venue that we have, alcohol. That's added $2 to $2.50 per head on that. So what we have now is a EBITDAre level even though the total number of movies being released is down because of the strikes. Our coverage is the same because the revenue mix has changed, and we've got a much more higher-margin business in the food and beverage.

And I guess the other thing would wind up being is that, correct me if I'm wrong, but you've also got better balance sheets out of the major operator.

We do. And again, some of that is of their own doing, and some of it is [ court appointed ]. I mean what we had, we had a lot of people asking us about the credit quality. What occurred candidly is we had 2 major operators, the 2 largest operators in the world. AMC and Regal, both engaged in major M&A activity just leading into COVID. Great timing, but nobody could predict COVID and then they get shut down and they have balance sheet issues. Regal went through their bankruptcy. We restructured. We've got -- we managed that, put everything in a master lease. AMC continues to pull rabbits out of a hat, whether it's -- not Hello Kitty, whatever, [indiscernible] kitty or whatever it is. But they continue to be able to manage that. But the fundamentals of the underlying demand haven't changed. And as we saw, we have some of the most productive theaters in the country. You mentioned that we have 3% of the theaters in the country, and we have 8% of the box office. Now you add that most of our theaters are also going to have that higher food and beverage complement and alcohol. So we're driving a much higher level of productivity now than we were before. And so if you look at what we've done with those 2 largest tenants, we've got them both in unitary master leases. So we feel really good about where we're at with those portfolios. And if we look to the future, you've got a box office that's continuing to grow. This year was impacted by the strikes. But next year, we're -- most analysts are saying we're going to be $9.5 billion, $10 billion. That's $8.3 billion this year and you asked about percentage rent. Some of those restructurings, we took a -- especially Regal, we took a percentage rent component. Again, that we will participate in that growth and allow us to -- our estimation is on a $9.5 billion box office, our revenues will be equal to or better than what we had before in the theater space.

You guys have talked about sort of not growing the theater business from here. Is that more of a not purchased anymore or do any more deals and let it be diluted through other stuff? Or at some point in time, when the time is right, are you expecting to sell some of those properties?

My guess is to materially change that we'll sell. There'll be a market that, again, theaters have transacted pre-COVID on a fairly regular basis. That market has, like I said, is all this healing continues, that market will be. And if we want to materially lower that exposure. It's not because it's not been very good for us, but we also think that increased diversity is mobile enhancing. So we will, at appropriate times, sell assets in that.

Could you talk a little bit about the Eat & Play. It's the second largest segment at around 25%. I think people might be know some of the concepts like TopGolf and Andretti Karting, but what's the sort of spend -- average spend at those type of businesses? How much of that is food and beverage. And how much, I think that, Greg even said that you guys are growing within Karting, how does that look like over the next few years?

Again, there seems to be a growing -- what we love to do more than anything and especially post-COVID, is spend time with our family, friends and colleagues. And that's only increasing with the baby-boomer generation as it ages up with still a considerable amount of the wealth in the country. I think average spend is, Greg, help me, $40...

In the low $40s.

Lower $40s per person. So again, on a relative basis for food and beverage and an activity that you're going to spend 2 to 4 hours on. It's not overly excessive. We've still seen, in our TopGolf portfolio, we had roughly 2% same-store growth last year against this backdrop. So we feel really good about capturing that part of the market, and it takes -- we're very mindful of what is the activity, you take in activity, you surround it with food and beverage. Does it create kind of moats that allow you to own a particular concept in an area. And the durability, I mean we get asked all the time, well, how long is -- how durable is TopGolf. Our first TopGolf, we did 2006, 18 years ago, and it still is one of the top performers in their chain in Dallas. So again, we feel still very good about that idea of creating an activity that's approachable, that people can enjoy do and then surrounding it with a good food and beverage operation.

What are some of the other sort of concepts in that sort of Eat & Play category? Is it that might be less well known to the audience that are out there that you guys are excited about?

Funny you asked, Rob, just -- we just opened this week a standing wave park in Dallas. It's called Good Surf. So it's food and beverage and as well as the ability to surf. 1 or 2 people can serve at a time. And we think there's a lot of opportunity for Surf in the U.S. So another example things that we look at.

We have bowling, we have pinstripes, pinstack.

[ Bolero ].

Yes, we have [ Bolero ]. So we have a lot of these various concepts that we think people are looking for still ways to come together. And like I said, spend time with people. It's -- like I said, it's important to make the activity approachable. There's a reason TopGolf works because everybody thinks they're [ their offer ]. They don't realize that whole outfit is sloped. And if you just hit it, it's going to find something and make points. But it makes you feel like you're better at it than you are. But what's really about is hanging out there with your friends and laughing and cutting up and we're very excited about those aspects, much like, like I said, when we're spending time in the fitness and wellness space. We think about this baby-boomer generation aging and wellness is very much something that's top of mind. What we're probably not going to be is the fitness center that's in our in-line retail with a bunch of machines. But like we have a climbing gym here in Brooklyn that has 6,000 members. I mean it's incredible and on a big parcel of land in Williamsburg. So we like relatively the income flow from it, and we like where we're positioned long term.

One of the other things that you guys own is both the ski stuff as well as some of the water parks. Can you talk about how that business operates and the seasonality there and how that sort of impacts the company?

Sure. seasonality, again, it doesn't impact the company. These are leases or fixed income stores. So it does impact us in coverage. But ski has changed materially from 10 years ago. 10 years ago, you used to come in and go, how is it going to snow this year? Where is the snow? The season pass of either Epic or Ikon Pass has changed the business materially. We will know relative to the performance of our ski assets by November before the first snowflake falls because of Epic's snow passes. And we're Vail's largest landlord. We like the idea that we've got essentially an investment-grade tenant that's supporting our 11 -- 11 properties with them. So that dynamic has changed materially with the season pass. Water parks are incredibly straightforward in their -- the major issue for a water park is rain. If you know the demographics of your market, you know the competition of where you're at. We have a highly predictive model of how well that property is going to do. What we can't control is how many days does it rain. So you underwrite for a kind of level of rain where you want your coverage at because people don't go to a water park during the rain. So again, it's one of the factors that we are really, really blessed. Greg and his team, we have a very detailed -- we're probably one of the few groups. I think we have 4 CFAs and our underwriting team. So we're highly data-driven. We've developed models on all of these properties. And what are the drivers? Where are the risk at? How do you underwrite for those? How do you accommodate those? And they've done a wonderful job in executing on that.

Okay. Mark, do you want to just -- before we open it up for questions, you want to talk a little bit about balance sheet strategy. Where you guys were to target for leverage, et cetera?

Sure. So I've been at the company for 20 years, and we've always managed debt-to-EBITDA 5% to 5.6%, generally low 5s, and that's where we're going to continue to manage it. We are investment-grade rated. We briefly lost our investment-grade rating as COVID happened as we had 100% of our tenants shut down, but they reopened quickly and demonstrated the type of coverage that Greg talked about, and we're the first one to get that investment-grade rating back. So first and foremost, we manage the company in a conservative nature. I think the other thing coming out of COVID that we took advantage of is resetting our AFFO payout ratio, which used to be in the low 80s. Coming out of COVID, we decided to set that 70%. In fact, with deferrals, we were receiving was even in 60s in '23. So that allows us free cash flow to invest, and that's very accretive, as you can imagine, you kind of generate it and reinvested at 8.5%. Even though we're in somewhat of a capital-constrained environment with the $100 million of free cash flow with some of our dispositions that we've had, we're able to do $200 million to $300 million a year of investments without having to access the capital markets. Again, we had 0 drawn on a $1 billion line of credit, and we have cash in the bank. So we're in great shape. And that allows us to grow this year, if you take out the deferrals from last year, a little over 3% and you combine that with an 8-plus percent dividend. That's an 11% plus return to shareholders without any rerating. And we think our multiple will [ rerate ] over time because we're certainly too low in terms of multiples. So again, low 5s. As far as debt maturities, this year, we only have $136 million due. And given the cash on hand and the 0 drawn on the line and the cash flow we're generating, we can easily pay that off the line of credit, so no need to access the capital markets to execute our plan. And as we roll in to '25, we have $300 million, a very manageable amount. So really feel good about the way we reset coming out of COVID and have always maintained and been conscious of our balance sheet and keep it in a conservative way.

All right. Why don't we open up for questions from the audience, sir? [indiscernible].

Again, the pass system is incredible generally. None of our properties are on. We have 11 with Vail and we have one other. We have the #1 ski property in Alaska, and it's on the Ikon Pass. So it's not that the pass won't work. It's just that those 2 people are crowding everyone out of the market, not that there's anybody here in antitrust. But they are dominant players, and you generally are going to be an Epic or an Ikon Pass depending upon where you live and ski.

Yes. So to your point, your investment grade rate your balance sheet is very strong. You've done an amazing job recovering from COVID and [ the stock ] is traded somewhere between 8, 8.5x AFFO. I think the market is asking you, what is your plan to rerate your stock? What's your business plan for the next 5 years? Where is EPR over the next 5 years? And how does that happen because if you're trading at, I think it's a 30% or 40% discount to your closest competitor in this space. So you guys, again, have done an amazing job at how to [ break down ] [indiscernible] balance sheet. What's the plan? Are you going to turn that around?

Again, I think, first of all, we've heard loud and clear that notwithstanding what I told you about theaters, people don't like theaters. So we're going to, at points in time divest out of that. I mean if you look -- let's do the simple math of this. Next year, if you go forward, we're going to do $5 or better, you can just kind of look at the numbers and see. Non-theaters represent 67% or 63% of our portfolio. So that's $3.15. And if you put a 12.5 multiple or an [ 8 ] cap on those assets. Remember, this is Vail. This is TopGolf. Those assets don't sell for [ 8 ]. They're lower than that, but I'm trying to be conservative with you. That's $39.50. We're selling right now for $40 and a little something. So that $1.80 of theater value is trading at [ 50 cap ] -- it just -- it doesn't make any sense. But we're also mindful we're -- you guys have given us this capital. So we've got to do responsible things with it. It doesn't mean that I couldn't tell Greg. Greg, I'll sell you this for a [ 40 ] cap and you can go away and get rich on it because you guys would think we're crazy. There will be a market for theaters. It's coming back already. I mean, there are simple things as -- like I said, you look at a Cinemark whose debt trades at 7%. We could sell them their own theaters back to them at 9%. They can borrowed the money and it's accretive for them. So there will be an opportunity to create value in that. It's being selective and thoughtful in how we do that. And candidly, along the way, we're still nearly top of the group as far as TSR. I mean, there's no one that's delivering 11.5% this year. So we are paying everyone to work as we work through this. And no one in our estimation, has the opportunity or the catalyst to drive change as we go forward. If we get a 2-turn multiple, you're looking at a 30%, 35% TSR, and that's still below our long-term average multiple. So I think there's a lot of opportunity that we have. Oh, and along the way, you're getting [ 8.25 ] to sit there and be -- and to wait for that change to occur.

Why not buy that stock [indiscernible] it seems like that could be accretive.

It's a great question. We look at it like an investment. And so literally, if you're saying your stock is trading at [ 8.25 ] if you're buying something -- because it's not leverage-neutral, you've got to look at it and say, okay, you are -- if you take all your capital and you do that, then you're actually using -- you're taking up some of your debt capacity but if we are investing at [ 8.5% ] or higher, with growth, we're actually getting equal to or better return for our long-term view. So we look at it kind of very similar to as an investment. It's not off the table. Listen, it's not a who's right. It's a what's right. We're not trying to prove anybody wrong or try to tell you -- we're trying to execute on what we think are the best decisions as we approach this.

Has there been any examples for you guys in the market theaters [indiscernible].

We've sold 2 for industrial, sold them for 6 caps. Let's put it this way. We have sold 14 theaters.

16.

16 theaters to date, probably ranging from a cap rate of 6% to 12%, not for theaters, for something else. Cash flow in theaters, as I said, you're giving me a 50% cap valuation. The land value underneath these, we could just sell. I mean most -- and we're talking about what people understand of some of the most productive theaters in the country. Like our Burbank theater is the #1, #2 or #3 theater in the country every week, every week.

Do you expect to [indiscernible].

Again, when we get a theater that's vacant, it's easy to do that. We're at a point where nobody is giving us back theaters. They're actually making money on them and they want to keep them operating as theaters. So we would be selling income.

Just one other point on the sales is, it's obviously real estate location dependent. You can't do industrial everywhere. So generally, when we sell a theater that's vacant, we just market it widely and take the best offer we get. So if it's industrial, great, if it doesn't work for that, we'll sell it for whatever we can.

So everything that we have sold -- and all of them when we say sell, it doesn't mean they're using the building sometime it's just a [ scrape ]. We've sold for industrial, multifamily, office, retail.

And theaters.

And theaters. So I mean people don't -- people sometimes get most theater parks are 15 to 20 acres in -- where most of our theaters are located in the top 50 DMAs in the country.

Are there any other areas of [ investment ] that you might be looking [indiscernible] in the properties?

Yes. I mean we have a small education portfolio that we're actively looking at and thinking about selling down on that. Nobody seems to be bothered or care about that. So I mean, as the question the gentleman asked we will have 35 meetings over 2.5 days here and 90% of our meetings will be about theaters, 37%, 63% we don't talk about. Not because we don't want to talk about it.

Do you want to conserve some of the entertainment concepts that they go out of popularity and thinking about contribution [indiscernible].

Again, if you think about it this way, let's say, we always think about it, like I said, and we think about TopGolf and like I said, it's approaching 20 years in its existence. But like this last year, we developed it in, for TopGolf in Los Angeles and King of Prussia. I don't know that I feel bad about -- generally, the underlying property is about 1/3 of the level of investment, and we own 20 to 25 acres in Los Angeles and King -- or control that in Los Angeles or King of Prussia. We feel pretty good about what our -- we don't always think about it in the sense that you've got to use the building. It's, can I replace the income from what I've got there?

[indiscernible]

Is he doing a pickleball deal? Is he doing a pickleball deal? I know -- we know more about this than you can imagine.

And I have to say [indiscernible] I really question for the long-term, now they're not going to operate every [ purposing ] the inside of the [ new ] markets and restaurants [indiscernible].

Again, we have a challenge with pickleball. And again, we get very -- it's not -- we don't question the popularity of pickleball. We question the barriers to entry. Every person in the country, every country club, every parks and rec are turning things into pickleball courts. So we might have told somebody that really you have to get comfortable that you have a 92% revenue restaurant. Are you comfortable owning that? When you look at a TopGolf, think about it this way as opposed to -- we'll do a pickleball juxtaposition. There are generally at most 4 pickleball players on a pickleball court, right? In a TopGolf with 103 bays and 6 people in each bay, there are 618 people. If you take the utilization of square footage divided by the number of people, TopGolf is much more efficient with their space than Pickleball, because...

Eat and drink.

And you can hold a beer while you're doing it.

I think pickleball is an exercise activity. People want to exercise. And then the question is, are they going to hang around and eat afterwards or not, whereas TopGolf has perfected eating and drinking as part of the activity.

So essential we wouldn't buy [indiscernible].

We've affirmatively already passed on it.

Well, and I would also say beyond that because I don't want to pick on your friend that we never say never, but we haven't invested in pickleball at all.

We can't figure it out.

Why don't we...

What's that? [indiscernible]

Why don't we stop it there. And, if there's any questions for management, you may stick around.

Thank you.