Thank you for standing by. Welcome to the EPR Investor Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. I would now like to hand the call over to Brian Moriarty, Vice President, Corporate Communications. Please go ahead.
Great. Thank you. Thanks for joining us today for our call and webcast. Participants on today's call are Greg Silvers, Chairman and CEO, Greg Zimmerman, Executive Vice President and CIO, and Mark Peterson, Executive Vice President and CFO. We'll start the call by informing you that this call may include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, identified by such words as will be, intend, continue, believe, may expect, hope, anticipate, or other comparable terms. The company's actual financial condition and the results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of those factors that could cause results to differ materially from these forward-looking statements are contained in the company's SEC filings, including the company's reports on Form 10-K and 10-Q.
If you wish to follow along, today's presentation is available on the Webcast page of the Investor Center on the company's website at www.eprkc.com. Now I'll turn the call over to Greg Silvers for opening comments.
Thank you, Brian, thank you for joining us today. We are pleased to have this call after months of hard work, both within the company and with our partners. Theatrical exhibition is gaining momentum. After being severely impacted by the pandemic, it is now undergoing a strong recovery. With this in mind, our approach to this restructuring plan had to be multidimensional, considering not just where we are today, but also where we'll be in the years to come. Today, we'll discuss the goals of our negotiation, the specific terms of the resolution, the anticipated economic impact of the transaction, and finally, a reconciliation of the anticipated Regal run rate for years 2023 and 2024. Just to level set for everyone's understanding of the facts, at the commencement of the bankruptcy, the company owned 57 Regal theaters, which were documented in 30 leases.
Included in that lease count were two master leases, one with 11 properties and the other with 18 properties. Our total Regal revenues were approximately $86.3 million, including annual fixed rent, CAM, and ground rent, but excluding deferral payments. This number represented approximately 13% of our total revenue. Over the months of this bankruptcy, we've spoken with many of you about our approach. We were willing to negotiate on either a lease-by-lease basis, which is the right of a debtor in bankruptcy, or on an entire portfolio basis, which we have utilized with other operators. In the end, Regal agreed with the portfolio approach. This approach relied heavily on our deep internal knowledge of the industry. We believe that this plan illustrates that depth of knowledge.
While our equity multiple has been severely dislocated, we appreciate that investors dislike uncertainty. We believe that this plan lays out a clear, creative, and rational path for recovery and growth. At the commencement of the bankruptcy, we established some clear goals that would anchor our negotiations: limit revenue reduction, participate in exhibition recovery, meaning we understood that the industry was at a low point in its recovery. We were unwilling to establish rents at the trough without a clear path for participation in all of the recovery. Maintain a quality portfolio. Create a master lease structure, which we have utilized this approach with another operator and believe that a master lease structure only strengthen our portfolio for the future. With these goals in mind, I'm gonna turn it over to Greg Zimmerman to go over the details of our resolution.
Thanks, Greg. I'll walk you through the details of the comprehensive restructuring agreement, starting with Slide five. The new master lease will comprise 41 properties with staggered tranches and a weighted average lease term of 13 years, an increase of four years over the pre-bankruptcy weighted average. The 41 master lease theaters have the highest productivity in our pre-bankruptcy Regal portfolio. The best illustration of this higher quality is pre-bankruptcy annual fixed rent for these 41 properties was $61.5 million, versus $65 million in the master lease. Significantly, in 2019, with $11.4 billion in North American box office gross, our pre-bankruptcy Regal portfolio covered at approximately 1.7 times. You will see later in the presentation on Slide eight, at $9.4 billion in box office gross, Regal's coverage will be approximately 1.6 times.
By eliminating lower-performing assets, Regal will be able to focus on growing market share. As Greg noted, we made clear from the very beginning that we would not set rent at a box office trough. We set percentage rent to take advantage of 100% of the upside from box office recovery. We anticipated the continued box office recovery from 2021 and 2022, which is borne out by year-to-date 2023 North American box office gross of $4.3 billion. The breakpoint is $220 million. In 2022, with box office gross totaling $7.4 billion, Regal revenues for these 41 theaters exceeded $221 million. Percentage rent will be based on a lease year, so we'll start with the effective date of the lease.
The median industry analyst estimate for 2023 is $9 billion, and for 2024 is $9.8 billion. Based on these estimates, we expect the first lease year box office gross to be around $9.4 billion, which will provide around $8.7 million in percentage rent. Finally, and importantly, there is no cap on percentage rent. Moving to slide six. We have several credit enhancements beyond the master lease, including a corporate-level guarantee, a note for $51.8 million in deferred rent, which will be held in advance and forgiven at the end of the term of the third tranche, unless there is an uncured event of default. At which time, the entire amount will become immediately due and payable. The remaining balance of the deferred rent related to the surrendered properties will be an unsecured claim in the bankruptcy proceeding.
We're always focused on improving our portfolio. To that end, we will reimburse Regal for 50% of revenue-enhancing improvements they may choose to make in the first five years of the master lease, capped at $32.5 million and not to exceed $10 million per year. Regal is not obligated to make these improvements, and we have approval rights over the units, the types of improvements, and that they will be revenue enhancing. We plan to operate five of the 16 surrendered properties. We're pleased that Cinemark will manage four high-performing units, all in top 20 MSAs, three of which are reclined and two of which have premium large format screens. Phoenix will manage one in a smaller market. We have 34 leases and a long-standing, deep relationship with Cinemark.
We value their partnership and greatly respect their ability as a high-quality operator and their laser focus on the profitability of their theaters. Phoenix has successfully operated two of our theaters since the end of COVID, and we're pleased to expand that partnership. We plan to sell 11 of the theaters as part of our ongoing strategy to reduce our theater footprint. We know how to sell theaters. Since the end of 2021, we've sold nine theaters for multiple uses, including industrial, residential, retail, and theater reuse. We have retained brokers and have been soft marketing the 11 theaters, including at this year's ICSC RECon in Las Vegas, all pending final resolution of the bankruptcy. Nine of the 11 we're selling are less profitable locations in smaller MSAs.
One is a traditionally seated theater in a highly competitive zone in the outlying suburbs of a top 20 MSA, one is a traditionally seated theater in a major metropolitan area, which is built against and requires a substantial improvement just to maintain market share. As Greg will explain in more detail, we plan to reinvest the proceeds from these sales to acquire non-theater experiential assets. Finally, the new master lease, including the rent structure and credit enhancements, is effective as of the effective date of Regal's emergence from bankruptcy, which they have said will be in July. Now that the bankruptcy court has approved their plan of reorganization, Regal has a period to execute the necessary documentation and transactions needed to effectuate the plan. As such, the effective date is entirely within their control.
Until the effective date, they will continue to pay pre-bankruptcy rent on and operate 57 theaters. I'll turn it back to Greg for a discussion of our views on box office recovery and what it means to our overall economics from this comprehensive restructuring.
Thank you, Greg. As you can see from our structure, our approach was grounded in a belief that exhibitors did not have a consumer issue, but rather a content issue, specifically, the amount of wide-release films that were made available to exhibitors. Ultimately, box office projections are driven by the number of wide-release films, and the number of wide-release films is increasing and is predicted to continue to do so. On slide seven, we have provided you with a graph demonstrating this recovery. In 2021 and in 2022, North American box office had tremendous growth as wide-release films finally made their way back to theaters. Based upon the median of multiple analysts, the 2023 box office is projected to reach $9 billion, and 2024 is projected to reach $9.8 billion.
On slide eight, we are illustrating what we anticipate will be the recovery of pre-bankruptcy Regal rent under various box office projections. We have also added the projected income from the theaters we'll be operating and the projected income from the reinvestment of the 11 theaters that we anticipate selling. We highlighted $9.4 billion of box office as percentage rent will be calculated on a lease year basis rather than a calendar year. To arrive at $9.4 billion, we simply took the midpoint between 2023 and 2024 estimates. Couple of key points to understanding our likelihood of hitting these numbers. These projections are based upon Regal maintaining current market share that they have demonstrated over the trailing 12-month period. There is not an increase in that.
These projections are based upon existing pricing without assuming any increases, and the operating theaters do not assume any improvement in performance or cost structures beyond knowable items such as film cost and cost of goods sold. As you can see, at the $9.4 billion level of box office, we should achieve approximately 96% of our pre-bankruptcy rent. This is before we account for the reinvestment of proceeds from the 11 theaters that we anticipate selling. For purposes of this chart, we have assumed that we can sell those properties at recently appraised values, totaling approximately $40 million. Reinvest those proceeds at an 8% return. Under this scenario, we can achieve approximately 100% or greater. The actual sales and redeployment are timing dependent.
As the number of wide release titles continues to grow, we believe that this approach will allow us to achieve near-term recovery with significant long-term upside. I know we are often asked about specific rent coverage by tenant, and while we're reticent to talk about a specific tenant, we believe that it was appropriate to provide that information as Regal emerges from bankruptcy. As Greg said, at the $9.4 billion box office level, we anticipate that Regal's coverage will be approximately 1.6 times. I'll turn it over to Mark to discuss the Regal year-over-year analysis.
Thank you, Greg. Turning to pages nine and 10 of the presentation, you will find financial projections and related footnotes for the Regal portfolio for both fiscal years 2023 and 2024. First, note that we have split out the components of revenue in more detail than our typical reporting to enhance the comparability of results between the two years. 2023, we assumed a new master lease year for purposes of the projections beginning on 7/1/2023, and thus we have included the previous monthly rental amount in out-of-period deferral payments through June of 2023, with the remaining subrent of approximately $3.5 million being paid in the third quarter.
Both the minimum rent and CAM amount, as well as the deferral income, could end up being higher in 2023 based on the final effective date of the lease. Given that percentage rents are calculated on a lease year, we do not expect to receive any percentage rents from Regal for calendar year 2023. We have assumed that the five surrendered properties that we intend to operate, reflected in other income and other expense, will break even over the remainder of 2023 as we transition them to the new operators, and that we will incur an estimated total of $5 million in reopening costs that are included as transaction costs in the 2023 projection.
We also anticipate moving Regal to accrual accounting from cash basis on the effective date of the master lease, given their greatly improved credit profile coming out of bankruptcy, thus we will begin recording straight-line rent. We have also added approximately $1.7 million to property operating expense for the second half of 2023, related to the estimated carrying costs of the surrendered theaters that we anticipate selling over time. We expect to record an impairment charge in the second quarter of approximately $50 million related to these properties, although that amount has not been finalized and is subject to change. For 2024, the minimum rent and CAM line item includes $65 million of base rent, plus an estimated $3.5 million for triple net charges, including ground rent.
Percentage rent for the first lease year, ending in 2024, is estimated at $8.7 million, which correlates to an expected box office of approximately $9.4 million, as Greg discussed. Footnote two on page 10 provides a sensitivity analysis of estimated percentage rent for various lease year box office outcomes. Similarly, we have estimated the profit from the five operating theaters for calendar year 2024, based on an expected box office of $9.8 billion, and footnote three provides a sensitivity based on various calendar year box office outcomes. The bottom of page nine also provides various EBITDA measures for both fiscal years.
Note that adjusted EBITDARE, which adds back the impairment charge and transaction costs and is equal to the impact on our primary reported measure, FFO as adjusted, is expected to be lower in 2024 versus 2023 for Regal due to the out-of-period deferral and subrent payments received in 2023 that don't repeat. However, it should also be noted that our annualized adjusted EBITDARE, which removes the impact of the out-of-period deferral and subrent payments, is expected to be higher in 2024 versus 2023 due to percentage rents and the impact from the operating theaters. In our upcoming earnings call, we will be providing 2023 earnings guidance for the company that will incorporate the expected results for Regal.
In summary, we are very pleased that we achieved all our goals in the resolution of Regal's bankruptcy, limited the near-term revenue impact while positioning ourselves to return to 100% or more of the previous revenue level as we participate in the exhibition recovery through meaningful percentage rents and theater operating profits. We have improved the quality of our portfolio with significantly enhanced tenant credit and a multi-tranche master lease structure. While reducing our overall theater footprint and generating capital from theater sales to invest in other experiential assets. Now, with that, we will open it up for questions. Operator?
As a reminder, to ask a question, you will need to press star one on your telephone. Again, that's star one on your telephone to ask a question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Anthony Paolone of J.P. Morgan. Your question please, Anthony.
Thank you, and good afternoon. Still coming up with some of these questions here. You covered a lot of ground, but I guess, the first one is, you know, trying to understand, like, can you just give us a recap on what happened in 2Q, and then just again, help us roll into 3Q, with respect to, you know, kind of I guess there won't be any more deferred rent, you'll pick up the straight-line rent, and just kind of what the dollars sequentially change, what that dollar change is sequentially?
Sure. The deferred rent that we collected for Regal in Q2, we collected all three months, $1.5 million , roughly a month. That's $4.5 million was the deferrals we collected for the quarter, second quarter. As far as revenue, we collected the full amount of revenue in CAM. That number annually it had grown due to rent bumps to about $88 million a year. Take half of that, or take a quarter of that, and that's what we collected in the second quarter. Full rent and full deferrals in the second quarter, and then beginning July, we've got the new rent structure.
Okay. Should, and fair to assume this will be in effect, like July 1, I guess?
Well, here, as I mentioned in my comments, we had to pick a date for this. The effective date isn't fully known right now. As the effective date moves out, let's say instead of July 1st, it becomes, say, July 31st. All that means we'll get another month of full rent and another deferral payment, and our master lease will kick in August 1st instead of July 1. For this purpose, we assume July 1 because we don't really know the effective date. It's not in our control. That's how we modeled it. Like I said, it would just make the numbers higher for 2023, should that date move out to a further date other than July 1st.
Okay. In terms of the operating assets that you have, those five, like on page, on slide nine, it looks like the 23 are showing no profit, but, you know, then it kind of bounces back up. Is that like, I guess, why is that?
I think, Tony, I think, again, we're probably, we're being conservative, we're changing operators. We're giving them time to get how they want to position the asset. We felt it was reasonable just to set for, again, the other side, as Mark said, we don't know when the effective date is. Again, it kind of made sense to just kind of set the balance of this year at break even.
I mean, is it your view that those theaters make money right now?
Yes. Yes, they do.
Just last one for now, the 11 assets that you intend to sell, just can you maybe describe, like, what those you know, or do you think they'll be theaters, or are they just land plays and just timing of getting that cash and repatriating it and reinvesting?
Hey, Tony, it's Greg. Yeah. I would say roughly half of them we would anticipate might be theaters, although, as we've said many times, we're fairly agnostic about it. We market them widely, and we'll sell it to the person who presents us with the most compelling offer. Some of them will probably be repurposed or perhaps torn down and repositioned. As far as timing, you know, I think the analog coming out of COVID is probably a good one. It took us about just under two years to sell nine, so we're anticipating that we'll be on the same cadence here.
Okay, thanks.
Thanks, Tony.
Thanks.
Thank you. Our next question comes from the line of RJ Milligan of Raymond James. Your line is open, RJ.
Yep, thanks. Good evening, guys. Thanks for the table here on Slide 8. I think the sensitivity is very helpful, so appreciate that. The estimated master lease rent coverage is 1.6 times at that $9.4 billion box office number. What is the current coverage level on today's box office?
I think we would say it's probably about a 1.4 on that, where we're at, a little low 8s right now. Oh, 8.
For all 57.
Oh, for the 41.
For the 41.
Yeah.
Okay. The $30 million of CapEx, I think you guys mentioned that was over a five-year time period. What's the expected cadence of the deployment of that capital?
Yeah, RJ, it's actually, thirty-two and a half is our portion of it, and it's a reimbursement, should they elect to do it. Essentially, think about it, they have to get things started within five years, and it's limited to a cap of $10 million a year.
Got it. That's helpful. Based on the updated projections, does that then not really change the pro forma leverage level?
Correct. I mean,
Five times.
Yeah, yeah. If you kind of pro forma, even without the percentage rents or the operating profit kicking in, we're still within our range of $5.00-$5.60. Still well within that range. Then barring, you know, nothing else, next year, that improves as EBITDA improves. Obviously, we'll get the percentage rent and the operating profit. No, we're in good shape.
Okay. You guys mentioned the expectation of about $40 million in proceeds from the sale of those 11 assets, but the expected timeline, I think you said, was probably over the next two years. The expectation is that you can reinvest that at an 8% cap rate. I'm just curious, you know, given the expected or the current leverage levels and now sort of the clarity here that we've gotten on Regal, what is the outlook for your ability to execute on additional external growth?
Again, I think as we've said before, I think we have good opportunities. It's really about capital. We hope that, again, with this removing of this cloud that was over here, you know, over our price with this, we're hoping to see improvement in that and hopefully to drive more growth. I think we're very positive about this. I mean, you know, RJ, we talked with a lot of people, and a lot of people were modeling expectations of you know, 20%-25% rent reductions. We're hopeful that people will be pleased that, you know, really straightforward, we're kind of at 96% recovery. As you look at ninety...
like a $9.8 billion run rate box office, we're closer to 100% recovery without even any of the proceeds from those sold assets. That becomes additional capital. again, I think all signs are pointing in a very positive direction.
RJ, I would also add, obviously we've known that the structure of the deal would be coming for several months, and my investment guys are out traveling the country just as busily as they always have been, and we've got a very robust pipeline.
Thanks. My last question before I jump back in the queue, is obviously, you know, to get back to that 96% level, it's based on box office projections. I'm just curious if you have any updated thoughts, Greg, on the writers' strike and sort of what that means for potential 2024 or even as we look into 2025, in terms of, you know, wide release, wide releases in the box office and the potential impact there?
As we said, we're about 60 days into this, and most of the industry, the theater and exhibition industry pundits say, you know, probably if we can get something resolved in the next kind of 40 to 50 days, it will have little or no impact on the theater space. If you go beyond that, it will have probably 5% or more in the second half. That $9.4 billion that we talked about there is kind of a half year convention. We feel pretty good with that number.
Thanks, guys. Appreciate it.
Thanks, RJ.
Thank you. Our next question comes from the line of Nick Joseph of Citi. Your question please, Nick. Nick Joseph, your line is open.
Hey, yeah, it's Eric for Nick. For the Regal coverage, you're estimating at 1.6x. Are you using the sort of total payment of $82.7 million for that? That includes sort of the operating theaters, and that includes the percentage rent. Just trying to.
It's not the operating. It's just a minimum fixed rent. That's what. I think that's pretty much the convention of all net lease companies.
I mean, the other, the operating theaters aren't leased.
Yeah, they're not leased, so they wouldn't be in there.
it's the $65 million. Right. Clear.
Okay. I guess, how are the operating theater and what's the agreement there? What percentage of profit are you receiving?
Again, it's what percentage-
Well, the operating theaters...
They have a management fee that they would be collecting. Again, there's more EBITDA there. That's generally going to be at a set percentage. For competitive reasons, we're probably not going to disclose that. I can tell you there's. of upside to the extent that, again, even when we did this management agreement, we, Cinemark, had as a requirement to get a right of first offer on these, but we were unwilling to lease them at these box office levels and want to see better recovery.
Okay, got it. Last question is, for the percentage rent component, did you say that it changes based on lease year? I know there's nothing, it sounds like nothing in 2023, but does it change from, like, 2024 to 2025? Is there any sort of thresholds that, where the sort of percentage that you receive changes based on the amount of the box office or the amount of gross sales above a certain amount?
No, I mean it has defined thresholds, but it doesn't change on a box office dependent. I think we were just trying to say it's a lease year. The lease year, in our example, we gained, you know, we used July first to July first, so we had to interpolate kind of the midpoint year of two box office years, and that's why we chose 9.4.
Importantly, as box office rises, and that translates to Regal revenues, our percentage rent will rise as well, and there's no cap on that.
Yeah, Eric, just to be clear, because we did mention in the deck threshold amounts increasing, that's a standard breakpoint change when base rent goes up.
Yeah.
Understood. Thank you.
Thank you.
Thank you. Our next question comes from the line, sorry, of Rob Stevenson of Janney Montgomery Scott. Your question please, Rob.
Good evening, guys. Mark, what was Regal paying you guys annually in rent pre-COVID and their rent coverage then versus what their rent coverage is now? I think you said it was gonna be 1.4 times now.
No, no, no. It was $1.7 and the rent. No, he said what they're paying now, it's not third party. It was about $80. What was the?
Oh, $82 million.
$82 million. $82 million and a 1.7 at a $11.4 billion box office. What we're saying is at a 9.4 and 65, these are going to be at a 1.6.
Okay, that's helpful. Thanks. Greg or Greg, what is the impact to the master lease if you guys wanna sell 5 or 10 or, you know, anything less than all the theaters 3 or 5 years down the road? Does it pierce it and then make it invalid? Does it hold up? What is your understanding of that if you guys do it without substituting and instead just sell assets out of it?
Again, it's always one of those challenges that if you, if you provide a roadmap, I will tell you, it would have to be a negotiated because we did not put a roadmap to remove, you know, four or five in there just because that's not the strongest argument that you can have. I would say it does have some challenges with that. It doesn't mean that you can't work through those with the operator, but we did not put a mechanism in there because as we've seen in previous bankruptcies, if you put that mechanism in, the courts can use that to break your master lease.
Okay, last one for me. What is the $3.5 million of third-party charges on slide five?
It's CAM that we actually charge or they pay us ground rent. You know, truly third-party charges that are paid to us and we're paying off to other people.
Okay. I guess one last one associated with that. In terms of the revenue-enhancing improvements, the thirty-two and a half million, potentially, is there a return on that, or is that just an investment that you're basically making into those theaters?
Rob-
Does your rent go up?
It's an investment. It's an investment we're making into the theaters. They're not required to pay additional rent, we made very clear to them that it has to be revenue enhancing. We will absolutely do an investment analysis before we would go forward with that. Occasionally, also, you know, you need to make an investment in your theater to maintain market share and to do improvements as well.
We participate, remember, in percentage rent.
Yeah.
As the revenue goes up as a result of those improvements, we participate in that revenue, but it's not rent, it's percentage rent.
Right.
Not base rent.
Okay. All right. I just wanted to confirm that. Thanks, guys.
Sure.
Thank you. Our next question comes from the line of Mitchell Germain of JMP. Your question please, Mitchell.
hey, guys. Congrats on getting the deal done.
Thank you.
Thanks, Mitchell.
I'm curious, you know, you're making this announcement tonight, and it seems like some of the others might still be in negotiation. You know, why now? Why not see if, you know, you can kind of, as maybe some of the other deals are struck with other landlords, you know, see what they're getting and how it could potentially change, you know, what your perception of, you know, value could be.
I think for us, when we entered into and you saw today, there was a reference to an Omnibus Agreement, that was a material agreement for us, and we needed to disclose it. Again, I think the other side of that is, to the extent that you did not have a deal today, it's our understanding that you had to agree to extend the rejection period for your leases. You're really not necessarily. If you think you're, you know, we felt like we had negotiated a good deal.
We felt like we had got the terms upon which we set. We wanted to lock this down, as opposed to say, if we went on like anybody who's not been assumed as of yet is still subject to rejection. Therefore, they still are, even though they filed their plan, they reserve the right to do that. Therefore, you really didn't advance yourself to being done at all.
Okay, understood. That's good to know. The calculation of percentage rent, is that, I mean, kind of just threw your chart into Excel as you were talking, it seems like. Is it like, what, like 14%, 15% of the difference? Is that how we should be thinking about it?
Against the first breakpoint, it is, yes, 15%.
Okay, your numbers are just kind of round numbers on the percentage rent side?
Yep. Yes. I think in fairness, that we have a breakpoint for the first $50 million and then a breakpoint after $50 million. I mean, a different rate after $50 million. We feel like, you know, we have great confidence that those numbers are achievable, as we said, based upon kind of not increasing. I mean, literally, Mitch, with inflation, we'll get bumps in that and with box office and candidly, with their focus now back on these properties, I think we feel like we've positioned ourselves to not only achieve 100% recovery, but in excess of 100% recovery. Again, Mitch, it's uncapped.
Yes, understood. The 220 initial kind of breakpoint, we'll call it, rIght? ... threshold, right?
Yep.
That goes up 10% in 5 years. Is that the way to think about it?
That's correct.
Okay, great. You spent a little time talking about the theaters that have moved to the operators. You spent a little time talking about the location and quality of theaters that you're selling, right? I'd love to gain some perspective on what you're keeping and why you think those are the best 41 out there.
Again, I'll let Greg jump in on this. Clearly, these were highly productive theaters. We, as many of you have heard us say all through this, these were, you know, what we felt were key to Regal's emergence from bankruptcy. You know, as Greg said, talking about the performance, we actually raised the rent on these 41 properties.
He's talking about the operating.
No, I was talking about the 41.
I'm sorry.
Yeah. Again, I don't think most bankrupt tenants think you're going in and raising the rent. We did because of their performance and candidly, because of the team that we have here being able to put forth that. I think we feel really good about those. I think, again, if. What's interesting is everybody, you know, we talked about our strategy, the portfolio approach. If you look at those, a vast majority of those were the individual leases. You know, I mean, again, so it goes to kind of the what I would say is the strength of the underwriting team. I think these are all top theaters and top markets that are kind of at the core of necessity for Regal. Greg?
Yeah. Again, as we've said repeatedly, Regal had a debt issue, more so than a quality of theater issue. We did absolutely have smaller market theaters, As I mentioned, the vast majority of what we're gonna sell are smaller market theaters, which just by definition, are not as profitable and probably not worth as much effort going forward. We thought we had a really good Regal portfolio before, and now we think it's a even better Regal portfolio.
As Greg mentioned, we raised the rent on those, that portfolio, and even at 9.4 of a 1.6 cover, kind of tells you the quality right there.
Yeah.
Right. My last question is: seems like that $220 million threshold for those 41 theaters, right, was based on the, I guess, last year's number, right? Last year's box office number.
That's correct.
Yeah. Okay. it equates to about $5 and a half million per theater, though I know that not every theater is built differently. I'm curious, like pre-COVID, do you know where those figures were?
I don't have it readily available, but I can tell you, like I said, these are in the clearly top 20% of Regal's entire portfolio.
Including a couple that are probably in the top 15 of their entire portfolio.
Great. Thank you, guys.
Thank you, Mitch.
Thank you. Our next question comes from the line of Michael Carroll of RBC. Your question please, Michael.
Yep, thanks. Sorry if I missed this. Greg, can you talk a little bit about the operating theaters that you're maintaining? I guess, why keep them in this operating structure? Does the two new operators managing those contracts, do they want to eventually lease them, or do you just see upside of those properties, and you just want to maintain flexibility?
I think we could definitely lease them, and Greg can jump in here. We're seeing, again, the, where we set the rent is based upon kind of where sustained performance is at. As I said earlier, Michael, Cinemark required a right of first option to acquire and lease these properties if we entered into this agreement. We just were unwilling to set a lease here at these points now. As this recovery continues, we think we'll have an opportunity to move those in a lease structure. We think, you know, you see the performance of kind of where they're at now, and that's on a $9.4 billion, and that's kind of candidly with Regal's operating metrics. We think there's gonna be improvement, and we think there's a right time to set those. It just wasn't now.
Okay. Is there capital investment plans that you think it's worthwhile putting into those assets to kind of accelerate that recovery?
It's not, as Greg talked about, three of the four properties with Cinemark have recliners already. Two of them have, you know, premium large format. I mean, these are not the 11 that he talked about in smaller markets. These are good theaters.
Top 20 MSA.
Top, yeah, top 20 MSAs. Yet, you know, this was our team determining that either for a lot of reasons, we didn't think Regal was the right operator, either because of their presence in the market or their ability to kind of operate in certain areas. We think that these properties are strong performers. We didn't pick properties that we think need a tremendous amount of capital improvements, that these have already been, or most of these, to a large degree, have been amenitized.
Yeah, I think the best way to think about it is we thought we could make more money than whatever incremental rent we would get from Regal in operating these five. They're not five that we thought we should sell. To Greg's point, we're not interested in setting a lease right now, given market conditions. For us, it's kind of the best of both worlds because Cinemark gets to operate it. They're a quality operator, and hopefully, at some point, they'll want to lease them.
Okay, great. Just last question on the $32 .5 million, I guess, potential money that you could give back to Regal, for the reimbursements. I mean, how would that be treated on an accounting basis? Would that be a deduction from AFFO? Or is that just a different accounting, given it's really not recurring CapEx?
We view it as investment CapEx because it does increase the revenue, which increases the percentage rents. We think we're investing in the theaters, and we think it'll be treated that way.
Okay, great. Thank you.
Thanks, Michael.
Thank you. Our next question comes from the line of Ki Bin Kim of Truist. Your question please, Ki.
Thanks. Just a couple of follow-ups here. On the $32.5 million of revenue-generating CapEx, that you'll reimburse Regals for 50%, does the $32.5 reflect your share, or is your share half of that?
No, that's the, that's our share, Ki. It's $65 million total. $32.5 million is our share.
Remember, Ki, it's a reimbursement, so they have to put it all in first.
Yeah.
We're not putting much. I mean, they have to make a decision. We have to agree that it's revenue enhancing, and then they have to go spend it and produce evidence of that spend. As we've said, it's no more than $10 million in any one year, and $32.5 million over a five-year period.
Okay. No rent, like you said earlier.
Well, I mean, again, I really challenge that in the sense that, as we talked about, if you're getting 15% percentage rent and it's revenue enhancing, then you're actually getting double what you're getting on a fixed rent basis at 8%, or nearly double.
How much off the books deferred rent did Regal pay in 2Q?
$ 4.5 million, roughly.
Okay. $ 4.5 million . The percentage rent that you'll collect after the anniversary period of the effective date, does that come in a lump sum, or does it come over time?
As we get evidence that they're exceeding the limit, we can accrue it, because we're on an accrual basis. It's when during the lease year, they exceed our threshold, we can start accruing that amount. Start accruing amounts.
You get paid, like, pretty in short term, or is there a long period of time they can hold on to it?
At the end of the lease year.
End of the lease year, you get paid, so we'll still get the cash in the same year expectations.
Okay. I guess I'm curious about the dialogue you've had with your bondholders. I'm not sure if they're all finding out the same time as we are, but, you know, what kind of impact or reaction do you think this will have on your cost of capital?
Well, frankly, we haven't been able to talk to them about the deal, just like we couldn't talk about you since it's confidential and, you know, non-public information. I think at the end of the day, the fact that we're showing this level of recovery is going to be very favorable to both our equity and debt costs, especially just eliminating the overhang, I think is going to be helpful.
I see. But no, guesstimate of what kind of cost of capital improvement it will have on the, on the bond side?
No. Again, the announcement was just today.
Yeah.
Again, I mean, I think we have briefed the rating agencies on this transaction, I think we felt they thought very favorably about it. We'll see from there.
Okay, thank you.
Thanks.
Thanks, Ki.
Thank you. Our next question comes from the line of Todd Thomas of KeyBanc Capital Markets. Your question please, Todd.
Yeah. Hi, thanks. Good afternoon. Just a couple follow-ups, I guess. You know, first, you know, in terms of the percentage rent, sounds like nothing's expected to be collected in 2023, if you do hit the $9.4 billion box office, you know, what would the distribution of percentage rent be in 2024? Is that, you know, should we assume that primarily hits in the second quarter, or could some of that hit earlier with that box office projection?
Well, contingent on the lease year. If the lease was July, it could be, you know, depends on the lease year, the effectiveness of this deal and when the lease year starts. It's just the trajectory is gonna depend on box office and when we start exceeding those thresholds, which, you know, you're gonna get most of it towards the end of the lease period, because at that point, you start exceeding the threshold, you're getting your full amount.
Yeah. I mean, you could, Todd, you could, toward the end of first quarter, see some of it accrue. It'll predominantly be, my guess is in the second quarter.
Second quarter or third, if it's.
Yeah, on our example.
Yeah.
Yeah.
Right. Got it. Primarily second quarter and third quarter of 2024. How does food and beverage, you know, concessions factor into the percentage rent?
It's every dollar of revenue generated in the box.
You know, are there any sort of additional hurdles, any key hurdles to Regal exiting bankruptcy from your standpoint, as expected in early July? You know, what are sort of the final steps or requirements really necessary for them to emerge at this point?
Again, I, we're very careful because, you know, that's not our purview necessarily, but we understand based upon what they've accomplished to date, that it's really kind of finalization of some documentation with lenders and things. Things that are completed and have been agreed to, but now need to be documented. But I think that's our understanding, that there's no major hurdle.
Yeah, Todd, just in case it wasn't clear, the judge approved their plan of reorganization today.
Okay. Then, question on the dividend, which is currently at $3.30 per share. That compares to, I think $4.50 per share in 2019. I know there's been, you know, other activity, other changes to cash flow since 2019, but any implications on this Regal restructuring agreement as it pertains to the dividend or taxable income that we should be considering as we think about, you know, 2024? Again, assuming the box office projections, you know, the sort of the baseline, I guess, $9.4 billion that you're looking at.
I think given where we're at and not knowing exactly when the effective date of this will be, that our dividend, our board will probably take it up in their normal course, which is at kind of the beginning of this in 2024. We'll have a lot better visibility to that. I'll let Mark think if we have any cash-
No, I mean, our dividend remains well covered even for 2023. As Greg said, you know, we'll project our results for 2024, have better visibility to things like percentage rents and operating profit. We'll look at everything, our investment CapEx, and we'll assess, you know, does it make sense to do something with dividend?
Okay. All right. Thank you.
Thank you, Todd.
Thanks.
Thank you. We have a follow-up question from Anthony Paolone of J.P. Morgan. Your question please, Anthony.
Thanks. Just hopefully two small ones here for me. You know, number one, just on the percentage rents outside of this, I think the last time maybe you talked about it for EPR, it was gonna be running around $10 million for the year. I know you've done some things with the education out of some things. Any way you could just refresh us on, like, where we should think the starting point is, as we start to think about what we want to assume to put on top for Regal in the out years?
We'll give guidance for 2024 in February, you know, kind of as we in our normal course. That percentage rents that we had this year, you know, you can think of this probably being additive to that as far as next year, but we'll update that percentage rent range if we look at our entire portfolio, really in February is when we'll give 2024 guidance.
We'll probably discuss that here in at the end of July or, you know, in our next earnings call for this year. There will be no addition, but you'll have a base.
Yeah, we'll update the guidance range for this year, but this won't impact that.
Right. Okay. I just didn't know if you could give us a sense as to, like, whether that's where it changed for other reasons, like in the last few months or something. The second question, just to make sure I understand, because it looks like on your slide, you're including this for half a year for 2023. In simple terms, though, this is gonna add $1 million a quarter to straight-line rent, effectively, that will hit your FFO. Is that fair?
In 2024, right. In 2023, it's half a year. It really is gonna start on that effective date, so it's July 31stst. It may be a little lower than this, but you'll get higher minimum rent. It depends on the effective date, it's about... Yeah, you're right. It's about $1 million a quarter. That's right. $1 million .
Okay. Yeah. Thank you.
Thanks, Tony.
Thank you. Our next question comes from the line of Mitchell Germain of JMP. Your line is open, Mitchell.
Thank you. Just two follow-ups. The $4.5 million of deferred rent collected, does that relate to the September non-payment or was that part of the $82.4 million?
Frankly, neither of those. We didn't get any subrent. The subrent in second quarter, we'll get the remaining subrent, we expect in the third quarter, and we expect that to be $ three and a half million. The subrent is not a part of that. The $82 million that we mentioned was minimum rent, excluding deferrals. Deferrals run about $ 1.5 million a quarter, and we got $ 4.5 million of those in the second quarter. $ 4.5 million .
Yep, $ 1.5 million a month, not a quarter.
Yeah, yeah. $ 1.5 million , totaling $ 4.5 million for the quarter.
Yes.
Understood. Okay. Then, are you gonna be fully GAAP accounting upon the switch for all revenues? When will that become effective, you think? Is it gonna be for the calendar year?
No. As soon as the master lease becomes effective, and we're just talking about Regal here, Regal will become accrual upon that date. If it were July 31st, we'll begin accrual accounting, you know, at the beginning of the lease term, which, you know, we'd probably begin 8/1, and we'd start accruing rent, you know, start booking straight line. It's been more of accrual basis at that time.
Who's gonna who remains on cash at that point?
Frankly, we still have AMC on cash basis. We have a couple others. They're performing well, paying us in total. In some cases, not AMC's case, there's still a pretty large amount of deferred rent owed, not on our books, but we wanna see that become lower and see their continued performance before we put them on accrual. They're paying 100% each month.
Appreciate it. Thank you.
Sure.
Thanks.
Thank you. Our next question comes from the line of Nick Joseph, of Citi. Your line is open, Nick.
Hey, thanks for taking the follow-ups. Just quickly on the rent coverage, again, on the 1.6 times. If I basically just take that $65 million of fixed rent multiplied by 1.6, they're gonna generate around $104 million of EBITDAR. Is that right?
Yes.
Okay.
Yes.
To calculate. Okay, great. Then to calculate the sort of profitability, if you will, or cash profitability of for them, you know, then you would just minus off $8.7 in percentage rent, the sort of $3.5 of expense reimbursement, the $65 million, of course, of rent payment, and then just some allocation around interest expense or... I'm just trying to kind of get a sense for, you know, after-
Again, they probably wouldn't do interest-.
EBITDAR, by definition, is before interest-
Yeah.
Without interest.
you had all the other.
Yeah, I guess I'm just trying to think through, like, will they have some cushion from a sort of cash expense to absorb something? You know, just after all sort of the payments that are owed to you.
Almost by definition, to emerge from this bankruptcy, they have to have that. I mean, just they have to prove they're solvent. Yes. I mean, even like I said, if you think about, you know, and Greg, you get up, if you think about average margins in the 30s, if they're even on the percentage rent they're making, if we're making 15%, they're making 20% on it. The, it's generating, you know, quite a bit of free cash flow.
Got it. That's helpful. Last question is, to calculate the sort of GAAP impact, and I don't think it's included in this, but you would just basically look at like a 13-year average lease and then, you know, just assume the sort of to 10% you know, kind of rent bumps along the way. That's the way you would just look at it?
Yeah.
To get the GAAP impact?
The three tranches are 11, 13, and 15, kind of evenly split. Accounting makes you take use the 11, frankly, for the straight-line calculation, the lowest number. At the end of 11, it would go down, in theory, to 0, and then as that got released, it would, you know, as they extend, start again. Use the lowest number of the three tranches to calculate that straight-line.
Okay, great. Thanks for taking the follow-ups.
Thank you, Nick.
Thank you. I would now like to turn the conference back to Greg Silvers for closing remarks. Sir?
Again, thank you all today. Hopefully, we fulfilled what we told you that we would when we said we would lay out, not only what our results were, but why and what the impact of that was. As, as many, as we've talked about today, we're very pleased with this result. We think this allows us to not only, position us very well in the current environment, but actually create a really nice factor of growth, especially in an inflationary environment. As always, I, if you did not get all your questions answered, we will be around. We look forward to talking to you if you have those. Just reach out, and we'll be glad to answer more questions. Thank you for your time and attention today, and we look forward to talking to you soon. Thank you.
Thanks.