Today. Good afternoon, everyone. My name is Upal Rana. I'm the Senior REIT Analyst at KeyBanc Capital Markets. Thank you for joining the EPR presentation. We are joined here by Greg Silvers, Chairman and CEO. I'll have him introduce the rest of the team.
Sure. Thank you, Upal. To my right is Ben Fox, who is our Chief Investment Officer, and to my left is Mark Peterson, who is our Chief Financial Officer.
Great. Greg, for those in the room who are not familiar with EPR, maybe you can give us a quick overview of the company, what you own, how the portfolio is structured, and maybe what differentiates EPR from the rest of the net lease REITs.
Sure. First of all, it feels a little bit like my college classes, everybody sitting in the back of the room. There's plenty of seats up here in the front. We won't call you out. EPR, we're organized as a net lease REIT. Again, that's our primary, but our focus is different than most of what I would call the retail world. Our focus is on what we call experiential assets. Those are generally not where you're buying a product, but you're creating an experience. We deal in the world of memories, whether that's the movie theaters, whether it's amusement parks, whether it's water parks, whether it's Ski properties, whether it's eat-and-play attractions, fitness and wellbeing, that is our focus. We're unique in that way.
We're the only diversified experiential REIT that's out there, and have delivered what we think are really strong and exciting returns, and feel like our unique space gives us an opportunity to recreate those returns for the foreseeable future.
Great. The experiential economy has been a popular secular trend recently. Can you talk about the durability and the resilience of your portfolio today, especially in today's economic environment?
Sure. I think first of all, remember, when we talk about the experience of economy, if you look at now what will be 2024 to 2025, the experience economy grew by 7%. In the face of what was a challenged consumer, it continued to grow. The economy of experiences as opposed to the economy of stuff, has continued to be valued and continue to grow in value with the consumer. Our overall portfolio has been incredibly resilient. Our coverage, which is four-wall EBITDA compared to our rent, has been remarkably stable over the last two years, generally in and around two times. Again, we really haven't seen the degradation. The consumer seems to be hanging in very well with our properties. If you look across the board, in different areas, the theater space right now, box office is up 12% through May 31st.
Again, if you look across a lot of our categories, we're seeing actually positive trends. Notwithstanding that we're not acknowledging the stress in the consumer, it's just not manifesting itself in our Experiential properties.
Great. It seems like growth has been a central part of the EPR story lately. The company's had a great start to the year. You beat earnings, raised your guidance. Earnings is implying about 6.5%, which is at the high end of some of the net lease peers. You've also raised investment guidance up to $550 million. What's driving that acceleration, and how sustainable is that?
Again, I think for us it's really getting the cost of capital that makes driving investment volumes greater. As we came in this year, we created a focus on driving those volumes. The opportunity set is there. Like I said, we're unique in the property types that we pursue, so we think that we're uniquely- positioned to take those. Last year we did probably $270 million, $280 million. This year, our targeted range right now is close to $550 million. Last year we did 5.1% growth. This year, I think right now at our guidance range midpoint is about 6.5%. I think we're well-positioned not only to continue to replicate that, and given our size, that with the investment volumes that we're able to attract, that we could do that for the foreseeable future.
I wanted to touch on your recent acquisition, the $300 million Six Flags acquisition. It was one of the company's largest post-COVID. Six Properties have already closed. There's one left. Can you give us the latest update on where things stand and how those parks are performing relative to your underwriting, and how that's impacting your growth this year?
Sure. They've opened all within the last two weeks, so the performance to date is looking really well. Again, it's nice. Remember, those are parks that generally Memorial Day to Labor Day are kind of the They have certain weekends after that, but that's it primarily. Again, I probably am the only person who's out reading Yelp reviews of amusement parks, and it seems like things are going quite well. I think what we suspected was that Six Flags and Cedar Fair merged, and they created a company of about 55 parks, that some of those were not getting the attention that they needed.
When Six Flags came to us and talked to us about a transaction, we selected some parks to do, to work with operators that we felt had a strong underlying consistency in their performance that just needed someone that was their priority to that.
We worked with various operators who could meet all three of the criteria. one, they had expertise in running parks of this size. Two, they could bring capital not only to pay for the operations, but to pre-fund both deferred maintenance and maintenance capital reserves for the parks. The operators that we worked with were able to do that. I think clearly they've got a real focus on making these parks stronger. Like I said, we bought them at, we think, are very, very attractive pricing, and we feel like we're well-positioned as it moves into their operating season.
Great. That was helpful. Maybe we can touch on the golf segment. It's been a meaningful new vertical for the company. EPR has acquired five property golf course late last year in Dallas for $91 million which is part of the health and the fitness and wellness category. Topgolf is part of the eat and play categories and is one of your largest tenants. How are you thinking about the golf thesis and what the pipeline looks like there?
We'll segregate those just a little bit. For one, what we call traditional golf, which really has caught our attention mainly because of the supply-demand dynamics. Since about 2008, there's been about 4,000 golf courses that have come offline, the demand dynamics have totally changed. Therefore, we're able to what we think, purchase non-replicable assets that have tremendous amount of demand. We feel like we're able to buy these attractively. We like the setup. The operators, again, consistent with what we've said before, bring capital. They're committed to the property, signing long-term leases. We feel like we're in a good position. On our Topgolf or not Topgolf, again, it's been very resilient for us. High coverages.
Again, when we think about Topgolf, there's a lot of noise, but remember, this is a company for the first 15 years, they never even marketed. They just opened the doors, and people showed up and waited in long lines. Now they're having to get out there and compete for time, so they're dynamically pricing. They're looking at their marketing. The underlying fundamentals as far as foot traffic and everything remain very high. We're pleased with both of those options.
Great. Beyond Six Flags and golf, what else are you seeing that's the most compelling new opportunities today? Are there any other verticals or property types that you're actively exploring?
Yes, as you guys have heard enough from me, I want to let Ben, who runs our investments, give us a little bit about what he's finding exciting now.
I think what we're finding exciting, Greg, right, is that there are just ample opportunities across all of the sectors. I think a theme that Greg is touching upon, whether it's in golf or attractions, is the experience economy is benefiting from secular tailwinds from demographics, whether that's Gen Z on one end or the baby boomers on the other end, whether that's across fitness and wellness, other experiences of eat and play, attractions. Consumers are voting with their wallets, and they are choosing to spend on these experiences. With that, there are a lot of entrepreneurs and existing businesses looking to continue to capitalize on this spending, and we are the partner of choice, given the depth of our investment team's relationships and breadth.
We're often the first and many times the only call being received in order to partner with these operators as they look to grow their businesses and expand.
Yeah. Ben, maybe we can touch on that a little bit more on just the sourcing of the deals. Is there something that you guys do that's unique in terms of sourcing more of these deals and top-of-funnel opportunities?
Yeah. Well, that's really what the team has done so well is foster relationships over multi-year periods, right?
Hang on. Just get a picture. We got to look good here.
It's the rare exception-
No, that's fine
for us to have a shiny package put in front of us. Most of the time, it's our team working with folks in the industry who might be new to doing sale-leaseback or using net lease capital. We are working with them and creating these relationships, some of which take two, three years to develop. It creates a very attractive moat for our business in these relationships.
Got it. That was really helpful. Maybe we can touch on capital recycling a little bit. You've had some success in reducing some exposure to theaters and some of your education portfolio. Maybe you can talk a little bit about the progress you've made over the last few years and what's really left to do there.
Yeah. I'll take a little bit. I think part of our capital planning really comes into form as we talk about three buckets. If you think about our free cash flow, which is about $140 million, if you talk about dispositions, capital recycling, you talk about raising equity, we talked about in the first quarter, we raised about $50 million on our ATM program. You look at those three buckets, of those, the dispositions, it's really that and the ATM is one that we can expand greater. We've said there's two categories that we're looking to reduce our exposure into. One is our education, which really is not as much as a risk issue as it just strategically doesn't fit in an experiential focus. We're committed to recycling that capital lowering our theater concentration.
The last couple of years, we've done a significant amount in the theater side. We've probably sold 35 theaters. This year coming through, I think you'll see us a little bit more on the education side, selling some of that. All of that is to build that pot upon which we can reinvest. There's been really good, in our education side, a real good spread for us to sell and then redeploy that capital. We think that creates really good opportunistic recycling.
Great. That was helpful. Then maybe we can just touch on the Theaters segment of the portfolio. It's typically one of the largest segments within the portfolio, and it seems like the industry is starting to pick back up again since COVID. Maybe you can talk about some of the dynamics of the Theater industry and relative to your portfolio and what's sort of changing there.
Sure. I think there's just generally some overall positive that have occurred in the last couple of years as we've kind of gotten through COVID and then through the strikes. We've got a much more recognition of how streaming and the theater system are going to exist, and you've got all of the studios now recognizing that they actually exist quite comfortably. This last year, we've had Paramount announce that they want to do 30 films a year. You had Universal, who was a different in the shorter window period. They used to say that some period would be 17 days. They announced that they're going back to a full release window, 45-day window. You have Netflix, who just announced they're going to do their first full theatrical release with Narnia. Again, another part of content.
What you've also seen is what were some smaller studios now really gaining traction with what you saw over the last weekend, two weekends with "Obsession" and "Backrooms", two A24 studios that releases that both did over $100 million. I think what fundamentally the ecosystem has realized is that the consumer doesn't punish you for releasing to theaters and then showing on the streaming platform. It gets the studios two bites at the apple, two revenue sources. They're all sort of embracing that mantra. Again, what it really is created a really kind of positive outlook in the space. The forecast, not only for this year but next year and beyond, is for escalating box office, which should play very well to our underlying portfolio.
Maybe you can talk about where is the Theater business today relative to prior to the COVID? Maybe some of the economics and maybe there's a food and beverage component, the foot traffic content that you've already touched on.
Sure. It's really, if you look at the business on an EBITDA standpoint, from a box office standpoint, in 2019, we had $11.3 billion box office. We also had a food and beverage component that was about $4.20. That's per person. If you forward now, we have a box office this year that's expected to be about $9.5 billion, but a food and beverage component that's $8.75. Notwithstanding what you may know or believe, that it's pretty high margin business in that food and beverage. That Coke has got a lot of good margin in it. Actually from an EBITDA standpoint, those two are equal.
The EBITDA from an $11.3 billion box office with a 45% margin and a food and beverage now a $9.5 b illion with a 8.75 with an 80% margin, the total amount of EBITDA that those two sides correct are equal. We will be back to the same level of EBITDA that we achieved at pre-COVID this year. Again, and now as we start to move past that, like this year's expectation is somewhere between $9.5 billion and $9.7 billion box office next year. Pundits say $10 billion. We're moving ahead as far as where we're at as total EBITDA contribution.
Great. How do you expect the Theater business to trend over for the rest of the year in terms of content?
It should be Again, the content is pretty well laid out right now. What's really exciting from somebody who's in this business is the depth and breadth of the content. If you think about just in June, it's not dominated by a superhero, really. You've got family product with "Toy Story" and "Minions." You've got full-on dramas with a Steven Spielberg film called "Disclosure Day," followed up by another Christopher Nolan product called "The Odyssey." Now we just had two $100 million horror pictures in there. It's really expanding the depth and breadth of the offerings, which we've always said it's a content business, meaning the more content flows, the greater the box office results will be.
Great. That was really helpful. Maybe, Ben, if we can bring you back in. Could you walk us through how EPR underwrites new investment? What are some of the key attributes you look at and how you decide to pursue or pass on certain properties?
Yeah. The underwriting process is really rigorous. To put it in perspective, the underwriting team and investments team, I'd say probably 80% of our team has a CFA, right? In terms of the process, before we enter into any new industry, we often talk about the demographic themes and that. We write a white paper on the industry covering all of those dynamics from a macro perspective down to a micro, thinking about the landscape of operators, total addressable market, and even down to the unit-level economics so that we set a very strong framework within which we construct our investments.
When you then fast-forward into reviewing the actual opportunities. Given those relationships we talked about earlier, we see a really great breadth of opportunities, which allows us to be selective in what we're pursuing with a very high focus on the credit of the operator, those unit-level economics that we have already kind of identified what works and what doesn't, and then, of course, heavy emphasis on the underlying real estate and finding those opportunities that check the boxes across all of those categories.
Okay, great. That was helpful.
Thank you.
Maybe we can touch on tenant health today. Coverage remains pretty solid at 2x . Are there any tenants you're monitoring or anyone on your watch list? Maybe you can discuss some of the metrics you monitor to stay ahead of any kind of potential credit issues.
I'll jump in. Generally speaking, like I said, we're in a pretty good space right now. Again, coming out of COVID, we kind of dealt with a lot of issues. We're always on the theater space looking at AMC. They're performing on a unit level basis. When you ask about how we monitor, and I'll let Ben add, if you want, it's not only looking at your properties, but it's looking at your tenant and then your industry. What's the industry doing? What's your property doing? What is your tenant doing? Because you can have great properties, but your tenant gets in trouble. You can have a not-so-great property, or you could have a great tenant, but a not-so-great property, and then the industry.
Those are the ways by which somebody gets our attention, but I think overall, we feel like we're in as good a place as we've been for a while.
Maybe we can touch on the consumer a bit. With tariffs, elevated gas prices, and a bit of uneven performance across income cohorts, are you seeing any impact from guest visitation or spending from your tenant locations?
We haven't yet. Like I said, we do this generally through conversations with our tenants. Again, it's easy to look at the theater business as reported daily, kind of what box office is doing. As I said, it's up 12% through last Sunday. Again, it's clearly doing. It has a history of outperforming during recessions. If you go back and match it to every recession, the theater business outperforms. The Attractions business has just really, as I said, got started. It's really a kind of a Memorial Day to Labor Day kind of business. Now, when we talk to our tenants, they're actually excited because they think that most of our properties are located somewhere two to three hours in and around major metropolitan areas, and that people will be doing more staycations or not driving as far. They're actually encouraged by that.
Knock on wood, right now, we're not seeing it, but we're very mindful of that being out there, and we're monitoring.
Yeah. Maybe you can touch on some of the different types of Gen Z versus some of the Boomers or Millennials. How are they kind of playing into how your portfolio fits together?
Yeah, I'll let Ben add. I'll add, I think for us, it's really important to understand that those are the two largest demographic groups, and therefore-- What makes them very interesting is one has all the money and the other one wishes they had all the money. What we're seeing now is multigenerational opportunities, meaning if you go to our ski properties, you will see multi-generations there. Somebody's footing the bill for it, but they're there, and that's the way they're coming together. Especially what we see in fitness and wellness, it's two different perspectives. One, for Millennials, most of their lives, they have incorporated fitness and wellness into their lives. It's no longer consumer discretionary. It is just what they do. For those of us who are a little bit older, we just want to live longer.
We're doing everything that we can to do that, and that's more on the wellness side of that. Some of our business is focused on different aspects of that, but it's a way to lean into both of those phenomenas that allows us to capture both ends of that spectrum. Ben, I don't know if you have anything more.
No, I think that's exactly right. Just add on that really, the wellness side captures all of it. When you think about the Gen Z and the youngest cohort, even Alpha, and the concept of iPad kids and the children wanting to be plugged in, the opposite is really happening, right? They are 40% of attendance in movie theaters. They are craving and seeking in real life experiences, and the properties in which we invest facilitate that human connection where groups of friends can gather away from devices and cannot be disintermediated through the internet or artificial intelligence.
That was really helpful. Maybe we can bring Mark into the conversation. Maybe we'll talk about the balance sheet a little bit. We've talked about the company is on its way to growing earnings. Maybe you can discuss your funding strategy and your overall balance sheet strategy today.
Sure. Maybe given that there's only six minutes left, it tells you maybe our balance sheet's in great shape or there's not a whole lot of questions. We are in great shape. We finished the quarter at 4.8x leverage. Our range that we generally operate is 5x-6x, so we're under-levered at the end of Q1. We had nothing drawn in our line of credit and $68 million of cash in the bank.
If you roll forward our investment guidance on the U side and our debt maturities, we do have debt maturities in August and December this year on the U side, and then on the source side, the cash flow that Greg talked about, the $140 million of cash flow on an annual basis, and you run through that dispositions, it kind of points to at least one debt deal, let's call it $500 million, would put us at about $300 million on our line at the end of the year. One debt deal is kind of what in our plan, and we still end up in the low fives below the midpoint of our leverage. Now, given the growth and given the pipeline that we have, We raised $50 million of equity, as Greg said, in the first quarter.
We would look to incrementally raise more equity should our stock price allow, and potentially also look at a second bond deal or debt deal. That could be in the nature of a term loan, because we have that capacity. Pre-COVID, we had a term loan, so we have that source, and of course, we could do a second public bond. We have a lot of flexibility. We don't need to raise equity, which is a good place to be. We will look to incrementally raise equity if the price makes sense to accretively raise that and do additional volume.
We've got a few minutes left. If anyone has any questions, please feel free to raise your hand or ask away.
Sure You're- You . I know you got questions. You're up.
Okay, first thing, let me make sure I heard you right, that the movie theater's not going the way of the dinosaur?
Not going away the dinosaur.
High gas prices. You answered the first half of my question, which I think is that in the short term, because it's mostly Memorial Day to Labor Day, it's a little too early.
to figure that out. What about thinking longer term? If gas prices stay high for the next six months, does that change or influence the type of acquisitions you'll be looking at?
Again, we'll factor it in. It may end up what we pay for them. I think we think these trends are long-term trends, that people are not giving up these activities. It may factor into what we pay for them as that, but I wouldn't see us changing up what we're buying.
Okay, thanks.
Yes.
What's your embedded combined rent growth?
Generally, it's about 1.5%-2%. That's kind of changed. Remember, this is our 28th year, again, over time, that's changed. Here lately, we're probably accelerating that a little bit, probably 2%-2.5%, if you look at the whole kind of portfolio.
Weighted average lease term?
12.
Little over 11.
Yeah. Mm-hmm.
Anyone else? Okay. Maybe I can add one more question on my side. I kind of have to ask the AI question.
Sure.
How are you guys utilizing AI in either asset management or underwriting, or could it be a potential differentiating factor in the future for the company?
I think we're trying to incorporate it in both of those areas. One example is we generally have a report that talks about what's going on in our tenants or our industries, and our asset managers used to kind of compile these reports. Now it's like the push of a button, and it's daily. That's amazing, and we're using it in assistance with our underwriting. I would say it's more of an enhancement. I don't think we've eliminated any positions as a result of it, but I think we are seeing how it can be a tool that can expedite what we're doing and get further efficiencies.
Got it. Okay. Maybe tying it all together, what should investors and the people in this room take away about EPR and where it's heading?
I think it's really positive. I give you 4 numbers that you could take away: 65, 71, 51, 65. These are not our ages. That's our 2-year, our 3-year, our 4-year, and our 5-year total shareholder return. That's top of the group. That's an average on any year, if you look at it, of at least 13%. That is what we have delivered consistently. The best indication of what we're going to do in the future is what we've done in the past. If you look at pre-COVID to 2019, that was our 20th anniversary, 1999 to 2019, the number 2 TSR of all REITs. Again, being in what we do and being able to own a space, to underwrite it, to identify, and to deliver on that allows us to produce these kind of results.
We want to thank you for your time and attention, and as always, if you have any questions, don't hesitate to reach out to us. Thank you.