EPR Properties (EPR) Earnings Call Transcript & Summary

Welcome to BofA's 2025 Global Real Estate Conference. I'm Jana Galan, and I cover the net lease REITs over at Bank of America. I'm very honored to be here today with EPR, and we have Chairman and CEO, Greg Silvers; CFO, Mark Peterson; and the new CIO, Ben Fox. So maybe I'll turn it over to Greg to give some opening remarks on the company and strategy.

Sure. First of all, 2 things. First of all, as Jana did, I wanted to introduce on our second quarter call, we announced that Greg Zimmerman, who was -- who is currently our CIO, is retiring in the first quarter of next year. We also announced that we had hired Ben, who is to my right. Again, long storied history in the industry, both with Realty Income and Ares. We've done and looked at transactions with Ben and known him for many years, and we think will be a great fit within our organization. The next thing that I just want to hit, and it's -- we can talk about broader strategy, but we've got a lot of questions about this while we were here. So I wanted to touch base on it is a lot of people ask us in the July time frame when our stock price went up is why didn't -- did you consider issuing equity and things of that nature? Well, it's been pretty reported now that the -- we have a gaming asset in the cat skills, of which we own a ground lease and that the Genting Group has told us that they intend to exercise their option on the ground lease with financing supplied by the IDA of Sullivan County. So again, that will be $200 million roughly that we will get back at a very attractive cap rate. That is -- that transaction is not closed. It's -- they're out in the market now raising those bonds. If it closes, it should close this month. But it did show up, again, a credit to everybody here who has the best tickler system. It showed up in the Malaysian times. And we thought, well, I don't know that anybody will see that. And then as soon does that happened, 3 con calls. So again, that -- what we're excited about and what that means for us is given where our leverage is, that additional capital, this will take us substantially down below 5x if it closes. So we're going to have a really strong war chest to begin to look at revving up our growth engine. We came into '25 with several goals. One of them was letting the theater noise calm down. And I can't tell you how grateful I am that we actually have had most of our meetings here and at a 35 meeting -- first 30 minutes, we don't talk about theaters. So again, hopefully, that means they are in a much more stable environment. We also had a significant amount of dispositions of selling vacant theaters that we worked through there. So that '26 was setting up to really energize our growth engine again. Now we're going to have what we think is very attractive cost of capital to do that with, get back to our -- more of our kind of $500 million run rate of acquisitions. And so I think even now at 4.3% growth this year, we're kind of near the sector leading as far as growth. And next year, we're having the dry powder and the opportunity. So '26 sets up very favorably for us. And why don't I open it up for questions after that.

Great. Anyone in the room is welcome to speak up, but maybe I'll just kind of start with that, that you've been very successful recycling capital this year. And I guess maybe if you can just talk to us a little bit about like the deploying that capital and kind of the opportunities you're seeing and the mix of whether it be development, mortgage or kind of income producing?

I would say that it's definitely gearing more towards acquisitions, so not development. I think if you go back and you think about our history, generally to do the numbers that we did, we kind of had an anchor transaction in there, and then we did the add-ons from that. But when we were just doing kind of $250 million, it's hard to do a $150 million transaction and then satisfy the needs of our existing tenant. With the capital that we are creating now, we're going to be back in this game. Right now in the market, so everyone knows, there's $400 million-plus transactions out there in the market right now. I don't know that we'll get one of those or any of those, but we're -- that's an environment that we're back in. I think we feel like our pipeline is as robust as it's been. We think -- now there's no doubt this -- it takes time to get through these and get these transactions. For us, this has always been about the setup for '26. And we feel like we're in a really good position for that. One of the things that I will kind of lean into my friend to the right, Ben is -- Greg has done a great job, but there's always new energy when somebody new comes in. So there's a lot of energy in the building about gearing up and getting things done and let's go forward. And we kind of hamstrung Greg for several years with the amount of capital, and now we're -- as soon as Ben gets here, we're releasing it. And so I think it's a very good environment set up for what we see as a really good going forward. I think in our unique setup, we kind of -- a segment that -- or segments that we kind of own. And so we're not seeing a tremendous amount of cap rate pressure. Things are still in the 8s. So we feel good about that. We feel good about -- like I said, if you think about by category, we're looking at ski deals and everybody -- sometimes there's any more ski. We're looking at ski deals. We're looking at attractions. We're looking at Eat & Play play. We're looking at fitness and wellness. So I think we feel there is a really good backdrop. As this has kind of worked out to our plan that we got through the dispositions. We got through kind of the stabilization of theaters, now turn on the growth and the narrative. As I tell our team, it feels like we're just getting the clean air and now let's hit the gas.

And I don't know if you could provide maybe a little bit more color around those larger $100 million-plus transactions, kind of where in those categories...

Sure. I'll give you an example. I can't give specifics. There's in attractions. There is an Eat & Play. There is in fitness and wellness and trying to think right off something. I know it's in that, maybe you remember the other one?

Those are the predominant...

So in those areas. So again, I think we think things are starting to happen very positively in these spaces. And we feel really good about kind of the setup. Like I said, these will be competitive. I don't know that we will get them. We are getting the calls. And so again, we've got a hat to throw in the ring, and we've got a cost of capital that we think is going to be very competitive.

And maybe if you could just kind of talk about that competitive environment, and you guys have really carved out a unique niche, but like who do you compete with on these types of transactions? Are you running into any of the other REITs?

Actually, we were just talking about this within another group. Two years ago, I would have said it's other REITs. Now it's predominantly credit funds. Credit funds that used to be 55, 60 are now 80, 85 and so to LTV. So it's a different group. Now what's really interesting about that, Jana, is rate-wise, it's not. I mean they are -- sometimes they're more expensive than us. But it really is kind of a philosophy of where the seller is at that point. Are they wanting long-term capital? Or are they wanting short-term capital? Do they think the world is getting significantly better in 3 years, and I'll take a 3-year deal? Or do I want to lock in my economics and know where I'm at? But we're seeing more of that now than we are another net lease REIT.

And then maybe just, again, touching kind of like on the disposition side and the success that you've had with the theaters and just the tremendous box office plus when you look at -- it's getting backfilled with a lot of great titles. Does that on the margin kind of just change your thoughts about...

I don't think so. I mean, again, we firmly believe that you set your strategy and you go forward. And we want to diversify away from theaters. But we said all along, we're not buyer sellers. We know where value is. We know these assets are performing well. Our coverages now are better than they were in 2019 on the theater side. So again, that's good. To the disposition side, it's really about owning quality real estate. I joke that last week, we got -- or not last -- it was probably last month, I got a call from an investor. We sold a theater to the Children's Hospital of Philadelphia. Investors like called me and said, what is the Children's Hospital going to do with a theater? And I'm like, I don't think they're going to use it as a theater. I think it's 20 acres and very good. And you look at that deal we -- or the one in California, where we sold to Costco, we bought that theater for $19 million, operated for 20 years, and we sold it for $24 million. So from an ROI standpoint, if you own good quality real estate that in the end is what creates value for you. Most of our theaters are in large metropolitan areas. They're generally 15 to 20 acres. So it's -- so we've sold these -- it's really about highest and best use. We've sold for retail. We've sold for office. We've sold for multifamily. We've sold for any variety industrial. So again, we started off, I think, originally with 24 or 25 theaters. We have one left. So we've gotten through that process. We achieved candidly better results. When we put our plan together, we outperformed those and got better results than we thought. And then as I said, the underlying theater business is -- it's a different business than it was in 2019. In 2019, we had an $11.3 billion box office and the average spend of the consumer on food and beverage was about $4.20. Now it's, call it, somewhere $9 billion, $9.5 billion box office, but the average spend on food and beverage is closer to $8. That's 80% margin business. I don't know -- I don't want to scare you guys, but they don't pay a lot for that Coke and popcorn that you're paying for. So it's a really good margin business. And you look on an EBITDA basis, an $11.3 billion box office is the equivalent of a $9.5 million from the EBITDA generation. So the business is -- and as you said, we've got more titles coming. You have -- Amazon bought MGM. Two years ago, they did 7 titles. This last year, they committed they want to do 13 a year. And so again, Apple just had their first real financial success with a title with F1. I mean they've done other kind of, what I would call, more art product films, but F1 generated $600 million. So again, so they're more enthusiastic. Paramount, Skydance that bought Paramount doubled down and said, we want to do more theatrical releases because they see that as feeding their ecosystem of further down streaming. So again, the business feels very good and stable. Opportunities are great. We've kind of cleared out a lot of the distraction. So we -- like I said, we think we're really well positioned as we move into '26.

And as you kind of think about the kind of portfolio compositions, do you kind of think rough targets around...

Yes. I mean, again, what we would say is if you look at the investable universe of experiential theater business, if you think about it as a total, is probably about 20%. So would it be ideal sometime to get our portfolio representative of that investable universe? I think that would be a target. That's going to take time. As I said, we're not -- we're at a position now to where we're not going to dilutively do something for the sake of saying we did it. If we -- there are more transactions trading in income-producing theaters now, we're starting to see that. That asset class is gaining in interest, but we'll just have to see how that plays out.

And then maybe turning over to Ben and just sitting in this new seat, I guess, where do you start? What are kind of the things that you were kind of looking at or focusing or carrying a similar strategy or maybe broadening out to different categories?

No, I think it's exactly as Greg said, really, building on the momentum and continuing what the team has already done very well and just kind of getting that momentum at the inflection point of going into growth as we enter next year and round out this year. The depth in the existing verticals is there. There's breadth and depth. So it's continuing to do what the team has been doing very well and keep that going forward.

Great. And you mentioned kind of this $500 million go forward, maybe near term more on the income-producing side. I guess, is there still an opportunity to do kind of attractive development deals...

There'll be aspects of that in there. I mean, we still have, as Ben referenced, long-term tenant relationships that we've built over years, and we've continued to help them grow. I think there is also -- I think we want to demonstrate our capabilities and you demonstrate that with acquisition. I mean you show -- but nobody sees the results of a development for 18 months, whereas we want it to be more impactful in '26. So I think it will lean more into the acquisition side. It doesn't mean that we will not have developments because, again, either if it's an existing tenant or to do something on a really strong new relationship, we would definitely take a look at it. But most of the opportunities that we're looking at now are on the acquisition side.

And I think just kind of seasonally, you had some new product come online, maybe just early trends. How is that going?

Again, I would say generally speaking, the tenancies are hanging in. There's no doubt, and we've talked about it. I think on incomes below $100,000, there's clearly more stress than there is above that. But the correlation is often kind of -- it's interesting. If you think about the theater business, generally, if you map recessions, theaters outperformed during a recession almost every time. I mean, because notwithstanding, I always enjoy the fact that I'm in New York, but the average ticket price in the U.S. is $10 to go to movie. So yes, a parent can take -- and children's prices are half of that. So for most of the U.S., a parent can take 2 kids for $20. And everybody thinks I'm a [ lier ] who lives in the city, but ...

I'm going to tell you what I spent on Superman.

Okay. But -- so that's a little different. Like I said, you see sort of more softness in something like a Six Flags where an average ticket price is $80 to $100. That consumer is a little less affluent. That's their vacation. That is what they're doing. And if you take a family of 4, that's $500. So again, that's -- so we have seen a little bit of softness in there. You look at a Topgolf, that's $125-plus. That's been quite resilient from what we've seen. So it's not -- it's also interesting when we look at like fitness and wellness and people will often say kind of consumer discretionary. For a lot of people, fitness and wellness is not discretionary anymore. That is they've inculcated that into their lives for their physical and mental well-being, they need to have that aspect of it. And we've seen actually increasing trends in that more than anything declining.

So maybe just in terms of kind of rent coverage better in fitness and wellness and theaters...

Our actually rent cover -- overall rate coverage went up in second quarter. But I've just given you an insight as to where kind of things. We'll see how it comes through on third quarter, but that was through June. So that's -- again, we're not seeing like cracks. I spend a lot of time talking to our tenants and getting their kind of feedback and what's going on in the market and what are they seeing. So I try to understand these trends. But often, most of these things other than maybe a little -- and it takes a lot to move the needle. It's -- we're net lease. So it doesn't directly impact us about whether we're going to get paid or not. But if people are interested as a proxy for the overall economy, how are things doing.

And just to kind of talk about the strength of the portfolio, I think this year, your percentage rents came in, in the first quarter, much higher than expected. Maybe just thinking about the way that these different leases are structured, is that potentially a headwind next year? Or how do you think about?

Again, we say this all the time, but it continues to perform. I mean, again, we've seen that -- the biggest component of our percentage rent as an actual thing was our Regal restructure and Regal delivered. If you look at the chart we gave, I think Regal will be pretty right close to that exact number. So we hit our underwriting and everything done. If you look at that business, the current forecast for next year are up over this year. So do you have certain things that go down a little bit and other things go up a little more? I think it's been remarkably consistent. And so I -- we will see when we kind of give guidance next year. But I think as we set up right now, I don't -- Mark, I don't...

Yes. Note that the casino transaction, which, by the way, hasn't closed yet. They have not given us notice. They need to raise the bonds. We're in great shape, whether it happens or not from a capital perspective given our low leverage. But what I want to comment on part of that component, there's a percentage rent component to that casino. So when we quote the cap rate, it will be inclusive of some percentage rents, we'll talk -- we'll provide more clarity on that. So that will go down, but the transaction is such that we'll redeploy. It's a good thing. We did have some out-of-period percentage rents in Q1 that we called out that won't repeat as well. As Greg said, that's kind of offset by the fact that box office should go up, therefore, Regal percentage rent should go up. And then you have tenants from time to time that hit a breakpoint -- I'm sorry, hit a rent bump where it moves from minimum rent from percentage rents. The line item percentage rents could change, but our overall income statement doesn't. So there's a lot of dynamics there, but we feel good about the ongoing percentage rent profile.

And maybe just also on -- it was a very good ski season. I guess, do those also come with the percentage rent and how we think about like weather impacts?

I mean we -- first, everybody should know there's not a segment that we have that doesn't have percentage rent. Maybe 1 or 2 leases don't, but most everything we structure with a percentage rent. And yes, ski is paying percentage rent.

Part of the out-of-period was ski related and one asset that we got in the first quarter. So that will change. But as far as the performance, we would expect probably to be pretty similar in the ongoing performance of...

These out-of-period things that carry cash because we periodically audit people.

And there's...

Maybe they take liberties that we figure out and then we agree to make that right and make that payment. In ski, it's a lot of it about how you allocate pass revenue, as you can imagine, because the pass business is the driver. And so we got to the bottom of that.

And then kind of any updates on the operating portion of the business and Kartrite...

So I mean, again, as we've said, we're really down to 4 theaters, and they kind of reflect box office. And so clearly, there trajectory is positive. The other major issue is Kartrite, which is our water park hotel up at the Catskills, which we've talked about extensively. We did that to activate what is this gaming thing. But the challenge there, and I'm probably not telling anybody is operating a hotel with union labor is -- again, if we take the revenue line and apply the margins of our other water park hotels, we would love that property. But somehow in that environment, all the money seems to go away for one reason or another, and it's basically a breakeven to slightly losing proposition.

And by the way, when you compare year-over-year, last year, we had 7 operating theaters. This year, it's 4, a little bit of apples and oranges comparison year-over-year. But I think one thing going from 7 to 4 is part of the simplifying the story element of what we're trying to do, less operating properties. We're not doing operating properties going forward. We went from 7 to 4 on the consolidated...

And those will probably continue to go down.

Yes. And we're down to only 2 unconsolidated JVs that are operated. So the story is getting simpler, I believe, which is part of our objective. And yes, and as Greg said, those theaters that are left are kind of right in the box office wave, so they should continue to do better.

And kind of the plan is to completely exit operating? Or is it good to have a little R&D...

We'll keep -- there -- it's an interesting thing about theaters. So I hope no theater companies are listening to this is if you operate a theater, there's a service. Every theater in the country is pulled nightly to get box office data. And what you can do if you're operating properly, you get that and you could actually see all that data for the entire country. I think we'll keep at least one for that aspect of it because it is really good data because you can -- you actually have a peer into every one of the competing properties you're up against as far as kind of how they're performing. I think -- I don't know that we need 4, but they're making money now, and we're just waiting for the right opportunity to exit like we did in California. Costco comes along and says, hey, I'd love to do this. We're not hell bent on being in that business, not at all.

And then maybe going back to this $500 million per year sort of like how are you thinking about the financing for that? Right now, you have this great cost of capital from the dispositions, but over time, how do you think about that spread?

Let me comment on that.

Yes. You're the CFO.

No, I want to say something. So we talk about the fact that even if this casino transaction doesn't happen, we're 5x levered, right? If the casino transaction happens, we go quite a bit under 5x. Our stated goal is 5 to 5.6. We have quite a bit of room, actually a lot of room either way to do transactions in the near term, very accretive transactions with low-cost capital that don't necessitate the need to raise equity. Beyond that, I think as that -- as theater sentiment has improved, as we start executing on that growth, I do expect that our equity price will probably continue to rise, which will lower our cost of capital. And then we're in a mode where once we get through this capital, we're in a place where we could raise equity and do incrementally more. If you look kind of pre-COVID, we were doing $500 million to $600 million a year. Like Greg said, generally kind of a bigger transaction combined with some smaller transactions. We generally think of that as -- but for the case we're in, it's sort of 60-40 funded. It's 60% equity, 40% debt, just to kind of keep our investment-grade ratings and kind of stay leverage-wise where we need to be. But that creates -- you probably got a little bit outsized creation here in the near term, but that creates about 4% to 5% FFO growth, combined with a 6% dividend today, that's double-digit returns. And that's what we did for 20 years prior to the COVID that created those outsized returns. You got a nicely covered dividend that's outsized today. Hopefully, that comes down as the stock price goes up. But today, it's a nice sized dividend. Combined with that growth, we think we can deliver really attractive shareholder returns.

The only other thing I'd add to that, and Mark can comment on it is beyond that, we're probably generating somewhere between $130 million and $150 million of free cash flow beyond that. So again, if you start to look at all those components and we get back to a reasonable multiple, all of a sudden, that creates a really nice kind of setup for delivering that level of growth.

And then just thinking about kind of investment spreads kind of when you were in this pre-COVID environment with this nice kind of 4% to 5% FFO growth, kind of where would those average historical investment spreads? I think this year and next year, they'll be much wider. And then do you see them coming back to that range? Or...

I would say we always talk about is -- it's just the reality. We talk about targeting a minimum of 100 basis points. I would say we probably realized closer to 175. Yes. When you say it doesn't mean if you wanted a new relationship, you wouldn't go to the minimum and you get more in a little. But I would say, it generally would run around 150 to 175 on an initial cash-on-cash yield. Clearly, that would be higher on a GAAP yield, but...

And higher on an IRR with escalators as well.

Maybe just talking about rent escalators. Is there any change in kind of how you...

Everybody is trying to push a little bit. Remember, we came from a period of 10 years where we all kind of anchored into kind of 2% and then about 2012, every tenant started pushing back, and we had some deals in there that got down to kind of 1.5%. I think we're on the other side of that where people are trying to push a little bit above 2%, whether that's 2.25%. That will be a discussion. But clearly, we try to anchor on where inflation expectations are and try to have those discussions with our tenants.

One near-term catalyst that we talked about is AMC, a larger tenant has its first rent bump subsequent to the deal we did with them. And that hit July 1. That's a $6 million increase in rent. So we're going to get kind of $3 million this year back half and then that annualizes next year. So some of these are not always 1.5% to 2% per year. Sometimes they're every 5 years, and that...

Wouldn't be a cumulative 10%...

10% every 5 years. So you get that 2%, but it doesn't necessarily hit every year. And that's just a larger tenant just want to call out that's kind of a catalyst.

Are there any other kind of onetime or step-ups occurring kind of...

The only reason they're on a cash basis, which most of them would not be -- so in that...

There's a whole list of -- some of them are annual, some are every 5 years. They kind of tend to average out. It's just when you have a large tenant, a larger tenant, it becomes more significant. And as Greg said, that one happens to be FFO and AFFO because it's not straight line.

And then maybe if you could just remind us like how much of your APR is like on a cash basis?

Really, for any significant [ AMC ] -- we have one tenant that still has a back deferral, but effectively, they have good coverage. They're paying the rent. We set that level such that they had an EBITDA threshold that if they exceed, it was set pretty high. So if they exceed that EBITDA threshold in theory, that could get repaid, but we're not guiding to that or anything like that. So -- but yes, AMC is really the significant tenant that remain. And their coverage is improving. They're paying every month. By going accrual, you'd just be booking a bunch of straight line, and there's not much benefit of doing that anyway.

Anything from the audience? Michael?

Yes, please.

You mentioned you have $500 million investment. Just wondering if [indiscernible] costs goes way it's your plan. We will have room to look at [indiscernible]

Yes, we have more than that. I mean there's no doubt that we have more than that, and we can move that and scale that up. Again, I think it's what we tried to set is reasonable expectations of -- I mean, we had a $250 million. We're saying we're probably taking that up to closer to $500 million. We're doubling what we're doing. I think what we would love to do is underpromise and overdeliver. That is the mindset that we've done consistently over our years of existence. And I think Ben and his team have got a lot of things in the works. I think we feel that things are moving our way. And like I said, we've kind of cleared out all of the -- to a large degree, the negative discussion. And I think now the focus is going to be about growth, and I think we're going to be able to deliver that.

Sure.

[indiscernible] And secondly, is there a situation that you can...

Again, I think what we always looked at it, Michael, was the idea that the greatest inflation protector was the idea of -- we didn't give up to do that. We didn't give up rate. We didn't give up escalators. So we always looked at this as just a kicker. Now let's set Regal aside because that was a research. So for most of our products, it was the idea that if inflation ever kicks in, we'll be able to ride that out. Nothing ever stops a tenant from calling us and saying, listen, I'm paying you $2 million, what if I paid you $1 million in fixed rent, would you take that? They might do that. But right now, it's variable for them. It is based on their performance. The reality is it's worked out very much in our favor so that it is a significant contributor. So I still think in an inflationary environment, it is a much better tool than just a 2.5% rent escalator. Yes. But we get to ride up as our tenant rides up. And if our -- it's also a good indication for you guys to understand our properties are doing well, meaning they are paying actually -- a lot of these are set on natural breaks where you say rent is going to be 10% of revenues. And if it exceeds 10% of revenues, we participate. And that means that clearly, revenues -- your rent, that's a proxy for coverages are improving because you're getting paid and you're actually driving down your occupancy cost. So I think we like the structure. I think it lets us -- like I said, we didn't give up economics to get it.

I mean, the other way, we don't even -- Regal aside, we don't even underwrite it. It's extra. Like if they perform really well, we want to participate. So it's an inflation hedge, it's extra income for EPR. In other words, we underwrite the deal. We're happy with it. If they perform really well, we're going to get extra is what it is. Now Regal is a different story. That got set at a different time, coming out of their bankruptcy was set at a low. That was a compromise.

That was a bet by us saying we think the business is coming back, you want to set a low rate. We'll set a low rate -- a lower rate, but we actually want to participate. Again, would it surprise me that we get a call from Regal in the near future with the projections on how much they're going to pay? I mean, our bet was good. I mean we're going to be significantly -- we had projected that kind of with that at a $9 billion box office, we'd have a 97% recovery of everything. We're going to be at that or better. So again, the bet was the right bet to make for us.

Yes, they wanted to set box office on where it was at the time. We knew where it was going. The compromise was a percentage rent structure for Regal. And that's about 1/3 of the percentage rents. The other percentage rents, I would just characterize as gravy because the investments have [ gone away, ] and they're paying us extra because they exceeded the thresholds.

So I have 3 quick rapid-fire questions that we're asking all the REITs at the conference. When the Fed starts to cut, do you expect rates for long-term debt to decline, stay flat or potentially rise?

My bet would be stay flat or rise. I hope I'm wrong.

Last year, the majority of companies stated they're ramping up spending on AI initiatives. How would you characterize your plans over the next year, higher, flat or lower?

Definitely higher. We're all -- I mean, again, I have challenged each of my direct reports. So we have finance, assets and then we have administrative legal of how we can incorporate elements of AI. Again, that's a discussion we had at our Board level.

And then do you believe same-store NOI for your sector will be higher, lower or the same next year?

I think ours will be slightly up.

Great. Thank you so much for the time.

Thank you, guys.

Thank you, everyone.