EPR Properties (EPR) Earnings Call Transcript & Summary

Hello, and welcome to the EPR Properties Q3 2026 Earnings Call. [Operator Instructions] Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. I will now hand the call over to Brian Moriarty, Senior Vice President, Corporate Communications.

Thank you. Thanks for joining us today for our third quarter 2026 earnings call and webcast. Participants on today's call are Greg Silvers, Chairman and CEO; Ben Fox, Executive Vice President and CIO; and Mark Peterson, Executive Vice President and CFO. We'll start the call by informing you that this call may include forward-looking statements identified in the Private Securities Litigation Act of 1995 by such words as will be, intend, continue, believe, may, expect, hope, anticipate or other such comparable terms. The company's actual financial condition and the results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of those factors that could cause results to differ materially from these forward-looking statements are contained in the company's SEC filings, including the company's reports on Form 10-K and 10-Q. Additionally, this call will contain certain references to non-GAAP measures, which we believe are useful in evaluating the company's performance. A reconciliation of these measures to the most directly comparable GAAP measures are included in today's earnings release and supplemental information furnished to the SEC under Form 8-K. If you wish to follow along, today's earnings release, supplemental and earnings call presentation are all available on the Investor Center page of the company's website, www.eprkc.com. Now I'll turn the call over to Greg Silvers.

Thank you, Brian. Good morning, everyone, and welcome to our third quarter 2026 earnings call and webcast. Our focus this year has been on accelerating growth, and our third quarter results demonstrate continued momentum across the business. Revenue increased 12%, while FFO as adjusted per share increased 8.8% compared with the same period in 2025. These results were supported by a strong in-place portfolio and a robust pace of investment activity. Our investment spending remained strong throughout the quarter as we continue to broaden our experiential portfolio and establish important new relationships. We entered the live venue category through a build-to-suit development in Portland, Oregon with industry leader Live Nation. We have long discussed the strong sustained demand fundamentals of live performance and our team worked diligently to identify the right initial opportunity. We also acquired a Life Time fitness and wellness property in Irvine, California, further expanding both the depth and quality of our fitness and wellness portfolio. Our portfolio coverage incrementally increased during the quarter to 2.1x. We're also pleased to see box office running well ahead of last year. The third quarter capped off a record summer and year-to-date box office was up approximately 20% through September, driven by a broad mix of genres and compelling titles that continue to bring audiences back to theaters. Our results underscore that the consumer continues to demonstrate that they value and prioritize experiential offerings. We continue to draw on multiple sources of capital to fund our growth. During the quarter, we recycled capital through the sale of a private school property, entered into forward sale agreements under our ATM program and executed a new credit agreement that includes a $600 million term loan. With our credit facilities and forward equity in place, we have the capacity to fund a strong pipeline of opportunities. Given our capacity and our activity to date, we're pleased to raise our investment spending earnings guidance, which represents an increase of 8% at the midpoint over 2025. As our portfolio expands and diversifies, we remain well positioned to capitalize on the continued growth of experiential real estate. With that, I'll turn the call over to Ben for a closer look at the business and our performance.

Thank you, Greg. As Greg just highlighted, this quarter marked several notable firsts for EPR. Our first investment in the live performance venue with Live Nation and our first acquisition of a fitness facility leased to Life Time. Both transactions highlight not only our continuing investment momentum, but also the accelerating diversification of our portfolio. During the quarter, we invested $172.4 million at an average initial cash yield of approximately 8.3%, bringing our year-to-date investments to $664.5 million. That volume includes a new experiential category, live venues, along with continued additions to our fitness and wellness, eat & play and experiential lodging portfolios. Two of this quarter's investments stand out for their exceptional A+ real estate, Life Time in Irvine, California and Onelife Fitness at Tysons Galleria in Virginia, both occupy world-class locations that we believe support their long-term success. In addition to these investments, we expect to invest another $21 million this year in experiential development and redevelopment projects already underway. As we noted last quarter, our theater exposure continues to decline as our experiential investment volume accelerates. Theaters now represent roughly 1/3 of our portfolio, and we expect that share to continue trending toward our long-term goal of approximately 20%. Given our investment pace and the depth of our pipeline, we are pleased to once again increase our 2026 investment spending guidance to a range of $675 million to $725 million. Two points on our pipeline and the current investment environment. First, the breadth of our pipeline is unparalleled in recent memory, and we look forward to sharing some of the exciting opportunities we're pursuing in the coming quarters. Second, on cost of capital and investment spreads, three factors are working in our favor. Our transactions generally have rate protection built in prior to closing, which provides a buffer during periods of market volatility. As we've said before, our biggest competition is debt, not net lease. In this market, debt capital has repriced even faster, so our clients are receptive to conversations on pricing. And because our business is relationship-driven with a proprietary pipeline, we enjoy higher average entry yields, which give us a natural cushion. Turning to the portfolio. At the end of the third quarter, our portfolio totaled $7.6 billion of gross investment value across 350 properties, which were 99% leased or operated. By ABR, 96% is in our core experiential categories represented by 296 properties operated by 61 clients, which remain 99% leased or operated. The remaining 4% is our education portfolio, made up of 54 properties leased to four operators, which were 100% leased at quarter end. Portfolio health remains sound with unit level rent coverage increasing to 2.1x. While data indicate pockets of strain among the lowest income consumers, people's enduring preference for experiences over things continues to support our portfolio. Our portfolio also benefits from diversification across multiple demographic dimensions with experiences that appeal to many generations and income levels. Theaters are a great example. Not only do they span all of these demographics, but they also have historically proven resilient in economic downturns. And most importantly, as Greg has said many times, content drives performance. People want to see cool stuff. This year's box office, which is up 20% year-to-date and on track for its best year since 2019, demonstrates exactly that. We've talked about who goes to the movies before, but with the strength we continue to see across our theater portfolio, a few points are worth repeating. Gen Z accounts for 40% of all moviegoers and in multiple polls, Gen Alpha has said it prefers the big screen. Format matters. People can't replicate IMAX and other premium large-format screens at home, and the industry has created real urgency around seeing certain films in these formats. Our portfolio over-indexes to exactly those experiences. 71% of our theaters have recliners, 84% offer enhanced food and beverage and 69% have premium large-format screens. These features help our theaters generate roughly 8% of North American box office gross with only 3% of screens. Finally, the industry has coalesced around a 45-day theatrical window, which supports exhibitors and spare studios a second marketing push after films leave theaters. Some films will run longer, including the upcoming Netflix release of Narnia with a 7-week window. And it's not just the movies. Young people are lining up for concerts, comedy shows and other live events. They want to get out of the house, and they are hungry for shared experiences. We're capitalizing on this momentum through partnership with industry leaders like Live Nation, whose venue will host concerts and comedy shows. Turning to other areas of our portfolio. Our eat & play segment remains resilient, strengthened by the quality of our locations despite broader industry moderation. Topgolf's positive momentum since the sale continues. Expense reductions and revenue initiatives are delivering results, and our Topgolf portfolio remains very healthy. Attractions performed well in the third quarter with several parks outperforming. As we saw in ski during the winter, geographic diversification and attractions helped offset isolated summer weather events. Our fitness and wellness portfolio continued with solid performance in the third quarter with stabilizing trends at several recently renovated and expanded properties. Finally, our education portfolio continues to face industry-wide headwinds, including higher labor costs, grant funding challenges and regulatory pressure. Despite this backdrop, this portfolio remains resilient. Moving on to dispositions. Reflecting our commitment to accretive capital recycling. In the third quarter, we completed the sale of the British School of Chicago to a public net lease peer, transacting at a cap rate in the low 7% range. Following this sale, we are updating our 2026 disposition guidance to approximately $86 million as we do not anticipate any additional dispositions prior to year-end. In summary, our portfolio remains resilient. Our diversification is accelerating, and we are very excited about the investment opportunities in front of us. With that, I'll turn it over to Mark for a review of our financial performance.

Thank you, Ben. Today, I'll discuss our strong financial performance for the third quarter, provide an update on our balance sheet and close by discussing the increases in our earnings and investment spending guidance for the year. FFO as adjusted for the quarter was $1.49 per share versus $1.37 in the prior year, an increase of 8.8% and AFFO for the quarter was $1.54 per share compared to $1.39 in the prior year, an increase of 10.8%. Please note that this quarter, we have revised our definition of AFFO to no longer deduct maintenance capital expenditures. This change was made to be consistent with most other triple net REITs and is immaterial. All prior periods have been recast to reflect this change and reconciliations from the previous definition to the new definition are included in the supplemental and press release. Before I walk through the key variances, I want to explain two items excluded from both FFO as adjusted and AFFO. First, during the quarter, we had disposition proceeds of $74 million, which included the sale of a private school property for net proceeds of $68.2 million and a gain of $30.5 million was recognized. Second, as discussed last quarter, we entered into a new amended and restated $1.6 billion credit agreement. And in connection with this, we recognized $605,000 of costs associated with loan refinancing or payoff. Now moving to a few key variances. Total revenue for the quarter was $204.1 million versus $182.3 million in the prior year, an increase of $21.8 million or 12%. This increase was primarily due to the impact of investment spending as well as rent and interest bumps. Percentage rents and participating interest for the quarter were $9.8 million, up from $7 million in the prior year, primarily due to higher percentage rent recognized from our attraction and theater properties. Both other income and other expense relate primarily to our consolidated operating properties, including our four operating theaters and The Kartrite Resort & Indoor Waterpark. The increase in other income and other expense versus prior year is due primarily to better performance at our theater properties as a result of strong box office during the quarter. On the expense side, interest expense net increased by $7.1 million due to an increase in average borrowings and the weighted average interest rate on our outstanding debt as well as a decrease in capitalized interest versus the prior year. FFO as adjusted for the 9 months ended September 30 was $4.16 per share compared to $3.81 in the prior year, an increase of 9.2%. And AFFO for the same period was $4.26 per share compared to $3.88 in the prior year, an increase of 9.8%. Turning to the next slide, I'll review some of the company's key credit ratios. As you can see, our coverage ratios continue to be very strong with fixed charge coverage at 3.5x and both interest and debt service coverage ratios at 4.0x. Our pro forma net debt to annualized adjusted EBITDAre was 4.9x at quarter end, which is below the low end of our targeted range of 5X to 5.6x. Pro forma net debt is calculated by subtracting the estimated net proceeds from all forward sale agreements under our ATM program from net debt. Additionally, our pro forma net debt to gross assets was 40% on a book basis at quarter end, and our common dividend continues to be very well covered with an AFFO payout ratio of 60% for the third quarter. Now let's move on to debt and capital market activities and our balance sheet, which is in great shape to support our continued growth. At quarter end, we had consolidated debt of $3.3 billion, of which $2.8 billion is fixed rate debt with an average blended coupon of approximately 4.4%. During the quarter, upon maturity, we repaid in full $179.6 million of senior unsecured notes that were originally issued in a private placement transaction. As discussed in our last call, on July 17, we entered into a new amended and restated $1.6 billion credit agreement that, among other things, extended the maturity date and reduced the interest rate on our $1 billion revolving credit facility and established a new $600 million delayed draw term loan facility that was fully drawn at quarter end. The term loan is due in 2032 with interest based on our current credit ratings at SOFR plus 115 basis points. Additionally, during the quarter, we entered into two forward sale agreements under our ATM program for initial gross sales proceeds of $66.6 million or an average sale price of $6.79 per share. No forward sale agreements were settled during the quarter. And as of quarter end, we had total estimated net proceeds from unsettled forward sale agreements of $134.6 million, representing just under 2.3 million common shares. Our liquidity position remains strong, and we are well positioned to support our continued growth. In addition to the amount available under forward sale agreements that I just discussed, at quarter end, we had $52.4 million of cash on hand and no balance on our $1 billion revolver. As far as upcoming debt maturities, we have $450 million of debt coming due in December and then nothing comes due until June of next year. Turning to guidance. We are increasing our 2026 FFO as adjusted per share guidance to a range of $5.49 to $5.57 from a range of $5.41 to $5.57, representing an increase versus the prior year of 8% at the midpoint. We expect a slightly higher percentage increase in AFFO per share. We are also increasing our 2026 guidance for investment spending to a range of $675 million to $725 million from a range of $600 million to $700 million. We are revising disposition proceeds to $86 million for the year from a range of $50 million to $100 million. We are increasing our percentage rent and participating interest income guidance to a range of $21.5 million to $24.5 million from a range of $18.5 million to $22.5 million, primarily due to higher amounts expected related to our theater and attraction properties. Please note that the midpoint of this range implies that fourth quarter percentage rent and participating interest income will be approximately $6 million. This is lower than the prior year's fourth quarter amount of nearly $8 million due to the recognition of a part of one tenant's percentage rent in the third quarter of this year versus the fourth quarter in the prior year. We are revising our G&A expense guidance to a range of $57 million to $59 million from a range of $56 million to $59 million due primarily to an increase in expected noncash share-based compensation expense. Finally, our guidance for other income and other expense has been updated to a range of $44 million to $50 million and a range of $43 million to $49 million, respectively. The net increase in this guidance of $1 million reflects the additional contribution expected from our operating theaters given the strong box office performance as well as additional gains anticipated related to our Canadian FX hedges, which is booked to other income. Guidance details can be found on Page 23 of our supplemental. Now with that, I'll turn it back over to Greg for his closing remarks.

Thank you, Mark. As you've heard today, the experience economy continues to demonstrate strength and resilience, and EPR is uniquely positioned to take advantage of this trend as it is the only diversified REIT that focuses solely on the experiential economy. So far this year, we've delivered post-COVID highs in investments and sector-leading FFO as adjusted per share growth. During the quarter, we utilized multiple tools in our tool shed, including opportunistically raising equity through our ATM program, recycling capital through dispositions and thoughtfully refinancing our debt with a new term loan execution. Our focus remains on prudently deploying capital to acquire high-quality properties that are valued by the consumer and deliver accretive earnings growth to our shareholders. With that, why don't I open it up for questions. Operator?

[Operator Instructions] We'll take our first question from Anthony Paolone with JPMorgan.

My first question relates to what you described as an unparalleled pipeline of deals. So can you talk a bit more about just what's in that? How much is maybe acquisition opportunities versus build-to-suits, portfolios, areas that you would invest in, et cetera?

Sure, Tony. So, by breadth, we really are talking about all those things that you've mentioned. It's that the diversity of opportunities we're seeing is really, really exciting, right? So we've talked about fitness and wellness before. And even within that category, we're really seeing opportunities that stretch all the way from things that we've talked about from golf to fitness facilities and everything in between. And then beyond that, we're seeing opportunities in a lot of our other verticals, like eat & play, attractions, live entertainment, all of them have activity and the conversations have just been very engaging and encouraging.

Tony, I would add, I think part of what, again, that's going on right now is we're seeing a really continued focus on people even in these categories, continuing to focus on spending money on these experiential properties and the consumers continues to be highly supportive of this. And so our operators and our tenants are continuing to invest and grow their businesses. So that's creating opportunities even in the face of some of the challenges that are generally going in the economy.

And then on the point of development versus acquisitions, we're seeing a split. And consistent with this year, there are a number of acquisitions that we can expect for the coming year. Development, there's always a high hurdle. And in the current rate environment, that hurdle is probably even a little bit higher, but we are exploring those opportunities and as discussed on the call, have a pipeline of those already in place.

Okay. And then just my second one is as it relates to your more recent theme park acquisitions this year. How did they do this summer? How are they performing and also your appetite to do more in that space?

Again, Tony, I will let Ben chime in. I think, again, as we anticipated, this was a transitory year. So we -- consistent with that, I think we think these are performing in line with kind of where we anticipated. It doesn't mean there was -- we anticipated some degree of challenges as you change the operator and things. I think as we move into this coming year, you'll see a ramp-up. Remember, we committed to the capital -- additional capital going into those properties, and I think that will do. I think likewise, again, the overall attractions industry has been incredibly resilient over time and continues to demonstrate that. We've had certain events toward the end of the season this year that has brought attention to that. I think everyone in the industry, any sort of event that occurs is like that we've seen is tragic and all of our operators are very much in the focus of that. Safety is of utmost importance to them, and they have demonstrated programs of inspection and safety. And literally, if you look over the billions of people that have written rides and things of that, they have a great overall track record of safety. So we'll have to see how -- if that impacts our belief on kind of the -- what we would do in the future. But right now, everything is playing out the right way. I think we thought it would be, and we'll see about opportunities as we go forward. But Ben, I don't know if you had anything to add to that.

I think that covers it very well. That's exactly what we're seeing.

Our next question comes from James Feldman with Wells Fargo.

You've got Conor here on with Jamie. Given your first investment in Live Nation for a performance venue this quarter, can you talk through what makes performance venues attractive from both a credit and real estate perspective? And can you describe what your runway to grow exposure here looks like?

Again, I'll let Ben give more details, but I think, Conor, first of all, again, if you go -- if you just look about the resilience of it, I mean, live performance has been -- it has been incredible as far as its strength in the underlying experiential economy. I think the model for how musicians make their money has substantially changed to where they're all out and supported on that road. And let's be candid, Live Nation is the 800-pound gorilla in that market. So I think they've announced a multibillion-dollar expansion program that they're looking for to increase the depth and breadth of their venues. That doesn't mean we're going to be able to do all of those. But I think we're excited about the underlying dynamics of demand compared with the ability to partner with a world-class operator. And I think that just opens up a whole another opportunity for growth for us. But Ben?

Yes. That's exactly what we're seeing. And then what's very exciting is you look at the growth that Live Nation some of the other operators are having, there's a void still of midsized venues. If you think about 4,000 seat, right? So you have the larger amphitheater and then there's smaller local, but that midsize still is an underserved market. And it's really a sweet spot in that it's the perfect size that attracts headline performances and you can command very attractive pricing and there's just a lot of unmet demand. So that gives us a lot of encouragement about the pipeline and the future opportunity in this sector.

And just to note, when we say very attractive pricing, we think that's very attractive pricing for ourselves. The cost of the tickets, I know everyone is complaining about the cost of tickets, but very attractive pricing is relative to which side of the equation you're sitting on. So we think it's very attractive from our perspective.

You also mentioned credit. We have Live Nation credit. So that's important to point out as well.

Really appreciate the insight. And then maybe given the tick up in rent coverage in the portfolio to 2.1x this quarter, can you walk us through what you're seeing that's driving this increase? And are there any specific sectors or types of tenants driving that?

I think overall, clearly, there's no doubt that the overall rent coverage is being helped by the theater and the performance of that. But I think overall in experiential, I think there's some really good data points. I think -- and I'd reference you guys to McKinsey's report on the State of the Consumer in 2026, where they wrote that the experience economy has become one of the structural forces reshaping global consumer markets rather than viewing experiences as discretionary indulgences, consumers are increasingly treating them as an important part of how they choose to spend both their time and money. So what we're seeing is people are choosing experiences over stuff and they're continuing to demonstrate that with their spending patterns. And whether you look at credit card data or spending data from the various banks, we're continuing to see experiential spending up and to the right. So we think we're in the right categories, and we think we're the only REIT that offers that level of exposure. So we feel really well with how we're positioned.

Our next question comes from Rob Stevenson with Huntington.

Greg or Ben, the new Live Nation asset, press reports have that opening next summer. Is that still accurate? And can you talk about how big of an investment that is? And if there's a period of free rent or that starts to get rent to you guys next summer?

That time line is still accurate. And in line with our other practice, we're not going to disclose the specific transaction economics, but that time line for opening is consistent.

Okay. And then, Mark, you have roughly $50 million in cash and $135 million available under the ATM. How much additional debt can you issue from here and still stay in your targeted leverage range? Just curious as to how much dry powder, so to speak, you have to deploy here without having to go back to the market and issue more equity.

Yes. Let's just kind of roll forward where we're at. As I mentioned, $50 million of cash, so kind of $35 million of excess as we kind of roll forward to the rest of the year, that should cover our investment spending, which remaining is about $35 million. So we kind of finished the year, that's covered. We have zero on our line today. We do have $450 million of debt due in December, and we can take that down with our lines since we have zero on it or -- and of course, we have those proceeds from the forwards. But we probably don't need the forward equity until next year, so we can kind of have that in the tank for next year's spending. And as that line gets to about that mid-4s, you start to look at potentially a bond transaction that would pay down that line. Typically, that gets to $450 million, $500 million, we look to the market to pay down the line. In terms of leverage, we finished the quarter here, third quarter at 4.9x pro forma. Just even with the refinancing of the debt in fourth quarter, should that happen, we finished the year around 5x. That's without taking down any forward equity. So we're in great shape kind of approaching next -- going into next year when our leverage range is 5 to 5.6 and being at the lower end of the range. So I think we have plenty of capacity to support the growth.