EPR Properties (EPR) Earnings Call Transcript & Summary

Hello, and welcome to the EPR Properties Q2 2026 Earnings Call. [Operator Instructions]. I will now hand the call over to Brian Moriarty, Senior Vice President of Corporate Communications.

Thank you. Thanks for joining us today for our second 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. I'll start the call by informing you that this call may include forward-looking statements as defined in the Private Securities Litigation Act of 1995 and identified by such words as will be, intend, continue, believe, may, expect, hope, anticipate or other comparable terms. -- company's actual financial condition and the results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of these 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 references to certain 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 second quarter 2026 earnings call and webcast. Over the last several quarters, we've highlighted our focus on accelerating growth. and the second quarter marked a significant step forward in executing that strategy. For the quarter, revenue increased 10.1% and FFO as adjusted per share increased 12.7% and compared with the same period in 2025. These results demonstrate the strength of our platform and the continued momentum we are building across the business. On the investments front, we set a new post COVID high for investment activity in a single quarter totaling more than $440 million. In addition to our previously announced acquisition of the Six Flags 7 property portfolio, we further diversified our experiential portfolio with additional investments in attractions and fitness and wellness. As part of these investments, we are pleased to welcome Netflix as a new partner through our acquisition of Netflix House in King of Prussia, Pennsylvania. These properties allow Netflix to deepen customer connections by transforming popular digital intellectual property into physical immersive experiences. This level of investment spending reflects both the depth of our opportunity set and our disciplined approach to deploying capital into durable experiential assets. It also reinforces our confidence in the portfolio's long-term growth trajectory as we move through the balance of the year. Turning to our portfolio. Tenant performance remained solid as we maintain coverage of 2x across the portfolio. The box office is up approximately 10% year-to-date, driven by a compelling mix of major studio tentpole releases and lower budget breakout films that have broadened attendance and reinforce the enduring appeal of the shared theatrical experience. Notably, titles such as backrooms and obsessions, both from filmmakers who built -- who built early audiences on YouTube demonstrate how new creator-driven voices are expanding the theatrical audience and generating outsized box office results. Outside of theaters, fitness and wellness continues to be resilient as consumers increasingly treated as a protected nondiscretionary category. Our -- even flight tenants are also reporting steady healthy trends. We also continue to strengthen our financial position, establishing a new $1.6 billion credit agreement that addresses our maturities later this year and ensures our balance sheet remains a source of strength in support of the pace of our investment growth. With that, I'm also pleased to report that we're increasing both our 2026 investment spending and earnings guidance. At the midpoint, our updated earnings guidance represents a 7.2% increase over 2025. We believe this underscores our confidence in the durability of our growth. Finally, I want to note that this summer offered an extraordinary reminder of the power of congregate entertainment. The FIFA World Cup, the largest in history, shattered the all-time attendance record as millions of fans traveled across North America and spent at record levels, not for a thing, but to be present for a moment. This is the same consumer impulse that is at the heart of our business. The demand for shared location-based experiences that cannot be replicated at home. We built this company around that enduring demand and this summer afforded a powerful reminder of its continued relevance. Now I'll turn the call over to Ben, who will review the business in greater detail.

Thank you, Greg. As Greg just noted, the second quarter marked another strong step forward in our growth strategy, building on the momentum we established at the start of the year. During the quarter, we invested $440.8 million at an average initial cash yield of approximately 8.5% bringing our year-to-date total investments to $492.2 million. This investment volume is inclusive of our previously announced acquisition of 7 theme parks formerly operated by Six Flags as well as 2 additional attractions properties, a new investment in golf and a new investment in Hot Springs. On the Netflix house investment, not only is Netflix and A-rated corporate credit, but is 1 of the leading streaming platforms, our partnership with them further validates the powerful role of the physical experiences play in an increasingly digital world. Equally noteworthy is the continued diversification of our portfolio and the corresponding decrease in our theater concentration from 36% reported last quarter to roughly 1/3 of the portfolio today. Beyond these investments, as of June 30, we expect approximately $92 million in additional investment for existing experiential development and redevelopment projects of which approximately $65 million is anticipated to be funded throughout the remainder of 2026. Given the velocity of investment activity in the first half of the year, and the expanded breadth and depth of our pipeline, we're pleased to increase our 2026 investment guidance to $600 million to $700 million. We continue to expect investment activity for 2026 to be tilted more towards acquisitions than development. To reiterate a theme from the first quarter, our investment pipeline is sourced almost exclusively from nonmarketed investments generated by direct relationships, our investment team has established over many years. and demonstrating that EPR is the partner of choice for experiential real estate. Approximately half of our investment pipeline represents repeat relationships. On market pricing, we continue to see investment yields holding steady despite volatility in the debt capital markets. Turning now to an update on the portfolio. At the end of the second quarter, our portfolio represented $7.5 billion of gross investment value, consisting of 346 properties, which were 99% leased or operated. 95% of this value reflects investments across our core experiential categories. These 291 properties are operated by 57 clients and continue to be 99% leased or operated. The remaining 5% of the portfolio represents our Education segment comprised of 55 properties leased by 5 operators. At the end of the quarter, these properties were 100% leased. The portfolio remains resilient with unit level rent coverage steady at 2x. As consumers redefine wellness and human connection as essential rather than discretionary, we exceed these trends translate into continued strength in the portfolio. Within our theater segment, the second quarter saw a continuation of the outperformance witnessed in the first quarter. Ticket sales are approximately 10% in '25 as the industry demonstrates sustainable growth. What's especially encouraging is that younger moviegoers are helping fuel to come back. 87% of Gen Zers and 82% of millennials saw at least 1 movie in a cinema during the past 12 months. Within the Eaton Play segment, rent coverage is stable with positive trends emerging at TopGolf from early operational enhancements post separation from Callaway. Attractions delivered strong performance in the second quarter with the reversal of some of the prior year's negative weather impact and the removal of certain geopolitical variables, which adversely impacted 2025. Our fitness and wellness segment continues to deliver solid performance with stabilizing trends at some of our recently renovated and expanded properties. Lastly, our education portfolio continues to remain healthy despite industry-wide labor headwinds. Pivoting to dispositions, as referenced on the first quarter's call, the pace of dispositions is moderating given our renewed focus on opportunistic sales relative to defensive sales. This shift is reflective of the general health of our portfolio and the outstanding work done by the asset management team and reducing legacy vacancies. Accordingly, we are maintaining our disposition guidance of $50 million to $100 million. In summary, our company benefits from durable, demographic and consumer spending tailwinds. These same forces fueling our growth also reinforce the stability of our portfolio. We see significant opportunities ahead and look forward to continuing to expand and diversify. With that, I'll turn it over to Mark for a review of our financial performance.

Thank you, Ben. Today, I will discuss our strong financial performance for the second 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 $1.42 per share versus $1.26 in the prior year, an increase of 12.7% and AFFO for the quarter was $1.43 per share compared to $1.24 in the prior year, an increase of 15.3%. Now moving to a few key variances. Total revenue for the quarter was $196.1 million, versus $178.1 million in the prior year, an increase of $18 million. 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 $4.8 million, up slightly from $4.6 million in the prior year as an increase in percentage rent accrued related to the Regal lease was partially offset by a decrease in percentage rent related to our Northern California ski property that was impacted by unfavorable weather conditions. Additionally, during the quarter, we recognized $500,000 in defeasance fee income related to the prepayment in full of a $10.8 million mortgage note receivable secured by an Eaton play property. On the expense side, interest expense net increased by $5 million due to an increase in average borrowings and a decrease in capitalized interest versus the prior year. Partially offsetting this was an increase in interest income related to short-term investments. Lastly, equity and loss from joint ventures for the quarter was $1 million compared to $1.7 million in the prior year and was due to better performance at our 2 RV Park joint ventures. FFO as adjusted for the 6 months ended June 30 was $2.67 per share compared to $2.45 in the prior year, an increase of 9% and AFFO for the same period was $2.71 per share compared to $2.44 in the prior year, an increase of 11.1%. Through the next slide, I will 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 3.4x and both interest and debt service coverage ratios at 4.0x. Our pro forma net debt to annualized adjusted EBITDAre was 5.1x at quarter end which is at the low end of our target range of 5 to 5.6x. Pro forma net debt is calculated by subtracting the estimated net proceeds from all forward sales agreements under our ATM program from net debt. Additionally, our pro forma net debt to gross assets was 41% on a book basis at quarter end, and our common dividend continues to be very well covered with an AFFO payout ratio of 65% for the second quarter. Now let's move on to the debt and capital markets 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 $3 billion is either fixed rate debt or debt that has been fixed through interest rate swaps with an overall blended coupon of approximately 4.4%. During the quarter, we entered into 2 forward sales agreements under our ATM program for initial gross sales proceeds of $23.4 million or an average sale price of $59.70 per share. No forward sales agreements were settled during the quarter. And as of quarter end, we had total estimated net proceeds from unsettled forward sales agreements of $69.5 million, representing just under 1.2 million common shares. Subsequent to quarter end on July 17, we were pleased to also enter into a new amended and restated $1.6 billion credit agreement that, among other things, extends the maturity date and reduces the interest rate on our $1 billion revolving credit facility and establishes a new $600 million delayed draw term loan facility that is due 2032 with interest based on our current credit ratings at SOFR plus 115 basis points. Our bank group, which was expanded as part of this financing was very supportive of these new facilities -- we want to thank them once again for their confidence in our long-term strategy. Our liquidity position remains strong, and we are well positioned for continued growth. At quarter end, we had $16.2 million in cash on hand and $640 million available on our $1 billion revolver. In addition to the amount available under our revolver as well as positive cash flow and disposition proceeds expected over the back half of the year, we have the cash available to draw down on our new term loan facility and unsettled forward sales agreements that I just discussed. These liquidity sources significantly exceed our anticipated outflows, including those for our expected investment spending and debt maturities over the balance of the year and this provides us with significant financial flexibility as we move forward. Turning to guidance. We are increasing our 2026 FFO as adjusted per share guidance to a range of $5.41 to $5.57 from a range of $5.37 to $5.53 representing an increase versus the prior year of 7.2% at the midpoint. We expect a similar percentage increase in AFFO per share. We are also increasing our 2026 guidance for investment spending to a range of $600 million to $700 million from a range of $500 million to $600 million. The increase in earnings guidance reflects this increase in investment spending as well as other favorable impacts from our investment activity to date and strong portfolio performance. We are confirming disposition proceeds of $50 million to $100 million and our percentage rent and participating interest income guidance of $18.5 million to $22.5 million. We are also confirming our G&A expense guidance of $56 million to $59 million. Finally, our guidance for consolidated operating properties has been updated by providing a range for both other income and other expense of $40 million to $50 million with no change to the expected net difference. 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. We are very pleased with the pace and quality of our investments to date, and our focus remains on supporting our strong growth trajectory. The performance and momentum across our businesses allows us to confidently increase our investment guidance and demonstrates our ability to source attractive transactions and attractive transactions in this competitive landscape. We remain focused on executing our strategy and advancing our growth objectives in the quarters ahead. With that, why don't we open it up for questions.

[Operator Instructions] Our first question will come from Conigan at Bank of America. [Operator Instructions].

Congrats on excellent quarter. Maybe starting on the transaction environment and the initial yields were about 50 bps higher this quarter. I know, Ben, in your remarks, you said that pricing is about the same. I guess, maybe if you can help us understand, was it the mix? Was it portfolios? How are you able to kind of bump that up 50 basis points?

I think what we've said historically is in the low to mid-8s. And so we're hovering in the same general vicinity. -- really, the mix is holding pretty steady as is the pricing.

And would that be similar kind of on the forward pipeline?

Yes.

Great. And then maybe just quickly, Mark, if you can help us understand the magnitude of the guidance increase given the strong second quarter outperformance.

Yes. Some of the second quarter performance is timing, particularly percentage rent was a little higher in Q2 than we expected, which turns around if you look at our guidance for the year. But overall, if you look at our guidance for the year, we're up $0.04. I'd say $0.35 of that or so is due to the investment spending and better performance in the portfolio, i.e., less bad debt expense than we envisioned. And then about $0.05 from that defease fee that I called out in my comments from the prepayment of a mortgage loan. So that's really what the $0.04 is about. We did have some, like I said, some timing in the first quarter related to percentage rents that were a little outsized from what we had anticipated. And then managed properties was a little higher, but we think that turns around over the back half and really comes into line with what we had anticipated.

Our next question will come from John Klick with Wells Fargo. [Operator Instructions]. John, you may ask your question.

Can you hear me?

Yes.

Awesome -- just want to make sure I got that right. So you're trading well north of where you issued on the ATM in this quarter. And I'm curious today, how does that impact how you're thinking about funding the rest of your pipeline with access to more capital -- and is there room to take up that acquisition pipeline now that the second half may look better than the first half just from an accessibility to capital point of view?

John, again, that's something we'll evaluate. Again, it's in conjunction with finding deals not only that we like, but that are -- can get done within the time frame. I think Ben and his team are actively in the market looking and searching out quality deals. I think Mark and his team are doing a great job of providing an attractive capital source and capital cost. So those 2 work in conjunction. And as we've seen when we have the availability and both of those things come together, we've accelerated. I would -- will continue to look at those opportunities.

Yes. I'll just add to that. If you look at our cash flow over the last 6 months, it's pretty balanced in terms of uses and sources. On the used side, we've got investments pending some bond maturities. And on the store side, we've got some -- the term loan and disposition proceeds and excess cash flow. -- and the potential to settle some ATM shares. Those are about equal, and we start the year -- start -- ended the quarter at $360 million. So we have that $640 million availability in liquidity kind of through the end of the year and really our plan is fully funded. As far as leverage, that's the other thing you consider when looking at equity, -- we are at 5.1x at the end of 6/30, including our forward equity that number only grows to about 5.2%, raising no more equity. So I think what that tells you, we have a lot of flexibility here to decide when and how we access the market for equity and/or debt. given our leverage profile, given our liquidity profile over the remainder of the year.

Okay. That was very helpful. And then my second one, Mark, you kind of highlighted earlier on the percentage rent side that 2Q ran a little bit above expectations. -- but the guide remains flat. So I'm curious what that is implying now for the second half, especially given the strength that we're seeing in the box office, how is that impacting your outlook on percentage rent for the rest of the year?

Yes. So June came a little bit higher, particularly for Regal, really strong June. We'll see how July plays out. And July is anticipated to be lower than previous although strong, -- and there's innings to play on that. I mean Spider-Man's out and Friday could be $100 million a day, which moves the needle on percentage rent. So we kept it the same, but there's potential for some upside should Spider-Man perform over really tomorrow is the last day of the last.

Today's previous tomorrow. But I mean, as Mark said, John, that could be in excess of $100 million. And as we've said, $100 million, that's -- since we're across the barrier, we'll fall right to the bottom line of where we're at. So I think we -- it's given the short time period, we decided just to not move things, we'll see how it plays out. And the upside would be fairly modest, but could be if things play out, like you said, over how things go tomorrow.

The 1 thing I'd add to that is we projected a lot of increase in the box office. We anticipated a lot of that. So it wasn't like a surprise to us that the box office is doing well.

Our next question comes from Rob Stevenson with Huntington. [Operator Instructions]

Mark, what are the bigger variables that pushes you towards the 541 of FFOAA at the low end versus the upper end at $557 million.

Yes. There's quite a few things. You think about percentage rents, they're still innings to play. It's not just brought Regal nearly 2/3 of our rent is a percentage rent is from other tenants. Obviously, we have operating properties. Third quarter is its primary operating season. So we'll see how that goes up or down. Obviously, the timing of acquisitions, forward acquisitions and cap rate -- those are some of the variables. G&A can vary in terms of incentive comp. So there are several variables that could impact that, but we do feel confident in that midpoint in terms of our guidance.

Okay. And then Greg or Ben, can you give us any indication as to how the -- I know it's early, but how the former Six Flags park assets are doing versus what they were doing over the last couple of years directionally.

Yes. I think, listen, being open a month, what we're really looking at is kind of kind of almost guest reviews certainly. And there seems to be some really positive momentum in terms of kind of cleanliness, friendliness, availability of rides. So the initial indications seem positive, talking with our operator, they seem still very positive. -- as we talked about any major changes since they only got control of the parks in April will come after the season. So this really was kind of getting the operations up and moving and controlling certain things that they can control, but things have been positive so far, Ben, I don't know if you have anything to add on that.

That's right. Across those. And then with our other attractions, we are seeing continued strength and a little bit of outperformance relative to the prior year.

Okay. And then last 1 for me. How many of these Netflix houses are there today? And is this a concept that they're looking to expand? Is there an opportunity for you to expand with them, if that's the case?

I think there's 3 total. Again, we're -- Ben and his team are in constant contact, again, with all of our tenants, and we'll have to just see how it plays out. But I think it's evidence of our ability to kind of when new concepts come in, we're on top of it quickly and see if it's something that we think grows with us. And so we'll continue to stay in contact with them.

Our next question will come from Nicholas Joseph with Citi. [Operator Instructions].