Good afternoon, everyone. My name's Rob Stevenson. I run the real estate equity research team at Janney Montgomery Scott. This is the 3:30 P.M. 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 can 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, introduce both the company as well as his management team. Greg?
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 theaters and Vail in 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, theaters, our rent coverage level is back to the level that it was in 2019, and our non-theater portfolio is 30% ahead of where it was in 2019. So the consumer's 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, you know, 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?
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, you know, 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, you know, good times and bad times economically?
It's a great question, and, and I, 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 theater business, it outperforms recession. You can go mark it 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 a- activity. Most of our other aspects of, 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, 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.
When you take a look at the market for deals today, you guys just bought a water park recently. You know, how do you look at the acquisition environment in a higher-for-longer interest rate environment, given the cost of capital is, you know, precious today?
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 you know, we're being highly selective in what we're buying. We understand that we're buying durable assets for you know, 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're, we have a wonderful underwriting team. I mean, again, to look back on it, you know, pre-COVID, other than some assorted retail, we'd never gotten a property back. So yeah, you know, 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.
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-$100 million deals. We also like to invest with folks who are gonna give us opportunities for further investment. So we 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're Andretti's largest landlord, so we want to be able to facilitate their growth, as well.
I think that one of the areas that I think people are normally focused on with you guys is the movie theater business, given your ownership there. I think it's, you know, it's almost 40% of EBITDA. But you have some of the most productive theaters in the US. I think the last call, you talked about 3% of the screens and 8% of the box office, if I'm not mistaken.
Correct.
One of the interesting things from the earnings, the recent earnings call, was you said that movie theater 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, you know, remembering that these were shut down in, in.
Mm-hmm.
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 theater business is, and how that sort of impacts, you know, both your revenue from a straight lease standpoint, but also from a percentage lease?
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 theaters. We're all gonna 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 theaters. So not only have you had all the theater, 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 theater. At pre-COVID, the average food and beverage spend in the theater 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 mature. 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 theater. Not in Manhattan or in the city, but in almost every other venue that we have, alcohol.
That's, that's added $2 - $2.50 per head on, 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.
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.
We do. And again, some of that is of their own doing, and some of it is court-appointed. I mean, yeah, you know, 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. Yeah, you know, 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 theaters in the country. You mentioned it, we have 3% of the theaters in the country, and we have 8% of the box office. Now, you add that most of our theaters are also gonna 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 gonna 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, e specially 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-dollar box office, our revenues will be equal to or better than what we had before in the theater space.
You guys have talked about sort of not growing the theater business from here. Is that more of a, you know, 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?
My guess is to materially change that, we'll sell. We'll—there'll be a market that, again, theaters have transacted, you know, pre-COVID on a fairly regular basis. That market, as, like I said, as 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 that.
Can you talk a little bit about the Eat & Play ? You know, it's the second largest segment at around 25%. You know, I think people might know some of the concepts, like Topgolf and Andretti Karting, but, you know, what's the sort of spend, average spend at those type of businesses? How much of that is food and beverage? And, you know, how much, I think that Greg Zimmerman said that you guys are growing within karting. You know, how does that look like over the next few years?
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, help me, $40.
I would say in the low $40s.
Low $40 per person. So again, on a relative basis for food and beverage and an activity that you're gonna spend 2-4 hours on, it's not, not, 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, you know, 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, you know, 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.
What are some of the other sort of concepts in that, in that sort of eat and play category that might be less well known to the audience, that are out there, that you guys are excited about?
Funny you ask, Rob. Just, we just opened this week, a standing wave park in Dallas. It's called Goodsurf. 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's a lot of opportunity for surf in the U.S. So another example of things that, you know, we look at.
We have bowling, we have Pinstripes, PINSTACK.
Bowlero.
Bowlero. 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. You know, 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 kinda hit it, it's gonna find something and make points. But it makes you feel like you're better at it than you are. But what it'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 you know, this Baby Boomer generation aging, and wellness is very much, something that's top of mind. What we're probably not gonna be is the fitness center that's in an inline 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, it's incredible, and, and we own, you know, a big parcel of land in Williamsburg. So we, we like, relatively, the income flow from it, and we like where we're positioned long term.
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, you know, operates and, you know, the seasonality there, and how that sort of impacts the company?
Sure. Seasonality, again, it doesn't impact the company. These are leases or you know, fixed income stream, and so it doesn't impact us in coverage. But ski has changed materially from 10 years ago. You know, 10 years ago, you used to come in and go, "You know, how's it gonna snow this year? Where's the snow?" The season pass of either Epic or Ikon Pass has changed the business materially. We will know, relative to performance of our ski assets, by November, before the first snowflake falls, because of you know, Epic 's snow passes. You know, and Vail, we're Vail's largest landlord. You know, 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 in their, and the major issue for a water park is rain. You know, 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's 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, 'cause 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.
Okay. Mark, you wanna just before we open it up for questions, you wanna talk a little bit about the company's balance sheet, balance sheet strategy, where you guys sort of target for, for leverage, et cetera?
Sure. So I've been at the company for 20 years, and we've always managed it, debt to EBITDA, 5 - 5/6, generally low 5s, and that's where we're gonna continue to manage it. We are investment-grade rated. We briefly lost our investment-grade rating as COVID happened, as we had to, you know, 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 80s. And coming out of COVID, we decided to set that more at 70%.
In fact, with deferrals we were receiving, it was even in the 60s in 2023. So that allows us free cash flow to invest, and that's very accretive, as you can imagine. You kinda generate it and reinvest it at 8.5. So even though we're in somewhat of a cost, a capital-constrained environment, with $100 million of free cash flow, with some of our dispositions that we've had, we're able to do $200 million-$300 million a year of investments without having to access the capital markets. Again, we have zero drawn on a $1 billion line of credit, and we have cash in the bank, so we're in great shape. And that allows us to grow.
This year, if you take out the deferrals from last year, a little over 3%, and you combine that with an +8% dividend, that's an +11% return to shareholders without any re-rating. And we think our multiple will re-rate over time 'cause we're certainly too low in terms of multiples. So, again, low fives. As far as debt maturities, this year, we only have $136 million due. And given the cash on hand and the 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 2025, we have $300 million due, very manageable amount.
So really, really feel good about the way we reset coming out of COVID, and have always maintained and been conscious of our balance sheet and keeping it in a conservative, in a conservative way.
All right. Why don't we open it up for questions from the audience? Sir.
Just curious to hear your thoughts on the Indy Pass, the smaller.
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 and ski.
In the back?
Yeah. So to your point, you know, you're investment-grade rated, your balance sheet is very strong. You've done an amazing job recovering from COVID, and yet your stock is trading for somewhere between 8-8.5 x AFFO. I think the market is asking you, like, what is your plan to re-rate 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 closest competitor in the space.
Mm-hmm.
You guys, again, have done an amazing job and have a great balance sheet. You're probably the cheapest REIT out there with that kind of a balance sheet. What's the plan? How are you gonna turn that around?
Again, I think, first of all, we've heard loud and clear that notwithstanding what I told you about theaters, people don't like theaters, 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 gonna do $5 or better. Yeah, you know, you can just kind of look at the numbers and see. Non-theaters represent 67% or 63% of our portfolio, so that's $3.15. If you put a 12.5 multiple or an eight cap on those assets. Remember, this is Vail, this is Topgolf. They don't. Those assets don't sell for eight. 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 theater value is trading at 50 cap? Yeah, you know, it just 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," 'cause you guys would think we're crazy. There will be a market for theaters. 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 theaters 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. You know, if we get a two-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. Oh, and along the way, you're getting 8.25 to sit there and to wait for that change to occur.
Why not buy back stock with that, that cheap.
That much of a dividend? It seems like that would be accretive.
It's a great question. We look at it like an investment, and so literally, if you're saying your stock's trading at $8.25, if you're buying something... 'Cause 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. We're more, l isten, 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.
Yes, sir.
Has there been any examples for you guys or in the market theaters of, conversions to industrial? Like, a lot of these theaters.
We've sold two for industrial. Sold them for six caps.
All right.
Like, listen, let's put it this way. We have sold 14 theaters to date?
Uh, 16.
16 theaters to date, probably ranging from a cap rate of 6-12. Not for theaters, for something else! And cash-flowing theaters, as I said, you're giving me a 50 cap valuation. The land value underneath these, we could just sell. I mean, most of, a nd we're talking about what people understand of some of the most productive theaters in the country. Like, our Burbank theater is the number one, two, or three theater in the country every week. Every week.
Do you expect to do more of those type of sales mix?
Again, when we get a theater that's vacant, it's easy to do that. We're at a point where nobody is giving us back theaters. They're actually making money on them, and they want to keep them operating as theaters, so we would be selling income.
Just one other point on the sales is, you know, it's obviously real estate location dependent. You can't do industrial everywhere. So generally, when we sell a theater that's vacant, we just market it widely and take the best offer we get. So if it's i ndustrial, great. If it doesn't work for that, we'll sell it for whatever we can.
So everybody know, 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.
And theaters.
And theaters. So, I mean, people don't, p eople sometimes forget, most theater parcels are 15-20 acres, you know, in where most of our theaters are located, in the top 50 DMAs in the country. Yes?
Are there any other areas of divestment that you might be looking at in the business, any other sort of properties?
Yeah, I mean, we have a small education portfolio that we're actively looking at and thinking about, you know, selling down on that. Nobody seems to be bothered or care about that. So I mean, as the question the gentleman asked, you know, we will have 35 meetings over two and a half days here, and 90% of our meetings will be about theaters. 37%, 63% we don't talk about, not because we don't want to talk about it, but yes.
Do you have concern that some of the entertainment concepts may go out of popularity, and then thinking about alternative uses of the real estate?
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 one in for Topgolf in Los Angeles and King of Prussia. I don't know that I feel bad about, generally, the underlying property is about a 1/3 of the level of investment, and we own 20-25 acres in Los Angeles and King of Prussia 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?"
'Cause a friend of mine owns a former Neiman Marcus store-
Mm-hmm.
In suburban Boston, and they, of course, filed for bankruptcy, and he bought it.
Is he doing a pickleball deal?
Excuse me?
Is he doing a pickleball deal?
R estaurant.
I know! We'd know more about this than you can imagine.
We might have talked to him.
I have to say, a very good friend of mine, so I don't want to insult him, but I really question the long-term staying power of that. Now, they're not gonna operate.
Yeah.
They're repurposing the inside of Neiman Marcus, and there's restaurants.
Mm-hmm.
And I think 15 pickleball courts.
Yeah.
Yeah.
Do you think that has staying power?
Again, we have a challenge with pickleball, and again, we get every, it's not that- we don't question the popularity of pickleball. We question the barriers to entry. Every person in the country, every country club, every, you know, parks and rec, are turning things into pickleball courts. So we might have told somebody that.
Yeah.
R eally, 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, w e'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-
You can also eat and drink.
You can hold a beer while you're doing it.
W hich you 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 gonna hang around and eat afterwards or not? Whereas Topgolf has perfected eating and drinking as part of the activity.
So it sounds like we wouldn't buy the Neiman Marcus store.
We've affirmatively already passed on it.
Well, I would also say beyond that, 'cause I don't want to pick on your friend, that we've, we never say never, but we haven't invested in pickleball.
At all.
A nd don't plan to.
We can't figure it out.
All right. Why don't we.
What's that?
How about Fidelis?
I still.
Yeah. We're okay with Fidelis.
Why don't we stop it there, and if there's any questions, management can stick around for that.
Thank you.
Thank you.
Thank you, gentlemen.
Thanks.
Have a safe trip back.