EPR Properties (NYSE:EPR) Nareit REIT Week: 2024 Investor Conference Call June 5, 2024 3:30 PM ET
Company Participants
Greg Silvers – Chairman, President & Chief Executive Officer
Greg Zimmerman – Chief Investment Officer
Mark Peterson – Chief Financial Officer
Conference Call Participants
Rob Stevenson – Janney Montgomery Scott
Rob Stevenson
Good afternoon, everyone. My name is Rob Stevenson. I run the real estate equity research team at Janney Montgomery Scott. This is the 3:30 session with experiential triple net REIT EPR Properties, ticker, EPR. We have several members of management with us today. So, why don’t I turn it over to management? We could talk about the company, and take your questions at the end of this session.
With that, it’s my pleasure to turn it over to Greg Silvers, EPR’s Chairman, President and CEO, to introduce both the company as well as its management team. Greg?
Greg Silvers
Thank you, Rob.
Joining me up here today to my left is Mark Peterson, our CFO, and Greg Zimmerman, our Chief Investment Officer.
As Rob indicated, we are a net lease REIT. We focus on experiential properties. So, our tenants look like movie theatres and Vail and the ski, Six Flags, Topgolf, many household names that you guys have heard. I think the very positive thing that we’re talking about, again, if you look at how we’re doing in this environment right now, well, theatres, our rent coverage level is back to the level that it was in 2019. And our non-theatre portfolio is 30% ahead of where it was in 2019. So, the consumer is clearly speaking. They value experiential product. It’s where they’re spending their dollars. They’re supported with the two largest demographic group being the baby boomers and the millennials. And we’re seeing the benefit of that. Again, much like many people, we’re kind of challenged in this environment with our cost of capital, but we’re pleased to talk about the outstanding results that we’re delivering.
So, why don’t we open it up and kind of go from there?
Question-and-Answer Session
Q – Rob Stevenson
Sure. So, I guess, one place to start here is that you and I both mentioned experiential and you ticked out some of your major tenants. Can you talk about how those tenants perform if the economy gets a little tougher? You obviously continue to have some inflation, food and gas prices, student loans, things like that. How does the consumer impact the tenants there? And how do they sort of — that translate through good times and bad times economically?
Greg Silvers
It’s a great question and I think it’s always important that we talk about what the data tells us, because your gut says this is discretionary. So, it actually should not perform as well, but the data would say otherwise. In the theatre business, it outperforms recession. You can go market against every recession and it actually outperforms. Why is that? It’s because people have got enough drama in their lives and they’re looking for escapism. Going to the movies is the most popular out-of-home entertainment going, notwithstanding what everyone thinks. More people go to the movies than NFL games, Major League Baseball, NBA, and hockey combined. They still are the most attended activity.
Most of our other aspects of our — whether that’s ski or attractions or our Topgolf perform quite well because what most people do even in recession, whether it’s the staycation or the aspects of, like I said, still embracing the idea of, “I don’t want my family to feel the total impacts of this.” We see water parks and amusement parks tick up during recessions because they’re, like I said, staycations. Maybe you don’t go away, but you go visit the parks.
So, the good thing about our portfolio, this is my 27th year, so we’ve had a couple of recessions, and we’ve weathered all those quite well.
Rob Stevenson
When you take a look at the market for deals today, you guys just bought a water park recently. How do you look at the acquisition environment in a higher for longer interest rate environment given the cost of capital is precious today?
Greg Silvers
Again, it’s about being selective, and I’ll let Greg jump in on this in a second, but our opportunities right now exceed our available capital, candidly. And so, we’re being highly selective in what we’re buying. We understand that we’re buying durable assets for 20-year leases. So, it’s looking at not only what the accretion is immediately, but what the viability is of that long term. And we have a wonderful underwriting team. I mean, again, to look back on it, pre-COVID, other than some assorted retail, we never gotten a property back. So, whether that’s ski, whether that’s water parks, whether that’s Topgolf, we’ve got a good track record of being able to underwrite that.
But Greg, maybe…
Greg Zimmerman
Yeah. And Rob, in terms of deal flow, I mean, I think what we’re seeing is we tend to play in the space of $50 million to $100 million deals. We also like to invest with folks who are going to give us opportunities for further investment. So, we’d like to do relationship agreements with people that hopefully if we achieve one, we’ll have the right to at least look at the next couple of deals. And then on top of it we also want to service existing clients. So, we also announced a couple of Andretti Karting deals. We were Andretti’s largest landlord, so we want to be able to facilitate their growth as well.
Rob Stevenson
I think that one of the areas that I think people are normally focused on with you guys is the movie theatre business given your ownership there. I think it’s almost 40% of EBITDA. But you have some of the most productive theatres in the US. I think that last call you talked about 3% of the screens and 8% of the box office, if I’m not mistaken.
Greg Silvers
That’s correct.
Rob Stevenson
One of the interesting things from the earnings — the recent earnings call was you said that movie theatre coverage is back to 2019 levels. Can you talk about like what fundamentally, that business is today versus the pre-COVID? Because I think everyone still has the notion remembering that these were shut down in some municipalities during COVID that the movie release schedule got pushed back not only because of COVID delays, but then you had the strikes, et cetera. Can you talk about where the movie theatre business is and how that sort of impacts both your revenue from a straight lease standpoint, but also from a percentage lease?
Greg Silvers
Sure. And I think it’s important to realize those businesses were shut down in a regulatory framework not because of consumer demand. Everybody wants to think about the reality is that streaming was going to kill movie theatres. We’re all going to sit at home and watch our movies. The reality is just not true. What your streaming platform is really replacing what used to be your cable TV. We watch episodic television on streaming. The studios have all confirmed they don’t make any money on movies unless they go to the theatres. So, not only have you had all the theatres — all the studios embrace the theatrical model again, you’ve had two new entries, Apple and Amazon have both committed to $1 billion annual of movie theatrical releases. So, it actually creates an environment where you get two bites at the apple. You get the income from the theatrical exhibition, and then you get to load it onto your platform. So, there’s a lot of value.
But what has changed in the environment is, the mix of revenues at a theatre. Pre-COVID, the average food and beverage spend in the theatre was about $4.50 per patron, think your traditional popcorn, cokes, candy. The average per cap spend now is nearly $7.75. That’s 80% margin business. So, it’s matured. Now, what’s driven that, I don’t know what this says about society, but we introduced a really good concept of letting you have alcohol in a theatre. Not in Manhattan or in the city, but in almost every other venue that we have, alcohol. That’s added $2 to $2.50 per head on that.
So, what we have now is a EBITDA level, even though the total number of movies being released is down because of the strikes. Our coverage is the same because the revenue mix has changed, and we’ve got a much more higher margin business in the food and beverage.
Rob Stevenson
And I guess the other thing would wind up being is that, correct me if I’m wrong, but you’ve also got better balance sheets out of the major operators?
Greg Silvers
We do. And again, some of that is of their own doing and some of it is court appointed. I mean, yeah, what we had, we had a lot of people asking us about the credit quality. What occurred candidly is we had two major operators, the two largest operators in the world, AMC and Regal, both engaged in major M&A activity just leading into COVID. Great timing, but, hey, you know, nobody could predict COVID. And so, then they get shut down and they have balance sheet issues. Regal went through their bankruptcy. We restructured. We’ve got — we managed that, put everything in a master lease. AMC continues to pull rabbits out of a hat whether it’s hello — not Hello Kitty, whatever — Roaring Kitty or whatever it is, but they continue to be able to manage that. But the fundamentals of the underlying demand haven’t changed.
And as we saw, we have some of the most productive theatres in the country. You mentioned it. We have 3% of the theatres in the country and we have 8% of the box office. Now, you add that most of our theatres are also going to have that higher food and beverage complement and alcohol. So, we’re driving a much higher level of productivity now than we were before. And so, if you look at what we’ve done with those two largest tenants, we’ve got them both in unitary master leases. So, we feel really good about where we’re at with those portfolios.
And if we look to the future, you’ve got a box office that’s continuing to grow. This year was impacted by the strikes, but next year, most analysts are saying we’re going to be $9.5 billion, $10 billion, that’s $8.3 billion this year. And you ask about percentage rent. Some of those restructurings. We took a — especially Regal, we took a percentage rent component. Again, that we will participate in that growth and allow us to — our estimation is on a $9.5 billion box office, our revenues will be equal to or better than what we had before in the theatre space.
Rob Stevenson
You guys have talked about sort of not growing the theatre business from here. Is that a more of a not purchase anymore, or do any more deals and let it be diluted through other stuff? Or at some point in time when the time is right, are you expecting to sell some of those properties?
Greg Silvers
My guess is to materially change that will sell. There’ll be a market that, again, theatres have transacted pre-COVID on a fairly regular basis. That market is as — like I said, is all this healing continues. That market will be — and if we want to materially lower that exposure, it’s not because it’s not been very good for us, but we also think that increased diversity is multiple enhancing. So, we will at appropriate times sell assets in there.
Rob Stevenson
Can you talk a little bit about the eat & play? It’s the second largest segment at around 25%. I think people might be — know some of the concepts like Topgolf and Andretti Karting, but what’s the sort of spend — average spend at those type of businesses? How much of that is food and beverage? And how much — I think that Greg Zimmerman said that you guys are growing within karting. How does that look like over the next few years?
Greg Silvers
Again, there seems to be a growing — what we love to do more than anything and especially post COVID is spend time with our family, friends and colleagues. And that’s only increasing with the baby boomer generation as it ages up with still a considerable amount of the wealth in the country. I think average spend is, Greg, it help me…
Greg Zimmerman
I would say in the lower $40s.
Greg Silvers
Lower $40 per person. So, again, on a relative basis for food and beverage and an activity that you’re going to spend two to four hours on, it’s not overly excessive. We’ve still seen in our Topgolf portfolio, we had roughly 2% same store growth last year against this backdrop. So, we feel really good about capturing that part of the market. And it takes — we’re very mindful of what is the activity. You take an activity, you surround it with food and beverage. Does it create kind of moats that allow you to own a particular concept in an area? And the durability — I mean, we get asked all the time, well, how long is — how durable is Topgolf? Our first Topgolf we did 2006, 18 years ago, and it still is one of the top performers in their chain in Dallas. So, again, we feel still very good about that idea of creating an activity that’s approachable, that people can enjoy, do, and then surrounding it with a good food and beverage operation.
Rob Stevenson
What is some of the other sort of concepts in that sort of eat & play category as it might be less well known to the audience that are out there that you guys are excited about?
Greg Zimmerman
Funny you ask, Rob. We just opened this week a standing wave park in Dallas. It’s called Good Surf. So, it’s food and beverage, as well as the ability to surf, one or two people can surf at a time. And we think there is a lot of opportunity for surf in the US. So, another example of things that we look at.
Greg Silvers
We have bowling, we have pinstripes, pinstack.
Greg Zimmerman
Bowlero.
Greg Silvers
Yeah, we have Bowlero. So, we have a lot of these various concepts that we think people are looking for still ways to come together and, like I said, spend time with people. It’s — like I said, it’s important to make the activity approachable. There’s a reason Topgolf works because everybody thinks they’re a better golfer. They don’t realize that whole outfit is sloped and if you just kind of hit it, it’s going to find something and make points. But it makes you feel like you’re better at it than you are, but what’s really about is hanging out there with your friends and laughing and cutting up. And we’re very excited about those aspects.
Much like, like I said, when we’re spending time in the fitness and wellness space, we think about — this baby boomer generation aging and wellness is very much — something that’s top of mind. What we’re probably not going to be is the fitness center that’s in our in-line retail with a bunch of machines. But, like, we have a climbing gym here in Brooklyn that has 6,000 members. I mean, it’s incredible and we own a big parcel land in Williamsburg. So, we like relatively the income flow from it and we like where we’re positioned long term.
Rob Stevenson
One of the other things that you guys own is both the ski stuff as well as some of the water parks. Can you talk about how that business operates and the seasonality there, and how that sort of impacts the company?
Greg Silvers
Sure. Seasonality, again, it doesn’t impact the company. These are leases or fixed income streams. So, it doesn’t impact us in coverage. But ski has changed materially from 10 years ago. 10 years ago, you used to come in and go how’s it going to snow this year? Where’s the snow? The season pass of either Epic and Ikon pass has changed the business materially. We will know relative the performance of our ski assets by November before the first snowflake falls because of Epic snow passes. And Vail — we’re Vail’s largest landlord. We like the idea that we’ve got essentially an investment-grade tenant that’s supporting our 11 — am I right? 11 properties with them. So that dynamic has changed materially with the season pass.
Water parks are incredibly straightforward, and the major issue for a water park is rain. If you know the demographics of your market, you know the competition of where you’re at, we have a highly predictive model of how well that property is going to do. What we can’t control is how many days does it rain. So, you underwrite for a kind of level of rain where you want your coverage at because people don’t go to a water park during the rain. So, again, it’s one of the factors that we are really, really blessed.
Greg and his team, we have a very detailed. We’re probably one of the few groups, I think, we have four CFAs in our underwriting team. So, we’re highly data-driven. We’ve developed models on all of these properties and what are the drivers, where are the risk at, how do you underwrite for those, how do you accommodate those. And they’ve done a wonderful job in executing on that.
Rob Stevenson
Okay. Mark, you want to — just before we open it up for questions, you want to talk a little bit about the company’s balance sheet strategy, where you guys sort of target for leverage, et cetera?
Mark Peterson
Sure. So, I’ve been at the company for 20 years, and we’ve always managed it debt-to-EBITDA 5 to 5.6, generally low 5s, and that’s where we’re continue to manage it. We are investment-grade rated. We briefly lost our investment-grade rating as COVID happened, as we had 100% of our tenants shut down, but they reopened quickly, and demonstrated the type of coverage that Greg talked about, and we’re the first one to get that investment-grade rating back. So first and foremost, we managed the company in a conservative nature.
I think the other thing coming out of COVID that we took advantage of is resetting our AFFO payout ratio, which used to be in the low 80%s. And then coming out of COVID, we decided to set that more at 70%. In fact, with deferrals we’re receiving was even in the 60% in ’23. So that allows us free cash flow to invest, and that’s very accretive as you can imagine, you kind of generate it and reinvest it at (8.5%) (ph).
So, even though we’re in somewhat of a cost capital constrained environment with the $100 million of free cash flow with some of our dispositions that we’ve had, we’re able to do $200 million to $300 million a year of investments without having to access the capital markets. Again, we have zero drawn on $1 billion line of credit. We have cash in the banks, so we’re in great shape. And that allows us to grow this year if you take out the deferrals of last year, a little over 3%, and you combine that with an 8%-plus dividend, that’s an 11%-plus return to shareholders, without any rerating. And we think our multiple will reiterate over time because we’re certainly too low in terms of multiples.
So again, low 5s. As far as debt maturities, this year we only have $136 million due. And given the cash on hand and zero drawn on the line and the cash flow we’re generating, we can easily pay that off the line of credit. So, no need to access the capital markets to execute our plan. And as you roll into ’25, we have $300 million due, very manageable amount.
So, really feel good about the way we reset coming out of COVID, and have always maintained and been conscious of our balance sheet and keep it in a conservative way.
Rob Stevenson
All right. Why don’t we open up for questions from the audience?
Unidentified Analyst
(indiscernible).
Greg Silvers
Again, the pass system is incredible, generally. None of our properties are on — we have 11 with Vail, and we have one other — we have the number one ski property in Alaska, and it’s on the Ikon pass. So, it’s not that the pass won’t work. It’s just that those two people are crowding everyone out of the market. Not that there’s anybody here in antitrust, but they are dominant players, and you generally are going to be an Epic or an Ikon pass depending upon where you live in ski.
Rob Stevenson
On the back?
Unidentified Analyst
Yeah. So, to your point, your investment-grade rated, your balance sheet is very strong. You’ve done an amazing job recovering from COVID, and yet your stock is trading at somewhere between 8, 8.5 times AFFO. I think the market is asking you like, what is your plan to rerate your stock? What’s your business plan for the next five years? Where is EPR in the next five years? And how does that happen? Because you’re trading at, like, a I think it’s a 30% or 40% discount to your closet competitor in this space. So, you guys, again, done an amazing job (indiscernible) balance sheet. What’s the plan? How are you going to turn that around?
Greg Silvers
Again, I think first of all, we’ve heard loud and clear that notwithstanding what I told you about theatres, people don’t like theatres. So, we’re going to, at points in times, divest out of that. I mean, if you look — let’s do the simple math of this. Next year, if you go forward, we’re going to do $5 or better. You can just kind of look at the numbers and see. Non-theatres represent 67% or 63% of our portfolio, so that’s $3.15. If you put a 12.5 multiple or an 8% cap on those assets, remember, this is Vail, this is Topgolf. Those assets don’t sell for 8%. They’re lower than that, but I’m trying to be conservative with you. That’s $39.50. We’re selling right now for $40-and-a-little something. So that $1.80 of theatre value is trading at 50% cap. It doesn’t make any sense.
But we’re also mindful. You guys have given us this capital, so we’ve got to do responsible things with it. It doesn’t mean that — I couldn’t tell Greg, “Greg, I’ll sell you this for a 40% cap and you can go away and get rich on it,” because you guys would think we’re crazy. There will be a market for theatres. It’s coming back already. I mean, there are simple things as, like I said, you look at a Cinemark, whose debt trades at 7%. We could sell them their own theatres back to them at 9%. They could borrow the money and it’s accretive for them.
So, there will be an opportunity to create value in that. It’s being selective and thoughtful in how we do that. And, candidly, along the way, we’re still nearly top of the group as far as TSR. I mean, there’s no one that’s delivering 11.5 this year. So, we are paying everyone to work — as we work through this, and no one in our estimation has the opportunity or the catalyst to drive change as we go forward. If we get a 2 turn multiple, you’re looking at a 30%, 35% TSR, and that’s still below our long-term average multiple. So, I think there’s a lot of opportunity that we have. And along the way, you’re getting 8.25 to sit there and be — and to wait for that change to occur.
Unidentified Analyst
(indiscernible).
Greg Silvers
It a great question. We look at it like an investment. And so, literally, if you’re saying your stocks trading at 8.25, if you’re buying something because it’s not leverage neutral. You’ve got to look at it and say, okay, you are — if you take all your capital and you do that, then you’re actually using — you’re taking up some of your debt capacity. But if we are investing at 8.5 or higher, we’re — with growth, we’re actually getting a equal to or better return for our long-term view. So, we look at it kind of very similar to as an investment. It’s not off the table. Listen, it’s not a who’s right. It’s a what’s right. We’re not trying to prove anybody wrong or try to tell you. We’re trying to execute on what we think are the best decisions as we approach this.
Unidentified Analyst
(indiscernible).
Greg Silvers
We’ve sold two for industrial. Sold them for 6% caps. Listen, let’s put it this way. We have sold 14 theatres to date?
Greg Zimmerman
16.
Greg Silvers
16 theatres to date, probably ranging from a cap rate of 6% to 12%. Not for theatres. For something else. And cash flow in theatres, as I said, you’re giving me a 50% cap valuation. The land value underneath these, we could just sell. I mean, most — and we’re talking about what people don’t understand of some of the most productive theatres in the country, like, our Burbank theatre is the number one, two or three theatre in the country every week, every week.
Unidentified Analyst
(indiscernible).
Greg Silvers
Again, when we get a theatre that’s vacant, it’s easy to do that. We’re at a point where nobody is giving us back theatres. They’re actually making money on them, and they want to keep them operating as theatres. So, we would be selling income.
Greg Zimmerman
One other point on the sales is, it’s obviously real estate location dependent. You can’t do industrial everywhere. So generally, when we sell a theatre that’s vacant, we just market it widely and take the best offer we get. So, if it’s industrial, great. If it doesn’t work for that, we will sell it for whatever we can.
Greg Silvers
So, everything we have sold — and all the time when we say sell, it doesn’t mean they’re using the building, sometimes it’s scrape. We’ve sold for industrial, multifamily, office, retail…
Greg Zimmerman
And theatres.
Greg Silvers
And theatres. So, I mean, people don’t — people sometimes forget most theatre parcels are 15 to 20 acres, where most of our theatres are located in the top 50 DMAs in the country. Yes.
Unidentified Analyst
Are there any other areas of divestment that you might be looking (indiscernible).
Greg Silvers
Yeah. I mean, we have a small education portfolio that we’re actively looking at and thinking about selling down on that. Nobody seems to be bothered or care about that. So, I mean, it’s the question the gentleman asked, we will have 35 meetings over 2.5 days here, and 90% of our meetings will be about theatres. 37%, 63%, we don’t talk about. Not because we don’t want to talk about it, but — yes.
Unidentified Analyst
(indiscernible).
Greg Silvers
Again, if you think about it this way and let’s say we always think about it, like I said, and we think about Topgolf. And like I said, it’s approaching 20 years in its existence. But like this last year, we developed it in — for Topgolf in Los Angeles and King of Prussia. I don’t know that I feel bad about — generally, the real — the underlying property is about a third of the level of investment, and we own 20 to 25 acres in Los Angeles and King — or control that in Los Angeles or King of Prussia. We feel pretty good about what our — we don’t always think about it in the sense that you’ve got to use this building. It’s, can I replace the income from what I’ve got there?
Unidentified Analyst
(indiscernible).
Greg Silvers
Is he doing a pickleball deal?
Unidentified Analyst
Excuse me?
Greg Silvers
Is he doing a pickleball deal? I know. We know more about this than you can imagine. And we might have talked to him.
Unidentified Analyst
And I have to say, he is a very good friend of mine, so I don’t want to insult him. But (indiscernible).
Greg Silvers
Yeah. Again, we have a challenge with pickleball. And again, we get every — it’s not — we don’t question the popularity of pickleball. We question the barriers to entry. Every person in the country, every country club, every parks and rec are turning things into pickleball courts. So, we might have told somebody that, really, you have to get comfortable that you have a 92% revenue restaurant. Are you comfortable owning that? When you look at a Topgolf, think about it this way as opposed to — we’ll do a pickleball juxtaposition. There are generally, at most, four pickleball players on a pickleball court, right? In a Topgolf with 103 bays and six people in each bay, there are 618 people. If you take the utilization of square footage divided by the number of people, Topgolf is much more efficient with their space than pickleball. Because…
Greg Zimmerman
And also eat & drink.
Greg Silvers
And you can hold a beer while you’re doing it.
Greg Zimmerman
(indiscernible) can’t do while you’re playing pickleball. I think pickleball is an exercise activity. People want to exercise. And then, the question is, are they going to hang around and eat afterwards or not? Whereas Topgolf has perfected eating and drinking as part of the activity.
Unidentified Analyst
(indiscernible).
Greg Silvers
We’ve affirmatively already passed on it.
Greg Zimmerman
Well, and I would also say beyond that, because I don’t want to pick on your friend, that we never say never, but we haven’t invested in pickleball…
Greg Silvers
At all. We can’t figure it out.
Rob Stevenson
All right. Why don’t we…
Greg Silvers
What’s that?
Unidentified Analyst
(indiscernible).
Rob Stevenson
Why don’t we stop it there? And if you — if there are any questions, management can stick around. Thank you.
Greg Silvers
Thank you.
GIPHY App Key not set. Please check settings