EPR Properties ($EPR)

All right. Maybe we'll get started here today. Good afternoon, everyone. My name is Upal Rana. I'm the senior REIT analyst at KeyBanc Capital Markets. Thank you for joining the EPR presentation. We are joined here by Greg Silvers. Chairman and CEO. I'll have him introduce the rest of the team.

Sure. Thank you. To my right is Ben Fox, who is our Chief Investment Officer. And to my left is Mark Peterson, who is our Chief Financial Officer.

Great. Greg, for those in the room who are not familiar with EPR, maybe you can give us a quick overview of the company, what you own, how the portfolio is structured and maybe what differentiates EPR from the rest of the net lease REITs.

Sure. First of all, it feels a little bit like my college class is everybody sitting in the back of the room. There's plenty of seats up here in the front. We won't call you out. But EPR, we're organized as a net lease REIT. Again, that's our primary, but our focus is different than most of what I would call the retail world. Our focus is on what we call experiential assets. Those are generally not where you're buying a product, but you're creating an experience. We deal in the world of memories. And so whether that's the movie theaters, whether it's amusement parks, whether it's water parks, whether it's ski properties, whether it's Eat & Play attractions, Fitness & Wellness. That is our focus. So we're unique in that way. We're the only diversified experiential REIT that's out there and have delivered what we think are really strong and exciting returns and feel like our unique space gives us an opportunity to recreate those returns for the foreseeable future.

Great. And the experiential economy has been a popular secular trend recently. Can you talk about the durability and the resilience of your portfolio today, especially in today's economic environment?

Sure. I think, first of all, remember when we talk about the experience of economy, if you look at now what will be '24 to '25 the experience economy grew by 7%. In the face of what was a challenged consumer, they continue to grow. People -- the economy of experiences as opposed to the economy of stuff has continued to be valued and continue to grow in value with the consumer. Our overall portfolio has been incredibly resilient. Our coverage, which is 4-wall EBITDAre compared to our rent has been remarkably stable over the last 2 years, generally in and around 2x. So again, it's -- we really haven't seen the degradation. The consumer seems to be hanging in very well with our properties. And if you look across the board, I mean, in different areas, the theater space right now, box office is up 12% through May 31. So again, if you look across a lot of our categories, we're seeing actually positive trends. So notwithstanding that, we're not acknowledging the stress on the consumer, it's just not manifesting itself in our experiential properties.

Great. It seems like growth has been a central part of the EPR story lately. The company has had a great start to the year. [indiscernible] earnings, raised guidance. Earnings is implying about 6.5%, which is at the high end of some of the net lease peers. You've also raised investment guidance up to $550 million. What's driving that acceleration? And how sustainable is that?

Again, I think for us, it's really getting the cost of capital that makes driving investment volumes greater as we came in this year. We created a focus on driving those volumes. The opportunity set is there. Like I said, we are unique in the property types that we pursue. So we think we're uniquely positioned to take those. So last year, we did probably $270 million, $280 million. This year, our targeted range right now is close to $550 million. So again, but -- last year, we did 5.1% growth. This year, I think right now at our guidance range, midpoint is about 6.5%. So I think we're well positioned not only to continue to replicate that and given our size that with the investment volumes that we're able to attract that we could do that for the foreseeable future.

And I wanted to touch on your recent acquisition, the $300 million Six Flags acquisition. It was one of the company's largest post-COVID. Six properties have already closed, there's one left. Can you give us the latest update on where things stand how those parks are performing relative to your underwriting and how that's impacting your growth this year?

Sure. They've opened all within the last 2 weeks. So the performance to date is looking really well. I mean, again, it's nice. So remember, those are parks that generally Memorial Day to Labor Day are kind of the they have certain weekends after that, but that's primarily. Now again, I'm probably the only person who's out reading Yelp reviews of amusement parks, but -- and it seems like things are going quite well. I think what we suspected was that Caesars -- Six Flags and Cedar Fair merged, and they created a company of about 55 parks that some of those were not getting the attention that they needed. So when Six Flags came to us and talked to us about a transaction, we selected some parks to do to work with operators that we felt had a strong underlying consistency in their performance that just needed someone that, that was their priority to that. So we worked with various operators who could meet all 3 of the criteria. One, they had expertise in running parts of this size; two, they could bring capital not only to pay for the operations, but to prefund both deferred maintenance and maintenance capital reserves for the parks. And so the operators that we worked with were able to do that. I think, clearly, they've got a real focus on making these parks stronger. Like I said, we bought them at, we think, are very, very attractive pricing, and we feel like we're well positioned as it moves into their operating season.

Great. That was helpful. And then maybe we can touch on the golf segment. It's been a meaningful new vertical for the company. EPRs property acquired 5 properties golf course late last year in Dallas for $91 million, which is part of the health -- the Fitness & Wellness category. Topgolf is part of the Eat & Play categories as one of your largest tenants. So how are you thinking about the golf thesis and what the pipeline looks like there?

Yes. And we'll segregate those this a little bit for one, what we call traditional golf, which really has caught our attention, mainly because of the supply-demand dynamics. There's been about -- since about 2008, there's been about 4,000 golf courses that have come offline. And so the demand dynamics have totally changed. And therefore, we are able to what we think purchase non-replicable assets that have tremendous amount of demand. And so we feel like we're able to buy these attractively. We like the setup. The operators, again, consistent with what we've said before, bringing capital. They're committed to the property, signing long-term leases. So we feel like we're in a good position. On our Topgolf -- again, it's been very, very resilient for us, high coverages. Again, when we think about Topgolf, there's a lot of noise. But remember, this is a company for the first 15 years, they never even marketed. They just opened the doors and people showed up and waited in long lines. So now they're having to get out there and compete for time. So they're dynamically pricing. They're looking at their marketing, but the underlying fundamentals as far as foot traffic and everything remain very high. So we're pleased with both of those options.

Great. So beyond Six Flags and Golf, what else are you seeing that's the most compelling new opportunities today? Are there any other verticals or property types that you're actively exploring?

Yes, but I'm going to -- as you guys have heard enough from me, I'm going to let Ben who runs our investments kind of give us a little bit about what he's finding exciting now.

I think what we're finding exciting, Greg, right, is that there are just ample opportunities across all of the sectors. And I think a theme that Greg is touching upon, whether it's in golf or attractions is the experience economy is benefiting from secular tailwinds from demographics, whether that's Gen Z on one end or the baby boomers on the other end, whether that's across Fitness & Wellness, other experiences of Eat & Play attractions. Consumers are voting with their wallets and they are choosing to spend on these experiences. And with that, there are a lot of entrepreneurs and existing businesses looking to continue to capitalize on this spending. And we are the partner of choice, given the depth of our investment team's relationships and breadth where often the first and many times the only call being received in order to partner with these operators as they look to grow their businesses and expand.

Yes. And Ben maybe we can touch on that a little bit more on just the sourcing of the deals. Is there something that you guys do that's unique in terms of sourcing more of these deals and top of funnel opportunities?

Yes. Well, that's really what the team has done so well is foster relationships over multiyear periods, right?

Hang on, just get a picture. We got to look good here.

The -- it's the rare exception for us to have a shiny package put in front of us. Most of the time, it's our team working with folks in the industry who might be new to doing sale leaseback or using net lease capital and we are working with them and creating these relationships, some of which take 2, 3 years to develop, and it creates a very attractive moat for our business in these relationships.

Got it. That was really helpful. And then maybe we can touch on capital recycling a little bit. You've had some success in reducing some exposure to theaters and some of your education portfolio. Maybe you can talk a little bit about the progress you've made over the last few years and what's really left to do there?

Yes. I'll take a little bit. I think part of our -- kind of our capital planning really comes into perform as we talk about 3 buckets. If you think about our free cash flow, which is about $140 million, if you talk about dispositions, capital recycling, and then you talk about raising equity. And we talked about in the first quarter, we raised about $50 million on our ATM program. So you look at those 3 buckets. And of those, the dispositions is really that and the ATM is one that we can expand greater. We've said there's 2 categories that we're looking to reduce our exposure into. One is our education which really is not as much as a risk issue as it just strategically doesn't fit in an experiential focus. So we're committed to kind of recycling that capital and then lowering our theater concentration. So in the last couple of years, we've done a significant amount in the theater side. We probably sold 35 theaters. This year coming through, I think you'll see us a little bit more on the education side, selling some of that. But all of that is to build that pot upon which we can reinvest. There's been really good in our education side, a real good spread for us to sell and then redeploy that capital. So we think that creates really good opportunistic recycling.

Great. That was helpful. And then maybe we can just touch on the theater segment of the portfolio. It's typically one of the largest segments within the portfolio. And it seems like the industry is starting to pick back up again since COVID. Maybe you can talk about some of the dynamics of the theater industry and relative to your portfolio? And what's sort of changing there?

Sure. I think there's just generally some overall positive that have occurred in the last couple of years as we kind of got through COVID and then through the strikes. We've got a much more recognition of how streaming in the theater system are going to exist. And you've got all of the studios now recognizing that they actually exist quite comfortably. So this last year, we've had Paramount announced that they want to do 30 films a year. You had Universal who was a different in the shorter window period, they used to say that some period would be 17 days. They announced that they're going back to a full release window, 45-day window. You have Netflix who just announced they're going to do their first full theatrical release with Narnia. So again, another part of content you have. And then what you've also seen is what were some smaller studios now really gaining traction with what you saw over the last weekend, 2 weekends with Obsession and Backrooms, two A24 studios that releases that did both at over $100 million. So I think what fundamentally the ecosystem is realized is that the consumer doesn't punish you for releasing 2 theaters and then showing on the streaming platform. So it gets the studios two bites at the apple to revenue sources. So they're all sort of embracing that that mantra. So again, what it really has has created a really kind of positive outlook in the space. And so the forecast not only for this year but next year and beyond is for escalating box office, which should play very well to our underlying portfolio.

And then maybe you can talk about where is the theater business today relative to -- prior to the COVID, maybe some of the economics and maybe there's a food and beverage component, the foot traffic content that you've already touched on.

Sure. It's really -- if you look at the business on an EBITDA standpoint, from a Box Office standpoint, in 2019, we had $11.3 billion Box Office. But we also had a food and beverage component that was about $4.20. That's per person. If you forward now, we have a box office this year that's expected to be about $9.5 billion, but a food and beverage component that's $8.75. And notwithstanding what you may know or believe that it's pretty high margin business in that food and beverage. That Coke has got a lot of good margin in it. And so actually, from an EBITDA standpoint, those 2 are equal. The EBITDA from an $11.3 billion Box Office with a 45% margin and a food and beverage now at $9.5 billion with $8.75 with an 80% margin. the total amount of EBITDA that those 2 sites correct, are equal. So we are back -- we will be back to the same level of EBITDA that we achieved at pre-COVID this year. So again -- and now as we start to move past that, like this year's expectation is somewhere between [ 9 5 and 9 7 ] Box Office next year. [indiscernible] $10 billion. Now we're moving ahead as far as where we're at as total EBITDA contribution.

Great. And how do you expect the theater business at trying for the rest of the year in terms of content?

It should be -- I mean, again, the content is pretty well laid out right now. What's really exciting from somebody who's in this business is the depth and breadth of the content. So if you think about just in June, we really have it's not dominated by a super hero. Really, you've got family product with Toy Story and Minions. Then you've got full on dramas with Steven Spielberg film called Disclosure Day followed up by another Christopher Nolan product called The Odyssey. So again, and now we just had two $100 million horror pictures in there. So it's really expanding the depth and breadth of the offerings, which is really -- it's -- we've always said it's a content business, meaning the more content flows, the greater the box office results will be.

Great. That was really helpful. And maybe, Ben, if I can bring you back in. Could you walk us through how EPR underwrites new investment? What are some of the key attributes you look at? And how you decide to pursue or pass on certain properties?

The underwriting process is really rigorous. And to put it in perspective, the underwriting team and investment team, I'd say probably 80% of our team has a CFA, right? That's the starting point. And in terms of the process, before we enter into any new industry where often we talk about the demographic themes in that. So we write a white paper on the industry covering all of those dynamics from a macro perspective, down to a micro, thinking about the landscape of operators, total addressable market and even down to the unit level economics. So that we set a very strong framework within which we construct our investments. When you then fast forward into reviewing the actual opportunities, given those relationships we talked about earlier, we see a really great breadth of opportunities, which allows us to be selective in what we're pursuing with a very high focus on the credit of the operator, those unit level economics that we have already kind of identified what works and what doesn't. And then, of course, heavy emphasis on the underlying real estate and finding those opportunities to check the boxes across all of those categories.

Okay. Great. That was helpful. Maybe we can touch on [indiscernible] health today. Coverage remains pretty solid at 2x. Are there any tenants you're monitoring or anyone on your watch list? Maybe you can discuss some of the metrics you monitor to stay ahead of any kind of potential credit issues.

I mean, generally speaking, like I said, it's -- we're in a pretty good space right now. Again, coming out of COVID, we kind of dealt with a lot of issues. We're always on the theater space looking at AMC. They're performing on a unit level basis. But when you ask about how we monitor and I'll let Ben add if you want, it's not only looking at your properties, but it's looking at your tenant, so is -- and then your industry. What's the industry doing? What's your property doing? What your -- what is your tenant doing? Because your tenant -- you can have great properties, but your tenant gets in trouble, you can have a not so great property, but I mean, you can have a great tenant but a not so great property and then the industry. So those are the ways by which somebody gets our attention. But I think overall, we feel like we're in as good a place as we've been for a while.

And maybe we can touch on the consumer a bit with tariffs, elevated gas prices and a bit of uneven performance across income cohorts. Are you seeing any impact from guest visitation or spending from your tenant locations?

We haven't yet. Like I said -- and we do this generally through conversations with our tenants. Again, it's easy to look at the theater business as reported deadly, kind of what Box Office is doing. So as I said, it's up 12% through last Sunday. So again, it's clearly doing but it has a history of outperforming during recessions. If you go back and match it to every recession, the theater business outperforms. The attractions business has just really, as I said, got started. It's really kind of a Memorial Day to Labor Day kind of business. Now when we talk to our tenants, they're actually excited because they think that most of our properties are located somewhere 2 to 3 hours and around measurement [indiscernible] and that people will be doing more staycations, we're not driving as far. So they're actually encouraged by that. But knock on wood, right now, we're not seeing it, but we're very mindful of that out being out there, and we're monitoring.

Maybe you can touch on some of the different types of Gen Z versus some of the boomers or millennials. How are they kind of playing into how your portfolio fits together?

Yes. And I'll let Ben add -- I think for us, it's really important to understand that those are the 2 largest demographic groups and therefore -- and what makes them very interesting is, one has all the money and the other one wishes they had all the money. And so there are -- and what we're seeing now is multigenerational opportunities, meaning if you go to our ski properties, you will see multigenerations there. Somebody's putting the bill for it, but they're there, and that's the way they're coming together and especially what we see in Fitness & Wellness. It's 2 different perspectives. One, for millennials, most of their lives, they have incorporated fitness and wellness into their lives. It's no longer consumer discretionary. It is just what they do. For those of us who are a little bit older, we just want to live longer. So we're doing everything that we can to do that. And that's more on the wellness side. of that. So some of our business is focused on different aspects of that. But it's a way to lean into those -- both of those phenomenons that allows us to capture both ends of that spectrum. But Ben, I don't know if you have anything more.

No, I think that's exactly right. And just to add on that, really, the wellness side captures all of it. And when you think about the Gen Z, the youngest cohort, even alpha, and the concept of iPad kids and the children wanting to be plugged in, the opposite is really happening, right? They are 40% of attendance in movie theaters. They are craving and seeking in real life experiences and the properties in which we invest, facilitate that human connection where groups of friends can gather away from devices and cannot be disintermediated through the Internet or artificial intelligence.

That was really helpful. And maybe we can bring Mark into the conversation. Maybe we'll talk about the balance sheet a little bit. We've talked about the company is on its way to growing earnings. Maybe you can discuss your funding strategy and your overall balance sheet strategy today?

Sure. Maybe given that there's only 6 minutes left, it tells you maybe our balance sheet is in great shape, but there's not a whole lot of questions. But we are in great shape. We finished the quarter at 4.8x leverage. Our range we generally operate is 5 to 6x. So we're underlevered at the end of Q1. We had nothing drawn on our line of credit and $68 million of cash in the bank. If you roll forward our investment guidance on the use side and our debt maturities. We do have debt maturities in August and December this year on the used side. And then on the source side, the cash flow that Greg talked about, the $140 million of cash flow on an annual basis and you run it through that dispositions. It kind of points to at least one debt deal, let's call, it $500 million would put us at about $300 million on our line at the end of the year. So one debt deal is kind of what in our planning, we still end up in the low 5s, below the midpoint of our leverage. Now given the growth and given the pipeline that we have, we would look to raise -- we raised $50 million of equity, as Greg said, in the first quarter. We would look to incrementally raise more equity should our stock price allow and potentially also look at a second bond deal or debt deal. That could be in the nature of a term loan because we have that capacity pre-COVID. We had a term loan. So we have that source. And of course, we could do a second public bond. So we have a lot of flexibility. We don't need to raise equity, which is a good place to be, but we will look to incrementally raise equity if the price makes sense to raise that and do additional volume.

We've got a few minutes left. If anyone has any questions, please feel free to raise your hand or ask away.

Sure. I know you've got questions.

Okay. So [indiscernible] let me make sure I hear that the [indiscernible] not going away the [indiscernible] High gas prices, like you answered the first half which I think is, is that in the short term, because it's roughly Memorial Day to Labor Day as a little too early. Think of that [indiscernible] now thinking longer term gas prices stay high for the next 6 months. Has that changed or influence the type of acquisitions are we looking at.

Again, we'll factor it in, it may end up how we -- what we pay for them. I don't think -- I think we think these trends are long-term trends that people are not giving up these activities. It may factor into what we pay for them as that. But I wouldn't see us changing up what we're buying.

What's your embedded combined rent growth?

Generally, it's about 1.5% to 2%. That's kind of changed. If you said that's -- remember, this is our 25th year. So again, over time, that's changed here lately. We're probably accelerating that a little bit, probably 2% to 2.5%. But if you look at the whole kind of portfolio.

And weighted average lease tariff?

12.

Anyone else? Okay. Maybe I can add one more question on my side. I kind of have to ask AI question.

Sure.

How are you guys utilizing AI in either asset management or underwriting? Or could it be a potential differentiating factor in the future for the company?

Again, I think we're trying to incorporate it in both of those areas. I mean, again, one example is we generally have a report that talks about what's going on in our tenants or our industries and our asset managers used to kind of compile these report. Now it's like the push of a button, and it's daily. So that's amazing. And we're using it in assistance with our underwriting. So I would say it's more of an enhancement. I don't think we've eliminated any positions as a result of it. But I think we are seeing how it can be a tool that can expedite what we're doing and get further efficiencies.

Got it. Okay. And maybe tying it all together, what should investors and the people in this room take away about EPR and where it's heading.

I think it's really positive. I'll give you -- I give you 4 numbers that you could take away 65, 71, 51, 65. These are not our ages. These are -- that's our 2-year, our 3-year, our 4-year and our 5-year total shareholder return. That's top of the group. That's an average on any year, if you look at it, of at least 13%. That is what we have delivered consistently. And the best indication of what we are going to do in the future. is what we've done in the past. If you look at pre-COVID to 2019, that was our 20th anniversary, 1999 to 2019, the #2 TSR of all REITs. So again, being in what we do and being able to own a space to underwrite it, to identify and to deliver on that allows us to produce these kind of results. So we want to thank you for your time and attention. And as always, if you have any questions, don't hesitate to reach out to us. Thank you.