Excellent. All right, good afternoon, everybody, and thank you for coming. My name's RJ Milligan. I'm with the Raymond James Equity Research team, and we're proud to present EPR Properties. And so with that, I'm going to turn it over, but I'd also like to encourage you, after a brief presentation, to make it as interactive as possible and raise your hand, and let's have an engaging discussion. With that, I'll turn it over to Greg.
Thank you, RJ. Joining me up here today to my left are Mark Peterson, our CFO, and Greg Zimmerman, our Chief Investment Officer. I think for a couple of opening comments, I think for those of you who may or may not know, EPR is the truly only diversified experiential REIT. We focus on experiential properties, not traditional retail or some of the major office groups. I think for us right now, it's an exciting time as most of our properties have recovered from COVID and are recovering. As many who follow us would know, we have a large exposure to the cinema industry, and there was a considerable concern about that coming out of COVID. However, I think now we've seen that the industry is not only going to survive but flourish.
We've got. We're moving from about $7.4 billion of box office last year to targeting approaching $9 billion this year and even greater next year. We've got all the studios who are now committing to theatrical exhibition. And we have, in our non-theater exposure, we had coverage ratios of low twos that have moved upwards to 2.7 as we're exiting COVID. So again, a really great position we find ourselves in that's strongly supported by the consumer with really accelerating growth prospects. I think overall, a value proposition for EPR, given what I just told you as a backdrop of COVID, we're trading at what we think is a significant discount to our valuation. That's notwithstanding being the best-performing triple-net REIT of the year.
We still think we have a long way to go as far as value creation, but we feel like we're well-positioned to do that, and we think that we have some catalysts coming forward that will help further that value creation. With that, why don't I, I don't know if either one of you guys want to add anything, but with that, why don't we open it up? These are best generally dealt with questions, so why don't we open it up there?
Sure. And I'll start out with just a few questions, and then we'll open it up. But if we focus on the non-theater portfolio, experiential, obviously during COVID, everything was pretty much shut down. As you mentioned, an improvement in the coverage levels versus 2019, so more people are doing experiential. One of the questions that we get from investors is, given these uncertain macro times, what is, is there a concern that the consumer may pull back on experiential if we do go into a recession? And what does sort of history show you about the performance of the non-theater portfolio?
Sure. I think the key to understanding most of our portfolio is understanding that it's a drive-to destination, not a fly-to destination, which we think, and we're also generally on what we think is a value part of the equation. And so historically, most of these, different than what may have been intuitive to people, is they outperform during recessionary times. And I'll give you a quick data point because people have asked us about this. They said Topgolf, when that gets the economy, how's it going to do? Well, Topgolf issued a report earlier this week or earlier this year, and we had some people say, "I read a headline that their forecast is down." And I said, "Yeah, it's down. It's gone from 9% growth to 7% growth for corporate spending." But 7% growth in the face of what we're saying feels pretty good.
We're seeing a lot of real resilience. If you look in, like I said, if you go back and you mark, and I know you said non-theaters, but I'll give you a data point. If you talk theaters to recessions, they generally always outperform in recession. It's the lowest-cost form of out-of-home entertainment. The ski business, again, people may not fly to their destination, but they're still going to their local drive-to destinations. And we've had great history with that. The good thing about our business is this is our 25th year, so we've had a few economic cycles, and we've seen really solid performance all through those.
I did want to talk about the theater portfolio.
He saved it one question. He held one question in.
We'll mix in a little bit of both, but I did want to talk about the theater portfolio. As an analyst covering the stock and talking to investors over the past two years or three years now, COVID comes, everybody says movie theaters are dead. Nobody's ever going to go back to the theaters. We've seen that clearly in the box office numbers that that hasn't happened. One of the other pushbacks that we got from investors was the move for studios to go direct to streaming. Can you talk about that dynamic and sort of how that has played out?
Sure.
I think if you're, again, I'll give you a little longer history. The death of the movie business has been going on for at best 80 years. TV was going to kill it, then cable television was going to kill it, then VHS tapes were going to kill it, then DVDs were going to kill it, then streaming was going to kill it. I think the reality is we just had the perfect storm if it was going to die because every studio generally has a supporting streaming platform. They had the ability to try this model out. And what they found was it doesn't work. People don't want to experience, or they're not going to pay a premium to see that experience in their home. It's an out-of-home type of entertainment option, and so what we've now seen, and don't take our word of it. Go talk to the studio heads.
David Zaslav, who is one of the prominent studio heads, said it was totally flawed, and it was, who ran HBO, he said, "We did day-and-date release on streaming." He said, "It's the worst move we ever made. It was economic disaster." Not my words, his words, and so what we're seeing now is just the opposite of that. This year, we now have Amazon and Apple committing to putting movies in theaters before they go to streaming. So if you want to make money, and now subscriber growth isn't the driver, it's actually making profit, then the model is pretty straightforward. You release your movie into the theaters for a defined period of time, minimum 45 days, and then you release it to your streaming platform, which is, again, to use a movie analogy, we're just going back to the future.
That's the way it was before, and we're going back to it. And if you look at day-and-date examples, Amazon made the movie Air, which is the Phil Knight, Michael Jordan kind of story. They decided, "We're going to release that to theaters first." It made $82 million in theaters. Then last week, they released it to their streaming and are saying, "This is the way we should do it." We love to hear that from the studios, and we think the model is proving out that again and again, this is the way the consumer wants to view that.
Questions from the audience?
Sure.
First, an observation and then a question.
Absolutely.
Blockbuster. Streaming killed Blockbuster into movie theaters. Blockbuster was going to kill movie theaters, but it didn't. Movie theaters are staying. My wife and my kids can't get enough Marvel movies.
We'll have you make a, can you get that on tape? What he said? Yes.
I'll repeat it for you. Question. You had a deal to buy a casino that didn't come to fruition. What are your thoughts about going into the casino or purchasing casino properties these days?
Okay. Just for the record, the question was, we had a deal to buy a casino property. We pulled out of that deal going into COVID. What are our thoughts on casino properties going forward? We think gaming makes sense in a diversified portfolio. We don't want to become a gaming REIT, but we think it has a place in a truly diversified model. We did have a transaction. We can talk about that transaction now. That transaction was Maryland Live in Baltimore, that GLPI purchase. We like what we think of as dynamic regional assets that have more than just gaming, that had live performance. There's a lot of things going on for it, and we think in the future, we're still going to look at those deals. We continue to see them. Given our cost of capital, it probably doesn't work in the size that those are.
But I think long-term, having an element of that is appropriately in our portfolio.
Greg, I don't know if you...
No, I think that's absolutely right. And we continue to see almost every deal that transacts, and we're paying attention. Additional questions?
Just to be more specific, you mentioned some, I think it was some dollars that the [colleague] studio released this year. Can you contrast that to what was pre-COVID number? But also talk about seat bucks in the seat at theaters.
Sure. I think, again, we tried to explain this to people, and hopefully, it'll make sense to you. The highest correlation any year for how box office is going to do is the number of wide-release films. I know that sounds, but I'll give you an example. Last year in 2022, we had 74 wide-release films. Now, you'll hear a number. There's 400 films, but trust me, wide-release films. In 2019, there were 132 wide-release films. So that's 68%. Box office was 67% of 2019. So that number correlates. You can take it back year over year, and the number of wide-release films highly correlates to box office. So in that year and this year, you'll have roughly 80%-85% of the total box office will be made up of those number of wide-release films. The remaining 300 will make up $1.5 billion or $2 billion.
So this year, we're going to have 100 wide-release films. So we're going from 74 to 100. So that's why I say when we go to $7.4 to $9, it's really about the number of wide-release films. In 2024, we think we'll be at 120. So we're getting back toward building that content back into the pipeline to get to that 125 to 130, which are really kind of the determinant of where box office goes. It's not as much as trying to predict each film how well it will go. Just take that total number, and you'll get back really close to where kind of box office is going to be.
And headcount, tracking the better. I had the impression that prices are 25%-50% higher than they used to be.
It's a great thing. It's cheaper to go on an inflation-adjusted basis to the movie today than it was in 1973. I mean, again, it is. It actually kind of lags that. The other point that people often don't miss, or there's two things I want to touch base on. One is just how big is it? Going to the movies is bigger than all professional sports attendance combined. That's football, basketball, baseball, hockey. Add them all together, they still don't come close to the number of people who go to the movies. The other aspect about your equation about just the revenue kind of generation within a theater and why for us, 2019 was $11.3 billion box office, but we don't necessarily need 11.3 because the revenue mix at a theater has changed.
When we entered 2019, or if you look at 2019 actuals, the amount of food and beverage spend was approximately $5.40 per patron. The food and beverage spend in 2022 was approximately $7.60 per person. So again, that's a much better margin business, that food and beverage. And the reality of that is we have the ability now to sell alcohol in theaters. And that's been a game changer relatively to the food and beverage. And that's 75%-80% margin business. So the actual EBITDAR can get back to 2019 levels without achieving 2019 box office levels.
Additional questions?
Okay. Let's talk about the alcohol at the movie theaters for a second.
Everybody wants to talk about getting a drink.
Does it do the same thing as a license that a bar or a restaurant would have? And if the movie theater operator has financial troubles, does that license stay with your property or does it stay with the operator?
It's generally jurisdiction dependent. In a lot of jurisdictions, we have to be a participant in that as the property owner. So it can be transferred to us. But it is very, very jurisdictional dependent. But if you look at generally, when you think about theater amenitization, and we'll talk about that, and I'll have Greg comment on that at three different levels. One is what we call recliner amenitization. So if you've gone to a recent one, they have the full recliners. They're wonderful seating. Expanded food and beverage, which generally includes liquor license. And then what we call PLFS or Premium Large Format Screens, IMAX, things of that nature. If you look at those, generally speaking, our theaters are about twice the industry average of all of those things. Meaning that if reclined seats are in the low 30s, we're 58%. If alcohol is 30-45, we're 75%.
So again, our portfolio is at the premium end. And to your point, we treat the license or often try to treat the license that we would get a security interest or be on the thing so that we could control it.
But Greg, I don't know.
Yeah. The only thing I would add is we're in the experiential real estate business, and one of the things that people want in a theater is a good experience. So we're proud of the fact that our theaters are amenitized with premium large format screens, recliners, enhanced food and beverage, because that's what the customer wants in today's world.
So I have a question for Mark. And obviously, for those of you that don't know, EPR pays a pretty outsized dividend relative to its peers. But can you just talk about the coverage of that dividend, the free cash flow still that the portfolio generates after paying that dividend, and then thoughts on the uses of that free cash flow?
Sure. So prior to COVID, we had a dividend payout ratio in the low 80s, which is probably pretty typical of REITs. But coming out of COVID, when we reestablish our dividend, we reestablish at a level that's actually high 60s today, mid to high 60s. So what that means is we're retaining more cash flow. We're generating a lot of cash flow. And this year, we'll generate well in excess of $100 million of free cash flow. So we're coming into the year with zero on our line of credit, $100 million in the bank, and generating over $100 million of cash flow. So we can take that free cash and invest it accretively, obviously, because it's generated by our portfolio, and grow probably 3%-3.5% just on that small level of investment. Normally, we would do more than that.
That translates to $200 million-$300 million of investments a year. Normally, we'd probably do more $500 million-$600 million. But because of the cost of capital is not there, and most of our growth comes from retained cash flow, we thought it was appropriate coming out of COVID to set that level lower. So it's very well covered, and it allows us to still grow in a capital-constrained environment.
Additional questions? Don't be shy. All right. Well, I'll kick it off. On the external growth side, you guys have said that it's not really a lack of opportunities. It's more of a cost of capital issue. But maybe you can talk more about where those opportunities are if we do see an improvement in the cost of capital.
Sure. Greg, do you want to?
Yeah. I think we're seeing, RJ, we're seeing opportunities in all of our verticals. Last year, we actually transacted in each of our verticals other than, as we mentioned, gaming. We're not going to grow our theater exposure, and we're not going to grow our education exposure. We did cultural attractions, eat and play, experiential lodging, fitness and wellness. And in some of those categories, multiple opportunities. We continue to see those. Already this year, we acquired the VITAL Climbing Gym in Williamsburg, Brooklyn. That's our second entrée into the climbing gym space. And then also interesting transaction at the end of last year, we financed the acquisition of Gravity Haus, which is six kind of boutique hotels in mountain towns, which also have enhanced food and beverage, fitness aspect, and then co-working space. We're really excited about that opportunity as well.
I think the other thing I would add to that is if you saw our investment spending last year, we closed $600 million worth of deals, stated value. We funded about $400 million of that. So when we gave guidance this year of $200 million-$300 million of spend this year, we already have accomplished with what we've done at the Vital. We're at about $191 million, if that's fair to you. So again, as we said here in the first half of the year, we're at the lower end of our range already. So we feel good. Again, that means, like I said, we've got a lot of pipeline of opportunities. There are a variety of avenues.
I think what we're telling people is we're focused on two. I won't say verticals, but two major categories. One is supporting existing clients, meaning that again, if we have a relationship with somebody, they're organically growing their business. It's important for us if we think it's a good value equation that we support those. Evidence of that is for those who are in and around the Philadelphia area, the new Topgolf King of Prussia will open in the next two weeks. That will be ours. And so hopefully, you guys who are in that area will get a chance to have that experience. Also, supporting existing clients, but doing new deals that give us future growth. Greg mentioned Gravity Haus. It's very similar to what we do a lot.
When we do a new deal with somebody, we also enter into a relationship agreement that we get access to your product either for a number of years or for a set amount of capital. That's not a commitment by us, but you have to show it to us, and if we want to do that deal, we get to do it, so we're mindful of supporting tenants, but also creating pipeline that gives us future growth.
So you mentioned that EPR is the best performing net lease stock year to date, but granted, starting from a pretty low valuation.
We've written a lot about the potential near-term catalysts of coming to a resolution with Regal, which is one of your largest tenants that's in bankruptcy and expected to emerge in early July. Can you talk about, obviously, you can't talk about the negotiations, but maybe the timeline and the thought process as you think about that process?
Sure. What we've told everyone is that Cineworld's stated timeline is to file their order of kind of confirmation order June 27th, 28th, and their stated timeline is for the judge to either would approve that and issue his order around July 7th. Again, our thought process is that if we're successful in negotiating some terms, we would then have a call in which we would lay out kind of the impact of that, what it means for us, why we did it, and all the kind of idiosyncrasies of any sort of agreement, but again, I go back to your earlier point on value.
If you look at kind of where we're at right now, historically, not being as diversified as some of our other triple-net peers, if you go back and look at our history, we generally traded at about two turns kind of below the median of the triple nets. We can argue if that's justified, and me and my family will have a big argument about if you think it's justified. But anyway, if you think about it now, we're trading at about nine multiple, and the median peer is about a 13.5 , 13 and three quarters. So we think there's a really good opportunity for at least two to two and a half turns of value creation for EPR as we move into some of these catalysts and we remove certain of the reasons for people to have hesitation to invest in EPR.
Yeah. We would argue that it's the lack of clarity versus really any economic impact that I think has some investors on the sidelines, and we certainly see that as a near-term catalyst. So we have time for just a few more questions. So please.
I'll throw another one, you're right. You've talked about occasionally the theater backlog. That's no longer viable as a theater. It gets repurposed to best use, sometimes residential, sometimes retail, sometimes warehouse. First, how many properties do you have that are currently in that for sale or repurposing status? Second, typically, what's the amount of time it takes you to work a deal? And third, when you finally do sell it, are you making money, losing money, breaking even?
Yeah. I think, again, I think we have two properties.
We have two.
Two properties left. We've probably done 12.
We've done nine since COVID. So that'll give you, we'll call it two, two and a half years. We've sold nine.
Yeah. The biggest issue on timing is really about are you zoned correctly? I mean, and so if there is adequate value creation for getting that rezoning, then we'll proceed that. So as an example, if you say, "I've got a parcel. It's worth $10 million, but it's worth $25 million if it's zoned for warehouse." And we think it'll take 12 months. Well, that's probably worth it to try that if you go. So that's generally kind of the almost everything timing related relates to zoning and getting the right zoning. I think overall, I think we would have, given the length, a really positive ROI on all of those investments. Remember, most of these, it's been a theater for 20 years. And then what you've depreciated down and the land value is appreciating, even if it goes, they're going to knock it down and turn it into residential.
It's generally a pretty good equation for us.
Yes. Just a quick question on the comment you made about trading kind of multiple two times higher or two times higher. Is that on current incomings, or is that on what could potentially be an earnings number that is reduced by whatever?
Again, that's just really the multiple. So again, you could apply whatever kind of FFO. I'm just saying when you look at the multiple that we have relative to other multiples. So again, I think it's upon us to demonstrate to you guys what the FFO will be once we have some sort of resolution of this or the AFFO, whichever one you want to do. But the underlying quality of that, it really kind of speaks to the multiple.
It's generally a forward multiple based on analysts' consensus for next year, really. That's probably the best way to put it or forward 12 months, and that should take into account their estimate of whatever R egal impact would be.
Right. For example, our estimate does include a rent reduction for Regal. So that multiple is a lower earnings base than, say, the 2022 run rate.
Yes, sir. I remember a few years ago, you had an emphasis on charter schools. I wonder what's going on in that sector and what you guys are doing there and what the business is like.
It's actually the business is doing quite well, but we sold all of them. We sold all of those and did a, I think, 12%.
12% unlevered return.
Unlevered return. Again, the business for EPR was quite good, and I think it's done quite well, but we no longer have any interest in that.
We do have some. We still have early childhood.
Early childhood, but not in charter schools.
With that, we have time for one more question.
Again, this is my perspective. It's not that they were unsuccessful as an investment. They were unsuccessful in a triple-net public income vehicle. Again, I think a lot of people, we got a lot of questions. There are headlines in charter schools. There's a lot of much more concern. It's a very, very local business, and there's always something in the paper about them. People didn't understand them. The model was often like you would have a charter school that would operate five-seven years, and then they would want to buy themselves out of a lease, and they would pay us a 20%-25% premium, which is a good economic model. But it was a difficult model for net lease investors to get their hands on.
Great. And with that, thanks everybody for attending, and thank you to EPR.