EPR Properties (EPR) Earnings Call Transcript & Summary

All right. Welcome to Citi's 2025 Global Property CEO Conference. I'm Smedes Rose of Citi Research. We're pleased to have with us EPR and CEO, Greg Silvers. This session is for Citi clients only and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC 25 to submit questions. Greg, I'm going to turn it over to you to introduce your company and team, provide any opening remarks and tell the audience the top reasons you think an investor should be buying your stock today, and then we'll go into some Q&A.

Sure. Thank you, Smedes, and thank you, Citi. Joining me up here today, so everyone has a reference whether you're here or on the line, to my left is our Chief Investment Officer, Greg Zimmerman; and to my right is our Chief Financial Officer, Mark Peterson. I think for those who are listening, we are a net lease REIT. We focused on experiential properties, those being not necessarily retail focused where you don't -- you're not looking to buy a good, but it's really about the experience. And so whether that's ski, Topgolf, movies, amusement parks, things of that nature that we've seen and still create, I think, tremendous value in the minds of the consumer. As far as the 3 reasons, I think one is valuation. If you look, we're still trading about 3 turns behind the average. And so we -- notwithstanding some movement that we've had, we're very happy with that, but we're not satisfied of where we're at. I think number two is that we have as compared to some others, greatly derisk our execution for this year. If you think about our earnings that just came out, we're projecting at the midpoint, 3.5% growth with about $250 million of spend, of which $100 million of that is already underway. We have no equity capital markets in that plan. And so I think our ability to achieve these objectives is significantly reduced relative to others and what they have to do. And finally, I think, is a very strong and well-covered dividend. When you look at what we've done and how that's produced over the last total shareholder returns on a 4-year, 3-year, 2-year, 1-year, year-to-date, we are at or near the top of the group. So I think those things play into that. But why don't we open it up for questions and see what people want to discuss.

Yes. I just wanted to clarify something. You said valuation 3x below average. Are you talking about average for the group or below your historical average?

Average for the group. So that's where I was saying is, again, average for us -- different than, but we look at ourselves and say, okay, we're trading 3 turns below the average of the group. That's historically a much greater discount than we've traded at.

Okay. I mean it does feel like things have turned a fair amount for your business, as you noted or implied, your stock is up quite a bit year-to-date. And I guess maybe just sort of big picture, maybe movies are not concerning you, but is there anything that is concerning you that you maybe have less visibility on or that you want to talk about? Or is it all everything is hunky dory?

You always have concerns. I mean, again, there's no -- nothing that's presenting itself wildly. I mean if you look at theaters, theaters are projected to be up somewhere between 10% and 12% this year. So that's a really attractive backdrop relative to some other consumer categories. We look at our non-experiential, everybody is always asking us about the consumer. Our coverages have held in there. If you look at kind of what our tenant reporting in, it still seems like the consumer is there. So it's not -- we never would say we have no worries because we always are mindful that we're looking at those things. But to date, we just reported our coverages, and they're still very, very strong. And so we feel like we're -- at our non-theater business, we are 25% of where we were in 2019. So we've created quite a bit of cushion even from where we're at right now. And as I said, our theater business is kind of near back to where it was in 2019, but we're forecast to have 10% to 12% improvement, which should take our coverages even beyond what they were in 2019.

So for the non-theater portfolio coverage, I think it was 2x at the...

2.5.

2.5. And it's been -- I feel like the last couple of quarters, it's been coming down very modestly.

It's come down. It was 2.6, 2.6, 2.6 2.5. So it's come down 1 point more. It actually related primarily, so that is -- we sold at one of our cultural assets, which was the Titanic museum, even though it was small, it was probably a 5x...

Actually 2 separate Titanic museums.

And so when we sold those, that was the major contributor to that slight reduction in coverage.

And that 2.5x coverage is comparable to a 2.0x coverage pre-COVID. So it's up -- that's the 25% you referenced. So we got a lot of headroom there.

Okay. Okay. And you provided an outlook, as you noticed, of $200 million to $300 million of acquisition activity. I think it's -- that's not too dissimilar to what you completed in '24. Maybe just touch on kind of the near-term visibility, what you're kind of seeing and any financing commitments that you've talked about and re-leasing on some assets, I think you mentioned on the fourth quarter call.

Yes. I don't know that we have much re-leasing. What we really have is of that $250 million, what we said was we have $100 million already underway, meaning that it's build-to-suit or things that we are committed to. I'd let Greg talk a little bit about what we're doing. Last year, we did roughly $265 million. So again, consistent with that. It's really being driven. Like I said, our cost of capital is not something we would issue equity at. But if we're raising -- I mean, if we're generating about $120 million of free cash flow, we've got about at our midpoint, $50 million of dispositions if you think about that on a 60-40 leverage neutral, that gets you to that kind of 250. But Greg, maybe you want to talk about what we're seeing as far as the acquisition.

Sure, Smedes. We announced on the call that we've done our second deal with IAM, an attractions operator. This is bigger land, which is about.

I going to get the mic a little bit close.

About half an hour east of Philadelphia. In addition, we will complete 2 ready cardings, one in June and July that we started last year. And we're seeing a lot of opportunities in most of our verticals. We've got a couple of other deals not ready to announce, but we're fairly comfortable they'll happen in the second half of the year.

Okay. So going back maybe to the cost of capital and not wanting to access the equity markets. But I mean, you're kind of getting to the point where it seems like at least relative to consensus NAV, kind of your stock is approaching that or maybe even a little ahead of that at this point.

Yes. I think it's -- again, when we see that, but I think that's all shaped if you look at the NAV basically by the theaters. And I would tell you that I think the perception of those are changing. I get that feel just from this conference of how people are looking at it. If you look at Topgolf right now, there's 2 Topgolfs in the market that have recently transacted sub 7.I don't know if we're getting if your NA models are giving us that credit, if you look in the rest, our top-tier ski tenant is Vail, our top-tier amusement tenant is Six Flags. So again, I think that NAV model is very much shaped by the perception of theaters. We're going to sell or we have under contract our first couple of leased theaters where they're selling for lease, and it's a small operator in a small market in New England, and we're selling those for a 9 cap. So if you think about like a Cinemark with a BB credit and a Regal who are less than 3x levered, we think that market is moving our direction, and we think the people's perception of those are changing. And as I said, we feel that here in this conference from talking to investors.

And you -- yes, so just maybe let's just touch on the dispositions and maybe just kind of recap what you're selling on the theater side and anything else that's in the near-term sites. It's $25 million to $75 million is targeted. So a pretty big range. But what's kind of the variation from the high end to the low end?

Sure. The high end to the low end, the midpoint is really based on everything that's under contract right now scheduled to close. So again, we always create a range because something could fall out and could we do more? It could be. But it's really going to be driven by -- Greg and his team have done a great job of selling some -- we had some vacant theaters as a result of the restructurings over the last 2 years, he sold 25 of those. Now we're selling some of the theaters that we had managed, and there's a couple of those in that deal. And then there's 2 theaters that we said are leased theaters that are in that transaction.

And we also announced on the call that we had already sold one theater in Q1 and one vacant early childhood education.

Okay. So as you work through the remaining theaters, are you basically done on you're happy with your theater portfolio after that? Or would you go...

Well, again, I think we're still mindful. And if you -- if anyone follows our strategic plan, it is to lower our theater exposure. The question and what we've said all along is we're not a fire seller of theaters. We have the most productive theater portfolio in the country. As many of you have heard us say, we control 3% of the U.S. theaters and 8% of the box office. So again, it's a highly productive. As that mindset is changing on theaters, we will continue to look to reduce that exposure. We have great opportunities outside of theaters, and we'll continue to lower that exposure over time. It's just -- as I said, that perception that we're starting to see and beginning to feel and the confidence in that industry as it comes back, we will lean into that. And so hopefully, that will create greater opportunities.

And you mentioned selling one at a 9% cap. Like maybe how does that just compare to kind of where...

I said it's two small New England towns to a small operator wouldn't even be a top 20 operators. So again, I think the coverage is in line with our overall portfolio. So when you compare that, like I said, to a Cinemark or a Regal that are under 3x levered, much more on a national scale. Cinemark's public already. They've been a great performing stock this year. So there's confidence coming back in that name. Regal, if you saw, they have announced or exploring an IPO. So they're going to be a public name. I think we feel like the confidence is growing in that sector. And against some backdrop, again, as we talked about 10% to 12% growth this year, further growth in 2026 in the box office. So that should flow. And what's really interesting, and I think it's that people should understand because everybody looks at box office. But the dynamics have changed so much. So if you go back and you look at 2019, you had $11.3 billion box office and everybody points to that. But you also had an average per cap spend of food and beverage of about $4.20. That now, if you look at all the public reporting, AMC, Regal take us for sure, we get all the numbers and Cinemark. That per cap spending has changed to nearly $8. So on a -- the business is set up this way. There's -- the theater sales, ticket sales is roughly a 45% margin business. I know this will come as a surprise to no one, but the food and beverage is about an 80% margin business that popcorn and soda does not cost a lot. So if you say that has moved up, that has doubled, that the equivalent from an EBITDA contribution of a $9.4 billion box office with an $8 per cap spend is the same as an $11.3 and a $4.20. So again, from an EBITDA standpoint, the operators are back where they're at. And now we are expected to, in 2026 and beyond, go above that number. So it's -- the trend line is really working right now.

And I suppose there's not really any new supply in the theater world.

Not really. No, we're not seeing it. Occasionally, I mean, it's very intermittent, but you will see -- I mean, we got noticed today, Mall of America is trying to do a new theater, but we're not participating in any theater of investments.

Okay. Okay. And then you're going to stop providing theater level coverage, right?

Yes. Our process was it was very important, again, to show kind of the difference between the 2 because people for a valuation standpoint. But theater, the coverages are both above -- will be above where they were before in 2019. So we put them back together. And what we did also was our reporting historically had been one quarter delayed. We now through the pandemic and working with our tenants, we've got everything saves education up to the same quarter. So we'll be reporting on the quarter performance in the quarter that we're reporting for all of our tenants other than education.

Okay. And theater will be weaved into that same average.

Yes.

Okay. And then maybe just talk about as you move to de-expose yourself to theaters to some degree, I guess, what would be kind of the right amount of -- right now, it's 37%, I guess, is kind of...

About 36%.

36%. Where would you like to see it over time?

Probably over time, get it down to around 20% or around there because if you think about the experiential market, that's kind of where theaters kind of represent as part of the landscape. So that's significant. It will take time. But again, we're it's -- we're clearly not growing that area, and we also have stayed clear in our intent to lower that.

And does it come through more of a sell-down? Or does it come by buying more stuff that...

We actually think it will require some selling. Yes. I don't think you can, again, grow your way into that, that at some time, it will take selling some of that exposure. And like I said, there's growing interest in that as an asset class.

And from -- when you -- and just kind of maybe it's just too soon to really tell, but kind of when you say growing interest, like who are the buyers that you're seeing come out of that?

Again, what we're starting to see right now are privates Again, when you think about...

Private equity or just private.

Equity, family office, things of that nature that -- where people are saying, I like the yield. I think I'm comfortable with it. I can get -- if you're buying in the 8s with some leverage, you've got very, very comfortable double digit without having to have any cap rate compression, whereas someone who's trying to buy something at 6 and finance it, you got to count on compression to get you back up to that number. So I think as people look for those -- or people are starting to explore that, we're starting to see that interest.

Okay. And I guess to buy theaters, I mean, you have to be comfortable that Hollywood is going to continue to produce because you -- I think as you said before, it's not about it's content movies it's about how many they are and that drives the box office. Is that...

It's still true. I think if anything, one of the great things that was challenging, but also great is the great streaming debate is over. I mean, again, streaming is going to be the killer of your cable. It's not going to be the killer. And in fact, you just had Amazon. They're going to be one of the presenting partners this year at CinemaCon, which is the theater exhibition conference. They are deeply -- they just bought the -- paid off and bought the 007 brand. All of these people -- Apple is spending more money on feature-length films now than almost anything in their content. I mean if you see the new film that's going to come out this summer, F1, they spent a ridiculous amount of money making that money -- making that movie. And in fact, what we're seeing going forward is a greater number of titles coming.

As we look at '26, would you?

Yes. I mean we -- as I said on the call, we already have 78 major releases scheduled for this year. Same time last year, we were at 64. That will continue to grow through the year and into '26. And I can't -- we can't underestimate enough -- overestimate enough the value of Amazon getting into the mix.

Okay. Okay. Maybe we can just touch on moving away from movies for a minute. You're probably talking about them, but it's an important part of your business. But you've talked about growing in the Eat & Play segment. That's the second largest contributor to EBITDA at about 24%. Maybe kind of remind us who your largest exposure there and kind of how would you where would you like to grow.

Sure. Clearly, our largest exposure there is Topgolf, and we could talk about Topgolf because they've been in the news. I think from our perspective, Topgolf is a great tenant. They've continued. I think the challenge for when Callaway bought them is that they wanted them to be a high-growth vehicle. So if you look at what happened with Topgolf, Topgolf did about 5 to 7 venues a year. And then Callaway bought them and said we're going to do 12 to 15 venues a year. We're very public about this, and we talk to their Topgolf's management team all the way that Topgolf, in our opinion, needs 1 million people in their catchment area to have a successful. Those sites, if you're doing 5 to 7 a year, are achievable. Think about you got to identify, you've got to entitle, you've got to get everything done in major metropolitan areas. When Callaway was pushing them to do 12 to 15, you maybe chose some secondary cities, nothing against anybody, but didn't meet that kind of number. If you look at what they've said subsequent about the spin, first thing that Artisteer, who's their CEO, said, we're going back to doing 5 a year. We hit our numbers every time when we do that. So I think we feel very good. They're being -- if everything goes as planned, they're being spun out with no financial leverage and $200 million of cash. So their financial profile will be better than they were in 2018. And we still see their active commitment today as -- is it 4 of our sites? 4 of our sites are under refurbishment right now at their expense. They're actively kind of spending dollars on those and refurbishing those. So we still see that as a good tenant. We've clearly tout down our growth with them. We've only done 3 with them over the last 4 years. So again, but all 3 open to top 5 in the history of the company. So when they hit the right number and they hit the right site, we did suburban L.A., San Jose, California and King of Prussia. And as somebody reminded me today, they've been by our King of Prussia, but they can't find a parking space to get into the place. Not -- we love that kind of problem. And then we've also -- as Greg said, we announced we've got 3 Andretti under construction, 2 will deliver this year, one will deliver next, highly successful concept that we've seen kind of great performance by. But Greg, I don't know if you want to add anything.

No, yes. I can't say enough about Andretti. I mean, obviously, a great operator brand with the Andretti family. We'll be opening in Kansas City, Oklahoma City and then in suburban Chicago, Schaumburg, Illinois, first part of next year. And we're always on the lookout for other Eat & Play concepts. But to Greg's point, those are our 2 largest tenants.

Okay. And just to kind of go back to Topgolf for a moment. So when that spins, there's no changes to your payments. And how many do you own out of their total portfolio?

38 out of about 85.

Okay. And that's an area where you'd be willing to grow with them, either new.

Like I said, we're very mindful of our concentration. We see every project. We've done -- it wouldn't surprise me if we did one a year, something like that.

What's the kind of scope of investment for one a year?

Nearly $25 million.

And Smedes, I would say we would probably be looking at the kind of markets that Greg mentioned. So San Jose, Ontario, King of Prussia, very, very major markets.

And it's -- our backdrop on that is if you have control of 15 to 20 acres in these major metropolitan areas, we feel pretty good about where we're going and the underlying valuation of that.

Okay. Is there an international opportunity with Topgolf?

They have taken us -- asked us multiple times, Australia, Europe. It just doesn't make sense for us to do something on a scale. I think we would hear it's more distraction than it is value add. So again, notwithstanding the fact that I had plenty of people on Greg's team who wanted to go explore the Australia alternative. They were willing to do 2 weeks going down and we passed on it. And so...

One of the other challenges, Smedes was some of those were going to be set up as franchises. So we're happy to have the Topgolf brand, but we really want the Topgolf credit as well.

Okay. Okay. And just maybe final on Topgolf. The leases are -- I mean, they're cross-collateralized.

Yes we have 2 master leases and then everything is crossed.

Okay. And then on the Andretti, so you have 3, you will have 3. What's kind of the typical investment to build one? And what do you think the opportunity there is?

Yes. Just to correct, I mean, we actually have 5 already. So we'll have 8 total. And the investment is around the same as the Topgolf.

So about $25 million. Yes. And is that something you would see one a year? Or how do you think about -- I'm just trying -- because you have said you're going to grow this section. So I'm just kind of wanted to get a sense of the pace of growth.

I think clearly, we could -- it's clearly a lower concentration. We could do -- you saw us do 3. Again, we could do more. I think the overall theme, Smedes would be when we had a cost of capital that worked, we were doing $600 million to $800 million a year in around variety of our categories. In 2022, we did $600 million. We're comfortable that we can identify, underwrite and secure those types of investments. It will be -- what I would say is what we're seeing now is we're probably not as an aggressive bidder on bigger deals. And so if somebody comes to us right now and says, I've got a $200 million, $300 million deal or bigger, it's not something -- we're not going to kid somebody and go, yes, let's do it because that we don't have that capacity without raising capital. We're aware of at least 3 of those in the market right now that have come to see us, and we're like, we'll be honest, just -- we can't do it. They want to do it with us, but we can't do it. And so I think we'll be able to -- but part of our business has always been about relationship investing and taking tenants. We tell people all along, we're not venture capital, we're growth capital. But if you have 2 or 3 units that we can study, underwrite, understand, we can grow you. And we've done that repeatedly and across all our categories. If you look at Miraval, which is a wellness investment that we made last year, we have 3 right now. They're under construction on a fourth. We have the ability to take them out of that in, I think, '26. So again, it's creating those things that allow us to not only see new concepts, but to grow from those. And Greg and his team does a great job of any time we get introduced, and we're doing a new concept that we want some sort of relationship agreement that we will have not the obligation, but the opportunity to see future deals that will allow us to create a depth of pipeline because we've always planned to get back to that $600 million or $800 million kind of growth trajectory.

Okay. That's the longer-term hope. Okay. And then you're extricating yourself from the Margaritaville RV, right? Was that a significant -- it wasn't a significant...

It wasn't a significant. It was just -- candidly, it was a mistake. And listen, I don't want to -- so we have a Margarita RV in Pigeon Forge, Tennessee that's on a net lease, and it does phenomenal. It's incredible. And so we had this opportunity presented to us in Louisiana, and we thought, okay, we can buy this and convert this. The reality is that is not a Margarita customer that's a Bud Light customer, maybe a BUSCH LIGHT customer, maybe that -- and it was a disaster. There's no getting around it. We just...

Can you get -- sorry, not to be dumb, but like what -- so what's the difference? I mean, when you say Margaritaville versus a Bud Light...

I'm going to tell you, Smedes, it was worse than just people like, I don't like it. It was like getting letters like you've screwed this up. This is not who we are.

All right. We just missed the mark on the customer Smedes.

I mean it's -- I mean we own it. That's our fault.

But our capital was $16 million.

So it's not a huge number to rebrand it, to get out of that branding group to do all of these things was going to cost more than it made sense to invest. So we decided we're going to take our medicine, admit our mistake. And and move on.

Okay. And what's sort of the timing on that, I guess, to wind that?

We're done. We're done.

And then the St. Petersburg, similar kind of situation.

No, I wouldn't say it's a mistake. Here's what occurred in there and we could talk about is that property worked very well for several years. We refinanced it, got our investment down to a de minimis and then we got hit by 2 hurricanes in the same season. If those of you who don't have Florida properties, each hurricane name storm has a separate deductible, a 10% deductible. So on a $100 million policy, we just had $20 million worth of deductible. It also had -- one of the buildings was hit significantly enough that in Florida, if they have more than 40% damage, you have to bring the building up to new code, which is not covered by insurance. And so when we did the math, we only had about...

$12 million.

$12 million in it. And so not only were we going to have to pay $20 million, we were going to have to pay additional money to bring it up to code. And then insurance rates were already up. We got hit with back-to-back years of 20% increases before we were hit with 2 hurricanes. So we just said, economically, it didn't make sense. And therefore, we decided to -- we had a nonrecourse loan, and we decided to give that back to the lender.

I think -- I was going to say the good news is we have only 2 more operating JVs with an investment of like $14 million, so pretty de minimis left in the JV land. And on the consolidated side, we have Kartrite Indoor Hotel and Waterpark, 6 operating theaters, but 2 under contract for sale. So from an operations, it's declining. It's going to simplify understanding EPR, the operations, we're not doing operations going forward. The theaters were more a result of what we got back from -- we'll probably keep a couple of theaters operating so we get the data because when you own and operate a theater, you get a lot of data on the theater that helps us for the broader market.

It will be like your guinea pigs, but otherwise...

That's a good way to put it. It's down to guinea pigs.

Okay. Okay. I mean just -- I know we're coming into the last few minutes, but you've talked about in addition to reducing theaters over time, early childhood education, private schools, that's about 7% of EBITDA. What's kind of the time frame there?

And I think you'll see that starting this year. We'll start to look at -- again, we wanted to get through selling down our vacant theaters and how many people -- we've sold 25 over the last 2 years. So I think we'll start to look at that portfolio and say, okay, that's -- they're great performing assets. And as that market -- we get calls on it all the time. I think we'll be -- we'll start to see some movement.

Fairly liquid market, too, a lot of people invest in those.

Okay. And so your reason to reduce even though their performance..

Strategically as much as I want to tell people that going to daycare is an experiential asset. Even I have a difficult time convincing that. So from a strategic focus...

And what's the market like for those?

Yes, I said it's fairly liquid, a lot of buyers, including other triple net lease REITs. And as Greg said, we get calls weekly on the portfolio.

I mean WPC owns several schools of private school. I mean our major private school is the British School of Chicago, so we are always meeting with people who are like, my kids go there. So again, it's a quality name, well attended and well located in Chicago. So I think there will be -- we may even have an assembly group of parents who want to own that.

Okay. And then maybe just to touch on the dividend. You talked about a very healthy yield. And I think you've targeted about 70% as an AFFO payout. And does that correspond with your taxable requirement payout? Are you paying above your taxable requirements or...

Well, we're not expected to pay any taxes. So it's covering our taxable income for sure. So if you look at this year, we had actually had a return of capital fairly significant. If you look again, project next year, 70% will cover us.

So it's close.

It's close to your taxable -- required taxable distributions. Okay.

Yes. We have some room there. I mean if we could go up further or we could go down a bit further and still be okay, but it's not that tight, but it works, 70% works.

Okay. I guess I was just thinking it didn't seem like you're necessarily being rewarded for the yield and maybe if you have the opportunity to retain capital, maybe that would make sense.

I think we look at it and say, we went up 3.5%. We've told the market we're going to grow it commensurate with our growth, and we project 3.5%. So if you say on a $75 million share count, $75-million plus, and we're going up $0.12 it's really -- it's $6.5 million. So it's not like it's $65 million.

And the 70% is a conservative number. And triple net investors want yield, and so we wanted to reward that while keeping that conservative.

Okay. As we come down to less than a minute, I just want to ask you, if you think about the net lease space for 2026, kind of what do you think the same-store NOI can be, not for you guys, but just for the...

I mean from what we're seeing, call it, 2.5%.

2.5%?

Yes. I mean, again, from what we're hearing 2%, 2.5%. I hear people saying that.

Okay. Okay. And do you think there'll be more the same or fewer net lease companies in the public space a year from now?

Again, I guess the safe thing to say is the same, but there always seems to be -- I think we got 2 new ones this year. So who knows? My crystal ball is horribly poor with that.

Have to give me one of those answers I have a spreadsheet.

I apologize. We're going to go with the same.

Thank you for your time, guys.

Thank you