Okay, good afternoon, everybody, and thanks for coming. We're happy to have EPR Properties here, and we've got Greg, Greg, and Mark, and we're going to do a quick run-through or a little update on the company, but then we want to open it up to Q&A. I've got a list of questions as well, but feel free to raise your hand as we go through it and chime in with any questions that you have. With that, I'll turn it over to Greg.
Thank you, RJ. Just for reference, joining me to my left is Greg Zimmerman, our Chief Investment Officer, and to my right is Mark Peterson, our Chief Financial Officer. EPR Properties, we are organized as, generally speaking, a triple-net, which has a different focus than a lot of triple-nets. We're focused on what we call experiential properties. Again, not something where you necessarily go to buy an item, but you go to have an experience. A lot of that, and one of our primary previous in our history investment categories, is the theater business. I thought, again, for a lot of people, we've been fighting the idea that this business is going away. Hopefully, everybody now understands after we just had a record-breaking Memorial Day weekend, the largest ever. All of you who went to see Mission Impossible or Lilo & Stitch, me and my family, thank you.
We're greatly appreciative of that. Again, that business is clearly doing quite well now, as is really all experiential businesses. It's a growing area. It's a niche that we have dominated for 20+ years. It's something that we're very proud of, that we've built our reputation in there, and it's where the consumer continues to spend and spend their money. In all situations, even in recessions, people don't give up fun. Even if it's escapism, people are looking for that alternative, and we've seen that proven out through years. What that's helped us to do, if you look back over our history, there's no doubt we had challenges during COVID, but prior to COVID, a 20-year total shareholder return, I think we were number two of all REITs.
If you look at now on a five-year, a four-year, a three-year, a two-year, or a one-year, we're top two in triple-net, one or two, and probably top 15 of all REITs. It is a position that we're very proud of and looking to continue to grow that and deliver the results that we think we have delivered for the past and we can deliver again.
With that, RJ, why don't I see what people want to discuss?
Sure. We'll just start off, and maybe you guys can give a little bit more color on the box office, sort of what we saw in the first quarter, what we've seen since the first quarter as we've had a couple big weekends over the past couple of weeks. Then sort of how does that translate into where coverage has been and where you think it's going?
Sure. What I tell people all the time is we are ridiculously bad at predicting how successful a movie will be. We're decently good at predicting a quarter. We're really good at predicting a year. We came into this year and said we thought the annualized box office for this year would be somewhere between $9.3 billion and $9.7 billion. We came out of the first quarter down about 17%, so that prediction looked a little bit frightening. Through last weekend, we're up 25%. You see those things ebb and flow. We think that our prediction for $9.3 billion-$9.7 billion, at $9.5 billion, kind of midpoint, is still a very good target for what we think the year will be.
What that really means for us from a coverage standpoint is, and I would ask everyone, if you get the opportunity and you need something to look at as you're trying to fall asleep, our investor presentation has a really good slide on what box office means and how it's changed. If you go back to 2018, box office was roughly $11.3 billion. I'm saying this year it's going to be $9.5 billion. What we're all doing now is we're spending more at the theater. Anybody who goes to the movies, you've realized they do not give that popcorn away. They do not give that 55-gallon drum of Diet Coke away. Now we've introduced beer and wine. The average spend right now that the person who goes to the theater used to be in 2018 about $4, it's now over $7 that you're spending.
The margins on that business are quite good, so about 82%. Do not hold it against people. That is just the nature of the business. A $9.5 billion box office and the contribution with the current kind of food and beverage spend is the equivalent of an $11.3 billion box office for the amount of EBITDA that that generates to the operators. Actually, our coverage will be as good or better than it was in 2018.
What about on the Ski business side? Obviously, there's been some Vail stock has been all over the place. What about the underlying business and how you feel about it?
The underlying business we feel is still very good, notwithstanding what everybody, some of the headlines that you read. The introduction of the pass into the Ski business has been a godsend to the stability of that industry. Our business used to be kind of week to week, how the weather was and how people would react to it. Now almost all the business is done via pass. There were some headlines this year with Vail mainly regarding some of their resort destinations. Park City, they had a strike. They had some things that went on there. Actually, our business, which is more regional, we were nicely up this year.
There's obviously a lot of concerns about the consumer, a lot of volatility in the market. One of the concepts that I think we've heard over time is that even if the economy or the consumer takes a downturn, we'll see them trade down. We've seen a lot of sustained spending in experiential, and we've also not really seen a lot of weakness towards the higher end of the consumer just yet. How do you think that all plays into EPR's specific businesses?
I think it's going to demonstrate the resiliency for which we underwrote these assets. If you look at historically, and not every recession is the same, but if you look at it historically, the theater business actually outperforms in a recession. Most people are looking for some form of cheap escapism, or what you will see is the type of movies will change. We won't get hardcore dramas or things. You'll get more lighthearted. You'll get more family pictures. In the last three recessions, it's actually trended up as a reference in box office. I think the other, when you look at our portfolio, it is a moderately priced option. I think we hope we're going to benefit from some downsell. We haven't seen real sustained kind of weakness.
We feel well how we're positioned and think that the consumer is still highly supportive of experiential and our properties.
Staying on the different business lines, if we go into eat and play, Topgolf, one of your top tenants. It's also been in the news over the past couple of years. Just curious how that business is trending and coverage levels there.
Again, I think for us, it's been still relatively strong. I mean, we've been affiliated with them for now probably approaching 20 years. Again, a lot of we're in major metropolitan areas and feel good about that. I think they are figuring out how they're going to separate from Callaway, and that story seems to be changing. We'll see how it works out, but we feel very confident that if you look at our coverages, they're very strong properties and we'll have no issues in what we own. Hopefully, if you look at what they did, Callaway bought them and asked them to be a growth vehicle in total number of units. If you talk to them now, they want to get back to growing more purposely and fewer units, but higher productive units, which reflects our portfolio.
This is probably a good time to pause as we're talking about the different business segments and tenant exposure if we have any questions from the audience. Sure.
Excuse me. My name is Rob, and I actually work with a group of large number of retail investors that are interested in EPR. I've been exposed to it through Topgolf and have invited that way. My question is related to actually the investor presentation you wrote. Strategically, if you all shared this morning to reduce the position in theaters as well as the early childhood education areas, based on what you just said around the strengths in theaters, is strategically, are you still looking to reduce that position?
Yeah, let me take that off. Again, historically, triple-nets that we're a part of, concentration is viewed as a weakness. They want greater diversity. Our exposure in theaters is about 37%. What we want to do is reduce that exposure, not because we do not like theaters, but because we want to increase our diversity. We'll always have an exposure to theaters because we think it fits in an experiential kind of portfolio as ours. It's just that there are, when you're that concentrated, if you have issues like COVID or something, certain things get exacerbated. We want to kind of increase our diversity. The second point was education. As much as I'd like to convey to people that going to school is experiential, I can't carry that argument. That's a strategic fit. Again, we've said that just doesn't fit in with kind of the experiential.
The business is quite good. It's performed very well. Our coverages in early ed are higher than they were in 2018. It's just really from a strategic kind of telling our story and being concise and it being experiential.
That probably lends itself to a good follow-up. Just if you could talk about some of the recent successes that you guys have had in that capital recycling on the disposition side year to date.
Yeah. I'll let Greg, who's kind of led that effort, kind of talk about that.
Sure. I think, RJ, a couple of things. One, as a result of the Regal bankruptcy and the restructuring we did with AMC, we took back a number of theaters with the thought that we would sell them over time. Over the past four years, we've sold 27 theaters. Right now, as it stands, we only have three vacant theaters, and of those, we have contracts to sell on two of them. We're quite pleased with the results on that. With respect to early childhood education, we had restructuring of one of our tenants. KinderCare took it over and then went public. Through that, we also had a couple of vacancies, which we sold. We have said all along, as Greg mentioned, that since education is not a core part of our portfolio going forward, at the appropriate time, we'd monetize.
We were able to announce a deal where we sold some assets for a 7.4% cap, which we're quite pleased with. I think as you think about our education portfolio going forward, it'll be recycling when we have the opportunity to use that capital to deploy into other experiential opportunities.
Maybe just some more color on the proceeds or the pricing that you've been able to achieve on some of those.
I think you've referenced we did a 74 on the education.
Yeah. On the theater side, RJ, if that's what you're asking, I mean, most of those theaters were vacant, so we're selling them for real estate value. We have a contract to sell two theaters that are leased by an operator back to that operator that we hope to close at a 9% cap. We're not seeing a lot of trades yet of cash-flowing theaters yet in the public markets because of the theater recovery.
What do you think the catalyst is to start seeing some trades in the theater space? Obviously, the box office is recovering quite well. We're seeing higher food and beverage spend.
I think it's really, again, there's two sides to that, and I'll talk to both of them. I think on the private side, you're going to start to see it because debt availability, and again, that is really what's going to drive that. On the public side, I hate to point the finger, it's investors. If you think about all the public REITs, for a large majority, they owned theaters for a while, and then we went through COVID, and that was like, "Oh, don't want to own theaters." And people used to start their earnings call going, "Oh, and by the way, I don't own any theaters." And you never owned any theaters before.
I think as investors make it okay, which we're starting to see that, questions like, "Do you really want to get rid of something that's working?" Those sorts of things, we'll start to see that open up as well.
Questions.
Another one related to.
We're boring, as many questions as you ask.
Related to Six Flags, you all work with them on a lot of occasions. What does it look like as far as, now, they're seemingly looking like they're expanding and building new parks? Is that something that you all work in tandem with them, or is it an area where you opportunistically kind of look to buy some of those properties when they're changing the operator?
Sure. I think I'm going to challenge that a little bit because if you think about Six Flags merged the last couple of years with Cedar Fair. While the name says Six, all of the management is Cedar Fair. Richard Zimmerman runs that. I think they're going through a process now where when you combine two companies and they went from about 25 and 18 or 25 and 20, they're expanding certain parts, but nobody's really building a brand new park. They're looking at rationalizing some of their, what I'll call their fleet, where they have two parks that are too close. I think we continue to talk to them and work with them to see if we can be part of that solution, meaning some other operator that is interested in that or how they want to do that.
It's been a very good and close relationship. Greg and I were down meeting with them two weeks ago in Charlotte. I think they're working through that process. If you heard their last earnings call, they talked about it. They're very hopeful and excited about this coming year with the fact of something you mentioned, RJ, staycation kind of thing. They're actually quite positive on how the year is going to play out for them. Hopefully that will lead to opportunities that we'll be able to be a part of.
Greg, I don't know if you have.
No, I think that's yeah.
You ready?
Yes. Here it comes.
Two-part question. The first one is.
Concrete. Wet and it's dry.
The 3% of locations and 8% of box office. Is that still the case this year as it was last year?
It's actually a little higher than eight.
That's what I like to hear. As far as the low-performing locations, do you see some of those coming back to you in the next 12 months, or is that mostly in the rearview mirror?
I think that's mostly in the rearview mirror. Remember, when we went through these things, we culled. And so I don't think that we have that.
Greg, I mean, I don't think you.
No, again, I would say, as we've said, we're intent on reducing our exposure. If the right opportunities come along, we will continue to trade in theaters. I don't think we'll see a lot of vacant theaters coming back to us. Kind of been through that.
It sounds like even the low-performing ones are turning a little bit of a problem now.
Yeah, but I mean, most of the low-performing ended up being vacant theaters that we took back that weren't through insult.
Exactly. Right. Thank you.
A big part, and Mark will get you involved. A big part of the success that EPR's had, the returns that they've had, has been the dividends. Part of that is just the amount of free cash flow that the portfolio generates. Can you talk about the free cash flow? Can you talk about the dividend policy? Recently increased the dividend. How do you think about that going forward?
Yeah. We took the opportunity kind of post-COVID to reset our dividend at about a 70% payout ratio. Whereas before, we were in the low 80% payout ratio of cash flow. So we're retaining more cash. And the beauty of that is we generate probably roughly $130 million above and beyond our dividend and interest payments, which that's cash to it's got pretty good juice as far as growth. So we're using that $130 million plus some of these disposition proceeds to allow us to do about $250 million of investments per year without having to access the equity capital market. Because our equity, although it's gotten much better, isn't quite there where we can raise equity accretively. So we're able to do $250 million, keep our leverage, which currently is about five times debt to EBITDA, so at the low end of our range, and still grow.
This year, our growth is a little over 4%, which is better than the triple-net peer group with a lot less execution risk because we have that retained cash flow, we have the benefit of some disposition proceeds, and low leverage. It is really a pretty good setup. You combine that with some of the box office improvements, and we participate in the Regal percentage rents and so forth, which is also helping to fuel that growth. Low execution risk and result that is, I think, better than the peer group in terms of growth.
As part of that free cash flow, can you maybe talk about the investment pipeline, what you're seeing out there? Then maybe the decision tree is to at what point do you take a more offensive position to potentially issue equity to go out and buy additional assets? I think one of the things to point out for EPR is that because of that retained cash flow, I think that the 2025 earnings growth is going to be in line, if not slightly better than the peer group.
Forwarding stuff.
I'll let Greg talk about that.
Yeah, I mean, we feel good about the investment pipeline. As I said on the call, we continue to see a lot of opportunities in most of our verticals. I would say probably fewer in casinos nowadays, but already this year, we've introduced a foray into golf, which we've been looking at for a number of years. We feel really good about that. We did another deal with an attractions operator outside of Philadelphia. We feel really, really good about the fitness and wellness space. As I mentioned on the call, we opened our expansion of our Pagosa Springs, Hot Springs Resort in Pagosa Springs, Colorado, a couple of weeks ago, $80 million expansion. We also opened an $80 million indoor water park in Frankenmuth, Michigan. We feel good about the breadth of the opportunities we have.
I'll let Greg talk about when we hit the gas pedal or when I get told to hit the gas pedal.
I think it's getting more interesting, I mean, candidly. I mean, we're trading above an 11 multiple. So clearly, we could do things now that are gap accretive, if not a push at cash accretive. The reality is what this means is it opens us up for looking at potentially some larger transactions. I think the depth of what we have and Greg talks about is good and high quality. But we're very mindful of the fact that we're stewards of your guys' capital and the fact that it's our job to every dollar we spend needs to be an accretive dollar and create consistent and reliable cash flows. I think, as you mentioned, we're starting to get where it's starting to get interesting. It started to get interesting in the last two weeks. Again, maybe we would you can't turn it just that quick.
We're excited about if you think about what we did kind of pre-COVID, we did $500 million-$600 million a year, about 10% net asset growth. We think that's a good goal for us. We're not having to do $3 billion. We can do $500 million-$600 million and generate 4%+ kind of growth, which combined with our dividend gives you a double-digit TSR, which I think is hard for a lot of our competitors to touch. We think we can create a compelling value of investment, and we're very close to doing that.
Additional questions?
Go ahead. Fire away.
If you ask one more, they're going to think we're related.
I can keep staring.
This growth, which added to dividend yield, results in a TSR in low double digits. I'm just wondering, what is the capital requirement to achieve this growth? Because I looked at the charts and this is on your database. The return on equity is like mid-single digits, so I'm just wondering this must be wrong. What is the return on capital of when you invest capital and achieve this growth?
Again, the key to it is a couple of things. If you think about this first $250 million, we're using free cash flow and leverage so that we're making probably 600 basis points on that $250 million, which is substantial. The thing that we all talk about in REITs is that you make 100 basis points of spread minimum. Let's just say that. If you're making 100 basis points of spread, the next $200 million makes $2 million. That first, that retained cash and investing in that is really kind of the rocket fuel. Now, with that, we also have a lot of leases that we do not straight line. We're getting real FFO and AFFO cash boost from our increases in our escalators in our leases. You combine those two.
Candidly, we've gotten pops from almost everything we have has some level of percentage rent kind of participation in there. Those are really starting to kick in. We're seeing growth along all of those. That percentage rent's not people always think about that in terms of as one tenant. We're getting it in theaters. We get it in ski. We got it in early ed. We're getting it in eat and play. It's coming across the board as these businesses continue to prosper.
Can you break it down further? Which is the TSR, you added like 4-5% from growth. On those components, can you break it? Or maybe it's not available. Over the long term, 10-20 years.
It's probably going to be kind of, Mark will help me, it's probably going to be 2.5-3% from our acquisition growth, another kind of 1.5% or so on our escalators. That's kind of how we kind of get there.
I have one final question, but we still have five minutes. If anybody else has any more questions, feel free to ask. One of the things that we love about the net lease space is the CapEx and the minimal CapEx requirements. It is also very important to maintain theaters and make sure that the operator is keeping them up to standards and, if not, improving them. Can you just talk about how that works with your tenant relationships?
Yeah. Greg and his team do a really good job that is different than I think you would see in a lot of retail. Like Vail has a CapEx escrow that they have to fund for ski. Six Flags has one. A lot of our leases have built-in features which require our tenants to fund those sorts of things. Generally, we'll go through, we'll say, "What is the normal CapEx expenditure, whether it's 2%, 3%, 4% of revenues?" We will make them fund that throughout the year. Then we'll pull it down, allow them to pull it out to fund those. Greg, I don't know.
Yeah. RJ, another thing that we talked about when we did the Regal deal is we made an arrangement with them that we would meet them halfway on CapEx as long as it was going to be income producing so we get a return on it. We try to do that as well with some of our tenants. If indeed they need more money, we'll advance it, but we need to get a return. We need to be comfortable that we're going to get the return. We underwrite it.
With that, any additional questions? If not, thank you guys very much.
Thank you everyone.